Imax Corp (IMAX) 2009 Q2 法說會逐字稿

Welcome to IMAX Corporation's Second Quarter 2009 financial results conference call. Please note that today's conference is being recorded. It is Thursday, August 6, 2009. At this time I would like to turn the conference over to Miss Heather Anthony. Please go ahead.

Good morning, and thanks for joining us on today's second quarter conference call. Joining me is our CEO Rich Gelfond and our CFO Joe Sparacio. Also with us is our General Counsel Rob Lister.

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 may pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes.

During today's call references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. The full text of our second-quarter release, along with supporting financial tables, is available on our website, www.imax.com. Today's conference call is being webcast in its entirety on our website.

Today Rich will review highlights of the second quarter, our JV initiatives, future film slate, and will also touch on some of our strategic priorities. Joe will then review our Q2 financial results in more detail. With that, let me now turn the call over to Rich Gelfond.

Thanks, Heather. We are pleased with our second quarter results. The combination of the continued rollout of our digital systems, a significantly larger theater network, and a strong film slate resulted in a profitable quarter for IMAX and we believe our results provide a first look at the potential leverage inherent in our business model.

Such financial results are what we had envisioned when we developed the joint venture business model and committed to the development of our digital projection system. We believe the second quarter is a tangible reflection of the hard work put in across our entire organization over the past two years and we believe that the pieces are in place to deliver profitability over the long term.

We are excited by the level of momentum and business activity here at IMAX. We believe our Company and brand are becoming an important strategic partner for studios and exhibiters and that our results reflects the consumer appeal of IMAX. We offer the special and differentiated movie going experience that consumers are looking for and that filmmakers want to provide. From our crystal clear images and superior sound, to filmmakers like Michael Bays shooting scenes with IMAX cameras, to our best in class 3-D presentations, IMAX provides quality and value to studios, exhibitors, and moviegoers, which you'll hear more about over the course of today's remarks.

Some highlights of the second quarter include total revenue nearly doubling to $41 million, operating income of $6.5 million, a $14 million improvement over the year ago period. Net income of $2.6 million or $0.05 per diluted share which includes certain items not related to our day to day operations that together negatively impacted our bottom line by about $0.03.

Gross box office increased 346% to $84.2 million and in June we completed a common stock offering which generated net proceeds of $76.3 million. This, coupled with the higher level of EBITDA that we are beginning to generate, should go a long way towards improving our ability to refinance our debt.

More specifically, you may recall that prior to our amendment last May, under the terms of our Wachovia Credit Facility, we were subject to an EBITDA covenant. It's interesting to note that if we were to do that same calculation, we would have generated $34 million of EBITDA over the trailing 12 months.

This morning we also announced that we are increasing our 2009 install guidance slightly to approximately 100 installs. The increase, which Joe will discuss in more detail later, primarily reflects a larger than expected number of digital system upgrades which we believe is a positive indicator of the appeal of our digital rollout.

The combination of DMR film revenue and revenue from our joint venture arrangements were the primary drivers of our second quarter results and I actually think this next point is one of the most important points of the call. Together, revenue from these areas, joint venture and DMR, delivered 47% of our revenue in the quarter compared to just 14% last year and 17% just one quarter ago. The second quarter exemplifies the benefits of the JV business model, a larger theater network, and of course good movies.

Since all of our box office results are detailed in this morning's press release, in the interest of time today, I'll hit on some key highlights and go on to discuss some of our strategic priorities.

A strong second quarter box office performance resulted in DMR film revenue for the quarter of $12.1 million. This is the highest level of DMR revenue we have ever achieved in a given quarter. A record four DMR titles were shown in the IMAX network in the second quarter. DreamWorks Animations Monsters vs. Aliens, Paramount Pictures' Star Trek, 20th Century Fox' Night at the Museum: Battle of the Smithsonian, and the first week of Paramount's Transformers: Revenge of the Fallen, was captured in the quarter. This was among the strongest lineup of films we have ever had in a given quarter, with all four pictures currently residing in the top ten performing titles of 2009.

DMR gross box office per screen across all titles was $412,000 and $574,000 for the second quarter and six month period respectively. When comparing IMAX to conventional per screen averages, it is clear that our outperformance reflects much more than just out price premium. We are driving consumers into theaters as well. And looking at a ratio we monitor closely, we continue to over-index nicely versus conventional theaters, delivering an average of over 9% of domestic gross box office for our 2009 DMR titles on less than 2% of the screens.

Our total gross box office through July of 2009 already exceeds the box office we generated for all of 2008 which included The Dark Knight, and all of 2007 which was previously our best box office year. While we would of course remind you that this is the movie business, and therefore there will be periods of strength and periods of weakness, the increased number of releases that digital IMAX allows us, makes us less dependent on the performance of any one film and allows us to operate with a more diversified portfolio of titles.

