Imax Corp (IMAX) 2012 Q4 法說會逐字稿

Good day and welcome to the IMAX Corporation fourth 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.

(Operator Instructions)

Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Teri Loxam, Vice President of Investor Relations. Please go ahead.

Thanks, Michelle. Good morning, and thanks for joining us on today's fourth quarter 2012 conference call. Joining me today is our CEO, Rich Gelfond; our CFO, Joe Sparacio; and Rob Lister, Chief Legal Officer. Also here today to join us for the Q&A portion of the call is Greg Foster, Chairman and President of IMAX Entertainment.

I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking, in that they pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes.

During today's call, references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and the definition of these measures, as well as reconciliation to adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in the morning's press release.

The full text of our fourth quarter earnings release, along with supporting financial tables, is available on our website, 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, Teri. We've often discussed how our business model is quite straightforward; grow the network, maintain per screen averages, and control costs, which results in higher recurring revenues, margin expansion, and bottom line growth. In the fourth quarter, we executed on all key aspects of our business, forging a strong finish to a successful year and proving the operating leverage inherent in the business model. A key driver of our growth is the expansion of our network, and we continue to see significant demand for new IMAX theaters in regions around the world. In the fourth quarter, we signed deals for 28 new commercial theaters and installed 43 new theaters, bringing our total commercial network to about 600 theaters operating in 53 countries. To give you some perspective on the rapid rate of growth in our network, we opened The Dark Knight in 2008 on 135 screens; and four years later, we played The Dark Knight Rises on over 550 screens. In addition to reaching an important network scale in 2012, we also achieved scale in our film portfolio, having released a total of 35 movies,with 15 of them on screen in the fourth quarter.

Importantly, in 2012, we increasingly focused on the strategic programming of our global theater network. This includes optimizing the film slate to fill gaps in international release calendars and to cater to cultural preferences in each market, including Hollywood films, as well as local language films. This emphasis on maximizing the gross box office for our international film portfolio is critical for IMAX, as the international markets are the drivers of our network growth going forward. This global approach helped propel our portfolio of films to deliver a record $152 million in box office in the fourth quarter and $621 million in box office for the full year 2012, an increase of almost 50% from 2011. In addition, our average global per screen average rose to approximately $1.2 million in 2012, from about $1.1 million in 2011.

A combination of both network and box office growth helped to drive strong recurring revenues from our joint revenue sharing and DMR businesses in 2012 and resulted in a 20% total revenue growth compared to the prior year. The solid top line, along with disciplined cost control, translated to $107 million EBITDA in 2012, which was 58% higher than the 2011 and full-year adjusted EPS of -- than 2011 and full-year adjusted EPS of $0.80, a 95% increase over 2011. Just as important, the scale of our business also translated into significant free cash flow.

But 2012 was not only about financial accomplishments. We also were proved successful on a number of strategic fronts. We further strengthened our studio relationships, both in Hollywood, as well as with local studios in international markets, and intensified our focus on our global film strategy. In addition, China entered into an agreement with the WTO which led to both higher DMR rates for IMAX and specifically increased the number of IMAX films that can be released to the country. We also rolled out our IMAX brand campaign, and we saw an increased demand and use of IMAX differentiation in films, including the use of our proprietary IMAX cameras, our unique aspect ratio, which is specifically formatted exclusively for IMAX theaters and early release windows. These are just a few of the strategic successes from 2012 that have laid a strong foundation from which we can continue to execute our business plan in 2013 and drive growth over the long term.

Now let's turn to 2013. I have laid out three key priorities for IMAX this year; penetrate, differentiate, and scale. First, penetrate. In terms of penetration, we've quadrupled our commercial network over the last five years, but we still have plenty of runway for growth, with almost 65% of our 1,700 identified zones still available, the majority of which are in underpenetrated international markets. Our signing activity continues to be strong, with 142 total signings in 2012, 121 of which were for new commercial theaters. This results in a robust backlog of 276 screens, compared with 263 at the end of 2011. And we have started off 2013 with a lot of activity and opportunities around the world, as well.

We expect the Asian market, including China, to continue to be a source of growth for us in 2013 and beyond. We are pleased with the pace of new installs and signings, with almost 50% of our signings last year from the Asian market and about 30% of them across 13 different partners in China. We ended the year with 108 commercial theaters operating in greater China and 122 more in backlog. This brought our total number of commercial theaters open or in backlog in greater China to 230 theaters. Our PSA in greater China in 2012 of $1.2 million was slightly lower than expected, impacted by delays in release dates in China and the release of multiple major Hollywood movies on the same day in China. At the same time, we remain optimistic about our long-term potential in China. We believe that favorable market trends in China, including government initiatives to foster cinema screen growth in China, and per the WTO agreement to increase the number of Hollywood films, particularly IMAX 3-D released into China, bode well for additional IMAX growth long-term.

