Imax Corp (IMAX) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to IMAX Corporations Q3 2008 Conference Call. Please note that today's conference is being recorded. At this time, I would like to turn the meeting over to Mr. Brad Wechsler for opening remarks and introductions.

Thank you very much operator. Good morning everybody and thank very much for joining us on today's third quarter conference call. Joining me is my partner, Co-Chairman and Co-CEO Rich Gelfond. Also with us our CFO, Joe Sparacio, our General Counsel, Rob Lister, and our Head of Investor Relations, Heather Anthony.

Before we begin, let me remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking and that they pertain to a future result or occurrences. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for more detailed discussion of some of the factors that could affect our future results and occurrences.

During today's call a reference is maybe made to certain Non-GAAP financial measures as defined by Reg G of the Securities and Exchange Commission. A full text of our third quarter release along with the supporting financial table is available on our Web site www.imax.com. Today's conference call is being webcast in its entirety on our website.

Today we will start by reviewing our quarterly results followed by an overview of the launch of our new digital projection, joint venture systems. Then I'll turn it over to Rich, who will take you to our film performance and future outlook as we work toward financial improvement and profitability in 2009.

First, I would like to take a short detour. We all know that these are very challenging economic times. We like many companies have seen our equity evaluation decline significantly. However, unlike many companies the key drivers of our business are transition to digit, out transition to an occurring cash flow joint venture business model and our ability to finance our digit rollout remain fundamentally on track, but we cannot control the macro environment in which IMAX operates. We can impact the progress of our business. I am pleased to record that we made both operational and financial strives in the third quarter and that we will talk about as we go on this morning.

To that end, we generated operating income of approximately $2.5 million in the quarter which represent a $5.3 million improvement on a year-over-year basis and a $10.2 million improvement from where we were just one quarter ago. Looking at the Q3 financial overview, I would like to walk you through our financial results which primarily reflect that record breaking box-office results of "The Dark Knight" -- the IMAX experience -- coupled with lower operating expenses than what we have experience over the past few quarters.

Total revenue increase 13% to $33.5 million compared to $29.6 million last year and $21.2 million in the second quarter. Systems revenue was down slightly versus the year ago at $14.1 million. However, we installed 18 theater systems in the third quarter compared to 6 in the last year third quarter, of the 18 installs, which is the most we have ever done in one quarter, 14 were under joint revenue sharing agreements for which we do not recognize revenue upon installation but rather overtime as occurring revenue and one installation was an operating lease.

Film revenue increased to $13 million compared to $9.5 million last year and theater operations and other increased to $6.3 million compared to $5.1 million last year. This increase in both film and theater operations revenue reflects year-over-year film performance and as largely attributable to the strong performance of our DMR release of Warner Brothers "The Dark Knight", Directed by visionary film maker Chris Nolan.

Gross profit increased 53% to $15 million compared to $9.8 million last year. On an absolute dollar basis FTNA expense was relatively flat to last year at approximately $10.5 million. R&D expense is also flat to last year at $1.6 million. Overall we recorded a third quarter net loss of $2.1 million or 0.05 per diluted share compared to a net loss of $7.5 million or $0.19 per share in the year ago period, which also compares favorably to average losses of approximately $11 million over the past three quarters.

Turning to the balance sheet we remain confident that we have the necessary funds to continue to plan rollout of our digit projection systems. We ended the quarter with cash and cash equivalents of $37.6 million up from $24.6 million last quarter and $18.2 million a year ago.

Given the current macroeconomic environment we thought that it would be helpful to review two important financing transactions that took place in May of this year and another of October this year. First, on May 5 we entered into an amendment to our $40 million secured credit facility where by the minimum cash and excess availability requirement was reduced from $15 million to $7.5 million.

In addition, we are no longer subject to an EBITDA maintenance covenants provided we meet the $7.5 million in cash and excess availability. The amendment also extended the facility by one year to October 31, 2010, like many companies during the quarter we made the conservative strategic decision to draw on our credit facility and therefore to $10 million in July as discussed on our second quarter call and a second $10 million at the end of September.

In accordance with the term of our senior notes in the credit facility, we have access to another $10 million on the facility. On May 8 we completed a private placement of common stock with IMAX as the larger shareholder to the purchase of approximately 2.7 million shares at market price or $6.60 per share at the time with resulted in proceeds of approximately $18 million.

While this two transactions provide the necessary capital to fund our rollout in early October with the credit market essentially frozen, we secured a new $10 million letter of credit facility with Bank of Montreal which we placed our previous $5 million LC facility with the same bank. We currently have $4.9 million in LCs outstanding under this facility. All totaled the combination of our approximately $38 million in cash, $10 million in addition availability on our credit facility and our new LC facility provides us with even greater financial flexibility as we move forward with our rollout.

