Imax Corp (IMAX) 2011 Q4 法說會逐字稿

Good day, and welcome to the IMAX Corporation Fourth Quarter 2011 Earnings Call. All participants are currently in a listen-only mode.

(Operator Instructions)

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.

Good morning, everyone, and thanks for joining us on today's Fourth Quarter and Fiscal 2011 Conference Call. Joining me in Los Angeles is our CEO, Rich Gelfond, and our Head of Filmed Entertainment, Greg Foster. In New York, we have Joe Sparacio, our CFO, and Rob Lister, our Chief Legal Officer. We've also uploaded 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 the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking and that they pertain to 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, as well as reconciliations to adjusted EPS and adjusted EBITDA are defined by our credit facility, are contained in this morning's press release. The full text of our fourth-quarter release, along with our supporting financial tables, is available on IMAX.com. Today's conference call is being webcast in its entirety on our website. With that, let me now turn the call over to Rich Gelfond.

Thanks, Heather, and good morning, everyone. I'm in our LA offices with Greg Foster and I have a series of industry meetings this week.

Our fourth quarter financial results came in generally as expected. Revenue was $66.7 million, adjusted EBITDA was $21.1 million, and adjusted earnings per share was $0.14. The fourth quarter continued the strategic momentum we enjoyed throughout 2011, and we ended the year on a positive note, with the success of Paramount's Mission Impossible Ghost Protocol, which was released five days early in IMAX. Throughout the quarter, we remain focused on several initiatives that continue to position the Company for long-term growth. The theme of these initiatives is the differentiation of the IMAX experience through content differentiation, technical differentiation, and marketing differentiation, all of which we will touch on during today's call.

Looking back on 2011, as you know, we manage our business on two levels, financially and strategically. From a strategic and therefore long-term financial perspective, 2011 was one of the most productive years in the history of IMAX. For example, we exceeded 200 total theater signings for the second year in a row, and in fact signed an all-time high of 190 new IMAX theaters. We installed a record 170 IMAX theater systems, including 33 digital system upgrades. We grew our commercial theater network by 33%. We established IMAX China and signed our first Chinese joint revenue sharing agreement for 75 theaters with Wanda Cinema Line, our largest international signing ever. We more than doubled the size of our theater network in greater China, ending the year with 88 total IMAX theaters open there. We secured the exclusive license of digital laser projection IP from Kodak, and as I mentioned, we enjoyed the successful run of Paramount's Mission Impossible Ghost Protocol, which is now the third-highest-grossing movie in the history of IMAX.

From a financial perspective, 2011 was disappointing. As we've discussed in the past, we are in the business of blockbusters, and this year there weren't as many as in 2010. Total grosses from the Top 10 titles of 2011 were down 21.5% versus 2010 in the entire overall -- as compared to the overall industry, which was down 4% year over year. In addition, our film slate was overly dependent on animated titles, particularly in the domestic market, and that genre did not generate the kinds of grosses it has historically enjoyed. In an effort to offset some of our box office challenges, we proactively cut back on expenses in the second half of the year. We believe we've made the necessary adjustments to our film slate in 2012, which I'll discuss in more detail in a few moments.

The five day early release of the IMAX version of Mission Impossible IV was a huge success for the studio, exhibitors, and IMAX, making it the must-see event film of the holiday season. Securing and delivering on a five-day early-release window in North America was a major accomplishment for IMAX, but it wouldn't have mattered if Paramount, Brad Bird, Bad Robot, and Tom Cruise hadn't made a terrific, crowd-pleasing movie. The opportunity of the early window allowed our organization to launch several new efforts that we will look to leverage in the future. For example,, we executed a strategic marketing and communications plan utilizing tools like Facebook, Twitter, and Fandango. We also took over the banner ad on YouTube, a first for us, which generated an extraordinary level of traffic to IMAX.com the day before the IMAX window opened. We had a record 115,000 visitors the day before the film opened in IMAX, 93% of which had never been to the site before. For context around the time of Potter and Transformers, we had about 50,000 visitors to the site. This proactive marketing engagement built positive word of mouth for the movie, and generated new interest in IMAX, which appears to be carrying over into the first quarter.

The effectiveness of the strategy is reflected in the grosses. To date, Mission Impossible 4 has grossed $70 million worldwide in IMAX, making it our third-highest-grossing DMR title in our history, behind Avatar and Harry Potter 7, Part 2. Worldwide, the film has grossed $670 million overall for Paramount, which makes it the highest-grossing installment of the franchise, and also Tom Cruise's highest-grossing film of all-time. We believe, however, that the long-term benefits of our approach to MI 4 go far beyond any box-office revenue generated from the film. This event has gotten the attention of exhibitors, studios, and filmmakers alike, and we believe we will participate in more early-release windows in the future. That said, early releases are just one way we could differentiate ourselves with a film.

As an aside, yesterday Greg and I met with senior management of Paramount, and we asked them to diagnose the impact of IMAX on MI 4, and without going into the details, they were extremely complimentary, and they thought IMAX really made it cool and put it in a very different dimension in terms of its performance. That said, early releases are just one way we could differentiate ourselves with a film, whether it's through different filming methods like shooting with IMAX cameras as Brad Bird did, differentiated content, unique marketing events, or utilizing the expanded IMAX aspect ratio. We believe incorporating some kind of IMAX DNA into certain key titles will ultimately help the excitement factor around these films and drive it even higher.

Turning to 2012, our box office results to date indicate a strong start to the New Year. We've also announced some exciting developments that will allow us to re-focus our growth in under-penetrated markets, and we have added some of the most highly anticipated films of the year to our slate. Regarding network growth, we continue to experience significant traction in markets like North America, Russia, and of course, China. Both China and Russia delivered per-screen averages of approximately $1.7 million in 2011. Certainly, the WTO announcement on Friday between the US and China should have positive impacts on our Chinese business.

