Amc Entertainment Holdings, Inc. Q1 FY2021 Earnings Call

Greetings and welcome to the AMC Entertainment First Quarter 2021 Earnings Conference Call. During the presentation, participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded today, Thursday, May 6, 2021. I'd now like to turn the call over to John Merriwether, Vice President, Investor Relations.

Thank you. Good afternoon. I'd like to welcome everyone to AMC's first quarter 2021 earnings webcast. With me this afternoon is Adam Aron, our President and Chief Executive Officer; and Sean Goodman, our Chief Financial Officer.

Thank you, John, and good afternoon everyone. Thank you for joining us today. For the last year, I've started all our AMC earnings webcasts and all our internal employee meetings by expressing my sincere wishes that you and your families, along with your colleagues and friends have been and are still in good health during these challenging COVID times. Today is no different. I hope that you all are well. But with 250 million vaccination doses already in arms in the United States, and more than 1.2 billion doses of the vaccine administered globally, and given that millions of more vaccine injections occur every single day, both at home and abroad, this may be the last time or close to the last time that we feel the need to do a preamble on these calls about your health. Isn't that a glorious thing to contemplate? I watch those vaccination statistics closely, because let's say what it is. Vaccination is our way out of all of this. Count me among the many. So, continue to marvel. And by the way, that's little 'm' marvel, as in being amazed, not capital 'M' Marvel through which Disney will be releasing some extraordinary movies theatrically this year.

Thanks, Adam, and thank you to everyone for joining us this afternoon. I also hope that you and your families have been keeping safe and well during this time.

Thank you, Sean. Two very quick points, but important points before we open it up to your questions. First, on AMC's continuing liquidity. Let's assume that our current 43 million share at the market equity raise continues to go well. Let's also assume that the domestic box office, as a proxy for the industry's overall health, has some semblance of a recovery starting in the second half of 2021. How do we define some semblance of recovery? A domestic box office, meaning the box office for the U.S. and Canada hitting $5 billion or more in 2021 and a domestic box office of $8 billion or more in 2022. How reasonable is an $8 billion placeholder for 2022? We all have our opinions, some more informed than others, but literally no one knows for sure. After all, 2020 was a disaster, and there are myriad predictions as to how quickly a recovery in movie theater ticket sales will occur. Still reflect on this: absent a global pandemic, the domestic box office exceeded $8 billion every year between 2001 and 2019, 19 years in a row. It exceeded $9 billion every year between 2006 and 2019, 14 years in a row. It exceeded $10 billion every year between 2009 and 2019, 11 years in a row; and exceeded $11 billion every year between 2015 and 2019, five years in a row. And finally, also assume that everything else more or less works out along the lines of our current expectations. In that scenario, when looking at our liquidity, we can say now that AMC will have materially extended our liquidity runway all the way through the end of 2022. Given our sizable market share, our domestic box office in 2021 above $5 billion or domestic box office in 2022 above $8 billion would put a lot of extra money into AMC's profit. Second point, AMC now has an army of passionate, interested individual shareholders, some 3 million strong. The exact number was 3.2 million shareholders on March 11th, the last time we got an investor count. They own more than four-fifths of our then 450 million outstanding shares as of that March 11th date. Since then, a lot of AMC shares have changed hands. So, we actually delayed our annual meeting of shareholders to July 29th with a new record date of June 2, and we'll get an updated count of shares outstanding. As of that date, June 2, we'll also get the number of shareholders and their contact information in early June. We did all this in part so that we could give our current investors the opportunity to make their important voices heard. So, we already know this well before June 2. These individual investors likely hold a majority of our shares. They own AMC. We work for them. I work for them. So, by definition, their interests and passions are important to AMC. Their interests and passions are important to me. Many of you remember the extraordinary and heartwarming 1988 movie Gorillas in the Mist, nominated for five Oscars. Starring Sigourney Weaver, Gorillas in the Mist showcases the extraordinary life story of American primatologist Dian Fossey, who dedicated her life to saving the endangered gorilla species, especially where they commonly reside in Central Africa, mostly in Rwanda and the Democratic Republic of Congo. With all that support over decades, the gorilla population quintupled—more than quintupled actually, but even so there are still fewer than 1,100 gorillas alive today in this part of Africa. Saving these beautiful creatures is a noble goal. Many of our investors too have embraced Dian Fossey's cause and raised substantial funds for it. Each year, AMC raises third-party money from our suppliers and others so that our off-balance sheet charitable foundation, AMC Cares, can provide financial support to worthy causes. I am pleased to announce today that AMC Cares will make a $50,000 cash donation to the Dian Fossey Gorilla Fund. And that I also am pleased to announce today that out of my pocket, personally, I will match that AMC Cares donation dollar for dollar, bringing the total contribution from AMC Cares and for me up to $100,000. AMC is going to become one of only seven platinum sponsors of the Dian Fossey Gorilla Fund, the highest tier of their sponsorships. And I will join its Digit Society, its highest tier of personal donors. The Digit Society, by the way, is named after Digit, Dian Fossey's favorite gorilla when she was alive. Above and beyond those cash donations, we already started discussing with the Fossey Fund other ways that AMC can be of help. Within the boundaries, of course, of law, integrity, ethics, as well as the exercise of wise judgment on behalf of all stakeholders in the free market capitalist system, the shareholder is king. As I said before, the interests of our shareholders become our interests, the passions of our shareholders become our passions too. With that operator, we're ready to go to Q&A.

