Imax Corp (IMAX) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the IMAX Corporation first quarter 2011 earnings conference call. My name is Onika, and I will be your operator for today. At this time all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

At this time, I would now like to turn the call over to Ms. Heather Anthony, Vice President Investor Relations. Please proceed.

Morning, and thanks for joining us on today's first quarter 2011 conference call. Joining me is our CEO, Rich Gelfond, and our CFO, Joe Sparacio. Also with us is our Senior EVP and General Counsel, Rob Lister.

This morning we uploaded a PowerPoint presentation in PDF format onto the IR section of our website to help illustrate some points included in today's discussion.

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 in that they 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. A discussion of Management's use of these measures and the definition of these measures, as well as reconciliations to adjusted EPS and adjusted EBITDA, are contained in this morning's press release. The full text of our first quarter release along with supporting financial tables is available on imax.com. Today's conference call is being webcast in its entirety on our website.

With that, let me now turn it over to Rich Gelfond.

Thanks, Heather. Our first quarter box office performance was disappointing, primarily due to the lack of event films in the period, and our first quarter financial results reflect this. However, at the same time, we signed deals for 101 IMAX theater systems in the quarter, which has already exceeded our signings goal for the entire year in just three months.

As a result, this morning we increased our outlook for 2011 new theater installations by 40%. All things being equal, the high level of signings activity, increased rate of network growth, and our robust backlog have much greater impact on our business than a weak box office quarter over the long term - hence, our positive outlook.

Given the signings activity, we now expect to install between 115 and 125 new IMAX theater systems in 2011, making this year our busiest yet for new theater installations and enabling our commercial theater network to grow by at least 30% for the third consecutive year.

As always, our outlook for new theater installations is strictly from current backlog and does not include theaters that may sign and install in the same year.

Briefly touching on the quarter, revenues were $45.2 million. Adjusted net income was $2.5 million, or $0.04 per diluted share. On a fully reported basis, we reported a net loss of $1 million, or $0.02 per share and adjusted EBITDA was $9 million. Our fully reported earnings and EBITDA results were negatively impacted by a one-time charge of $2.1 million, or $0.03 per diluted share, related to an arbitration proceeding arising from a discontinued subsidiary.

It is important to note that we continue to expect revenue and adjusted EBITDA growth in 2011 as compared to 2010, and we look forward to our summer film slate which will feature more blockbuster titles than ever before.

Domestically, Universals Fast Five arrives in 254 IMAX theaters tonight at midnight. And internationally Thor will play on about 70 screens this weekend, as the film opens in several international territories before it launches domestically next weekend. We believe these two titles are an excellent way to kick off the summer film season, as they're receiving strong advance word of mouth, and the early per-screen grosses we are seeing from Thor in markets like Australia, the UK, and France, are encouraging.

Before I discuss the quarter and our outlook in more detail, I want to mention that, as noted in a separate release today, we announced that we received a new commitment letter from our commercial lenders, Wells Fargo and EDC, for an expanded credit facility of up to $110 million. Upon completion, this facility will mature in October 2015, versus our previous facility which was to mature in 2013. We are very pleased to secure this new line at the reduced spread of LIBOR plus 2% versus the previous interest rate of LIBOR plus 2.75% and 3.75% for the revolver and the ABL, and to continue our strong relationship with our existing lenders.

This new facility, in combination with cash from operations, will be used for general corporate purposes, putting new JVs, and increases our financial flexibility as we pursue our strategic initiatives and our aggressive network expansion.

In addition to our signings momentum, we focused heavily this quarter on operational execution so that we will be in a position to capitalize on the remainder of our 2011 film slate, which we believe includes some of the most highly anticipated films of the year. We installed a total of 43 digital theater systems in both new and existing locations in the first quarter, an aggressive pace that equates to over three systems a week and compares to 19 systems installed in the year-ago period.

We not only signed deals for 101 theaters, but the types of deals that we signed and the geographic makeup were also strategically significant, as they serve to highlight two growth paths we are pursuing - international markets and small-to-mid-tier domestic markets. The reason we are aggressively pursuing international expansion is not only due to the sheer opportunity for network growth overseas, but also the box office potential.

During the first quarter, our existing international screens generated a per-screen average of $266,000, two times the level of box office of our domestic screens, and particularly impressive given the challenging film slate.

During the quarter we made significant inroads across several of the [brick] countries. In China we signed our largest international theater agreement ever, which was also our second largest overall theater deal in IMAX history. In India, we signed a four system deal, which we hope will create additional interest from other players in the country. And in Russia we signed our signed largest agreement ever.

Let me briefly highlight each of these. Consistent with our goal of strategic reinvestment, our 75 theater joint revenue sharing agreement with Wanda Cinema Line, the largest cinema operator in China, is our first full rev share agreement in Greater China, and it is expected to more than double our international rev share footprint.