We believe the agreement essentially does two things -- It allows a carve-out for 14 additional IMAX or 3D titles beyond the 20-film quota that remains in effect; and two, it increases the Hollywood film rental fee to about 25%, as opposed to 13-17% today. As a result, we believe that in time, our DMR fee should move towards our global rate, rather than the 6.5% we currently receive on Hollywood films exhibited in China. This will translate to financial results, having a small positive impact on revenues and margins in 2012, with a more pronounced positive effect in 2013 and onwards, once the new splits are more fully fleshed out and in effect for full calendar year.

While there's still some details of the agreement that need to be finalized, we believe we should be able to program even more Hollywood titles into our film slate in China than we have in the past. For example, in 2011, 10 Hollywood titles were featured in IMAX, compared to 18 Hollywood titles in the US. We'll also continue to promote local-language films as well, especially coming on the heels of Bona's Flying Swords of Dragon Gate in December. Having grossed over $86 million, Flying Swords is the fourth-highest- grossing Chinese film in Chinese history. The film has grossed a record $10.6 million in IMAX from just 61 screens, or more than 12% of the country's box office for the movie.

I'd now like to spend time discussing the markets that we need to jump-start, and the strategies we are executing to make that happen. I am pleased to say that in just the first eight weeks of 2012, we've already made good progress towards our goals of further penetrating South and Central America, western Europe, and India. In Central and South America -- in mid-January we announced the restructuring of our agreement with RACIMEC, our Central and South American development partner. By way of background, in March of 2008, we signed a 35-theater agreement with RACIMEC to help us penetrate the region. The structural challenge for each of us has been that RACIMEC has had to charge prices well above our traditional selling price worldwide, which was clearly impacting our ability to get traction.

I personally went to Brazil between Christmas and New Year's and was pleasantly surprised at the level of appetite for our brand, even with their small size of our current footprint. We found that making some modifications to our arrangement with RACIMEC would likely make us more successful. Now for example, RACIMEC is able to offer JV arrangements, sales deals at prices that are in line with our typical selling price, and we are able to be more directly involved in the sales effort, while of course working collaboratively with RACIMEC. We believe it is a stronger, more effective partnership now, and the new agreement has already resulted in a one-theater deal in Brazil with Cinepolis, Latin America's largest exhibitor, and a long-time exhibitor partner at IMAX. We are seeing more activity in the region, expect more theater deals to come as the year progresses.

IMAX theaters in markets like Sao Paulo, Curitiba, and Rio De Janeiro Brazil are strong performers, having generated average 2011 gross box office per screen of approximately $1.5 million. In addition, four new IMAX theaters are scheduled to open in Brazil in the first half of 2012, including the Cinepolis theater which we're announcing on this call. Our current analysis of the market suggests that 150 theaters could exist across South and Central America over time, up from 15 IMAX commercial theaters today.

Turning to India, we currently have two commercial IMAX theaters in operation. Over the last 12 months, we've signed agreements for another eight, bringing our total backlog for India to 10. We believe that by some time in 2013, we'll be in a position to start offering IMAX versions of Bollywood titles, which today account for 90% of India's internal annual box-office receipts. Key to our development in India is the building of more modern complexes, and our current zone analysis suggests that India could support approximately 70 IMAX theaters at this time.

Moving to Western Europe. We are very pleased to have announced the appointment of Andrew Cripps as our new President of theater Development for Europe, the Middle East, and Africa. Andrew comes to us from Paramount, where he was President of Paramount International. Before that he was President of UIP and is one of the best-known and respected film executives in Europe. Andrew's long-time relationships in the European market, his expertise of the international region, and his leadership style make him the ideal person to help us reignite our growth in EMEA. Andrew is highly respected throughout the industry and is seen as a cutting-edge executive. We believe that with his stewardship, we should see increased momentum there.

Today we have 96 commercial theaters across EMEA. Given our strong traction in eastern Europe, Andrew's primary focus will be on western Europe, the Middle East, and Africa. Our current goals are to grow to 350 commercial theaters over time. Andrew will also work closely with Greg Foster and the international film team to secure territory-specific Hollywood releases and local-language DMR content.

Overall, we remain optimistic about the trends we're seeing in our international theaters. At year-end, we're only 18% penetrated overseas, and our international per-screen average for 2011 was $1.5 million, or 1.8 times that of the domestic box. As we look at our grosses for films like Mission Impossible, and even the better-than-expected results of Journey 2, it is becoming increasingly evident how our international business is having an important impact on our grosses, and it's poised to have an even bigger impact on our recurring revenues over time.

Now to technology. Our commitment to differentiation is not just limited to marketing and content. Our licensing agreement for Kodak's laser projection technology gives us the exclusive rights to a significant portfolio of patents. Our next-generation laser projection technology will be based on this ground-breaking Kodak IP. We believe that laser-based projection keeps us on the cutting edge of technological innovation. Our new IMAX laser projectors will present greater brightness and clarity, a wider color gamut and deeper blacks, and consume less power and last longer than existing digital technology.

To make our vision a reality, we selected Barco to help us co-develop the system. Under a seven-year agreement, Barco will be our exclusive worldwide partner in the development of digital projection technology for use in IMAX theaters. We will work together to combine Barco's unique laser innovations, our IP with respect to image quality, and the Kodak digital laser patents, which we will sub-license to Barco. The goal is to bring our laser-based systems to market by the second half of 2013. Meantime, we will work to integrate an enhancement of Barco's existing Xenon-based projectors to satisfy our backlog requirements and new system signings later this year.

As I've discussed on previous calls, one of our big corporate goals for 2012 is a focus on marketing our brand. Given the positive results we experienced around our MI 4 campaign, we are confident that our commitment to owning the brand will bring us closer to our core fan base, which should result in increased loyalty engagement, and ultimately contribute to top-line growth. As part of these efforts, over the last several months we conducted an in-depth consumer research study to gauge movie-goers' impression of the IMAX experience, and the results have been very positive.