Moving on to Europe, we saw strong network growth and per screen averages for both the UK and Russia in 2012. We finished the year with 20 theaters in the UK, which average an impressive PSA of over $2 million each, up 45% over 2011. With strong partnerships with exhibitors such as Odeon and Cineworld, we expect this region to provide further growth for us. Our network in Russia also continued to deliver strong growth. We ended the year with 32 commercial theaters in Russia and the CIS, with a PSA of about $1.8 million. Given our 105 identified zones in this region, we expect to see continued penetration in 2013. We also think there will be a continued opportunity in other European countries and regions, such as Scandinavia and many other areas where we are currently underpenetrated.

Latin America is another area of focus for 2013. To begin with, we have further restructured our agreement with RACIMEC, our South American partner. As a result, IMAX will now be directing the sales activities in Brazil, Colombia, and Ecuador, and RACIMEC will have direct sales activity in the remaining Latin American markets. As part of our zone analysis, we've identified 175 potential zones in Latin America, with 54 in Brazil alone. At the end of 2012, we had 6 theaters in Brazil, which delivered a PSA of about $1.5 million. Given the strong results we've seen so far from these theaters, we expect they will act as reference theaters and help us further penetrate this market.

Turning to India, we had three commercial theaters open at the end of 2012, and expect to open several more before we're scheduled to play our first Bollywood title, Doom 3, near the end of this year. My trip to India last November and December was very enlightening. Although India comes with its own challenges, I came back more optimistic about the long-term potential for IMAX in India. We're in business with four of the best exhibitors in the region, and they are building world-class malls in more upscale areas. These areas seem to garner significantly higher ticket prices than the averages we generally hear about. In fact, the average ticket price at our IMAX theaters in India are closer to $8, and they've been doing strong business so far.

While the majority of our growth opportunities going forward are expected to be international, we continue to further penetrate the domestic market, as well. In fact, over one-third of our 2012 signings were in the domestic market, with increased commitments from some of our largest partners, such as AMC and Regal.

The next goal for the year is differentiate. In 2013, the Company will try to further differentiate in terms of technology, films, and our brand. We remain excited about the development of our laser technology. We continue to expect to have systems to demo by the end of the year, with the full commercial rollout expected to begin in the second half of 2014. As you know, one of the big drivers for laser has been to transition our largest film-based commercial theaters to digital, so that they have the ability to play our full portfolio of films. Many of these large film-based theaters are some of our most profitable in the network, even while playing only a handful of films each year. In 2012, the film theaters missed out on some of the biggest titles, such as Avengers and Hunger Games, which were digital-only releases. In addition, due to the proliferation of digital, film stock is becoming more limited.

So in an attempt to get these leaders to digital as soon as possible, we've created an interim solution to convert a number of these theaters, the film-based theaters, to our existing xenon-based digital projection system before ultimately upgrading them to our laser system, once it becomes available. We've piloted this effort late last year with the BFI in London, as well as with our theater in Jordan's Furniture in Boston. Given the success of this interim solution at these two venues, we've decided to roll it out further to some of our other high grossing film theaters in the first half of this year. We have 5 theaters that have already installed the interim solution, and we currently have agreements with 9 additional film theaters to transition to the interim digital solution this year. In addition, we have recently begun our laser sale efforts, and we have signed 7 laser deals so far, including the 3 theater deal with the Smithsonian that was announced last month.

Further IMAX differentiation of films that we present is also important to us, and is being embraced by more and more film makers to bring their artistic vision to life. For his Star Trek Into Darkness, J.J. Abrams filmed scenes outside of the Starship Enterprise with IMAX cameras. For Catching Fire, the next Hunger Games series, Francis Lawrence shot scenes inside the Hunger Games arena with our cameras. Joe Kosinski will utilize our unique expanded aspect ratio for Oblivion, starring Tom Cruise, which will be released to IMAX theaters one week ahead of its broad release. Similarly, Star Trek Into Darkness will open two days early in IMAX theaters. We believe the early release strategy increases the event nature and marketing around the films, and ultimately translates to higher box office results for us, as well as our studio and exhibitor partners.

We've been talking a lot about our international film strategy, and I think it is worth my spending a couple minutes to give you additional color on this strategy, since we think the global nature of our business further differentiates IMAX. As I mentioned before, we have started to strategically program our global theater network by cherry-picking the best movies for each country. This strategy has started to materialize in higher international box office for IMAX. As a result IMAX is no longer solely tied to the domestic performance of Hollywood titles; and in fact, for IMAX, you'd be misled if you are focusing too heavily on the domestic market.