During the third quarter, we invested approximately $6 million related to equipment purchases under our joint venture strategy and approximately $9.6 million for the first nine months of the year which are both on plan.

At end of the third quarter there 320 IMAX theater systems and operation worldwide, an 8% increase over last year. We estimate ending the year with approximately 350 IMAX theaters in operation of 17% increase over last year. During the quarter we have signed agreement for 11 new theater systems compared to 18 last year, through the first nine months we have signed agreement for 83 theater systems compared to 37 on the same period last year. To put these 83 signings in perspective from 2000 to 2006 we average 29 signing of the year. In the 20 months since then we have signed agreements for 207 digital systems, a strong indicator of our digital launch in joint revenue sharing model are fueling exhibitor interest.

Our backlog at the end of the quarter consistently of 238 systems including 106 sales in sales type lease systems value at $149.2 million and 132 joint venture agreements which, as a reminder, carry no backlog value. This compares to total backlog of 90 systems last year which included 83 sales in sales type lease systems valued at a $126.4 million and seven joint venture arrangements. As a reminder we estimate that each joint ventures system on our backlog will on average throughout approximately $200,000 in revenue pre-system per-year and that excludes the film revenue that will also we will receive from each location. And the projected economics for our exhibitor partners are even more attractive.

Moving on to our most important business development, this quarter also marks the official beginning of IMAX's digital era while we still have much more ahead of us, we feel we can now begin moving the IMAX conversation from one of vision strategy and development to one of operational execution and financial improvement. Together with JVC Partner, AMC, we opened a total of 14 IMAX digital theater during the third quarter. Subsequent to quarter end we are pleased to have launch our first digital systems with JV Partner, Regal Cinemas. Our total number of JV digital theater installed as of today is 35, but still very early we are pleased with the results of our digit theater from virtually every aspect -- box office performance, reliability, operational efficiency and consumer acceptance.

Over the last five weeks, our original 14 digital theaters that were opened for the day and date release of "Eagle Eye" have generated first screen averages 13% above the overall network during the same period and 32% above our MPX systems which is a better apples to apples comparison. We attribute much of the strong performance to the excellent multiplexes as we are installing into as well as of the strong marketing support from exhibitor and studio partners.

Overall, our install times are meeting our expectations and costs are coming in on budget. Our systems are also proving to very reliable of the approximately 5,900 total shows, we have only loss 39 and of that only 13 were system related which equates to an impressive reliability percentage of 99.8%. We are also getting very positive early reviews from the consumer. Our initial market research tells us that 91% of viewers polled at our digital theaters said they would want to see future films in IMAX.

Tomorrow the release of Dream Works Animation's , "Madagascar Escape 2 Africa" -- the IMAX experience -- represents our widest day and date release ever. In fact the size of this release is approximately 50% bigger on average than any day and date release as far in 2008. Following Madagascar we anticipate having approximately 45 digital screen in operation for the IMAX version of Fox's "The Day the Earth Stood Still" which will be released on December 12 domestically and later on in various international territories.

As for a most recent film "Eagle Eye" -- the IMAX experience -- that has index in line with our historical trend as Rich will discuss in a moment. I can't think of a tougher time to release a movie than October of 2008 and yet consumers continued to visit their local multiplexes and pay a premium for the IMAX experience.

Before I turn over to Rich, let me reiterate how pleased we are with the strategic and operational progress being made on several key fronts. We delivered improved financial results a first step toward the goal of returning to profitability in 2009. We are confident that the combination of our cash position, available credit, and projected EBITDA generated from our JV theaters will provide the necessary funding for our current and future joint venture initiatives and our digit rollout is on track and early results are positive. We have been working very diligently to make the IMAX business easy and profitable for ourselves, exhibitors, and the studios. Our third quarter financial results and digital launch mark important steps toward the goal. With that I would like to turn it over to

Thanks, Brad. I would like to begin by taking to our film slate, recent joint venture deals and business outlook for the remainder of 2008. Before I get into specific box office performance, I want to talk a little bit about how studios are viewing IMAX more and more as a key element of their overall distribution strategies.

I believe there are four developments striving this, the first two we have spoken out about at great length in the past, but the second two are important, are emerging development in our business. First, as discussed in the past our transition to digital projection has been firmly embraced by Hollywood, our commitment to digital not only creates an attractive revenues stream but it makes the overall profitability of being the in the IMAX business, that much more appealing to studios as print cost are virtually eliminated.

