Imax Corp (IMAX) 2012 Q1 法說會逐字稿

Good day and welcome to the IMAX Corporation first quarter 2012 earnings conference call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question and answer session, at which time you will be requested to press star one to ask a question. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Heather Anthony, Vice President of Investor Relations. Please go ahead.

Good morning and thanks for joining us on today's first quarter 2012 conference call. Joiningme today is our CEO, Rich Gelfond, our CFO, Joe Sparacio, and Rob Lister, our Chief Legal Officer. We have 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 of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking, and that 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 more detailed discussion of some of the factors that could affect our future results and outcome. 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 as defined by our credit facility, are contained in this morning's press release. The full text of our first quarter release, along with supporting financial tables, is available on Imax.com. Today's conference call is being webcast in its entirety on our website.

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

Thanks Heather, and good morning everyone. We are pleased with our start to 2012, and encouraged by the positive momentum that we have experienced through the first four months of the year. The first quarter and early part of the second quarter are usually a quieter period for box office performance. So it is exciting for us to be heading into the summer blockbuster season with so much wind at our backs. In addition to strong box office results during the quarter, we made important progress on several strategic initiatives,differentiation, technology, and our new brand campaign, which is launching imminently. Our progress related to these three key initiatives was of great interest to our studio and exhibitor partners this week at Cinemacon, the exhibition industry and studio's annual conference. We will discuss all of this today as well as update you on network growth initiatives. But first let me review our first quarter highlights.

We constantly say that the network growth, paired with compelling content leads to recurring revenues, and this really played out in the first quarter. Driven by a near doubling of gross box office, total first quarter revenues increased 23% to $55.6 million. Adjusted earnings per share were $0.06, and reported earnings per share increased to a profit of $0.04. First quarter adjusted EBITDA was $16.4 million, up 82% versus last year. We also increased cash flow from operations by $20 million year-over-year. We believe much of the box office success from the first quarter stems from the halo effect of Mission Impossible 4, being involved in the right titles for IMAX brand. MI 4, Journey 2, and The Hunger Games all generated very strong results for us.

As I mentioned box office momentum from the first quarter is continuing into the second quarter. Our global network has generated $35 million of gross box office through the first three weeks of April, which is up nearly 500% versus the same period last year. The summer slate is kicking into gear as we speak with the international roll out of Avengers, which began two days ago, and the early results are quite encouraging. The movie has been extremely well reviewed, and the early results overseas as I said are very strong, as are domestic presales for Avengers the IMAX experience. Yesterday Movietickets.com reported that 37% of their presales for Avengers tickets were for IMAX theaters.

Segueing into our three strategic initiatives I will start with differentiation. We continue to make strides towards our goal of differentiation whether it is through marketing, content, early release strategies, or utilizing our IMAX cameras or unique aspect ratio, in order to really eventicize the biggest blockbusters. And I think it is important to pause here, because this is what IMAX is all about. IMAX is about setting the highest standards for quality, technical excellence, and being a creative source for our exhibitor and studio partners so that they can deliver something truly unique and special to movie goers.

IMAX differentiation is something that is being embraced by film makers and studios. For example, this year's titles such as Underworld and Titanic have been released with expanded aspect ratio exclusively in IMAX. What that means is a regular movie is seen in more of a letter box 2.40 format, where IMAX is much squarer, varying from like 1.45 to 2.0, which creates a more immersive image, and these films were formatted specifically for that IMAX aspect ratio. Soon we will see Sony's reboot of the Amazing Spider-Man, and Fox's Prometheus, featuring similar differentiation, and we see this trend continuing into the future. The highlight of this summer's slate, Christopher Nolan's, The Dark Knight Rises, will feature at least an hour of footage shot with IMAX cameras, more than any other feature film to date. And JJ Abrams is currently on set filming Star Trek 2, with two IMAX cameras following his and Paramount's success with MI 4. Star Trek 2 is scheduled to open in May 2013, and will mark the third consecutive year that at least one tent pole title has been shot using IMAX cameras. This streak is a first for us and for the industry, and one that we plan to continue into the future. A number of other films are also being differentiated using IMAX camera or aspect ratios unique to IMAX, but those projects have not yet been formally announced.

The topic of differentiation also brings me to IMAX early release strategies, which I know you are all curious about. In Russia, as we speak, Disney is utilizing the early IMAX release strategy for nationwide exclusive one-week run of Avengers in IMAX before the film opens in all formats in Russia on May 3rd. Domestically as we said before, we and Paramount are very pleased with the success of the MI 4 release strategy, and we continue to anticipate future IMAX early releases. We believe that incorporating some kind of IMAX DNA, such as the cameras or the aspect ratio, is one of the key ingredients to ensuring the success of an IMAX early release. Also key to the strategy is seeing the film in its entirety, and believing that it will benefit from the positive word of mouth that an IMAX early release generates. Between this fall and next summer, there are a meaningful number of titles that could be candidates to incorporate an IMAX early release window into their marketing and release strategies, on that point stay tuned.