We also continue to be pleased with the diversity of studios releasing films to IMAX and are happy to have Sony in the mix once again. In addition, we believe our programming strategy of alternating between family titles and action/adventure titles has been successful and we intend to continue that approach in 2010.

Moving to our joint revenue sharing business, we ended the quarter with 91 JV theaters in operation, up from 69 at the end of the first quarter and 11 at the end of last year's second quarter. The 11 joint venture theaters that have been open for at least a year as of June 30 are generating IORs above 40% and that is before taking into consideration the 12.5% of gross box office license fee we typically receive from studios on DMR titles. At this time, we believe we will have approximately 120 JV systems in operation by year end.

Let me quickly touch on the remainder of our 2009 film slate and announced titles thus far for 2010. The third quarter began, as I mentioned, with DreamWorks Pictures and Paramount's Transformers: Regence of the Fallen. Executive produced by Steven Spielberg and directed by Michael Bay, the movie features three sequences shot with IMAX cameras. The film has performed above our expectations and has delivered worldwide IMAX box office of $43.3 million to date. Domestically the film has generated a very strong first screen average of $195,000 and IMAX represented 8.6% of the box office on less than 2% of the screens. The film has also played very well in IMAX internationally, having generated a per screen average of about $170,000.

As previously discussed, Harry Potter and the Half-Blood Prince, the IMAX 3-D experience, was recently released broadly to international IMAX theaters and three domestic IMAX theaters on July 15 which was then followed by the wide domestic release on July 29 on 163 additional IMAX screens. Last weekend, we drove 17% of the domestic box office on less than 2% of the screens which we believe was a combination of people coming back to see this film for a second time and people that chose to wait and see it in IMAX.

While still early, so far the film is performing in line with our expectations. Through Tuesday, the film has generated approximately $15 million in worldwide IMAX gross box office and we are encouraged with how the film has performed mid week.

As previously announced, we are pleased to have finalized our fall titles with Sony's 3-D title, Cloudy With a Chance of Meatballs, which represents our 40th DMR title and will be released to IMAX theaters no September 18. Where the Wild Things Are, our 20th Warner Brothers title, will then be released solely to domestic IMAX theaters on October 16th. Cloudy and Wild Things represent the 11th and 12th DMR titles we have contracted for in 2009 which is a record level of DMR titles in a given year. You will recall that when we announced our plans to introduce digital, we envisioned a time when we would be able to show 10 to 12 Hollywood titles a year. We are pleased to have reached the high end of that goal in the very first year of our digital rollout.

On November 6, we will release Walt Disney Picture's A Christmas Carol, a 3-D motion capture picture directed by Robert Zemeckis. A Christmas Carol is our third Zemeckis 3-D motion capture film, the others being Beowulf and Polar Express, both of which were very successful IMAX releases. Based on the footage we have seen and the positive reaction at Comic-Con, we believe it will be well received by adults and kids alike.

And on December 18, 2009, 20th Century Fox will release James Carmeron's groundbreaking 3-D title, Avatar in IMAX. Portions of the movie have now been viewed at Comic-Con and Cinema Expo. The film generated incredible buzz with both exhibitors and consumers and is consistent with our positive outlook for this title. In a widely anticipated appearance at Comic-Con, Jim Cameron announced that on August 21st, the public will enjoy complimentary screenings of approximately 15 minutes of Avatar footage exclusively at IMAX theaters domestically and at IMAX and digital 3-D theaters internationally. We are excited to be such a featured and prominent aspect of the release plan and marketing associated with this innovative piece of filmmaking.

And while not -- excuse me, a DMR title, we continue to be pleased with the performance of our original IMAX film, Under the Sea 3-D, which we produced in partnership with Warner Brothers. The film has generated almost $15 million in box office to date, primarily in institutional settings.

Looking ahead, 2010 is coming together nicely and were are in the process of finalizing our film slate. To date we have officially announced four commercial titles and one original IMAX title for 2010 and look forward to announcing additional titles as soon as possible. Avatar should carry over from December and be our main title for January and February which is typically a slower time of the year for big budget pictures. We'll then move into Disney's Alice in Wonderland 3-D on March 5, which is being directed by Tim Burton and which stars Johnny Depp as The Mad Hatter and Anne Hathaway as The White Queen. We will follow with the releases of our fourth and fifth DreamWorks Animation titles, How to Train Your Dragon 3-D on March 26, and Shrek Forever After, also in 3-D on May 21.

We are also working on an IMAX original film in partnership with Warner Brothers currently entitled Hubble, which was shot with IMAX 3-D cameras and captured the final repair mission of the Hubble space telescope. We remain in constant discussions with virtually every studio about titles as far out as 2012.

With our film slate filling up and the rollout of our digital projection systems progressing smoothly to date, we're beginning to focus on other strategic priorities like the continued growth of our network, particularly internationally. During the second quarter, we signed contracts for seven new systems, all under sales and sales type lease arrangements, compared to six systems signings a year ago, four of which were JVs.

