Imax Corp (IMAX) 2011 Q2 法說會逐字稿

Good day and welcome to the IMAX Corporation Second Quarter 2011 Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question-and-answer session at which time you will be requested to press star-one to ask a question. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Heather Anthony, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning and thanks for joining us on today's second 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 in the Presentation section 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 second 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.

This morning, Rich will review trends we are seeing in the business and our industry, our network expansion and future film slate, then Joe will review the quarter in more detail. Rich?

Thanks, Heather. When I look at our business, I evaluate it through two key lenses -- how quickly are we expanding our network and how is the film slate performing overall. There is no question that, overall, this year's film performance prior to Transformers and Harry Potter was disappointing. However, what we believe is more fundamental to the long-term value of our business is the fact that we continue to deliver solidly on network growth.

In the second quarter we signed 52 theater deals for a total of 153 deals year to date, compared to 98 total theater deals in the first half of 2010. Right now, we're sitting on a record backlog of nearly 300 theaters against an installed base of approximately 400 commercial theaters and the deal pipeline remains robust.

But, before I get into a network growth update, which is very positive, I'd like to take a few minutes to discuss film performance; specifically, what we are seeing currently and some thoughts on the first six months.

Total IMAX box office for the second quarter was approximately $108 million versus $114 million in the second quarter of 2010. As I mentioned, box office for the year has not lived up to our expectations. So the simple question is, why? Is something fundamental going on or was this simply a bad stretch? Given the strong consumer response to the IMAX experience for Transformers and Harry Potter, we believe it appears to have been a bad stretch.

Our box office figures so far for the third quarter to date are outstanding. This supports the portfolio theory, which suggests that, in the end, gross box office will adjust to a certain level. Gross box office for the first 27 days of the third quarter is approximately $88 million, which compares to the $98 million of box office generated in all of last year's third quarter. To put that in some context, these last five weeks of box office performance are on a par with the levels we last saw with Avatar.

Looking at the results prior to Transformers and Harry, it is clear that there were fewer blockbuster titles that are consistent with our brand this year than last year. We often say we're in the business of blockbusters. To that end, through the first six months of the year, three movies broke $200 million in total box office domestically and we participated in two of them -- Fast Five and Pirates. By comparison, last year at this time we were involved in all six movies that had crossed that milestone.

While we believed our slate had a great deal of promise, it's important to remember that, in the movie business, if you run a portfolio, the expectation is that, over time, box office evens out, but for a short period of time you can have dislocation.

In addition, there are certain other factors that negatively impacted our business. For instance, this quarter we had some scheduling challenges and commitments that resulted in shortened runs and shared screens.

And I should pause here as I know many of you are aware that last night Paramount announced that it is moving Mission Impossible 4 to December 21st. We are aware of how close this opening date is to Tintin and we are working with Paramount, since they are the distributor of both films, to maximize screen time for both movies, including the possible early release of one in IMAX.

Getting back to my previous point, through these challenges, our per-screen average through the first seven months of this year is just over $700,000, which would imply a run rate which is inline with our long-term model.

In addition, we are still commanding healthy per-screen multiples versus other formats. For example, per screen we did four to five times the average level of other 3D box office for Transformers and Harry on each of their respective opening weekends. And we continue to maintain healthy multiples against all other formats on other titles as well. These results reinforce what we know to be true. For nearly a decade IMAX has been the moviegoer's number one premium venue of choice for event films and we see no signs of that enthusiasm dissipating.

Our per-screen matrix during this difficult period are a true testament to the brand and the experience and the loyalty of IMAX fans around the globe. In fact, we believe that this is the time to go further to tap into the consumer's loyalty to the IMAX brand, which is we are so pleased to have hired Marc de Grandpre as our new Chief Marketing Officer and to working with Sid Lee, a prestigious brand marketing agency with worldwide presence.

Finally, as we have discussed in the past, the IMAX model is about cherry picking the biggest and best titles, whether 2D or 3D, that suit the IMAX experience. Over the past 20-plus years, our experience has been that the results are about the movie and the IMAX experience; not whether it's in 2D or 3D.

Let's now move on to network growth since commitment to the IMAX brand for our partners and moviegoers is a much better indicator of the long-term prospects of our business than short-term box office.

As I mentioned, year to date we have signed deals for 153 theater systems, a 56% increase from the same period last year. This follows our record 221 signings in all of 2010.

It is especially gratifying to have our partners step up to the plate and expand our relationships. In fact, 85% of signings year to date have come from existing partners. Wanda Cinemas signed a 75-theater joint revenue sharing agreement with us, and our two largest domestic exhibitor partners, AMC and Regal, recently exercised their options for 10 and 9 more JV sites, respectively. They recognize that IMAX brings in incremental audiences and dollars, just as we do.

The ROI on our unit economics remain very compelling for us and our exhibitor partners, whether at $1.2 million a screen or at least year's $1.8 million a screen, which included Avatar. We believe that our long-term track record of success is what is driving exhibitors to enter into business with us or to increase their previous commitment to IMAX.