Moving on to our second key initiative, this week we hosted several demonstrations of an early prototype of our new laser digital projector at our Santa Monica office. Our new IMAX laser projectors will present greater brightness and clarity, a wider color gamut, and contrast that produces deeper black ranges, and will consume less power while lasting longer than existing digital technology. Three of the major studios were in attendance for the demo, as well as about 20 exhibitor partners from around the global, both institutional and commercial. The feedback from these demonstrations was extremely positive. We had a similar demo strategy when we developed our digital projection system back in the fall of 2007. And in this case, the feedback exceeded our already high expectations. On the marketing front, we are just a couple days away from launching our brand-new campaign IMAX's Believing. As I have discussed on previous calls, we are focused on marketing our brand to gain more brand ownership which is one of our primary corporate goals for 2012. You can can get a sense of the look and feel of our new campaign, and our IR presentation that accompanies today's call.

One example which is launching with Avengers would be one of our posters, which says Watch Superheros or Become One, IMAX is Believing. And that is sort of the heart of the campaign, which is really to convince audiences of the emotional connection in IMAX rather than just the technical attributes. You will notice how we are modernizing the color pallet and the headline nature of the campaign, brings out this connection people have with our brand. These headlines will be in theaters introduced through online, social and mobile media, and at various events like Comic-Con, where we will have a significant presence this July. We begin rolling out the campaign in North American theaters on May 1, and by July we will be in 52 markets across the globe. In fact, we have already met with 22 of our exhibitor partners from around the world, including Wanda in China, and Wanda has already begun to work with our team to bring the new campaign to life in their theaters.

Moving on to network growth, in the first quarter we signed deals for 23 theaters, and installed 16 new IMAX theaters. We achieved an exciting milestone for our Company with the opening of the 500th commercial IMAX theater in the world in Luoyang, China with our JV partner, Wanda. As of March 31, there were 510 IMAX commercial theaters in operation, a 32% increase over the same period last year. As I mentioned earlier this week I was at Cinema Con in Las Vegas. Over the course of the conference, the team and I met with dozens of existing and potential IMAX exhibitor partners. I believe important progress is being made in the key markets we spoke about earlier in the year, such as western Europe and Latin America. We also continue to be encouraged by the potential pipeline of new business domestically, as well as in established international markets.

In greater China, we have 91 total theaters in operation today, up 107% versus this time a year ago. Both the size of our network and the number of JVs that we now have in operation are clearly having a positive impact on our financial results. Our grosses from the rerelease of a single film, Titanic, which generated $9.5 million in two weeks from just 64 commercial theaters in the People's Republic of China, or about 10% of the country's total box office for the film, eclipsed the total box office we generated from China for the entire year in 2009. Our largest exhibitor partner, Wanda, is ontrack to roll out 20 or more IMAX systems this year. And during the quarter, we signed agreements for another eight theaters in China with various other partners.

In 2012, our footprint in greater China is poised to grow by at least 45% versus the end of 2011. As discussed on our last call, an agreement between the US and China was announced in February, which we believe should have positive impacts on our Chinese business. We believe the agreement will essentially do two things. One, it will allow a carve-out for up to 14 additional IMAX or 3D titles beyond the 20 film quota that remains in effect. And two, it will increase the Hollywood film rental fee to about 25% as opposed to 13% to 17% today. As a result, our DMR fees are already beginning to move towards our global rate, rather than the 6.5% flat rate we have historically received on Hollywood films exhibited in China. While there is some language in the agreement that still needs to be finalized, we also believe we should be able to program more Hollywood titles into our film slate in China than we have in the past.

Before I move on, I know many of you have recently read articles about a competing offering in China. This was expected. After all, if you don't expect local competition in China, you haven't been reading the newspapers. As we have faced competition around the world over the last 40 years, and we are familiar with this particular company. As a reminder, we have devoted significant resources over many years to build our infrastructure in China to where it is today, with 40 employees, and created the wholly foreign-owned enterprise, IMAX China. We have 220 theaters either open or in backlog in greater China, and we believe that number will continue to grow. While we always have and will monitor competitive developments very closely, both our gross prospects in greater China, and the appetite for the IMAX experience in China, remain stronger than ever. The reason we have beaten our competition consistently throughout the world and over the years, is that we have superior technology, a world class brand, and are the only end-to-end solution.

Moving to less penetrated markets, in western Europe, we have successfully opened three new theaters with our new exhibitor partner, Cineworld, England's largest cinema operator. In France we generated solid results with our first local language title, Marsupilami, which was produced by our exhibitor partner, Pat Fay. Conversations are ongoing with exhibitors throughout western Europe, including the UK, Austria, the Netherlands, Italy, and Germany. In Latin America, in the first quarter we installed two new theaters in Brazil, one of which is with Cinepolis, one of Latin America's largest exhibitors, and we plan to install another two in the coming months, in the not too distant future our footprint in Brazil is expected to increase to seven theaters, up from two theatres just 12 months ago. While I was in Columbia last week, I had the opportunity to meet with several real estate developers, and to get a deeper understanding of the growth happening, not only in Columbia, but throughout Latin America. The population demographics certainly align with our brand as 70% of Latin America is age 28 or younger. The appetite for our brand is strong with developers, exhibitors, and consumers.

Finally on the domestic front, we still see plenty of opportunity for growth. In particular, recently we have become more open to the concept of installing second IMAX auditoriums in existing IMAX multi-plexes. The second theater in an existing IMAX complex would enable us to capture more spillovers when our theaters sell out, especially during blockbuster opening weekends, it could also help with scheduling multiple titles that overlap, during key times of the year like the summer and holiday season. We are speaking to some of our exhibitor partners about potentially testing this initiative sometime over the next six to 12 months.