The five days around the release of Diehard just this past weekend provide an interesting data point. Diehard did well in IMAX domestically, with about $4 million in IMAX box office over the first five days. But in fact, that is just a portion of the almost $10 million in total global box office for IMAX last weekend, which was driven not only by Diehard, but also by the nine other titles that we were playing across our network, including a local language film in China. We've been playing the local film, Journey to the West, in China over the Chinese New Year. And while the film may be below the radar in North America, it is one of the highest grossing Chinese films ever made and has grossed about $7 million in IMAX so far, which equates to a PSA of approximately $70,000. Now that is not to say that every local movie will perform that well for IMAX, but I think that's a good example of how we are strategically programming our theaters in the international markets and the impact of globalization to IMAX.

Moving on to our brand, we look at the IMAX brand as a differentiated asset for the Company. Our brand resonates around the world, and is known for excellent quality and a premium entertainment experience that just can't be found anywhere else. We will continue the brand campaign that we started to roll out in 2012, and plan to drive further brand awareness and loyalty, especially internationally, where we expect the majority of our future growth to come from.

Finally, our third Company priority for the year is scalability. Over the last several years, we have dedicated our efforts to executing the rapid growth of our theater network and our film portfolio. We have now begun to further focus our attention on promoting efficiency in our business and to slow the growth of SG&A. For example, we are more heavily scrutinizing our vacancies and hiring decisions. We are more closely managing our meetings and travel practices, and we are implementing more effective systems to improve our data input and analysis. These are just a few examples of the ways we are becoming more efficient and more disciplined in our SG&A spending.

So to recap, 2012 was a great year, financially and strategically. We continued to grow the network, increased our per screen averages, and controlled costs, which translated into expanding margins, bottom line growth, and ultimately, free cash flow generation. Our growth opportunity in underpenetrated international regions, combined with our ability to program each of those markets individually, positions IMAX as s unique player in the global entertainment industry. And with that, let me turn it over to Joe to go through some of our financial highlights from the quarter.

Thanks, Rich. We finished the year off in a very strong fashion, with quality growth in Q4 across our top and bottom lines, as well as margin expansion resulting in another quarter of free cash flow generation. Total revenues of $77.8 million in the fourth quarter increased by 17% compared to last year, helping drive a 42% gross margin growth, 29% growth in adjusted EBITDA, to $27.4 million, and a 77% increase in adjusted EPS, to $0.23 for the quarter. We expanded our commercial network by 20% over the last 12 months, and this, along with the strong PSA of $264,000 in the quarter, resulted in $48.1 million in recurring revenues, or growth of 58% over the same period last year.

Recurring revenues also drive an improvement in our total gross margin percentage in the quarter, which increased 54.4%, up nearly 1,000 basis points compared to 44.7% in Q4 of last year. Margin expansion was primarily driven by the recurring DMR and joint revenue sharing business segments. DMR margin was 70.9% this quarter, driven by strong box office performance and lower DMR costs, resulting from the scale of the DMR portfolio and the digital nature of the majority of films exhibited in the quarter. The Q4 joint venture gross margin of 52.6% also showed significant improvement over the 45. 5% in the fourth quarter last year, even after accounting for a number of hybrid systems installed during the most recent quarter. On an absolute dollar basis, our JV margin of $9 million in the fourth quarter more than doubled from the $3.8 million in Q4 of 2011. IMAX System's revenue of $24.3 million in Q4 was down from the same period last year, reflecting the installation of 14 full new theater systems under sales and sales-type lease arrangements in the most recent fourth quarter compared to 17 in the fourth quarter of 2011. The Company also installed three digital systems under upgrades under a sale and sales-type lease arrangement in the fourth quarter, compared to one upgrade last year.

Moving on to operating expenses, SG&A, excluding stock-based comp, came in at $19.7 million in the fourth quarter, bringing our full year SG&A to a total of $68.4 million. Fourth quarter SG&A was $5.3 million higher compared to last year, primarily due to staff-related expenses, as well as foreign exchange. If you'll recall in last year's fourth quarter, we had a $2.2 million foreign exchange benefit, which was not repeated this year. We started to slow the growth of our SG&A during 2012, and we are looking to further slow it in 2013. We are issuing full-year 2013 guidance that we expect SG&A, excluding stock-based comp, to increase approximately 5% to 8% compared to the full year 2012. In terms of phasing, we expect SG&A expense to be fairly evenly spaced across the quarters in 2013.

Stock-based compensation for Q4 was $2.9 million, with the full year coming in at $13.1 million. We expect stock-based compensation for the full year of 2013 to be approximately $13.5 million. Q4 R&D was $3.8 million, bringing the full-year R&D expense to $11.4 million. Our fourth quarter and full-year R&D expenses were slightly lower than previously expected, due to the timing of some of the expenses related to our laser technology development moving into 2013. We expect our full-year 2013 R&D expense to be about $13 million to $15 million, primarily driven by continued development of our laser technology, as well as development efforts on additional IMAX cameras and other initiatives. We anticipate the phasing of R&D spending in 2013 to be weighted a little more heavily in the front end of the year.