So, the whole profit outlook gets that much more compelling to our partners in Hollywood and they are insensivized to release more and more of their biggest films to the IMAX network as being no longer need to amortize print cost over long runs. That is the reason we anticipate 10 to 12 DMR Hollywood films in the digital era versus the six to seven films we have released each year historically. We know that with the time being what they are everyone if looking for ways to drive their top and bottom lines and IMAX is larger digital network does exactly that for the studios.

The second development, as we have discussed previously, is our joint venture model which enables exhibitors to get into the IMAX business for a roughly a $150,000 well below the historical levels of between a $1.5 million and $3.5 million.

Third, and this is one of the newer developments, is "The Dark Knight" and specifically Chris Nolan ground breaking used of IMAX cameras which is driven interest from the film making community in working with IMAX cameras from the initial designed of the film. As we previously announced, Director Michael Bay and Executive Producer Steven Spielberg are using our cameras for the production of "Transformers, Revenge of the Fallen" throughout this summer and another top directors have spoken publicly about their interest in filming in IMAX and/or incorporating IMAX 3D into their future film projects. Whether it happens or not it is clear that our brand is top of mine with many directors and studios, the two most powerful influencers in Hollywood and you can see the results of filming with IMAX cameras as they played out in "The Dark Knight" in IMAX.

Fourth, another recent development is the fact that our digital rollout is taking place despite the fact that financing challenges may have slowed other digit initiative somewhat will DCIP financing will undoubtedly come through at some point. Our digital rollout clearly does not hinge in any way on DCIP financing as evidence by the 35 theaters we have installed from the last four months.

With the substantial amount of 3D content coming in the next 12 to 18 months, the IMAX brand in its 20 year history in 3D is becoming increasingly important within the 3D ecosystem. Nearly 70% of our total network is 3D capable and that percentage continues to grow with each new digital theater we open. It's also worth noting that last fall "Beowulf" was released in 35 millimeter digital 3D and IMAX 3D. IMAX did six times the box office per screen as compared to conventional 3D digital.

With that said, let me move on to film performance. As Brad noted on July 17 we released Warner Brothers, blockbuster hit "The Dark Knight" -- the IMAX experience -- which is generated a record $62 million in IMAX worldwide box office to date. A less than 1% of the screens with gross approximately $47.5 million over the $528 million in domestic box office or $432,000 per screen. Worldwide, our gross box office per screen was consistent at approximately $410,000 per screen.

I would like to put this box office numbers into perspective because obviously The Dark Knight is a very special film. As most of you know, our JV unit economics are modeled on each JV screen generating approximately $800,000 in gross office box a year which is historically where they have averaged with about six films.

When you consider that The Dark Knight's $432,000 per screen average represents more than half of the annual film budget in our model in one film alone, you realize that if we have only just three films doing half the per screen amount that "The Dark Knight" did in the summer holiday season, it give you three quarters of the of the way to your annual target with at least five and as many as eight more films to come.

These are extremely compelling numbers especially when you consider that over the past two years our DMR films have generated per screen averages of approximately is $160,000. Remember that this $800,000 in annual gross box office which we are using in our pro-forma gives IMAX that an estimated IRR in excess of 40% per JV and the exhibitors make even more and that excludes our returns for the studio side of doing the DMR.

We hope this perspective provides further insight as to why we and the exhibitor community have embraced the JV model and find it compelling, which is a good segue into a joint venture update.

At the end of September, we have 26 dealers operating under the JV model up from nine last year. We anticipate between having between a 115 and 125 JV theaters on operation by the end of 2009 which only take JV designated systems already on our backlog into consideration.

While projected [insolves] are subject to slippage generally outside of our control. It is worth noting that only a handful of our 2009 JV installations are deemed to be new built. Most of the JV installations are going to existing multiplexes and the retrofit time is averaging about two week, therefore, the lowering in chances that to be slippage of those JV theaters.

The exhibitor community has expressed enthusiasm for a joint venture model. In addition to AMC and Regal, recently we have announced our four theater JV deal Hoyt Cinemas in Australia, the first three of which are scheduled to open in December of this year. Our JV deal for up to four theaters with Tokyo systems in Japan scheduled to begin rolling out mid next year and our three theater JV with Cineplex in Austria which are planning to open throughout next year. In addition, while not a JV, we are pleased to be working with Odeon, Europe's largest exhibitor which recently signed a deal for two IMAX digital theater systems.

We hope that once these new exhibitors are up and running, we could build on these relationships much as we did with AMC and Regal in the United States where they started with smaller deals saw the financial results and upped their commitment to IMAX.