From a global perspective, it is clear that worldwide box office trends are skewing internationally, and we see that in our business as well. The per-screen average for our international theaters stands at approximately $950,000 for the first seven months of the year. Our international results in many instances are nothing short of incredible -- $3.1 million a screen at the BFI in London; $2 million in Hong Kong; theaters across Russia doing anywhere from $1 million to $2 million; Wanda Beijing, $1 million; Gateshead in the UK, $1 million. These are all results through seven months. A new theater in Singapore which opened in May has already grossed $1 million.

Given these trends and our under-penetration internationally, we are very focused on continuing to build our network overseas. Approximately 80% of our total backlog is international and 69% of our JV theaters in backlog are for international locations. As you can see from the chart in our presentation, over time our geographic breakdown for JV theaters will increase from just 15% in international to 35%, based on backlog alone.

For perspective, if our JV mix was 65%/35% domestic versus international for Pirates, we estimates that would have translated to approximately $1.8 million of additional EBITDA in the second quarter. We believe our domestic/international JV mix will continue to balance out based on international opportunities, some of which I'll detail for you now.

During the second quarter we made important progress in several key territories. As you know, we're working on transitioning China to a revenue-sharing market with the appropriate partners and we believe there are additional revenue-sharing opportunities in that market.

Operational progress in China includes the establishment of our wholly-owned foreign entity. We have selected a CEO of IMAX China who is Chinese, who will begin in mid-August and have added about 15 positions in the last couple of months. At the end of the second quarter 46 IMAX theaters were in operation in Greater China. By the end of the year we project to have between 80 and 85 theaters in operation in the region. 25 to 30 of these theaters will be full revenue-share theaters, led by the rollout of our Wanda revenue-sharing partnership. We opened our first Wanda site in June and are on track to open several more in the third quarter.

Through July our theaters in Mainland China have generated approximately $990,000 per screen and we are very pleased with our result on Transformers. The movie opened to an incredible $3.7 million from 31 screens for a per-screen average of $120,000; higher than our previous per-screen average record of $97,400 with Avatar when it opened on about 11 screens. And Harry Potter is opening on November 4th. Numbers like this demonstrate -- I'm sorry, August 4th. Numbers like this demonstrate the opportunity we see in China. Chinese bloggers have compared the supply/demand dynamic in buying an IMAX ticket to Transformers to buying a train ticket during Spring Festival when millions of Chinese head back to their hometowns to welcome the New Year. We believe this analogy bodes well for the demand for IMAX in China.

In South America we made progress opening sites in partnership with our master licensee. Our new theater in Brazil opened last week to levels as strong as our other two locations in Brazil. And our new IMAX theater in Trinidad is poised to open imminently. In addition to these two sites, discussions are in progress that could result in a good number of new IMAX theaters opening in 2012 across important South American markets like Brazil, Argentina and Colombia.

I recently spent several weeks in Western Europe, including time spent at the CineEurope Exhibitors Studio Conference. And I was pleased to see the enthusiasm for the IMAX business continues to build. Over the past year we have signed or installed strategically important deals in France, Germany, Italy, Spain and, most recently, Portugal. These theaters are complementing what we -- that we are already well established in European territories for IMAX, like the UK, the Netherlands and Austria.

Similar to our strategy in the US several years ago, we're seeding the market with reference theaters which, as they perform, tend to lead to additional deals. For example, our new theater in Italy, which has grossed approximately $400,000 a box office since launching in mid-May, has moved up the national rankings by approximately 20 positions, making it now a top-15 site in the country. Given past history, results like this tend to lead to an increase in signings and installations in a region and we would expect the same for our network growth in Europe.

As for North America, as I mentioned, we're very pleased to announce that our two largest domestic exhibitor partners, AMC and Regal, committed to the maximum number of theaters under their multi-theater agreements they each entered into last year.

During the quarter we also expanded our relationship with Canadian exhibitors Cineplex and Empire. And if you look back about a year to where we are now, our presence, including backlog, has just about doubled in Canada.

And in May we announced our first revenue-sharing agreement with a regional partner, Southern Theaters. Since opening with IMAX, Southern complexes in Macon, Georgia; Slidell, Louisiana; Winston-Salem, North Carolina; and Panama City Beach, Florida have moved up in the North American rankings by an average of 220 positions relative to the same period last year. Also when compared to the same time last year, these complexes grew their box office by 27%.

Our robust backlog has enabled us to announce this morning that we anticipate installing between 90 to 100 new theaters in 2012, purely from backlog. This is effectively our base case for installs next year as this is purely from backlog at June 30th and does not include any future signings.

It's worth mentioning to put this in context that, at this time last year, our initial 2011 install guidance solely from backlog called for 55 to 60 new theaters versus the 90 to 100 we're talking about for 2012. So, we're well ahead of where we were last year already and we're six months away from 2012.

2011 guidance also went up for installs as well, which Joe will discuss.

Finally, as we referenced on our last conference call, we believe it is likely that our total addressable market worldwide is higher than the 1,200 to 1,250 we've discussed previously. Certainly, we think the trends in network growth metrics suggest as much. We're in the process of updating our market analysis and we would expect to make an update over the coming months.

On the technology front, IMAX is known for the highest quality and most differentiated cinema experience available and is the brand that consumers have known and trusted for years. We are committed to our promise to always deliver the premium movie-going experience available and we're constantly working to enhance our platform.

To that end, we have recently made significant investments in new digital laser technology which we believe will continue to widen the gap in the quality of exhibition between ourselves and other formats, and which we will discuss in greater detail on future calls with you.