The deal was the culmination of 12 years of developing key relationships with the Chinese government, top exhibitors, and, more recently, Chinese studios and filmmakers. Greater China is our second largest market after North America, with over 175 theaters either in operation or in backlog. To put that in context, in 2008, we opened the Dark Knight in 149 theaters worldwide, and now in China alone, including the backlog, it's 175, two years -- a little over two years later.

We worked incredibly hard over the past year to create a plan that would allow us to expand in this high growth region and to find a model and a partner that would enable us to generate more recurring revenue.

As part of our expansion in Greater China, in the first quarter we announced the formation of IMAX China, a Hong Kong legal entity, through which we will oversee all of our operations in the region. By yearend, we expect to have approximately 85 IMAX theater systems in operation in Greater China, just from what is currently in backlog, nearly double the 45 theaters in operation as of the end of March.

In Russia, we grew our relationship with Cinema Park, the country's largest theater circuit, with an agreement for another eight systems, in addition to the 10 for which they already contracted. By yearend, we anticipate having approximately 22 systems in operation in Russia and the CIS, just from what is currently open and in backlog, compared to six at the end of 2009.

We are now in business with every major cinema operator in Russia. This success is a reflection of our powerful per-screen grosses which are driven by strong attendance levels and high average ticket prices in that country.

We believe that our four theater agreement in India with PVR, the country's leading cinema brand, has the potential to provide us with some traction in this market. Today we have three theaters in operation in India, and we have six in backlog, including the PVR deal. While our network size in India may seem small at the moment, it is worth noting that India is a developing multiplex market. Of a total of 180 multiplexes, only five sites house seven or more screens in the entire country. That said, more modern complexes are being built, which should begin to open over 2011 and 2012, and should hopefully enable us to further penetrate the market.

In addition, key to IMAX's growth in India will be our ability to DMR local language titles, as 90% of India's box office comes from Bollywood Films. We believe we will be in a position to do this once 10 or more IMAX digital theaters are in operation.

Moving to the domestic market, over the past two and half years, we've concentrated heavily on expansion in the largest urban markets, primarily with our national markets Regal and AMC. And we expect to continue to expand our partnerships above the contractual minimum with each.

Now we are focusing increasingly on small and mid-tier markets where the IMAX brand is enjoying great success with regional partners like Warren Cinemas in Kansas, Zyacorp in New England, and Cobb Theaters in the southeast.

Consistent with the small market focus, we recently signed agreements with Premiere Cinema Corp., and Warren Theaters, two of the most prominent regional exhibiters in the Country. Interestingly, some of the small market sites we are contemplating were never part of our North American zone analysis, which brings me to a point about our zones. We're often asked, how do you define zones and is there room for more zones? We do, in fact, think there's room for more zones from theaters in some of the smaller domestic markets to emerging markets like Russia or the way in which we define zones in Greater China, which are typically smaller than other parts of the world because of population density. All these factors suggest to us that we can grow our footprint beyond the 1,200 to 1,250 theaters we are currently targeting.

Periodically we evaluate our analysis and, if warranted, make updates, just as we did last summer.

As a reminder, at the end of the first quarter, our worldwide commercial IMAX network stood at 386 theaters in operation and 283 in backlog.

Moving on to the film slate. We are very excited about this summer's -- this year's summer lineup, which will feature some of the biggest blockbuster franchises today. As I mention, the season kicks in tonight at midnight with Universal's Fast Five domestically, and Marvel, Disney, and Paramount's Thor opening for us internationally. Then next Friday will mark the domestic debut of Thor on our IMAX digital screens.

On May 20th, Disney's Pirates of the Caribbean 4 - On Stranger Tides, starring Johnny Depp and Penelope Cruz -- by the way, which advance tracking is very strong -- will open on approximately 420 IMAX screens. To put that in context, that's almost twice the number of screens that Shrek 4 opened on at the same time just one year ago.

In June, several of our international territories will show DreamWorks Animation Kung Fu Panda 2. On June 10th, we move on to J.J. Abrams and Steven Spielberg's highly anticipated sci fi thriller Super 8, a Paramount picture that received significant buzz at the Entertainment Studio Exhibiter Convention in Las Vegas, CinemaCon.

On June 24th, IMAX theaters will feature Disney Pixar's Cars 2, our second Disney Pixar title following last year's successful run of Toy Story 3. On July 1st, we'll release Paramount Picture's and Michael Bay's latest installment of Transformers - Dark Side of the Moon. And then on July 15th, IMAX theaters will feature the final installment of Harry Potter. Both the Transformer series and the Harry Potter franchise have historically done very well in IMAX, generating strong per-screen averages and market shares.

It is also worth noting that in April we, along with our original content partner Warner Brothers, released our latest IMAX original production, Born to be Wild. The film has generated nearly $4 million in its first three weeks, and like all of our original titles will continue to play in IMAX institutional settings for years to come.