To wrap up, Q1 was a great way to start off the year. Important progress was made strategically on key initiatives, and we look forward to getting into the heart of the summer film slate. After Avengers, we go to Tim Burton and Johnny Depp's Dark Shadows, which also stars Michelle Pfeiffer on May 11th, followed by Sony's Men in Black on May 25th, and 20th Century Fox's Prometheus, directed by Wrigley Scott, the prequel to Alien, which will arrive in theatres on June 8. In June we will also release Dreamworks Animation's, Madagascar 3, Europe's Most Wanted in specific European territories where the Madagascar franchise is especially popular, and where 3D family animation has performed well. Then we go to The Amazing Spider-Man which arrives in theaters July 4, followed by Christopher Nolan's The Dark Knight Rises on July 20th.

Beyond summer key titles in the back half of the year includes November release of our first Bond movie, Sony's Skyfall, which is directed by Sam Mendes, and Warner Brothers' The Hobbit directed by Peter Jackson, which we believe will look stunning in IMAX, and will play very well to our core audience. We are seeing early signs of what the size and scale of the IMAX global network can deliver paired with great content.

With that, I will turn it over to Joe, who will take you through the financials

As Rich highlighted, the first quarter adjusted EBITDA as calculated under our credit facility, increased 82% to $16.4 million from $9 million last year, and reflects a 960 point EBITDA margin expansion. Our trailing 12-month EBITDA as of March 31 was $75.1 million. Total first quarter revenues increased 23% in the period. Driving the increase were our recurring revenue segments, which increased 75% over the same time frame, and represented 63% of our total first quarter revenues as compared to 44% last year. Over time, our recurring revenues should increase with the growth of our commercial footprint, and all together these segments come at a higher margin than our nonrecurring segments combined.

Adjusted net income in the first quarter increased 58% to $4 million, or $0.06 per diluted share from $2.5 million or $0.04 per diluted share on the same basis last year. Reported net income for the first quarter was $2.6 million, or $0.04 per diluted share, up from a reported loss of $1 million, or $0.02 per basic share last year, which included a one-time $2.1 million charge, or $0.03 per share related to an arbitration proceeding arising from a discontinued subsidiary.

Our first quarter 2012 results also included a $700,000 charge related to the installation of certain equipment to some of our digital theaters, which will enable them to play future titles, like The Dark Knight Rises, in either and analog or digital format. This charge was included in our IMAX systems business segment. We expect to take a similar charge in the second quarter, and expect to recoup some or all of these costs based on the anticipated performance of the film.

Looking at the business segments, JV revenue increased 190% to $11.7 million in the first quarter from $4 million in last year's first quarter, primarily reflecting strong box office performance in comparison to the prior year period, and the increase in our overall footprint. In total, we ended the first quarter with 265 JVs in operation, a 46% increase over the same period last year. DMR revenue increased 91% to $13.8 million from $7.3 million in last year's first quarter. Gross box office in the first quarter was $121.7 million versus $62.3 million in last year's first quarter, a 95% increase in gross box office demonstrates the powerful combination of network growth and strong film performance.

Our first quarter global per screen average of $247,600 is up over 40% versus last year's performance. We are particularly pleased with the performance of our domestic theaters, which generated per screen grosses 60% above the prior year. And yet again, our international theaters delivered strong per screen results, international per screen averages for the quarter were $304,000, which was up 14% versus last year, and 1.4 times our domestic per screen averages. First quarter revenues from IMAX systems were $15.7 million compared to $22.3 million last year. The decrease reflects the installation of eight new systems and 10 upgrades during the first quarter of 2012, as compared to 11 new systems and 22 upgrades in last year's first quarter.

Gross margin dollars increased by 30% to $26.9 million. As a percentage of revenue, gross margin increased by 260 basis points in this year's first quarter to 48.3% versus 45.7% last year. The increase in gross margin was primarily driven by 264% increase in our JV margin, and a 187% increase in our DMR margin. This was partially offset by a decline in gross margin on IMAX systems, primarily related to the lower number of new system installs, and a year-over-year decline in digital system upgrades margin.

Moving to operating expenses, first quarter cash SG&A from operations was $15.3 million compared to $13 million last year, which includes the incremental run rate impact of our standalone infrastructure in China of $1.3 million, and an increase in marketing expenses of $860,000, specific to our new brand campaign. Traditional stock-based compensation which excludes variable share awards was $3 million compared to $2.1 million last year. We currently anticipate full year SG&A from operations of approximately $69 million and $13.5 million of traditional stock-based compensation expense for a total of $82.5 million in SG&A. Reported SG&A was $19.1 million, and includes a charge of $782,000 from variable stock compensation.

Research & Development expense was $2.6 million compared to $1.9 million last year. We now expect full-year cash R&D expense of approximately $12 million to $13 million, plus $2 million in amortization expense, which primarily reflects our development of a laser-based digital projection system. During the quarter, we signed agreements for 23 systems, and installed a total of 26. Our backlog at quarter end consisted of 261 theater systems versus 263 at the end of last quarter, and 283 systems one year ago. The breakdown between system type is included in the back of our earnings release.

For the second quarter of 2012 we expect to install 10 to 12 new sales sales-type lease systems, and we also expect to install seven to nine JV theaters in the second quarter. As Rich alluded to, there is a significant level of activity going on, and we expect to increase our installation outlook for 2012 by our next call. Since we only discussed installations from existing backlog, and we do not predict systems that may get signed and installed within the next three quarters.

