Imax Corp (IMAX) 2011 Q3 法說會逐字稿

Good day and welcome to the IMAX Corporation third quarter 2011 earnings 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 *1 to ask a question. Today's conference is being recorded.

At this time, I would now like to turn the conference over to Ms. Heather Anthony, Vice President of Investor Relations. Please go ahead, ma'am.

Hello and thanks for joining us on today's third quarter 2011 conference call. We're conducting today's call from Shanghai, China. Joining me is our CEO, Rich Gelfond, and our CFO, Joe Sparacio. Also with us is our Senior EVP and General Counsel, Rob Lister. In addition, we've loaded a PowerPoint presentation in pdf format onto the IR section of our website this morning 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. Discussion of Management's use of these measures and the definition of these measures are contained in this morning's press release. Reconciliations to adjusted EPS and adjusted EBITDA are included in today's press release. The full text of our third quarter release, along with supporting financial tables, is available on our website, www.imax.com. Today's conference call is being webcast in its entirety on our website.

Today, Rich will provide an overview of the third quarter and review initiatives within our business and growth in our network, and Joe will review our Q3 financial results in detail.

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

Thanks, Heather, and good evening from Shanghai, China. We're here because of the tremendous growth of our brand across this market. In the fourth quarter we will open a new IMAX theater in China at a pace of three per week. And while we aggressively buildout our international network, our focus on key strategic initiatives is bearing fruit.

We've had several important recent developments here at IMAX; an early release window for Mission Impossible - Ghost Protocol, a strategic acquisition of exclusive rights to proprietary technology from Kodak that will keep us on the cutting edge of cinema technology, and we're on track to debut our brand marketing campaign in the first half of 2012. But before I address these important topics, let me first revenue the third quarter, one in which we experienced first hand the power of the expanded network when fueled by blockbuster titles.

The combination of strong film performance, a growing theater network and prudent expense management resulted in strong third quarter results. We delivered record third quarter revenues of $67.5 million, up 32% from the prior year. Strong top-line growth resulted in a 41% increase in gross margin, demonstrating the operating leverage inherent in our business model. Tight controls over operating expenses in the quarter resulted in cash SG&A that was $2.5 million lower than the implied guidance given on our last call.

And adjusted earnings was $0.16 per share, which were negatively impacted by a $0.06 foreign exchange charge related to the weakening of the Canadian dollar at quarter end and its impact on our unhedged forward contracts. Joe will discuss this topic in more detail; however, it's important to point out that since quarter end, the Canadian dollar has strengthened versus the US dollar. Given current exchange rates and assuming these levels hold through the quarter, we would anticipate a foreign exchange gain in the fourth quarter of approximately $3.4 million, using yesterday's number.

This quarter produced nearly $150 million of gross box office revenues, which is up more than 50% from a year ago and makes this the second highest grossing quarter in IMAX's 40-plus year history.

The third quarter featured two of the top five highest grossing IMAX DMR films of all time; Transformers 3, Dark Side of the Moon, which has grossed nearly $64 million worldwide in IMAX, and Harry Potter 7 Part 2, which has grossed over $73 million in IMAX. These two titles are clear indicators of the benefits of our growing network. The summer season was a great reminder of how this business and our financials can perform when the content is there. As we continue to grow the network, we should see more success stories from our upcoming blockbuster titles.

I'm also pleased to report that we are poised to set another record for new theater signings this year. Signings through September 30th have already totaled 166, which matches the number of new theater contracts signed in all of 2010.

We started this year focused on three strategic initiatives -- brand, differentiation and reinvestment. And the events over the last several weeks show significant progress against all of those goals.

We believe our acquisition of Kodak's Laser IP further solidifies our leading position in cinema technology, while securing a five-day early release window for Mission Impossible - Ghost Protocol is a perfect example of how our focus on differentiation can help studios and filmmakers to even further eventize the theatrical release of their films. And we look forward to launching a new brand marketing campaign in the first half of 2012.

We also announced today that we have increased our outlook for worldwide IMAX theater zones by about 25% to 1,500 from around 1,150 -- up 1,500 to 1,550, up from our most recent analysis, which mapped out 1,200 to 1,250 IMAX zones in the world.

Today I'll review these developments and what they can mean for the Company. First, MI4. Earlier this month we announced that the domestic release of Mission Impossible - Ghost Protocol will begin five days early in IMAX. And this is an important point. In IMAX it begins on Friday, December 16th versus the broader domestic release on December 21st. So, that means we have an extra weekend in IMAX before the film opens mid-next week.

This is a groundbreaking approach to releasing a Hollywood tent-pole film and we're proud that Paramount, J.J. Abrams, Brad Bird and Tom Cruise are embracing the IMAX experience to eventize the movie. We currently estimate the movie will be shown in around 300 IMAX theaters across North America, and theaters are expected to play a full show schedule during that five-day preview window. We've also secured early release windows for the IMAX version of MI4 in certain international territories, most of which are one to two days early, except for the UK, which is also five days early.

The movie features over 30 minutes of sequences shot with IMAX cameras, which completely differentiates the film when seen in IMAX. These segments include the much talked about action sequences of Tom Cruise's character scaling the tallest building in the world in Dubai. Many of us have recently viewed the footage and still cannot stop talking about how intense and ideal the experience truly was. Personally having seen it, the footage is really on a par with The Dark Knight, what Chris Nolan shot with IMAX cameras and the first time that I saw footage from Avatar.

The studio and filmmakers are obviously very excited about the film as they just wrapped up a 14-day -- 14-city global media tour, including stops in Los Angeles, London, Seoul, Tokyo and Sydney, which showcase some of the IMAX sequences. The response has been universally positive. The footage was shown today at Show East in Florida and the audience, mostly of exhibitors, reacted with very strong applause.

Last week we announced what I consider to be one of the most significant technology developments in IMAX history, our licensing of Kodak's laser projection technology and exclusive rights to a vast family of patents. We firmly believe that this will enable us to deliver the highest quality digital content available to IMAX-based, film-based screens larger than 80 feet and to dome theaters, which is a universe of about 150 or so theaters today.

