Great. Thank you, everyone, for joining today's fireside chat with IMAX's CEO, Rich Gelfond, and CFO, Patrick McClymont. We're going to have a discussion on IMAX's growth strategy, the future of moviegoing, including PVOD and subscription programs, the current state of exhibition, including the effects of theater closures and stay-at-home measures on the industry, to name a few. First, Rich, Patrick, thank you so much for your time and for making yourselves available. Although we normally start, I think, discussing some of the long-term prospects and strategies of the business, given theater closures and other challenges that the industry is currently facing, could you just describe for us where we are in the reopening of the global theatrical circuit and for IMAX specifically? And could you talk a little bit about some of the things that IMAX is doing to manage through the current reopening process?
Sure. And thank you for having us, Michael. We find this to be one of the most useful conferences of the year. So for IMAX, we've experienced a longer, more involved story than almost anyone because we're global. We're in 81 countries. So we started to shut down at the end of January in China. And then by March, we were, in mid-March, closed pretty much throughout the world. So over the last number of weeks, we have been reopening. We've reopened in 50 countries right now, and about 80% of our theaters are open, about 1,300 theaters around the world. And it's been an incredible learning experience for us. The bottom line is that where it's safe to go to cinema, people have been turning out, and they've been turning out in very good numbers. And that's been a good thing for us.
And it's been kind of a rolling opening, and there's been different capacity things. I'm sure we'll get into that and different changes. I think one of the better things I can say is we had a very good balance sheet going in. We said we had a cash burn rate, as Patrick will talk about later. We actually expect to go cash flow positive by next month. So the reopenings, although not nearly where they're going to be eventually, have been a good thing for us.
Great. So let's talk about some of the most recent films. Tenet, which was the first blockbuster to hit the market since the pandemic started, it opened in the United States on September 3rd after international openings. I think that started on August 26. Could you just give us a little bit of a postmortem on Tenet's performance domestically and what it taught you and the rest of the industry about the moviegoing recovery?
So I think it's early for a postmortem because it's still going on. One of the things, as you know, is that all the theaters haven't opened up in a lot of places, including New York and Los Angeles. And in fact, in New York, it's a little bizarre because bowling alleys and gyms and things are open, and you could go right through the tunnel to New Jersey. So the U.S. kind of patchwork opening with limited capacity has certainly had an impact. And we hope Governor Cuomo opens New York soon. We really don't understand why it's not, but that's for a different audience, Michael. So the idea of Warner was to open on a rolling basis.
I think they came to the conclusion that there wasn't going to be a point in the near term where it was going to be safe everywhere in the world and people were going to feel like they wanted to get to theaters right away, so they started by opening it internationally, except for China. Then it opened in China and the United States a little bit later, and the results go back to what I said in my opening comments. Where it was safe and where it was there was capacity, the movie performed extremely well. So in China, it did close to $30 million on its opening weekend, and IMAX indexed 18% of the country. So think about that. Where there was pretty much we were about 1% of the screens, people really came out to see it in IMAX.
That spoke to our brand and awareness and how people feel about that there. In the rest of the world, outside of the United States, it opened to over $50 million, which was good, and IMAX did 10%. In the United States and in North America overall, there was only about 60% of the network open, and there were severe capacity limitations in some places. For example, in Canada, you could only have 50 people in a theater. It was very low. Also, according to some of the research that was done, less than 40% of the people even knew theaters were opening because, for example, New Jersey opened the day before the movie opened.
So with all of that going on, I think the U.S. had a weaker result, and I think that was probably predictable because the theaters were just opening, and there's a lot of communication going on. And I think the plan was to, going back to this rolling opening, get the world open and then have follow-on movies come afterwards. And it would show that people felt safe going to the movies. As you call it in the postmortem, I think in the rest of the world, that played out very well. I think in the U.S., despite this incredibly innovative approach by Warner, there wasn't enough awareness at that point. So I think it got opening slower, and hopefully, the movie will have legs going forward.
Right, and with New York and LA closed, that probably has an outsized impact on a film like Tenet, which probably does well in those larger markets.