In terms of tax, we finished the fourth quarter with a tax rate of roughly 22%, translating to a full-year tax rate of approximately 27%. Our tax for Q4 and the full year were lower than expected, due to a tax benefit resulting from a reevaluation of certain tax accruals related to international withholding taxes. We expect our full-year 2013 tax rate to be in a range of about 28% to 30%, including an estimated $4 million to $5 million of cash taxes. At the end of 2012, we had approximately $36.5 million of NOLs remaining.

Our strong financials translated to another quarter of free cash flow generation, as defined by operating cash flow minus investing activities, which includes our investment in the JV network expansion. In the fourth quarter, we generated about $7 million in free cash flow, bringing our full-year 2012 free cash flow generation to $38 million, after $23 million in JV investment; or, $60 million before the JV investment. Probably worth mentioning is that the ROI in our JV investments is over 60%, including the DMR take. So, we think this is an excellent use of our cash.

During the fourth quarter, we also paid down our bank debt by $19 million, resulting in $11 million of bank debt remaining on our balance sheet. At the end of the year, the Company had cash and cash equivalents of $21.3 million, resulting in a net cash position of $10.3 million. We recently announced that we expanded our credit facility, which increased to $200 million. Our expanded credit facility, our healthy balance sheet, give us the right level of capacity and flexibility to invest behind our growing business and allows us to make disciplined decisions around new opportunities and shareholder returns.

In terms of our network, we installed 43 new theaters in the fourth quarter, with 14 sales-type installations and 29 JVs, bringing our total commercial network to 598 theaters, of which 316 are JVs. In addition, in the fourth quarter, we signed deals for 38 theaters, bringing our full year 2012 signings to 142 theaters, of which 121 were new theater systems. As a result, our backlog remains at a healthy level, with 276 theater systems in backlog at the end of 2012, of which approximately 80% are scheduled to be installed in international markets. We continue to expect to install approximately 110 to 125 new theaters in 2013. It is important to note that compared to 2012, we expect our 2013 installations to significantly skew towards the back end of the year, and also expect the installs to be much more weighted towards JVs, as we have a number of planned installations in 2013 from backlog deals with AMC, Regal, and Wander, who are our big JV partners.

And finally, to give you some color on our box office performance, we generated $152 million in global box office in the fourth quarter, a 56% increase over the same period last year. Our box office in Q4 tilted slightly more international, with 51% of Q4 box office from the international markets. Our fourth quarter PSA was $264,000, bringing our full-year PSA to about $1.2 million, with domestic PSA coming in at around $1 million and international PSA of $1.4 million. Given our encouraging box office and PSA results in 2012, we are looking forward to 2013 and our diverse global portfolio of films.

To recap, 2012 was a successful year for the company on a number of fronts. Our commercial network grew 20%, to almost 600 theaters globally. This, along with our global box office, which was up almost 50% year-over-year, drove strong growth in our recurring rev business lines, resulting in a 20% increase in revenues and over 95% increase in EPS for the full-year 2012, compared to 2011. While we may continue to see quarter to quarter variability going forward, due to the timing of installs or movie release dates, our portfolio approach to our films, along with our growing network, globally drives growth on an annual basis. With that, Michelle, I'll now turn it over to Q&A.

(Operator Instructions)

Townsend Buckles, JPMorgan.

Thanks. Rich -- or maybe this is for Greg -- it looks like your strategy of increasing DMR releases around the world paid off nicely in the quarter, and this has obviously continued in Q1. How should we think about the number of titles to expect this year? And I would've expected higher DMR fees as a result of the higher output in Q4. So if you could talk about maybe where you've made some improvements on these costs and how should we be modeling these going forward?

Yes, this is Rich. I'll talk about the costs, and then Greg will talk about the number of films and the strategy. On the cost side, one way to think about it is, we have roughly around a $30 million, $25 million, $30 million fixed cost for DMR that we amortize over a number of movies. So if you look at our slate as static, that's where you got the number of about $1 million a title. But as you do incremental titles, and Greg will go into the numbers, but this year we'll do 35-ish, or maybe a little bit more, then the cost per title starts to come down. So I think you'll see when you balance that all out, given the number of films that come out in about the $800,000 a year title -- area, assuming we do that number of titles this year, Townsend.

Townsend, this is Greg. What we're trying to do is balance the portfolio as much as we can, paying close attention to the individual territories and what works for them. So for instance, to give you an example, not only do we have local language titles, like Journey to the West or Jackie Chan CZ-12, but we also are taking some Hollywood titles that we haven't had the opportunity to play domestically and playing them internationally. And an example of that, for instance, would be in 2011, we released two movies that were Hollywood titles that were not released in the US. One was Tangled, and the other was Cowboys and Aliens. And our box office in 2011 on those two titles was a little more than $4 million. In 2012, we released eight titles, and our box office -- those are movies like Life of Pi, Les Mis, Twilight, Bourne Legacy, Total Recall, Battleship, et cetera -- and our box office is closer to $36 million. So, having the opportunity to focus on the needs of various territories has made a big difference. We also, as you know, are no longer playing animated movies domestically, but we are playing them opportunistically in certain markets internationally. And that's just helped us come up with a wide variety of flexibility. And that includes DMR local language titles in places in the next year, in 2013, our first in India, our first in Russia, Japan, et cetera.