Our backlog of sales and sales type lease systems is holding relatively steady at 104 systems compared to 107 at the end of last year's second quarter. And since quarter end, we have signed deals for an additional eight theaters, all of which were under sales or sales type lease agreements including the six-theater deal in Taiwan that was announced last week.

As you know, JVs are being installed at a very rapid rate. We ended the quarter with 67 in backlog compared to 139 last year. Just as a reminder, our general approach to new JV relationships is to start with a small number of theaters in a territory, just like we did with AMC's original four theaters in the United States in 2005 which then grew to 100 more in December, 2007. And Regal, which started with two in the United States in 2007, then signed on for another five later that same year and then came the 31-theater deal in March, 2008. The idea is to demonstrate proof of concept over a given period of time and then springboard from there. We're in the early stages of that right now with some of our international JV partners, particularly Japan, the second largest movie going market in the world which has gotten off to a strong start.

Our strategy of growing international business remains a priority and we are pleased that existing customers are coming back to sign deals for additional theaters such as Odeon, the largest exhibitor in the UK, and VieShow in Taiwan. In addition during the quarter, we announced our first international DMR film deal, an agreement for up to three picture with Huayi Brothers Media, China's largest privately owned studio. Applying our DMR capabilities to other countries, particularly those that create original film content, is an excellent way for us to capitalize on our existing IP to generate new revenue opportunities with little, if any, additional expense.

In addition, we believe our ability to DMR mainstream Chinese titles will help us to grow our theater base in Asia with deals like the one announced last week with VieShow. The first China DMR picture is the highly anticipated upcoming Chinese film, Aftershock, which is targeted for release to IMAX theaters in China, other parts of Asia, and key North American markets in July, 2010. China is our largest international growth market and it's also the fastest growing exhibition market in the world.

In closing, the second quarter was really an important one for us in many respects. First and foremost, our return to profitability is a key milestone for the Company. Second, our equity raise should go a long way in helping us refinance our debt. And our international growth strategies are showing early promise. We are pleased with our results to date for Transformers, Harry Potter is meeting our expectation, we have increased our installation guidance slightly, and we we look forward to announcing our additional 2010 titles as we believe we have put together a very compelling film slate. Thanks, and I'll now turn it over to Joe who will review our financials in more detail. Joe?

Thanks, Rich. As Rich mentioned earlier, we are pleased with the financial progress made in the second quarter from both the profit and debt reduction standpoint. Reflecting strong top line growth in a significant margin expansion, we generated second quarter net income of $2.6 million or $0.05 per diluted share compared to a net loss of $12.2 million or $0.29 per share in the year ago period.

Before I move down the P&L, I just wanted to highlight four particular items that impacted the second quarter. A $3.4 million increase in share based compensation expense primarily due to the increase in our stock price over the course of the second quarter and its related impact on variable stock awards such as stock appreciation rights. In addition, we had $1 million in fess associated with the early termination of a service contract. We also had a favorable foreign exchange translation gain of $2.5 million and a one-time gain of $444,000 due to the early retirement of debt. The net impact of these items was a $1.5 million reduction in net income or approximately $0.03 per diluted share.

Moving on, total revenue increased 94% to $41 million in the quarter compared to $21.2 million in last year's period.

Looking at our key business segments, revenue from IMAX systems, including sales and sales type leases, increased 33% to $8.3 million compared to $6.3 million in the period last year. We installed and recognized revenue on five theater systems under our sales/sales type lease model, including two digital upgrades, compared to two sales/sales type lease installs in the second quarter of 2008.

Revenue from joint venture relationships increased significantly to $7.2 million from $433,000 in last year's second quarter. We installed 24 JV systems in the quarter, including two digital upgrades compared to zero in the year ago period. As a reminder, we do not recognize revenue upon installation for JV theaters, but rather over time as recurring revenue. Both our sales type lease installs and JV installs in the quarter were in line with our expectations.

Total film revenue increased 145% to $16.1 million in the quarter compared to $6.6 million in the second quarter of 2008, primarily driven by our robust IMAX DMR business, which reflected stronger performance of DMR titles this year versus last year, as well as our larger theater network.

Total gross profit increased to $20.7 million in the quarter or 50.4% of revenue compared to $5.9 million or 27.7% of revenue last year, primarily driven by significant margin expansion in both our joint venture and DMR film segments. Non-recurring launch costs associated with the 22 new JV theaters opened in the second quarter negatively impacted gross profit by $1.5 million. We continue to drive significant expense leverage. SG&A as a percentage of revenue decreased to 29.9% for the second quarter compared to 53.1% in last year's period. SG&A expense overall increased to $12.3 million in the second quarter of '09 compared to $11.3 million in the second quarter of '08 and reflects the previously mentioned increase in stock based compensation and the $1 million in fees due to the contract termination.

Partially offsetting these items was the $2.5 million gain in foreign exchange translation adjustments and lower operating expenses reflecting our cost containment efforts.