Most importantly, joint venture theaters open for at least a year are generating high IRRs of approximately 40% and most of those or virtually all of those are film theaters. So, they have a higher cost and less films than we will have in a digital world.

Getting back to film, the strength of "The Dark Knight" offset much of the weakness have our first half film performance, resulting in gross box office to the network of $101 million for the nine month period compared to $105 million for the same period last year. As we have said in the past, the film business is a portfolio business and that is exactly what we are seeing play out here.

Turning to Eagle Eye, the IMAX experience, to date the IMAX version of film has generated worldwide box office of $6.7 million, $5.9 million over of it domestic or more than $61,000 per screen. Our share of total gross box office is in line with what we have historically enjoyed, even in this challenging macroeconomic environment. As Brad also touch on, "Madagascar Escape 2 Africa" -- the IMAX experience -- opens tomorrow for what was originally in two week run and its now on five-week run giving that "Harry Potter and the Half-Blood Prince" has moved to summer of 2009.

The movement of Harry Potter is a great example of my earlier point of how our positioning within Hollywood is evolving. While the Harry Potter move presented in a near term challenge for us, almost immediately following the news, we received a number of calls from various studios interested in releasing their movies in IMAX over the holiday period.

The end result of this change to our slate is the longer run for Madagascar 2 as well as our working with Fox to release an IMAX version of this sci-fi action thriller, "The Day the Earth Stood Still" on December 12, starring Keanu Reeves and Jennifer Connelly.

Given our growing network base and improving economics, we continue to expect and improved the year-over-year financials in the fourth quarter. However, our bottom line results maybe those of the third quarter given Warner Brother's Decision to delay their release of "Harry Potter and Half-Blood Prince" which was originally budgeted for November 2008 as I said now moved to July 2009.

Looking to 2009, our film slate is the fuel that drives that our go-forward business model and we are very pleased with how the year is coming together. On January 23 we plan to re-release Warner Brother's blockbuster, "The Dark Knight" in our IMAX film in digital theaters. We look forward to bringing this film back for wide release as we are impressed with how well it continues to perform even this late into the run and our limited number of screens.

Under the [C3D], an originally IMAX film partnership with Warner Brothers will be released February 13. On March 6, we will release the Zack Snyder's "Watchmen" -- the IMAX experience -- which has been distributed domestically by Warner Brothers and internationally by Paramount. Zack's last film "300," performed exceptionally well in IMAX.

On March 26, we will release to IMAX theaters DreamWorks Animation highly anticipated first 3D film, "Monsters vs. Aliens." We believe "Monsters vs. Aliens" will run on approximately 200 IMAX screens.

On May 22, we plan to release Twentieth Century Fox's "Night at the Museum 2 -- Battle at the Smithsonian". "Night of the Museum 2" will be our fifth film with Fox, one of the first of which was the "Night of the Museum" 1 in December of 2006 which delivered per screen averages of a $162,000.

On June 26, as I mentioned before, we plan to re-release DreamWorks Pictures and we plan to release sorry, DreamWorks Pictures and Paramount's "Transformers, Revenge of the Fallen" in IMAX, which will feature select scene shot by Michael Bay filmed with IMAX cameras. And we continue to expect that IMAX version of "Harry Potter and the Half-Blood Prince" in summer of 2009, approximately ten minutes of which will be featured in IMAX 3D.

In addition, as we announced this morning concurrent with our earnings release, we are very pleased to be expanding our relationships with Fox further. On December 18, 2009 we will release academy award winning director James Cameron's groundbreaking 3D title "Avatar" in IMAX. We believe that "Avatar" ranks as one of the most anticipated film projects in recent memory and marks Cameron's return to feature directing and filming the number one box office hit of all time, "Titanic."

The goal of "Avatar" is to revolutionize live action 3D moviemaking. And Cameron's style of epic big screen storytelling all of which should play extremely well to fans of Cameron and the strengths of IMAX.

So, as to wrap it up as Brad stated, we cannot control the noise of the macroeconomic environment. What we can impact is our ability to take the necessary steps so that we have the financing in place which we did, so that we can roll out our digital systems on time and on budget, which we have done to sign new business which we have done, created top notch film slate and continue to execute the business all of which we are doing. We think the fundamentals of the IMAX business are sound and we are optimistic about our future prospects. We continue to expect fiscal 2009 to be profitable.

We will look forward to reporting to you on our continued progress as we work to it deliver enhanced value for our shareholders. With that we would like to thank you for listening and open up the call to your questions.

Thank you sir. (Operator Instructions) Sir, we do have our first question from Eric Wold of Merriman Curhan Ford. Please go ahead.

Hi, good morning guys.

Hey Eric.

Good morning.