Certainly and thank you very much. First question comes from Eric Wold with B. Riley. Your line is open.

Thank you. Good afternoon, Adam and Sean. I appreciate you taking the time for my question. A couple of questions. I guess, maybe as the markets start to reopen, a question on your two largest states: how are you interpreting the new social distancing capacity rules in New York City, and what that actually means for capacity limits near term? And then on California, do you plan on going to 100% capacity when allowed to in mid-June, or are there some local restrictions that may not allow that?

So, Eric, whatever the capacity limitations are, they are a lot higher than 0%, which is where it was about eight weeks ago, and 25% where it's been recently, and 50%. In New York, especially the capacity—we expect that the capacity limit will be removed, but the enforcement of a six-foot social distancing rule will continue to be enforced by governmental authorities, which of course, we will respect. We've already made the decision to continue the mandatory mask policy deep into the summer at the very least, maybe beyond that, as we learn more about not just the pace of our recovery, but the pace of the nation's recovery from the spread of the COVID-19 vaccine. So, I think clearly capacity limitations are going up. That's true in New York, and that's true in LA. We intend to be very cautious. I am immensely proud of how much effort AMC put into AMC Safe & Clean. We opened our theaters back in August, and we still have not heard of one documented case of COVID-19 being transmitted guest to guest at our theaters. That's such a tribute to our people at our theaters who worked so hard to operate cleanly, responsibly, and safely. With this commitment to safety, at extraordinary expense, I might add, that AMC has shown since last August—protocols that we started working on last May. We're not about to blow it now by taking unnecessary risks. So, we’ll follow the science very carefully. We're listening to our Harvard faculty very carefully. It’s interesting that people we've been working with at the School of Public Health were so far ahead of the rest of the country, that airborne transmission was the real thing to worry about here rather than touching surfaces. And you’ll recall back last spring, all the worries about what you touched. In fact, we were out buying thousands of MERV 13 air filters for our HVAC systems, because we were way upfront that in addition to cleaning and sanitizing and wipes and gels and masks and social distancing, we needed high-tech solutions too to make sure that the transmission of the virus through the air was greatly minimized at AMC. So looking ahead, I’m sure the capacity limits are going to rise all across the country. We all know what President Biden has said. The 4th of July is going to be a great weekend in the United States, he says. We know that there were 250 million injections in arms in the United States 48 hours ago. There are more than that today. I think there will be a lot more by the end of May and by the end of June, and all this bodes well for taking capacity levels up, but we’re only going to do it safely. We think our associates deserve it, and our customers deserve it. The other thing to remember, in our case, we have the opportunity to be forgiving on capacity limitations because, as you’ve heard me say before, we sold more movie tickets than anybody in the world, and we only sold 17% of our available seats in 2019. We have so many showtimes where these capacity limits don't cost us a thing. So that’s how I’d answer your question. We’re upbeat. Capacity limits are going to rise in jurisdiction after jurisdiction, month to month as vaccinations rise and the infection spread diminishes.

Thank you. Maybe just one more, if I may. I guess, can you talk about what you're seeing in the current labor market and hiring hourly employees to come back to the theater? Are you needing to push up wage rates with all due track workers? And then, kind of taking it from the reverse, obviously you're trying to get out of this pandemic in a more efficient manner. Eventually, will you have the same number of hourly workers on hand when things ramp back up as you did in 2019, or will the number actually be lower?

