Imax Corp (IMAX) 2013 Q1 法說會逐字稿

Good day and welcome to the IMAX Corporation first quarter 2013 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. Teri Loxam. Please go ahead, ma'am.

Thanks, Michelle.

Good morning and thanks for joining us on today's first quarter 2013 conference call. Joining me today is our CEO, Rich Gelfond, our CFO, Joe Sparacio, who will have prepared remarks. Also here today is Rob Lister, our Chief Legal Officer.

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 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 this morning's press release.

The full text of our [third] 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.

As we discussed on our last call, we have three main priorities for the Company this year - penetration, differentiation and scale. We continued to execute against all of these objectives in the first quarter, which we believe will drive our long-term growth while supporting our financial results in the near term.

IMAX's annual results are based on a portfolio of films. And on the eve of our summer release schedule, we feel well positioned for the year.

We continued our global expansion by signing deals for 25 theaters in the quarter. Of note, the signings this quarter are from around the world and include Australia, Turkey, Indonesia, Chile, Russia, Italy, Canada and the US. We are very pleased that we continue to grow our network in many different countries, strengthening our presence in some and building reference theaters to help catalyze future growth in others.

Included in the signings was the 8-30 deal with Cinema 21 in Indonesia, which is an important step in expanding our presence in Indonesia, which is the most populous country in Southeast Asia and also one of the more robust economies in the region.

In addition, as a result of our increased focus on further penetrating the European market, we signed 3 new theaters in Turkey, 1 new theater in Russia and 1 new theater in Milan, which we believe will help us start to unlock the Italian market moving forward.

In Q1 we also added deals in the Americas, with 1 new theater in Chile under the Racemic Agreement and 2 more theaters with our Canadian partner Guzzo in Montreal.

Of particular significance, this quarter was our deal with the new TCL Chinese theater in Hollywood, formerly known as the Grauman's Chinese Theater, which is an iconic location visited by millions of tourists each year and where many Hollywood movie premiers occur. We are very excited that this theater will now be part of the IMAX network.

The TCL Chinese Theater, which will have almost 1,000 seats when completed, is a good example of the type of new opportunity that our laser technology is making possible for us. Construction for this theater is expected to begin this summer, opening with an interim Xenon digital projector this fall, then later upgrading to our laser system when it becomes available.

In the quarter we also had 8 signings for our interim digital solution and future laser system in existing locations. We are pleased to have signed a total of 8 laser deals so far. Importantly, the laser deals reflect financial terms that more resemble a new system sell, including new 10-year terms compared to the digital upgrade cycle we've discussed over the last couple of years.

This quarter we also installed 10 new theaters, which was in line with our expectations. As we mentioned on the Q4 call, similar to prior years, the installations this year are heavily weighted to the back half of the year, which is often the case as exhibitors time the opening of their projects to blockbuster movies which frequently occur around the holiday period in November and December.

And I would like to note that we have already seen a good deal of signings momentum coming into the second quarter, with 9 signed just in the first several weeks of April, including a 5-theater deal with Cinepolis in Mexico that we announced last week.

We had a lot of activity at CinemaCon, the entertainment convention in Vegas, where we had many positive discussions with a number of exhibitors for more theaters in countries around the world. In addition, over the four-day period of CinemaCon we announced 9 film deals with 3 different studios - Paramount, Sony and Universal.

Our 2013 confirmed film slate is now up to 28 titles and we continue to expect around 35 titles for the year. In addition, our tentpoles for 2014 and 2015 are now coming into focus.

In Q1 we continue our strategy of tailoring our international film programming to specific countries by playing a combination of Hollywood and local-language films. In China we played 3 local language titles, as well as 4 Hollywood titles in the first quarter. Director Steven Chow's Journey to the West, a local-language film, ended up being one of the highest grossing Chinese films in China box office history and grossed more than $7.5 million in IMAX theaters, our largest film in China this quarter.

However, Hollywood films did not contribute as much as we expected this quarter. We believe that Hollywood films may not have played as well overall given some release dates that lagged several months behind their broader global day-and-date release and marketing campaigns, while other films lacked the strong franchise awareness. The good news is that the second quarter for Hollywood films in China seems to be off to a better start, with G.I. Joe having performed well for IMAX, generating over $3.5 million in the first 10 days of its run this quarter. We're also looking forward to the upcoming release of Iron Man 3, which will likely be day-and-date with the US. We also anticipate playing Oblivion and Star Trek this quarter in China.