R&D decreased to $1.2 million in the quarter from $2 million in last year's period. Last year's higher level of R&D expense reflected the investments we were making as we geared up for the launch of our digital projection system in July of 2008. Our second quarter operating profit of $6.5 million represents a turnaround of over $14 million compared to last year's operating loss of $7.7 million in the second quarter.

Turning to the balance sheet, as Rich mentioned, we ended the quarter with cash and cash equivalents of $49 million compared to $27 million at the end of December primarily reflecting the proceeds from our public equity raised in June and the subsequent repurchase of 44.3 million of our senior notes which mature in December, 2010.

Our Q2 cash position also reflects our investment in joint venture theater systems of $5.7 million in the quarter. I should also note that subsequent to quarter end, we repurchased an additional 6 million of our senior notes. Our backlog at quarter-end consisted of 171 systems. 104 were sales/sales type leases valued at $131.7 million, and 67 were joint venture arrangements, which as a reminder carried no stated backlog value. This compares to a total backlog of 246 systems as of June 30 last year, which included 107 sales and sales type lease systems valued at $153.4 million and 139 joint venture arrangements.

Moving to system installs through the first half of the year, we have installed 14 sales and sales type lease systems including five digital upgrades. Given new signings that have occurred during the year as well as plans for some additional digital upgrades, we now expect to install a total of 25 to 30 sales and sales type lease system installations in 2009 including upgrades versus our original install guidance of 20 to 25 sales and sales type lease systems which also included some upgrades.

We have installed 46 JV systems through the first half of 2009 including seven digital upgrades. At this time we are increasing our JV install guidance to 70 to 75 from our original initial guidance of 65 to 70 which we believe will put our yearend JV total at approximately 120. As we have cautioned in the past, installations can and do slip from period to period often for reasons outside of our control.

To sum it up, we are off to a very nice start to 2009 and are pleased with our results. With that, let me now turn it back to Rich for final comments.

Thanks, Joe. So to quickly wrap it up, our business model is starting to generate tangible results, our international growth strategies are underway, our film slate is filling up, and we're optimistic about our ability to deliver consistent growth over the long term. With that, I would like to open it up for questions.

(Operator Instructions). Richard Ingrassia, Roth Capital Partners.

Thanks, good morning, everybody. Rich, if I annualize your revenue for JV in Q2, I get something north of $350,000 per screen if I'm doing that right on the back of the envelope here, well ahead of what you typically model at $215,000 or so for year one pro forma. Obviously the film performance carried the day here in Q2, but do you think you'll continue to model as before or do you think your assumptions need to be revised here for a 10 to 12 movie slate and higher average ticket prices overall?

Rich, obviously I agree with your math. If you look at it, we are certainly tracking higher than we were in the pro forma model that we put out earlier. I think what we want to do is give it a full year under our belts and then I think we'd revisit it going forward. Obviously this year on the way it's trending it appears it will do better than what was in the pro forma model. But what I said during the prepared remarks about it being the movie business, I mean we've been on a winning streak here and I think some of the films like Avatar and Christmas Carol will perform very nicely. But I still think let's have a year under our belt before we change the pro forma.

Understood, okay. And so far you've identified an addressable market of 400 commercial zones in the US and Canada and 600 internationally I think. But at what point do you think it's appropriate to start talking about multiple screens per zone? And if we include that factor, where does the addressable market go?

Well it's not only -- it's multiple screens per zone, it also may be multiple screens per theater. But I still think that's a few years off. We certainly have a nice backlog to build out and I think when you look at it, when you put multiple theaters in a zone or in a multiplex, you'll see some erosion of IOR. Now the IORs are very attractive and I think we could afford erosion of IOR, but there's a big enough addressable market for the time being that I think that's not a direction we have to go in the near term.

In terms of how big it could go, Rich, again, I don't mean to be evasive on it, but I think let's model out a full year, let's see what the box office looks like. And then I think that's something we should focus on next year.

Gotcha. Okay. And on the -- can you say a little more about digital upgrades? How do these negotiations typically go? In particular say with a client or a customer that's rolling off of an old lease? And maybe just a flavor for the economics if you can do that?

There are kind of three scenarios, Rich. One is yours where they're rolling off of an old lease at which point you can get a pretty nice margin and it's almost like selling a new system. The second is where they very recently entered into a lease and let's say they opened in the prior year or two which you'll try and work with them in some way because they just put in a new film system. So you'll try and accommodate the terms. And then there's the middle ground which is more typically it, which you'll try and get a decent margin. We're still working on a virtual print seat arrangement with the studios to facilitate the upgrades. But I think a lot of the exhibiters as well as IMAX just don't want to wait around, especially in the key locations for that to happen. So that's why you've seen some of these upgrades happening now. But we're working towards making that happen and hopefully facilitating a faster pace of upgrades.

