Imax Corp Q2 FY2022 Earnings Call

Good day, and welcome to the IMAX Corporation Second Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Anthony. Please go ahead, ma'am.

Thank you, operator. Good afternoon everyone and thank you for joining us on today's second quarter conference call. On the call today to review the financial results are Rich Gelfond, Chief Executive Officer; Natasha Fernandes, our Chief Financial Officer. Megan Colligan, President of IMAX Entertainment and Rob Lister, our Chief Legal Officer, are also joining us today. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our fourth quarter earnings press release and the slide presentation have been posted on the Investor Relations section of our website. At the conclusion of this call, a historical Excel model will also be posted to the website. I'd like to remind you of the following information regarding forward-looking statements. Today's call, as well as the accompanying slide deck may include statements that are forward-looking in that they pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause actual future results 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 a reconciliation to non-GAAP financial measures, including adjusted net income or adjusted net loss, adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in this afternoon’s press release and in our earnings materials, which are available on the Investor Relations page of our website at imax.com. With that, let me now turn the call over to Mr. Rich Gelfond. Rich?

Thanks, Heather, and good afternoon, everyone. Thank you for joining us. In the second quarter, IMAX delivered strong year-over-year growth and global box office total revenue, gross margin and our trailing 12-month adjusted EBITDA is nearing $100 million. Our fast rebound and strong performance demonstrate once again the appeal of our high-margin asset-light business model. Unlike our licensees in exhibition, our technology products, services and licensing revenue streams are not burdened with high operating costs or capital-intensive business requirements. On our last earnings call, we looked eagerly towards this summer’s fantastic slate and the rich pipeline of blockbusters stretching over the next two years. With summer now in high gear, that slate is fulfilling its promise. Across the last two years, we’ve been unwavering in our belief that when people feel safe and content is in supply, audiences will return to the movies, and any lingering doubt among this captive audience are quickly evaporating as we drive record-breaking results at the IMAX Global box office, affirming IMAX as a critical launch platform for major entertainment franchises and helping blockbuster releases reestablish dominance in the cultural conversation. It’s no longer a question of whether global consumers will come back to the cinema for blockbuster movies; they are back. It’s not just superhero fans; it’s not just the millennials and Gen-Z; it’s movie fans of every demographic in every region around the world turning out for films across virtually every genre. The data is showing that people everywhere are going back to the movies, and many of them, in increasing numbers, are choosing IMAX. Now that IMAX has come to lead the global resurgence in moviegoing, we are redoubling our efforts to drive future growth for the company by expanding our global theater footprint, content portfolio, and technology platform. Today, I’d like to discuss the growth trends IMAX is seeing at the global box office and a strategic outlook for China, how IMAX is driving growth across all our global networks and content portfolio, and our strategic effort to drive long-term growth by expanding the IMAX platform. First, our results at the global box office underscore the strength and differentiation of IMAX. We are not an exhibitor, and it’s an obvious fact further demonstrated by our results. Despite our first quarter blockbuster releases, our year-to-date domestic box office through June trailed 2019, our best year ever, by only 5%. In contrast, the domestic exhibition industry was down 35% over the same period. IMAX domestic box office for the second quarter was on par with the second quarter of 2019. In fact, our domestic box office in June even surpassed June 2019, and we continue to increase market share. Our domestic market share in the second quarter was 5.3%, and in May alone, we captured an impressive 7% of the domestic box office. For the first time in IMAX history, we delivered three consecutive $25 million plus global openings with Dr. Strange, Top Gun, and Jurassic World. Top Gun: Maverick has been an unbelievable success, which has nearly doubled our initial projection and will top $100 million in global box office for IMAX. From Avatar to Avengers, Top Gun: Maverick has joined the long list of films you have to see in IMAX. Films that have become typically linked with our brand demonstrate the power of our platform. Much of the credit for that goes to Tom Cruise and Director Joe Kosinski, who conceptualized Top Gun for IMAX, shot its incredible flying sequences in IMAX's exclusive expanded aspect ratio, and remain big champions of our technology. Top Gun delivered the highest IMAX opening weekend indexing ever for a film debuting over $100 million, and our indexing reached its high at 16.4% during the film’s initial IMAX run. We look forward to bringing Top Gun back to our network in August, when it will no doubt continue to excite fans. Just last weekend, IMAX delivered roughly 12% of the opening weekend box office for Jordan Peele’s NOPE, which the visionary director shot with our IMAX film cameras. Peele conceived the film for IMAX, working closely with our post-production teams, hosting the opening night IMAX live event at our Lincoln Square flagship and achieving a first in the history of IMAX by making our iconic film cameras part of the movie itself. It’s no coincidence that we are driving strong indexing and unprecedented market share at a time when more filmmakers than ever are embracing and creating for IMAX. It’s also notable that we are driving these strong results, even as concerns build over inflation and the potential for recession. This tracks with what we’ve seen during previous economic downturns. IMAX has historically been a recession-resistant business. Going to the movies is an affordable luxury, certainly cheaper than things like travel and live events. In fact, since 1980, the U.S. has seen seven recessionary years, and in all of those years, gross box office grew. Consider that our fastest pace of network growth ever occurred during the great recession of 2008 and 2009. Our momentum at the global box office is striking, but even more so given we’ve done it without the real benefit of China due to COVID lockdowns in China for much of the first half of the year and nearly all the second quarter. China has contributed little to our overall results. The environment in China remains challenging, but we are beginning to see encouraging signs. As of yesterday, 91% of IMAX theaters in China were operational. 