Globally, our brand's awareness is healthy and has continued to grow. In our developed markets, awareness tops 90%, with an overall awareness score of 73% across the eight key markets of the US, Canada, China, France, Italy, Japan, Russia, and the UK. Satisfaction, one of the most important metrics, is also logging extraordinary numbers across the eight markets, with our top satisfaction measures well above 90%. This research has helped inform our brands initiative, which we will launch during the second quarter. This will be our first IMAX-centric brand marketing campaign, and will feature a multi-pronged approach, primarily focusing on digital media, public relations, grass-roots activation, and consumer promotions. The initial focus will be our top designated market areas across North America. We also plan to roll out our in-theater messaging across the globe in over 20 markets, including a new brand trailer. We will partially fund this branding effort through a re-direction of some existing marketing dollars from other areas.

Moving on to the film slate, we kicked off the quarter with the continuation of MI 4, which enjoyed strong legs domestically, and has done very strong business in China. Underworld Awakening and Journey 2 have each delivered solid results for this time of the year, and the bulk of our Q1 line up is still to come, with The Lorax, John Carter, Hunger Games, and the opening weekend of Wrath of the Titans, all happening in March. We announced last week that gross box office through the first six weeks of the quarter was approximately $55 million versus $38 million over the same time frame last year, and at this point, the point of this call, we've grossed more this quarter than all of last year's first quarter, when we grossed $62 million. Our pillars of the 2012 film slate include Sony's The Amazing Spiderman; Warner Brothers' and Christopher Nolan's the Dark Knight Rises, which will feature about 50% of the movie shot with IMAX cameras, more than any other previous film; and Warner Brothers' the Hobbit, directed by Peter Jackson. These are all billion-dollar film franchises that we believe will play very well to our core audiences.

In addition to those franchises, we look forward to Tim Burton's Dark Shadows, starring Johnny Depp and Michelle Pfeiffer, and Sony's Men in Black 3. We also recently announced the additions of the highly anticipated films The Hunger Games, which represents our first film with Lionsgate; Disney and Marvel's The Avengers, directed by Josh Whedon; and this morning we announced Sony's Skyfall, our first Bond film, which is being released in November of 2012, and is being directed by Sam Mendes. While our pillars will likely drive the majority of our box office, we believe that this year we are creating a more balanced slate, which should mean less pressure on our biggest titles to out-perform. So far, 17 titles have been announced for 2012. We anticipate that the total number of titles playing through the IMAX theater network in 2012 will be similar to the 26 released in 2011.

We are also expanding our strategy of DMR'ing local language titles. We'll release our first European local-language film in France on April 4. The film, On the Trail of the Marsupilami, is being distributed by Pathe Distribution and is written, directed, and stars Alain Shabat. In December, we will release Jackie Chan and YE Brothers Studios, formerly called Chinese Zodiac, now known as C712 in China, and will likely also participate in at least one other local Chinese film this year. Finally, we recently announced that we will DMR our first Russian local language film, Stalingrad, which is anticipated to be a blockbuster title, and will arrive in theaters in October of 2013. In addition to these titles, we also anticipate some international-only runs of Hollywood films, including some animated titles, which continue to do solid business overseas.

To wrap up, we believe that IMAX's platform is becoming increasingly important to our business partners. Without a doubt, the entertainment industry is at a crossroads with regard to in-home and out-of-home options, and we believe IMAX as a technology, as a brand, as an experience, as a content provider, and as a marketing tool is uniquely positioned to generate enthusiasm with movie-goers, and get them out of the home and into cinemas. We look forward to continuing to collaborate with our partners on the ongoing success of blockbuster films and to driving excitement for our consumers. With that I'll turn the call over to Joe, who will review the financials.

Thanks, Rich. I, too, am optimistic about 2012, and look forward to what seems to be a very solid lineup of titles, with still more to come. Fourth quarter revenues were $66.7 million, compared to $69.2 million last year. Fourth quarter adjusted EBITDA as calculated under our credit facility was $21.1 million, versus $25.8 million last year. Adjusted net income in the fourth quarter was approximately $9.2 million, or $0.14 per share, compared to adjusted net income of $14.3 million, or $0.21 per share on the same basis last year. Reported net income for the fourth quarter was $6.3 million, or $0.09 per diluted share, compared to $54.2 million, or $0.80 per share last year. As a reminder, in last year's fourth quarter, we reversed our deferred tax valuation allowance, which resulted in a one-time non-cash tax gain of $54.8 million, or $0.81 per share.

Looking at the business segments, revenue from IMAX systems was $29.8 million, compared to $32.9 million last year. The decrease reflects the installation of 17 new systems during the fourth quarter of 2011, compared to 20 new systems in last year's period. We also installed one digital system upgrade in this year's fourth quarter, compared to seven in last year's fourth quarter. JV revenue was $8.4 million in the fourth quarter, compared to $7.8 million in the same period last year. DMR revenue was $12.3 million in the fourth quarter of 2011, compared to $13.1 million in last year's fourth quarter.

Gross box office in the fourth quarter was approximately $97.6 million, compared to $101.9 million in the same period last year. DMR gross box office for the full year of 2011 was $417.2 million. Our global weighted per-screen average in 2011 was $1.1 million, $840,000 domestic, and $1.5 million international. It is worth noting that if you look at our domestic per-screen average on a blended 2011 and 2010 basis, you'll find that the average is about $1.2 million. Of course the international PSA by the same measure would be well above $1.2 million.