We anticipate this to be a new sales cycle for IMAX as many of these theaters are 10 to 20 years old, resulting in what we believe to be a potential revenue opportunity of roughly $200 million. Our next generation laser projection technology, which we hope to bring to market by the second half of 2013, will utilize Kodak's IP and a technology being developed by Laser Light Engines, a company in which we invested last year.

While the more immediate opportunity lies within our existing theater base, this offering will ultimately be available to new customers as well, in particular, those in emerging markets that are building new complexes. And although we won't see financial results until we start to install these in 2013, we do expect to start selling them beginning in 2012 and to see those results in our signings that happen in that year.

In addition to the sales opportunity, we anticipate incremental DMR revenues to come from this new technology as our largest grossing film base commercial locations will now be able to enjoy similar programming flexibility to our digital theaters. This will take place without the need for expensive film prints which, as a reminder, cost between $25,000 and $40,000, which either the studios or IMAX bears.

There are likely additional opportunities stemming from our acquisition of Kodak's IP. For example, while we have no current intention for the IMAX brand to enter the broader single projector market, an OEM partner could sublicense this IP from us for the purpose of entering the single projector 3D market, which would create a new royalty stream for IMAX.

Turning to the brand, over the last several months we've conducted an in-depth consumer research study to gauge moviegoers' impressions of the IMAX experience. Studies have been conducted in eight markets, including the US, Canada, the UK, Japan, Russia and China. We are still in the early stages of analyzing the international data.

Domestically, moviegoers are extremely satisfied with their IMAX experience, with satisfaction scores at more than 90%, an incredible number as anyone in the market and world would tell you. And our awareness in North America is comparable to other world-class brands such as Nike, Apple and Coca-Cola, with a well-established aided awareness levels of 94%. We look forward to further analyzing this data which will enable us to strategically position the brand within these constantly evolving markets.

We plan on launching our brand marketing campaign in the first half of 2012. The concept behind the campaign will focus on what we do best, providing the most sensory, engaging movie-going experience possible. This concept will convey a much more powerful and visceral message that will connect with consumers on an emotional level that we plan to target directly at consumers.

Turning to the network growth. As I mentioned, this morning we announced that we've increased our global outlook for IMAX theaters by about 25%. This increase stems from extensive analysis of eight key international markets, including the BRIC nations, Japan, the UK, France and Spain. Overall, our international theaters have grossed approximately $1.3 million in box office per screen through the first nine months of 2011. In fact, the third quarter marked the first time that our international network out-grossed our domestic theater network on an absolute dollar basis.

As our mix of theater shifts include not only more high-grossing international sites, but more revenue-sharing theaters in the international markets. This should translate to our increased ability to capture more revenue and margin. In fact, approximately 75% of our theaters opening over the next 15 months will be in overseas markets. It's particularly exciting to be on the ground floor of many of these key markets, like China, Russia, Brazil and India, where most of our growth will come from our brand new, ultramodern complexes.

Not surprisingly, the biggest drivers of the increase are the BRIC nations. Let's start right here in China where we are right now, the fastest growing exhibition market in the world, as well as the fastest growing IMAX market in the world.

Last year we increased our outlook for the China market from 90 IMAX zones to 300 after accounting for the rapid growth in the industry, growing middleclass population, higher disposable income and change in movie-going habits as more and more Chinese seek out-of-home entertainment. With additional analysis, coupled with our own growth in the country, we now believe that this number should be at least 400 theaters.

Our theaters in China continue to generate very strong business. Over the last 12 months they've grossed approximately $1.7 million per screen on average. To support our growth in the region, we've established a WFOE, or a wholly-foreign-owned enterprise, have appointed Jianda Chen as our new CEO of IMAX China after he served as CEO of Sony Pictures Entertainment in China. And our staff here at our IMAX China headquarters in Shanghai has grown to over 30 employees. It's incredible to think that in 2008 The Dark Knight played in 150 screens worldwide. Today, we have nearly 200 theaters open or in backlog in Greater China alone, half of which are now new revenue-share theaters.

In the next couple of weeks we open Real Steel in China on 48 screens. About two years ago we opened Avatar in China on 14 screens in Mainland China. So, you see a tripling of our network in just two years.

We're in the early stages of our rapid expansion in China, as is the cinema industry overall. There were 6,200 total conventional screens in China at the end of 2010. In mid-September it was announced that China's total screen count has grown by 24% since then. And according to various reports, is poised to get somewhere to -- get to somewhere between 8,000 and 10,000 screens by the end of the year. We expect the IMAX theater network in the country to more than double this year to 85 to 90.

It's encouraging to note that the growth of the IMAX footprint in China is even outpacing the rapid growth of the overall industry; yet, with all this growth there are still 35 cities in China with a population of at least a million people that have no movie theaters.

We have opened our first nine revenue-sharing theaters in China with Wanda Cinemas and, so far, all the administrative and marketing aspects of the partnership are working out as anticipated. We also continue to sign significant deals in the region and grow our network, having most recently announced a new theater deal in China for 15 revenue-share theaters with existing partner CJ CGV of South Korea.

Moving on, we had previously estimated the market in Russia and the CIS in 60 zones. We're now increasing that number to more than 100 zones. Russia and the CIS are home to some of our highest-grossing theaters in the world. Over the last 12 months, our theaters in Russia have grossed approximately $1.8 million per screen. And Brazil, previously zoned at 26, has more than doubled to 55 potential future IMAX zones given the rate of industry growth and progress we're making in that region of the world.

I should reiterate that this update to our zone analysis was an in-depth dive into just eight key international markets. We'll continue to update other markets, including domestic, whereas we've referenced in the past we've seen great success with some of our smaller market theaters. It should also be noted that this analysis does not include any second theaters in existing zones or second screens within existing complexes.

Turning to the film slate, we kicked off the fourth quarter with Real Steel and key international markets such as China are yet to open. DreamWorks Animation's Puss in Boots will open in approximately 294 IMAX theaters starting tomorrow. Our screen count for Puss in Boots will build to at least 315; mostly like more over the coming weeks.