Can you give us a sense of the 115 to I guess your end next year, the 115 to 125 joint venture systems in operation. Give us a sense of how that will flow through the year and if you can, give a kind of breakdown of where of those will be in terms of how many of those be AMC, and how many would be Regal, and how many would be for others?

In terms of the split, approximately 40 to 45 would be in the first half of the year, many of them in AMC locations and then the rest in Q4 next year. With the summer, the summer is kind of --.

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Q3 a little bit but the majority of them would be beginning of Q4.

And Eric, one of things of things that you will see in terms of our installations -- the shoulder the periods when films -- when you don't have the blockbusters such as September or October, you will see heavier installations because the exhibitors don't mind having their theaters out of commission. It will be like periods between Thanksgiving and Christmas. Nobody wants to have a theater down, the same thing in summertime. So, it's not a straight line, it's a little choppy of the function of the film release.

The great vast majority of those theaters next year, Eric will be AMCs and Regals. They obviously include the international ones what I mentioned. But the guidance we have given you there is completely out of backlog and assumes that we have signed no more JV theaters.

Okay. And then switching to the film side to the deal with the studios, obviously you are getting a little more power now or use my words on that in terms of getting studios possibly the fight over slots, you are getting a lot more visibility in terms -- most of next year, if not all of next year already completed in terms of the slots being signed up. Is that translating into better revenue share numbers and I am looking for exact percentage or are you starting to see the average deal pick up a little bit in terms of the things you are getting?

Eric, We are not trying to make that occur and I don't think we view -- we don't view our relationship with the studios at all adversarial, it's more one of the partnership and I think we have come up with a business model which is pretty stable and pretty fair to both sides, which becomes more valuable to both sides as the network grows. And so, I don't think if we did have more leverage I don't think you seeing IMAX trying to take advantage of that leverage on the flip side, when the studio has a great film. I don't think the studios trying to push IMAX down on pricing. So, it's pretty stable pricing at this point.

The only place I think you have seen as manifest itself Eric, is that probably just the availability of film product and particularly 3D film product. When you look at the results "The Dark Knight" really caught people -- got people's attention on the one hand on the 2D side. And on the 3D side, as you know there's an awful a lot of 3D films in production and with the slowdown in the digital cinema initiative, the power of the IMAX network becomes more important to studios. So, that gives us more choice for the leader and more choices for the prime date.

So, we are actually using it to get better films rather than better film terms. And, I think, as you look into 2009 and not a slight any other film but when you have a year that includes Avatar, Transformers, Harry Potter, Monsters and Aliens and other things. I think that's where you are seeing the increase power rather than in the film splits.

Okay. And just say -- kind of an industry question with the softness in the economy -- obviously we are still seeing overall domestic box office is actually up to date versus last year. Are you seeing any change in your part and the theaters to kind of hold the line, or watch the line, or possibly reduce the premium for IMAX ticket, or you guys holding that pretty stable or don't see the reason to pull that in that in a little bit?

Eric in October for the release of Eagle Eye which was out there, the prices were pretty much identical to what they have been and the digital theaters open with the typical 30% price premium. And we did some third party research and over 90% of the people said they would return to the IMAX Theater again for another IMAX experience. So, that it seems to indicate to us that there wasn't really price resistance. Obviously you would be naive not to want to keep monitoring that and looking at that and that is something we looked at, but even the economy was pretty soft during "The Dark Knight" and obviously there were no push back there. So, we will monitor but we have no evidence of it.

And just one last question while I've got you. So, one thing that's always been in the non-IMAX industry is moving theater prices, a ticket for every single movie that exact same price you don't try to show that one movie is better than the other. You don't give Star Wars an $8 price and "Driving Miss Daisy" or something of a $6 price. Not say that the "Driving Miss Daisy" wasn't a great movie, but is it what the IMAX releases, does every IMAX release at a certain theater carry the same premium or do they have the ability to change around the ticket for IMAX based Dark Knight versus something else or whatever they have want?

You know Eric, we -- first to state the obvious -- we don't set the pricing, right. The exhibitor sets the pricing and I think many years ago in the conventional business -- when that was suggested, I think that [Edgar Brompton] suggested sort of tiered pricing, nobody thought that that would work. That notwithstanding in the current environment, I think both the studios and the exhibitors are open to different degrees of experimentation. But I don't think -- that's not IMAX specific.

We can tell you at one point years ago, in our owned and operated theaters, when we wanted to test price elasticity and I forgot the film. We actually kept raising the ticket price by $1 every week because we wanted to see with the graphs look like what the curves look like and we wanted to see when consumer whose going howl and at that time and that is of several years ago was at about $16 and like a 60% premium. But that was just more anecdotal than anything else and does not go to industry right question which is what is your asking.