While this is the movie business, we believe we are taking our key learnings from 2011 and applying them to our 2012 film slate, such as increasing the number of fan boy titles as compared to animated titles, particularly domestically, and increasing the number of local-language titles to maximize grosses from those regions of the world that deliver significant levels of box office. Gross margin was 44.7% in this year's fourth quarter versus 52.6% in last year's fourth quarter. The decline in gross margin was largely in our film segment, which included the funding of film prints for some of our animated titles that did not achieve the levels of box office we had anticipated, and as Rich alluded to earlier, we spent approximately $900,000 in incremental marketing dollars related to the IMAX early-window release of Mission Impossible 4, which we believe contributed to our strong box office results. We expect our DMR gross margin rate to rebound from these levels in Q1 and thereafter.

Moving to SG&A. Excluding the impact of stock-based compensation and foreign exchange impact on unhedged forward contracts and working capital balances, fourth quarter SG&A from operations was $16.5 million, which was in line with the same basis last year. Traditional stock-based compensation expense, which excludes variable share awards, was $2.3 million in this year's fourth quarter, which was slightly lower than our prior guidance. Reported SG&A of $17 million includes a benefit of $2.2 million, or $0.03 per diluted share from foreign exchange, largely related to the strengthening of the Canadian dollars and the related impact on our unhedged forward contracts and forward-denominated working capital balances. Partially offsetting this benefit was a $440,000 expense, or $0.01 per share, from variable stock-based compensation. Research and Development expenses was $1.8 million, which is lower than the $2.3 million of R&D expense in last year's fourth quarter, and below our guidance of $2.5 million to $3 million earlier.

Our backlog at year-end consisted of 263 theater systems, versus 224 systems at the end of 2010. This is the biggest backlog we have ever had at year-end. Included in quarter-end backlog were 10 digital system upgrades, versus 25 last year. The breakdown between system type is included in our supplemental presentation.

Turning to signings, in the fourth quarter we signed deals for 26 systems, compared to having signed 23 theater deals in the fourth quarter of 2010. For the year, we signed contracts for a total of 209 theater deals, our second consecutive year of 200-plus theater signings. Our current outlook for 2012 theater installations from existing backlog is 95-100 theaters, versus our previous outlook of 90-100. Of the 95-100, we expect 45-50 to be JV theaters, and approximately 50 to be sale and sales-type lease theaters.

As a reminder, current installation guidance is based only on what is in our backlog as of today. It does not factor in systems that may get signed and installed within the same calendar year. By way of example, in 2011, 54 of the 137 new theaters installed, or 39% of the installs, were from theater agreements that were signed in 2011 and therefore were not part of the installation guidance that we gave back in February of last year. The pipeline of theater deals remains robust, and we wholly anticipate that installs will increase as the year progresses, just as they have for the past several years. For the first quarter of 2012, we expect to install between six and eight new sales or sales-type lease systems. I want to point out that in last year's first quarter, we installed 11 new sales type lease systems, and 22 digital system upgrades. We also expect to install seven to nine JV theaters in the first quarter, which is similar to last year's first quarter.

In support of our 2012 corporate objectives, we estimate cash R&D expense will be approximately $12 million for the year, as well as an increase in amortization of approximately $2 million associated with the development of our laser-based projection system. We expect SG&A expense, exclusive of stock-based compensation, to be approximately $69 million. This includes the incremental full-year impact of our infrastructure in China of $3.8 million, plus incremental brand marketing expenses of $5 million, which will be partially offset by $2.2 million worth of reductions in other marketing areas, which are treated as a component of cost of goods sold. Traditional stock-based comp is estimated at $13.5 million. We estimate the full-year tax rate to be in the range of 30% to 33% for next year, with $5 million to $6 million of that to be in cash taxes. With that, I'll turn it back to Rich for closing remarks.

Thanks, Joe. Again, while we would have liked a stronger year financially, we feel that we have executed our strategic plan extremely effectively, and that this should position the Company for long-term financial growth. We enter 2012 with a commercial network that is 33% larger than at this time a year ago. Our mix between domestic and international theaters is moving toward higher-grossing international, and our pipeline for new theater deals continues to be robust. We are assembling what we believe to be a very compelling film slate that is more heavily weighted to titles that appeal to our core audience.

We believe the fundamentals of our business model, network expansion, and higher revenue contribution coming from higher-margin businesses, should position us to deliver significant growth over the long term. We continue working tirelessly to eventize movie-going, and to make the IMAX experience better and better. I want to thank our employees for their continued efforts and commitment to IMAX, and of course I want to thank our shareholders for their support. With that, I'd like to open up the call to your questions.

Thank you.

(Operator Instructions)

Thanks, good morning, everybody.

Good morning, Rich.

Rich, can you scope the extent of the laser light transition, not just for IMAX but for the whole exhibition industry? Are we on the cusp of a new replacement cycle here for digital cinema, and does that technology that you've now cornered here in laser light with LLE, Kodak, Barco possibly put you in a position to benefit from just the solving of the darkness problem in standard 3D overall?

It does, Rich. In fact, that's one of the primary attributes of laser technology, in particular the Kodak system, is brightness. It's orders of magnitude brighter than the existing system, and the Kodak system which we're developing with Barco also has blacker blacks and better contrast, so it truly is a revolutionary development in the cinema industry. In fact, when we did our diligence on it, we took one of the directors who is very well known for not liking digital and liking film, and we showed him the technology, and he was really impressed. His input into this, and by the way we're having other filmmakers involved as we put this together, was extremely positive. With that -- so that's the first part, Rich.

The two other parts that I have to answer your question. The second is, does it position us to participate in the regular segment, the non-premium segment, and the answer is it does. I don't think we would develop a product that we would sell to replace conventional 35 or existing digital, but under the terms of the agreement with Barco, Barco is in a position to use the Kodak IP in order to sell into that market and pay us a significant royalty out of it. Neither we more Barco has decided how to proceed, but at some point we are in a position through Barco to enter that market and reap some of those revenues.

