AMC Entertainment Holdings, Inc. (NYSE:AMC) Q2 2020 Earnings Conference Call August 6, 2020 5:00 PM ET
John Merriwether – Vice President-Investor Relations
Adam Aron – President and Chief Executive Officer
Sean Goodman – Chief Financial Officer
Conference Call Participants
Eric Wold – B. Riley
Jim Goss – Barrington Research
Meghan Durkin – Credit Suisse
Jason Bazinet – Citi
Eric Handler – MKM Partners
Aaron Lee – Macquarie
Greetings, and welcome to the AMC Entertainment Second Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 6, 2020.
I would now like to turn the conference over to John Merriwether, Vice President of Investor Relations. Please go ahead.
Thank you, Kevin. Good afternoon, everyone. I’d like to welcome you to AMC’s second quarter 2020 earnings conference call. With me this afternoon is Adam Aron, our President and Chief Executive Officer; and Sean Goodman, our Chief Financial Officer.
Before I turn the call over to Adam and Sean, let me remind everyone that some of the comments made by management during this conference call may contain forward-looking statements which are based on management’s current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. Many of these risks and uncertainties are discussed in our public filings, including our most recently filed 10-K and 10-Q. Several of the factors that will determine the company’s future results are beyond the ability of the company to control or predict. In light of the uncertainties inherent in any forward-looking statements, listeners are cautioned to not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events.
On this call, we may reference measures such as adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency, among others, which are non-GAAP financial measures. For a full reconciliation of our non-GAAP measures to GAAP results, please see our earnings release posted in the Investor Relations section of our website earlier today.
After our prepared remarks, there will be a question-and-answer session. This afternoon’s call is being recorded, and a webcast replay will be available in the Investor Relations section of our website at amctheatres.com later today.
With that, I’ll turn the call over to Adam.
Thank you, John. Good afternoon, everyone. And thank you for joining us today. Needless to say, I begin the call as I’ve begun so many over the past several months, I do sincerely hope that all of you and your families are safe and healthy. This is a time that AMC has been waiting for since mid-March, of this horrid horrible year of 2020. More than a third of our theatres in Europe and the Middle East are already open once again and essentially all should resume operations within two weeks.
And of course, we are greatly looking forward to the reopening of our theatres in the United States, which seems to be at hand in most, but not all U.S. cities by the end of this month. Both for financial and psychological reasons, we are so eager to delight moviegoers as AMC has done now for a full 100 years.
It’s no surprise to anyone that was all of our theatre operations suspended between March and May. And most of our theatre operations suspended even now. The COVID-19 once in a century global pandemic has significantly impacted the financial performance of companies across multiple sectors, with the movie theatre industry being particularly hard hit, and AMC has not been exempted from that faith.
With no revenue to speak of coming in the door until June and then for AMC only in some countries in Europe, you are already all aware that the second quarter of 2020 was arguably the most difficult and unsettling quarter that the theatrical exhibition industry and AMC have ever seen.
I cannot tell you though enough how proud I am that the entire AMC organization has responded quickly, boldly and decisively with an exceptional level of commitment, tenacity, and professionalism, to adjust our plans and then to deliver on very aggressive new targets, whether those be for massive capital expenditure and operating expense reductions, endless time devoted to landlord negotiations, achieving dramatic enhancements to our liquidity position or the skillful crafting of safe and responsible theatre reopening plans.
This afternoon, similar to our first quarter earnings call, we really won’t spend very much time at all on the actual financial results of Q2. But instead we’ll focus on what we believe is a primary interest of most of you. And that is to update you on the actions we’ve taken to manage through this crisis, our preparations to safely welcome guests to our theatres once again and our general thoughts about the prognosis for our company, looking forward.
The four priorities that we outlined on our last call remain our primary focus. One, continuing to take actions to bolster our liquidity and to deleverage our balance sheet; two, reducing our cost structure and spending posture, realizing that revenues may take time to ramp up. Three, reopening our theatres as smartly and as professionally as we can and listing some of the world’s top scientists and experts to help us offer a safe and clean theatrical environment for our guests and associates.
Leveraging our industry-leading guest platform and rich consumer database to drive attendance and implementing a wide variety of strategies to optimize theatre profitability once theatres do reopen. And four, managing our business to whatever structural changes, world events or industry dynamics are throwing in our direction.
In the 60 days or so, since we last spoke, AMC has made significant progress in each of these four focus areas. The two most important of which include, first, our recent successfully completed debt exchange, a new first lien debt issue that lowers leverage, provides additional liquidity and extends debt maturities, as well as second, the signing of an historic agreement between AMC and Universal Studios that we believe will expand the market for both Universal and for AMC. It will preserve the most important period of time during an exclusive theatrical window in which most of the movies revenues come in the door. While allowing AMC to share a new premium video on demand revenue streams.
Our agreement with Universal also works to increase studio profitability from theatrical releases, which over time should lead to the green-lighting of more theatrical releases, which after all is the lifeblood of our core business. We’ll share more in a moment, but before we do, I’ll now turn the call over to Sean to update you on the second quarter and some of the more recent specific actions taken by AMC.
Mr. Goodman, sir, you’re on.
Thanks Adam. And thank you everyone for joining us this afternoon. I do hope that you and your families have been safe and well during these difficult times. As Adam mentioned, our results for the quarter was severely impacted by COVID-19 crisis, which necessitated the suspension of all our theatre operations in the U.S. for the entire second quarter and all of our international theatres for two-thirds of the quarter. Theatres in our international markets began to reopen in early June, but only on a limited basis. And for the quarter, international attendance was only 100,000 tickets sold compared to around 25 million last year.