To wrap up, while the first quarter was disappointing from a box office and financial point of view, we are signing strategically important theater agreements in high profile markets, installing theaters at a rapid clip, and, as a result, we have increased our outlook for new theater installations for 2011, by 40%. Our backlog is at record levels, and we are very well positioned for a strong lineup of summer movies. Our international and regional domestic growth strategies have momentum and our theater network continues to over index versus other formats at levels that demonstrate the strong consumer appetite for the IMAX experience.

With that, I'll turn it over to Joe.

Thanks, Rich. Looking at the business segments, revenue from sales and sales type lease systems increased to $22.3 million, compared to $11 million last year. During the quarter, we installed 11 new theater systems which is above the install guidance that was given in the fourth quarter conference call, and compares to four new theater systems a year ago.

We also installed a record 22 digital system upgrades in the quarter, which, as a reminder, come with a lower gross margin profile than our full new theater systems and, therefore, mask the 65% gross margin rate we recognized on our new theater systems.

However, digital upgrades allow us to maximize our box office potential, something we wanted to be in a position to do, given the upcoming film slate.

Our JV and DMR businesses were down versus last year, and both the revenue and margin basis reflecting the lack of event-type films in the quarter and the difficult comparison to the record-breaking performance of Avatar last year.

During the quarter, we installed 10 JV theaters, which is at the high end of the guidance that was given on the first quarter call, and which compares to five JV theaters installed in the year-ago period.

SG&A expenses, excluding stock based compensation, was $13 million, which was inline with our expectations and compares to $10.2 million last year. We now anticipate selling, general, and administrative expenses, excluding any stock based compensation, of approximately $48.5 million for the remaining nine months of the year. On a run rate basis this is higher than our previous guidance and primarily reflects the anticipated incremental expenses associated with the formation and infrastructure required for IMAX China. Approximately $1.5 million of which are startup costs and, therefore, one time in nature.

Reporting selling, general, and administrative expenses for the first quarter of 2011 was $16.9 million compared to $19.5 million on the same basis last year. First quarter reported SG&A expense included approximately $450,000 related to the startup of IMAX China, as well as $1.8 million charge for variable stock compensation.

As of March 31, 2011, approximately 605,000 variable stock awards were outstanding. As a reminder, we anticipate that by the end of the second quarter, less than 200,000 variable stock awards will remain outstanding.

Reported SG&A expense also includes standard stock option expense of $2.1 million in the first quarter, compared to $600,000 last year. The increase largely reflects the approximate 80% increase in the company's stock price year-over-year and its impact on the accounting value resulting from the binomial option model.

Standard stock option expense was not included in our 2011 SG&A guidance, which excluded all stock based compensation. We currently estimate standard stock option expense to be $7.6 million for the remainder of the year.

As Rich mentioned, during the quarter, the company recorded a one-time charge of $2.1 million related -- due to an arbitration award related to a discontinued subsidiary. The company is seeking to set aside the ruling, however, accounting rules dictate that we must accrue for this award at this time.

Research and development expenses were $1.9 million, which was inline with our expectations, compared to $1.2 million last year. We continue to anticipate full-year 2011 R&D expense of between $8 and $9 million, as we continue to focus our technology efforts on enhancing the quality of the IMAX experience and further R&D projects like laser light and our portable theater initiative.

Our backlog at quarter end consisted of a record 283 theater systems, which compares to 224 systems at yearend, and 156 systems at the end of last year's first quarter. Included in the quarter end backlog were five digital system upgrades. As Rich highlighted, we now expect to install a total of 115 to 125 new theater systems this year, up from our previous outlook of 80 to 90 new theater systems.

As illustrated in our slide presentation, we expect to open 20 to 25 JVs and five to 10 sales-type lease systems in the second quarter, excluding upgrades.

As always, we remind you that installations are subject to slippage between periods, often for reasons that are outside of our control.

With that, I'll turn it back to Rich for final comments.

Thanks, Joe. To wrap it up, if you're inside the IMAX organization, it's hard to be anything but optimistic. Our network growth rate is increasing, our visibility has never been stronger, and the summer movie season starts tomorrow.

With that, I'll open it up to questions.

Thank you. (Operator Instructions) Your first question comes from the line of Richard Ingrassia with Roth Capital Partners. Please proceed.

Thanks. Morning, everybody.

Hi, Rich.

Hi, Rich.

Rich, the expansion in China, Russia's obviously pretty dramatic, and India's on the come here. But you haven't said a whole lot about Latin America, at least recently. What's the -- can you give us just a summary of the growth profile there? And then also, switching back out to Asia, maybe assess the situation in Japan, given the tragedy there.

Sure. One reason I haven't commented on Latin America is it's complicated. Actually, the number of IMAX theaters scheduled to open there is increasing. Theaters that are open there, particularly in Brazil, are doing extremely well, and I consider it a very promising market.