The third point of it is, is it a replacement cycle for the existing kind of digital industry. It could be, but the question I have is who's going to pay for it? Under the arrangements, the financing arrangements, ECIP, that it's kind of a leased financing, which is the way the exhibitors transitioned over. But that lease financing provides for a 10-year payback under the virtual print fees, so if there were additional costs to transition over, I just don't know who would pay for it. In fact, I think as a result of that, I think Rich, that our differentiation is going to widen versus the existing digital technology.

I've got to think somebody's going to be motivated to pay for it when they see the differentiation of laser in standard digital as well.

The question there though, Rich, is how can they recoup it, is the consumer going to pay even more of a differential? The consumer does not seem willing to pay a differential for digital. My own view is I think your point is well taken, but we'll see. As you know, no one was willing to pay for digital transition for a decade before, so I don't think that's going to change.

A quick second question here on internet, or just marketing spend overall. You mentioned some banner placement on Ghost Protocol. Was that a one-time event then, or is that now part of your movie marketing strategy in any kind of formal way?

I think it's not a one-time event. It's part of our ongoing strategy, but it really depends on the film and the time of year. We probably would put incremental marketing dollars behind something like Avengers, which is a key fan boy movie, and has a lot of potential during that time of the year. That would make sense for us. I think if it were a shoulder-period movie, where there wouldn't be a lot of likely impact, that's a place where we won't put the money.

We've definitely put marketing money into the budget, and it's definitely part of our plan going forward. I mean, one of the things is, one of the responses is obviously we're not blind to the fact that our competitors have created generic boxes that have an X name in them. I think we could -- not only do we have a technical differential, and not only do we have filmmakers and film differentiation, but I think to the extent we keep reinforcing the brand image, we can even have more of a differentiation.

Thanks, Rich.

James Marsh, Piper Jaffray.

Two quick questions. First Rich, on the changes to the China film market, I've got a couple questions here. One relates to kind of the mechanics of the whole thing. You talked about the 14 IMAX 3-D carve-out. What gives you confidence that that's going to drive more IMAX in 3-D content, and it's not just going to shift the IMAX in 3-D films out of the previous 20-film quota bucket, if that makes sense?

Well first of all, James, when you look at the existing 20 buckets, 15 of our films we're getting in under that bucket anyway, more or less, because the kinds of films that we generally do are the blockbuster sorts of movies, so the Spiderman, the Harry Potter, I think they'll continue to get into the quota. Greg, who's with me, when you start asking the question, answered it by the phone calls we've gotten already. I think the fact of the matter is, there are certain films that won't get in under the existing quota, but in a way we're kind of the ticket into the country for other films.

I think China was very thoughtful and careful in structuring it this way, because what they're saying is that IMAX films and other enhancements such as 3-D sort of define a lot more money being spent on the film, and a lot more of a blockbuster status, and I think the word "enhanced format" and IMAX was a shorthand version for that. I don't think they instituted it not to do it. I guess the last point I'd make on that, James, is because of the growth in cinema in China, which you know very well, 2,000, 3,000 screens added a year, they're going to need content to play in China. I think part of this was a way -- the Chinese didn't have to officially change their quota number, but they could accommodate the consumers and the exhibition community in China.

Okay, and then just a quick follow-up to that, related to China. What's your expectation on the timing here? I know there's a number of regulatory bodies that have to kind of sign off on this, but obviously you've got some high-level political figures involved in it. What's your take on the dynamics there and timing?

Well, this announcement was made by the Vice President of China, who's going to be the next President, Xi, and it was also made by Joe Biden, so this kind of level I don't think that's the kind of thing you play around with. I think certain aspects like the 25% are done. I think there does have to be some regulation filled in around it. I'm not sure exactly when, but I've been told by people in China that they're acting quickly, which at the earliest, I've heard it could be a couple weeks, and at the latest I've heard it's going to be a couple months. My guess is with the change in government coming later in the year, they're going to want to get it done relatively quickly.

Okay. Just my last question and I'll let someone else take the mic here. Do you have any sense for how the Hunger Game advanced ticket sales are going? I know they started yesterday, and we were hearing that it was tracking towards a potential 24-hour record. Do you guys have any color on that?

Greg, why don't you answer that.

What I do know is on isolated situations that I heard about yesterday. For instance, one from our partner at Regal. They put the tickets on sale, and 400 tickets in a specific theater went in about an hour, and it's a 405-theater auditorium. That's one theater, but based on the traffic that we're getting and the questions we're getting on our website, and this data -- not only on that theater, but a couple of others -- I suspect that especially in the beginning, that opening weekend is going to be pretty substantial on Hunger Games. It has generated a level of interest that we didn't anticipate being quite as high as it is, and clearly it's very -- I mean, we thought it would be terrific, but we didn't think it would be as massive as it seems to be. It's definitely part of the culture.

Greg, could you -- just to follow-up on that. Could you give us some reference point for how some of these other pre-sales have gone? Obviously Harry Potter and Twilight were big numbers, but did they take place closer to the launch after the promote -- marketing and promotion has started? How long did it take to generate those $25 million or $30 million in pre-sales? Do you have any idea?

It depends ultimately on when the exhibitor puts the tickets on sale, and it would be silly to compare Hunger Games four weeks out to what happened with a picture like Harry Potter or Transformers, but I would categorize what we've seen so far of Hunger Games as robust.

Okay.

James, as you know, we already have significant pre-sales for the Dark Knight Rises in July, but that's a bit of an anomaly.

Okay, that's very helpful. Thanks guys.

Eric Handler, MKM Partners.

Yes, thanks for taking my question. Just a quick question regarding your screen installation guidance, and tell me if I'm interpreting this correctly. Your guidance is based on what you know and what's signed as of December 31. You put out a couple press releases since that time, including the Latin American deal, so if I'm interpreting correctly, based on February 23, should those numbers actually be higher?