With that, I will turn it back to Rich for closing remarks

Thanks, Joe. Again, we are very pleased with the positive momentum we are experiencing at the box office,which has continued in the first quarter and into the second quarter. Network growth which drives recurring revenue, higher margin, and increased cash flows was demonstrated in the first quarter, and we look forward to building on this over the longer term.

With that, we would like to open up the call to take your questions.

(Operator Instructions). The first question comes from Rich Ingrassia of ROTH Capital Partners. Please go ahead.

Thanks. Good morning, everybody

Hi Rich.

Rich, I don't think investors realize how significant the second theater initiative could be, given than there is not a single IMAX multi-plex location with two screens today. But I expect your exhibitor partners might fall back to their old fears of cannibalization, et cetera, can you tell me a little bit more maybe about what kind of data you have to offer, or hope to offer to allay those fears, or how you can otherwise make that business case for the second screen?

I think, Rich, what I said was we are going to test it. And that is pretty easy. We have talked to a number of, a handful of exhibitors and there is interest. And what we will do I think is put it in a second screen in a multi-plex. When you have a film like The Dark Knight open, which will clearly open very strongly, you can open the thing simultaneously in both screens, and I think you would expect very strong results.

I think it is also interesting when you have a situation like now where we have Avengers for one week, and then it carries over in a limited number of theaters, and then we go into Dark Shadows, where one screen can play Avengers, continue to play it, and the other screen would be able to play Dark Shadows. When you look at our business where a majority of the revenue comes from only four or five blockbuster titles a year, you can see being able to utilize the second screen in a very effective way.

I think what we would do with the exhibitors, Rich, would be we would say that if the second screen isn't performing after an IMAX opening, which is most likely sort of the shoulder period, then would you let them go to alternative programming. But the reaction I have gotten from exhibitors so far is kind of well, this sounds like win/win situation. Let's give it a try, and let's see how it works in the real world.

As I said to you at other times, I wasn't for it years ago. Because I felt that our brand wasn't strong enough and we didn't have enough film product to deal it and I was concerned about lower IRRs, since our IRRs in our exhibiting network are about 60% of not counting the film side, if we end up getting IRRs in the 30% range, that is still pretty acceptable and still a pretty good return, I think we can create a win/win.

Okay. Thanks. And on the brand campaign, you have described pretty clearly what you hope to accomplish with consumers. But do you also think it might be effective in pointing out the distinction between IMAX and some of the copycats you alluded to one, for your business partners around the world, or is that not really necessary?

Well, I mean I wouldn't use the word. It is always helpful to gain a competitive edge. But I think what really gains that edge historically and will continue to is consumer demand. And I think there is a lot of low hanging fruit out there. I think brand campaigns, you can't bet on them having immediate results. But in this case I think there are enough people that walk into a theater, and doesn't even know what IMAX is, or understand the differentiation. So I am actually pretty pumped about it, Rich. I think it has a very high likelihood of making a difference. One of the things I didn't mention but as part of the launch is we are actually going to engage the social media, and ask our fan audience to write the headlines themselves, and create contests in describing IMAX, and I think that is going to create additional awareness and buzz around our brand.

Okay. Great. Just finally, if I am breaking down your backlog comments correctly, in addition to what you currently have for the remainder of the year is about 80, you expect 15 to 20 systems to be signed and installed between now and year-end?

We haven't given guidance on that. What we do on that, Rich, is the level of business activity is quite strong. But we never predict what is going to sign and install.

Got it. Thank you.

Thank you. The next question comes from Eric Handler of MKM Partners. Please go ahead.

Hi. Thanks for taking my call. Just a quick question on your statement about the install guidance increasing it next quarter. I think we got a little spoiled last year with all of the big China deals, and the number of very large deals. I wonder if you could give us some color,your signings have declined sequentially over the last two quarters. Just the tone of the market, what may be some of the stumbling blocks in getting some deals signed, and how optimistic you feel for the rest of this year?

We feel pretty optimistic. I went through it in detail in Latin America and China. Went through western Europe and what is going on, there is a lot of activity. It went down from last year because we signed a 75 theater deal with Wanda. I mean we don't have a 75 theater deal every quarter. I feel really good about the level of business activity around our business. When you look at things like 100% increases box office in the first quarter, 500% increases so far quarter-to-date, the summer line-up, those are usually leading indicators of where signings are going to go. And you pair that with active discussions under way, and I feel pretty good about it.

Great. And just a follow-up. The Avengers, which of your big markets do you have that opening up this weekend?

No. It has opened already. It opened in Australia and it opened in Russia. And the results were quite encouraging. For the first opening day, which is a weekday, I think we did around $20,000 a screen. And the second day, there really wasn't much of a drop off. If you follow our numbers, those are very, very strong results. You see results like that out of a Potter or a Dark Knight, or things like that, it opens next weekend in the US.

Great. Thank you very much.

The next question comes from James Marsh of Piper Jaffray. Please go ahead.

Great. Thanks very much. Rich just quick, hopefully you give us a quick update of the timing of the WTO rule changes. There was some scuttlebutt that might be retroactive. I just didn't know if you knew what that language would look like, and how it might be different than kind of the earlier discussions?