Puss in Boots is followed by Warner Brothers Happy Feet Two, a film we expect to open in approximately 375 IMAX theaters worldwide. And Tintin opened with previews this week in markets like the UK, France and the Netherlands.

Here in China, as I mentioned, we look forward to the December release of Bona Film's Flying Swords of Dragon Gate, which stars Jet Li and as our first language -- local language 3D title. It's also a fairly big budget 3D film in China, one of the first 3D big-budget films ever made here. We believe that MI4, like Avatar and Tron in previous years, will open in China in January.

Looking ahead to 2012, we are excited about our upcoming lineup of films. The first quarter will begin with the carryover from Mission Impossible, followed by Sony's Underworld Awakening. Other IMAX titles in the first quarter include a one-week release of Universal's The Lorax, Warner Bros.' Wrath of the Titans, and Disney's John Carter. John Carter is a classic Sci-Fi fantasy story which should connect with our fanboy audience. An early word from our film team is very encouraging after they viewed a series of sequences two weeks ago.

The pillars of our 2012 film slate included Sony's Spiderman IV; Warner Bros.' and Christopher Nolan's The Dark Knight Rises, also being shot with IMAX cameras; and Warner Bros.' The Hobbit, directly by Peter Jackson. These three movie franchises have grossed a combined $6.8 billion of box office worldwide and we believe they are some of the most beloved films among audience -- IMAX audiences.

Chris Nolan is busy shooting sequences of The Dark Knight Rises with our cameras as we speak and has said that the film will feature more IMAX footage than any Hollywood film made to date. We estimate when The Dark Knight Rises is released in IMAX next summer it'll be shown on approximately 550 IMAX theaters around the globe. As a reminder, The Dark Knight grossed more than $400,000 per screen on approximately 150 theaters of IMAX when it opened in 2008. Even if you take a substantial haircut to those per-screen assumptions, you can envision the type of box office this film can deliver given the significant increase in the size of our network and our involvement with Chris Nolan in developing this film.

The bulk of the remainder of our 2012 film slate has been agreed upon at this time and includes IMAX versions of additional titles such as Sony's Men in Black 3 for Memorial Day weekend, Tim Burton and Johnny Depp's Dark Shadows and Warner Bros.' Gravity in November, starring George Clooney and Sandra Bullock. We also have several Chinese language DMR titles planned for 2012 as this strategy works with our network growth here in this market. We'll be releasing more details about our 2012 slate over the coming months but, generally speaking, we're quite optimistic about how it's shaping up right now.

In closing, it was a strong quarter for us financially, one in which significant top-line growth resulted in substantial operating leverage. The strong backbone of our business model, combined with strategic developments over the last six weeks, are a reflection of our unwavering commitment to delivering strong results to our shareholders and to staying on the cutting edge of our industry, be it through experiments with windowing, rapid network expansion in the fastest-growing markets in the world, pairing our cameras with the world's premier filmmakers to create the highest-quality experience for moviegoers, and taking advantage of our strong balance sheet to make technology investments that will continue to widen our competitive mode.

These initiatives, coupled with our fast-growing theater network and strong lineup of 2012 titles, position us well for the medium and the long term.

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

Thanks, Rich.

Our third quarter results reflect the combined positive impacts of network growth and strong film performance. Third quarter revenues increased 32% to $67.5 million from $51.1 million last year, while gross margins increased 41% to $36.4 million from $25.9 million last year.

Adjusted EBITDA increased to $21.3 million compared to $17.3 million in last year's third quarter. Adjusted net income, which excludes any impact from variable stock compensation and deferred taxes, was $11 million or $0.16 per diluted share, up from $9.8 million or $0.15 per diluted share last year. As Rich mentioned, a foreign exchange charge at quarter end related to the weakening of the Canadian dollar negatively impacted the quarter by approximately $4.1 million or $0.06 per share. I'll discuss further during the review of SG&A. On a fully-reported basis, net income was $8.4 million or $0.12 per diluted share, up from $6.7 million or $0.10 per share last year.

Looking at the business segments. Revenue from sales and sales-type lease systems increased 39% to $20.6 million, compared to $14.8 million last year. During the quarter we installed 11 full new theater systems, which compares to 7 in the year-ago period. We also installed 4 digital system upgrades in the quarter compared to 3 upgrades last year.

JV revenue increased 54% to $10 million from $6.5 million in last year's third quarter. During the quarter we installed 14 new JV theaters, which compares to 18 new JV theaters installed in the year-ago period. JV installs were lower than our previous outlook; however, those theaters are now slated to open in the fourth quarter and, in fact, some already have.

JV launch costs this quarter amounted to approximately $1.3 million, which compared to $1.1 million last year. If we exclude launch costs from both periods, JV gross margins were approximately 80% in this year's third quarter, up from 79.3% last year.

DMR revenue increased 50% to $18.6 million in the third quarter as compared to $12.4 million in last year's third quarter. DMR gross margin increased on both a dollar and a percentage of revenue basis, reflecting increased volume and the benefit of our growing network.

Third quarter gross margin dollars increased 41% to $36.4 million compared to $25.9 million last year. As a percentage of revenue, gross margin increased 320 basis points from 50 -- to 54% this year from 50.8% last year. The primary drivers of margin growth were our system sales, JV and DMR business segments.

Moving to SG&A, if you turn to slide four of the presentation you can see that, excluding the impact of stock-based compensation and foreign exchange, third quarter SG&A from operations was $14.8 million, which is better than the $17.3 million implied run rate of SG&A guidance given in our second quarter call. This reflects prudent expense controls throughout the quarter. Traditional stock-based compensation expense, which excludes variable share awards of $2.5 million in this year's third quarter, was in line with our prior guidance.

Reported G&A was $19.4 million and includes a non-cash benefit from variable stock compensation of $2 million, or $0.03 per diluted share, which was offset by a $4.1 million or $0.06 charge for foreign exchange, largely related to the weakening of the Canadian dollar at the end of the quarter and the related impact on our unhedged forward contracts.

As a reminder, we have a large operation in Canada and, therefore, many of our operating expenses are paid in Canadian dollars. As a result, we actively hedge against currency risks related to the movement of the Canadian dollar, which helps to protect the integrity of our budgeting process as we move through 2012.