Yeah. And as a matter of fact, I should add to that, when you look at kind of the psychographic data around Tenet, the biggest fan bases are on the coast, and that's where the reviews are, and that's where the buzz is spun out from. And it was bold but difficult under those circumstances.
Right. So the discussion around Tenet is a good segue into talking about what's happening in China. To your point, there were some promising results in China between Tenet and The Eight Hundred . Could you just talk about how the Chinese recovery is going and whether or not you think that's a good indication of the path that markets that are a little bit behind China in the recovery will be able to recover globally?
Yeah. So China's going extremely well. The Eight Hundred opened three or four weeks ago, and it did $115 million its opening weekend. So that was, for us, for IMAX, it was the third-best opening of a Chinese film. So that's a place where people felt very safe, and that was despite the fact that there were 50% capacity limitations in China. And so I do feel optimistic, and I do think it's going to be a model for the rest of the world. As a matter of fact, China announced yesterday that on September 25th, it's upping its capacity to 75%. And when you think about a theater, 75% is pretty full when you picture the front couple rows typically aren't a place people want to go. And the Chinese national holiday starts in a couple weeks, October 1st.
A lot of those movies were moved from Chinese New Year. So I think you're going to see a very strong recovery in China. It's a very promising beginning. And there's nothing unique about China other than the fact that they're ahead of the rest of the world to suggest that the world won't follow. So I do think it's the model, Michael.
Great. Let's shift gears and talk a little bit about the film slate. First, can you help us think about what's most exciting for the remainder of the 2020s film slate? And what are you most looking forward to in 2021? And maybe you can also talk about whether or not it's even worthwhile to talk about the film slate. Are those films set in stone, or do you see a risk of them moving given how dynamic the situation is?
So let me start by continuing my answer on China. So China has this national holiday period starting October 1, and a lot of the best movies of the year, which couldn't be released on Chinese New Year, were moved into that period of time. So we're incredibly excited about where that goes, and we believe the rest of the year in China will be very good. There's a lot of content there. I think we have a lot of local language content outside of China in places like Japan and Russia. Japan just lifted its capacity constraints also. It had been 50%, and effective this Friday, it goes to 100%. And Tenet opens in Japan. So we're pretty optimistic about given the awareness and the capacity that'll do very well there.
In the rest of the world, I think there's a lot of local language content and a number of films coming out. When you get to the U.S., it's a bit of a question mark. There are some very high-profile, terrific films scheduled. There's Black Widow. There's Bond. Wonder Woman just moved to Christmas. But I think we're cognizant of the fact that things are moving around. And actually, of those films, they all have IMAX DNA in them and IMAX special features. So there are a number of smaller films around that. But if things hold, we feel very good for the rest of the year. But we'll have to see since we have a strong balance sheet and we're in it for the long run, we're more focused on when does the full recovery take hold on a global basis.
For next year, very encouraging releases, partly as a byproduct of the pandemic because films didn't get released this year. They're moving into next year. So a lot of things are in the can that are very promising, including Top Gun, the Tom Cruise movie, Fast and Furious 9, a number of Marvel movies, including The Eternals that didn't get released this year, Kong vs. Godzilla. So those are the ones that are already slated from this year. In addition, there are a lot of high-profile films in production. Productions opened up around the world. As a matter of fact, I read somewhere it's going to open up in New York shortly. I think it's opened up in California. And those films include Jurassic World, which is back in production, Mission Impossible, Avatar is back in production.
I think in a way, when you look into 2021, it looks like an embarrassment of riches, particularly for IMAX, which is in the blockbuster business. All the blockbusters that didn't get out this year, plus those scheduled for next year, all come together. We feel very good about next year.
That's great. So production is restarting. The box office slate looks like it's going to improve into next year. Let's talk a little bit about network expansion. I think a bit less than half of IMAX's global screen footprint is in China right now. Once the pandemic subsides, what's your outlook for network expansion in China? And I just ask about China specifically because that's historically been the region where you've seen a lot of network expansion. But commentary around any other regions would be helpful as well.