As of June 30, we have 37 international theatres open, mostly playing older library Hollywood titles, and some local content. As of July 31, that number of open theatres had grown to more than 130. And as of today, we have 184 theatres open internationally. We now have theatres open in every country where we operate abroad. It’s very early days, but the initial results from our international locations are encouraging, particularly with respect to food and beverage spend per person, which is holding up nicely and actually running well ahead of last year.
We’re also especially encouraged by the performance of a local language sequel that just opened in Spain. The sequel this year is actually driving more box office revenue, even in these coronavirus impacted times than the original did last year. And the original was the single highest grossing domestic film in Spain in 2019.
Hopefully, this is a harbinger of what can occur when new Hollywood titles are released in the U.S. and overseas starting later this month. But with virtually no revenue generated in the second quarter, our bottom line financial performance in the second quarter is almost irrelevant. What is crucial is how we performed against our priorities, namely the preservation and enhancement of liquidity, the reduction of debt and the management of our expenses.
From a liquidity point of view, as of June 30, 2020, we had $498 million of cash, plus $10 million of restricted cash. Our total cash burden for the second quarter was $292 million precisely within our targeted monthly cash burn that I guided you to on our last call.
In early June, as you know, we announced an exchange offer to our senior subordinated debtholders and other related transactions, which closed on July 31. More than 87% of the senior subordinated noteholders elected to participate in exchange resulting in the issuance of approximately $1.46 billion of new second lien notes that are not due until 2026 and the elimination thereby of $555 million of debt.
In addition, as part of this overall transaction, we raised $300 million of new cash, prior to transaction costs, premiums payable and original issue discount from the issuance of new 10.5% first-lien notes due in 2026. $200 million of this new cash was raised from subordinated debt holders, and $100 million was raised from Silver Lake.
Also in conjunction with the debt exchange, the $600 million of 2.95% Silver Lake convertible notes had been restructured to first-lien convertible notes with a maturity extension from 2024 to 2026. And a reminder that the coupon on these Silver Lake notes remains unchanged at an extremely attractive 2.95%. The transaction also calls for the interest expense on the exchange notes to be picked due in 2026, instead of cash due now for the first 12 to 18 months. This saves the company between $120 million and $180 million of cash outlaw – outlay in the coming four to six quarters.
In summary, this debt exchange transaction meaningfully improves our financial position in four key areas; one, reduces net debt by $555 million; two, provides incremental liquidity of $300 million before discounts and transaction costs from the issuance of the new first-lien debt; three, provides $120 million to $180 million of enhanced liquidity from the ability to defer cash interest payments on newly issued second-lien debt for the first 12 to 18 months; and four, extends maturities for approximately $1.7 billion of debt that was previously due in 2024 and 2025 through to 2026. As a result, our liquidity runway, should theatre operations remain suspended, is extended through 2021.
Switching topics; I’d like to provide an update on our negotiations with landlords. Our strong and long-term landlord relationships remain the foundation upon which we have successfully been able to defer or abate the vast majority of rent owed during the second quarter. Currently, we have over 900 distinct theatre leases and we have already reached agreements on approximately 75% of our leases to defer or abate rent. Each agreement is unique, but you should note that in the second quarter, the vast majority of the rent expense shown on the face of the income statement has been deferred with repayment terms mostly around 24 months, although, a number of agreements have repayment periods that extend through the remaining lease term, which in some cases is in excess of 10 years.
As I previously mentioned, the terms that we have agreed with our landlords are generally confidential and specific to particular facts and circumstances for each landlord and each theatre. While future cash rent payments will depend on our ultimate reopening schedule and level of attendance, we expect that a sizable portion of the rent reflected in the income statement for the third quarter will also be deferred.
Shifting to capital expenditures; we have slashed capital expenditures to minimize maintenance – to the minimum maintenance levels while theatres’ operations remain suspended. We’ve halted all but essential maintenance CapEx and growth CapEx that is associated with projects that we’re committed to prior to the onset of COVID-19.
During the second quarter, our CapEx spend was only $26.1 million, net of landlord contributions, most of which was committed prior to the outbreak of the pandemic. This spend is $85.4 million lower than the same quarter a year ago. We continue to expect 2020 net CapEx to be between $130 million and $160 million.
Finally, before handing the call back over to Adam, it’s worth noting that we are using these unprecedented times as an opportunity, to intensely examine literally every category of our spending and all plausible opportunities to enhance our efficiency and improve our profitability for the long-term. While the closure of our theatres is temporary, the learnings and the actions that we are taking will have an adjuring benefit for AMC.
Thank you, Sean. In response to the unprecedented environment that we find ourselves in, we’ve taken bold and decisive action to get through this period of extended, suspended operations to best position AMC for the future.
Many of my personal friends and business colleagues graciously have asked me in recent months, how stressed am I feeling around, or am I holding up or something like that, given the tough hand that we and the movie theatre business have been dealt? Ironically, I’ve been able to reply each and every time that I honestly haven’t felt any pressure, because if we want AMC to get through this, it was just so obvious to us exactly what we had to do, and so essential that we get the things we needed to do actually accomplished, and to do so expeditiously. The lack of doubt made it easy to proceed.