So, let’s talk about how difficult it is or is not to hire. In the next several weeks, we’re going to be hiring between 5,000 and 10,000 people to beef up our staffing levels as we approach the summer season, when we see a lot of new movies being released and a lot more people coming to our theaters. Fortunately for us, AMC has always been a very happy place to work. Morale at our theaters has always been high. Our theater general managers devote so much effort to care and attention to what we call our film crew at our theaters. And so, if anybody's going to get employees to come back, I believe it will be us. We have seen some wage pressure by other employers in some low count areas. But we ourselves have not felt much wage pressure yet. How that will change over the next six to eight months, we will learn together. But I know that as captain of the ship, I'm relaxed about hiring talented people to work at our theaters, and our operations department is nervous about it. And that’s because I get to tell them to hire the people, and they have to figure out how to do it. But they’ve done it really well for many years. I think they’ll get it done again. Here's a little fact that you may not know about companies like ours, who tend to pay starting job wages. Not necessarily minimum wage; in some cases, minimum wage, other times higher than minimum wage, but still these are first jobs for a lot of young people in the country. The turnover in that workforce—what I might call the starting wage workforce—is about every four to six months. While our theater managers might stay with us for 30 years and our supervisors might stay with us for 20 years, and our hourly managers might stay with us for 20 years, a lot of our film crew, cashiers, ticket takers, popcorn poppers, they’re with us for six to nine months, have a great work experience, and then they move on. So actually pre-pandemic, AMC was hiring about 50,000 people every single year to staff up our theaters. So we’ve got a lot of practice at it. We know how to do it. I’m confident we’ll staff as needed, and that we will be able to do it without massive wage pressure. Where the wage pressure will come in is as more and more laws are passed raising the minimum wage. Because not only will it raise the minimum wage, but it will also raise wages that are close to minimum wage. But that’s a problem for 2022 or 2023, more than it is for June of 2021. As for staffing levels, we worked really hard during this horrible pandemic to get more efficient than we’ve ever been before. We slimmed down our overhead significantly. In our corporate headquarters in Leawood, Kansas, our management staffing is about a third less than it was two years ago, and the company is the same size. In our theater manager counts, the way we manage our theaters, general managers, senior managers, supervisors, hourly managers, we’re also down roughly a third in terms of the supervisory workforce. But I don’t expect that we’ll cut line staffing very much. Now, we certainly have reduced operating hours and reduced days that our theaters were open since last March when we shut all our theaters and when we reopened. For months and months, even though we were open, we only had one or two showtimes a day at our theaters, when historically we would have had four or five showtimes a day. So, we were able to cut staffing levels commensurate with much lower demand levels and attendance. But we do expect that this is about to change. Big new movies are coming out. Thank you, Universal for F9. Thank you, Disney for Black Widow. Thank you, Warner for the movies they're bringing to our theaters, and to Paramount and Sony and Lionsgate and all the studios we work with. A lot of new movies are coming, and the number of guests coming to our theaters should geometrically increase, and we will have to raise our staffing levels to serve them well. But, of course, as we raise our costs, we’ll also be raising our revenues because those people will be paying customers. I especially like serving paying customers. Just look at the food and beverage revenue per patron that we reported in the first quarter; the numbers continue to be historically high. Our food and beverage business is a high-margin business, and these people haven't been deprived of their — AMC perfectly popped popcorn accompanied by a nice 54-ounce cup of Coca-Cola. They’re heading to the concession stand and they are getting the whole AMC experience. So, we do need to make sure that we staff up so that we can let them buy these food and beverage items from us, with the high margins they bring in.

Perfect. Very helpful. Thank you, Adam.

Thank you, Eric.

And our next question comes from Meghan Durkin with Credit Suisse. Your line is open.

Hi, guys. Adam, I wanted to ask about the new shareholder base quickly. So, how do you see this going? I mean, if management thinks that increasing the share authorization is the best move for the company, but the new shareholders don't, then what is the way forward from there? And then for Sean, quick one. Are you still expecting to crossover and turn cash flow positive in Q4 2021? That's it for me.