I am told that it is supposed to sign shortly, James, but in fairness I have been told that for the last several weeks. But on fairly good authority, so that would be my expectation. China Film has been operating from a splits point of view, as if that agreement has already been signed. So for films that have played in Asia, like Battleship, and like Titanic, it is subject to the new fee structure rather than the old fee structure. And again, I haven't seen the document. But based on intelligence I have gotten, the language is not only expected to be consistent with what I have described, but maybe even a little bit stronger in terms of being favorable to IMAX

Excellent. And then another quick question regarding the laser product, at CINECON NEC was demoing a laser product. I don't know if your people got a chance to look at it. but are there any fundamental differences between what they are doing with their laser light engine, and what you guys plan to do and what you demoed for the exhibitors and the studios?

There are a lot of fundamental differences, James. Some of the things that we are very focused on as I briefly mentioned in my remarks, are the color of black which sounds funny. I will elaborate in a second. And also the contrast and brightness. And by the color of black, I mean when you see black on a screen typically in a regular theater it kinds of looks gray. But the blacker the black looks, the more the contrast shows up in different scenes, and that creates for the viewer just a far superior image. And as far as I know, well certainly no one else has the Kodak proprietary technology which we spent a lot of money buying those patents. So I think we will have an extremely differentiated product, and I think the people who saw it who, some newspapers have started writing stories and quoted them, you should read them. It is just like there can be analysts at one level and analysts at another level, there could be lasers at one level and IMAX lasers.

Understood. And then just one last quick question. There has been a lot of talk at Cinecon about 48 frames per second. I assume it is just a quick software upgrade for your projectors?

It actually isn't a quick software upgrade. It requires some R&D on our part, and requires some cost. And certainly we intend to upgrade a number of projectors in our system to accommodate The Hobbit, Peter Jackson's film, which is shot in 48 frames per second. So as I say, we are going to take part in that, but it is not so simple

Okay. Understood. Thanks very much.

Thank you.

Thank you. The next question comes from Ben Mogil of Stifel Nicolaus. Please go ahead.

Hi. Good morning and thanks for taking my question. So Rich, just two questions. In terms of looking at Latin America, so in North America the exhibitors premium formats, the XDR, PX, et cetera, really haven't been an issue for you, because you obviously roll that out much earlier, when you look at Latin America, Cinemark is being very aggressive with rolling out the XD screens, and in branding them as sort of the way to watch premium format. Can you talk a little bit about how you see that market evolving from that perspective, given that you don't have the sort of first mover advantage that you do in North America?

I have been down there twice Ben since the new year, and not only me, but the exhibitors are kind of amazed by how powerful the IMAX brand is, given the low penetration that we have in that area. And I think of our newer screens, we have been doing around 1.7 million per screen, which is extremely high. I think people have gotten to know IMAX on a worldwide basis, and what I consider to be the key constituencies, the real estate developers, and the exhibitors get the joke that they all, or most of them have operations in other parts of the world.

I think in Brazil, there are 60 malls being built right now, and I think the data from the rest of the world shows that the copycat theaters don't bring in incremental audiences. They bring in a ticket price premium, but not extra people. If you are a mall developer you want something that provides the anchor tenant function and brings people in. If you are an exhibitor, you want people to come in who, incremental people that weren't in your theater before, and you're also going to sell popcorn to, and you are going to keep that and not split that with the studio. So I just haven't seen that kind of resistance.

As a matter of fact, we heard yesterday and I haven't verified this, but we heard through Cinemacon that one of our exhibitors outside of the US has two of the home growns and they are converting them to IMAX. They approached us about could converting them to IMAX. And you talk to pretty much any of the exhibitors, except perhaps for Cinemark and the other the exhibitors acknowledge that it doesn't bring in incremental bodies. Maybe there are unique attributes to the Cinemark system that I am not aware of. But the copycat thing really hasn't brought in incremental bodies anywhere in the world.

Okay. Thanks. And then just to make sure, that 1.7 million box office per screen, that is the Latin American numbers you have gotten so far, correct?

Yes, for the newer theaters is what I am saying. There are some older like institutional kind of theaters that I am excluding.

Sure. That is very fair. And then secondly, when you talk about these sort of specific market releases, I think Madagascar 3 was one you gave us as an example. You obviously have a fixed cost in terms of converting the film into the IMAX DMR. Can you talk from a box office perspective, how small a box office you could realistically, how many few countries can you realistically do this in and still make it worth while? Like could you do a film in Russia alone, and make that worth the conversion costs?

There is no question in Russia alone it would work, because of their box office. For example we are doing a Russian film next year, Stalingrad. But the cost is variable on the DMR, and in fact it is lower on animation than it is for live action. So Madagascar 3 won't be that expensive for us to convert, and Russia is actually one of the key markets we will release it in, where CGI 3D is extremely popular. So we generally won't go into these things unless we think we will at least break even or make money on them.

The one exception might be in places where we are hoping to grow the market so I think I discussed on the last call how we were going to do DMR Bollywood in India, as a way to spur growth in that market, and we did this limited release in France on Marsupilami, which really isn't a money maker. On the other hand, digital only releases, a digital production like CGI is a lower cost for us to convert, significantly lower but the DMR process we take film and we convert it to digital, then up res it, then we change it back to film. When you talk about digital only, you don't have to do the first step or the last step. So the costs are lower.

Okay. That is great. Thanks again.

Thank you. The next question comes from Aravinda Galappatthige of Canaccord Genuity.