Dating back to March, in a very short period of time this is what AMC has done; eight crucial steps, absolutely necessary, which enable us to move forward. One, we suspended operations and mothballed a multibillion-dollar global enterprise with 1,000 locations spanning three continents in only a week. Two, we’ve reduced our capital expenditures and operating expenses so dramatically while simultaneously stepping up our cash management efforts with such stringency that our sustained cash outlays were cut by an incredible 80% to 90% in just a matter of weeks. Three, in April of 2020, we raised $500 million of new public debt. We needed that cash.
Four, we renegotiated hundreds and hundreds and hundreds and hundreds of theatre leases the world over. In addition to deferring and abating rent in 2020, we took this opportunity to permanently lower some rent agreements going forward. Not talking about the reimbursement of deferred rent dating back to Q2 or Q3 of this year, but looking at ongoing lease contracts. We already know for example, that our rents owed for 2021 operations and for essentially all the years thereafter will be permanently lowered by at least $35 million per annum as a result of these lease renegotiations. And discussions and negotiations with landlords are still ongoing and continuing in many cases,
Five, John just took you through the successful bond exchange offer, which reduced our debt, increased our cash and extended our maturities. I want to take this opportunity to thank our investment bankers and attorneys, who so ably helped us through this complex transaction, namely Moelis & Company, and Weil, Gotshal, respectively. Thanks also to all the firms who thought long and hard about this effort to strengthen AMC.
Our senior subordinated noteholders led by PGIM and H2 deserve special mention, as they two worked incredibly hard to buttress AMCs future. Many of these noteholders provided AMC with much needed additional cash as did Silver Lake. Their actions were consistent with the support that AMC has enjoyed over many, many years from all of our stakeholders up and down the capital stack from top to bottom, which were also truly great.
Six, John also just related to our pouring through every operating expense line and every staff position in our headquarters and at our theatres to reduce our cost structure going forward for the long haul. We’ll be talking about this in more detail on our next quarterly call, but you should know that our targets were reduction in operating and capital expenditures is in the several hundred million dollar range.
As part of the effort to reduce costs, it’s always painful to have to say goodbye to some truly talented managers. But under these unique circumstances, we had no choice but to reduce staffing at our corporate headquarters by about one-third fewer people going forward as compared only a year ago. Our theatre management teams have similarly been streamlined. We are certainly getting leaner than we have ever been before.
Seven, we developed our extremely important AMC Safe & Clean protocols consulting with the Clorox Company and faculty of Harvard’s prestigious School Public Health. This all being done with the overarching goal in the near-term of resuming theatrical operations safely and responsibly. And finally eight, we just negotiated an industry changing agreement with Universal, that will reshape exhibition for years to come and we’ll do so in ways that we believe will materially benefit AMC shareholders.
There are signs that we’re starting to emerge from the deepest abyss of the pandemic, as our international theatres began reopening over the last 60 days. Just yesterday, we welcomed back our 1 millionth paid guests since resuming operations in our international markets. And we are literally counting the days to our U.S. reopening, expected to commence only a couple of weeks from now in the United States.
Let’s turn to the subject that many of you are now thinking about. Our agreement with Universal, what it means for AMC and what it means for exhibition more broadly? As you know, from our previous announcement, this is a multiyear agreement that provides for a theatrical exclusivity for all Universal Pictures and Focus Features theatrical releases for at least three weekends comprising at least 17 days, the time when as much as 80% of the films theatrical viewing has already taken place. After which time, the studio will have the option to make its titles, available across premium video on-demand platforms known as P-V-O-D or PVOD, including our very own AMC Theatres on Demand accessible at the www.amctheatres.com website. Universal has said publicly, that not all of their titles will move to PVOD after 17 days, but admittedly, it does provide Universal with that option. Even though the Universal agreement is about a week old, we already have offered similar arrangements to all of our studio partners. Undoubtedly, some will and some will not take us up on our offers to do the same.
So why didn’t AMC do this? Here’s the answer. We cannot just live in the past, spear change and hope that it will never take root. Sometimes one has to stare change in the face, recognize that it has or soon will arrive and reshape it to one’s own benefit. That’s what we’ve done at AMC. Yes, the press seemed focused on Universal’s experiment with Trolls back in March. But we were looking at much larger and more important trends. Take a deeper look at what has happened of late. Netflix has outbid major studios for one script after another. Disney took Hamilton, Artemis Fowl and now Mulan to Disney+. Warner took SCOOB! to HBO Max. Paramount took SpongeBob to CBS All Access. Sony sold Tom Hanks’ new Greyhound to Apple TV+. Exhibition will not receive a penny on any of these movies.
Sure, some hope that this is merely a short-term coping with closed theatres during the virus. But we saw a changing industry where we at AMC needed to figure out how to be included in the economics of all film viewing, whether it takes place in our theatres, on our own website or on people’s couches at home. Incidentally, our capital costs invested in someone’s couch at home is precisely zero.
Although the financial terms, the Universal agreement are confidential. I can tell you that the agreement allows AMC to participate handsomely in the entirety of the economics of this new structure, including receiving a share of each films PVOD revenue stream, whoever may be the retailer, as well as receiving considerable additional economics when the film is retailed on our own AMC Theatres on Demand service.
AMC benefits in three ways with this new Universal agreement and hopefully with other studios where we do something similar. One, we now will be cut in included and paid when Universal movies go to the home early. Two, hopefully the market will expand. Think about this very carefully of the hundreds of movies released last year in 2019 pre-COVID, only about 15 grossed more than $150 million domestically, only another 15 or so grossed between $100 million and $150 million domestically. That means that even though movie theatres sold well more than 1 billion tickets in the U.S. and Canada last year, which is a stunningly high number in total, only 30 movies in total, so more than about 10 million tickets in the U.S. and Canada, only 15 movies in total sold more than 15 million tickets in total, that in two countries of more than 340 million people in total.