The other thing to note there, Rich, is that if you'll recall, there were a handful of installs that we had to defer because of digital upgrade clauses. I think there was a total of five systems. We've now upgraded four of the five at this point. So it was just burning through those arrangements as well.

I see. Okay. And last question then, there's still by my math maybe 30 something million on the balance sheet from the June raise, maybe a little more than that. How do you expect, or how much do you expect to use for further bond repurchases? And how much do you want to leave there you think just for a working capital cushion?

Yes, I think, Rich, that you'll see most of that used in the bond repurchase area.

Okay, thanks a lot. Congrats.

Marla Backer, Hunston Square Research.

Thank you. I want to turn to the international front because obviously that's becoming a more important focus for you. And what do you see there in terms of the potential JV landscape? Because I think you've done a handful of JV deals there, but most of the deals seem to be the traditional sales lease deals. So could you address what you think the potential JV market is internationally?

I think you have to look at it by market, Marla. The reason why you're seeing more traditional deals is we just, I have to remind everybody, launched the JV product internationally about three or six months ago. So what you're seeing in terms of signings is a lot of runoff from a lot of work in the countries where we're not inclined to do joint ventures. Places like China and Taiwan where you've seen a fair amount of signings come out of.

In the other markets we just, as I said, we just went in in a fairly modest way late last year. And the first three that opened were Austria, Australia, and Japan. And as I mentioned in the remarks, I think it's going to work very much like the US is that the exhibitor is going to want a proof of concept and we're going to want a proof of concept. Because we're not going to run out and put our capital into a territory unless we're convinced that there's going to be a good return on it. So again, going market by market, I mentioned in the call that Japan had gotten off to a good start. And in particular one theater in Kawasaki, as soon as it opened, became the number one multiplex in all of Japan. And Japan is typically a country that it's very difficult to enter because people sort of have set business ways about them. And then once you're in the country and there's a track record of success, it tends to be very easy to expand that. I don't want to overstate the speed or the ease, but since we had the opening which was literally five weeks ago, we've gotten a number of inquiries from Japan about joint ventures. And Japan is the second largest film going market in the world. So we haven't gotten through it on a specific number, Marla, but could you do 50 theaters in Japan? Certainly you could do 50 theaters in Japan.

And you know, similarly places like Korea, Australia, Western Europe where, as I mentioned, we just opened our first JV literally in the last month. So I think we need to see what kind of traction they get. The early results are on a territory by territory basis, but we think there's a lot of potential.

Okay, thank you. I have two other fast questions. One is about Harry Potter. You said in your remarks that it's tracking in line with your expectations and the film obviously had a nice lift once it expanded wide in IMAX. But has it had the legs that many of us originally thought it would have? Are you prohibited from doing anything within the IMAX system like pulling in an IMAX original movie for a one day special or something if you see at the tail end of Harry Potter that it's really falling off more dramatically than you had expected? Are you prohibited from doing something like that by your contractual agreement with Warner Brothers?

Marla, first I want to say that we are actually happy with the way it's playing. And we haven't got to see many of the legs yet in North America because it just opened generally last week. But our international openings, as well as the three domestic openings, showed much stronger legs than the 35mm run showed. So putting it more in English terms, the tail off was less than it was in 35mm both internationally and domestically. And this is only our first week day, but it's appearing pretty good as well as the last two Harry Potters we did, both of them showed much better legs than the 35mm version of Harry Potter.

With that said, there's a certain contractual amount of time that we have to play it. After that period of time, if it showed weakness, we could theoretically put in other films. But I really don't see that as happening.

Okay, thank you. And then the last question is, obviously there's a very big 3-D slate coming up. Are you speaking to just about everyone now about potential 3-D DMR? I mean should we assume that at this point it's a buyer's market and IMAX is a buyer?

I think that's a fair assumption, Marla. The only thing I would add though is I think much more of our slate will be 3-D next year than it was this year because there's so much product to choose from as you said. On the other hand, something you know, but I'll just remind everybody, is that we always see ourselves as going for the best movie at a particular time rather than 2-D or 3-D. And no offense to any other movies, but we thought Transformers was the best movie out at that time even though there were 3-D alternatives. And I think that proved right. So while we're focused on 3-D and there is plenty to choose from, you'll also continue to see us do a number of 2-D films.

Thanks.

Eric Wold, Merriman Curhan & Ford.

Thank you. Good morning, guys. One quick question, then a couple maybe kind of philosophical ones. On the backlog, do you have a sense of how many of the theaters in backlog, I guess the sales type leases, could be installed over the next 12 months? Or maybe by the end of 2010 just from where they're kind of contractually or scheduled?

Eric, I think the thing we don't want to do is take a stab based on half-baked information on that. We just increased our guidance for this year and I think we're pretty comfortable with where that is. And we do that on a bottoms up basis which means these are sometimes buildings that have to be built or sites that have to be readied. And we send people at IMAX either directly into the field or they communicate with people in the field on a regular basis. And we haven't really done that for 2010 yet. So it would just really be guessing and I prefer not to do that.