Well, the answer is -- I mean, first of all, installs always move in and out. At the end of the -- you look at the end of the year, we do this in real time, so you can't just take the old number and say it's static, and add the signings into it. The second point I'd make is if we think there's less than a 50%, or I'd say probably less than an 80% chance of it installing, we're not going to put it in our guidance. Joe, you may have some specific things to add to that.

No Rich, I completely agree with your comment. We scrub all of the installation information that we provide guidance on, so it's not a straight add, believe me.

Okay.

And as you noticed, Eric, we pretty much beat it most quarters and most years, and that's because the last thing we want to do is promise installations and have them not happen.

Understood. Just as a follow-up, with the way you're looking at marketing, it seems like a fine line of what you're going to do versus what the film distributor should be doing. How do you sort of delineate in terms of whose going to pay for the YouTube type of advertisements, and some of the other promotions that you're looking at doing?

As a practical matter it's easier than you would think, and that's because our marketing is really brand-centric, and their marketing is film-centric. During MI 4, our banner ad said IMAX is Believing, and was focused on the IMAX experience, whereas Paramount's marketing was more focused on the film itself, Tom Cruise, things like that. It's discretionary on our part, in large part. What we do is we assess what's the best way to market the brand. As I said, if it's a small shoulder-period movie, that's not one we're going to choose to really promote the brand, but if it's a larger movie like the Dark Knight or Spiderman or something like that, we're going to focus on the brand at that time. It's ad hoc, but it actually works, Eric.

Got it. Thank you very much.

Marla Backer, Hudson Square.

Thank you. I have a couple of questions on the films. First of all, since MI 4 was just such a success, and as you say, to a large extent attributable to the IMAX early release. Can you just give us a little bit more color on what it is you'd look for to green-light an early -- or with the studio, to go forward with an early release of another film?

It's Greg. I'll take this one. It's actually a fairly simple formula. The key to it is differentiation. We've had several companies ask us since the success of Mission Impossible to say yes to an early release, and we've said no to some of them, because we're not going to do it for every movie. We need to -- more of the same is clearly not working. That's what 2011 showed us, if there's an IMAX film that has specific IMAX DNA that differentiates the film from the rest of the market place, if it's a movie that can actually benefit from an early window.

Mission Impossible 4 was a franchise that had three titles before. The last one was five or six years before, and it needed a little bit of a kick-start. The IMAX DNA, and IMAX -- which was shooting with the cameras. IMAX-focused filmmakers like Brad Bird and Bad Robot and the support they got from Paramount, as well as Tom Cruise, plus the where it sat in the competitive market place during December, was the perfect title to do this way. Those are the kind of criteria that we'll be looking at going forward, to make sure that we can actually add something to it, as opposed to doing it just to say that we did it.

We shouldn't have to worry at all about this becoming sort of too run-of-the-mill to remain special?

No. We're going to be extremely careful about it.

Yes, the way we summarize it Marla is we say the movie has to have IMAX DNA around it. Because I think if you look back, one of the problems that happened with 3-D is it got oversaturated too quickly, and it got put in every film whether it was appropriate or not, and I think we'd rather do two films a year and do them well, than do six films a year and dilute the effectiveness.

Okay, that's good to hear. Fast question on the local content. A market such as China, local content seems to make so much sense. India, because of Bollywood content, is such a large part of their exhibition in that market. In a market like France, where you're planning on the first local content title, how are you planning to look at local content on a market-by-market basis? When does it just become un-economical to satisfy your exhibitor partners in that market, because the market's just too small to support your DMR costs?

It's a very good question, Marla, and I think let's talk about France, specifically. The theaters have done well, the per-screens are okay, but Pathe Gaumont thinks they could be better, and they're also in the film-making business. We've agreed sort of to do that one as a test, and I think they see it as largely a branding exercise, because they believe this Marsupilani is going to be one of the highest-grossing French films of the year.

We've agreed to do it with them as a test and see what happens. I don't think we'll lose money. In a worst case, we'll sort of break even on it, but I think part of what we're going to do is not set hard and fast rules. We're going to try and be pragmatic and see who our partners are and what the film is. That film in particular can also play in French Canada, so I think the economics look differently than if you look at it just in France. But I don't think you should expect us to do a lot of films like that, unless there's concrete results.

Like in Russia we have about 40 theaters including backlog, and so obviously doing Stalingrad in 2013 is economic for us and that's the kind of film which I think can do very well. If you look at China and Flying Swords, I mean doing 12% of the box office on less than 2% of the screens is a powerful statement, and Greg was just in China about two weeks ago, and how many films did you get offered?

16.

16 films. We're not going to do all 16 films, but I think we can replicate some of the successes we've had in the US, where we get to cherry-pick, we make good relationships with the studios, the studios communicate with the exhibitors, they drive exhibition, and it becomes a virtuous cycle.

That makes sense. Okay, my last question is on the laser technology, the licensing deal. I agree with what you said, Rich. It really seems that opportunities to upgrade within the exhibition industry are kind of limited for the -- exactly as you said, the financing aspects of it. Do you think there are any opportunities outside of theatrical that you could possibly leverage by virtue of your licensing deal, either with Barco or with potentially another partner?

I think there are, Marla, and whether it's the commercial projection market, or whether it's eventually scoreboards at stadiums, or other things, I think the attributes of our system are so differentiated that I think they are. We certainly haven't put a business plan together on that, but we will.

Right, and doesn't Barco have a business that's similar to that. Not -- I'm not sure if it's specifically scoreboards, but they have that digital kiosk outdoor business, don't they?

They do, yes. So imagine Jeremy Lin on the new laser screen at Madison Square Garden, I think it would be even more special than it is today.

I'd love to see that. Okay, thank you.

Steven Frankel, Dougherty & Company.

Good morning. Rich, could you give us an idea of how many screens you think you'll have open in China by this time next year?

I don't know. Joe, do you have it specifically? I think probably around 130, that would be my guess, not having the data in front of me. Joe, do you have any more color you could add to that?