How much can movie going and movie viewing increase with PVOD? As AMC will meaningfully share in that new revenue stream, this potential dramatic expansion of revenues should protect AMC against the cannibalization that admittedly will occur as some people shift from theatrical viewing to home viewing instead. This is something that we have very carefully researched, very thoughtfully modeled and something that our company has been thinking about for almost five years.
And the third way that we’d benefit from PVOD is this. PVOD creates the added potential for increased movie studio profit from that added home viewing of theatrical movies. More profitable theatrical movie making should logically in turn lead to more theatrical movies being made. The reaction of one major studio to our Universal agreement was that AMC would take some incoming flack. But more importantly, and I quote them verbatim, “Adam, you’re going to take heat, but with this action, AMC justice saved exhibition. Honestly, we were going to green-light fewer and fewer theatrical movies. Now with an added revenue stream to studios, we’ll be green-lighting more and more theatrical movies instead.” No doubt, some of you may be interested in our reaction to Disney’s Mulan announcement this week, I’ll save the sharing of our view until one of you ask this during Q&A.
Before we open up the call to your questions in summary, one, AMC remains focused on driving down costs, preserving and increasing liquidity and reducing debt as we manage our ways through the current market challenges. Two, the safety and wellbeing of our guests is enormously important and those of you who have visit our theatres when they reopen, we’ll see for yourself that AMC is all over this issue of providing a clean, safe and enjoyable experience at our theatres as we resume operations.
Our marketing activity will be extensive to convinced moviegoers, to get out of their homes and apartments, where they’ve almost been imprisoned since March. And see movies once again at AMC’s and audience theatres in our big seats with our big sound and on our big screens. Three, AMC is not afraid of change. And it said, we believe that we are forcing that inevitable change to bend in ways that will serve AMC well and will benefit AMC shareholders as a result.
And four, finally, as we celebrate AMC’s 100th anniversary, we’re thankful to all those institutions standing by us during difficult times, we’re especially thankful to the dedication and commitment of our management group and our associates who have been and continue to be working tirelessly with great dedication and a great personal sacrifice to allow us to emerge from this crisis as a strong industry leader, ready to provide thrilling experiences for audiences at home and abroad as we’ve done for decades and decades and decades in century number one now behind us.
With that, thank you for listening. We now look forward to taking your questions. Operator?
Thank you. [Operator Instructions] The first question is from Eric Wold with B. Riley. Please go ahead.
Thank you. Good afternoon. A couple of questions probably for Adam, I guess. I guess, four questions on the Universal deal. Obviously, you spoke with universal extensively on this digital modeling. How do you think about – how should we think about the decision that we made as to whether or not a film is pulled after 17 days or not? I’ll leave that to you kind of answer how you want it. And how will that be communicated to consumers? This communicated well ahead of time? Will they be – a movie showing in a screen so they know it’s on PVOD in 10 days or not be announced until right the release to PVODs. I just want to make sure that they’re not obviously adjusting their behavior as much as they can with advanced notice.
Thanks, Eric. And I really appreciate the question because it gives me an opportunity to make sure that everybody in the call understands what we actually did. First of all, under the Universal agreement, no movie is being pulled. The movies that go to PVOD at 17 days are going to stay in theatres. And we expect to still sell a whole bunch of tickets at our theatres, even when movies are available on PVOD. There are certain advantages to watching a film on a 40-foot screen than watching a film on a 40-inch screen. Our company has invested billions of dollars over the past few years to make sure that our theatres are in a great condition and that our fleet of theatres appeals to consumers.
Similarly, I remind everybody, the conventional wisdom about streaming and PVOD and all this before the pandemic was – by the way, conventional wisdom from people who I disagree with, but that’s a different issue, without theatres are an anachronism. Why would anybody go to a theatre, people want to stay home. If the pandemic has taught us anything, it said people would do anything to get out of their house or their apartment. If you told me right now, I could go spend three hours at a hardware store. I would tell you that’s an exciting afternoon. And so movies aren’t going to get pulled from theatres. They’ll stay in theatres, we’ll still continue to sell tickets. And on that score yet another reminder, every house has a kitchen. Every apartment has a kitchen. People go out to restaurants all the time.
On the issue of when people find out that a film will be going to PVOD, remember that not all films will, so already you’ve unpredictability as to which films are going to go PVOD and which films are not going to go PVOD. Especially, if some other studios take very few films to PVOD and even Universal itself has said that on many of their films, they won’t go to the home in 17 days. By contract with the Universal, they are not allowed to talk about a film being released to the home or to tablet or cell phone or whatever other distribution channel to your laptop I guess.
They’re not allowed to date that until after the 10-day of the after release. So the only advertising for a movie through its first two theatrical weekends, when well, more than half of the movies, revenues are booked, we’ll say only in theatres. It’s only the Monday after the second weekend, where Universal can start talking about the fact that this starting this coming weekend, the movie be available in theatres and at home.
And finally, one last important point, buried in the press release, no one buried, but it was there, but I’m not sure everybody focused on it. In the press release, we announcing the agreement we contractually reaffirmed with Universal the 74-day electronic sell through window and the even later video-on-demand window than that.
So other than the PVOD channel, those cheaper distribution vehicles that exist today for consumers to watch movies in other than theatres are not going to slide forward. And there’s been enormous discussion and pressure within the industry over the past four or five years to bring those windows forward. Those windows have been fully protected under the terms of the Universal agreement.
Perfect. Thank you. And then just one last follow-up on, you think about the theatres reopening in the coming weeks. And we think about it kind of the combination of the operational changes you’ve made to reduce expenses going forward, including, how kind of offset by some of the expected pressure from enhanced cleaning procedures, et cetera. How should we think about on a consolidated basis, the best you can domestically, what kind of a breakeven level of attendance would look like
So that simple question, complicated answer. First of all, on enhanced cleaning costs, they are sizeable. I’ve seen others of our competitors’ state, what they think they are for their chains. We think they are appreciably higher in part. Because we’re taking this so seriously, we’ve got electrostatic sprayers and HEPA vacuums and upgraded MERV 13 air filtration filters that are quadrupled the cost of what we had previously. We can’t eat all these costs.
Ultimately, we’re going to have to pass these costs on the consumer. As all business, past costs on the consumer, well I don’t think you necessarily should assume that enhanced cleaning costs are only going to come out of our bottom line. In terms of breakeven, it’s a question I’d like to say for the next quarterly call when we can exactly and precisely identify our cost cutting targets for 2021.
The – as I said, our ambitions are high. We already have $35 million found in rev reductions. We’ve already knocked several hundred people off the payroll. And we’re cutting costs all over the place. So we’ll be looking for hundreds of millions of savings, either in capital expenditures or operating expenses and by definition, where we land will also affect the breakeven point.
But let me just share with you this number. The real question is, are we better-off open or closed? And by our calculation, it were more than about 25% of last year’s volumes. We’re better off open than shut. Because the theatres would be cash positive. They may not be generating as much EBITDA as they degenerated if we were had last year as a tennis level. But there’ll be generating contribution to overhead, contribution to landlord rent, payments.
And I haven’t seen any research that suggests that with new Hollywood content, with new titles, that we’ll be doing less than 25% of last year’s attendance levels for any lengthy period of time. So I think that’s the most important number. If we cross 25% of last year’s levels, we’re better off open than shut and of course, the sooner we can ramp up to much higher attendance level, the sooner it won’t be an issue are we better off open and shut, it’ll be an issue of how much EBITDA are we generating and driving the business forward.
Perfect. Thanks, Adam.
Next question is from Jim Goss with Barrington Research. Please go ahead.
Okay. A couple more on the topic du jour, Adam. When you say 80% of their revenues are box-office revenues, usually generated in the first three weekends? I wonder if that figure changes is, gets more compressed. If people do know that a PVOD will be available and I guess that’s always been the whole argument and against a longer window, because even though the majority are done upfront that’s because there’s a longer lag.
And so I wonder what you think that might come down to and what sort of PVOD sell through, do you think you’d need to make up for whatever it is you might give up. And are you suggesting today that whole issue might involve not just that particular film, but the broader group of films? So that’s how part of the rationale as well, and maybe call it that first?
Okay. So on the 80% figure, that number is a pretty good number, but it does vary title by title. And on some movies, it’s only half of the businesses done in the first three weekends. On other films, it’s almost a 100% of the businesses done in the first three weeks – by the end of the first three weekends. Obviously, the bigger the film, the more successful the film, the more of its revenues will occur after 17 days. Having said that the bigger the film, the bigger the potential theatrical revenue to come, that could actually cause a studio not to want to take on film to PVOD of 17 days. They might prefer to wait and knock the – the exclusive theatrical window for all they can get. Remember there’s not a requirement here that all movies go to the home at 17 days. It’s an option.
On a film by film basis, for each and every studio, who partitioned something similar, and we’re putting them in the driver’s seat. Because as I said, we believe that we’re well compensated, if they go to the home. How much we need to essentially breakeven from cannibalization, really depends on how big PVOD becomes or not, and for what films is it allocated. In some circumstances, we would need for the incrementality to be very small for us to be ahead of the game on that – the admitted cannibalization that’s going to come. Some people clearly who would have seen a theatre are going to watch it home instead. But we’re getting paid for everybody who watches it at home.
And as I said, we’re getting a meaningful chunk of that revenue. And we do need some incrementality for this to prove, to be a wise decision for AMC, but it’s a reasonable amount of incrementality that we need. We’ve modeled this with very high cannibalization rates. And based on our agreement with Universal, we come out just fine. The terms are confidential. So I’m not at liberty to say what they are. And so I – it’d be wiser if I ducked a third question. but as I said, we’ve modeled this very carefully. It’s gone through a tremendous amount of analysis. We’re pretty sure we’re ahead of the game, not behind the game.
Okay. I appreciate that. A couple of others, I’ll give you the chance to talk about Mulan as you seem to be interested in. And also, is there room for the other exhibitors to do a similar deal, or if you’re a first mover advantage and they would not – there would not be enough left that one of the studios would want to cut it in more than one on the PVOD issue?
I’m expecting this is going to become an industry standard. So, I would expect that some of our competitors will do it, not all. That – that’s going to be up to the heads of those other exhibitors and the heads of each studio as to – that’s a private negotiation between lots of parties, multiple studios, multiple exhibitors.
Our agreement is U.S. only at the moment, but we did say in the release that we expect this to go to some European territories over the next – in the coming weeks or months, we’ll sit down with Universal and sort through that where it makes sense. I do think you should assume that we got a first mover advantage, because we were a first mover and first movers do deserve to get a first mover advantage.
As I said, we think, we made an attractive deal for AMC shareholders, and we know it’s an attractive deal for Universal. This is something they wanted to do for very long time and it’s interesting with all the letter writing and press statements privately. Our discussions with Universal are always amiable, respectful. We sell more tickets for Universal than anybody on the planet. We want bond in our theatres. We want F9 in our theatres. We want Candyman in our theatres. And there might have been a little posturing, but there was no ill will between Universal or AMC during this whole process. And coming out of this whole process, both AMC and Universal are both all smiles and very much committed to continuing to sell a lot of tickets for AMC.
Speaking of our great friends, if I’m – if I just talked about Universal, and I’m going to talk about Disney, I would be really remiss if I just didn’t say the word Warner Bros., because I think Warner Bros. is doing something heroic for the exhibition industry by releasing Tenet in a few weeks, assuming it doesn’t slip, but sounds pretty good for a Labour Day weekend. And I just would like to thank everybody at Warner Ann Sarnoff, Ron Sanders, Jeff Goldstein, Andrew Cripps, Toby Emmerich, like Warner Bros. is right out there on the edge for exhibition.
Now, having said that, surprisingly, you might think I’m disappointed that Mulan is moving, but AMC is no bigger friend in the planet than Disney. We sell more tickets for Disney than anyone else in the world. Disney provided us with more content last year than any other studio in the world. It’s a symbiotic relationship between Disney and AMC, where both companies will thrive, if each company thrives. Mulan was supposed to go to market and have its premiere in March.
It got delayed and delayed and delayed. Their company just announced earnings. Just like AMC is under duress, Disney is under pressure too. And at some point they’ve got to monetize their movie products. They’ve a huge slate coming for the balance of 2020. We will benefit mightily from Disney titles in 2020 with or without Mulan.
So, we fully understand that we – what they did, we would have preferred that they kept the movie as a theatrical movie only. But I think our biggest reaction overall to the Mulan announcement is how much it reaffirms our wise and smart decision last week to take the risk and sign on to PVOD. Because right now, Disney’s choice under the current world order or these two choices, they can take it to the home or they can take it to theatres. They can’t do both. Under the PVOD model, they could have taken it to theatres and taken it to the home, essentially at the same time, admittedly, with this at least 17-day lag, where a huge percentage of Mulan’s revenues theatrically would have been booked.
As we go down the road with studios like Disney. I’m hoping that we take them out of the Hobson’s choice of having to choose between Disney Plus or theatrical. I’d like to give them the opportunity to do an and, not an or. And I assure you that we would make far more money out of Mulan, if that movie had been released to our theatres and then to PVOD, especially, if we got a cut, then we would benefit from Mulan, just going straight to the home and are not seeing a penny from him.
I do realize that, some of our competitors are anxious about this change. Change is always difficult for some to cope with. But as I said, we’ve researched it, we’ve modeled it, we’ve thought about it, we’ve argued it, we’ve debated it and we’re sure that we’re coming out ahead.
Okay. They have an extra issue, because you have to pay for a Disney Plus subscription and pay the extra $30. So that makes it even more interesting, because it’s limited to the audience.
Well, that’s true. That’s one reason why theatre release would still be attractive. And right now, they’re prevented from doing the theatre release. But if the AMC and Universal thing becomes an industry standard, they would not be. And by the way that the Universal-AMC agreement calls that, movies cannot be retailed for less than $20. You’ll notice that Disney chose to retail Mulan for $30, $29.99. That’s interesting to us, because that gives our theatres an easier point of price comparison.
The other thing that we are especially relieved about is, until the Mulan announcement, the Disney Plus model was the Netflix model. It was, you pay some dollars a month, and you have an unlimited content. There was nothing transactional in it. So, it’d be hard to figure out how we might share in Disney’s Disney Plus revenue streams. But what Disney has just agreement with Mulan is a transactional PVOD release, where the consumer does have to pay a premium to watch Mulan. That’s a very good thing for us, because they – if they so chose, they could strike an agreement similar to what we’ve done with Universal, without compromising any of the economics of the basic Disney Plus options.
Thanks so much. Appreciate it.
Thank you, Jim. I hope you’re well.
[Operator Instructions] Our next question is from Meghan Durkin with Credit Suisse. Please go ahead.
Hi, guys. I just wanted one for Adam and one for Sean. If other exhibitors Adam, don’t sign on to a similar deal with Universal, how do you envision that proceeds like Universal then would they sort of segment their titles and deliver the ones that they’re aiming for PVOD to just you and then the tent poles go to everyone? How do you envision that would go? And then I’ll have a follow-up on.
I think that’s a question more smartly directed to Universal than to AMC. But I can tell you that under certain scenarios, if other circuits do not reach agreement with Universal. Then AMC stands to benefit even more and potentially, dramatically more than we do in an environment, where everybody signs onto the AMC-Universal model. But I think that’s smarter for me to let Universal comment on the distribution of their films and their alliances with other exhibitors.
Got it. So Sean, I just wanted to clarify on the comment you made on liquidity through 2021. Does that mean you have liquidity through the end of calendar 2021? And then just – I just wanted to touch on the food and beverage strength that you’re seeing overseas, where’s that coming from? Or I’m assuming you’re not selling the expanded menus currently. Is there alcohol that’s feeling that anything you can give us on that?
So, from a liquidity point of view, one thing, I’ll give you that might be quite helpful. So, we disclosed at the end of June, we had $498 million of cash available to us. Pro forma for the debt exchange transaction that goes up to other $700 million of cash. And when you think about then our run rate assuming that the theatres remained closed right, throughout the remainder of 2020, so, we – in that scenario, we continue to spend roughly $100 million a month. That’ll take us into early 2021.
Obviously, we benefit from the – as a result of the debt exchange transaction, we benefit from the interest savings from pick interest that kicks in at various points in time during the year. So that will give us some additional liquidity as well. So that should give you an idea of kind of how things look should everything remain closed right through 2020.
And before Sean goes to the second question, I just want to weigh in Megan, we’re not done yet. We have identified other ways to bolster our liquidity if we need to bolster our liquidity even further, and these are options that we think are well within our grasp. But of course, the modeling that Sean just described assumes that all of our theatres are shut. Already, that’s not true, right. Already, a third of our theatres are open in Europe. We think all of our theatres will be open in – by Tenet’s August 26 release, and we ought to be able to open two thirds of our – at least two thirds of our theatres this month in the United States. So, we’re not going to be shut.
So, if our theatres are indeed cash positive that even further pushes the runway out later into 2021. I really do think that subject to never relying on a forward-looking statement, which is the good time to bring that up again. I think we’ve survived the corona crisis, and now we just have to get back to running the company really well. And I’d say that either, because of liquidity actions we’ve already taken, or the liquidity actions that are within our grasp, if we need to take more. now on food in Europe.
Yes. So, just a couple of points on food and beverage in Europe. What’s interesting there is that some countries, because of the regulations the audience is required to wear masks and in some countries, they aren’t. but we’re seeing food and beverage strength across both and actually in the countries, where audience required to wear masks Spain, Italy, and Germany. food and beverage growth is really in line with the rest of Europe. So that’s really pleasing to see what we see it’s really in terms of transactions, a higher percentage of audience is purchasing food and beverage. There is a limited menu in certain of the countries, but it’s just a higher percentage of people purchasing food beverage.
bear in mind that obviously, the attendance is lower than normal levels, just because of the library content that we’re shoving. So, it’s fairly early stages up, but we’re very encouraged by this. And hopefully, we’ll see some of the trends in the U.S. when we open here. So, we never underestimate the appeal of the aroma of popcorn, slathered in healthy butter and salt, washed down with Coca Cola.
Got it. Thanks.
Next question is from Jason Bazinet with Citi. please go ahead.
I just had a question regarding some of the covenants in your – in the new first lien bonds. The language seems to suggest you might be contemplating asset sales potentially in Europe. Is that a reasonable interpretation?
look, what I will say is, the covenants were negotiated with our first lien bondholders to give us flexibility to do transactions that may be helpful or ongoing liquidity going forward. Yes. In according to the covenants, there are opportunities to sell assets. We’re allowed to do that. If you look at the details in the covenants, there are certain restrictions on the cash flows from those asset sales in terms of what percentage goes to repay debt and what percentage stays in with the company. But we do have the ability – we do have the ability to the sell some assets, and we do have the ability to keep some of the proceeds from myself. Yes.
Super helpful. Thank you.
Next question is from Eric Handler with MKM Partners. Please go ahead.
Thank you very much for the question. So, I want to touch on the universal deals a bit more? So, when I’m doing the math, when you look at the average ticket price you had last year and the average spend on food and beverage. and then so your margin on both of those lines, I get to a per-person gross margin of $9.23. If you add on the profit associated with digital ticketing fees that goes even higher.
Now, I can’t imagine Universal’s willing to give you $10 when they’re only charging $20 for PVOD. So, unless you’re getting a substantial reduction in film rents, how are you making profit on a universal deal? And then secondly, are you getting paid for each transaction that occurs for PVOD by universal? Or are you just getting paid on the PVOD transaction is done in zip codes, where you have theatres?
So, like the terms are confidential. So, I can’t – as much as I’d like to help you model, your numbers are right. for every cannibalized fellow, male or female, we lose $9, it could be more if they’re coming in Manhattan or Los Angeles and we’re getting paid something on PVOD attendees. I’m not allowed to tell you what that is. but since we can do the same math that you just did, I’ve been saying for four years, we would never do a PVOD deal that was bad for our shoulders. So, I think you should assume without being specific that we knew the same math that you’re aiming at and we would not have signed onto an economic program that we thought was a negative.
And to clarify your final question, and I know I’m dodging a little bit, but I can’t release the terms. So, I can’t release the terms. I can’t release the terms. But we’re getting paid on regardless of whether the PVOD customer would have gone to our theatre or not, would have lives in a zip code near our theatre or not. but of course, the exact structure of that and the other components’ agreements are not released. And you don’t actually have – you have the loss of the cannibalization that you can calculate, but you don’t have the inflows.
And it’s the combination of the incrementality, right; the payments on incrementality, the payments in total against the cannibalization loss and I think you – I’ve said that we’ve researched it and modeled it, and analyzed it as carefully as we can. We think we’re ahead of the game there. but with not even in our calculus, if this causes more movies to get released, to be green-lighted and released theatrically, then we’re so far ahead of the game here so far out of the game. Because as I – is in that quote that I shared with you, and the examples that I gave you of so many, what could have been theatrical movies, not being released theatrically.
Our industry was facing a circumstance, not just during this PVOD time, but looking ahead, where we might see fewer theatrical movies being released. And fewer theatrical movies are being released, whether there’s PVOD or no PVOD, theatrical attendance will be lower. Theatrical revenues will be lower. We’ve got a 25% market share in the United States that’s very meaningful to AMC. So it’s extremely important to us that studios continue to release movies. And if we can provide them with incentives to produce – to release even more movies to first make and then release even more movies, that’s where – that dwarfs, the pivot economics, positive or negative. But as I said, we think that the pivot economics on their own are positive for AMC based on the deal that we got.
Got it. And then one question for Sean, when you think about your stated interest, not the cash interest, but the overall interest that you’ll be paying each quarter, you’ll have a reduction because of the redemptions that are being done, but you’ll see an increase because of the new debt that you know how. So net-net, what is your as reported quarterly interest payments going to look like? And what is – what would be the cash component of that?
So the cash – let’s start with the cash compound, the cash component, if you assume that we pick interest on the new second lien debt, the cash component when you compare before the debt exchange versus after the debt exchange and taking into account the new incremental first lien debt and your cash interest will be lower, lower by probably around $20 million, $30 million on an annualized basis, right, because obviously you’ve got the significantly lower interest that you’re paying on the second lien debt, because of big, but you’ve also got all the new interest that you pay on the new first lien instruments.
When you look at the income statement amount, the interest is going to be a little bit higher, it’s roughly about 115 basis points and 120 basis points higher on the new second lien debt, that it is on an apples-to-apples basis, so that’s about – 120 basis points higher, just given the 10% versus the average of 6% and then adjusting for the exchange ratio, so you got that impact, and then you have the impact of the new first lien debt. So you can kind of calculate it from there.
Okay. Thank you very much.
Thank you, Eric.
And everyone, we have time for one more question. So our last question is from Chad Beynon with Macquarie. Please go ahead.
Hi, this is Aaron on for Chad. Thanks for taking my question. I just want to talk about Ellis for a little bit, given your…
You broke up – say again.
Hey, can you hear me?
Yes, I wanted to talk about Ellis a little bit.
Yes. Given your success with the program last year, are there any features you’re thinking about rolling out in the near-term that you think could help drive attendance or engagement upon reopening?
Yes. And we’re going to share them with Ellis members first, before we share them with all of our competitors, we’re going to get a copy of this transcript of this call. But, you should assume that we are going to be very aggressive in marketing offers to Ellis members, to Stubs members and to our general customer base at large, because we need to get them back in our theatres. And when we get them back into our theatres, they will just be surrounded by a massive amount of AMC, safe and clean paraphernalia. And we hope that they will look around our theatres and say the theatre has never been cleaner, and I felt good there. And so if we get them in our theatres, we think the experience that is graded in our theatres will accelerate word of mouth, as they tell all their friends, I went to a movie theatre and my goodness it was, I enjoyed the movie and the theatre felt great.
And to do that, we’ve got to be very aggressive, the will people back. So I think there would be a general agreement on this call that if you look at the past five-ish, years, AMC has been a really good consumer marketer, whether it’s A-list or Stubs or other things that we’ve done, we’re a really good marketing organization. Our marketing department continues to blow me away with how good our marketing materials look, the power of their thinking and designing offers for consumers. So without necessarily revealing exactly what they are, you should just assume that the words hyper-aggressive should be connected to AMC in terms of convincing moviegoers to come back to AMC once we reopened in the States.
Got it. Thank you. That’s helpful. Last one for me, as you think about the international operations, how do you think the recovery will be different from the U.S. when you guys talked about higher of the strong CPP? Any reasons why that shouldn’t be the case in the U.S. as well?
No. There’s no reason why the U.S. should or should not perform differently than Europe on food. But I will tell you that within the various countries that we serve in Europe, even though it’s the same continent, and a couple of islands off the Northwest Coast called England and Ireland. The performance country-by-country is very different country-by-country. So if you ask me how the U.S. will perform versus Europe, the virus is under better control in Europe currently than it is currently in the United States. So I think the ramp up of attendance levels in Europe would logically come faster than it will come in the United States, but no one’s going to know exactly what that ramp is until we open.
And we all can speculate, but there is not a one of us on this phone call, who really knows what the state of play of the virus is going to be in the United States in October or November or December. We talked to our scientists and experts at Harvard and elsewhere almost every day. We’re hearing very encouraging signs about rapid testing, rapid inexpensive saliva testing, therapeutic treatment improvements that you’d get the virus, the prospects of vaccines being close at hand. I was on a Harvard call yesterday for a couple of hours with Sanjay Gupta and Dr. Anthony Fauci, who were sharing with some Harvard insiders their views as to what’s coming.
There is a lot of talk that vaccines and therapeutic treatments and rapid testing are close. There is also a concern that the virus is obviously not as well under control in the United States, as it is in some other countries abroad. So this is something we’re all going to learn together.
Got it. Thank you.
This is Sean, just want to come back to one thing, I was just looking at the numbers on the interest question from the previous question, and just want to clarify that, the new first lien debt, the $300 million of first lien debt, 10.5%, that’s $31 million of interest payment, cash interest payment. The cash savings that we get on the previous subordinated debt is having $20 million, I’m talking everything on a 12 month basis. So effectively from a cash basis, as a result of the transaction, the interest expense is done by about $90 million.
Then you have the April – then you have the April financing as well.
Sure. So I’m just performing for the debt exchange, the April financing obviously you got another $500 million, 10.5%, which you would adjust for as well. I just wanted to make that clear.
Operator, we’ll take one more question, if there is one.
There is nothing in the queue at the moment. But if we did have time…
Then we’ll let people go. I leave you with one and only one thought, we are very close to theatres opening soon in the United States, see you at the movies, see you at AMC. Thank you all for joining us today.
And everyone, that does conclude our conference call for today. We thank you for participating, and you may now disconnect.