Understood. And then a follow up on a question from Marla. Looking at the debt and the balance sheet, you did some in Q2, you did a little more in Q3, you said you'll probably do a little more of the remaining proceeds. Thinking about the capital structure in total, you had the debt before, you refinanced it, now it's still out there and kind of looming. Is debt something that you're kind of comfortable as a company having on the balance sheet? Would you rather be a debt free company? Can you give kind of a sense of the capital structure plans?

When you use the word looming, Eric, one of the good things was, because of the equity raise, if you look at the number I mentioned in the call, the Wachovia EBITDA test which I tied it do, the amount of debt we need to refinance now is about three times trailing EBITDA. And if you look at your estimates and others for the rest of the year, that gets you in a zone that's closer to two times than three times EBITDA if we in fact achieve those numbers. So I think we're in a zone where the debt is refianaceable I believe and we've had a number of proposals from all kinds of institutions. And then I think it's just really up to us to figure out what the best way for the Company is to operate going forward. And I think we're just going to look at all the proposals and be opportunistic and look at the costs and figure out what capital structure makes sense.

I appreciate that. I didn't want to infer that looming meaning it would be difficult for refinance, I just wanted to get a sense if debt is something you'd like to have on the balance sheet versus debt free. But I understand you can evaluate that--

I believe we'll always have debt as part of our capital structure.

Okay. And then lastly, now that you've got a couple of years of good film slates and some winners, some losers, some huge winners, and I know that you're kind of working with different on some of these films like Harry Potter working to put some part of it in 3-D, Transformers having a little bit of added scene on there that wasn't in the regular version. Can you give us a sense of what you've found maybe in general? What type of movies work very, very well, which type of movies you thought may have worked well, don't really work well, you'll probably avoid going forward? Is there kind of a method to that? Or really is it a film by film basis?

No, there is a method to it. Of course it comes down to the movie ultimately, but there is a method to it. And we have two general categories we look for which are either family films or what we call fan boy films. And obviously Star Trek and Transformers are more fan boy and Monsters vs. Aliens and Night at the Museum are more family. And we kind of go back and forth with those categories.

With that said, we have a list of criteria that we look at which includes IMAX takes you somewhere you otherwise couldn't go. Increasingly we're trying a new approach, Eric, on as many films as we can, which is to add something different to the IMAX audience. So what that means, you've seen it in the last couple of films in Transformers, some of it was shot with IMAX cameras, so you couldn't get that in another theater. And Harry Potter and the Half-Blood Prince right now, 12 minutes are in 3-D which you can't get somewhere else. I think in A Christmas Carol you'll see the action take place farther out into the audience and that's not only a function of their IMAX system, but it's a function of special changes that the filmmakers will make in connection with the IMAX release. And Avatar, you'll see it released in a different aspect ratio in IMAX. So increasingly that's going to be something we're going to look for and I think the studios want as IMAX delivers more and more box office.

The one lesson I think we've learned is that 2-D animation doesn't -- IMAX doesn't seem to add all that much to flat 2-D animation. I would expect you wouldn't see us doing much of that. But other than that I think it's on a film by film basis with kind of the general guidelines I gave you.

Perfect. Thank you, guys.

Aravinda Galappatthige, Cormack Securities.

Thanks very much. Good morning. First of all, congratulations on a great quarter, guys. I have a couple of questions. First of all on the sales type leases, could you confirm the number of sign and install deals that you've signed so far in 2009? So what was signed up this year that will also be installed in 2009? Based on the press release that you issued, my count is at about four. I was wondering if I can check if that's correct.

Joe is looking. While Joe looks, I want to remind you obviously that the year is not over, it's only half over. So there may be some more sign and install. Joe, do you have that offhand?

Yes, the total number is about eight, including upgrades though. So you've got to -- and you've got to allow for some slippage on that. Because these are new deals and new deals tend to slip.

All right, thanks for that. Just on the JVs, so you're guiding to 120 JVs by the end of the year. And looking at the backlog, just simply assuming no more JVs are signed up for simplicity, so the end of the year you still have another 38 in backlog. Do you see yourself installing those pretty much by the first half of 2010 or would that be more stretched out towards 2010?

I think the plan would be to get them up and running as quickly as we can. These are by and large they are facilities that already exist, so it's a matter of just working through the logistics.

And I should add to that that our primary partners, Regal and AMC, are pleased with the results, so from their point of view we're both working, each group of us is working hard to get them in as quickly as we can.

All right. And my last question is, just on the box office returns on a per screen basis that we're seeing, as someone mentioned it's tracking well ahead of your initial pro forma numbers. Is there a significant variance between the per screen box office revenue that you're seeing on the JVs versus your overall network? Or is it relatively uniform across the board?

Well it's somewhat lower on the JVs but that's largely explained by the fact that they're smaller boxes. There are much less seats in the JV theaters than there are in some of the traditional IMAX theaters.