We have about 500 theaters in backlog. We've been installing new theaters and opening them since July. We're scheduled to open a significant amount of theaters for the remainder of this year on a global basis. Also, we had a number of signings. It's kind of hard to believe in the middle of a pandemic, but we signed a fairly significant deal in Korea and another one in China. People understand that the premium IMAX experience is going to be valuable when the world returns to normal. I would think we'll still have significant growth in China. We're discussing a number of new things in China that aren't yet done. The Middle East is an incredibly exciting territory for us. Saudi Arabia, I think we have north of 20 theaters in backlog, and we could do significantly more than that in the country.
But for Tenet, which we were just talking about, at half capacity, we average $55,000 a screen for our two theaters that are open in Saudi Arabia. And we think we're going to open more this year and certainly more into next year. Japan is a very promising market. Our per-screen averages there are among the highest in the world, and we have a good backlog there that's opening and a lot of interest. Korea, where I mentioned we just had another signing, Korea is also one of our highest per-screen territories in the world, and that one has a lot of potential. Western Europe, France, we have a significant way to go. Germany. So I think it really is a global story. As you know, North America is highly penetrated, but in the developing markets where cinema is still growing, that's where we have the most potential.
Great. That's really helpful. Local language films are becoming a more important part of the IMAX film slate, and we've certainly seen that with the success of The Eight Hundred in China, which I think continues to do really, really well despite competition from Tenet. Could you just talk about the role of local language in your programming strategy? And even after the pandemic, given the resonance with local language in some of the tier three, four, five cities in China, do you see that being a more meaningful part of the slate going forward?
So it was always part of our strategy to do more local language films. And as you know, two-thirds of our revenue is outside of the United States. One of the, I think, messaging problems we have is getting people to understand that the North American box office and North American exhibitors are not a great comp because that's only a third of our business. So we've been focused for a really long time on how to get more local language films. And in fact, we have nine slated for the fourth quarter of this year, which is more than I think we've ever had in a quarter. And those films are in various places, including China, including Japan, including Russia, which is some of our best markets in the world. So we've been developing. We have concrete results coming as soon as the next quarter.
But I think it's particularly important this year, where you do have the pandemic and you do have uncertainties and there are moving targets in the Hollywood releases. So there was always this really good reason we go where our business is globally. But this year, it's fortuitous that a lot of our releases are coming at a time when the movies here are a little bit of a moving target.
Right. And we spoke a little bit about network expansion earlier. IMAX did sign a few notable deals this year, including a 17-theater deal with CJ CGV in June and a 20-theater deal with Wanda in July. Could you talk about the pace of signings this year and what you're expecting in terms of installations for this year and next? And if you're not able to get specific about it, maybe just talk broadly about when installations could get back to normal.
I'll turn that over to Patrick.
Sure. Yeah, we're very pleased with those signings. I personally was surprised. I would have expected signings to really slow down during this period. But the reality is our salespeople maintained a very active dialogue with our clients throughout this process. We were able to convert those two deals, which were meaningful. But we've also got active dialogue going on around the world. And the reality is our partners plan on continuing to grow their business. There's white space on the map. There's opportunities for them to grow. And they've concluded that growing with IMAX makes the most sense. So we've been quite pleased with that. On the installation front, I would say it's similar. It's always slow in the first half of the year. It was slower this year, as you'd expect. Some of that was we simply couldn't get into facilities.
Some of it was that construction of the mall or the multiplex slowed down. It's ramping up in the third quarter, and it'll ramp up further in the fourth quarter, as it always does. We won't get to the same kind of levels we did in 2019, but it is ramping up, and as we talk to our clients about next year, we'd expect a further ramp up. In essence, we think that, well, the backlog is held, as Rich described. We actually have 560 total theaters in backlog, of which 460 are new, 100 are upgrades. That backlog has held strong throughout this process. The install curve has been pushed out a bit, but we're still confident that we'll be installing those theaters.
And not surprisingly, some of your exhibitor partners have been challenged in the current environment. Could you talk a little bit about which exhibitors are your biggest customers or counterparties? And what conversations are you having with those exhibitor partners as it relates to the IMAX JRSA agreements?