Okay. Thanks guys, appreciate it.

Operator?

Thank you. Our next question would now come from Richard Ingrassia of Roth Capital Partners. Please go ahead.

Thanks. Good morning everybody.

Morning, Richard.

I have different industry question. I know that the outlay for the exhibitors is significantly lower on a JV model. But how do you assess any risk that given the environment, AMC and/or Regal stop spending capital on new theaters or upgrades all together.

Well, Rich, first of all, that's related to IMAX.

You are asking about IMAX or about their general business?

General, right. More of a health of the industry question -- capital spending.

First, I have to say Rich that virtually all the places we are going with them are in retrofits. So, it really doesn't have much that of an impact on us -- virtually none. To give you a scope, the whole digital rollout with AMC is costing AMC $15 million and the whole digital rollout with Regal is costing them about $4 million. And the dynamic is they understand how quick the payback is and some cases less than a year so we have had zero push back about that and in fact if anything they want know if there's any way we can move off some things that's more of like the dynamic not slow them down, just not the way it's playing out.

In terms of their own desire to build -- new build, I don't think we have a discussion with that with them on regular basis to really have a qualified opinion about it. I will tell you that we have discussed additional locations, but -- not only with Regal and AMC -- but with other operators and they have indicated to us they are still building things, but we can't judge versus what they we are thinking before but it's my sense just from conversations that they have not put new builds on hold. But I don't know what to compare that to Rich.

Okay and the revenue upside was not a big surprise. Obviously thanks to Dark Knight. But the cost of goods was quite a little bit lower than expected and even if you laugh at the higher proportion of films revenues -- can you give us an idea of how gross margins more fear under the increasing mix of JV revenues? Can we expect to get it for a low 50s again like you were in '05?

I''m going to ask Joe to talk about -- but yes well, first let me ask -- the second part. In terms of the growth margin on -- what I am going to do is give you the numbers in my head. Basically, we assume a joint venture of $500,000 outlay and we got about a couple hundred thousands dollars a year from the joint venture and a $100,000 a year from film. That's $300,000 coming back pre-amortization.

And the amortization is $70,000.

$70,000 for that's almost a 50% margin when looked at that way. So, I think on our unit economics. So, that's the way we look at everything, we take that unit and then we build it up. You do see around a 50% gross margin from the joint venture business. So, I think that will help pull the margin's up, but that won't speak to the last quarter, because we had so few of these and out there so maybe Joe can answer that.

In terms of the last quarter, what was driving the margin was really Dark Knight, which was a 2D title, which was a standard DMR processing fee are our end, and we were able to leverage that over a much wider box office level.

Which is just hopefully a peek into the future not that every film is going to be like Dark Knight, on the other hand will have a lot more theaters out there, so hopefully those numbers could be achieved with more screen.

Okay. Thank you.

Operator?

Thank you. Our next question will now come from Marla Backer at Research Associates Soleil. Please go ahead.

Thank you.

Marla?

Hi. I have a question about the JV strategy internationally. So, you have started now and had three nice deals with some international operators and then you have mentioned in the call that you also had signed a deal with Odeon. So, the decision to decide as to traditional -- under the traditional model rather than the JV model, was that an IMAX decision was it that they weren't sure that have a how they felt about the JV model? Is it something -- are your standards for rolling up for JV internationally a little different in your standard are more than your requirements are domestically?

Okay. There are a few questions in there. So, let me try and sort a matter before I miss any of them, please circle back. But in terms of the Odeon deal, they actually -- we started negotiating actually a joint venture and they actually looked that the model and they thought it was basically too favorable a deal for IMAX. So, they requested the switch from the joint venture model to the traditional sales type model. Without getting into the specifics of the deal though, that's not exactly our standard lease and we have more of the up side that we have and are traditional lease deals.

So, again I don't want to make this too complicated but it somewhat of a highest rated, it's accounted for as a standard lease type deal, but we have more upside than we do. And certainly not as much upside as the JV but on the other hand, lower risks than a JV.

So, I think what was said all along is that there is no one standard model and the model will evolve to fit the needs of the customer and going back to broader question and to important context that we put it in. It comes to the question the international JV strategy and without being too long, I think it's important to remind people that our strategy in North America was to open a number of theaters a small number with AMC and then see how it went and decide whether to do a broader deal. And we open four theaters with AMC and the IRRs for the venture were around 40% and they were attractive for AMC and IMAX and they both decide to do more.