Several years ago, we gave sort of like analogous to a master license agreement to a Chilean business man, and it was around 35 theaters. And he agreed to a fixed payment schedule and to roll it out. And for that, he has that exclusive territory under that agreement. So he's been the -- he's made the payments and he's been the one that's rolling out the theaters, and we're recognizing them as sales-type leases.

There are a number of issues under that contract that are somewhat murky - let's just put that, at this point, although our relationship with our partner is good. And we're dealing with him and seeing if there's a way to maybe change that relationship where he still has his rights, but maybe there is a way to develop the market faster.

And if I sound like I'm being a little diplomatic, Rich, I am.

Okay.

But we're trying to see if we could speed up growth there in the context of existing arrangements.

In terms of Japan, I think we have about 10 or 11 theaters open there. Initially, because of the earthquake, three or four had some damage to them. Right now there's one that's not open, and that's supposed to open in time for -- there actually might be two, and one is opening very shortly and the other one, the most seriously damaged one, was 45 minutes north of Tokyo, and that one is scheduled to open for Harry Potter. We have -- actually, our general manager of the region is there right now.

We were originally concerned, Rich, about whether there were the possibility of any supply disruptions because a number people in our supply chain, a number of companies are Japanese. But we've gotten comfortable over the last period of time that that isn't the case.

And talk of expansion in that market. I mean, I suppose -- I mean, it's probably not shut down altogether, but obviously taking a backseat to other infrastructure issues in those cities.

Yes. Much to my shock, Rich, we had a deal with someone who they had opened four and they could have opened the fifth one when they wanted. In the last week or two, they signed an amendment to open the fifth one. So they're going ahead.

As far as I know, the openings we have scheduled for the year are happening.

We're in discussions with a new client in Japan, meaning not an existing IMAX player for a small deal, and I have reason to believe that's likely to proceed. But I think, obviously what's going on there, again, my general manager told me he was at the Hyatt in Roppongi, and there were two people in the lobby. And if you've ever been there, I mean, it's a very bustling place.

So I'm sure it won't sign at the pace we thought it would this year, but it's certainly not closed for business.

Okay. Rich, and I know there's no way really to give any kind of guidance, and I'm not going to ask you to do that on the senior sign and install. But I mean, any sense for how this year feels versus 2010 and 2009, where, I mean, you're saying your sign and installs were pretty big numbers going back. Do you have a sense at all, just qualitatively, maybe, how it's tracking?

You mean signings or installs?

Senior type --

Oh, senior sign and installs. I mean, in the first quarter we have sign and installs. Typically we have them every year. I would say it's no -- doesn't feel different than any other year at the moment, Rich, which is, as I said, my expectation would be there would be some of them. But who knows? You really can't predict. But I personally would be surprised if there weren't some of them.

Okay. Thanks. Just quickly for Joe. Joe, can you just go through the -- how we should be thinking about taxes for the balance of the year?

Yes. I mean, what I -- I would use an effective rate, Rich, of about 32.5%, and I would carve out of that [assign] about $3 million of that number to cash taxes, and the remainder to this unwinding of the tax [asset] that's on our balance sheet. That's how I would deal with it for now.

Got it. Okay. Thank you.

Your next question comes from the line of James Marsh with Piper Jaffray. Please proceed.

Great. Thanks very much. Rich, I was hoping you could just circle back on this South America, Latin America issue and just kind of help us understand how big that market opportunity could be. Is this a 200-screen market that's currently capped at 35 because of this licensing deal? And then I have a follow-up question.

My answer to that would be, James, is we really haven't done the kind of market analysis where I'd be comfortable giving a number. And the reason is because we have this arrangement with our partner, we've kind of used the number 35, which is what is in his agreement with exclusivity over the number of years that the agreement runs, which I don't remember.

But as you know, Brazil is a country whose size is, physical size is around the United States. I don't remember the population, but I think it's around 150 million people. So clearly it's more than the 35 we've got in the agreement. And hopefully we'll be able to work through that and figure out a way to penetrate it quicker. But I don't know the exact number other than clearly it's more than what we've got today in terms of our total count.

Okay. But to be clear, the 35 number that you have built into your 1,200 or so market opportunity for the world?

Yes, it is.

Okay. All right. Good. And then secondly, I just wanted to follow-up on there's been some concern about, we'll call it superhero fatigue in the box office. And I guess I just wanted to get your view on that. Do you kind of agree with that? Do you view this as a negative for IMAX or is it a potential positive as you kind of differentiate the different superhero movies out there?

James, I feel that the media tends to draw trends at a movie performance rather than a movie-by-movie basis. So I don't think there is superhero fatigue. I still think the movie business is about, is it a good movie or is it a bad movie. Look at the Dark Knight Rises, which at the time I think became the second or third highest grossing film of all time, and that's only two years ago.