In addition to the local-language films in China, we also released our first-ever local film in Japan, Toei Animation's iconic property Dragon Ball Z. This Japanese film is an important proof of concept to this region as there are a number of exhibitors that are also studios, and our performance on this local title provides them with an important data point as to the value of IMAX both to their exhibition and film business.

In addition, we announced an expansion of our deal with Yash Raj Films in India, signing an agreement to release 3 Bollywood titles over the next few years, which will begin with the release of the much anticipated DHOOM 3 at the end of the year.

During the quarter we continued efforts to further differentiate several aspects of our business. IMAX is the only end-to-end premium entertainment solution in cinema, starting from collaborating with the film makers during the design of the film right through to the point of presentation, customized equipment and ongoing quality and service.

One area that we continue to focus on is production differentiation and we continue to have many discussions with film makers who are interested in leveraging our IMAX cameras or our unique aspect ratios to deliver the best theatrical experience possible to audiences.

As you know, Oblivion, which opened last week and which has generated about $13 million globally in IMAX so far, is featuring our unique expanded aspect ratio, specially formulated for IMAX theaters by director Joe Kosinski for the entire film exclusively in IMAX theaters. In addition, the upcoming Star Trek, as well as Hunger Games Catching Fire films will feature footage shot with IMAX cameras.

These movies are an important part of our portfolio of films for the year, which will be kicked into gear this week with the international launch of Iron Man 3. This will be followed by Star Trek in mid-May then Man of Steel in June, as well as the international-only release of Fast & Furious 6, all of which we believe will round out a very good slate for the second quarter. In fact, Iron Man 3 opened in about 30 locations internationally yesterday and the early results were extremely encouraging, where we did about $15,000 a screen on average. And in several of the territories it set all time IMAX records.

As you probably saw last week, we announced an agreement with Paramount to participate in 5 new tentpole films in 2014 and '15, including the new Christopher Nolan film, Interstellar, as well as Michael Bay's Transformers 4, both of which will be leveraging IMAX cameras to film certain sequences of their movies. Christopher Nolan began the innovation of using IMAX cameras for Hollywood blockbusters. And others, like Michael Bay, who will use IMAX 4K 3D digital cameras for the first time in a Hollywood production, are continuing the trend.

We are really pleased to strengthen our partnership with Paramount and work with some of the most talented directors in Hollywood who value the quality differentiation and incremental revenue that the IMAX experience brings to their films.

We also re-released two movies in the past couple of months - Top Gun in March and, most recently, Jurassic Park. As we've said in the past, we don't expect these re-releases to be huge financial windfalls, but they do provide a number of benefits to us and our exhibitor and studio partners. These types of films are consistent with the IMAX brand position and they are good gap fillers during periods when there are not a lot of blockbuster films playing as they drive incremental attendance to the theaters.

Take Jurassic Park, for instance, which grossed almost $12 million in IMAX and for which IMAX indexed over 30% of domestic box office on just under 10% of the screens, driven by our strong partnership with Steven Spielberg and Universal, who understand that savvy marketing, combined with the IMAX brand, quality and experience can help to relaunch a 20-year-old franchise and drive good buzz for the film as it prepares for its Blu-Ray release.

Moving on to our technology differentiation. We've been making good progress in R&D with our laser initiative and we're on track to have a demo available at the end of this year and production rollouts starting in the second half of 2014. We're currently developing our next-generation laser projection system from the ground up, benefiting from IMAX's own intellectual property in image quality, Barco's laser innovations and the laser IP we license from Kodak. This state-of-the-art solution will incorporate dual 4K laser technology and we expect it to deliver increased brightness and the greatest contrast in the industry, even surpassing that of IMAX films.

And finally regarding scale, as we mentioned on our last call we have company-wide initiatives underway to become more efficient and cost effective in all aspects of our business, including implementing new hiring and spending policies across the Company. The beginnings of these initiatives were reflected in our slowing SG&A growth in the quarter and we plan on continuing our efforts throughout the remainder of the year.