Makes sense. And then, Rich, on your increased credit facility that includes a buyback and dividend basket, can you elaborate a bit more on how you're weighing investment in new growth initiatives versus returning cash to shareholders? Do you feel there is room for both, and any timing considerations we should keep in mind?

Well, as Joe mentioned during his presentation, the JVs are getting us ROIs of about 60%. So, as long as we can create 60% return on investments or even lower than that, attractive investments, as a shareholder, I'm quite comfortable all day long making those investments. So I think we have that facility there. I think that once we don't find attractive investments, the concept of dividends or buybacks will become higher on our radar screen. I also think the facility is there, because there are also macro events you can't control. So if for some reason our stock price doesn't reflect the business performance, that's there as dry powder to deal with. So I wouldn't say we have a current plan to use that right now, but I think it's there if and when we need it.

Okay. Thanks.

Drew Borst, Goldman Sachs.

Great. Thanks. I was wondering if you could elaborate a little bit on the Latin American opportunity. You touched on the fact that you restructured the sales relationship down there. I was wondering how you see the growth proceeding in that market over the next couple of years?

I think it's a very attractive market for us. As I mentioned, in Brazil, we only have six theaters open. We spent this last year working with our partner, RACIMEC, in starting to transition to some relationships which we took more of a lead role on. We signed deals this year with UCI and with Synopolis, which are two of the biggest players in Latin America and Brazil. So, based on my experience, when you see -- when you have multiple parties in a market and you have good reference theaters, good per screen averages -- and in fact I think three of the top five complexes in all of Brazil have IMAX theaters in them, those are the ingredients for success. And an example I would give you is England, where a couple of years ago we had 8 theaters, but then we had two major players in it, Odeon and Cineworld; and now we have 20 theaters open and some more in backlog.

So, I think the ingredients are there for there to be a big success, over time. I don't think -- I think when you look at the world, you have to realize that Brazil doesn't have the number of zones that a place like China does. Maybe it's closer to Russia or India. So I think it's a terrific opportunity for us, but I just think that we should keep in mind that there are other really good opportunities as well, some of which I mentioned, including India, including Western Europe. We have no theaters in Germany. We have virtually no theaters in Italy, Greece, Scandinavia. I'm very excited about the opportunity in South America, but I'd say I'm equally excited about the opportunities in India and Western Europe and some other areas.

Great. And then just one other question on a different topic. The PSA internationally is much higher than it is domestically. I think you said it was $1.4 million international versus $1 million US. Can you talk about the factors that drive that differential, and do you think they are sustainable over the long-term?

I do think it's sustainable over the long-term. Some of the factors are obvious. One is higher ticket prices, based on exchange rates. So in places like Japan and in England, you talk about ticket prices that are over $20 apiece. So that's -- unless rates start to vary dramatically, I think that is sustainable. I think there's also more flexibility on the exhibitor side in a lot of those territories, so there's screen sharing. So whereas in the US, if you are playing a film and then another film comes along, the first one comes off the screen. In many international territories, they share screens, so you can play both films. And that's particularly good if you have one film that plays to a certain demographic during the day and another film that plays to a different demographic at night. So I think the existing of that screen sharing is also inherent in that.

Also, I think, although it's hard to quantify this, our brand in certain foreign areas has a much more resonance than it does in North America. And an example I would give you is China. And the reason is, in North America, there was an established multi-plex infrastructure. So people went to movie theaters. And 10 years ago, they went to IMAX's for science or documentary kind of films. So you had to retrain them. In a place like China, we got in on the ground floor, just when multi-plex building was expanding rapidly. So I think when people in China think of blockbuster movies, they think of IMAX. And I think that's driving the numbers.

So I do think that -- I do think it's sustainable. And in fact, as we mentioned, we're starting to spend more marketing dollars internationally. So I hope that will have a positive impact. Greg, do you want to add anything?

No. I think the screen sharing is the key thing. And also, in some of these markets, we don't have as many theaters. So as a result of that, it facilitates having a huge per screen average, because there's total sell-outs in a location, and that only fosters creating more demand for our product in those markets.

Okay, guys. Thanks very much.

Ben Mogil, Stifel Nicolaus.

Good morning, and thanks for taking my question. Can you -- I'm not sure if I can totally get it from the release, how many hybrid upgrades or hybrid JVs did you install in the quarter?

There were 10, Ben.