So and I was at CinemaCon, and I think some of the superhero movies look really good and some look not as good. So I don't think there's superhero fatigue. I think there's bad movie fatigue. And I think when there are good movies, people will come to the box office.

In terms of benefiting IMAX or not, I mean, I'm very, very optimistic. This is the kind of call you don't want to be overly negative or overly positive and you want to try and create some balance. But it's not a lot of data. But Thor opened in Australia, played for one week, and the numbers are quite good. And by the way, the same week that Thor opened in 35 millimeter, Fast Five opened in 35 millimeter, and it out grossed Thor in Australia, even though a lot of the talent in Thor is Australian.

So I think starting -- in a way it's too bad we couldn't have this call on Monday because we'll see if I'm right or wrong. But, and as you go through the time of the year, it's still April. So the movies that are your bigger moves are Pirates and Transformers and Harry Potter. And as I mentioned, the Pirates' numbers are tracking very good.

Super 8, the J.J. Abrams directed film, produced by Steven Spielberg, I saw about 25 minutes of that movie, and it's like an old Steven Spielberg kind of ET, Close Encounters, that sort of movie, but it plays perfectly to our [fan-boy] base. And if you look back at Sucker Punch, which was not a great financial success for us, on the opening weekend, we still did 20%, and Tron we did 25% on the opening weekend.

So like everyone else, I am fatigued from, to use your word, from the first quarter results. But I think you build the network. It's like -- it's almost like a pinball machine where the levers are all in place. And is it possible the ball somehow blows up before it gets out there? Of course it's possible. But I think it's going to be fun to watch the ball bounce around for a while over the summer.

Great. Thanks very much, Rich.

Thanks, James.

Your next question comes from the line of Marla Backer with Hudson Square. Please proceed.

Okay. Thank you. I have a couple of questions about the content. Given what we saw in the first quarter, and I completely agreement it's bad movies (36:08). But you've really accelerated the flexibility that you have to try to tweak the slate a little bit when you have a situation like that.

If you are going to be doing more of these local content films, like Founding of a Party that you have coming out, is there any opportunity down the road to show those titles on a limited basis in markets where you have a significant population that would be interested here in the states or in other markets?

Of course, Marla, you're right, and you do have the flexibility to do that. The two biggest questions are, do the films have a distributor here? So, for example, the Founding of the Party doesn't have a US distributor. So if we wanted to, we couldn't.

And then the second question is marketing. And it's one thing to open a movie, it's the second to have marking support behind it. And, obviously, on a single market basis, it's not really going to pay for us to open an international film, because if we paid for the marketing, it's very hard to recoup your investment. So all that is -- it's theoretically possible. But as a practical matter, I don't really see it as really making a big difference on our bottom line.

I think more likely it would be things that we've done before, which would be to try and get another movie to put in quickly, another domestic movie.

Now, one thing I should point out which is kind of interesting is in the first quarter we didn't make great choices of films in certain instances, but we went through and if we had chosen the top grossing film for every period that we played a film, rather than the film we played, we would have had about another $10 million in box office, which probably would have translated to $1.5 or $2 million in the bottom line, something like that.

So the first quarter was really the quarter -- again, as a company, we'll step up if we screw it up. And, in fact, we didn't have a lot of great titles. But just the whole industry is where it was in the first quarter, and we couldn't have done a lot to have changed the industry, and it is where it is starting tomorrow, and we'll see.

Right. Okay. Switching topics. The opportunities in China clearly warrant building out IMAX China. Do you see down the road that the opportunities in Russia or India might warrant building out an IMAX Russia or IMAX India at some point?

Well, I mean there are two parts to that. One is that I don't see doing recurring revenue kind of transactions in Russia and India like we're doing in China for a few reasons. One is the box office transparency is not equivalent to what it is in China, but maybe most importantly the rule of laws is not similar in those territories. So from a kind of a deal point of view, I think we'll -- we won't go in that direction in any meaningful way.

In terms of building out a separate entity, I mean, I think it's more likely that we would build out an IMAX Europe and put Russia under that umbrella, or that we would build out an IMAX Asia, rather than a country-by-country. The number, the sheer size of China and the opportunity I think is what really led us to build it out in that way.

But I would doubt we would do it -- I think it's more likely we'd do it on a regional basis.

Okay. Thanks. And then the last question is on the portable theater initiative. Can you just give us a little bit of color on where that stands right now? When do you expect to launch commercially?

We're still testing it technically, Marla. And it's been up in Toronto where we wanted to expose it to wind. But, in fact, we had a special treat this winter that we got hail and snow besides wind. So we've been testing it. And I think when we make more of them we're going to make some design changes. So I think it's going to be a while until it's deployed in any kind of meaningful way. We want to test out the business model.