Moving to film. We operated at virtually full capacity for both Transformers and Harry Potter during their respective opening weekends. For the third and final installment of Transformers, we generated a higher level of box office domestically than we did with Transformers 2, despite showing the movie on fewer screens because of our commitment to also exhibit Cars 2. As I mentioned, response to the film overall, and particularly in IMAX, has been very strong. And Transformers 3 is still set to open in Japan.

For Harry Potter, many multiplexes around the world played the film on upwards of 10 to 15 non-IMAX screens per complex during opening weekend. Yet, our single-screen network was able to deliver per-screen averages higher than those of Harry Potter and the Deathly Hallows Part 1, our previously highest grossing installment. And we maintained our market share despite the increased screen count of other formats.

We look forward to upcoming titles, including 2D titles like Contagion in September, Real Steel in October, and Mission Impossible 4, 30 minutes of which was shot with IMAX cameras. IMAX footage of MI4 is included in the IMAX trailer that was attached to the opening of Transformers, which has been very well received. We remain in discussions about differentiating IMAX through early-release theatrical windows and remain optimistic about securing a title in the not too distance future.

Looking to 2012, the film slate is being finalized as we speak. Key titles that we have signed and secured for the next year included Warner Bros. and Christopher Nolan's The Dark Knight Rises, which will feature more IMAX footage than any previous IMAX DMR picture. It is exciting to think that over the next 12 months two [10-pull] titles, The Dark Knight Rises and MI4, will be released that were shot partially in IMAX, which is consistent with our goal of differentiation.

In addition, on Tuesday we announced that Sony Pictures' The Amazing Spiderman will be shown in IMAX. And response to the footage showed at Comic-Con was very positive. And we look forward to being a part of Warner Bros. and Peter Jackson's The Hobbit, which will mark the first time we'll be involved in a Lord of the Rings title. We believe there is significant overall lap in fans of the J.R.R. Tolkien series and the IMAX fans.

Looking at the 2012 film slate, we are excited about being involved with these iconic franchises. We look forward to providing more updates in the weeks and months ahead.

To wrap up, we believe we are executing effectively against our strategic initiatives, building our network, adding to backlog and investing in the IMAX brand, technology and differentiation. Admittedly, the first six months of 2011 did not live up to our expectation and, therefore, we estimate that 2011 adjusted earnings and EBITDA will be lower than 2010, although we do expect revenues to be consistent with last year.

But, when we think about how rapidly our network is expanding and how future 10-pull titles like The Dark Knight Rises, Spiderman and the Hobbit will play out on that larger network, our long-term outlook remains very positive for the simple reason that we've seen this business grow and perform before. We often say that blockbuster films are the gas that drives the IMAX car. The results of the past five weeks remind us of what happens when we add fuel to the tank.

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

Thanks, Rich. When we look at the second quarter, a lot of what you see are investments in the business that will benefit future periods, like our aggressive JV rollout schedule and related launch costs, increased R&D spending year over year, infrastructure improvements overseas, and some noise from stock comp, the impacts of which were magnified by a soft box office quarter.

Second quarter revenues increased to $57.2 million compared to $55.6 million last year. Adjusted EBITDA was approximately $16.2 million, which is on par with last year's second quarter.

Adjusted net income, which excludes any impact from variable stock comp and deferred taxes, was $4.6 million or $0.07 per diluted share. On a fully-reported basis, we reported net income of $1.8 million or $0.03 per share.

Looking at the business segments, revenue from sales and sales-type leases increased to $20.5 million, compared to $17.3 million last year. During the quarter we installed 11 new theater systems and 1 used system, which is above the install guidance that was given on the first quarter conference call and compares to 6 new theater systems installed a year ago.

We also installed 6 digital upgrades in the quarter which, as a reminder, come with lower gross margin profile than our full new theater systems, and compares to 11 upgrades in the year-ago period.

Our joint venture revenue was essentially even with last year at roughly $8.3 million. During the quarter we installed 23 JV theaters, which is at the high end of our guidance and which compares to 4 JV theaters installed in the year-ago period. JV margins were negatively impacted by the high level of install activity in the period and the related marketing and launch costs of $1.8 million. This compares to what was a very light JV install quarter last year when we incurred launch costs of just under $700,000. As a result, you can see the difference in gross margin between a high install quarter and a light install quarter. If we exclude launch costs from both periods, our JV gross margin was approximately 80% in both periods.

DMR revenue was below last year, reflecting the lower level of box office year on year; however, DMR gross margin dollars were inline with last year, reflecting lower costs, including fewer film prints bought by the Company in the period this year versus last year.

Gross margin dollars were $26.3 million in the second quarter compared to $27 million last year. In addition to our investment in JVs and higher depreciation, other items like marketing costs associated with our IMAX original documentary film Born to be Wild, and increased costs from theater system maintenance for proactive service on our systems impacted our margin performance.

Reported SG&A expenses for the second quarter were $19.5 million, which was up $8.4 million versus last year. The entire $8.4 million increase in SG&A was attributable to year-over-year swings in stock comp expense. In particular, you may recall that variable stock comp actually benefited last year's second quarter by about $4.9 million or $0.07 per diluted share, as compared to a charge this year of $1.4 million or $0.02 per diluted share. Traditional stock comp expense of $3.2 million in this year's second quarter was higher than the $1.1 million expensed in the second quarter of last year.