92% of our Beijing theaters were open and 55% of our Shanghai theaters were open with various capacity limitations. During the second quarter, IMAX China's box office saw sequential improvement as the quarter progressed as more theaters became operational and Jurassic World Dominion was released day and date. We’ve also seen incremental progress in Hollywood movies gaining entry to the Chinese market. Most recently, Jurassic World Dominion became the first Hollywood film in over a year to gross over $145 million U.S. in China. That comes on the heels of The Batman, Fantastic Beasts, and Ambulance gaining approval. Of course, there is no question that the bar for approval remains higher now due to broader issues impacting the West and China. However, we believe two developments should help clear the way for more Hollywood films to gain entry into China. First, the failed experiment of day-and-date streaming releases for blockbusters has been abandoned, a misguided effort that unleashed rapid piracy in China. Secondly, the backlog of local Chinese films that built up throughout the pandemic is now running its course, creating more space for Hollywood content in the slate. We are encouraged by the mix of local and Hollywood films set at the Chinese network through the end of the year. Whether it’s a current crop of local language summer films, the always lucrative October national holiday period, Avatar: The Way of Water, which we believe has a good chance of gaining entry to China given James Cameron's relationship with the market and the franchise's history there, or the sequel to the biggest Chinese film of all time, Wandering Earth, tentatively slated for Chinese New Year in 2023. We are optimistic this situation will continue to evolve as lockdowns are fully lifted and consumers feel free to enjoy out-of-home experiences. There are parallels to where we were at the end of summer 2020 when COVID restrictions began to ease in China, and local blockbusters like The 800 ultimately opened to record-breaking business. We’ve been in business successfully in China for over 20 years. We’ve seen up years and down years, and we remain confident that the recent setbacks in the market are only temporary. As I said earlier, we are focused on building box office to drive growth across our networks, our content portfolio, and expanding the IMAX platform. First, in terms of network growth, our market share gains and the strength of our brand globally are beginning to accelerate sales activity in important markets as our partners in the exhibition industry look to IMAX as a driver for future growth. As key industry touchpoints, including CinemaCon, the Cannes Film Festival, and CineEurope return to in-person, we are seeing optimism and growing demand for the IMAX experience. We’ve been very active with our exhibition partners, signing agreements for new theaters and solidifying locations and timelines for the rollout of our contextual backlog. In the past three months, we’ve announced new theater agreements with key international partners including Aeon in Japan, Major Cinemas in Thailand, and ODEON in the UK. We’ve locked locations for the launch of contracted theaters across key markets including the U.S., India, Spain, Italy, Germany, France, the UK, and the United Arab Emirates. Simultaneously, we are enhancing and diversifying the IMAX content portfolio. This portfolio consists of Hollywood blockbusters, many of which feature IMAX DNA, local language blockbusters across a growing international footprint, a new generation of IMAX documentaries, and exclusive live events and experiences from a widening roster of new partners. The Hollywood pipeline looks very strong through the second half of 2022 and into 2023. The summer is followed by a strong fall slate that includes Marvel’s Black Panther sequel and DC’s Black Adam. As I mentioned, the year concludes with the release of Avatar: The Way of Water, the first of four planned Avatar sequels. Next year, we expect to have multiple Marvel films including new installments of Captain Marvel, Guardians of the Galaxy, and Ant-Man, multiple DC films including Aquaman and The Flash, the highly anticipated new Mission Impossible, and the latest Fast and Furious event, and of course, Christopher Nolan’s Oppenheimer, which makes groundbreaking use of IMAX film cameras. We are also very excited to see Marvel Studio’s forthcoming slate presented at Comic-Con last week, culminating with two new Avengers features in 2025. In addition to the previously mentioned China title, we have a robust slate of local language titles in key markets like Japan, South Korea, and India. In fact, we have set to release approximately 15 local language titles across roughly 50 IMAX markets in the third quarter alone. The first project in our renewed documentary slate, Blue Angels with JJ Abrams, Bad Robot, and Top Gun: Maverick breakout star Glen Powell has completed principal photography in advance of its release next year. We are excited to bring modern IMAX documentaries to our networks and create new business opportunities around them, given the demand for compelling documentary content across the landscape. We are already in conversations with streaming services about downstream licensing opportunities for Blue Angels. Finally, we are pursuing our vision of growing beyond blockbusters to include unique events and experiences globally by putting our technology in the hands of an expanding set of content creators and platform partners and becoming a destination for fandom of all kinds. We are making good progress, building our connected network to support these events and enable the delivery of live and interactive content with low latency and superior visual and audio clarity. This capability is unmatched by anyone in the global marketplace. In partnership with leading top-tier ISP partners including Verizon, NTT, Orange, and others, we’ve expanded our connected network to more than 100 theaters across the United States, Canada, and Europe, and we expect to double our connected footprint by year-end with locations in Asia and the Middle East as well. We’ve also focused on the expansion of our IMAX Enhanced initiatives. Our goal is to grow the footprint of Enhanced further across streaming platforms and high-end devices. We are enhancing our presence on Disney Plus, most recently with the IMAX Enhanced release of Dr. Strange and the Multiverse of Madness in June. We recently added LG to our roster of device partners while expanding our partnership with Philips as well. We are also looking to build out our tech stack to further drive the IMAX experience on streaming platforms and incorporate software tools that would yield recurring revenue in our streaming partnerships. Across both IMAX Live and Enhanced, we can make smart incremental investments in new revenue-driving opportunities given how we’ve successfully managed the challenges over the past two years to maintain a very strong balance sheet. In conclusion, IMAX is capitalizing on the strong blockbuster pipeline to drive solid results, grow its share of the global box office, and strengthen its brand with consumers. As we do, we are committed to building on our strengths and driving further growth for the company by expanding our network, our content portfolio, and what we can deliver for our fans in our theaters and their homes. We look forward to furthering our transformation into a premier global technology platform for entertainment and events of all kinds, and remain focused on accelerating our financial momentum and driving value for our shareholders. With that, I am happy to turn it over to Natasha.