Okay. There were 10. So when you look at that, is that the -- is the 10 that you installed in the quarter the bulk of -- how many more do you think you have going, and is that some of the better hybrid JV opportunities in the network or down in the quarter?

I wouldn't say the better ones, I just think it was what was scheduled. There were a number of them, and a couple in China. There were a number that were in the UK. And we have a number going forward. So, it's just -- I think you'll expect a similar number in 2013. But again, it's not going to move the needle that much.

Okay.

-- on an immediate financial basis.

When you are looking at Latin America -- so Cinemark, on their call last night, was pretty bullish in terms of how much CapEx they were spending on XD. They didn't delineate between Latin America and US, but obviously a lot of it's going to be in Latin America. What you're talking to exhibitors in the region, can you talk about how they view XD, in terms of when you're talking about things, how they are viewing the two formats? Are you seeing, ironically, Cinemark rolling out XD as being helpful to you in terms of your sales pitch in Latin America?

No one ever mentioned XD to us in Latin America. As I said, we're in business with UCI. We're in business with Synopolis. We're talking to all of the exhibitors. Literally, in any discussion I've been involved with, the word XD hasn't come up.

Okay. And then lastly, I think this is for Joe. When you look at the tax rate going forward -- forget about the cash tax, but the actual GAAP tax rate -- obviously lower in the year in 2012 than you had originally guided for, and it looks like the '13 guidance is lower than what the original '12 guidance was. Is this a mix shift, or is there something else going on, if you will?

No, it's just a migration of our business to different markets. As you move -- as you create more income in international markets where you have a lower effective tax rate, eventually it's going to bring your overall rate down.

Okay. I think that's it for me. Thank you very much.

Eric Handler, MKM Partners.

Hello. Thanks for taking my questions. Two questions for you. First, when you look at China, you've had some very good local language results of late, with Journey to the West, CZ-12, even Grandmasters. Can you talk about -- you seem to be getting about 3% share of the overall screens, but on average, what type of revenue share are you getting in China for some of those films?

And then secondly, when I look at breaking down your box office revenue, your JV revenue was a little over 11% of the box office, so typically above your 9% target. Is there a specific reason that it was above average? And similarly, you had about 12%, nearly 13% for your DMR revenues as a percentage of the overall box office. Is this something that should continue?

For China -- this is Greg -- for China, we're getting 12.5% on local language films.

Joe, do you want to --?

Yes. During the fourth quarter, we installed 10 hybrid JV deals. And under our hybrid, there's a small up front that we get that will roll through income, and then the cost of goods goes against it, as well. It's a nominal margin event. And in those deals, we'll generate 10% to 12% moving forward as a percentage of box office. So that's what created the quarterly skewing, if you will.

And then just going back on China, I know you guys are getting a 12.5% fee, but I'm talking about in terms of the overall box office revenue. So if a film does about $100 million, you're about 3% of the overall screens, but on average what has been your take in terms of the market share of that film?

It's anywhere between 6% and 9%.

Okay. Thank you very much.

Vasily Karasyov, Susquehanna Financial.

Thank you. Good morning. If I'm doing the math right, international PSAs for 2012 went down 5%. So I was wondering if you could talk about put and takes and going forward for 2013? Can we expect growth in PSAs, and what would that depend on? And that's international only, not domestic.

The only reason for that decline last year was China. And as I mentioned during my remarks, and I could -- put mid-life, I could spend a lot of time talking about this. What happened in China is with the changes in the WTO that opened up the more importation of Hollywood films, for the first half of the year, the per screens were well ahead of what they were in previous years. Because the Chinese government elected to try and promote Chinese market share versus Hollywood market share, in the second half of the year, they double dated some films, which means they released The Dark Knight Rises and Spiderman on the same day. So obviously, that decreased the box office potential significantly. So that change in the second half of the year is literally the only reason that the international PSAs are lower.

There's some evidence that that was not a policy that's going to be abided going forward. For example, Skyfall was not double dated with another film. The Hobbit opens this week. It's not double dated with another film. While certain elements of the Chinese government had an agenda to promote Chinese films, a side effect of that was less people went to the movies and less people went to shopping malls, and it wasn't good for their overall economy. So, there's no solid evidence of this, but my belief is that there will be a lot less of that double dating, and we're starting to see it. So if that's the case, I think we'll perform at the level that we performed at before.

In terms of going forward, I think it goes to what I said during my prepared remarks and Greg talked a little about in Q&A, which is we're programming now for 53 different countries. And that includes runs of Hollywood films, but it also includes runs of local films in those countries. So, this year we'll have --I don't know -- six Chinese films in China, we'll have a Russian film in Russia, we have a Japanese film in Japan. So, since the release dates aren't day and date worldwide, I think that flexibility and our relationships with those international studios will continue to give us the leverage to maintain, or hopefully increase, our PSAs in those markets.