During the quarter we earned $0.08 a share of adjusted EPS, which included a $2.2 million benefit in SG&A, or $1.6 million after tax, related to the curtailment of our Canadian post-retirement plan, the impact of which will lower operating expenses going forward.

Joe will now go through some of the financial details of the quarter in detail.

Thanks, Rich.

Total revenues of $49.9 million in the first quarter decreased 10% compared to last year. However, given some improvements in cost of goods sold, this translated to only a small decline in gross margins to $26 million as compared to $26.9 million in the same period last year, resulting in significant expansion in our gross margin rate, which was 52.2% for the quarter, up from 48.3% in Q1 of last year. This improvement was driven by our DMR margins, which were up to 64.2%, almost 700 basis points higher than Q1 last year. Our DMR costs this quarter benefited from the mix towards more digital and international-only releases, while we continue to expect the cost per title for the full year to be about $800,000 per title.

In addition, the gross margin rate for our sales-type systems also improved by almost 1,800 basis points to 53.9% in the quarter. But remember that our costs had been impacted in Q1 of last year by the installation of certain rail systems in a number of theaters.

IMAX System's revenue from sales and sales-type leases of $9.8 million in Q1 was down from the same period last year, reflecting the installation of 6 full new theater systems under sales and sales-type lease arrangements in the most recent fiscal quarter, compared to 8 in the first quarter of 2012. The Company also installed 7 digital systems upgrades in the first quarter of 2013 compared to 10 upgrades in the comparable period last year.

Global box office was up 6% to $128.7 million versus Q1 of last year, driven by our international markets where box office of $76.5 million was up 33% over the first quarter last year.

Our international box office was driven by network growth and our continued strategy of tailoring our film programming to specific countries, which included strong performance from international-only releases of Hollywood films, as well as local language content.

Our global PSA was $213,000 per screen, with international PSA of $284,000, 1.8 times that of the domestic PSA.

Some of the international countries that performed particularly well this quarter included the UK, whose PSA increased 21%, and the rest of Asia outside of China, whose PSAs grew 35% with the first quarter of 2012. However, we did see weakness in our domestic and China PSAs. Our box office in China was impacted by lower than expected contributions from Hollywood films, partially offset by better than expected performance of local films.

In addition, our film theaters also suffered from a lack of content, playing one carry-over title and one new movie in Q1. As you are aware, film stock is getting more expensive and scarce, which is driving us to convert these large film theaters to digital as quickly as possible so they can play our full portfolio of films. So far, we have successfully converted 14 of our commercial film theaters to digital with our interim digital solutions.

Moving on to our operating expenses, SG&A, excluding stock-based comp, came in at $14.7 million in the first quarter. As Rich mentioned earlier, there was a $2.2 million benefit this quarter in SG&A related to the curtailment of our Canadian post-retirement plan, the impact of which will lower operating expenses going forward. Also remember that last year's fourth quarter included a $1.4 million foreign exchange benefit, largely due to unhedged forward contracts, which was not repeated this year.

We started to slow the growth rate of our SG&A during 2013 and we are looking to further slow it in the remainder of 2013. We are on track to meet our full-year 2013 guidance on SG&A, excluding stock-based comp and the curtailment benefit, of 5% to 8% growth compared to the full year 2012. In terms of phasing, we continue to expect SG&A expense to be fairly evenly spaced across the remaining quarters in 2013.

Stock-based comp for Q1 was $2.8 million and our full-year expectation for stock-based comp is approximately $13.5 million.

Q1 R&D was $3.6 million, reflecting our ongoing efforts on our laser initiative, as well as costs associated with the IMAX camera development and other initiatives. We continue to expect our full-year 2013 R&D expense to be about $13 million to $15 million. As mentioned before, we continue to anticipate the phasing of R&D spending in 2013 to be a little more heavily weighted to the front half of the year.

In terms of tax, we finished the quarter with a tax rate of 28.7%. We continue to expect our full-year 2013 tax rate to be in the range of about 28% to 30%, including an estimate of $4 million to $5 million of cash taxes. At the end of the first quarter we had $35.7 million of NOLs tax asset remaining.