Thanks, Rich, and good afternoon, everyone. As Rich mentioned, we posted another quarter of significantly improved performance driven by an exceptional film slate that highlighted IMAX DNA. Operating results continued to improve, which served to highlight our superior, differentiated business model. As a reminder, we are a global, asset-light licensing business with a low cost base and high incremental margins. Second quarter 2022 revenue increased 45% to $74 million from $51 million in 2021. Adjusted EBITDA increased to $25 million versus $9 million in the year-ago period, and adjusted EPS improved to $0.07 from a loss of $0.12 in the year-ago period. Net income and EPS for the quarter were constrained by a $3 million or $0.06 per share impairment of a Chinese film investment due in part to COVID-related lockdowns and depressed box office levels in China. In addition, the quarter was impacted by a $5 million or $0.09 per share valuation allowance against our deferred tax assets. This is a remnant of the pandemic, which creates uncertainty regarding the ultimate realization of these assets. IMAX Technology Network revenue increased 134% to $46 million in the second quarter from $20 million in Q2 2021. Total gross box office was $248 million, an increase of 128% over last year’s second quarter box office of $109 million. As we expected, the appeal of the Q2 slate drove strong box office results, with domestic office in May and June eclipsing that of the same period in 2019. Gross margins for this business were $31 million or 67%, up from $9 million or 44% in 2021 due to the higher box office-driven revenue and the operating leverage inherent in our business model. IMAX Technology sales and maintenance revenue for the second quarter decreased to $24 million from $29 million in last year’s second quarter. The lower revenue was the result of seven fewer revenue system installations versus the prior year comparative period, as China’s zero COVID policy for much of the quarter affected our ability to grow the IMAX footprint in that region. This quarter, we installed four new IMAX systems, three of which were sales and one hybrid. This compares to 11 new IMAX systems, of which nine were sales and two hybrids in the prior year period. Gross margins for this business decreased to $13 million from $16 million, which reflected the lower level of installation activity, particularly in China, and a loss of revenue associated with the theaters in Russia, Ukraine, and Belarus. These factors were partially offset by an increase in maintenance margin. Conversations with our exhibition partners around network expansion continue to build given our performance in the second quarter and the strong slate ahead into 2023. As history is a guide, Avatar will be a catalyst. We are already seeing exhibitors accelerate installations to get ahead of the highly anticipated sequel. We expect to exceed the number of installations achieved in 2021 with a total of between 80 and 100 systems this year. Our ability to hit the high end of that range will depend on how quickly the situation in China continues to improve. Moving on to operating expenses, SG&A, excluding stock-based compensation, was $30 million in the quarter, which was above the comparative quarter in 2019 of $26 million and higher than 2021 levels of $22 million. The year-over-year increase in SG&A is primarily driven by increased staff costs as we returned to normalized work schedules, a $3 million negative variance year-over-year related to foreign currency movements mostly in Greater China, and other expense areas like increased travel and office costs as the business returned to more normalized operations. With respect to China, during the period of prolonged theater closure, we managed our costs proactively by adjusting our workweek while maintaining our ability to quickly scale operations as soon as theaters fully reopen and business normalizes. We have also significantly reduced marketing, travel, and other discretionary spending. These important steps during the quarter to reduce our costs in China will help in the second half of the year. We ended the quarter with $110 million in cash and $230 million of debt, excluding deferred financing costs. $77 million of cash was held at IMAX China and $33 million at IMAX Corp. Our $300 million revolving credit facility remains undrawn. When combined with our cash on hand and the undrawn components of our IMAX China working capital facilities, we have approximately $470 million of available liquidity. In May, the company chose to terminate the covenant waiver period under the credit agreement. Upon this election, the original terms of the credit facility were reinstated, including but not limited to full access to our investment and share repurchase baskets, as well as the $75 million minimum liquidity covenant, which was no longer in effect. Capitalizing on what we view as an undervalued stock price during the quarter, we repurchased 2.7 million IMAX shares at an average per share of $15.92 for a total cost of $43 million. Subsequent to the quarter end, we purchased an additional 71,000 shares, bringing our year-to-date repurchases to approximately 3.2 million IMAX shares at an average price of $15.99 for a total cost of $50 million, with $25 million of remaining available room under our current program, which we recently extended for 12 months. For the six months ended June 30, IMAX China repurchased 1.5 million shares at an average price of $1.26 per share for a total cost of $1.8 million. We intend to continue to be opportunistic in repurchasing shares when we view our stock price as disconnected from the underlying fundamentals of the business. Overall, we believe our second quarter results represent the key fundamentals of our business, and we look forward to building on our momentum. Fans are turning to us to see their favorite movies in IMAX; increased revenue is driving profitability improvement, highlighting our superior, high margin, asset-light business model. We have a strong balance sheet with substantial liquidity to support strategic investments aimed at driving growth. Finally, we remain excited for the strong slate of IMAX family titles set to be released later this year and in 2023. With that, I will turn the call over to the operator for Q&A.