For the second half of 2011, we now expect SG&A to be approximately $39.5 million, which is comprised of $34.5 million in cash SG&A and $5 million in ongoing traditional stock comp. This would bring our full year to roughly $72.7 million, which compares to our previous guidance of $71.2 million. Regarding variable stock comp, it is worth mentioning that just 133,000 variable awards remain outstanding compared to 1.5 million last year at this time.

Research and development expenses were $2.1 million, which was inline with our expectations, but compared to $1.2 million last year. For the second half of 2011 we estimate R&D expense of $5 million as we continue to focus our technology efforts on further enhancing the quality of the IMAX experience through R&D projects like digital laser projection, which will enable us to illuminate larger screens with the level of quality that IMAX is known for. This implies full-year R&D expense of approximately $9 million, which is at the upper range of our prior guidance of $8 million to $9 million.

I also want to highlight a $400,000 adjustment made to our deferred tax provision which resulted in a reported effective rate of roughly 41.8% for the quarter. Absent this adjustment, our effective rate would have been at more normalized levels.

Our backlog at quarter end consisted of a record 294 theater systems, which compares to 283 systems at the end of the first quarter and 187 systems at the end of last year's second quarter. Included in the quarter-end backlog were 12 digital system upgrades. We now expect install a total of 120 to 130 new theater systems this year, up from our previous outlook of 115 to 125 new theaters indicated before.

As illustrated in our slide presentation, we expect to open 20 to 25 JVs and 10 to 13 sales-type lease in the third quarter, excluding upgrades. This compares to our having installed 18 JVs and 7 sales-type lease systems in last year's third quarter. For modeling purposes, it is worth noting that many of our JV installations in the third quarter are overseas, which will likely result in a launch cost per theater consistent with that of the second quarter, which came in at about $78,000 per system. As always, we remind you that installations are subject to slippage between periods, often for reasons outside of our control.

As Rich mentioned, Q3 box office to date is currently at $88 million, which compares to approximately $98 million of box office that was generated in all of last year's third quarter.

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

Thanks, Joe. Like you, we're not happy with our Q2 box office. However, we believe our contracted and network growth, field pipeline and future titles should create significant long-term value for shareholders. We are investing in our business to sustain our long-term growth and our start to the third quarter is encouraging.

Except for the short-term effects of the last two quarters of box office, the response to our brand for moviegoers across the globe is the best reminder of the growth opportunities in front of us. As a result, we remain optimistic about our business and believe that we remain in the early stages of global expansion.

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

Thank you. (Operator instructions.) Richard Ingrassia, Roth Capital Partners.

Thanks. Good morning, everybody. I guess that's the trouble with higher expectations here and you've got to take these kind of quarters with quarters like Q1 '10. But obviously, international growth was very strong, but I guess it's no secret that there's a bias among US investors that makes prospects for US growth more impactful to the stock. Hopefully, that changes over time here. Obviously, a theater is a theater. And in fact, internationally your per-screen averages are even better than in the US in some cases. But, talk about the strategy for expansion in the US, perhaps in some secondary markets, for lack of a better word; other opportunities for expansion in North America that maybe aren't on investors' radars right now.

Well, Rich, I mean, I think it falls into two categories. The first is the regional exhibitors. And as I mentioned during the remarks, we did this four-theater JVs with southern theaters. The fact that they went up an average of 220 places in the rankings, which is quite significant, has certainly caught the attention of a lot of other regional exhibitors. So, we're in discussions with a number of regional exhibitors with about -- similar kinds of transactions. And some of those are in the US, some of those are in Canada and I think there's a fair amount of activity there.

The second is, obviously with the larger guys, the AMC and Regals. And you saw in the quarter that they both formally upped their commitment from where it was. So, although the market is much more penetrated in the US than overseas -- I don't have the number off-hand, maybe Joe does, but we've had significant growth in the US this year in terms of the number of signings than last year. So frankly, Rich, much stronger than I would have expected.

And then the final part would be putting second theaters in zones or in multiplexes and we have discussions about that. You do know my bias about that because I've talked to you before, which I think build out your market before you do stuff like that too aggressively. But, there's certainly the opportunities to do it. A number of exhibitors have discussed it with us.

Okay. Thanks for that. And then, just a question on the cost side. Obviously, when you have a string of misses in a quarter in the first half against a lot of DMR fees, you're going to have a margin impact as well as a top-line impact. Have there been any efficiencies achieved of any kind in the DMR process over the last -- I don't know, even over the last couple of years that maybe would make that impact a little less severe? And then talk about -- I mean, you've communicated quite clearly, I think, about the increased R&D and other investments in the business, but maybe just recap us there a little with a little longer-term view.

Well, the answer to your first question is, yes, there have been DMR savings that we do recognize. And if you do the math you'll see some of them.

On your second question, Rich, our primary focus and our R&D effort is on developing a laser system that can light much larger screens. So for example, right now we can't light Sony Lincoln Square or the BFI. And we're aiming to have a product available by mid-2013, although there's no guarantee about that.