Since quarter end, the Canadian dollar has strengthened against the US dollar. Given the current -- given the exchange rate as of yesterday and assuming these levels hold through the remainder of the year, the Company would anticipate a gain from foreign exchange in the fourth quarter of approximately $3.4 million.

Excluding the impact of foreign exchange of variable stock compensation for the fourth quarter, we now expect SG&A from operations of approximately $15.5 million and we continue with -- to expect $2.5 million in ongoing traditional stock comp.

Research and development expenses in the quarter were $2 million compared to $1.5 million last year. For the fourth quarter of 2011, we estimate R&D expenses of approximately $2.5 million to $3 million. This implies full-year R&D expense of approximately $8.5 million to $9 million, which is in line with our previous R&D guidance.

Our backlog at quarter end consisted of 295 theater systems versus 257 systems in the backlog at the end of last year's third quarter. Included in the quarter-end backlog were 10 digital system upgrades this year versus 20 last year. The breakdown between system type is included in our supplemental information.

As illustrated in our slide presentation, we now expect to open between 49 and 59 theaters in the fourth quarter, which equates to an install pace of approximately four systems a week, 75% of which are opening in China. Our fourth quarter installation outlook includes 15 to 20 new sale-type lease locations and 34 to 39 new JV theaters. For modeling purposes, we estimate JV launch costs in the fourth quarter of approximately $75,000 per system. As always, we remind you that installations are subject to slippage between periods, often for reasons outside of our control.

Given the increase in fourth quarter installs, we now expect to end the year with 490 to 500 commercial theaters in operation, an increase of over 30% since last year.

We are leaving our base case outlook for 2012 installations at 90 to 100 theaters. By base case we mean that this is purely based on theaters in backlog as of September 30th and, therefore, does not include any theaters that we'll sign after that date.

We fully expect our 2012 installation outlook to increase beyond the base case as the year progressing, just as it has in 2011. For example, our base case guidance for 2011 was for 55 to 60 new theater installations. And due to signings since that point, our outlook has more than doubled to 130 to 140 installations today.

Just one housekeeping item. Please note that we have collapsed our theater operations segment into Other given the small size of the business today and its relatively low materiality on our results.

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

Thanks, Joe.

The third quarter was an excellent reminder of the operating leverage inherent in IMAX's business model. And when we think about the sheer number of IMAX theaters we'll have in operation going into 2012, the positive mix shift taking place in our network towards more international markets and the lineup of titles for 2012, we're very optimistic about the year ahead.

Through films like Mission Impossible - Ghost Protocol and The Dark Knight Rises, and staying on the cutting edge of technology, we believe that we and our business partners will continue to redefine the movie-going experience for our consumers, not only in 2012, but over the long term.

Again, thank you to our shareholders for taking this time with us and we'll be happy to open it up to questions.

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

Thanks. Good evening, guys.

Hi, Rich. How you doing?

Hey, Rich. Good morning.

I'm good, thank you.

The acceleration of the install pace that you're guiding now for Q4, was it -- what drove that? Did the exclusive window for MI4 drive some urgency from exhibitors or was it some other factor?

I think it was a couple of factors, Rich. It was -- as we indicated on the call, it was the timing of certain JV installs that we initially targeted in Q3 that will now be installed in Q4. Certainly, the presence of MI4 I think accelerated some installations from 2012 into 2011. And I think that's why you saw our guidance not go out -- up in 2012, because of that movement.

Gotcha. Okay. And with the LLE and the Kodak deals now, would you say that you've locked up one of the primary technologies in the market today for laser light projection?

Absolutely, Rich. And one point on that to follow-up, the Kodak technology, even though it's an IP pool, there is a working prototype. And it's not a prototype of the IMAX system, but it's a prototype of the single projector system. So, this isn't some mad scientist inventing technology and getting patents, it's actually a working system.

And as part of -- before we bought that, we did -- we spent almost a year on that deal. And we've even had a very prominent filmmaker go up to Rochester and look at the images for us. And this is a product that I really think is going to transform the differentiation. And right now, we're talking about differentiation in terms of shooting with IMAX cameras or releasing a week early. This is the kind of differentiation that's going to even widen between regular films that we show -- that are shown and IMAX films.

LLE is a -- sort of a -- Kodak relates to lasers and heat and the ability to show really bright images and contrasts and blacker blacks. LLE deals with kind of a shimmering that sometimes happens during laser technology. So, we think Kodak on its own is really significant, but our ability to put the two together will certainly widen the differential between what we can do and anyone else can even theoretically do at this point.

Thanks, Rich. And I know this is asking to look maybe a little further ahead than you can at this point, but how would you expect the upgrade cycle to laser light to go in the market at large? So, obviously you have control over what you're going to do in the IMAX circuit, but can we expect the kind of dragging of feet here on standard-size screens that happen with digital and 3D?

Well, I think one of the problems that people have in the standard market for 3D is that they've entered into these longer-term contracts, at least in North America, and they're kind of like an equipment lease. So, they can't really -- I mean, who's going to pay for the upgrade, right? PCIP agreed to this equipment leasing deal that has to stay in for a period of time. Of course, the international markets are -- they're more open game, Rich. But, I think as we start to install our laser solution, the differential between existing technology and what we're doing is even going to get greater.

Okay, thanks. Just last question here on -- now on Wrath of the Titans now in the 2012 slate, I take it Warner is planning a little further ahead on the 3D version of it this time?

I think so, but I -- that's one I really won't get into, Rich.

Okay. Alright. Thanks, guys.

James Marsh, Jaffray.

Yes, hi. Two quick questions here. First, just to follow-up on the Kodak technology, I guess just broadly laser has two benefits -- one, it improves the light and, two, you can polarize an image and create a 3D effect, but they're two different things. I just want to be clear. On the 150 screens that you plan to upgrade, are you going to be using a new 3D technology or are you going to be using your same linear polarized technology that you currently use today? And then I have a follow-up.

We're going to use the same technology, James, but it'll be a dual-projection technology. And by the way, and I'm far from a technical expert on it, but my understanding is that other advantages are it improves the contrast and the blacks are blacker. So, it's not only the virtues that you mentioned.