We will now take the first question from Eric Handler from MKM Partners. Your line is open. Please go ahead.

Yes. Good afternoon and thanks for the question. Rich, I wonder if you could just dig down into China a little bit here. Specifically, I know the government doesn’t give a lot of lead time with films, but are you getting any visibility at all into the back half of the year slate, particularly around the October Hollywood – the October holiday period? And what Hollywood films might actually get approved? And then, also for installs which were pushed out of 2Q in China? Are you – is there already a plan to get those installed and how is that going? And Shanghai, any idea of what needs to happen to get those theaters opening yet?

Okay. So, in trying to answer them in order of your questions, Eric, I think there are some promising signs about more Hollywood films getting in; as a matter of fact, we don’t have permissions to say it on the call, but we’ve heard one film that is getting in, probably towards the end of August, a decent size film. As I said in my remarks, I think Avatar will get in at the end of the year, because of James Cameron's relationship with China and how well this movie gets there. I think a lot of things going on in China, especially with the West, are a little bit tense, given the election of the new leader in China in early November. So, I kind of look around that day, and I think people are just being cautious in China before that period of time because not everyone wants to do the wrong thing. So, cautiously optimistic are the words I would have about some of the films getting in, and I think the law of gem will probably open up after the election. On your second question, the installs that went out of Q2, I mean, obviously, you couldn’t install if there was a lockdown in the city. So, my answer would be that when things return to normal and the COVID levels go down and it’s more business as usual, that’s when they would happen. With that said, when we gave our guidance for the year, we took into account some things that have moved forward from next year because of Avatar, as well as things that have moved back from early in the year because things were closed and now they are open. So, if I could be more specific, I would be, but I think you better focus on the overall range that we gave in China predicting which particular ones are moving from quarter to quarter. In terms of Shanghai, as you probably know, it was scheduled to open up; I think it was around – overall. And then it slid back a little bit. Our offices are in Shanghai; as you know, most of our employees live in Shanghai. I think the only context I could give is that this lockdown is a lot less rigorous than the earlier one, and I think anecdotally the people who work with us don’t get the sense that it’s going to be as long-term and that it’s more short-term lived. But again, I’m not being there and government not being more specific, I am giving you more of my impression than my guidance.

Understood. And that’s all very helpful and then just as a quick follow-up question, can you talk about maybe some of your live events that are scheduled for the back half of this year?