You probably heard during my comments I mentioned that we did a few select investments, including the acquisition of some technology. And we feel we've made some good progress against -- I don't want to put the cart before the horse, but I hope in future quarters we can brief you a lot more on the strides we -- prospectively we may make, which we think are significant, at least on paper. They're not in the real world yet.

So, that's really where the bulk of our R&D is going. And not only would it light bigger screens, but it would light -- not only light, create a much better image on smaller screens. And save operating costs because you wouldn't have to change bulbs, you'd use lasers. And that's really where a lot of our effort is being put right now.

Okay. Thanks, Rich. Thanks, everybody.

Martin Pyykkonen, Wedge Partners.

Yes, thanks. Good morning. A couple things on just kind of looking out for new deals. I know you don't want to set expectations in this, but I'm looking more directionally. When you -- I'm thinking of things like the credit facility extended. If I've got this right, on Transformers and Potter I think you -- both of your second weekends of those, your share actually went up. So in other words, word of mouth and got to see it at an IMAX kind of thing. And when you go back to Avatar and kind of the aftereffects and the flurry of deals, I'm just wondering. Is your sales funnel, if you will, as you kind of exit Potter and having performed well in Transformers, do you think that's expanding for new deals beyond what you've probably got in backlog here?

Well, it's hard to say, Martin. Historically, that certainly would be the case. But every month I have a conference call with our sales team around the world in terms of what deals are being negotiated and processed. And the last one I think was right at the end of Transformers and right before Potter opened. And it was as strong as it had been, really, the rest of the year before that.

And I think some of the people in different territories had said, some people were waiting to see how Transformers performed and Harry Potter performed. So, I think it's got to be a positive to us. Whether it brings these prospects over the finish line or leads to more I can't say. But historically, certainly it's led to more activity. But again, I don't want to overstate the point, but our level of business activity is very, very strong.

Yes. And wasn't -- have I got that right, that the second weekends of Potter and Transformers you actually increased your share?

You mean our percentage of the box office that was in --

Yes, right.

Yes, it went up.

Okay. And then, just on Latin America, I know at your Analyst Day we spent some time on this and there's a master license situation on there. Anything opening up more there in terms of to the extent it opens up a potential for you in any fairly near-term, or is that still more of a longer-term workout situation?

Well, there are two things. One, under that master license agreement, I believe the pace of installs will pick up in 2012 versus 2011, irrespective of whether we restructure the relationship. On the second point, I think our partner there has indicated a willingness to discuss some kind of restructuring to open that up quicker, but that's not done yet or even in a documentation phase.

Okay. And then, lastly, just on -- I know we've talked about this and it's been happening a little bit internationally but, more domestically, do you foresee in terms of working with the studios the opportunity for early IMAX releases on some of the big films into next year? Is that something they might be willing to do, or is that still further out?

No, I think that is something they might be willing to do. And this isn't a big deal, but it was only a day or two, but Super 8 was actually released early in IMAX before it was released in 35 millimeter. And we are discussing that with a number of different studios.

James Marsh, Piper Jaffray.

Yes, hi. Two quick questions. The first one, I just wanted to drill down, Rich, on your comments about Mission Impossible. And just to be more clear on this, is that international markets only or is that domestic? And how do you guys decide who gets the screens if that situation emerges?

Well, James, Tintin releases in a different date internationally than domestically. I believe it releases in October and it releases at the end of December in the US. So, I don't think there's an issue internationally, I think they'll all have their own play dates. So, I was referring more to sorting it out domestically. I think it is sorted out internationally. I don't know, in every market but, by and large, it's a different date.

Okay. And then, I just wanted to drill down on the per-screen averages, I guess, question. And I understand, Rich, why you think the 1.2 is -- or Joe, why the 1.2 is a good number to use. You look over the long-term rather than the short-term and there's no reason to believe that the current underperformance is the new normal.

But, I wanted to talk a little bit about how you think the new screens would impact those averages. And I was hoping you could give us some sense for performance of newer screens versus older screens, and obviously adjusting for marketing and launch costs. But, do you see any decline in performance as you add new screens in the market?

And then, just related to that, I just think, intuitively, as you add more international screens to the mix and they've got higher per-screen averages and that baseline average has a lot larger percentage of domestic screens which are below average, wouldn't the average new screen be higher than the average? I mean, I know that's a little convoluted.

No, I -- the answer is, of course, yes, what -- the second part of your question. To the first part of your question, I think we've seen no general trend about lower per-screens based on more screens in the territory. Because as you know, we have exclusive trading zones. So typically, you're not opening -- I mean, never -- you're not opening one across the street from another one. So, each theater is new to its market. And historically, there's been no evidence of that kind of cannibalization overall. I mean, anecdotally, you look at China where, as I said during my remarks, we had 11 screens when Avatar opened and we did better when Transformers opened on 31 screens. So, there's no data to support that.

One thing that I think about is you really have to look at it as a portfolio. Last summer I remember Twilight opened in IMAX and it didn't really perform all that well. And I think, in retrospect, it really wasn't the right demographic for IMAX. I'm sure you remember this, James, because obviously you were following us closely. Everyone said is Twilight the new normal? And I think there's a real danger in taking a short period of time and saying it's the new normal.

And by the way, I didn't say -- by the same token, I didn't say Harry Potter and Transformers were the new normal; they're not. I think some movies do better, some do worse, and it kind of blends out in a portfolio. And again, back to the point of your original question. I think overall we've found no evidence of extra screens, lowering the screen count but, over time, we'll find out.