All right, so I guess if you were sort of looking at the overall number and saying $315,000, you're probably discounting it by maybe 10%, 20%? Is that sort of the adjustment we should be looking for, or?

Yes, probably in that range.

All right, that's all I have. Thanks very much, guys.

But as time goes on and the JVs become more of the base, the averages will be less susceptible to that variance.

Okay, great.

The average will go down sort of reflect the smaller theaters.

Okay, thanks very much.

Mark Argento, Craig-Hallum Capital.

Good morning. A couple of questions around -- you guys have done a great job rolling out, you still have a pretty good pipeline on the JV side. What's the gating factor do you think for an AMC or Regal that want to take the next step and do another 100 or another 50 JVs in your opinion?

I think it's locations. And the question is, how many locations do they have in zones that are open. Remember there are exclusivities granted around IMAX theaters. So as they look at a map, there aren't that many free zones where they already are. Now with that said, going the other way, in response to a question I was asked earlier, if they do well enough, they may want to put a second one in an existing zone or even a second one in an existing box. Or in certain instances we're already talking to them about the possibility of new builds in the future. But it's where your network likes in connection to the available zones.

Great And then shifting over to Japan, I know you had mentioned on the call or in your prepared remarks that you've been having numerous conversations over in Japan. Do you expect, if you guys were to do something over there in a JV set up, that it would have similar type of economics to what you're seeing here domestically?

We have a JV. The ones that are open in Japan today are a JV and they are similar economics to the ones in the US.

Great. And then long term in terms of the margins it looks like you guys are in about the 60%, 64%, 65% range in terms of gross margins on the JV, the JV revenue and also the DMR component. What do you think those can be long term?

They're really going to be dependent upon the film performance in any given period. So like if you took this quarter for instance and you strip out the $1.5 million in launch expenses that we incurred, your margin is upwards of 80% for the JVs which is pretty substantial. However, that margin can shift down next quarter if you have a softer film slate. So that's -- we look at it more as a portfolio and we're not looking at it as a one-off quarter If you recall, our pro forma had a margin in the mid 60s if you will. Now hopefully we'll beat that average margin on a portfolio basis and I certainly wouldn't tell you to margin it out at 80%. I think it will be a blend of some level.

To Joe's point, his first point, just to develop it a little bit more, as I think you know, we amortize our equipment and our contribution over the term of the agreement which is seven years with our big deals with AMC and Regal. And that's the depreciation charge. But in the first quarter when a theater opens, there are certain fixed expense which we write off, whether they're marketing expenses or commissions or whatever they involve, and that's where the $1.5 million comes from. So Joe is trying to say you can't exactly extrapolate that into an ongoing margin.

Sure, that makes sense. And then just in terms of progression for the JV and sale lease between Q3 and Q4, I know seasonally Q3 is a little busier time at the box office, more likely guys don't want to rip their theaters apart. Should it be seasonally weighted to the Q4 in terms of rollouts?

Yes, I would say you probably want to move it in that direction. Although there is some activity going on right now.

But when you think about -- it even gets more specific in an IMAX world where people tend to want to open for our tent pole films. So I think you can understand people would want to open for Avatar or people would want to be open for Christmas Carol. So you'll tend to see more of the installs bunched around high profile launches.

Great. Thanks a lot.

Jeff Blaeser, Morgan Joseph.

Good morning. Thanks for taking my question. Did you get a higher return from your DMR releases? Just kind of back of the envelope it looks closer to 14%, 15% than the typical 12.5%?

If you recall, we've discussed that our percentage will vary depending upon the deal. And that's just the nature of the deals.

Without getting specific, I mean some of the deals we've been in provide that over performance threshold you get a higher number and they vary from deal to deal.

And then on the international base, it seemed to have spiked up pretty good going into Transformers. What was the cause of that? Was it just more international theaters wanted the movies and are becoming more aware of it? Or was there a lot of growth internationally in the first half of the year?

Digital has really helped us internationally because we had issues with distribution. Whether the studios were willing to strike a print for a particular territory. But the opening up of digital has really removed that obstacle and it wasn't as much an obstacle in North America so I think it disproportionately helps us internationally.

The digital to the older format is the primary discrepancy between the total commercial theaters or the total theaters versus the number of theaters that would open up for Transformers or Avatar? Is that fair?

I'll just restate it in my way which is this, that the studios are much more willing to open a release wider when you have digital than when you have film.

Okay. And what was the D&A in the quarter?

Depreciation and amortization?

Yes.

Let's see, it's actually in the press release on page five -- $5.1 million. However, that includes $300,000 of financing amortization so if you strip it out it's $4.8 million.

Thank you very much.

Jake Hindelong, Monness, Crespi, Hardt & Co.

Good morning, everyone. Thanks. First question just to follow up on the last one, on the DMR and production line, so it sounds more like it actually was, because of the structure of the agreements and maybe some thresholds that you crossed, that the percentage of DMR was significantly higher by maybe 100, 200 basis points as opposed to something else in that line?