So, the model for international is if you would look at the territories, its open several -- between two and four in this case Japan, Australia, England and Austria we have got. Kind it see how it goes over the first period of time and if it's attractive, hopefully open a lot more in that territory because since we are risking capital, we don't want to go into a territory we don't understand and since they are making a commitment they don't want to make it much larger than they understand.

So, I think it's a model that works well for both of us. And, I think, Marla, in terms of once it gets going if that works to our expectations. We believe we will have a lot of opportunities in those territories and we will be able to drive economics that continue to be favorable to IMAX as well as work for the exhibitor. As you know in the US of the new model exhibitor gets return that model out over a 100% annually.

In terms of the question of standards, to some extent we are a little tougher internationally. I mean there are different risks internationally. There are currency risks. There are how strong as you brand in the territory, how well is your partner going to market the brand so I wouldn't say that's an across the board policy. But I would -- to the extent scrutinized everything, we probably have a slightly higher threshold and probably scrutinize it a little bit internationally.

Okay, that makes sense. Then I have just a couple of other questions. First for one is a housekeeping - "Watchmen." which is on your slate for '09. Have the issues with Watchmen been resolved? Is that still definitely a go?

As far as we know, I know your referring to the some litigation going on over the rights to the project. I don't know this first hand but we have been reassured that it's still a go. I would tell you we are working, we have got trailers playing and were working on what the plan is to the DMR, and we have no indication it isn't, but I don't have any independent read on the litigation.

No, I didn't even know if a litigation was still going on or that has been settled?

I don't know.

Okay. And then my last question is -- given your clearly growing tracts and with studios -- do you think -- you have said before in answer to one of Eric's question that you are not looking forward to negotiate better economic terms, you are looking for better movies and in that [sense] -- do you think it could reach a point where you might be able -- which I know would very unusual with Hollywood negotiations -- but do you think it would ever reach a point where you might be able to negotiate splitting the screen when it made sense? For instance that you have a Madagascar, which is somewhat younger skewing with a more mature skewing title that came out within a two weeks timeframe. Do you think you would have any success be able to convince the studio to split the screen, the IMAX screen?

I think the answer to that is somewhere between I don't know and yes. And part of that is the function as you say -- IMAX was viewed as unique and brings unique value ads. Also, obviously a relatively small platforming circuit compared to the main business. So, I think the studios are willing to consider the play by other rules in the IMAX world than they would in their conventional business particularly as we grow and you have different -- with two great film that appeals to different demographics one in action-adventure and one as you say a children's movie. I think there is a possibility of some type of screen sharing but that's down the road.

All right. Thank you very much.

Thank you. Our next question will now come from Jeff Blaeser of Morgan Joseph. Please go ahead.

Thank you and good morning. A couple of quick questions, one on the use of IMAX cameras, as they -- if they become more prevalent, would that be a financial benefit or is it more in terms of visibility on your end.

More of visibility Jeff. I mean we don't really look at the cameras as a significant profit seller. We more or less do it at cost. The theory being, I mean look at "The Dark Knight," which is done over $60 million in gross. All the [PNL] from that film was impressive and helpful the third quarter of this year.

You should lay that on a model, if that was the third quarter of next year and you would see it would have a dramatic impact on the Company. So, whether you make a couple of $100,000 dollars more on renting a camera or not is really a small change compared to the opportunity from being able to create that special experience through using it.

And just follow up on what you are saying, because implicit in what you are saying is something Rich said, just want to re-emphasize it. "The Dark Knight" was a little bit of a -- game changer is a little bit of a large statement -- but with respect to our relationship with the consumer and our recognition. I mean wearing this -- that the boosted awareness on the one hand and more as importantly with film makers and the best filmmakers in Hollywood and their recognition of what Chris Nolan did in terms of storytelling and story presentation by using different formats in going back and forth was something that was very, very exciting to best and most talented filmmakers in Hollywood and that has significant value for IMAX because it's unique to IMAX.

And sorry to belabor the point, but one of the things we had always said was that 3D wasn't a magic bullet. And that we strongly believe in a 2D and 3D mix and I think what we are saying about the use of the cameras and what the financial results prove about Dark Knight is that that seems to be true and I think it's a validation of our belief that it's about the movie not whether it's 2D or 3D.

Okay, great. And in terms when you approach or when the customer approaches you for a new theater. Are they -- do they gravitate more towards the joint venture format, more towards the sale lease format and has that change under current economic environments granted that, you have the final say in terms of who qualifies for a joint venture because you are putting up risk?

I think it's too early to say where it is in the current environment. I guess your question kind of -- it's sort of what will more people be interested in JVs because is cash is at a premium and financing and harder to get.

