Good day, thank you for standing by. Welcome to IMAX Corporation's call regarding its intent to acquire full ownership of its IMAX China subsidiary. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. We ask that participants limit themselves to two questions. Please be advised that today's call is being recorded. I'd now like to hand the conference over to Ms. Jennifer Horsley, Head of Investor Relations. You can now begin.
Good evening, and thank you for joining us to discuss today's announcement that IMAX Corporation intends to acquire full ownership of IMAX China. On the call today to review the transaction are Rich Gelfond, Chief Executive Officer, and Natasha Fernandes, our Chief Financial Officer. Rob Lister, Chief Legal Officer, is also joining us today. Today's conference call is being webcast in its entirety on our website, with a replay available shortly after the call. In addition, a press release on the transaction, as well as an investor presentation, have been posted on the IMAX Investor Relations page on our site. I would like to remind you of the following information regarding forward-looking statements. Today's call, as well as the accompanying materials, may include statements that are forward-looking and that pertain to benefits of the acquisition, future results, or outcomes.
These forward-looking statements are subject to risks and uncertainties that could cause our actual future results to not occur or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information, future events, or otherwise. During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures, as well as the reconciliation to non-GAAP financial measures, are contained in this afternoon's investor presentation, which is available on the Investor Relations page of our website at imax.com. With that, let me now turn the call over to Mr. Richard Gelfond. Rich?
Thanks, Jennifer. Thanks, everyone, for joining us. We're excited to announce our intent to acquire full ownership of IMAX China. The proposed transaction is for approximately HKD 10 per share in cash or a total of $124 million. We believe we are acquiring it at an attractive multiple. The offer represents an approximately 49% premium to the 30-day trading average closing price of IMAX China. IMAX's global growth strategy is predicated on being nimble, shrewd, and opportunistic from region to region, market to market. It's a strategy that has carried us to nearly 90 countries and territories, helped us build one of the most widely recognized entertainment brands worldwide, and established IMAX as a critical piece of the future of movies.
The proposed transaction is a clear reflection of that strategy, and we believe is positive for both IMAX Corporation and IMAX China shareholders. We believe this rewards IMAX China shareholders by offering them a premium to today's market prices and immediate value on their investment. For IMAX Corporation, this transaction is expected to provide immediate financial and operational benefits. First, from the financial perspective, we expect this acquisition will be accretive immediately following completion based on IMAX Corp's and IMAX China's financials.
If you look at the Q1 of 2023 results, by way of example, and adjust them to add back the IMAX China minority interest, then IMAX Corp. Q1 adjusted EBITDA would have been $5 million higher or 18% higher, and Q1 net income would have been $2.7 million higher, which equates to earnings per share of $0.05 or 109% higher. In fact, it's much more accretive than if we had bought in IMAX Corp. stock under our share repurchase plan. This is before realizing approximately $2 million of annual public company cost savings, as well as potential tax efficiencies resulting from the China go private transaction. It would also allow us greater flexibility in the usage of IMAX China's cash, which was approximately $78 million at the end of Q1.
Second, strategically, this unifies IMAX Corporation and IMAX China and would allow us to be faster and more flexible in bringing promising new growth initiatives, particularly our streaming and in-home entertainment technologies to the China market. Third, from an operating and structural perspective, this would streamline our corporate organization, reducing costs and potentially driving greater efficiency across our business. It would also streamline our financial reporting. We already consolidate IMAX China revenues. Now we will be able to consolidate the full EBITDA and profit of our highest profit region. Furthermore, it takes out the illiquid IMAX China shares, which we hope will reduce the complexity for public markets when valuing the entire IMAX enterprise. We remain as optimistic as ever about IMAX, its business, and its future growth potential in China. IMAX is a valuable, widely recognized premium brand in China.
The Q1 was our highest grossing Q1 ever in China, thanks to our highest grossing Chinese New Year ever, thanks to our highest grossing local language release ever, resulting in our highest grossing quarter ever for local language films. Through our diversified programming strategy, we are the only global entertainment platform in China that could take advantage of Hollywood blockbusters like Mission: Impossible, and local blockbusters like Lost in the Stars. Hollywood films are securing release dates in China with increasing consistency. According to Maoyan, 26 U.S. films have been approved for release in China year to date, versus 25 for the entirety of 2022. We consistently deliver double-digit opening weekend box office market share on Hollywood releases, even though we're on 1% of screen penetration in China. We are working more closely with China filmmakers and studios than ever.