Good morning. Thanks I have questions for Rich. I know you mentioned a little bit about the Chinese competitor to IMAX, from your perspective from what you see in the technology, is there anything about the technology that has surprised you, in terms of the sound or the resolution? Obviously it seems to be a step ahead of some of the North American exhibitor branded, the XDRX type products. Are there any similarities or differences you see with IMAX that have surprised you there?

Well, when you say seems to be a step ahead, I believe there are two theaters in operation. And the source of the information was from the Xinhua News Agency, the Chinese state-owned news agency, so I really wouldn't draw that conclusion necessarily. Some of our people have seen it, and think there is a significant differentiation with IMAX. So I don't necessarily buy the premise of what you are asking in your question. I think IMAX is IMAX, and we are constantly evolving and we have laser technology is the next thing down the road.

And as I mentioned during the last, starting at the beginning of this year going through the end of next year, we have close to ten films that are going to have specific IMAX attributes to them, including different aspect ratios, and film with cameras. We have a 45-year brand. So as I said, in China, when Blu-Ray came out, China film launched a product called Red Ray,and it wasn't that successful. I am sure there is a niche for this product somewhere, and the market will tell how broad that niche is. but I don't think it is going to really affect IMAX's growth prospects in a material way.

Okay. Thanks for that. And then just my last question on Europe, obviously you are making an effort to sort of try to get more traction in terms of new signings, et cetera, there. And obviously the box office performance has a lot to do that. Is there any commentary you can give us on how the box office has been fairing in Europe? Obviously, not as strong as China, et cetera. But judging by the international numbers, it looks like it is fairly strong. Is it sort of better than the domestic numbers, or how significant has improvement been in box office there?

There has been a significant improvement. But I don't want to mislead you. Europe has still been lagging behind the rest of international, partly it was the kind of films in the first quarter. I think that Avengers opened I think in the Netherlands and France, to very very strong numbers, as strong as the rest of the world. But given the economic situation in Europe, there are certainly challenges that are more significant there than elsewhere in the world. So Spain's box office, for example, and Greece's box office is quite weak. The UK's box office is quite strong, and as I said for Avengers, the Netherlands and France kind of blew the cover off the ball.

Okay. Great. I will leave it there. Thanks, Rich.

Thank you. The next question comes from Stephen Frankel, Dougherty & Company. Please go ahead.

Good morning. So Rich, you are talking about adding proprietary elements which is a great part of the strategy. Is there anything you can do specifically to increase the number of films shot with your cameras?

Sure, there is, Steve. And part of it is happening organically already. As I said, in addition to The Dark Knight and Star Trek, there are probably three or four films that we sort of have a handshake already to be using our camera that we haven't announced yet, and some of those films are outside of the USin some of the foreign territories. So that is just happening on its own because of box office.

The second part of it is we can invent better cameras, digital cameras that are easier to use, quicker reload times, and that is actually strategic initiative that we have underway this year, and I would think by the end of the year, we probably would have a better digital camera. In fact, one of the things that makes us unique as a company is our relationship with the film makers. So we haven't kind of gone out and invented camera and built it and they will come. Instead we are meeting with film makers and figuring out the kind of features, and things we can do to make them want to use it even more, and we are in the middle of that process.

Okay. Great. And then on the install guidance, it looks like three sales-type leases moved out of your guidance for this year, when I look back at last quarter's slide deck?

Steve, this is Joe, it has basically remained static from where we were. What you may have is if you are rolling forward the network, what you need to factor in is that there were a handful of closings during the period.

Okay. And as you look at all of the signing activity, or all the pipeline activity you have been talking about, is there anything in particular that has kind of stopped it from closing as quickly as you might have liked, or any event that, like a film or two they need to see at the box office before they step up and sign deals?

Steve, so if you look at last year compared to this year and you put Wanda aside, you have gone from 26 to 23. There is a really strong level of activity going on, and I think that Joe's giving me a look. Am I not saying it right? I am right about that.

Absolutely

I am right about that. When the three signings happened the last day of the month or the first day of the next month, really doesn't have to do with any kind of global trends. It has to do with whether a guy happens to be on vacation, or the second signatory isn't there. There are no trends, in my opinion, that have affected our signings outlook right now.

And lastly on China, assuming that the WTO agreement gets signed fairly quickly, how much of a pipeline of additional Hollywood films do you have to bring to bear to bring into China this year?

Well, all I can say to you is that last year we had about 12 Hollywood films in China, in addition to one or two indigenous films in China. In the US we had 20-something films, so that is the gap. Now the good news and bad news is the 12 included most of the blockbusters. So I don't really expect you will get in a lot of block busters. On the other hand, you will certainly get films in the shoulder period, either through the 3D window or the IMAX window. I don't know exactly what that number is going to be, but it will bring us closer to the US number.

Okay. Great. Thank you.

Thank you. The next question comes from Jim Goss of Barrington Research. Please go ahead.

Thanks. I have got several questions. First, you mentioned the increase in the overall studio take in China from 13% to 25%, which provides some potential upside on the DMR. On the flip side of that, I was wondering if you perceive there to be any push back at all from the exhibitors, as to either the DMR rate or the split on the joint revenue sharing agreements in the domestic markets or any other markets?

Well, I mean with the exhibitors, Jim, the splits are contractual. And, no, I don't anticipate any push back. Because I think the increase in the film take rate isn't coming out of the exhibitors in China, it is coming out of China film as a distribution fee. So the exhibitors are keeping the same percentage of box office that they had before. So I don't anticipate any push back on that.