Marla Backer, Hudson Square.

Thank you. Well, a couple of questions. Harry Potter and Transformers played incredibly well in IMAX. But, given that Potter dropped off I think about 62%, and that's not IMAX, so it's the general number, do you think that that -- the playability there is what you had originally envisioned?

I guess all I could say, Marla, is that we have an ultimate in our budget and we haven't seen any need to raise it up or down at the moment. The film will play in the future and we'll see. But, we haven't seen anything in its performance that's caused us to change our initial expectations at this point.

Okay. And then, for next year you've announced three films, including The Hobbit. Now, Peter Jackson is shooting that at a higher frame-per-second rate. How will that play in IMAX? So, I guess what I'm asking is, does IMAX support that technology? I don't think most other exhibitors have the technology in place right now to support that technology properly, to show it properly. What about IMAX?

We're looking at it, Marla. We're well aware of what he's doing. In general, I think the idea of a higher frame rate is an interesting one and it's something we've been thinking about for a number of years in the abstract. We haven't done it for a variety of reasons, but we're in discussions internally, and I believe with Warner, about whether it makes sense to do that or not. It's something we're thinking about but haven't decided.

And my last question, it's sort of a follow-up to a question you received earlier. I mean, it's obviously -- it's stating the obvious to say that the box office performance has a significant impact on the overall margins. So, you responded to the question of have you seen any efficiencies on the DMR front. But, I guess what I'd like to know is, in the short term, when you're experiencing that kind of box office disappointment, are there any other levers that you can pull to reduce spending, reduce expenses in the very short term?

I mean, I think the only things we can do are things like maybe cut back marketing a little bit, delay certain hires that we had in the Q. And those are things that we've been looking at, Marla.

Aravinda Galappatthige, Canaccord Genuity.

Good morning. Thanks very much, guys. I have two quick questions, first of all on China. I wanted to ask, I mean, has there been a visible change in the dynamics in that market since you announced that big deal with Wanda? I know obviously the exhibitors in that area and those that have build plans saw that deal and they know that IMAX is a pretty strong competitive tool to use. So in that context, has the negotiations or has the traction that you're getting in that market improved since that deal, or is that sort of too early to say at this point?

I think it's too early to say. The market's been kind of as good as it's been before. I don't think there's another 75-theater JV about to happen, so in numbers you wouldn't see that. But, if you look in the interest from the number of exhibitors and the kinds of interest, it seems somewhere between consistent and better.

I think what's more important than Wanda getting in is the $120,000 opening period for Transformers. I mean, that's an incredible result. Just to put that in context, Harry Potter had a phenomenal opening in North America and it averaged $57,000 a screen for a three-day weekend. In China it was a four-day weekend, but it was $120,000 a screen.

So, I think that's more likely to motivate people than the Wanda deal itself. And I think I said in my remarks the screens are averaging close to $1 million a year through the first seven months. I think those will be much more inducements than the Wanda thing. But, the level of activity is good.

Okay. And -- thanks for that. And just one other question on the SG&A (inaudible), Joe. Obviously, looking at the guidance you've given for SG&A, you're going to see some high inflation this year. We saw some high inflation last year. Longer-term, without actually asking for guidance, I mean, should we be thinking, given the growth trajectory you're in and given the international growth that we're going to see, should we be continuing to expect higher levels of inflation in SG&A even beyond 2011, or is that more likely to normalize post-2011?

Aravinda, as you'll recall, I think we discussed it on the last quarter call, we'll incur incremental expenses to build up our infrastructure in China this year, so that's really increasing the baseline somewhat. I would not anticipate a level of SG&A increase to the level that we had this year, year over year. That would surprise me.

Okay, great. Thanks, Joe. Thanks all I have for now.

Steven Frankel, Dougherty.

Fine. So, headed into this year one of the things you seemed most excited about was a really large film slate. Looking back on it -- and you made some comment about shorter runs. Were you overly optimistic on the number of films you can show per year? What do you think the right number is for 2012?

We're talking about that internally, Steve. It's a good question. My own vote would be for less with longer lead times, but we haven't fully parsed through that. I think that -- my guess is you'll see slightly less next year domestically than you see this year. But for example, I don't -- I did -- I may have mentioned it briefly in the call, we're doing a film called Sector 7 in Korea that opens on the first or second week of August.

So, I think you'll see kind of Hollywood films, maybe not as many as this year, but I think you will see more international films sprinkled in because we're able to do this in Korea. And by the way, by Korean standards, this is a big blockbuster 3D action film. In Japan our network is of sufficient size, so we're starting to look at doing films there. In Russia the network has gotten to a big enough size you could do it there. As you know, in China we've done it and we could do some more of them.

So, I think if you look at the total number, it may be similar to 2011, but I think the core group will be down a little bit, but maybe regional releases will be up a little bit.

Okay. And a housekeeping question for Joe. I know you gave the seven-month PSA numbers, but could you give us the quarter's PSAs domestically, internationally and globally?

Sure. Let's see, for the quarter the total per-screen average for the network was 316,000 per screen, domestic was 267 and international was 409.

Okay, great. Thank you. That's all the questions I have for now.

Jim Goss, Barrington Research.