Okay, understood. And then just -- I wanted to follow-up on the comments made in the press release regarding international screens. I think you mentioned that they were currently two times the per-screen average of domestic, and that seems substantially higher than I guess what you guys have done historically. I kind of looked back at the per-screen averages over the last few years and what I've seen is a pretty consistent outperformance, but it's usually in that range of 20%, 30% higher. Is that a recent spike up to 2X?

Yes, it is, James. And I think -- I mean, there are a couple of reasons for that. One is the real big blockbusters, like Transformers and Harry Potter, really blew the cover off the ball internationally in a way that's more than kind of a shoulder period movies. There seems to be a bigger appetite. Also, because of the weakening US dollar, the ticket prices in most international markets are higher. The occupancy rates have been greater. And I think our brand awareness has been stronger, frankly. So, I think it's all of those things.

Okay, great. Thanks, Rich.

Thank you, James.

Aravinda Galappatthige, Canaccord Genuity.

Hi. Thanks very much for taking my questions.

A couple of questions. First of all, just to clear up on the Kodak arrangement, obviously these 150 theaters you're thinking about, many of them are institutional. Rich, I was wondering if you can comment on whether you've had any discussions or you've got any feedback from these operators, that they're willing to do this upgrade and obviously show more Hollywood content. Is that something they're prepared to do or, I mean, is there any kind of comfort you've got from them that this is doable?

Yes. In fact, we've had a number of discussions and the discussions have been extremely positive at this point. Also, the aspect ratio could be 1-4-3, which is consistent with the aspect ratio that they have today. And not only are they positive to our projection system, but they're also very interested in playing Hollywood DMR content.

One other thing that we haven't really mentioned that much, but is relevant to your question, is that right now the domes can only show 2D content, not 3D content and, under this upgrade path, they'll be able to show 2D and 3D.

Okay. Thanks for that. And then just a different -- on a different matter. The early release of Mission Impossible, I mean, obviously that was a significant achievement. But, as we go into 2012, I mean, what are the possibilities of some of the key titles being early releases for IMAX? And what are the obstacles that you have to kind of get past to make that happen?

I mean, starting with the obstacles, whenever you break tradition in Hollywood there are obviously concerns. And in this case, some of the exhibition chains that had a large presence in IMAX theaters were very happy with the change, but some of the exhibition chains that didn't have any or had less IMAX theaters were less happy about it. So, I think that was one issue that sort of had to get through. I think that was made easier because it was filmed with IMAX cameras and I think that maybe had a justification.

Second of all, as excited as I am, which is a great deal with this release, because anyone could sort of pencil out what an IMAX theater does on a weekend when a blockbuster film comes out like a Harry Potter or a Transformers but, in this case, we really have not much competition about that. So, you can do the numbers from a financial point of view. Those five days can be fairly significant for us, depending how the film performs.

But I think that beyond that, one thing we haven't talked about and people haven't focused about, is we're going to create sort of an IMAX buzz around the movie. So, for the first five days people are going to be tweeting and they're going to be on Facebook taking about the IMAX release and how great it looked in IMAX.

And as I mentioned during my comments, I'll go out on a limb and say this is very special on IMAX when people see it. So, I think it's not only the early effect that it's going to have, but I think it's going to help us index quite well after the movie opens because people will be talking about IMAX.

In terms of it going forward, can it happen again, will it happen again, we've had a number of discussions where people have approached us about something like this. I think it is Hollywood, there are obstacles. But frequently, when something works in Hollywood it begins a trend. And I -- we'll see how it goes, but I wouldn't be surprised if it works out well to see other studios try it in the right circumstances.

Okay. And just one quick one on the -- one quick question on the SG&A. Obviously, the SG&A number came in a little bit less than you were guiding. Could you talk about where the cost reductions were achieved or where the cost sort of savings were achieved?

Well, I'm going to give you the general answer and then Joe is going to give you the specific answer. But, after the first half of the year, when we realized that the films had not generated the revenue that we expected, a budget is a -- is not a static thing, it's a moving thing. And I think as a responsible management team we delayed some of our hires and we pushed off some of our SG&A into 2012 and we eliminated some of our SG&A. So, I just wanted to make the point, it's not really accidental; it's something we manage for. And now Joe can give you the specific answer.

Yes. I mean, to add to that, we had to take a really hard look at any discretionary items that were in our budget that we could put a pin in for this year, certainly. There were certain marketing spends that we looked at to really determine whether we were going to get the biggest benefit this year. And if we could, we put a pin in those types of expenses as well. I think you'll find that the guidance right now between the third and fourth quarter is probably about a $4 million savings overall on cash SG&A.

Okay, great. Thanks very much.

Thanks, Aravinda.

Martin Pyykkonen, Wedge Partners.

Yes, thanks. Rich, a follow-up on the question about the early release, the exhibitor part that you mentioned, I -- pretty straightforward. I'm curious what you think the studios will be looking for. Obviously, this one coming up is Paramount, but the others will be watching as far as what that may mean for 2012. In other words, what's a success to them in terms of your early box office performance?

And then, one other question on the --

I think --

2012 slate at this point. You don't have much in the way of anything in terms of family animation and you've talked about kind of deemphasizing that. Should we -- kind of as you look into -- I thought you might feel -- I'll assume that there'll be a lack of family animation, much more focus on the fanboy as you've stated fairly recently.

I'll answer the second question first. Yes, I do think there'll be a lack of family animation. And while I think that family animation and 3D has appeal to it, I think that the pricing differential has gotten somewhat extreme. And I just don't think a family four or five in this economy is going to go see animation and pay the kind of pricing that people are asking for in IMAX.

So as a result, we -- as you know, we can't control the pricing, but we certainly can control the content. Our response to it is to rely much less heavily on family animation. And I think if over time the exhibitors make a decision to change the pricing, or there seems to be a different trend among the public, we certainly will reconsider that position, but that's kind of where we are for now, Martin.