We've launched some of our most exciting brand extensions into streaming, mobile, and other platforms to date in China, and we believe this transaction will further strengthen the financial and operational foundation of our business and help foster a new era of growth for IMAX in this vital market. With that, I'd be happy to take your questions.
As a reminder, to ask a question, you will need to press star one one on your telephone. That's star one one on your telephone. We ask that you limit yourself to two questions. Our first question comes from the line of Eric Handler of Roth MKM. Your question please, Eric.
Hello?
Hi, Eric.
sorry, couldn't hear you there. Hi, Rich. Back when IMAX China went public, I think 2015 or so, one of the reasons that you talked about going public was, you know, it looked good politically, and it served a purpose in China to have that. You know, here we are, eight years later. I'm curious, you know, as you buy this in, does it make a difference at all politically? How is your standing with the government?
The IMAX China IPO was done at a time of our rapid expansion in China to unlock the value to shareholders of the much higher growth rate in that region. We're much more established now. We raised the cash in the IPO, and we invested it and took out a private equity holder. By the end of 2015, when we did that, we had only 290 locations in China. We now have close to 800. We'll continue to run our business in China just how we've been doing. We have over 100 employees in China. That won't change. Local leadership remains the same. Strong relationships with government entities and exhibitors, deep connections with local filmmakers. Brand awareness study in 2019 by Maoyan showed an 85% awareness for IMAX.
Our market share in China in Q1 was up 4%-4.6% on 1% of the screens. The short answer is, we're comfortable that we've become very established during that point in time. As a matter of fact, as you know well, Eric, you know, local language is a very important part of the box office, and our relationships with stars, with directors, with studios is very different than it was at that time. We're, we're very comfortable that this won't really affect our fundamental position or our relationships.
Great. Just as a follow-up, you know, you mentioned in your prepared remarks about having some opportunities that you previously weren't capitalizing on, specifically streaming and in-home. I think this is somewhat new in terms of what you're mentioning here. Is that something you can elaborate on at this point?
Yeah, I would just say, Eric, if you look at some of our initiatives on the corporate side, like SSIMWAVE, since they're not businesses of which IMAX China bought into, we couldn't otherwise launch those opportunities in China. Unless IMAX China decided to buy in, and there was a separate strategy, which is time-consuming and complicated. As a result of this potential transaction, we'll be able to roll out our initiatives a lot more seamlessly in China than we can today.
Helpful. Thank you.
Thank you. Our next question comes from the line of Mike Hickey of The Benchmark Company. Your question please, Michael.
Hey, Rich. Hope you can hear me. line's a little shaky here. Hopefully, you guys are good. Congrats on this deal. Very exciting. I'm not sure if Natasha is on the call here or not, but if so, she may wanna chime in. Just curious, you know, I appreciate the $5 million add back in the Q1 . You look sort of pre-pandemic, it looked like for the year of 2019, the add back would be about $22 million in EBITDA. Obviously, that's off a full box office, and I think pretty good network growth, which is adding some EBITDA, I think, to the total. I guess, how do we think about in a normal China market, 1 Q is great, 2 Q, not quite as great, but obviously, we're hopeful for the year.
In a full box office or close to it, and with some network growth, Rich and Natasha, what's the add back on EBITDA? Rich, just to that question, I know you said you're gonna keep the employment the same, 100 employees. Daniel obviously looks like a superstar CEO, so it's great to hear that. I imagine that there would be some efficiencies from the team, given that they're not running a public company, and I'm guessing that some of the, you said streamline. I'm guessing some of the operational elements would be streamlined, given they're not a public company. Just curious on the math there, as much as you can help us.
In my remarks, I mentioned that we expected to save approximately $2 million, maybe a little bit more, in public company expenses, and obviously that would entail, you know, some of the people who are involved in running it as a public company and some other related costs, like board fees and things like that, you know, issuing reports, conference calls, things like that. There will be incremental savings that, you know, we did not include when we talked about the accretion and how much it will be accretive. Obviously, the more the earnings are in China, the more value we'll get to be accretive. You know, we're not gonna give guidance for the rest of the year or for next year in China.