I’ll turn that over to Megan.

Yeah, we are in the process right now of making some announcements that will be coming out in September. We have some studio events that are lining up. We will even be doing something with Moonage Day Dream. We have some music events but we are going to be announcing them when we put our tickets on sale to drive the ticket sale dates. So those will be rolling beginning in September, and we also have an announcement coming with an ongoing partner that we will be announcing again in the early fall.

And by studio, what Megan means is the Q&As that we've done; we've done a number of those. We did it around Jurassic World; we did it with NOPE with Jordan Peele. There have been series meetings, Q&As before and after meetings. So, that just details what she means by studio events.

Very helpful. Thank you both.

We will now take the next question from Mike Ng from Goldman Sachs. Your line is open. Please go ahead.

Hey. Good afternoon. Thank you very much for the question. I just have two. First, it was encouraging to hear about the new theater agreements in Thailand, the UK, and Japan. I was just wondering if you could talk a little bit about the pace of signings and whether or not those signings have been skewing more towards sales type of drawing revenue sharing and if there has been any meaningful change relative to pre-pandemic? And then second, just on the installs outlook, thank you very much for that. I was just wondering if we should think about that 80 to 100 installs as a good run rate beyond this year. Rich, I know you mentioned there may have been some pull forward due to Avatar, but it is also impacted by COVID lockdowns. So, any general thoughts around that would be great. Thank you very much.

Well, thanks, Mike, and I’ll start with that. I wouldn’t think of 80 to 100 as the run rate. I mean, China has been closed for six months, and we were backed out of over 200 theaters in China, and typically they, as you know, the backlog turns in about a three-year period of time. In the first quarter, actually until May or June, there really wasn’t a film slate, and then the third thing I’d say about this year is that exhibition was just coming out of the COVID period. They were financially challenged and weren’t ready to make commitments since their financing wasn’t necessarily in place. So, I would be surprised if you should consider this guidance. But I would be surprised if the run rate next year wasn’t higher than it was this year. I think a lot of Chinese events are going on simultaneously this year. In terms of signings, again it’s very much on the answer to that one, Michael, where they didn’t open the year and say, well I know Top Gun is going to do over $1 billion and I know Dr. Strange is going to be great. So, as a result, the first half of the year, the signings were slower than a typical run rate. So, I would think first you have engagement, then you have a period where people run through the numbers and we actually look at the size and figure out if we could do the theater and are there exclusivities and things like that. And then we actually get into deal negotiations. So, as you saw in the second quarter, things started to pick up a little. There are a lot of deals right now which are closed. So, I would expect in the next month or so you will see signings activity pick up again, but I think it’s going to have to wait till that cycle goes forward a little more to get that to 'normal.' And then, the last question you asked I think was about the relationship between sales type leases and JVs, and it is what it is typically. I’m not really sure, Michael. I don’t think that it’s dramatically one way or the other, because nothing has kicked up to me and it’s kind of said we are doing more of this, but I don’t really remember the exact number. I think it’s around the same as it’s been.

Great. Thanks for the thoughts and remarks, Rich. I really appreciate it.

We will take the next question from Eric Wold from B. Riley Securities. Your line is open. Please go ahead.

Thanks. Good afternoon. Rich, maybe just I want to follow up a little bit on the China situation. Obviously, it’s kind of fluid. Visibility is not that great, but maybe just taking you kind of somewhat of a worst-case scenario, let’s say that the Hollywood titles never regain the same level of importance to that market as it did before, whether it’s because of censorship or whatever the reason, you just don’t regain a prominent number of approved titles. Can that market’s box office get back to pre-pandemic levels under that scenario, where you are mostly driven by local language titles?

I mean, I think first, Eric, I just have to say that’s a scenario that I think is extremely unlikely. Then I’ll answer your question. But in my mind, it’s kind of like saying if Hollywood releases 10% of the number of films next year compared to today, how we are going to perform. I really do think it’s that remote. We have our feet on the ground in China. We have a lot of personnel. We talk to people all the time, and I think there’s just so much going on, including the lockdowns, including the backlog of Chinese local language films, and including issues with Hollywood that have come out of the pandemic, with piracy because of day-and-date releases. And I think the paradigm has just changed there. So, I think what you are suggesting is remote. But if it happens, we will react to it. The box office would be lower for us; there is no question about that. However, if you look at our increase in local language films and you look at other kinds of events that we are trying to do, including documentaries, we would try to make up as much as that as we possibly could. Again, when you look back in 2020 and 2021 when China came out of the pandemic without Hollywood films, we actually did really well. For example, in Japan in the past when there were no Hollywood films, we did about $1.5 million per screen average using local language films and filming events. I mentioned in my remarks, and it’s in the press release, for the third quarter, we’ve read a lot of headlines about there not being many movies available and big movies, but for IMAX, we have 15 foreign language films, local language films in the third quarter, and for IMAX, we are doing special releases of JAWS and ET and we will have a number of live events in those places. So, if there were no Hollywood films, that would affect us, but we are pretty agile, certainly much more agile than the exhibitor community, and I think we will make up for a lot of it in other ways.