No Rich, that's about right. That's about right, and that includes Taiwan and Hong Kong as well.

Okay, and--

Steve, if you include the backlog, we have up to -- we have about 212 that's built out, signed already today. There's still a lot of interest in China, even before the WTO came out with this -- I mean the governments came out with their response to the WTO ruling.

In regards to that ruling in your comments that you think it's going to get enacted pretty quickly, will that enable you to slot in a couple more films in 2012?

I think it's likely we will. One of the things I mentioned in general terms, but I'll be more specific about it. Some of our agreements with the studios this year say that we get 50% of whatever they get. In certain instances, we'll see an immediate impact this year. I do expect to see, as I said, a small positive impact financially, and I do think we'll be able to get more films in, although it's hard to quantify at this point.

Okay. Switching gears to the US, earlier in the year and late last year, you talked a lot about some successes in small markets in the US, and how those screens were significantly out-performing. I know it was a tough year domestically. Has that out-performance held up, or have those small-market theaters kind of reverted to the mean over the year?

No, as a matter of fact they continue to do very strong. The reason for that is they tend to be family-owned, and there tends to be a tremendous focus on marketing and promotion and differentiation. As a matter of fact a theater that we couldn't stop talking about in Wichita, Kansas, Bill Warren. He's opening today, I believe it is, in Oklahoma City?

Moore, Oklahoma, right outside of--

Moore, Oklahoma. I've seen pictures of what the theater looks like and its marketing, and it's just incredible. I don't know which theaters you look at, but it's day and night compared to what the chains have done, and I think that accounts for a lot of the over-performance.

One more domestic-focus question. Have you had any material discussions with AMC and Regal about starting to populate selected zones with a second theater? Is that something that's on the radar screen?

It's definitely on the radar screen. We sort of have a strategic initiative, and I'm going to talk a little bit about my own point of view. I had been opposed to it for a long time because I didn't think there was enough film product, and I thought there might be some consumer confusion. Given where we are now and the demand for IMAX film from the studios and the success of MI 4 and the possibility of an early-release window, internally we've put together a group to look at it. I'm certainly starting to moderate my position on this, and I wouldn't be surprised to see us testing it in some markets, but we haven't made a final decision yet.

Okay, thank you.

Ben Mogil, Stifel Nicolaus.

Hi, good morning and thanks for taking the call -- the question. Just following up on Steve's question. In north -- moving back to North America, where clearly there's been -- theater development has obviously been stalled across the board. Are you seeing any interest by exhibitors, or are you willing to sort of allow in some of the places where they can do sort of a premium format screen of their own, as well as one of your own screens? I think Regal in Anchorage has something like that. Your thoughts on that as a way to unclog some of the backlog?

Before I answer it, I want to frame it a little bit.

Sure.

In Canada, three years ago or around three years ago, we had eight theaters. We now have 33 theaters in Canada. We don't really talk about it that much, but the network is four times the size. We just announced a deal with Guzzo Cinemas in Quebec for four theaters. The level of activity, and following up on what Steve said in the smaller markets, there's more there than we thought originally, so I think there's more than we expected or you expected in those territories.

In terms of the second screens building out, it's really weird, but our experience with AMC was in auditoriums where they put ETXs, we actually grew faster than in auditoriums where they didn't put ETXs, and I don't quite understand all of the reasons for that, but it statistically works out. I think if you listen to all of the exhibitors with the possible exception of Cinemark, they would say that their home-grown brands don't bring in incremental audiences, therefore don't bring them additional concession revenue. IMAXs obviously bring in incremental audiences, so I think there's a place for them, and I don't think it's a terribly threatening place for us.

I think the question is, how do we keep differentiating and how do we keep moving forward. Mission Impossible 4, for example, was not playing in the same multi-plex in a premium screen where there was an IMAX screen. Certainly, we're not going to continue to develop a differentiated experience and allow it to be shared with the copycats, particularly in the same boxes. I'd say our response to it is brand marketing, owning the brand, and continued differentiation. If you look at the results, especially early this year, they seem to be positive. I'm monitoring it, we're responding to it. In my discussions, I'm not overly concerned about it, but I think I would be blind if I didn't say that we're constantly looking at ways to evolve and differentiate. I think ultimately laser light is going to be a very material way to do that.

And on laser light, I want to make sure I heard you guys correctly before. You're looking for this to be a 2000 -- a second half of 2013 installation event; is that correct?

That's correct. Again, it's an R&D project so I don't want to promise it, but that's the path we're on right now.

Sure, and lastly and then I'll cede the floor to someone else. Did you guys buy the patents outright from Kodak, or is it simply a license?

It's a license, partly because actually we have rights to every Kodak patent in their portfolio, and we have exclusivity in the quote-unquote cinema space,. If you've been reading, which I'm sure you have been, about Kodak's strategy of selling those patents for a lot of money to different people, we couldn't own them, because they have other uses, but we license essentially their entire portfolio.

Got it, great.

In fact, I was going to say, there may be other nuggets of things that are of interest to us in our license. Our license isn't limited to developing the laser projector. In fact, our license has exclusivity, as I said, in certain areas, and there may be side things that we can develop from them.

That's great. Thank you very much, Rich.

Aravinda Galappatthige, Canaccord Genuity.

Good morning, thanks very much. I have a question for Rich and one for Joe. I'll start off with Rich. Rich, can you talk a little bit about the prospects in the Latin American market? Obviously, it's a sizeable market. The PSA seem to be good. Are you still tied to RACIMEC, as you look to penetrate the rest of the market? There's obviously a fair bit of pent-up demand there given that the penetration there's been a bit slower as a result of the arrangement?