That sounds right to me Jeff as the theory but we haven't yet seen that. Obviously, from our point of view, since recognize cash is at a premium too. We are going to be continue to be selective and maybe more selective. That's the one unknown that we don't know yet is really how the macroeconomic situation is really going to effect that mix and the demand and we are in obviously as we are always in discussion about a number of transactions all over the world -- we signed the Odeon deal as a lease deal pretty much in the middle of the financial crisis and we still see demand for both. So, it's really too early to say.

Okay. And then just a couple of quick of ones, "The Dark Knight" prerelease, if I understand it correctly you have already recognized the cost there, would that a peer profit for you in the film revenues generated in that film.

For the most part -- yes.

Yes.

Okay and then any projections for sale leases in the fourth in 2009? I thought that you have been given that already.

You mean the number or signings or the number of installs?

Installs that you recognized.

I don't, Joe, you are doing that or no?

No.

No.

Okay and D&A expectations for '08 or '09?

I don't think we are giving those out yet. We are still in our budgeting process.

Okay. Thank you very much.

Thanks, Jeff.

Thank you. Our next question will now come from Robert Chung of Hedgehog Capital. Please go ahead.

Hi guys. It actually David Lu, I just had one question first. In regards to the premium for the IMAX tickets. I mean when we look at it, it's less than the cost of a large Coke really.

That's true. That's correct.

Have you done any research as -- I mean I see in IMAX is something you can't get at home. You could have a Coke at home or you can bring candies. I mean think people end up doing both but you know in a worst case scenario -- have you done any research in terms of whether people will substitute -- pay the extra premium for the IMAX and then buy less concessions or whatnot?

Yes, historically that hasn't been the case. We have owned and operated theaters and our concession revenues are consistent and in those with what they are and 35 millimeters. So, there's no evidence that they buy less if they come to an IMAX theater. And as I said before, David, we did satisfaction surveys pretty much in early October when all this stuff was hitting and these are people who pay the premium price and over 90% said they would like to see their next movie in IMAX. So, there doesn't seem to be any evidence of resistance.

Okay. I mean you know I think they probably do both but -- I mean it certainly gives you a cushion. So, actually and Bob had a question here.

Yes. Sorry, it's Robert Chung. I guess first off, I wanted to congratulate on the success of the digital rollout. So, far it's been pretty impressive.

Thank you.

I guess I wanted to focus on the international rollout. Specifically the general box office revenue for "Kung Fu Panda" was $200 million domestically and about -- it's was over $400 million I believe internationally and you know I think they noted that success in China was particularly good. I am just wondering, can you talk about the -- I guess the international roll in particular, China over the next few years given the release of "Kung Fu Panda 2" in 2011.

As you know Robert, the rollout from us comes from two places. It comes from our sale lease transactions and it comes from our joint ventures. We have a significant amount of backlog that's international particularly China-based. I think including the open ones something like 40 -- or between open and backlog and in China. So, we would expect to see that to continue. Joint venture -- we are starting to see this territories and I think in places like Australia where we are opening this year, or Japan where we are opening middle of next year. If those initial theaters are successful, I think you could see a lot of demand come very quickly.

How the international economic situation affects that is -- your guess is as good as mine right now. And, I think, what we are really concentrating on doing is executing the roll out of our digital joint ventures executing the rollout of or our backlog, seeding international with the smaller deals without taking a great amount of rest to see how they are doing and that's going to keep really busy in '09.

And if all works, it should produce good results in '09. You know depending on film performance but you know we are pretty optimistic going forward. If it all starts to come together the way we see it then 2010 would be a year you would tend to be much more aggressive internationally because you are seeded in all these territories and you will have proven concept in those territories much the way you did in the US with AMC. So, I think generally that's the way we think about it.

Right. Okay, great. Thanks.

Thank you.

Thank you. I now would like to turn the meeting over back to Mr. Wechsler.

Well, I think Rich and I are just -- my only closing remark is something that I said earlier which is obviously we are very pleased that -- or the quarter but I think going for a macro view. We are delighted that we at IMAX can sort of move the needle on the conversation from one of vision strategy and development to one of operational execution and the beginning of seeing the fruits of those labors in our financials. And Rich, do you have any --?

Yes. I just like to comment that you know a slightly different way and say that the last couple of years have been transitional years for IMAX as we transition from film to digital and we transition, somewhat, from our traditional model to our joint venture model as we tradition from six films a year to more films a year. And it's nice to be on the side where you are actually transitioning rather than on the other side of going into the transition and it's nice to see some of the early results sticking to plan.

Thank you very much everybody.

Thank you.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for participating and at this time we ask that you please disconnect your lines. Have yourself a great day.