Okay. Thank you very much. Do you notice if there is a penetration threshold in a particular territory after which it's harder to grow PSAs in that territory?

We haven't really looked at it that way. I think you can say though, if you look at it over the last several years, the PSAs have been fairly stable on a worldwide basis. And when we go into any given year, the leading indicator that we budget off of is what were the PSAs over the last several years. I think that's the best indicator.

All right. Thank you very much.

Colin Moore, Credit Suisse.

Great. Thanks. Good morning. Just wanted to touch base on digital cameras. You've talked about reduction in film stock, and you're converting the legacy film theaters over to digital. If I understand, you have a digital prototype, but if you could maybe speak to the evolution of the digital cameras side of the things and how that might affect the quality of filming or ease of use?

So there's two parts to that -- this is Greg. The first part is we continue to use our IMAX film camera, the same camera that J.J. Abrams used, the same camera that Chris Nolan used, because it provides just an extremely high level of resolution. And obviously, when we shoot something in film, we can still convert it over to digital. With that said, we do have our digital prototype. It's working very well. We just filmed a documentary movie. The working title is Madagascar. It's about Madagascar and the lemurs. It's a 40-minute IMAX documentary film. And it's the second one that we filmed with that prototype camera, and it was exceptional. The quality of the material is great. We actually just did a test with a filmmaker on -- who's making a Hollywood feature, who wanted to see what the IMAX digital camera looked like for his film tests, for his camera tests, and it was really strong. They were very, very encouraged by it.

So the point is, I think that what we try to do all the time is provide balance and flexibility for the film makers. If the filmmaker wants to shoot a movie with digital, we're going to have digital cameras for them to be able to use. If a film maker wants to shoot with film, we're going to have film-based cameras for them to use. The key to it is, they're using our DNA and they're differentiating the IMAX experience, which is something you can't get anywhere else.

Great. Thanks for the color. And just quickly, I think there's been some other questions in this vein, but more specifically, in China on the PSA, I recognize it's still early in the evolution, but do you have any color on what you're seeing as you do move into new cities and perhaps increase the penetration in existing ones, how that's evolving?

It's really too early to say. We haven't really noticed a material effect. As I said, I think if it wasn't for the double dating, the results would have been similar to the prior year. But, I think it's too early to say.

Great. Thank you.

Rich Ingrassia, Roth Capital Partners.

Thanks. Good morning, everybody.

Hello, Rich.

I apologize if someone asked, because I got dropped out of the call for a period of time here. But Rich, can you say a little bit more about the interim digital solution, the economics there, maybe the financial impact, and how many you expect to install, that sort of thing?

Sure. The reason for the interim digital solution is that film stock is disappearing faster than we had anticipated, number one. And number two, the labs and the price of film stock is going up. So in order to fully supply exhibitors that have film theaters with films would be somewhat costly for us to do that. That's why these theaters last year were playing only 6 films a year instead of 20 films, which included the digital run. So -- I won't say accidentally -- but we had two beta tests of this, one at the BFI and one at Jordan's Furniture, where what we did was we put in a xenon projector, which is our current digital projector. It can't fill the 100-foot screen, but it can go to about 80 feet, and we masked the sides of the screen, and we played some of the digital-only releases. And it did well. It didn't look as good as the film did, but the audience understood that that was the only way to get the film. So we've become proactive in that. And now I think we have 5 in and we have 9 more under contract. But I think we have a target of something like 30 theaters where we would like to try and put in the interim digital solution, so they can play more films and keep audiences happy and we can get more revenues there.

The business model for it, Rich, is that typically, especially where a chain does it, we'll lease it to them on a basis that we make a little bit of money, not a lot of money, more or less breakeven, a little bit more maybe, but we make our money on the film side, obviously, because we weren't going to play a film print there. And then the chain will agree to take that digital projector and deploy it somewhere else, once the laser becomes available. So it will be traded out for the laser, and then they'll put in another one of their theaters in the chain.

So is there any specific reference to a laser upgrade at that theater, I'm in a progression from this interim digital, or is that going to be a separate negotiation altogether?

In some, there are. In most, I'd say there are. In some, it will be a separate negotiation.

Okay. And just quickly, on the laser. Can you talk about production capacity for those systems? Are you yet -- have you scoped demand well enough to know that you can produce to meet it?

Well, if you remember, Rich, we're going to do the larger screens first, because those are the ones with the film prints that we've just been talking about, the ones over 80 feet. So, we'll start with a moderately slow rollout. We're not going to install 40 of them in the first couple of months, because with any new product, you want to get the kinks out of it and you want to sort of roll it out. So I think our production -- it's less about capacity and more about managing the rollout. So I think what we'll do is manage the rollout in a relatively slow way, and then as we get more comfortable with the technology, and ultimately when we develop other versions of it, we'll roll it out faster.