On the second question -- well, the first question you asked was how do the studios and we define success. It's interesting, because I think success has much less to do with the IMAX box office and more to do with the overall box office. And just today, grass -- for a moment, before Avatar was Avatar, what FOX did was it premiered the movie in IMAX -- they showed about 15 minutes of footage only in IMAX theaters. And I think that really helped eventize the movie and turn it into the box office juggernaut that it was. And before the Dark Knight was the Dark Knight, the prologue was attached at IMAX theaters only in terms of what it looked like. And that movie got to be a big buzz -- got a big buzz. And at the time, I think it was the third-highest grossing movie of all time.

So, I think what Paramount is doing is they're trying to not only get the IMAX box office, but eventize the movie and create a buzz around the movie. And as a result of that, I think the way they'll define success is not so much the IMAX box office only, although that'll be part of it, but does this help it become a real blockbuster. And again, when you see some of this footage in IMAX, I think it'll be a movie that's very much talked about and I think it's going to work. I think it will establish a lot of buzz and bring people to the movie.

So, I -- again, I don't know exactly how they define it, but the word I would use is blockbuster, and does it help achieve blockbuster status when other big movies are opening at that same time of the year.

So, I guess just to get a tone on that, because I know Greg talked at the Analyst Day about trying to break open the domestic studio market and doing things differently, dragging their feet in terms of past history. It -- is it reading too much in to say you'd be confident that this will happen in other cases as you go into next year? You don't want to talk about a particular movie because of studio negotiation, I get that, but just kind of big picture, this is -- you've opened the door and there should be more of these to come. It sounds like you're pretty confident that would be the case.

Well, I'd say if it reaches the definition of success, Martin, that they have then I think there's a good chance that it would happen again, because Hollywood by its nature tends to replicate other things that have worked before. I feel pretty good about the movie, but it still is the movie business and I'm not going to put up the flag and declare victory until it's over, but I think that's not an unlikely scenario.

Okay. And then, just one follow-up and partly clarification. You mentioned regarding Kodak and the licensing I think in tying it in, $200 million in terms of revenue opportunity. Were you referring to that starting in 2013 but over multiple years? And is that mostly on the existing screens you have, or is it -- are you kind of building into that sort of a new screen -- obviously a big, large screen, large seating capacity potential?

No, that's only on the existing screens, Martin, so replacing those large film theaters, as well as the domes. But it's important to note -- I mean, I mentioned in the opening comments those theaters are 10 to 20 years old and Hollywood, and even the institutional market, has really stopped supplying films. So, I mean, at some point these theaters really have no choice but to upgrade their theaters. I don't know if we'll get all of them, but it think the odds are that we'll get a pretty good chunk of them. So, that's over those only.

But I can tell you, as I mentioned several times, I'm in China and I met with several of our exhibition clients. And you could appreciate that the chance to build kind of a larger theater with a larger seat count and making a bigger statement while they're expanding cinemas so rapidly is something that would be very attractive in this market. And that's not included in those numbers.

Yes. And I guess in terms of China, considering the growth, and you've obviously updated again on that in terms of just the addressable market. It would seem likely a few years out that China somewhere would have maybe your top one, two or three biggest screens in terms of seating capacity just based on the fact that you'd have this brighter technology.

Exactly.

Yes, okay. Thanks.

Thank you.

Marla Backer, Hudson Square.

Thank you. A couple of questions. One is a follow-up on -- we've definitely beaten this topic to death because it's so interesting and so important, but the early release strategy. It's not surprising that you say that some exhibitors are adverse to it if they don't have the IMAX. Is one of the discussions that you're having with studios, does it include possibly doing an IMAX early release as well as other non-branded large screens in that early release window?

Yes. Well I think, Marla, there are going to be other select theaters that it's released in. Whereas we're opening in about 300 theaters, I would think it might open in about 100 other theaters, something like that. Some of them, I think, will be [FO] large format and I think some of them won't be, they'll just be regular theaters. But, yes, I mean that is part of the discussion.

Okay. And as China becomes a bigger and bigger part of the overall footprint, you guys have found a way through the JVs to really extract, like, tremendous value out of China, probably more than most other, if not any other, player in this space in terms of the economics. But should we assume that, as China continues to grow, it will have some negative impact? In terms of absolute dollars, obviously, a big positive impact, but some negative impact on overall margins?

I don't think so, Marla. And as a matter of fact, just to give you another story from what's going on here. I had breakfast, I don't know, last week, I've been here for two weeks, with a large state-owned company that's in the real estate development business and it hasn't built any theaters yet and is building theaters. And they said a directive is they have to have an IMAX in every multiplex they build where there's no exclusivity.

So, I mean, I think -- it sounds strange to say, but I think this opportunity has a long way to run. And as I said in the prepared remarks, there are 35 cities of over a million people that don't have a multiplex screen in them. And we're at 200 in backlog right now. So, I really am not focused on margin deterioration at this time.

Okay. That's fair. And then one last question. Since you haven't talked about the portable IMAX system in a while, because there's been so much else going on, but is that still something on the horizon that we should be thinking about?

I think it's not on the short-term horizon, Marla. We -- the one we designed had some issues in terms of how quickly you could put it up and take it down and what the costs were of doing that in an advertising model. And we've redesigned it -- we haven't spent much money on it, but we've redesigned it into another iteration. And I think we're going to go out and test what the business model is and, if there's a business model, we'll build it. But, I don't think you should see that as a priority right now with everything else going on.

Right. Makes sense. Okay, thank you.

Thank you.

Ben Mogil, Stifel Nicolaus.

Hi. Good morning and thanks for taking the question. So, I guess I'll have to be the one that asks about the Canadian dollar. Joe, when you're looking at it, sort of two questions. Am I right, it's that it's a balance sheet item issue so it's entirely a quarter, right, and not the average? And if you can talk about the tax, sort of the way we should be thinking about taxes around that change?

And then my second question is kind of a follow-up on Martin's question about the kid's pricing issue. And Rich, you obviously alluded to price, which I think we'll all agree has certainly an issue across all premium formats for kids. When you look at those issues, are you seeing any sense in the exhibitors are looking to maybe not discount kids tickets on premium format, but sort of add value packs, i.e., add in some concessions or add in something else that kind of effectively gets the price down? Those are my two questions. Thanks.