I think your answer is accurate and what I was looking for. I know you always have to make the choice here in China every weekend or week in terms of what film you are going to highlight on IMAX screen. It definitely sounds like there is enough replacement if that was the worst case in other places. But obviously, I don’t want to show you got that flexibility and I appreciate that. Thank you.

Thank you, Eric.

We will now take the next question from Steven Cahall from Wells Fargo. Your line is open. Please go ahead.

Yeah, thank you. So, maybe first you gave the amount of theaters as a percent that are back online in China. I was wondering if you have any sense of what the recovery is in attendance and where that’s running now. I am guessing it’s significantly below that 90th percent of spaces that are back online, but we’d love to get some sense. Secondly, I am wondering as you go into a lot of these install negotiations, given how strong the slate has been post-COVID, given how strong it looks going forward, and with recession often being something that theaters want to invest ahead of, because they tend to get more attendance, do you have any negotiating strength in terms of the terms you might ask for in some of those? And then finally, just wondering if you have material revenue yet from IMAX in hands and if there is any new streamings where we might see that show up on? Thank you.

Okay, that’s a lot of questions. If I miss one of them, Adam come back and you please fix me. Attendance in China is definitely not 91% of what we’d expect or seeing. But there are several reasons for that. First of all, there are diminished capacity in certain cities. In Beijing and Shanghai, it’s only 50% to 75% capacity, and there are some restrictions in other cities. The bigger reason is on the content side and there just haven’t been, as Eric Wold asked just before, Hollywood films; there haven’t even been big Chinese films. I’ll give you more context that we are a little bit hopeful going into this weekend; there is a movie that came out called Moon Man on Malian, which is a ranking service. It was rated 9.6 out of 10, and generally anything over 9 is considered quite good. I think Malian estimated something like RMB4.5 billion ultimate for that movie, which is about RMB4.5 billion, approximately $500 million for the run of the movie. So that would be a significant recovery, but again, I don’t own Malian and am reporting public information which I’ve seen; I think increased sales have been decent for the movie. So there just has been that turning point getting people back to theaters, and as we talked about in 2020 and 2021, once it started to reopen, it wasn’t really until The 800 came out, sort of a way like in the U.S. when some of the key movies came out. So, Dr. Strange, then Top Gun and Jurassic World created a sense of normalcy. I think you need that kind of cadence, but it’s possible that we are close to the beginning of that point, and we have to see. I know it’s not a perfect answer, but I hope that gives you a sense of how we see the market. In terms of negotiating leverage in the U.S., I think it’s too soon to see anything like that. Again, we’ve just come through this, even if we had leveraged a ton, likely we’d use it right now with these studios or the exhibitors, I think the industry is in the early stages of getting healthy and we are in the surge for the long run. We’ve been in it for over 50 years and I don’t think we look at the business, so how could we use short-term leverage to increase short-term results? As you know, during the pandemic, we worked with our exhibitors to get the industry healthy, and we gave concessions; we alluded to this before. We spent a lot of time in the couple of months, because we didn’t enforce the install schedules that weren’t a lot of context, plus the industry was in a place to do that. But over the last couple of months, we really reinforced what the rollouts are on a global basis with our exhibitors, and the fact that we had the way we did, I think has come back to us, and virtually all of the companies that we gave a break to negotiated reasonable rollout schedules right now. So, that’s more a philosophy rather than, I don’t want to overstate it, but I can’t think of any, but I just want to protect myself. Maybe there were a few, but virtually everyone who has a backlog with us has negotiated a reasonable rollout, which works for all of us, I think. And the last question on the U.S. question was about material revenue on Enhance and on live, and I think, as Megan gave the answer, with live, I think at the end of the year we will see more revenue. But I can’t characterize that as material or not, because I don’t know how it’s going to perform and I don’t know what days it’s going to come out, but I think you will be able to see an acceleration in the revenue stream as more events come online. I feel pretty good about how our rollouts are going right now.

Great. Thank you.

Next question from Mike Hickey from Benchmark. Your line is open. Please go ahead.

Hey, Rich, Natasha, Heather, congrats on a strong quarter. Awesome to see your business back. Rich, I guess, first question, I was just curious if you could speak to sort of the broader health of the exhibitor market. I guess, more specifically, domestically, your business is back, but when you look at sort of the attendance trends across the broader circuit there is still a big disconnect from what we are seeing this year compared to 2019 despite the slate. I’m just curious why you think that is and if that disconnect sustains, how that could impact your business? And then I have a follow-up for Natasha.