Yes.

Great. And then on the DMR, just what was your average ticket price for the quarter?

You know it really varies by theater and by market. I mean if you -- one thing I can say is that if you looked at some of the domestic sites, and I won't name the circuit, but they were running in the $11.50 range, $10.50 to $11.00 range.

And that circuit is slightly higher than the rest?

It really depends upon the geographic area that you're in.

And also you can -- a place like Japan where the yen is so strong, the ticket price was approaching $20. In a place like India or China where the ticket price was lower -- more India, China we're getting pretty good prices, but it's more closer to $5. So you really have to look at it on a market by market basis.

Okay, good, that color helps. And then looking at the stock based comp expense, just if we wanted to think about the second half of the year because if the stock were to continue to go up and your business momentum does continue, would you be willing to talk about either on a quarter to quarter basis or on a from here to year end basis, if the stock were to go from $9.50 this morning to $12 at the end of the third quarter to $14 at the end of the year, what would you tell us to model on stock based comp expense?

I won't get into that because it's -- when you're doing valuations of stock based comp, you're running it through a stock option model basically and I just don't feel comfortable giving a benchmark on that.

Although I think if you want to call in later to get a general feel for how it works, we'll go into some more detail for you to help you build your model.

Okay, great, thanks. And then just looking at the foreign exchange translation, and I don't know if this is semantics or if something was different from first quarter to second quarter, but the first quarter talks about a favorable ForEx translation adjustment -- I'm sorry, that was this quarter versus last quarter was a foreign currency exchange charge. Are those the same thing or is something slightly different there?

A lot of it, Jake, is being driven by the changes in the Canadian dollar. And as it impacts certain forward contracts that we have and as it impacts certain receivables and working capital items that are denominated in Canadian dollars. And if you were to look at it at year end, if at the end of the year last year, the rate was about $0.82 to the dollar, that dropped to $0.79 at the end of Q1. As a result, we had a write down or a charge in the first quarter. In the second quarter that came up to about $0.86 so we revalued it up to $0.86.

And just to explain the business logic behind it, a lot of our revenues are in US dollars but a lot of our expenses are in Canadian dollars since a lot of our staff is located in Canada and some of our suppliers are in Canada. So in order to hedge the Company from currency risk, we take out forwards so we can predict our cost of goods sold and we can predict our SG&A. So ultimately this all reverses itself, but on a quarter to quarter basis you have to mark it to market, or some of it anyway.

Just as an indicator, right now the Canadian dollar is running actually above $0.90 to the US. So it continues to trickle up.

Right, so that would help with current quarter. All right. And then just last question which is more a big picture timing question. This year versus last year you're obviously in a better position relative to the studios and selecting your content. About this time last year how full was the second half of 2009 and then just how should we think about when you'll make announcements on what we're going to see in the second half of 2010?

I'm actually going to cut through that answer in a different way rather than compare it because I don't remember exactly at this same time. But most of next year is, in our minds, is agreed to, in quotation marks, meaning that we're in the process of documenting agreements. We just haven't announced them yet. So if there are 10 or 12 films, I don't know the exact number, but we've announced about four and off the back of my, just thinking about this, probably about another four or five that we're in the process of documenting. So that gives you a sense of where we are.

That's great. Thanks a lot.

I think this should be our last question, Operator, because we're running a little late.

Certainly, Sir. Our last question is a follow up from Richard Ingrassia.

Thanks. Just to be clear, Joe, on the quarter, if we exclude the one-time items, the benefits from foreign exchange, and the early debt retirement, then the negative impact of the stock comp and the fees for at least the contract termination, we get to $0.08 pro forma, is that right?

Yes, if you net all of that together, it's about a charge of $1.5 million, right? And it's about $0.03 a share.

All right. That's all. Thanks.

If there's one quick question, Operator, we'll take it.

Certainly, Sir. We do have a follow up from Eric Wold.

Thank you. Just as you think about the film slate going into next year and then potentially beyond that as well, we had the two week run with Star Trek this last quarter, you had obviously the issue with moving of Harry Potter, having that too close to Transformers and had to delay a little bit. As you get into digital, as you get into what you think the number of screens will be into the coming years, what becomes kind of the minimal amount of time you'd want an IMAX movie to show on the screen? Is it two weeks? Could it get any sooner?

I mean, Eric, we did do Jonas Brothers for one week this year, a 3-D release digital only. I think as a practical matter, two weeks would be the minimum because of the marketing that you put into it and you want to play it on some film base systems. But I think if it was a unique situation, you might be able to shoehorn it in digital for a week.

Perfect. Thanks, guys.

All right, well thank you, everybody. And I especially want to thank the long term analysts and shareholders who have been with IMAX through our transition. And I'm very pleased to say that in the quarter we saw the beginning of the financial effects of the business transition that had happened before and we appreciate all your support. Thank you.

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