Sure. Well, first, to use a few different words, we don't have counterparties. We don't have customers. We have partners. We're in the partnership business, and that's how we treat all of our exhibitor partners. And we are in business with all the important exhibitors around the world. And we maintain a very close active dialogue with them, and we're pleased. We went into this crisis in a position of strength, and we did some smart things to make sure that we had staying power. And so have our partners. They've raised capital where they've needed to. They've negotiated relief where they've needed to. So we think the industry is doing all the right things, and now that things are opening back up again and we're back on a revenue path, we think we've turned a corner.
So when we looked at it, we really went to all of our partners and said, "We're going through this together. Let's push the pause button." And we pushed the pause button with everybody for about four months. And that means we didn't collect minimums. We didn't collect maintenance because we couldn't service the theaters. They weren't open. But we took those four months, and we just tacked them on to the end of the agreement. And that made sense to us, and that made sense to our partners. Pretty much everybody agreed to that. And that's kind of it. We asked people as part of that to affirm that they owed us some money and they were going to pay us that money. And we think we're in a really good spot with all of our partners.
Great. And let's talk a little bit about IMAX's relationships with filmmakers. This year, you guys have Tenet, Wonder Woman 1984, and the next James Bond film, No Time to Die, that were all filmed to varying degrees using IMAX cameras. So can you talk a little bit more about IMAX cameras, the importance to filmmakers, and how that affects indexing or IMAX from a profitability perspective?
When we use our cameras, we call it IMAX DNA, and we have different things, either the cameras or sometimes the aspect ratio or sometimes one or the other, and when we put more IMAX DNA in a film, it tends to over-index, so what I mean by that is for a typical blockbuster, maybe we'll do 10% of the North American gross, but when you use IMAX cameras, we'll do a higher percentage, so one of the outlying examples on the positive side is, I think, on Dunkirk, we did 22% of the U.S. box office, so we encourage filmmakers to use cameras, we've worked with them, and in fact, we've developed ways to add lenses and other features to cameras that filmmakers are used to that takes their typical camera and makes it more they can use that and create an IMAX result.
So we've done more and more of that. And anecdotally, as you know, Chris Nolan's done a lot of his movies. But when the Bond movie was filmed, they intended to do a little bit of it, but they loved the way it looked, and they loved the cameras, and they wanted to do more. And the same thing with Wonder Woman. As a matter of fact, the producer of that wants to do more with the cameras. So that's a trend that's been happening on a global basis. The Eight Hundred in China was filmed with IMAX cameras, and I think you'll see more of that in the future.
Great. Let's talk a little bit more about IMAX's partnership with movie studios. Naturally, production has stalled in a lot of North America, including in Hollywood, although that's beginning to reopen again. Do you expect this disruption in filming and production to affect IMAX film supply, whether that's next year or the following year, or is that not really a concern?
I don't think so, Michael. Again, because we're in the blockbuster business, there's really a backlog of blockbusters, right? The ones that were made to be released in 2020 and never saw the light of day, so we know there's a lot in the can, and then for 2021, as I said before, there's a lot of blockbusters in production right now that are getting up and running, and I just don't think so. Because also, if you recall, there were a number of 2021 titles that were already pushed back to 2022, so sometimes we get the opposite question is, will it be an embarrassment of riches, and I don't think so. I think it'll sort itself out.
But when we look to our 2021 slate, if there were a new blockbuster release, we couldn't find more than a one-week run for it in our next year's slate at the moment.
Okay. And one thing that we've also seen during this pandemic is film studios experimenting more with alternative film distribution channels, Trolls on Demand, Mulan on Disney+. Could you talk about whether or not this is a broader shift away from the theatrical window or are studios still very supportive of the theatrical window right now?
Of the movies that were postponed, very few went into PVOD or streaming. Again, I should be clear. I'm talking about the blockbuster movies, the movies that IMAX does. I believe that the studios are very committed to theatrical releases, and they've said it. Frankly, I think streaming works great for the studios, and I understand the economics and how they can recoup investments through streaming services. To be unequivocal, PVOD is a failed experiment. The numbers haven't worked in a pandemic, and so how would they work in a non-pandemic? Everyone understands the numbers on the streaming numbers for the big, I mean, the PVOD numbers for the big films have not been released to the public.