It’s a good question, Mike. I think it’s the lack of film products, mostly. During – as I said, during the first three months of the year, there was very little film product in the domestic market. I think it’s picked up a lot in the second quarter, and I guess we’ll figure out how much when the companies start reporting. I think there is a little imbalance in the domestic market in terms of the number of theaters. I’ve said this before; there aren’t, in our business, the number of movies coming out isn’t sized with the way the number of theaters that are out there right now. The 20-plus and the 25-plus and things like that; it’s just not a film market to fill those theaters the way it did in 2019. And as you said, I mean, we are all the way back, because our network is sized in a different way. Also, as you know well, Mike, we are global, and if you look at some of the results, Top Gun, I would say the international results were surprising. I mean, the books – they are great, but I think just how well that franchise did internationally. Again, the international nature of our business presents a different dynamic than people in the exhibition business. And we also have a lot of local language content, so to the extent there is a shortfall, we can fill in different places. I think it’s just a lag for them. There needs to be more titles coming out on a more consistent basis, and I think if and when that happens, they’ll trend more towards where they were in 2019 than they are now.

Nice. Thank you, Rich. Natasha, just curious on – one, thank you for the installation guidance; that’s something more than I expected. Just curious sort of why now, I guess, that you have sort of the confidence to give us some visibility here. I think this is the first time you sort of reinitiated your view of what you can do for the year, and Rich alluded to maybe – maybe that’s the answer. Sort of curious given this second half build here, primarily your confidence level to guide. And then, can you give us a comp of where you were in 2019? I have one 20, but I don’t know if that includes upgrades or not, and any color, I guess, Natasha, on the mix between sales type leases, JV hybrids, or upgrades would be great. Thank you.

Certainly. We – what Rich alluded to as well, that we talk to our exhibitor partners and we’ve been firming up the rollout schedules for our theater systems. Then we pass it out to the team for working hard with all of our exhibitor partners outside of China, showing them our slate and igniting growth plans in key markets. With all of that work done, we’ve been able to firm up and feel confident about the install guidance that we are providing. As for the mix, Q3 will be higher than levels seen in Q1 and Q2, with the vast majority of these plans for Q4 fairly balanced between JVs and sales in STLs as we look out for Q3 and Q4.

Did that guidanceIncludes upgrades or is that incremental?

Yes, the guidance we’ve provided includes upgrades, about one-third upgrades and two-thirds new locations.

Okay. Perfect. Alright, guys. Thank you very much. Good luck.

Next up we have David Karnovsky from JP Morgan. Your line is open. Please go ahead.

Hi, this is John on for David. Most of my questions have been answered. But I did want to refocus in on the live events. Can you give us some color around how the consumer reception has been, any highlights of attendance to these events or learnings as COVID impacts have become more or less apparent? And I guess maybe what’s the reception from artists to the events offerings been so far?

Yeah, happy to do that. We are doing a range of events, but I think one of the things that we’re looking at is we are capable of scaling our events. Right now, we are talking about 100 theaters, as Rich said; we are talking about nearly 200 theaters by the end of the year. That allows you to be in across North America and into Europe, and for artists, whether you're a musician or a filmmaker, your aim will be master places at once. You are also able to give spend that increased sense of fandom, which is a super special opportunity for people in places outside of New York and Los Angeles where you may not have access to those kinds of opportunities. We are seeing that people are really gravitating to those experiences. So, whether you’re talking about a Q&A or you’re talking about what we did most recently with Jordan Peele in NOPE, and you are getting a special introduction before a movie that you aren’t expecting or you are getting a highlighted premier event prior to opening which kind of rings IMAX and we get these special premieres in advance of the film. This gives not only increased box office that sets us apart from everybody else before the movie opens. It also signals to audiences that that is a premium and even more immersive experience in the film itself, and audiences are really responding to it. On the music level, we are working with artists all the time. We have artists coming through our offices and into our theaters, experiencing the technology, understanding how they can utilize that technology, and I can only say that there is going to be a wide breadth of experiences that will be sought after over the course of the next year because when you are dealing with sound systems and screen capability to utilize both film content and live content and be able to use that intermix creatively whether you are launching an album, using it to deploy against catalog content, or scaling a concert. There is a lot of opportunities there, and artists are very interested in how this can be utilized in new, fresh ways. So, we had tremendous acceptance both on the artist side and also I think the reception that we have received when we’ve done concerts. You can see online the reactions to the concerts to understand how much people enjoy the experience of being in an IMAX theater and watching an artist that they really love.