Got it. Okay. Thank you.

James Marsh, Piper Jaffray.

Great. Thanks very much. It seems like there were a disproportionate number of screens that were deployed in the fourth quarter for 2012. So I was hoping you could just talk a little bit about how long it takes those to ramp up to average PSAs. And does the mix of new build and retro fits have an impact? And maybe you could just differentiate between the international and domestic ramp ups, as well? Just any color there would be helpful.

You know, James, I think, as Rich said earlier, you take China, for instance, it just takes time to see how they're going to hit. If the theater is a good theater, generally there's very little ramp up. We'll see the PSAs hit a pretty high level fairly quickly. In a new build situation, it depends. Some new builds will take a little more time to ramp up than others, but it's no different than any other new theater opening. As you are aware, with our JV locations, we contribute with our partners towards a marketing campaign, which helps to promote the theater and the launch of the theater, and that has certainly helped us to hit run rate fairly quickly in those location.

It's also somewhat film dependent, James. So obviously, some people want to get their theaters open for Star Trek, by way of example. Since Star Trek was filmed in part with our cameras, and I think it will be promoted, the IMAX version, because that's the way the film maker sees it. I think if you're opening your theater with that, you'll get off to a faster start than if you're opening your theater with Hansel and Gretel, or -- so I think you can't really generalize.

Okay. And just one follow-up question here. One of the advantages of this laser technology is you could light up really large screens, maybe up to 130 feet or so. Have you guys been in any discussions for these mega-sized IMAX screens, and just any update on how the pricing for the laser projectors might look?

We have had a few discussions about mega screens. It's interesting, though, I think I've mentioned on a previous call that unlike the fact where cost of goods sold is similar for a digital projector, no matter how big the screen, in fact, the cost varies significantly with the number of lasers that go into the projection system. So the larger the screen you're trying to light, the more expensive the projector is, because the more lasers you need. So there is a much wider variance.

Okay. Great. Thanks very much.

Michelle, I think we've got time for maybe two more quick questions.

Steven Frankel, Dougherty.

Good morning. The film slate for 2013 domestically is pretty full, with a lot of turnover, especially early in the year. Greg, does that represent a full capacity, or do you think there's room for more films depending on film performance, especially later in the year?

Later in the year, particularly in the fall, we'll likely fill in a title or two. But what we have done this year is, for all intents and purposes, starting March 1, with Jack and the Giant Slayer, we have a new title coming every two to three weeks, and in some cases, every week. And it doesn't stop for quite some time. There will always be opportunities to fill in other titles, if something -- if schedules move or if something comes in in the third quarter, again, particularly in the shoulder periods, in September and October. But we have a very, very robust slate right now. And when you include some of the titles like Iron Man 3 and Star Trek and Man of Steel and Hobbit and Catching Fire, Pacific Rim, it's going to feel like we're going to have a very nice couple week run with each of these titles; in some cases, again, a little bit more. But the flexibility will be more in the second half of the year than the first half.

And one more quick follow-up. What's the performance been like in the dual language, dual screen units in Canada that you put in earlier this year. Has that performance held up?

Yes, it's held up. It's been very successful. Somewhat -- I've been pleasantly surprised.

Okay. Great. Thank you.

I think last question, Michelle.

Aravinda Galappatthige, Canaccord Genuity.

Good morning. Thanks for taking my question. Rich, just on the China film sharing issue and the double dating. It seems that there is some uncertainty now, given that Hobbit and Skyfall were separated, there's some optimism there. But given that [ambiquity], has that affected the signings there? Is there a wait-and-see approach on the part of the theaters, given that they really don't know how the Hollywood box office is going to be impacted, and particularly if it has an impact on IMAX?

Not at all, Aravinda. Because remember, we have a lot of local language films there, also. As we were saying, the one playing right now is doing extremely well. So, no, it hasn't had an impact on signings. And I think, with all due respect, I think when we look at it through the lens of the US, something that happens over a three-month period of time, people get really nervous that it's permanent or it's going to be this way forever. People that grow up in China know that there are anomalous results in short periods of time. But in long periods of time, particularly where the government is really encouraging the growth of exhibition and entertainment, that there will be a way that it's going to work out. So I don't really think it's been an impact.

So with that, thank you all for being in the call. As I said at the beginning, I think this is a very gratifying quarter and a very gratifying year for us. We really proved out the business model. We've been talking about it for years. Build out the network, deliver the films, and the recurring revenues, the earnings, the EBITDA, and the cash flow will come. And it did. It all proved out, just as modeled, during the quarter. And I think as you look forward beyond the quarter, as you keep building out the network, you should have positive impact on margins. As we develop new technology, we should increase our differentiation. And as we continue the globalization of our film slate, we should be able to attract audiences worldwide.

So I think I speak for the whole management team to say, it's a good time to be at IMAX. And thank you all.

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