That's because everyone in the industry understands there's been for 10 years, there have been different direct-to-consumer offerings, and whether they came on cable or whether they came on DirecTV , there's actually been a decline in that business. Streaming, I think, is an alternative, and I think especially for mid-level movies. I think PVOD just doesn't work.
Right. And I guess as a follow-up and perhaps to answer is that IMAX is truly in the business of blockbusters. Just on the AMC Universal deal, where Universal has the option to release content on PVOD 17 days after theatrical release, does that affect IMAX at all? And what do you think the implications are just for the broader theatrical window?
So I don't think it affects us because, again, as you've prefaced it, we're in the blockbuster business. And in fact, almost every movie we play for a year is for either one week or two weeks. And Universal's even said that for blockbusters, they don't foresee going to the shorter window. So I don't think it has an impact on us. For the broader business, I just don't think that that model is going to catch on. Since it was announced, no exhibitors have said they're interested in the model. And in fact, I think some of the exhibitors have specifically said they're not interested. I've talked to a lot of the studios, and I don't think they're interested in that model. That doesn't mean there won't be changes to the windowing in different ways that, again, likely won't affect us because of the blockbuster nature.
But I don't think that particular model is going to get real traction.
Right. And just switching gears a little bit and talking on the operating cost side of things, could you discuss some of the cost initiatives that have been implemented this year in response to COVID? What have you learned from that? And do you expect these cost benefits to continue beyond 2020?
Sure. So as Rich mentioned, we started this in January when our theaters in China closed. So we were ahead of the curve. We took actions then on some sort of logical things like T&E, outside expenses like consulting. As it unfolded, we have been in sort of a continuous process of looking at our costs. As you'd expect, we meaningfully reduced marketing. Some of that was variable marketing related to the titles that were coming out. But we also reduced other marketing expenses. We focused on non-essential capital expenditures to make sure we're preserving cash. We took a good hard look in March when our theaters closed down, and we concluded that we were going into this from a position of strength because we have a very flexible cost structure. We've got a very nimble business model. We don't have big operating leases.
We didn't have any funded term debt that we needed to cover amortization or interest payments. So we made the strategic decision that we wanted to keep our team together. We wanted to have the team ready to go when things opened back up again. So we've not done anything in terms of furloughs, and we didn't do anything in terms of that. We did reduce people's work time, took people down to less days per week, and we're able to realize savings from that, and that's continued throughout. So we're in a really good position. As our business opened back up again, we're up to 80% of our theaters. We need to be out there servicing those theaters. We need to be processing content. And so we think that that was the right decision for now. As things evolve, we can always make different adjustments.
But in terms of what carries over, I think it's more on process. We've learned how to do things differently and more efficiently, and that will continue. We've all kind of agreed that the degree of travel that we did between our own offices, we don't need to get back to that level. We figured out different ways to communicate. There are some workflow things that we've had to figure out differently out in California in terms of how we handle content that we'll preserve. So those kind of things. It's not fundamental changes, but I think it is process improvements that can add real value.
I do want to leave some time for investor questions. So again, if you have a question, you could submit it through the Ask a Question box on the webcast. Before I go into the list of questions from the audience, maybe I can ask one more. IMAX is often associated with the exhibition industry, but I think there are a lot of notable differences, right? It's capital light. It's focused on blockbusters. And I think relative to most exhibition partners, there's a broader international footprint. Could you talk about some of those differences and how that translates into a different financial profile for IMAX versus a traditional exhibitor?
Yeah. I mean, you've talked about some of them, but one of them I mentioned earlier, we're completely global, so our revenue is way more diversified. So by the way, the best month of the year in China is February, the Chinese New Year. That's typically the worst month of the year in the United States. So we can program very differently. We have more diversification. I think the fact we're in the blockbusters - blockbusters in general have made up a much larger part of the studio's slates over the last couple of years. And the threats from streaming and alternative content are really in the mid-range of movies, not the blockbuster range. Every studio has kind of said that's important. So I think that's a lot of wind in our sails.
I think the number of blockbusters in production has gone up while the number of movies has gone down. We have a very strong balance sheet. As I said at the beginning, we had enough to last for a very long time, and we expect to turn cash flow positive very shortly. I think we're in a completely different position.