I think we always said from the beginning that we're going to see how it goes. I don't want you to get the feeling I'm any less optimistic or more pessimistic about it - I'm not. It's just we're going to do it in a methodical, businesslike way. And given the growth in the rest of our business, we have the luxury to do that. And I think we'll see what happens over the next year or so.

Okay. Thank you.

Your next question comes from the line of Steven Frankel with Dougherty. Please proceed.

Good morning. Could you give us the global per-screen average number again? I don't believe I heard that.

We didn't give it. We gave the international one which was 266. Joe, do you have --

175.

175, Steve.

Okay. And what was roughly the average deal size on the new sales and sales-type leases?

What do you mean by deal size? Because some were joint ventures and some were sales-type leases.

The sales-type -- average size of the sales-type leases. Are those still around 1.4 million? What's the typical size these days?

I mean, the margins are similar.

Yes, they're similar margins right now.

A million (inaudible - technical difficulty)

[Average] revenue size. So right around a million three'ish.

Okay. And then just to clear up some confusion that I want to make sure I get this right. On your SG&A guidance, you're excluding all forms of stock comp in the numbers you gave us. But the $0.04 earnings number you used in pro forma, did that include regular stock comp but not the SAARs?

That's correct.

It seemed like apples and oranges to me.

That's correct, it did not include the stock appreciation rights.

But it did include traditional stock comp?

Yes, it did.

And you'll see that in the table in the back of the press release.

And the gross margin pressure we saw this quarter was due to the large amount of upgrades, and assumedly upgrade these as a percentage going forward, so we should see some gross margin lift?

Yes.

Okay. That's it. Thank you.

Thank you, Steve.

Your next question comes from the line of Aravinda Galappatthige with Canaccord Equity. Please proceed.

Good morning. Thanks very much, guys. Couple of questions. First of all, on the early releases, IMAX-only early releases that I think we talked a little bit about in the last call, is there any possibility of seeing some of that during the summer, at least internationally? And can you give me an update on the discussions you're having along those lines with the studies and the [key] operators?

The discussions with the -- the theaters, the ones I've spoken to, the exhibiters, would like to see it. They think it's a good thing. But, of course, they're our customers, they have IMAX theaters. So that's not surprising.

The studios are thinking about it. I mean, obviously there's a lot going on in the entire studio exhibiter world and the big headline, which you've all read, is about premium video on demand and what happens there. So I don't think you can look at release windows theatrically in a bubble. I think you have to look at it in the context of what's going on overall. And several studios have indicated a willingness to experiment at some point with an IMAX earlier window. I don't know when it would happen. I doubt it would be for this summer domestically. I think internationally, as you know we've done some of that already in Russia and in France and some other places. I think it's possible that it could happen internationally this summer, but it's possible it won't happen.

But I think that's a discussion, an ongoing discussion. And I think internationally you're going to see more of that. And domestically there's interest, but it's too early to say.

Thanks for that. And just another question on the European market. Could you talk a little bit about the outlook in terms of new signings in Europe? It doesn't seem that you got a lot of traction in recent times in seeing the ones and twos. But, obviously, it's an important market in terms of JVs. So what's the traction you're getting in terms of new signings there?

We have a tremendous amount of interest that we haven't been able to get over the finish line and turn into contracts. Our strategy in Europe is to open reference theaters and let them perform and then use that as a springboard to open more in the market. So an example would be in England where we did I think originally one theater or maybe two with ODEON. And now we're up to 13 with ODEON in England because of their success.

With Path in the Netherlands, we had one theater and now we're up to four. So that's kind of the business model. So we opened our first four theaters in France in the last six or eight months. We opened our first theater in Germany, again, within the last maybe six months. We opened our -- we are opening our first theater in Italy in the next several months.

So it's kind of -- what's happened on a worldwide basis for us is when you have reference theaters, that's what leads to more theater growth. And unfortunately, in Europe there haven't been a lot of reference theaters. And between the reference theaters and the number of discussions, I think you'll see that market growing. But when that happens, I can't predict.

Okay. Thanks for that, Rich. And a quick question for Joe. The working capital used, obviously you had some meaningful level of working capital used this year and also -- sorry -- in Q1 and also in Q4. Seems to be the same trend that you had the previous year. Sort of what's the outlook in terms of that? I mean, how should we be thinking about that in terms of modeling? Because last year, Q2, Q3 you saw some working capital come back. Is there any sort of guidance you can give along those lines?

The only thing that I could say, Aravinda, is, one is we anticipate a significant uptick in business as we move through the summer. So that will create more cash flow.

The other item, however, that I'll point out, which is a temporary drag, is, as I indicated earlier, we are in the process of liquidating the variable stock awards. So as part of that process, there are payouts that are required. And that will trickle down to virtually very minimal numbers once we get passed the second quarter.

Okay.

If you recall, we had a similar plan in place last year.

Okay. Great. Thanks, Joe. That's all I had.

Your next question comes from the line of Jeff Blaeser with Morgan Joseph. Please proceed.