Great. I will keep an eye out for some of those experiences going forward. I think that’s pretty much it for me. Thanks, guys.

Thank you.

Next question will be from Jim Goss from Barrington Research. Your line is open. Please go ahead.

Hey, thanks. I’ve got a couple of, so first, there is usually a significant gap between, say, August and September or into October. This year is no exception, as outlined in your Page 11 slide. I know you’ve indicated you are bringing Top Gun there and that’s tremendous resilience. Do you have other plans to fill in both in the domestic market and rest of the world, ex-China? You did talk about China quite a bit, so I just wondered about the other parts.

Yes. I think I mentioned, Jim, that we have 15 foreign language films in the third quarter. I think like four are five from China and the other ten are from other territories. In addition to that and you mentioned, Top Gun, NOPE has only played in North America. So, we are playing that in the rest of the world starting in a couple of weeks, and I think that will do pretty decent box office. Then we are also – we DMR, meaning converted into IMAX, JAWS and ET. I can tell you that particularly JAWS, because I have seen the other one looks spectacular. But we’ll see what the appetite is to come back to see this in live. I don’t think it’s ever been released in IMAX; it’s not a stretch to suggest that big shark and IMAX summer will do well. So we have some hopes around that. We are bringing Avatar in, and I think given the promotion around the opening of Avatar World of Water, there should be decent interest in people re-seeing Avatar. Megan said there are a couple of live events we are looking at during that period of time. So, between all of that goes, it’s not like the last quarter, but I think we have lots of opportunities.

Okay. And – thanks for that – and you’ve been perhaps the biggest beneficiary of this premium preference as attendance has resumed. I was just wondering if you have any concern as to the risk of losing customers back to some of the other films as things normalize to a greater extent, or do you think you are establishing some new IMAX favorable habits that you think you can sustain?

Well, I mean the market share number suggests that the preference is growing to go to IMAX rather than alternative ways of seeing it. Anecdotally, you look at the conversation and the culture of events we’ve created around several of these movies coming out over the last period of time. The global nature of the numbers coming out. So, I don’t have a crystal ball, Jim, on where that’s going; but looking at the numbers that I’ve seen and looking at our brand recognition, I add that we’ve implemented more digital marketing efforts and different ways to promote the films, not only through live events, which we just talked about, but other ways in the ecosystem on a global basis, and given the way we are looking forward in the film slate without going through it again, films shot by Christopher Nolan, who typically index very well, Marvel Films, DC Comics films, and the slate is very IMAX friendly. I would like to think that these trends have staying power.

Okay. Maybe one last quick one. Your DMR process benefits more films for the efficiency you create and now you are also doing it domestically and internationally, where – has that faced some challenges? How is that process working in terms of the efficiency of creating a product and what iconic costs?

Well, it’s always worked well, Jim, and actually we are in the process of moving a bunch of that to the cloud to make it more efficient and more user-friendly on a global basis. As you know, we are always ahead of the curve and trying to pick up the next things. So, it’s worked well, and I think it will get more important.

Alright. Thank you very much.

We will take the next question from Chad Beynon from Macquarie. Your line is open. Please go ahead.

Good afternoon. Thanks for taking my question. Just one from me kind of a follow-up on gross margins or EBITDA margins, I guess, in line with the last comment, but this one is more directed for the VSPLs and the installations that you said should expand in the back half of the year and into 2023. Given everything that we’ve seen with inflation and supply chain, should there be pressures on margins when you install these, or can we start to see some gross margins on those installs closer to what we saw back in 2019 and 2020 or 2018 and 2019 when things were really coming along? Thank you.

Well, we have inventories and we were concerned about some of the supply chain issues. So, we filled pretty much a lot of what we have then saw this year, bringing it into backlog. So I don’t think we have a lot of pressure on the cost side. Again, the margin is always a mix of which installs you have and what parts of the world, so, I can’t answer that but I can tell you that we haven’t left ourselves vulnerable this year to the supply chain issues.

Appreciate it. Thank you very much. Great quarter.

Thanks, Chad.

It looks like there are no more further questions at this time. I would like to turn the call back to our speakers for any additional or closing remarks.

Yeah, thanks, operator, and thanks, everybody for joining our call. If you just go out to a very high level that as some part of our network almost half has either been closed or operating at limited capacity, when you are in China and Russia, and literally do the math. We managed to be almost identical to 2019, the best year in IMAX’s history. Life is imperfect, but I think if you are sitting where IMAX is and with the macro trends and the win that you bet, I am quite pleased with where we ended up for the quarter and I am pretty pleased with where we are for the year. So we’ll be back to you at the end of the next quarter, and appreciate you taking the time to answer all those well-thought-out questions.

This concludes today's call. Thank you for your participation. You may now disconnect.