I'll handle the for-ex question first and hopefully hit on your point. At the end of each quarter the Company has to mark-to-market its foreign exchange contracts and there's two buckets that arise. The first bucket is those contracts that are hedged contracts, and those are primarily hooked into our payroll payments. Those mark-to-market adjustments hit our balance sheet. Those that are unhedged mark-to-markets roll through our P&L and we revalue those each reporting period. So, that's why we indicated this quarter we had a $4.1 million hit, and that was really largely at the end of the quarter. There was a sharp downturn. I mean, where we sit today, we've made up substantially all of that. I mean --

So -- Joe, I'm sorry for interrupting, but I want to add something here, Ben. We're not a currency speculator. So, the money -- what we do is we have our budget that we're working on for 2012. And when the Canadian dollar dipped below par to about $0.97, we loaded up and we kind of hedged our whole next year's position. And the hedging consisted of not only the payroll, which Joe talked about, but our backlog where we're delivering projection systems, because Christie's our primary supplier and we pay in Canadian dollars.

So, the fall of the Canadian dollar was a really good thing for us. And internally, it helped our budget for next year by reducing costs. What happened was it fell further than the $0.97, which we did it, and that's why we take this accounting adjustment. But, since we're using all the Canadian dollars there's no loss there. It's just the accounting rules require that, for other than payroll, we could -- we had to adjust them. So, even though we've pretty much matched them up against purchase orders, that -- and I'm taking that diversion and the time doing that, so you understand that this was a really good thing for us that kind of hit the quarter in a screwed up way and that's why we pulled it out.

Sure. Yes. No, I --

(Inaudible.) And then there's --

I totally understand that you want to -- that you've got a cost, a geographic cost sort of difference and you're trying to hedge against that. No issues there. And from a tax -- like, let me ask a different question. Is it about $0.01 is a $1 million change? Is that the way to look at it on a gross basis over time?

Fairly close to that.

Okay.

A little bit lower than that.

And on a tax basis -- so, if we were to look at it, like, from an EPS perspective, I think you disclosed that it was -- it was $0.06, now, that's a before tax number, right?

Yes. That is a before tax number. Yes.

We should tax it like, what, in the mid to high 30s?

You could probably tax that -- right now we're running a fairly high tax rate, so you're probably in the 35% range, plus.

Okay, so that's -- okay, that's great. And then, Rich, on sort of the larger question about the kids' stuff, are you seeing any -- are you seeing the exhibitors after what was probably for them a very disappointing '11 from a perspective of how kids films have performed, are you seeing them rethink anything?

To the extent we can, we're certainly expressing our opinion, Ben. We're not shy about it.

Sure.

I think we think that -- because, like a typical IMAX movie, 2D or 3D, it's a fanboy audience. So, people are buying one ticket or they're taking their date or they're going with a friend. But for a family, they're buying more tickets. And obviously, the economy isn't in great shape. And when you look at the conventional price of kids' tickets versus the IMAX price, it's a bigger differential than for adults. So, I think there's no question that's affecting IMAX audiences for kids. And we've let it be known that we're not going to pursue that avenue if that's their pricing strategy.

The other thing you should mention, I mean, you used the word premium large format. And I don't want to be defensive here, but I don't really think that's a category. I mean, I think there's IMAX, which is a category, and then the Xs of alphabet soup. I don't think anybody goes and says, I want to go the ABX Theater or whatever it is. So, I think maybe it's a factor there. Maybe it's not a factor, I don't know about it. But we -- we're in the IMAX business, we're not in the premium large format business.

Sure. I guess I was -- maybe I was wondering if you -- given how close you are to two of the major domestic exhibitors, not just -- obviously from a JV perspective, I was wondering if in general you're seeing just conceptually any kind of rethinking of how non-2D kids' ticket prices are being thought of. That's what I was more curious about.

Yes. And Ben, we've certainly expressed our opinion on that. But again, it's their business and they have their own issues and their own constituencies and their own shareholders. And they -- I'm sure they're doing what they think is best for them and certainly that's their prerogative. We certainly let them know what our opinion is, but they know their businesses presumably than we do, so we respect the way they deal with it. Even though we may not agree with it we certainly respect.

Sure. Okay, that's great. Thanks, guys.

Thank you.

Jim Goss, Barrington Research.

Alright, thank you. I was wondering if, given the issues we've been discussing about animated features and some of the other things you have faced, if you had perfect knowledge of everything that was going to happen and a perfect ability to implement strategic changes going into the last quarter, do you think -- how much would that $150 million of MX box office potentially have been increased?

And sort of in a corollary, what are the policy changes aside from animated, which you've discussed, that you think you might be implementing as you move into next year to maybe improve the bottom line results, which have gotten attention that's sort of taken away a little bit from the global footprint expansion that's been intact?

Well, the second question, Jim, about policy changes, I mean, as you know, I think the only animated film on our schedule next year is Lorax for one week. And I think that will probably play pretty well in our institutional theaters, as well as some of our commercial theaters.

I -- it's always the movie business. And when you go into it you do your best at figuring out what's going to play the best. I think -- if -- the best answer I would have is, the more we understand about our business, the more we understand we're in the blockbuster business and that a lot of box office comes from the blockbusters. And then, you have the shoulder period films.

So, part of the way we went about looking at 2012, lessons learned from 2011, was to try and not nail down as many blockbusters as we could. And then kind of circle around them with films which don't have the same box office potential, rather than that laying out the year. Because I think if you look at it, the blockbusters add so much to the box office. So, I think that'll be one thing as a way of box office maximization. Even in China where we are right now, we're doing this film called Flying Swords and we're hoping that's a Chinese blockbuster in the period.

So, I think we're trying to sketch out the year more blockbuster oriented and then fill in around that, rather than sort of focus more on filling in the year. That would be one policy thing that I'd say we think about.

A second one I would say also is, obviously, we have a lot of loyalty to our partners in terms of studios and our partners in terms of filmmakers. And I think another policy change we've made is that we have to err on the side of box office rather than err on the side of favors. And I think that's not to say under certain circumstances we won't do favors, they're still important, but I think on the other hand we have a duty to our shareholders. And that exceeds our duty and that might be another policy thing that we would implement.