Right. And as a follow-up to that, you and Patrick had both mentioned that you guys are approaching positive cash flow imminently. How does that change your capital allocation plans? Does it allow you to be more aggressive, whether that's buybacks or something else?
Gotcha. Right. So on our last earnings call, we had talked about that in an effectively no-revenue environment, we were burning less than $10 million per month, a bit less than 10. Now that revenue has come back, that revenue is coming with some incremental costs, marketing, and those kind of things, but it's coming with gross margin. And so we're already reducing that cash burn, and we do expect in the fourth quarter, early in the fourth quarter, to turn cash flow positive. I think it's early to start talking about the capital allocation question. Our core principles apply, which is we want to have capital to invest in growing our network where we see good return opportunities in our JV deals. Our maintenance CapEx is less than $10 million per year, so that's pretty modest. We want to have capital available for opportunities and to protect the enterprise.
And this year is the best example of that. Our strategy of making sure that we have capital made tons of sense. When it comes to returning capital to shareholders, right up until really early March, we were buying back stock. We bought about $36 million back in the first part of the first quarter. Of course, it made sense to stop that when the network was closed down. I think we need to get more clarity on what the slope of the recovery curve looks like before we'll get back into that. But I think we'll do what we always have done. When we've got excess cash and we believe that the stock is undervalued, we'll buy back stock and return that value to shareholders.
And over the history of IMAX, at least in the last several years, you guys have experimented with some new business initiatives that were adjacent to the core. Could you talk about some of the potential for those new initiatives right now? And are there any projects that you guys are pursuing at the moment?
There are a number of them, Michael. One of the things I think we could have done better at as a company is the IMAX brand is so ubiquitous and so valuable, was finding adjacent businesses to go into. And as you said, we haven't found that yet. We've got two right now that are quite promising. One is IMAX Live, which is basically to take alternative content in IMAX theaters. So you could think of things like concerts, e-sports, whether they're live or almost live, regular sports. And there have been lots of new technologies that enable you to up-res in shorter periods of time. So you could put them in IMAX theaters and make them look as good or close to real IMAX content. And we've had a number of test projects, which are promising, and we'll continue to test that out.
Obviously, with theaters closed, you can't do much work in that area. We've also got something called IMAX Enhanced, which is where we take content and we effectively up-res it in different ways. The technology enables us to take content from films or streaming services that are broadcast into the home and make them look much better. It's not an IMAX theatrical experience, but it's a much better experience than you could otherwise get. We think with the competitiveness now going on between different streaming services, and we think the value we add, and during this downtime with COVID, we spent a lot of time not only on business model discussions, but also new technologies. We're very excited about our ability to roll that out in short order.
Great. So we just have a couple of minutes left, so I wanted to offer a closing question. Over the next several years, how is IMAX leaning into the recovery to make sure that they emerge stronger on the other side? Is it trying to be more aggressive with network expansion? Is it working with your exhibitor and studio partners to ensure that there's a recovery that happens? It happens pretty rapidly. I would just love your thoughts on what you see as the path from here.
Well, not to disappoint, but IMAX is not really tied to the economic cycle. And in fact, in 2008, we did really well. Going to the movies tends to be, especially IMAX, it's an experience. And you may not want to go on vacation, but for $15, you can get something that really takes you away. So aside from the cycle, we spent a lot of time during this shutdown thinking about how we can be a better business. And Patrick alluded to some of the financial things. But we've also investigated things like direct-to-consumer marketing and offerings, changing how we use the cloud, ways we could use artificial intelligence to help manage our business better and provide better consumer things. And in 2000, when there was the last crisis in the exhibition industry, IMAX came out of it by figuring out how to convert regular movies into IMAX movies.
We did our transition from analog to digital. We didn't lay off anybody during this. We put people in the business of reimagining IMAX in a post-COVID world. We've got a lot of good things in store. Stay tuned. We'll unveil them in the coming months.
Excellent. That's fantastic. Rich, Patrick, thank you so much for being so generous with your time and for offering up all your insights. This was really helpful.
Thank you, Michael.
Thank you, Michael.
Thanks, guys.