In terms of what I think was the second part of your question on the DMR side, I mean we have had 12.5% since we launched DMR, which is, I don't know, about a decade ago. It hasn't changed. The demand remains very strong. We are offered many more movies than we are able to do. Film makers really want to be in the IMAX business, and I really don't see any short-term pressure.

Okay. That is good to know. And my second one is recognizing that IMAX is very much about its proprietary technologies, I was wondering if you were at all intrigued with the Dolby Atmos initiative? They were announcing at Cinemacon, and whether there is any chance that on that audio side that that might be something worth incorporating on a limited basis, to see if that would further enhance your experience?

Jim, I was actually very impressed with what Dolby is doing. But theirs is a much lower cost solution for the mass market. And in fact, what we do is more sophisticated than that. And in fact, this year, we introduced to our sound system realtime tuning of the speakers, so if one show has 200 people in it, and the next show has 400 people in it, the sound dynamics are very different. And by the way if half the people don't like the movie, and they walk out, the sound dynamics change in the middle of the movie. So although I am very impressed with what Dolby did for the mass market, I don't think it is as sophisticated as what IMAX is doing in its market.

Okay. Good. And the last question, I was wondering as sort of a variance on the early release schedule issue, would you ever lead into a big sequel or series, say The Dark Knight Rises, with the beginning of the week being the first couple of movies in the sequence, so you did Batman Begins and The Dark Knight leading into The Dark Knight Rises?

We talked about that, Jim, and think it is possible in certain circumstances to do that. I think the issue is one of marketing because our networks doesn't have thousands of theaters, so it would be a fairly high cost in doing that. But I could see as our brand efforts expand, and as our reservoir of names and Internet social media connections improves at some point maybe being able to do that, but probably not right away.

Okay. Thanks very much.

Thank you. The next question comes from Martin Pyykkonen, Wedge Partners. Please go ahead.

Yes thanks, good morning. A couple of things on the early release, I am curious what sort of conversation is going on, I characterize this with MI 4 expectations coming into it were certainly raised with the performance and the early release and everybody is happy, the studio is watching. Is there discussion going on for almost any film, or is it more films that maybe need an extra push in marketing and early release, I was just curious if they are clamoring for early releases, and you are playing hard to get to some extent, or if it is a very rifle shot approach for future films, without naming titles but just how you approach it?

Martin I apologize because I was probably being too subtle, if you are asking that question, which is there is a precondition to us to doing an early release, which is it has to have IMAX DNA in it. Meaning it has to be shot with the cameras or have a special aspect ratio. There is a precondition to the studios to doing it, which means it has to have a film that they see will benefit by word of mouth coming early. In terms of our precondition, as I said, there are probably six, seven, eight films we are working on right now that could potentially be early releases, because they either have the special aspect ratio, or they are being filmed with cameras. From the studio's point of view until the movie is completed or at least pretty much locked, they can't determine whether it is going to benefit from an early release or not. So think of it as an airport, people circling. There are a lot of planes circling right now. But until the movies are done, they can't make that decision. So I would expect there would be early releases, but they won't be announced until closer to the release date of the film.

So I know every film might be different but would an average be say that it doesn't happen until within a month of release until the studio sees how it is tracking to the extent they are interested?

No. I don't think it is a month. I don't think the tracking, I am sorry. I think it could be a month or two, something like that.

Okay. And then on the Latin American deal flow, I know you do I want to put out guidance and you are certainly not going to raise an addressable market number, but I am just curious where the master license was redone, are we approaching any sort of a tipping point, if you will, say for the back half of the year, where deal flow across the continent might start to open up more, or is it going to be bits and pieces would you say?

Well, I think it is a little bit like China where you spend some time building the ground work, and as I said twice, I have been there twice. I actually met with a number of South American exhibitors at Cinemacon. We hosted a dinner where we had 24 South American exhibitors, and there has never been an event like that before. There are a number of things under discussion.

And if you look back on China as an example, it didn't go from like zero to 200. It takes a little while to ramp up. So I am not predicting this, but by way of magnitude, whereas last year we did three or four signings in South America, I would guess this year could be 10 or 15, and then next year could be 25. Again, please don't take that as formal guidance, but I am just trying to give you a sense of the way I see it playing out

That is fair. Last question, just on Avengers after it opened and then you get Dark Shadows obviously on May 11, I don't know if you said this, but as of May 11 weekend what percentage of domestic screens will still be running Avengers versus starting Dark Shadows, can you say on that?

Yes. There are 75 screens will still be playing Avengers, and international pretty much has a two-week run everywhere Avengers.

Okay. Thanks

And there are 92 international runs on the pop, by the way.

Okay. Thank you.

Thank you. The next question comes from Robert Hoffman of Princeton Opportunity. Please go ahead.

Good morning. Thanks for taking the call. Quick question on your flexibility, and it is almost following up on Martin's question. If Avengers turns out to be a fabulous movie, and Dark Shadows is not, sort of similar to what we saw with Hunger Games and Titans, what is your flexibility in terms of swapping back, and is that changing over time? Is that an area that you can negotiate differently going forward, now that you are pretty much pure digital?