There are a couple of reports out there that you can consult from analysts, but, you know, we're very excited about the transaction and its impact on EBITDA and earnings, for IMAX.
Yeah, nice. No, we are too. Just, I guess, second question, Rich. I remember as well when you did this deal, it was super exciting, and I think it was definitely the right move. Just curious, like, how this sort of originated, the timeline, why it makes sense to sort of do it now? Obviously, I don't want you to, you know, lay out your whole pitch again, but just sort of curious, maybe anything incremental there. Just, you know, the box in 2Q in China was a little slow. Just curious how you see the remainder of the year in network growth in that region. Thanks, guys.
China, it, you know, started to rebound from the pandemic in December, when the quarantines were lifted and movie theaters were reopened. You know, in the Q1 , as I said, it was our best Q1 ever. We have not yet reported our Q2 . You know, things are certainly better than they were during the pandemic, and it's coming back, and I think it would be our hope and expectation that over time it would, you know, come back to pre-pandemic levels and, you know, hopefully over time, even better than that, because of our increased focus on local language films. We're optimistic about the market.
In terms of, you know, why now and, and the reasons, you know, the capital markets in China have not really appreciated the IMAX China story. You know, the sector is down, the volume is very low. We used to have 15 analysts that covered us. We now have 3 analysts that cover us. I think, you know, we just looked at all the factors I discussed in my opening remarks, and we concluded that this was the right time to do it.
Thanks, Rich.
Thank you. Our next question comes from the line of Omar Mejias of Wells Fargo. Your question, please, Omar.
Hey, guys. Thank you for taking my question. Rich, maybe quick question: How will this change your go-to-market approach in China? Maybe can you talk around some of the near-term opportunities and then more of a long-term approach? Would this have any specific impact in terms of how you go about local language films? I know that's been a very successful strategy for you guys, but any immediate changes to your operational strategy there, that'll be helpful. Thanks.
I don't think so, Omar, other than, you know, the cost savings of being a public company. You know, I think we'll also take a look at our cost structure overall. It also gives us just much more operating flexibility. As I mentioned in my opening remarks, we could do different kinds of tax planning on a global basis, and we think, you know, that could be advantageous to the entity overall. Being listed on the Hong Kong Stock Exchange puts a lot of constraints on your operational flexibility, and we can, you know, more align the operations of China to the operations of Corp. I think over time, you know, other benefits will accrue.
Thanks, guys. Appreciate it.
Thank you. Again, to ask a question, please press star one one on your telephone. Again, that's star one one to ask a question. Our next question comes from the line of Eric Wold of B. Riley. Your question, please, Eric.
Thanks. Hey, Rich, kind of a follow-up on a previous question. I don't think that you've announced any new signings in China so far this year. How do we think about the ability to harvest the existing backlog in that country? Has the trend and timeline on installations out of backlog changed, if at all? You know, how flexible are you seeing that backlog in terms of, you know, moving locations around to different cities or, you know, than may have been originally planned to boost the monetization of that backlog?
IMAX Corp. issued guidance on installations in our first call this year, and, you know, nothing has indicated that we should change that guidance at this point. We had a lot of signings at IMAX this year, which, if anything, have given us more confidence in the range that we've put out before. Some of those signings are in China. Some of those installs, I'm sorry, are in China, and nothing we've seen has changed, you know, what that's gonna entail this year. It's neither better nor worse than we expected. You know, I, you know, I answered part of this in an earlier question, Eric, but I think as the year goes on, things will start to go back to pre-pandemic levels.
You know, that includes signings and installs and, you know, all of that, box office. I think we're on a decent trajectory. Again, we'll announce our earnings at the end of July, and then we'll talk about how the Q2 was. I don't think it'll be different under the context of this transaction or how it was before. The primary differences will be in, you know, maybe somewhat in the cost structure and somewhat in, you know, how accretive it is to IMAX Corp.
Got it. Thank you.
Thank you. Our next question comes from the line of David Karnovsky of JP Morgan. Your question, please, David.