Good morning, and thank you. Within the 1,200 potential theater installs, is it too early [any] of you guys can give us on what you think that could be on the JV side? I know early on China was probably not a JV target, but now is. But any thoughts on that?

We really haven't analyzed it that way in terms of dividing the world. There are certain countries, as I said before, like Russia and India, where I think if we did any at all it would be strong and for strategic reasons. There are countries like Japan and Western Europe where we'd like to do them and as many as possible.

But it's hard to say because even in North America, we do both, and you can't predict it in advance. So we did a deal with Premiere Theaters and it was a four theater deal and it was a lease deal because it was markets that we just couldn't predict how the markets would do. They were smaller markets. There wasn't a lot of history. So we didn't really want to do the deal that way.

So this is one I really hesitate to make any kind of a guess on.

Fair enough. Thank you. And on the upgrade side, I'm sure that's kind of closing the gap in terms of theaters that are showing films like a Harry Potter versus a Sanctum. If you take out the international rollout schedule, do you ever envision a day when a lower profile film will show the same amount of -- as it came out in theaters as like a Pirates, or is that just not ever going to occur?

I don't -- I think probably not.

Okay. Thank you very much.

Heather wants to add something.

Yes. I would just -- I just want to add that really what happens is we release as the studios, inline with the studio's release schedule. So generally our domestic releases are inline with our screen counts and it's really then just whatever -- the international rolls out as the release -- as the studio releases the film internationally.

Right. But sometimes the older studios won't release the films of the older, which -- the digital, the upgrades takes that out of the mix, right, because they only want to go to the digital screens because it's cheaper for them on some of the lower profile films?

Right. And so that's why it's so important for us to upgrade to digital and why we were so aggressive in the first quarter.

Oh, no, no. Absolutely, it's good. Okay. Thank you.

Thanks.

Your next question comes from the line of Martin Pyykkonen with Wedge Partners. Please proceed.

Yes. Thanks. Good morning. One question I had on exclusivity domestically. I guess just with all you've got internationally potential and deals and a lot on your plate. Can you kind of put into context, number one, how much of a priority that might be over the next year or so? And then second part of that, just the mechanics of that. How easy or difficult would that be to do? And how are these contracts typically --

You mean to --

-- set up?

Martin, you mean to change the exclusivities? I'm sorry. There's a big thunder sound here, so you cut out a little bit for a second.

Okay. Yes. Basically to change it, what is the priority, what are the mechanics in order to open up some more growth opportunities domestically? I'm just trying to gauge how realistic.

So I'd put it in two categories. I'd say if the exhibiter owns the exclusive zone, so, for example, Manhattan, AMC owns the zone. So if they wanted to put more theaters in their zone, it's their zone, it's easy. And, in fact, we are in discussions with Regal and AMC about putting second theaters in their zones. So that, the mechanic, is very easy.

In terms of being able to put theaters in other zones, I don't know if you collected baseball cards when you were a kid and you traded cards. But there's a little bit of trading that goes on. So one chain will say to another one, hey, if you let me put a theater in your zone at this corner, I'll let you put a theater in at this -- in my zone in that quarter -- in that corner. And, in fact, that happens to some extent, and that goes on. It's a regular part of our business. We don't advertise it, but that happens all the time.

Now, in terms of people -- so that's realistic. In terms of people just voluntarily saying, I'll give up my zone, I don't think that's going to happen unless the world changes dramatically and we come up with some kind of inducement to do that. But I don't see that happening.

Okay. Okay. Then a question on the Q2 installation [look], the 25 to 35. Considering the box office strength you're right in front of here and the fact that a lot of times both standard screens as well as IMAX, you don't get as much build when the box office is hot. Is there more risk than typical in that number? I know you've been clear that there can be slippage for a variety of reasons. But I'm just wondering, is that a number you've really nailed down pretty tight with exhibiters?

The answer is yes, we've nailed it down pretty tight. We monitor it from a grounds-up basis. So it's not based on contracts. It's based on our project management team and discussions in the field. So we don't give the guidance unless someone says, the equipment's arrived here in Saint Petersburg and we're -- there are people on the site and we're building it. So it's -- we spent a lot of time doing it.

Of course, with that said, the language is there because there are situations sometimes where you get caught up in customs, especially in international and in new build, for whatever reason, the construction has slowed down. Since many of these are going into existing locations where they're retrofits, those are much lower risk than they are with the new build.

So a domestic retrofit is the least risky. An international new build is the most risky. And we try and put down appropriate discount factors when we come to it. But if you look back over the last couple years, I think we've met or beaten it every quarter.

Okay.

I mean, Martin what we're conveying in our guidance is our -- the result of an update of our due diligence. I mean, we go through this every other week with our installation folks. So you're getting our most recent take on these calls.