Well I think when I went into it, Aravinda, I thought a lot of the problems were the partnership and how it was functioning. When I came out of it after spending a lot of time, I think the issue was more the way the contract was structured, as I said during my remarks. We couldn't do JVs in Latin America. It was difficult to approach the chains. The way we've really restructured, two points. One is there's much more flexibility to deliver the kind of deals we deal in other countries.

The second thing is we have a much more direct role than we had before. In every case we'll work with RACIMEC, but in certain instances like with the big multi-national chains we'll take the lead, and in other instances RACIMEC will take the lead. There are also fairly tight performance standards under the agreement, so if there isn't results delivered within 2012, there are ways that we take more of a front row. I'm comfortable that the structure works and that the incentives are there, and while there are no guarantees, I would be surprised if we didn't see a significant pick-up in activity.

Thanks for that, Rich, and a question for Joe on the working capital use. Obviously, working capital usage in 2011 was quite high, nearly $50 million. It's gone up a lot in the last couple of years as well. I know there's a fair bit of liquidation of the size there, but I just wanted to see, Joe, are there any comments you can give us as we think about forecasting working capital on a go-forward basis, particularly keeping in mind that you've signed a lot, particularly in 2011, and that should start to help the deferred revenues as we step into 2012. Is there any comment you can make on that?

Yes I think, Aravinda, one of the big drags that we've had, not only in 2011, but also in 2010, was the liquidation of the variable stock awards. Those awards are really down to a trickle at this point, and that's really more than half of your difference. Other pieces of it are, we had a build up of inventory at the end of the year, because we're installing at a fairly rapid pace, so that's part of it. The other part, which will impact working capital, is we're a growing Company. As we continue to install at close to 50 to 60 theaters under our sales-type lease arrangement or sale, and we continue to grow our DMR revenue base, those receivables grow. Now, they'll get liquidated afterwards, but in a growing Company, you're going to expect a drag on working capital as you grow.

Okay, thanks. Then but offsetting that, Joe, wouldn't you have increases in deferred revenue as well, because your signings rate is quite high, and that should hit 2012, shouldn't it?

Yes it would, but the installation rate was at a higher level than the signings rate.

I see. Okay, thanks very much. That's all I had.

I apologize, but we can only take one more call because we have to run off to some meetings immediately. If there are any additional calls, certainly Heather will get in touch with you after this, and I'll be happy to talk to you at some point today. Operator, please make the next call the last one.

Jim Goss, Barrington Research. Please go ahead.

Thanks for squeezing me in. One follow-up to a previous discussion about the five-day early-release window. Do you think this would be useful during the crowded summer schedule, where there don't seem to be enough weekends?

No, that's one of the interesting questions, Jim, is I think you really have to look at it at a period-by-period basis. I think for most of the crowded weekends, films were getting in already. I think it's more likely to impact places where films weren't getting in, some of the shoulder periods. However, China's a funny place because sometimes the releases aren't day-and-day on a worldwide basis, so I think we have to do it on a micro level. My guess is, let's say we got four or five new movies in, by way of example, that probably one or two of them would be in a more -- a period where we had a hole that was a more popular period, and then the others would likely be on the shoulder period. I think it's not going to change the heavy part of the lineup dramatically.

Okay, one for Joe. If you look at the seasonal trends, variations in the revenue and earnings pattern, do you see that settling into some new pattern as you look at both the growth in your overall film screen slate, the geographic diversity, and then any of the other issues that are affecting it? Like which quarters do you think will be the relatively much higher versus lower quarters, as you see it right now, say for 2012 in particular?

I don't see any big shift here. I think if you were to look at our film slate for this year, certainly the second and third quarters look great, and we have some great films at the tail end of the fourth quarter. I don't really see anything that would change the trend. I see a very nice film slate shaping up. I think the shoulder periods are going to be the shoulder periods, and we'll try to fill in those slots. I think the good news in the first quarter is it seems like we're doing pretty good with some of the films we've been able to slot into what has been a fairly slow part of the year.

Okay, and the international area, as that becomes more prominent, it tends to have similar patterns to the US?

Yes, by and large. I mean some of the release windows are somewhat different, but by and large, they'll kind of track. I mean the only place, one of the places you might have a difference is like in China where Mission Impossible 4 opened in January and not December. Instead, we had Flying Swords in December, and that did very well. You could have some nuances there, but I think at this point, given the makeup of our portfolio, I wouldn't anticipate anything too dramatic.

Okay, and the last thing, if you look at the PSAs in the domestic screens relative to some of the international markets, does that vary by significantly by type of market or size of screen, or what exactly is driving that difference, and do you see that changing at all?

I mean Greg and Rich certainly can pipe in, but I would tend to think that some of what we experienced in 2011 was programming driven. Many of the animated titles that we had on screen just did not hold or did not perform as we had anticipated, and I think the result of some of that was the per-screen averages went down.

Okay, well, thanks, Jim. I think I ought to just summarize briefly. When we analyze the Company over a period of time in creating value for shareholders, the key metrics for us is network growth. In fact, the network grew 33% last year. It's been running a 30% compound annual growth rate. I think you look at this year, our backlog is strong, our signings were strong last year. Over time, I think we're creating a very valuable franchise with recurring revenues.

I think if you graph against that, the film results, you're not going to follow the same trend line exactly. You're going to go over the trend line, or are you're going to go under the trend line. Clearly 2011 was under the trend line, driven primarily by disappointing results from animation in the United States. I think when you look at the beginnings of 2012, you can't underestimate momentum, and I think MI 4 gave us a lot of momentum going into the year.

It's very early to say, but in 2011, the momentum was going against us. In 2012, you all have seen the film results, and our films are doing better than we expected. The WTO thing came a little bit out of the blue, and that's a positive. The year is feeling very good to us so far on both levels, the network growth level and the finance level. Let's hope that trend continues, but in any event I think we're increasingly building a very valuable franchise that's creating recurring revenues. Again, thank you for all your support over the time, and we'll report back to you soon. Thanks.

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