Thank you. One following up a little on what Steve was bringing up. To the extent that as your screen base expands, it sort of magnifies the volatility of the best guess in which product to put on the screen. Do you think there's any merit to thinking of maybe hedging your bets and having more than one product and splitting screens in cases which are more normal that don't include a Transformers or Harry Potter that would seem to be likely homeruns?

Jim, I don't think so at the moment. It turned out to be a fairly complicated dynamic when we split the screens for Cars and for Transformers. And where you're going to put what, in what theater. And obviously the exhibitors have their ideas and the studios have their ideas. And frankly, I don't think it was worth the -- I'm trying to think of the right word, the brainpower and the stress to go through that exercise, particularly for a non-event film. I don't think the box office is going to be that different for non-event films. So, that is not a way that I think we'll end up going.

Okay. And you had also talked -- addressed a little bit of the implied deceleration in screen count additions for 2012 with 90 to 100 I think implied now, versus 120 you're planning to add--.

No, no, no. Jim, sorry to cut you off, but that's out of backlog alone.

Right.

Last year, when we gave the same guidance for 2011, it was 55 to 60. It's now 18 months out until the end of next year. From backlog alone it's materially higher. So, I -- please, I didn't want to give you at all the impression of decelerating screen growth. As a matter of fact, if you just did a like-for-like of where we were, I think you'll see accelerating screen growth. But, we're just giving the number just from backlog. And we have six more months to fill the backlog before we start next year, plus we have next year sign and installed. So, in fact, we're in a much stronger position going into next year than we were going into '11 from a screen growth point of view.

No, I did understand the 50 to 60 versus 90 to 100. And I'm just wondering how long that process goes on. As you have accelerating screen growth counts, can that take place for another several years or at some point do you -- especially with the double-edged sword of a screen count launch costs. At some point does it become more of a focus on the profitability per screen, not that it hasn't been a focus, but does that shift to where you get even greater acceleration in the bottom-line benefit from the screen growth you had?

Jim, even at the lower box offices that we saw in the first half, the profitability of the JVs on kind of a model basis is so strong that writing them off in one quarter to get the benefits -- and if it's underperforming instead of having a year-and-a-half payback, you might have a two or a two-and-a-half year payback, which is obviously still a terrific economic investment. So, I don't think you would see us stop signing JVs because of the one quarter impact.

So, the -- you think you can be matching or exceeding the numbers of screens you'll be adding for at least another two or three years, I would imagine.

Again, we -- it's too long a period to give a detailed forecast, but since we have 300 in backlog and 400 open today and we're signing at a fairly rapid clip at the moment, it looks like over the next several years we could sustain very healthy growth.

Okay. And the last thing. If MI4 does wind up at the tail end of 2011, are you -- do you have any thought on how the split might be? Is it sort of -- did you say it was a Christmas Eve opening or that sort of thing?

The 21st I think is the --

The 21st? Okay. So, there will be some benefit to both years then, you're thinking, from that movie?

Yes, we're hoping, certainly, Jim.

Jeff Blaeser, Morgan Joseph.

Hi. Do you mind telling me how many territories, I guess, has China and Japan have been opened in Transformers or Harry Potter and how many theaters will be showing those?

Well, China, we know it opened 31 Transformers. For Potter, Joe, do you know how many it is?

I don't know.

I'm guessing --

Probably Similar.

It's around that number or it's several more. If you talk about Greater China, Jeff, there's probably another 14 if you include Hong Kong and Taiwan. In terms of Japan for Transformers, I think we have somewhere between 12 and 15 theaters open today; something like that. So, that would be the number.

Okay. Do you want to try to take guesses at what you think those two movies can do in gross box office in third quarter as we're -- we've got a big chunk of it already out there, $88 million it looks like?

All I can tell you is that Potter's historically been a good title worldwide. I don't know in China. I just don't know enough about their case to know how it plays. I will tell you, though, that the weekday numbers on Transformers in China have held up extremely well, almost better than any movie we've shown there versus the weekend. So, I think -- Transformers, I feel quite good about the numbers coming out of China and I think it's a very popular franchise in Japan. So, I'm feeling very good about that.

In terms of Potter in China, who knows? I just don't know enough about it other than to say that I believe we're going to keep some screen sharing there. If Transformers holds up, I think we'll show both at the same time to some extent.

Okay. And in 2012 you have some nice titles that seem to have some overlapping dates at this point. Are you getting any kind of -- obviously, as your database grows and your influence grows, are you getting any momentum where you could start to suggest moving some of those names to get larger lead times and better penetration when you do have overlaps?

Two parts, Jeff. First is, yes, and a number of studios have come to us and said if we move this to this would you be available for a two-week run or a three-week run? And those are discussions we have on somewhat of a regular basis at this point.

On the second part of it, though, of the films we've announced I don't think anything overlaps that we've announced so far.

No, no, I agree. I was just thinking of some other titles that probably would overlap that you wouldn't mind having in the slate. But, that's very helpful. Thank you very much.

Ben Mogil, Stifel Nicolaus.