Okay. And then just the last thing. On Potter coming out July 15th, and your next movie is Real Steel October 7th, are you at this point thinking you'll let Potter run through that or would you still potentially look for something to backfill the second half of September? Or what is your current thought on that?

I think it's highly likely there'll be another film in there. We're in discussions on a number of projects there. But we want to give Potter a lot of run room.

Okay. Thanks.

Thank you.

Your next question comes from the line of Jim Goss with Barrington Research. Please proceed.

Thank you. I was wondering in terms of the regional zones you're starting to identify, could you describe the, like the value of the market versus the larger markets you've traditionally talked about that you might expect to be adequate to justify a theater? And talk about the nature of such theaters or screens, the dimensions and whatever else you think is important?

Jim, it's really funny because some of this is on an ad hoc basis. And I'll tell you two anecdotes. One is, this company I mentioned in my remarks called Zyacorp, they have one theater in Hooksett, New Hampshire, and the other in Saco, Maine, neither of which I think was identified as a zone by us. But they approached us, and we sold to them. And their per-screen average is above the average for North America. I don't remember the number, but they both do extremely well. So one of them -- these are imaginary numbers. But the multiplex only did like $3 million, and we typically don't go in a multiplex unless it does $5 million. And I think the IMAX theater last year did close to $2 million - obviously changing the profile.

And actually, I don't remember the name of the city, maybe someone else does here. But they now are putting a theater between Hooksett, New Hampshire and Saco, Maine. So none of that was really on our radar screen.

Another tremendous success story is Warren Theaters in Wichita, Kansas, Bill Warren built a new multiplex, made IMAX the centerpiece of the multiplex. Before the IMAX opened, it was in the top 100 theaters in North America. But when IMAX opened, when IMAX was playing films there, I think it was like number six in North America. So that's one end of the scale.

It won't surprise you that people haven't brought to my attention ones in small cities that haven't worked, but I'm sure there are ones that haven't worked. So there really is no -- there really is no norm. It depends on what the [seat corner] is, how the marketing is, what the location is. But I think the examples of success I gave you, which there are a lot more, there's clearly really great opportunity if it's a good theater operator and a good marketer in a smaller location.

In terms of size, again, it -- our typical IMAX theater is probably around 350, and some smaller markets that'll go to 300, but it generally doesn't go much below that.

As you sense that there are such opportunities, are you looking at it as something that you would put a concerted effort into to identify partners among some of the smaller ones and make it more of a strategic priority than it had been in the past?

Jim, I'll make this very -- it is a strategic priority.

Okay.

And the reason is a lot of the larger markets have been -- have a lot of theaters in them. And a lot of slots, if you look at a map of the United States, a lot of the empty places are in regional markets, and it's a very high priority for us. As a matter of fact, the way we divide our sales force is by region, and the person who runs the Americas, that is his priority.

Okay. And then the other thing is, if you had to look at the next growth market, aside from this regional domestic area, but the next international market, would it still be China and more in China is a priority or would it become some of these other markets where you might have more issues to deal with such as what you describe with India, where the nature of the agreements to modify the risk might be a challenge or, you know, Russia maybe similarly. What -- and we've talked about Latin America today too. Where do you think would be the next area we should be thinking about?

Well, I still -- China would be number one on my list just because our brand is so strong there and the growth of traditional cinema is so strong there. As I said on several previous calls, there are 5,000 multiplexes open -- 5,000 screens open today in China, and the government estimates call for 20 to 25 thousand in the next five years.

So when you have our strong brand and you have that kind of built out, I would think that would be the market.

Going back to Russia. Actually, I'm not that concerned because -- about the risk because our partner in Russia, the largest cinema operator, is actually owned by one of the [Olegarts], who's a very good businessman. So I'm not really concerned about political risk there.

So I would think China. At some point, I think it's going to shift to western Europe, and I gave a lengthy answer to that. But I think we have to get a little more critical mass there.

All right. Thanks very much.

Okay. Well, I think that just wraps it up. Again, to repeat -- two things, to give you my kind of informal take on where we're at and then to repeat something I said before. Obviously the fact that the first quarter was disappointing in terms of the industry blockbusters and our financial results, that doesn't make me happy. On the other hand, I say to Heather, our head of IR for those of you who don't know her, if I could have had another $0.10 a share in the first quarter, but I had 25 signings, which was our budget, rather than 101, the mood on this call might have been dancing in the streets, you know, 10 more cents.

But for me, having 101 signings in the first quarter, that's more than my budget for the year, and falling a little bit short because the film slate didn't perform, that's a much better result for me in terms of a long-term outlook for this business.

And as I said before, just internally at IMAX there couldn't be a more optimistic mood because of that high level of signings, the installs during the first quarter, the installs going forward for the rest of the year, and a -- it's the movie business - I -- I'm not better at predicting than you are. But my own feeling is it's going to be a very strong summer.

So thank you very much, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a great day.