There's -- I forgot the other question, Jim. I'm sorry.

Well, I was wondering if the $150 million which was, as you said, the second biggest ever, would that have been significantly different if you had perfect knowledge going into the quarter and you had been able to implement whatever changes you think you would do going forward? Like --

Not for that quarter, I don't think it would have. Maybe for other quarters, Jim, it would have, but not for that quarter.

Okay. And then one other thing. Per-screen average targets. As the footprint expands and you get more international, should they be shifting a lot from the, say, $1.2 million you've sort of guided to in the past?

Again, Jim, the movie business is a pretty fickle business. And I think one thing we did last year with Avatar is we said throw Avatar in the garbage when you come up with the average -- per-screen averages. But I think, probably in retrospect, you don't throw it in the garbage and there are going to be years that are going to be better than $1.2 million and there are going to be years that are worse than $1.2 million.

So, if I looked at the film slate last year and my fingers were crossed and we achieved -- I mean the film slate this -- next year and you look at where our growth is coming from, I certainly in the abstract feel pretty good about it. But, I constantly remind myself that it's the movie business and it doesn't live in the abstract. Ultimately, the movies perform how they perform. So, I mean, viscerally I feel very good about next year, but I don't feel confident enough to change that guidance.

Okay. And the last question, I'd say, regarding the Kodak issue, is there any significant increase in the cost or charges for new screen installations versus the retrofits?

There --

Will it have some impact --?

Shouldn't be, Jim, no.

No? Okay. Thanks.

No.

Thanks very much.

We're going to take two more questions, operator.

Jeff Blaeser, Morgan Joseph.

Good evening. Thanks for taking my question. Just a follow-up on the Kodak question. How should we look at possible R&D and royalty amortization going forward, primarily I guess in '12 and '13?

I think we'll probably -- if you look at what our current run rate is and you add roughly $3 million in each of those years, that's probably the incremental R&D that it'll take.

Okay, great. And when look at the --

That's not to say it's only $6 million. We're going to take some of the R&D that we've spent in the past on other things and move it into that. But as you model it, I'd use an extra $3 million a year.

And any amortization in there from the up-front payment?

Well, yes. I mean, there'll be -- whatever payments we have will be amortized over the useful life, the expected useful life, which for your modeling purposes, at least on a preliminary basis, you might want to use something in the neighborhood of 10 years.

10 years? Okay, great. Thank you. And the 1,500 screens projected, do you have a feel for --?

One second. I'm sorry, I just want to ask Joe a question which, Joe, however, the amortization may not start until we introduce the product --

Right.

Is that correct? So, there may not be an amortization charge in '12 and it may fall late in '13.

Okay. That's helpful. And the 1,500 screens, any feel for what the breakdown would be, sale versus joint venture, or is that to be determined?

It's really to be determined because some of it depends on how the world evolves. I mean, if you'd asked me five years ago would we be doing joint ventures in China I would have said no way. So, it's really hard to answer. I think it really depends on the economies, transparency, the box office, all kinds of things. I think it's very difficult to do that.

Okay. And one final question, just more reaffirming what I believe is -- your theaters receive 3D glasses from you on an install. So, a shift in consumers purchasing those, if that were to happen, would not impact IMAX at all, is that correct?

That's correct, it would have no impact on us.

Thank you very much.

Thank you very much.

This is going to be our last question.

Steve Frankel, Dougherty & Company.

Good evening. We have significant outperformance in your international screens. Do you think that's a permanent phenomenon, or is some of that due to the fact that you're a new experience in a geography where going to the movies is new and interesting and fun, or is this a sustainable premium?

I mean, that's a really good question, Steve, and I wish I knew the answer to it. I certainly, looking at the data, think it's sustainable over the next couple of years. And you look at the numbers in China, where we're on track to do pretty much the same per screen as last year and we had Avatar last year. So, without Avatar -- so, if you're looking at China right now it looks pretty sustainable. And Russia and the same thing, it's pretty strong. But, I assume at some point of time the dynamics of the market will change. Like for example, in China there's not a large-screen TV in the home, there's not sports leagues. In time some of the factors that weigh in are going to change that dynamic.

On the other hand, though, I really just touched on this on my comments and I think it's an important point. We've said virtually nothing on consumer brand marketing. And I really don't want to overstate this or scare anyone on the call. And we're not doing Super Bowl ads and we're not doing national TV campaigns. But, we are going to do fairly concentrated and hopefully effective Internet campaigns, online campaigns to really do brand marketing. And one of my hopes is that there's going to be a pull-through effect. Obviously, we're not going to do it if we don't think we're going to get a financial result from that.

So, I think on the other hand that internationally we may see some forces that rationalize the box office in one way, but I'm hoping and thinking that our brand marketing will start to push up the box office the other way.

Okay, great. Thank you.

Thank you. I guess, just to sum it up, from where I sit, I think it was a really strong quarter. I think after the first half of the year people said, oh, my God, will people ever come to IMAX movies again? And I think the first half of the year was a reminder that we're in the movie business and sometimes you make the right choices, sometimes you get lucky, sometimes you don't get lucky.

During the quarter we built a very strong box office, our second strongest in history. And if we walk through the model, I think the model performed exactly as we've described the model performing. It's unfortunate the Canadian dollar had a three-day freefall, but I don't think that affects our business model in any way. And I think the financials for the third quarter really justified what we've been saying, network growth and putting through the right content, deliver strong financial performance, and we did.

And I think, at the same time we did that, we focused on two really long-term, important strategic objectives. The Kodak acquisition of IP I think is going to ensure market leadership for us for years to come and widen the differentiation between IMAX and other experiences, which I know a number of you has a competitive concern. And not only won't it be a concern, I think it will be a further benefit to us. And then, the final thing is I think MI4 has enormous potential to us in terms of the way people make and market and see movies.

So, although life is never perfect, the third quarter I think was really many important steps in the right direction. And for those of you who are shareholders or follow us, I hope you appreciate that and thank you for your support.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.