Hey, Rich, just wanted to see if you could discuss with the new structure and the cash freed up, how that might impact any capital allocation decisions. In the slide, you mentioned just maybe some efficiencies around the tax side. Wanted to see if you could speak to that. Thank you.
Natasha, why don't you answer that?
Hey, David. Yeah, we, you know, we're acquiring it for $124 million. We will be using a good portion of revolver and perhaps some cash on hand at that time. You know, and really, when you think about capital allocation, it's a good use of our money. We have choices between our growth CapEx that we talk about on our earnings calls of investing in our JVs, we do share repurchases. This is a really good opportunity for us, even more accretive than doing share repurchases at the Corp. level, as Rich said in his prepared remarks, to be investing in this acquisition to bring back China.
The other part to mention, and Rich did have it in his prepared remarks as well, there was HKD 78 million of cash sitting at the IMAX China level. Some of that, you know, this now gives us an opportunity to unlock the ability to use cash as well, at a consolidated level. I think from that perspective as well, having that access to cash will help us in the long run.
There was also cash leakage because we paid a dividend out of China, and obviously close to 30% of that went outside the IMAX Corp parent. After this transaction, you know, we'll have the ability, to keep that cash as well.
Thanks.
Thank you. We have time for one final question. That question comes from Jim Goss of Barrington Research. Your question please, Jim.
Thank you. I hope it's me, Jim Goss. In a broader sense, you've been gaining a lot of traction in sort of the rest of the world ambitions, including Japan and India. I assume this does not impact, say, the relative growth ambitions in China relative to those other markets. I was going to ask about the financial structure. I believe you've used some variation on the joint revenue-sharing model in China. Is that correct, and is that what you plan to pursue in anything future?
Yeah, I mean, Jim, it's gonna be pretty much business as usual. Yes, we, you know, we had a variety of transaction types in China: hybrids, joint revenue-sharing arrangements, sales. As you know, in recent years, we've especially in lower-tier markets, tried to place more emphasis on the sales model or the hybrid model, and I think we'll continue, you know, along those strategic lines. Of course, in the right instances, we'll still do joint revenue sharing, but it's not really our overall business strategy other than enabling us to pursue our new business ventures more simply, quickly and efficiently.
Okay. In terms of the relative growth profile, no change there either? That it's just ownership structure, nothing more.
Yes.
Okay. Thank you very much.
Thank you. We do have a follow-up question from Eric Wold of B. Riley. Your question, please, Eric.
Thanks. You know, quick follow-up either Richard or Natasha. Obviously, you mentioned a couple of times that, you know, the transaction will improve your ability to use or have access to that $78 million of cash held subsidiary at a corporate level. Maybe a little bit more on the process there, you know, kind of the ability to use that cash for things outside of the region. You know, how would that happen, tax implications? You know, maybe give a lower sense of that value kind of after all things consideration.
As with all of our cash, in China, historically, I mean, we can take it out of there and use it, you know, for whatever reason we want to. You know, when we have 100% ownership and, you know, there's a little slippage cost in terms of withholding tax, there's nothing preventing us from doing it. Obviously, we'll wanna keep some cash there to run the business, after the closing, we can do whatever we want with it.
Got it. Thanks, Richard.
Thank you. At this time, I would like to turn the conference back to Richard Gelfond for closing remarks. Sir?
Okay. Thank you, operator, and thank you for joining us at this last minute. You know, the timing's a little complicated because of the time differences in Hong Kong and here, and the regulatory scheme, and that's why we had to do it at this later hour. We're really excited about doing this. I mean, as I said in my introductory remarks, from a financial point of view, we think it's very good from a from an IMAX Corp. point of view. We think it makes sense from an IMAX China point of view. They had a very, you know, undervalued, underfollowed, under liquidity stock there. We think it's a good thing for all, and we think strategically, it simplifies things.
As Natasha just said, I think we could do much more efficient tax planning. At a lot of levels, and, you know, our IMAX China team is excited about this, and, you know, they were involved in negotiations. The independent directors in IMAX China looked at it and approved it, so we think it's very much a win-win situation. You know, over time, you know, on our earnings call, we'll be happy to answer any more of your questions that you have, but we think it's a very good thing for all involved.
This concludes today's conference call. Thank you for participating. You may now disconnect.