Thank you, Meghan. I’ll take the first one. If management thinks something and the owners of our business think something else, in the free market system, guess who wins? Guess who always wins? The owners of the business, because management works for the owners. Now, we can try to explain, and we can try to persuade. And we can also listen, and we can adjust our strategies. There are a lot of ways to skin a cat. And I’m quite optimistic about the new shareholder base of AMC. Just go on Twitter, just go on Reddit, just go on YouTube, read what these people write. They love AMC. These are not people who are just going to be investors in AMC. These are going to be customers of AMC who come to our theaters and enjoy watching movies at our theaters as paying guests. So, I love the idea that we have a compassionate, committed, enthusiastic shareholder base, and I’m sure that as we work together, management and ownership, we’ll come to the right answer. Look at what we achieved—the whole point of my prepared remarks, look at what we achieved in the last year. We will achieve good things in the next year and the year after that too. The only thing that will be different, though, is before, when I wanted to talk to the company’s ownership, I could fly to Beijing, and sit down with three or four people and they had 75% of the votes, or I could talk to some of you analysts who were in frequent contact with people who also held huge percentages of our company’s shareholding base. We are going non-deal road shows with you all and meet this institutional investor, that institutional investor and make our case and pitch. Well, it’s going to be a little different now, because I don’t have five people in one office. I don’t have 15 securities analysts who talked to those institutions. We’ve got 3.2 million people now who we’re going to have to talk to, to explain what the company’s up to, what the company’s doing, what the company wants to do, why we want to do it, how it impacts them, and do they agree with it? You’re going to see a lot more outreach to literally millions of investors in our company. And it’s going to be quite public. I’ve started tweeting again. Back when I ran the Philadelphia 76ers, I was tweeting 15 times a day. And I don’t think I’ve tweeted 15 times a year in the last five years at AMC, but I started tweeting again. We are communicating with our shareholder base. Some of you saw a YouTube interview that I did. Try getting four minutes on CNBC—that's pretty hard. Well, we got 90 minutes on YouTube, and it had 250,000 views. On YouTube, they get to grade it. They give you a thumbs up or a thumbs down. The last time I looked, over 20,000 people took the time to rate this 90-minute interview, and 99.4% of them gave us a thumbs up. So, it’s going to change the way we communicate, and it’s going to change who we communicate with. But I’m very confident that the outcome will have a happy ending. Sean?

Meghan, so to your question on the cash flow forecast for 2021, what I’ll say is, firstly, that our overall forecast for 2021 remains the same as it was when we last spoke on the previous earnings call. There’s an assumption behind that. The assumption is that the domestic box office is around the $5 billion level, and international is something similar. The timing of the cash flow is obviously going to be very dependent on the timing of specific film releases. What we see from the timing on the predictions for the remainder of this year is that our Q2 cash flow will be pretty similar to Q1. The second half of the year overall will be significantly better than the first half, but you’re going to see Q3 is going to be better than Q2, quite a lot better than Q2, and Q4 is going to be better than Q3. But exactly whether or not we will be breaking even in Q4 really does depend on how the final film slate ends up at the end of the day.

Okay. Thanks, guys.

Sure.

And we have time for one last question, which will come from Chad Beynon with Macquarie. Your line is open.

Hey, this is Aaron on for Chad. You guys had some really strong ticket and concession pricing, obviously, in the quarter. Can you share how much of that strength was driven by the strategic pricing adjustments you mentioned? And do you think this is sustainable going forward when demand starts returning full and other entertainment options open up?

So, I’ll let Sean give you the specifics on what part of this high food and beverage spend per patron was driven by prices rather than quantity. But I will tell you that the lion’s share of this massive surge in food and beverage purchasing is that more people are going to the concession stand and buying more things when they get there. I remember being kind of astonished when I joined AMC five years ago that almost a third of our entire clientele went to a theater, watched a movie, and didn’t get anything; they never bought any food and beverage items. Our food and beverage revenues are divided by our total patron count. So that which is bought by the people who buy food is blended with the nothing that was bought by a third of our clientele. Well, people have been so deprived of something that they love. People love going to the movies—all the talk about streaming that we hear—people love going to theaters. It happens a billion times in the United States in 2019. What we’re seeing now is how they’ve been deprived of that enjoyment. When they come back to theaters for the first time again in a year, they want the whole experience. They want popcorn, they want a drink, they want candy, they want hot dogs, they want nachos, everything that we have. They even want some of our more imaginative food and beverage items, like flatbread pizza. So what we’re seeing is more people are going to the concession stand, and when they get there, they are buying more items than they did before. I think that trend is going to continue for quite some time, because when you think of this recovery—a rolling recovery for our industry and company—it starts kicking in Memorial Day weekend and runs into the second half of 2022. I expect elevated food and beverage spending levels for a while. Will it be at this high level? And will it stay at this high level forever? We all will find out together. No one has a perfect crystal ball to understand what the future will bring. But we are pretty optimistic that at least as the recovery begins, food and beverage spending will be higher than what we’ve seen in more routine times. As for pricing, Sean?

Yeah. Adam explained the drivers of the food and beverage statistics very well. As to pricing, that was the least significant impact. The much more significant impacts were, as Adam said, people were buying, and the number of guests going to the concession and actually purchasing products as well. So, the price adjustment was very, very small in the total drivers there, less than 10% of the total increase.

Ladies and gentlemen, we thank you all for joining us today. It's been a wild ride, and that wild ride is going to continue, but we are very much hopeful that recovery is right around the corner. Thank you for being with us today.

And that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect.