Imax Corp (IMAX) 2002 Q4 法說會逐字稿

Please stand by, we're about to begin.

Good day and welcome to this IMAX conference call. This call is being recorded.

At this time I would like to turn the call over to Mr. Brad Wechsler. Please go ahead sir.

Thank you Operator and thank you all for joining us today.

With me today is my partner and Co-CEO, Rich Gelfond, Frank Joyce our Chief Financial Officer, and , head our IR Department.

Before we begin, our lawyers have asked me to read the following forward-looking statement language.

Our comments and answers to your questions on this call might include statements that are forward-looking, in that they address future results or occurrences, actual future results and occurrences may differ materially from these forward-looking statements.

You should refer to our SEC and OSC filings for a more detailed discussion of some of the factors that could affect our future results and occurrences.

That said, what we'd like to accomplish on today's call is a financial and operational overview of the fourth quarter and full year, ended December 31, 2002.

Second, we'd like to review our recent accomplishments that lead to our strength in financial condition.

And finally, we'll review and update you on our commercial theater strategy, which we believe will be the key driver of our long-term growth.

Let me begin with 2002 financial results, which were not only dramatically better than 2001, but also exceeded analysts expectations.

In the fourth quarter, IMAX reported earnings from continuing operations of two cents per share versus a loss of 62 cents per share in the fourth quarter of 2001. As we've mentioned in the past, year-to-year comparisons are somewhat misleading, as last year's numbers had several large one-time items and write-downs.

For the quarter, our revenues increased 10 percent over the prior period. Broken out, IMAX systems revenues increased - decreased by 18 percent as we recognized revenues on five theater systems versus six in last year's fourth quarter. And film revenues increased nearly 75 percent, primarily due to the strong performance of our film, SPACE STATION, which opened in early April. To date, the film has grossed over $43 million and continues to gross about $500,000 per week.

Other revenues increased over 110 percent as our owned and operated theaters benefited from the strong performance of Star Wars: Episode II Attack of the Clones and our Christmas film, Santa vs. The Snowman. Gross margin for the quarter was approximately 36 percent of revenues, which is significantly higher than last year's margin, due to the strong performance of our film and owned and operated theater groups.

SG&A declined significantly in the quarter to roughly $8 million versus 12.8 million in the quarters - in the quarter last year as 2001's number included certain nonrecurring items. R&D was approximately $700,000 during the fourth quarter versus 400,000 last year. Interest expense also declined by approximately $1 million.

Highlights for the quarter included increased theater signings in both institutional and commercial markets. In fact, we had the strongest quarter for signings that we've had in over two years. Early in the fourth quarter we announced our entry into the South American marketplace with signed agreements for IMAX theatres in Chile and Ecuador. We also signed deals for three more theaters to go into China. We now believe that, in the next five years, China may become our second largest market for IMAX theaters. These international signings exemplify the global demand for IMAX theaters and the penetration potential around the world.

In terms of the commercial market, which Rich will address in greater detail later in the call, we had a very important quarter, which has continued into early 2003. We entered into two consecutive agreements with Regal Entertainment. First, in October, Regal agreed to install five IMAX theaters. The agreement, which also provided IMAX with certain exclusivity rights to be Regal's large-screen format provider, was tangible evidence that our commercial strategy is taking hold. Secondly, just Monday we announced that we had signed another deal with Regal for two additional theaters. The combination of these two deals represents one of the largest commitments ever made to IMAX and makes Regal the largest third-party operator of IMAX theaters in the world.

Finally, in terms of content, we released Star Wars: Episode II Attack of the Clones in November. On the heel of our Apollo 13 release, Attack of the Clones was the second example of our DMR reformatting process. As many of you know, IMAX DMR technology allows 35-millimeter films to be converted to the IMAX format at a cost of roughly two to $4 million. In its first weekend, Clones, which like Apollo's DMR version, opening to tremendous consumer and critical claim, grossed $1.4 million on 58 screens for a per screen average of approximately $25,000. It was one of our biggest openings and we are pleased that the film lived up to our high expectations.

Our exit poll research surfaced many interesting results, some of which Rich will address later. Two of the things jumped out - two of the things that jumped out to us, however, were that 20 percent of the audience had never seen the film before and over 90 percent indicated that the IMAX presentation was a key driver in the decision to see the film.

Moving onto our financial results for the full year, IMAX reported earnings from continuing operations of five cents per share and net earnings of 36 cents per share. This compares to losses from continuing operations of $4.30 per share and net losses of per share in 2001.

For the year, our revenues increased over 10 percent over 2001 to $131 million, with IMAX systems revenues decreasing by seven percent, revenues increasing 36 percent, and other revenues increasing by 57 percent. Our gross margin for the year was 40 percent.

On the cost side, SG&S decreased 25 percent; R&D decreased 30 percent; and interest expense decreased 20 percent, compared to 2001. Of those numbers, I think I'd just like to call particular attention to the SG&A decrease of 25 percent, which is a fairly significant number in the outgrowth of some painful retrenching in 2000 and 2001.

The dramatic improvement in our financial results compared to 2001 reflected, among other things, our lower cost structure, a healthier balance sheet, and better operational performance, including better film performance, expansion into new international markets and acceptance of the IMAX DMR technology in the Hollywood community.

In terms of our balance sheet, we ended the year with a cash balance of $37 million, or approximately $1.11 per share. This is a degree of liquidity that IMAX has not seen for quite some time. We also ended the year with about $209 million of debt, which translates into net debt of about $172 million, which is approximately 35 percent lower than it was just 18 months ago.

We believe that our debt to EBITDA ratio will continue to improve significantly over the next three years, enabling us to refinance our 2005 maturing debt on reasonable terms. We were particularly pleased with S&P's recent decision to take IMAX' senior notes - to place IMAX' senior notes on positive credit . All of this is not only reflected in the reported financial results that just reviewed, but more importantly reflects the continued improvement in the tone of our business in general, and specifically a rebound in the level of new signings for IMAX theaters.

New theater signings is probably the best predictor of future financial results for IMAX because a signing today becomes revenues and earnings upon installation. During the year, we signed deals for 21 new theaters with an aggregate value of $45.5 million. This compares to deals for 12 theaters with a value of a little over $23 million in 2001. These numbers represent a 75 percent increase in signings and a 95 percent increase in the value of these signings as compared to 2001.

And, once again, I'd like to digress and say I'm throwing an awful lot of numbers at you. And probably some are more important than others. This is a very, very important statistic that I just referred to, because it is, as we discussed, a very good forward indicator of our business, and you're basically a doubling of value of contract signs since 2002 over 2001.

As we look forward to 2003, our key goals and strategies remain unchanged, making IMAX theaters the newest release window for Hollywood films, while continuing to grow the IMAX theater network and improving our IMAX results. Rich will say it again later, but it's worth repeating. Simply put: it is our goal that, when it's time to see event Hollywood films, such as "Harry Potter" or "Lord of the Rings" or "Star Wars," consumers will say, "Let's go see it at the IMAX," and will be willing to pay a premium price for the experience.

To better reflect our positive results in business momentum, we have revised guidance upward for 2003. Based on our current outlook, we expect to install between 18 and 20 theater, new theater systems, achieve total revenues of between 130 and $140 million, gross margins between 40 and 45 percent. We expect to spend between 36 and $37 million SG&A, similar to 2002 levels, and about three million in R&D and 17 million in interest expense, which should translate into earnings of between 10 and 15 cents per share.

Based on our current schedule of installation, which can vary from quarter to quarter, we believe that we may report a loss in one of our quarters, similar to what happened in the third quarter of 2002.

Specific milestones for 2003 would include releasing our day-and-date IMAX DMR films, continued improvement in signing, which should translate into a continued improvement in earnings and perhaps, even more significantly the announcement of the first sales of a new lower cost IMAX theater system. This brand new theater system, which is now in the process of being launched gives multi-plex operators both a cost effective way of adding IMAX theater to an existing multiplex and also a way to retrofit an existing 35 millimeter auditorium, with an IMAX 3-D theater.

With that, let me turn it over to Rich.

Thanks Brad. As Brad mentioned earlier, we're becoming increasingly optimistic about our business and the progress we've made in preparing IMAX for the future.

We've financially stabilized the company in 2001 and invested in our DMR technology and studio relationships in 2002. We did so with a singular focus in mind, which was positioning the company to sell and lease new theater systems, which is our core business and the ultimate driver of earnings. Fortunately that ground work and focus is paying off as we enter 2003.

Let me explain to you exactly Brad and I are optimistic about our prospects and exactly why we are now seeing the goals that we laid out for you over the past year beginning to be achieved, one by one.

On the film side, we told you that we would develop a proprietary technology that would enable us to economically convert live-action Hollywood films into IMAX. We did. DMR has been a great success, validated by the tremendous critical and consumer claim for the two films we released in 2002. The economics for these films are becoming more and more attractive for both studios and exhibitors and we look forward to announcing our first day-and-date DMR release over the next several months.

On the theater side, we told you that we would reduce the cost associated with building and opening an IMAX theater. We did. Not only have we achieved substantial savings on print and maintenance costs for IMAX theater artists, we are close to announcing a new product, the IMAX MPX, a lower cost system that actually allows us to retrofit existing stadium seat multiplex auditoriums, with a 3-D IMAX system.

Finally we told you that this improvement in film products and economics to theater owners would lead to more signings in IMAX's long-awaited entry into the North American commercial exhibition market. It did. We nearly doubled the number of our signings in 2002 to 21 from 12 and signed consecutive deals with the world's largest commercial exhibitor, representing one of the largest commitments ever to IMAX.

Let me begin with the film or studio side. IMAX has worked for years to deliver more and fundamentally better commercially viable IMAX films to theaters. Because the films had to be shot with IMAX equipment, which at times could be expensive and heavy, this often proved to be quite challenging. With IMAX DMR technology, directors can now shoot a movie in the 35-millimeter film and convert the film to the IMAX film format for only two to $4 million, a sum that is relatively insignificant to a studio, given that the studio typically spends upwards of $150 million on event films. The returns to the studio can be quite significant.

With Beauty and the Beast, Disney saw immediate payback from the box office receipts, while demonetizing an asset that was sitting in its library. Plus the release of the film also stimulated its home video business. Similarly, with Star Wars II Attack of the Clones, Fox's payback included box office receipts as well as significant promotions for the film's DVD release. These aren't theoretical returns, but real cash flows that Fox and Disney have already earned. But in our view, as interesting as these economics are for previously released films, they'll work even more efficiently for day and date releases, the simultaneous release of a major event film in both 35-millimeter and IMAX theaters.

Generally speaking, we estimate that the IMAX DMR release of a film could earn incremental box office revenue of between 20 and $25 million. This would mean about 10 to 12-and-a-half million in incremental revenues to the studio compared to a fully loaded cost of about six to $7 million once the cost of prints and some incremental advertising is added to the DMR conversion costs. This does not include the financial benefits that studios will receive from increased ancillary revenues as many of these contracts, like pay TV, where foreign rights are driven off of films' initial box office gross. This return is based on the current size of the IMAX theater network. As the network grows, the returns to the studios grow dramatically.

We believe this is an excellent return for the studios today and as this conversion process becomes more and more commonplace, we believe that IMAX will become a new release window for Hollywood films, much like the home video, pay TV and video on demand markets. More importantly, the studios believe it also. We strongly believe that events owned, such as Harry Potter, The Lord of the Rings or the next Star Wars, were made for our format and we continue to have discussions with almost all the major Hollywood studios about our first day and date release, which we expect this year.

We understand the importance of this film release and need to ensure that we choose the right titles. Hollywood, like all of our investors and customers, will be paying extremely close attention for the presentation and box office performance of this film. Therefore, we're taking extra caution in selecting the first film to make sure it's the right one for IMAX, the right one for the studio and the right one for the network. We were also very pleased to see 21 large format films released in 2002, the largest in the history of the industry.

The second area of progress I mentioned was on the economics for IMAX licensees or potential IMAX theater owners. As important as driving the financial returns for the studios, we must ensure that these visitors in the commercial market are generating sufficient incremental cash flow in their multiplexes to warrant investment in more IMAX theaters, as this is how we earn most of our profits. We've already made significant progress in reducing the operating costs of IMAX theaters by lowering print costs for and developing a new, less expensive maintenance plan.

However, we think that the larger opportunity is to reduce the capital costs that companies like Regal and other commercial exhibitors must incur to build an IMAX theater. Lower capital costs for IMAX theaters allow exhibitors to generate a higher return on investments even in secondary markets, and that profile justifies a greater investment in building out the IMAX theater network.

As we've said on these calls for a while, we've been working on reducing these costs. Prior to 1997, it cost approximately between $5 and $7 million or more to build an IMAX standalone theater. Then in 1997, we introduced the IMAX theater system, which decreased these costs to between $4 and $4.5 million.

We accomplished this by designing the theater to be part of a multiplex, where an exhibitor would only build three walls instead of four, and use a lower cost IMAX projector. It is our goal to improve on the IMAX theater and reduce exhibitor costs to about $3 million. Moreover, in the case retrofit products, where IMAX projectors could potentially be installed in an existing multiplex auditorium, that cost could be even lower. We believe we can do this while maintaining our healthy margins.

Such a product is about to become a reality. This low-cost system, which we are calling the IMAX MPX theater, is now in the process of being launched. We anticipate that we will shortly announce the signing of our first deal for MPX. Right now, we are in ongoing discussions with a number of commercial multiplex operators about both adding an IMAX MPX theater to an existing multiplex, and also about the possibility of selling IMAX MPX theaters as retrofit. The retrofit model would feature a combination of two existing 35-millimeter stadium seat theaters into one larger IMAX auditorium.

What is particularly exciting about what I just discussed is that is no longer theory, it is actually happening. The combination of more Hollywood film products and better economics for IMAX theater owners has translated into more signing. We told you a year and a half ago that we would love to again the North American commercial exhibition market after its severe downturn in 2000 and 2001, and we've delivered.

On Monday of this week, we announced our second consecutive deal in just five months with Regal Entertainment Group, the world's largest exhibition chain, for it's 13th and 14th IMAX systems. Similar discussions have been initiated with many, if not most, of the largest chain. And, as stated earlier, we look forward to announcing our first deal for IMAX MPX sales shortly.

For system sales to continue to grow even farther, it is crucial that the consumer will be willing to pay a premium for the IMAX experience, particularly day and releases. The good news is we have strong evidence that they will. Over the last 18 months, we've commissioned and Research, an independent research firm, to help us gauge potentials and consumer demand for IMAX DMR titles.

The research findings, in combination with existing empirical data, were very encouraging. Specifically, we found that consumers drove about 25 miles on average to see "Apollo 13: The IMAX Experience" and "Star Wars: Attack of the Clones: The IMAX Experience.". Just a pause; that's kind of incredible. Twenty-five miles average drive distance, compared to a fraction of that for a typical 35-millimeter release.

Moreover, the surveys show that consumers will be willing to pay a premium of between $3 and $4 for a day and release. In fact, with "Clones," which was a re-release, we see an average ticket price of over $10, a significant premium to the national average for the 35 millimeter film of a little over $6.

Finally, over 90 percent of those surveys said that they were either extremely for very satisfied with the experience and that the IMAX presentation was a key factor in their decision to see the film.

What we are doing is no different than what Starbucks has done with coffee, but before Starbucks, people simply bought their coffee from their local deli and probably paid less than a $1 a cup. Once Starbucks came along, and started offering a premium product for a premium price and combined it with a powerful brand, people regularly started paying more.

That's just what we're doing. Give movie-goers a significantly better experience, communicated by a brand and a higher ticket price. We feel strongly that Hollywood films released in IMAX has great appeal, as a response to IMAX DMR films has already been very positive.

In conclusion, we've very excited to see what we've been working on for the last two years, starting to show up in our reported and forecasted financial results. The combination of IMAX, DMR and our new IMAX MPX theater, is a very powerful one, and should have an impact on our business in the near term and potentially a dramatic impact on our business over the long term.

It is now our goal to take our improving financial and business outlook and convert that into significant shareholder return.

With that, I'd like to open the call for questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone phone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, that's star-one to ask a question. And we'll pause just a moment to assemble our roster.

We'll take our first question from of Ross Capital.

Morning everyone.

Morning.

Backlog, where did it end the year and are you seeing your lead time or lag time, rather, from contract install come down now with more sales?

There are two components. Frank, why don't you answer the one about the backlog on the year?

Backlog number ended at about 154 million.

What about the number of, number of theaters?

Number of theaters would be 63.

Sixty-three.

And with respect to whether the, we're seeing compression in the time from signing to, you know, installation, you know, I would say not really, we're not seeing any discernable trends either way, although with this new product that we're talking about, you would see compressions, especially on a retrofit product, which would be much, much quicker than we normally see in IMAX backlog.

OK. And can you give a sense of how films broke down, DMR versus post?

You talking about, either Frank give the revenue line.

Yes, yes.

joyce. We don't normally break that out. At this point, DMR is still developing, but it's, you know, very profitable piece of business.

OK, it looks like SG&A came down to a 22.5 percent of revenues versus about 29.7 percent over the first three quarters. What was done in Q4 that, to bring it down so dramatically?

Well Frank will give you the details. I think some of that had to with the non-recurring change.

Well, it's true, I mean year over year, one of the biggest pieces is that salaries and benefits are down year-over-year by a total of around six million. In addition, as Brad said last year, for the year in SG&A we had special charges about 4.2 million. But, you know, salaries and benefits were big when you recall that we had - we took a restructuring charge last year and that involved staff reduction.

OK. But any headcount recount reduction in Q4?

Well, certainly, versus the prior year there was. I'd say, you know, maybe a half a million, 600,000 of the variances that is in salaries and benefits again versus last year.

OK. Last question. Sorry. And the cash - you said, 37 million now on the cash account, which is 12 million more than it was at Q3. Where - it doesn't look like that came from free cash flow. Where is that cash coming from?

If you recall, we signed a multi-theater deal with Regal in that quarter. And as well is said, only some of our litigation and significant cash came in connection with that.

OK. So it's the settlement and the up-fronts then.

Yes.

OK. Thanks. Congratulations.

Thank you.

Thanks.

We'll take our next question from at .

Hi. It's great execution on 2002. Congratulations on that. I had a few questions here. First of all, as far as the Regal signings, you mentioned sometime summer of '03 - are those systems going to be - the new system - the MPX system or SR?

No, they'll be SR. As we said, we're just launching this new product. We're in the process of it now. The first deliveries of this product won't take place until the first quarter of '04.

OK. And you'd also mentioned an exclusive nature to the Regal deal. Does that basically mean that anywhere where they have a generic large format projection system going forward, that'll be a IMAX system? Can we ...

For a period of time.

OK. And would you happen to know how many systems that would be?

No. It's not a guarantee for any incremental system. It just provides that if they put in a large format system anywhere, for a period of time it has to be IMAX.

OK. So you're talking for new builds there.

New builds or it could be an existing retrofit auditorium.

OK. All right. And then, as far as going back to the MPX system, how long do you think, based on your, you know, early experience here, how long does a - would a retrofit take?

Oh, I think, depending upon the desire of the multiplex operator, you're probably talking in a period of - you know, call it six months to a year. It probably can be done in less than six months, but it's really when you want to use the, you know, auditorium. For example, if you find a retrofit deal, you know, in October, you're not going to retrofit your theaters going into the Christmas holidays. You know, if you find a, you know, a retrofit deal in, you know, January, you might retrofit very, very quickly because you want to be up in front of the summer. But it's not a - it's not a - an insanely long procedure.

OK. And then, can you say anything about the cost of an MPX or the number of seats you might have on average?

I think the two things that we should say in terms of the MPX. There's one thing you should say in general. When IMAX reduces - we have a goal of reducing cost for exhibitors. The reduction of costs come from two - from two places. You know, one is reducing the physical construction cost, obviously, for, you know, the - for the exhibitor. And the other is the price of the IMAX system. And you know, the - what those two things add to is the cost. I think, as Rich may have mentioned, for the add-on to a current multiplex, you know it used to be $4 to $4.5 million. We would like to bring that down to around the $3 million range all in. And for a retrofit it would be noticeably lower than that, as you can imagine.

OK. And then in terms of number of seats, would that, you know, average...

Roughly the same as...

Part of the engineering, though, is we actually brought down the cost per seat by about 30 percent from what it was in the . We are able to put more seats in the footprint to redesign.

OK. All right, that's great. And the last one is just a housekeeping question. I was wondering if you could just tell me what your EBITDA was for the quarter, and also EBITDA before non-cash items.

We calculated that to be around $28 million - for the quarter, about $7. For the year, about $28 for the year, adding depreciation back of about $12. And then adding probably about $1.5 million in special charges, coming out to $28 for the year.

OK, great. Thanks a lot.

We'll go next to Mike Gallant with CIBC.

Hi there. This is actually for Mike. I just had a question. It looks like you had 11 signings. But how many actually installations occurred in the quarter? And were there any closings?

You're going to have to repeat that. You faded out. Can you repeat the question?

I'm sorry. It looks like you had 11 signings. How many installations occurred in the quarter...

Installs in the quarter?

There were five.

There were five installations. And were there any closings?

I don't believe so, but...

I don't believe there were. I don't have that specific detail and I don't believe there were.

And, Brad and Rich, can you tell us a little bit more about this low cost theater system? Not the MPX, but I think you mentioned a different one, a lower cost one. Specifically how the quality of the picture, size of the screen, et cetera. How does it differ from the , and will the viewer be able to tell the difference?

I think here's what we should be clear about in terms of distinguishing the products. Think of a suburban multiplex. There is a product that we're going to be selling where there's an add-on to the suburban multiplex. You know you can build an IMAX auditorium.

And we have engineered the cost of building the IMAX box down dramatically. We've also, when you put the MPX projection system into it, we believe that the all-in cost for an exhibitor to want sort of a, you know, quasi classic IMAX experience will be a little over $3 million, and that compares to the $4 to $4.5 million that it would have cost a year ago.

Then, you know - again, one of the things you have to do in any business, like a business like ours, you have to listen to our - you've got to listen to your customer. Now, on the film side, our customer has been telling us for five years that they want to see "Star Wars" and "Harry Potter" in IMAX. Our customer, on the wholesale side, which is the - you know, the exhibitors have been saying to us, you have to make it easier for us. You have to lower the cost of entry into your business and you have to make it easier for us.

So one way is with a classic IMAX build-out, which costs, you know, a little over $3 million. But the other is giving - you know they have an itch and we scratch it. They still have an oversupply of auditorium and auditoriums. So the idea of taking down a non-load-bearing wall between different auditoriums and converting those theaters into an IMAX theater with this new MPX projector, which, you know, is lighter, easier to manage and costs less, than turning that auditorium into the best audio visual auditorium in the multiplex.

Branding an IMAX, and you know, delivering Harry Potter and the best event films there. This thing is a very, very compelling product and to have a price point noticeably below that $3 million, which also makes it very appealing and drive really good rates of return for the exhibitors.

While Brad was answering that question, we went through some data and in fact, there was one closing in the last quarter at a theme park in California.

So like how are you selling it to exhibitors, that you're trying to make existing boxes more productive by replacing it with, like an IMAX theater, when you have MPX systems?

Really in two ways. One, as Brad said, it's an add-on to a commercial or a retrofit of two auditoriums, so it depends on the exhibitors agenda and where they're at.

One of the problems, the commercial exhibitors have right now is that, they've kind of, they've promised growth to Wall Street and to various analysts, and at the same time, they've also said they're not going to engage in new builds. So they kind of have to figure out, other than just relying on the studios how to get more revenues and more income out of their existing boxes, and that's how we sort of designed it. So if you were in a suburban multiplex, which is where all the theatres are performing quite well, we'll say we can just add this thing on as Brad said, for around $3 million.

On the other hand, if you are in a location where you've got a 20 plex and two of the screens aren't performing and you have two screens next to each other with the right attributes, we're showing them, you know, a way that for somewhat less than the $3 million, they can remove the center wall, put in an IMAX theater and turn those money-losing screens into profitable screens.

So it depends really on, you know, who the particular exhibitor is and what their agenda is.

Great. Thanks.

We'll go next to Roger Lipton, Lipton Financial Services.

Yes, hi guys. I just let me pick, up the handset, if you don't mind. Yes, Rich, I wanted to ask you, how do you feel about the prospects of the company? But more seriously, do you, with the new retrofitting systems, in your model for this year, are you counting on some of those sales or is that kind of a baseline model for this year, for the old sort of standard systems?

Well Roger, since we said that we're not going to deliver and install any of the new systems until '04, certainly we think we'll get some from the signing point of view this year, but when we gave guidance, our guidance does not include the installation of any of those systems this year.

OK, but we'll, as we move through the year, we'll start to see some.

We'll start to see signings, we believe, but you know, it's, not install.

OK, great. Well, good work, not only for this quarter, but for the whole platform you've created for the long-term deal.

Thank you.

Thank you.

We'll go next to Tim Casey of Nesbitt Burns.

Hi, good morning. Could you just give us a bit of guidance on cash burn or generation you expect in the year?

And just wanted to chat a little bit about as you role our more DMR films, at the theater level, obviously the relationship changes particularly with the studios retaining 50 percent of the rentals, which is a little different than under the traditional model. And obviously somebody like Regal is quite comfortable with that. Could you talk a little bit about any resistance or any changes you have to make to that model when you go into some of your more traditional theater owners?

Thanks.

In terms of cash burn, first Tim, as we said we ended the year at around 37 million, a little bit more. I think we see, you know, obviously, we have to repay the $9 million in principal on the - on the sub-debt, which comes due in April, so that would bring the 37 down, I guess, to 28. And I think, you know, given our increased spending on R&D this year and some other investments we make, I think we'd say we hope to end the year somewhere in the vicinity of around 20 million bucks.

With respect to the second part of your question, , which is on the - on the film rental side as the business changes. Yes, obviously, the commercial operators are, you know, quite comfortable with paying the 50 percent film rental. On the - with the more classic IMAX operators, you know, they were used to paying 20 percent plus prints, plus marketing. That added up pretty close to 50 percent. It might have been 45, you know, it might have been 40 percent for some of the guys. It might have been 45 percent for other guys. But, you know, it wasn't - you're not comparing 20 percent and 15 percent.

And, you know, the dirty little secret here is when you look at the performance of Attack of the Clones, you know, across the IMAX network, there was not only - not a lot of resistance from institutions, the institutions that played the film did very, very well with it. And I think we're very, very pleased with the result. One of the area, you know, we are seeing some resistance from some of the European theaters with respect to - and the institutions with respect to DMR products.

But, you know, our view is products is a good thing. It's a free world. Every theater owner makes his own decision as to how he wants to program his theater. If he wants to do educational films in the morning and DMR programs in the afternoon, evenings and weekends, fine. If somebody want to do just classic IMAX programming, that's also fine. But, you know, we think the growth driver is this evolution to the more commercial Hollywood product.

Thank you.

We'll go next to Morgan Rutman at Harvest Management.

Hi, guys. Thank you very much. Can we just walk through the - and for lack of a better word, let's use the retrofit on the lower cost product because it's - and I just want to make sure it's a distinction from the MPX product, right? MPX is a new product and the retrofit will be a different product.

It'll be the same, you know, it'll be the same projector.

Right.

But when you look at the cost and configuration to the theater, the retrofit is different than the - than the, you know, add-on.

OK. And in answering a question earlier about how long it takes. Not how long it takes from the time you sign it to the time you do it, but how long would it take the physical work to be done from the day a guy said, OK. I want to convert my two stadiums to the retrofit format. How many workdays does it take to do that, approximately?

I think you're talking about, probably, three months.

Three months. Start to finish - three months.

Yes.

And what is the - from what you've looked at so far, what's the seatage loss in terms of you're taking to additional stadiums and X number of seats and you're converting them to a reformatted MPX.

That's going to vary from theater to theater. I mean, for example, if you're combining 280-seat theaters, there will be no seat loss. If you're combining two 225-seat theaters, it really - it depends on how high your ceilings are. Some of it's case by case. I mean, our goal is to have at least 350 feet, you know, in a retrofit theater. And sometimes it should - it should be more. A lot of it will be dictated by ceiling height.

Remember, just to add to that point, that when you're talking about people taking two screens and turning them into one IMAX, you're usually talking about a 20-plex or something like that, where only the - only 10 screens are really in the black. And on these incremental screens, there's very low attendance. So based on the conversations we've had now, I don't think the exhibitors are going to analyze this by how many seats they're losing since they're not getting any revenues from those seats anyway.

They're going to look at incremental return on investment versus what's going on in investment there now. And when you model that out, especially if you look at that attendance as really more or less incremental attendance at the multiplex, you don't need very high numbers of people to generate acceptable rates of return.

I see. I understand. When you say that it's mostly these 20 plexes, but I thought it was mostly - it's two stadiums that you'd have to convert. Is that correct, or can you convert the plain old boxes? You need the angle?

I think for the IMAX experience you need to be - we should be focusing on stadium seat theaters.

OK.

And just to give you some numbers, there are roughly 800 sites or so in North America of stadium seat theaters, which is not an insignificant .

OK. And that was going to go to my next question. What do you think - and this is - I know I'm asking for a total guess - but what do you think that the potential market really is and what you might actually be able to get in terms of appetite to retrofit?

You should understand that right now we've only penetrated 1.5 percent of the 1,800 multiplexes. So I mean you can add on to some of them, you can retrofit some of them. And you know the numbers we've given you are only North American numbers. Obviously, the - particularly in developed areas, like Western Europe, the same analysis applies. So to use a scientific term, there's a very big market out there.

OK. And when you said, "noticeably below $3 million," is noticeably below in the $1 to $2 million range, or is it...

We're not going to - it's premature to go into that level of detail.

OK. But you...

our customers that we sell to.

Of course. But you obviously still feel you can get the premium ticket price. Do you think you can get the same premium ticket that you could at a standalone true IMAX, or is there going to be some midlevel pricing?

That's a fantastic question, where, frankly, the proof will be in the pudding. I mean the research in the focus groups suggests to us that we're going to be able to charge that $3 to $4 ticket premium at the as well. But what people say and what people do, the proof will be in the pudding.

Although, to add, I want to give you a little more color on the research. In "Star Wars," as we said during our remarks, the average ticket price for conventional cinema was around $6, $6.50. In the IMAX world, it was $10, $10.50 for this film that was already out. When we told people, and we said, "What will you pay to see day and release of "Star Wars," something like 35, 40 percent said they would pay $3 to $4 more, and that was more than the $10, $10.50 they just paid.

So if you take that on face value, then you're saying that you have 35 percent of the people, that they'd be willing to spend close to $15. OK? Our models are only assuming a $3 to $4 premium over the $6 to $6.50 ticket price. So I think integrating that all together, with what Brad said, I think we'd be quite comfortable in saying our network will be able to justify the $3 to $4 premium.

Great. Two last questions. The first being and I just want to make sure I heard it clearly, you think you'll have your first signing of this sometime in the next few months?

Yes, we think so.

You think so. OK, and second, how does your existing network and the territories that you've given up in terms of you know, limiting the placement of new IMAXs to existing IMAXs. How does that play in with this new, would this be called an IMAX and therefore, you know, for the sake of argument, you know, you couldn't put one, you know, five blocks down the street from an existing, you know, from the existing one on 67th Street, or whatever it is, 60th Street?

IMAX, these are on a case-by-case basis. I mean there's not uniform way in terms of either geographical exclusivities or in terms of duration of exclusivities. This will be considered, this new product will be considered an IMAX theater, and you know, we will have to deal with exclusivities on a case-by-case basis, but I don't think we see that now as a huge impediment.

That will be a high-quality problem ...

Yes.

All right. Great. Thank you very much guys.

Sure.

We'll go next to of Phoenix Investment Partners.

Hi, I was wondering if you could just give us some color on what avenues you might potentially be looking at in order to refinance the senior notes, and what the timing of the transaction might be?

We've already been approached by different people with different ideas about refinancing the senior notes. Our view is that we have three years left until, or almost three years, so the end of December '05. If you look at you know, kind of where we're giving guidance this year and you translate into EBITDA multiples, if, you know, our debt structure's roughly trading now at around five times what we think our EBITDA will be this year, give or take a little bit. We believe with our strategy we will make significant progress over the next several years, in earnings and in our EBITDA and therefore, we believe that it's not going to be an issue to refinance it.

We think the decision to refinance it today would be taken largely, because you didn't feel the way we do as management of the company and I'll add, Brad and I are the largest individual shareholders in the company, and we see no reason, especially given the state of the capital markets today, where interest rates are on high-yield debt, this debt has a coupon of seven and seven-eighths percent on it, which is quite attractive. You know, we think given the direction of this company, you know, we'll refinance it when the time comes.

One last thought I'd add is that the debt is completing unsecured and we have the ability to layer over it if we want to. So not only from an operating point of view, but from a financing structural point of view, we think it's a you know, good piece of paper for the company to have and you know, we feel you know, we'll refinance it when the time comes.

Are there any limitations in terms of the amount of security that you could take ahead of the notes?

It's complicated, you get into the covenants, yes, there, you know, there is a complicated covenant structure and you have to look at the basket, so it involves a lot of analysis. Yes, there are limits.

OK, and just my last question in terms of, you mentioned EBITDA 2003, do you have an estimate for that?

I don't think we're giving that out.

OK, thank you.

We'll go next to David Marsh with Friedman, Billings, Ramsey.

Hi guys. I have a couple of comments and then a couple of questions. First and foremost, I would say this is a really good quarter and you guys should be commended on the progress you've made. It's really, really a very respectable quarter.

The second comment I would make is that I think one of the most attractive things about your company at this point is the de-leveraging that's take place. Certainly as evidenced by the inflow of cash that was experienced in the fourth quarter. However, I don't think that investors can fully see the de-leveraging that's taking place due to the fact that you have not provided a balance sheet in your press release. I would suggest to you that, going forward, you might want to add a balance sheet, and you might also want to consider putting one out in an 8-K, prior to the 10-K filing so that we don't have to wait two months to see what it looks like.

Good comment, well taken.

We'll discuss it internally - thank you.

OK. Now the questions. Just to verify, it looks like the theater count at the end of the quarter is somewhere around 233. Can you confirm that - the installed base?

232.

232? OK. The other question, you ran through the guidance pretty quickly, and I apologize, I didn't completely catch it. Your SG&A guidance, was that flat for the year, year over year?

Yes. Yes, I did go through that a little quickly, and I apologize. But, yes, it was flat, $36, $37 million.

OK. And the R&D budget for the year?

R&D was estimated to be around $3 million.

OK. And...

I would just add, the R&D is up a little bit from last year. And the reason is because we're investing in this lower cost theater, as well as DMR technology.

Absolutely, and I think that's a good use capital. And the cap ex, do you have a cap ex budget for '03?

You know we're not going to break that out. It's roughly flat against '02.

OK. OK, great. And then my last question is just with regard to the content. I know you've announced some of the new content, such as and so forth. Can you just give us an update on what the content pipeline looks like at this point and what your expectations are for rollout?

I think, again, there are two components. This year, I mean you're looking at obviously . You're looking at the 3D return of , which performed very well this past Christmas. You're looking at Disney's "Black Stallion" movie, which was made just for our format, which we have pretty high expectations of that.

In production, we just started production on the NASCAR 3D film in partnership with both Warner Brothers and NASCAR. And that hasn't been . We're also pretty excited about our next collaboration with Tom Hanks' company on another 3D film, , which has to do with walking the first - you know, the first moon walk.

Then, in augmenting that, unfortunately we're going to have to be general. Positive, but general. But obviously we have to deliver DMR films. And the good news is this is no longer theoretical. We're in real time and real conversations with many and almost all of the studios about both their big Hollywood event films, in terms of day and date releases, as well as, on a more collective basis, what would be the appropriate library films to bring back to the marketplace at the right time.

Unfortunately, I can't tell you which film will be the next DMR film, because we're engaged in conversation.

Fantastic. Do you - just, generally, do you have any expectations for a number of DMR films in the year at all, or...

I think that from our perspective I think we'd like to see a couple of DMR films this year.

Great - thanks, guys.

We'll take our next question from at .

Hi, guys. A couple of quick questions. The multiple that you said your was trading at now, is that on a market value to debt less cash, or is that just a market value to debt?

No, I think what we said was that we believe that, based on 2003's...

Right, that's what I'm trying to say.

... that it would be net debt.

It's net of cash.

That's net?

It's net of cash, yes.

And where it's trading now?

No, not where it's trading now.

OK. So that's fair. So 180 divided by five. Is that fair?

You take the amount of debt left in cash into EBITDA.

So mid 30s. And then could you walk me through kind of some of that 35...

Just to be clear, I'm not going to get into a numbers discussion here. I said around that, OK?

Right. Well understood. But I'm trying to back into the cash burn net of the payment.

I'm happy to answer it again. What I said before was that we started the year with around . We're going to repay the . So that brings you to .

Right.

And I said we'd end the year around .

So burn there, right? I'm trying to back into that from the mid 30 to the EBITDA number we're trying to get to, unless there's some big working capital that I'm not capturing.

Well, I mean there's...

You know I think what we should do is keep the conversation more general. I mean Richard, I think, gave you some pretty specific guidance on the cash of '03.

OK. That's fine.

We shouldn't do it in terms of multiples and net debt.

Fair enough. And then just on the savings from the $4 million cost of the theater to the , is that margin compression on your guys' part, or is that where you guys have taken out costs? So its, you know, an equal amount of dollars to IMAX?

Again, two components - three components, actually. And, again, good question. Part of it has nothing to do with IMAX whatsoever, because we were clever in what we were proposing to the exhibitor, where you say, when they design their theater it should have two exit and entry doors rather than four exit and entry doors, and that saves $90,000 of their construction costs. It has nothing to do with us or margins or margin or revenue.

The other part is, when we lower the cost of a projection system because we value engineered it and we make it more efficient, then your question is relevant. And, no, we don't expect to see margin compression. However, we do expect to pass on some of the efficiencies to our customers in reduced prices. So the absolute dollars that come to us on a given transaction might be less, but the margin would be similar. And we expect to, as they say, make it up in volume, because we think that this will be selling many more of these.

OK. And then on the retrofit, is the rate stream that you get from that - or , rather, is that going to be as much as on a full-blown new theater?

You know I don't want to be too specific because, you know, again, I'd be happy to be specific with you if you were negotiating to buy 10 of these.

But you know what I'm getting at?

The goal here is to make the point of entry and the operating costs less prohibitive and more attractive to our exhibition clients on the on hand, which we believe will turn into significantly higher volumes in terms of products we sell on the other.

But the contracts are going to be structured the same way, with an upfront and then ongoing?

It's our expectation.

OK. That's it guys. Thanks. Good quarter.

Thank you.

Thank you.

We'll take our next question with Roosevelt Investments.

My question is answered, thank you.

Operator?

We'll go next to Jared Berlin at Geo Capital.

My question was answered as well, thank you.

OK.

And we'll take our next question from with Paine Webber.

Good morning guys. I live in , Texas and we had to drive a little over 70 miles to get to Galveston to watch the Attack of the Clones, passing many, many complexes on the way. Also the Complex where they were showing, I think Apollo 13, had made remarks that they were not going to be involved in the commercial showing of some films.

But what, what is being done and how will you educate the public to understand what the new IMAX venture will be, because when we stood in line in Galveston, I would say probably 90 percent of the people there had heard of this by word of mouth. There was no general public education or advertising or marketing.

So who, how and when will the public start to get educated as to what IMAX is now offering, because it's an incredible experience and what critical mass of theaters commercially would you, or do you have a target in mind where you will start this general public education of what's happening in IMAX.

It's actually a very good question. One reason for the strategy is that, the overall strategy, is that the commercial exhibitors under the old IMAX business plan were responsible for the marketing. And they, you know, many of them, because they were commercial theaters not used to doing that really didn't spend the resources doing it. With the new strategy, the studio will do the marketing in connection with the release, much the way Universal did with Apollo 13 or Fox and Lucas with Star Wars.

So the thought would be that concurrent with the release, the advertisement would be stamped, see the IMAX version and you know, we believe, you know, the studies will have every incentive to communicate that in order to get the higher ticket price and we also believe that word of mouth will travel quite quickly at that point you know, to make it happen, and in fact if you look at the numbers for example, in Disney's Fantasia, that did about $65 million in its first four months on about 70 screens. So in fact with the right properties, it really does work. I think unfortunately, because of the size of IMAX and our financial resources, I mean, we can't afford to do it any other way, even though there might be a better way to do it.

In terms of size of the releases, the Disney films have been released on roughly 70 or 80 screens. Star Wars was released on 58 screens. Apollo was deliberately by us done as kind of a small, very premium kind of release at prestige locations, because we didn't want to incur a lot of marketing expense. But I would think in the early days, like a release somewhere between 60 and 75 theaters is what we look for.

OK. And the other question was on the maximum or the time constraints for the viewing. Because of your horizontal propagation of film, it says you're limited to two hours maximum. Is that in the works of being modified or changed technologically in the future?

Yes, it is. And, in fact, it will be our second modification, because the original IMAX basically even less. And then we had a 90-minute - we upgraded a number to take them over two hours. Our new level of upgrades will probably go to about a little less than two and a half hours.

I think - I'm not sure that we're going to push the three-hour barrier given the weight of the film. But we are going to deal with the two-hour constraint.

And one last question is, going back to the golden oldies such as "Gone With The Wind," are any of these old, old classics - which I think "Gone With The Wind" would be a good one for this - being considered or contemplated in the future?

I would say that they are among the film lovers, you know, at IMAX in the studios. I personally would be dying to see "Lawrence of Arabia" on IMAX.

Absolutely.

I'm not sure that anybody has been convinced that the economics will be compelling on the very old classics. I think we should test it at some point, but they seem to be - the financial model is probably more marginal in terms of profitability to, you know, the studio exhibitors than ourselves.

But was it such that the technology from the '30s and '40s and would prohibit that, or...

No, no, no. I mean it depends on how far back you go. If you go back to film negatives from the late 1930s, they make not look as good as when you convert them digitally and them print them back on to IMAX film. But certainly a film like "Lawrence of Arabia," no problem.

All right. And one last thing on the issue - in August of 2002, there was a significant of IMAX stock who agreed to hold for another year. Can you update us on the status of that? If that holder is planning to go further, or is that something that's just not at this time should be discussed?

Well, the holder is , which has held almost its whole position for seven years. I think they're strong believers in the long-term potential of the company. And I don't think they've stated what their intention is. They've gotten either two or three extensions now on that holding.

I think they believe that the value is not fully reflected in the stock price. But they have not indicated to us what they'll do this August.

Thank you, guys.

We'll take our next question from with .

Yes, good morning. Most of my questions have been answered. But I did want to ask you gentlemen to comment quickly again on the seasonality of the business you see going forward. You had mentioned a possible negative quarter.

And I was also intrigued by the China potential that you see and was hoping you could comment on that. Thank you.

In terms of seasonality, you know for whatever reason, it seems to be that in the third quarter there are less installations. So as we look at when these things schedule out, I guess it has something to do with summertime.

As we schedule out the - you know take a look at what's likely to happen in 2003, that looks potentially like the weakest quarter of the year. But with that said, you know if an installation is made on April 1 instead of March 31, you have a fairly significant swing in the quarter. And, therefore, that's why we always urge people not to put too much in quarters and to kind of look over the full year. But that's our best guess at this point.

Also, for whatever reason, signings seem to be best in the fourth quarter. I guess people focus on their plans at that point.

So in terms of your second question about China, we took a very long-term strategic approach to China. An analogy comes to mind right now much like the one we're doing with DMR. And instead of jumping on the first train and finding the first person who is willing to do a theater, we waited to do the right one. And we opened at with the right partner. And that theater has done incredibly well.

It just opened this year. It has high visibility throughout China. Its occupancy rate has been in the 60 percent area, which is extremely high by any measurement.

We've used that launch to get other interest there. I believe at the end of this year we'll have five or six theaters open in China. We already have contracts for a couple more than are scheduled to open in 2004. And there is an awful lot of interest there.

It's a market of 1.2 billion people, where studies indicate only 350 million can afford an IMAX ticket price. Well that's a market, you know, potentially as big as North America, which we've just started to penetrate. And we think our unique form of entertainment, which is geared to families and it's based on size and sound and and transporting, will be very well received in the market. And there continues to be a lot of interest, and we have a lot of hope there.

We'll take our next question from and .

Hi. Thanks, guys. Actually, most of my questions have been answered. Good quarter.

But one area that's been talked about a lot in this call that maybe I can use a little clarification on. You talked about the retrofit and the new MPX. And that new retrofit is going to hold as many people as the . And my question is, on the actual size of the theater, I'm told - and these might be wrong, I don't know - but I'm told that the can be as high as feet and as wide as 78 feet on the large side. And can be as low as 40 feet by 60 feet on the low side.

Right.

Are the new retrofits going to be about the same size in terms of screen size?

It's going to vary. You know, clearly, when you're combining on the width of two theaters , the width usually won't be a problem in terms of the width of screen. But you know part of - one part of the of IMAX comes from the , the ratio from the width of the height. And part of that will be determined by the ceiling height in the existing multiplex and whether it makes sense to go through the cost of raising the ceiling.

You know, generally speaking, to make it more specific, width is not a constraint. Height is a constraint. And it would be an expensive retrofit if you wanted to bump a normal stadium seat theater up to a 70-foot high IMAX screen, and I don't think you'll see a lot of that. Although you said an IMAX screen runs from 40 feet to 70 feet. And when you're talking about bumping a screen up to 40 feet, that won't be too costly.

And are there minimums? I know you kind of gave ballparks, but on the and the and now the MPX, that there's kind of ballpark ranges. Can we, as we move forward, kind of expect to see some kind of a ballpark range of a minimum size? In other words, for a retrofit or a new MPX theater you qualify as MPX, is there going to be - there's got to be a certain size? There's some kind of standard?

In other words, what we see in L.A. or in New York or whatever, if you go to some smaller town and go to an MPX theater, there's going to be some continuity in terms of theater size for MPX.

There will be continuity. That's another way of saying, that's something that's very, very important to us.

There are, without doubt, I mean, this company can't survive without quality standards and our quality standards have to do with the sound quality, image quality and the geometry of the theater, all of it coming together in what we refer to the IMAX experience. We don't brand these things, IMAX, we don't do it, unless we can deliver you know, a certain quality of the experience, and you know, that will create, you know, a degree of uniformity.

OK, great. Good quarter. Thanks a lot.

Thank you.

We'll take our next question from from .

Yes, hello guys. I just wanted to go over, is there anything in depreciation and amortization or cash taxes that is going to change in '03?

Not in cash taxes; depreciation and amortization might be down by about two million or so.

OK, excellent. So if I just take, I'm sorry, I'm just going back to this cash issue, if I just take this year's numbers 28 million EBITDA, I take 17 million in interest expense, three million in cap ex, that gets me down to eight million. So, then you have the nine million. So it gets me down to, you know, about $1 million cash burn. I'm just trying to understand where the 20 million cash levels, do you guys intend to pay down, is there any debt other than the convertibles, et cetera?

We're paying off, you know, we're buying of the convert.

Right, that still just gets you down to a million.

It's hard to do, you know, ...

It's R&D, it's cap ex ....

This way, I mean this is a little sloppy.

OK, thank you guys. Great quarter.

Mr. Wechsler, it appears there are no further questions at this time. I'd like to turn the call back over to you for any additional or closing remarks.

OK, well I think the closing remarks, I'd really, in summary, I'd like to quote my partner Rich Gelfond, who I think said it very, very well. I mean, look backwards and look forward when looking at a company. First, obviously, our general tone of optimism about the company, you know, must be coming through. That's clear.

But I'm looking forward to the before. You know, we said we were going to deliver DMR technology, turn Hollywood films into IMAX films. We did. We said we were going to bring Hollywood films into the IMAX business. We did. We said we were going to lower the cost of the theaters. We did. We said we were going to increase signings. We did. We said we were going to lower our internal cost structure. We did.

You know, basically we've been executing, we have a long, we have a short vision and a long vision. We think we've been trying to communicate it clearly. We think we've been executing on it and as we look forward, you know, we're excited about confident about you know, our big strategy as we go forward, which is in '03 and '04, you know we expect to convincingly demonstrate to the world that the best way to see Hollywood event films is in IMAX theaters.

So with that I think, Rich, do you have anything you'd like to add?

No.

All right. Thank you very much everybody. Bye-bye.

Once again that does conclude today's conference. We thank you for your participation and you may disconnect at this time.