Hi. Good morning and thanks for taking the call. Just following up on a couple of the questions that people had earlier about some of the scheduling issues. I mean, I realize that this is entirely beyond your control. How much do you see it being sort of alleviated given the studios continue to sort of jam stuff into the May/July time period and then into December? And given that you obviously want to or need to have good relationships with all the studios, so inevitably you just want to take some movies you want and some movies you've got less desire from. Like, when you look at the studio scheduling, have you seen them alleviating those issues at all on -- from what they're doing?

A little bit, Ben, which is kind of the last question Jeff was asking.

Sure.

I just -- two things. The Transformers/Cars 2 thing was somewhat of an experiment and it was a little bit of an accidental experiment. And what happened was we made a deal with Disney to do Cars, and originally Transformers 3 was supposed to come out next year, in 2012, and they moved it to 2011. And they moved it to a week later. And Disney was extremely cooperative, and we really appreciate that, in enabling kind of the split screen test. It's not something we aspired to do, it just kind of happened under the circumstances.

And as I said before, I think our experience was -- I hope none of you are dentists on the phone, but akin to going to the dentist. And I think that's not something we would strive to do. So, we would really try and work with the studios and seeing if we could get at least a couple weeks breathing room between them. And as we put together our slate for 2012, that's what we're going to try and do.

Mike Hickey, Janco.

Hey, guys. Thanks for getting my question in. Just -- obviously, it's got to be difficult to pick the majority of your film slate. The 10-pull are obviously, but I think kind of the B and C-level films are a little bit more intellectual. Just curious, looking to 2012, if you've made any adjustments to your process of picking films. And also, I'm wondering how you think about kind of the kiddy-centric market on IMAX, if it's -- is it still relevant or if you're going to kind of focus on more adult type films.

Well, the answer is yes to your question. We have drawn a conclusion that, in IMAX at least, our audience is more a fanboy-driven audience than a family driven audience. And that may have to do with pricing. It may just have to do with whether little kids appreciate the experience as much as teenagers or people in their 20s. So, we are going to make an adjustment and try to do more of fanboy-centric things and somewhat less family-centric things.

Okay. And then, are there any unannounced films for 2011, maybe in Q3, or is this the slate as we see it?

For 2011?

Yes.

There are some things that we're talking about. And I think, to some extent, you want to see how things play out. So, I don't think we mentioned this on the call, but Cowboys and Aliens is going to play in IMAX internationally and it opens about mid-August, something like that, internationally.

So, we're constantly able to readjust our schedule to add things if it looks like we're going to have a gap. And so, we've discussed a lot of movies, but we haven't committed to anything.

I'd like to -- operator, please take one more question.

Mark Argento, Craig-Hallum Capital.

Yes. Thanks, guys, for taking my question. I'll be brief here. Just any updates in terms of Japan? I know you spent a lot of time, a lot of growth internationally in China and Russia, but I know Japan's a huge market. Any new opportunities there and anything we should look for there? And then, lastly, any updates on some of your new initiatives? I know portable was kind of of interest before. Any kind of progress there? Thanks.

Sure. Japan, obviously, was a setback for us and everyone who did this there because of the earthquake and the tsunami. So, I think whatever you were doing got pushed back six months there.

We did sign a theater in the last quarter in Japan, and we've opened a few. One of them, Kawasaki, our best theater in Japan, was offline for most of the first half of the year. It came back online for Potter and was one of the best grossing theaters in the world. But through all of that, there's been a number of discussions going on in Japan, both with the people we're in business with and people we're not. And the numbers are very robust coming out of there.

So, I haven't been there, so I can't say psychologically how quickly they've recovered from the devastation they've experienced but, in general, I'm still very optimistic about that market.

One of the things that's going on is a number of the exhibitors, because of the damage that happened during the earthquake, are rebuilding their multiplexes. And we're in discussions about whether as part of that rebuilding process they would include an IMAX. So, the short answer is I'm pretty optimistic about it, but the timing is just hard to tell because of the recovery period.

In terms of -- I'm sorry, your other question was --

The portable and any other new initiatives.

Yes, other initiatives. The portable, we're just completing field testing on it and we're just really trying to decide what to do with it. There's actually interest in buying the portable from several clients. So, at the least I think we'll have a small business there, which would be selling the portable and people would use it as kind of a permanent theater in different places. We really haven't tested out our model yet of traveling it around and sponsorship. And I think that'll happen over the next six months. It's certainly an initiative we're working on.

We recently hired a senior executive to do strategic planning for us. And we've recently kind of more formalized our new business initiatives. And we have like three or four significant things in the hopper that we're kind of thinking through and working on and I'll keep you posted. One outgrowth of that is this technology thing that I've now referred to twice. It's not really ready to be discussed in prime time, but probably by the next call it will be and we can give you some updates on some stuff we've been up to.

Thank you. So, I think that's it. Just to summarize as usual, I appreciate all of the support you've given us over the years. My favorite saying at IMAX, internally and in life, is it's never as good as it looks or as bad as it seems. Certainly, I -- as a shareholder like you are, I understand that the first half of this year, the inputs, the gas in the tank wasn't really the kind of gas or the amount of gas that we had hoped for. But, when I step back from the whole situation and I look at the business model and what we've put in place and you look at the number of signings, which are a record, you look at the results on Transformers and Potter, which are extremely strong, you look at the number of installations, the theaters we have in backlog, I think they give us a solid footing going forward. So again, thank you for your support and I look forward to better quarters ahead. Thank you.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.