I am not sure we can negotiate it differently. But as a practical matter, I think it has become much easier to work around. So using your example, Wrath of the Titans opened pretty well, and did decently for IMAX in the first weekend. But over time it went down quicker than I think we or Warner Brothers would have liked. As a result we opened Titanic on only about 75 screens at the time. But by end of the second week Titanic was on most of the networks certainly on more than 200 screens, and Hunger Games came back, and Warner was quite gracious in their willingness to work with us.

And I think all of the studios kind of get it, they have relationships with exhibitors, we have relationships with exhibitors, it is not necessarily a contractual thing. But I am really glad you asked that question, because I think when you look at how our business used to run, if you picked a good movie, it ran and it did very well and if a movie didn't work as well, you stayed with it for perhaps longer than you would want to. But because digital allows the flexibility for $150 to pop in a different version of the film, versus $30,000 in the print world, it is much easier for us to kind of go back and forth. Soyes, there is more flexibility.

Great. And kind of a completely different question, with the laser ability to improve the large screen market, would you ever envision yourself doing JVs with kind of the museum market? Would that ever make sense?

That is actually definitely a part of the plan, and we have had special screens, I didn't mention this. But in fact, some of the people who saw the laser technology were museums. The museums typically have larger screens, so they would be a natural market for it. So the answer is yes, that will be one of the focuses for us.

Great. And if you had your druthers, would you rather have a JV or a purchase, if Liberty Science Center wanted to put the new system in?

It depends entirely on the characteristics of the particular institution. So if they do lots of people, and we get comfortable with the risk and the attendance, we would rather do a JV. If it is a more risky proposition in a more remote area, we would rather do a sale. So it is just a risk/reward analysis.

Okay. Great. Thank you very much.

Operator, if we could just take one more question.

Thank you. The last question will come from David McFadgen of Cormark Securities. Go ahead.

Just on China, could you tell us how many theaters in the backlog at the end of Q1 are designated for China, and then over what time frame do you expect to take to be able to install all of those?

We are getting that for right now, David. It is about 130, but I think about 40 more this year, am I right about that? 35 or 40, something like that this year. Wanda alone is 20, that is just a guess it will be around 30 to40 this year. One of the characteristics of China is a lot of the theaters go in new build. So Wanda is the largest mall developer for example in China. We are in virtually every one of their malls. And by the way at Cinemacon this week, I spent a lot of time with the CEO of Wanda, and he told me that the IMAX theaters were working very well in virtually every one of their malls, and virtually every one of their malls was working well. So probably over the next two or three years, the vast majority of that backlog will roll out, David.

Okay. So just to clarify that, so this year you are looking for 35 to 40 installs in China?

I don't know exactly. As I said, that is just a guesstimate. I know it's 20 alone with Wanda. Heather is trying to find it as we are talking. Just give us a second.

Can I ask you another question just on that?

Sure.

So as you said, most of these theaters in backlog for China are for new builds. How long does it take to actually build a theater from start to finish in China?

In China?

Yes.

First of all, to answer your question 35 to 40 so my recollection was right. In terms of building a theater in China, China is one of the fastest places in the world you can build something, because there is obviously so much labor and the labor is reasonably priced. This is just anecdotal. I am guessing, David, it is certainly less than a year. It may even be six months. But I was over there for an event when we announced the Wanda deal. And the night before, it was literally a barren ballroom, and the next day they had constructed the most amazing set I had ever seen. So they really can do things very quickly. So again, this is just my guess, but I would think they could probably do it in six months. You have to remember though, a lot of these are part of malls, so you can't just look at it in terms of how long it takes to build the theater, it is how long it takes to build the mall.

We signed the 75 theater deal in March, and then we beat our 2011 guidance in three months.

Last year the intention was they wanted to open quicker than we thought was feasible, and it wasn't from a technical point of view for us. It was more we wanted to make sure the marketing was in place, and people are trained and the operations are right. But they were actually pushing us harder.

Okay. And sorry. If I may ask one other one. Just on China again. If, for example, Dmax does have some success in the market, I guess the market would probably be big enough to allow you to continue to grow quickly, wouldn't it? And how would we know if Dmax is having an impact on you?

Yes. I will give you an example when Cinemark announced the first copycat theaters in North America, I had actually had the statistic and I don't remember it exactly, but I think we had something like 139 IMAX theaters, and as Dmax has gone along, we almost doubled our presence in North America, a little less than that, during the last two or three years while Dmax opened their 50 theaters, XD opened here, all of these anachronisms trying to copy our name confused me. I apologize. But as they opened their theaters, our growth was roughly double what theirs was. So if you look at the growth of our backlog and the number of signings, it appears like the market is big enough. And in fact, in the US, kind of the copycat market has been seen by most of the exhibitors as a supplement to IMAX, not a replacement. So our biggest clients like Regal and AMC also have those theaters where they can't put an IMAX theater in. And in fact, we have been told by China Film, that they see their large screen solution as a supplement to what IMAX is rather than as competitive or replacement.

Okay. Thank you.

Okay. So thank you all for being on the call. I don't underestimate the power of momentum. In 2010, it was very powerful for us, as you all know. In 2011, with the reliance on family entertainment films which weren't performing, momentum kind of worked the other way. And the momentum we have seen in the first quarter and then accelerating in the second quarter and heading into the summer movie slate seems to be quite good. It is the movie business so you never know what the future holds. But I feel the wind is at our backs, and quite good about where we are standing today. So with that, thank you all for being on the call.

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