In terms of our network, we installed 10 new theaters in the first quarter, with 6 sales-type lease installations and 4 JVs, bringing our total commercial network to 606 theaters, of which 319 are JVs. In addition, in the first quarter we signed deals for 25 theaters, of which 17 were for new systems. As a result, our backlog increased during the quarter to 283 theater systems, of which about 80% are slated for international markets. We continue to expect to install approximately 110 to 125 new theaters in 2013 and we continue to expect the installations to significantly skew towards the back half of the year, and also expect the installs to be much more weighted towards JVs.

As we have said many times before, we continue to expect quarter-to-quarter variability, depending on the timing of installs and movie releases, which is why we believe that it is important to view our business on an annual basis. And with the summer box office season kicking into full gear this week and the positive momentum for IMAX coming out of CinemaCon, we are optimistic about the remainder of the year and our long-term growth.

With that, I will turn it over to Q&A.

Thank you. (Operator Instructions.) The first question comes from Ben Mogil of Stifel. Please go ahead.

Hi, guys. Good morning and thanks for taking the question.

So, if we look at the DMR percentage of 11.2% in the quarter, it was probably a little bit lower than I think some of us were expecting given that there were a decent number of local Chinese films that actually played in the quarter. Can you sort of talk about on the DMR side, on the percentage side, where we are in terms of implementing the WTO agreements in China, where we are on splits? Sort of give us a sense of how we should be thinking about that.

And then sort of, I think, tied to that as well is, when we look at sort of JRSA as it relates to box office, JRSA revenue as it relates to box office, kind of really being all over the map the last couple quarters, but certainly lower than people I think had expected in this quarter, is that a function of sort of the weaker China PSAs that both Joe and Rich had alluded to? Thanks.

So Ben, I'll take a shot and then I'll pass it over to Joe to fill in some of the details.

To be clear, every single release that we've had in North America is at 12.5% gross in that -- and every release we sign into the future is at 12.5% gross. There are tax effects on that and Joe will talk about it. And generally, it takes it down to around the 11.5% range after taxes are applied.

In terms of China, the rate is a -- we've settled on a standard 9.5% of Hollywood films playing in China. And if it's Chinese films in China, it's 12.5%. The reason is that in China the studio's take is 25% of the box office, the US studios, whereas in the US it's closer to 50% of box office. And there are more complicated nuances I won't go into now, but that's why we've agreed on that take rate of 9.5%. So again, Joe will follow up. But, if you look at the blend of the Hollywood films in China and the tax rate, that's why you get to the 11.3% rate.

In terms of your other question about JV take rates, and I'll let Joe fill it in more, although we generally as you know get 20% of the box roughly, it -- the formulas vary. And on the first dollar you get less than that of the box and, on the later dollar, you get more than that of the box. So, depending what the DMR rate is in the quarter, that's why it bounces around.

And Joe, I don't know if you want to add anything.

Yes. I mean, I'll just add a little bit more to that, then. What Rich is alluding to is some of the earlier deals that we did which have that kind of dynamic. More recently, we've tried to standardize the rate to avoid some of that volatility, but to have a lower JV take rate in a quarter like the first quarter is not unusual.

Okay. So, you -- sort of some of your earlier JRSA screens you were kind of working off of the old box office model where the splits changed over the duration of the run, and your new stuff you're trying to split--.

Well, it wasn't necessarily box office, Ben. It was cost recruitment features, there was film costs involved in those calculations. Concessions was part of it. So, there's a number of different factors that could impact your take. I would cite really the cost recruitment features of those deals which, in a low-volume quarter, as Rich alluded to, has more of an impact than in a high-volume period when your take rates go up.

Okay. That's great. That's it for me. Thanks, guys.

Thank you, Ben.

Thank you. The next question comes from Townsend Buckles of JPMorgan. Please go ahead.

Thank you. I got disconnected briefly, so I apologize if this was already asked. But, on your screen affiliations for the year, you mentioned back half -- being back half weighted. But, if you can give a sense of Q2, can we expect a pick up from this past quarter? And any sense of the breakdown on JVs versus sales?

I think it's still going to be back-end loaded, Townsend, towards the end of the year, but our budget shows more installations in the second quarter than the first quarter.

Okay. And it sounds like your screen deals have picked up since the start of the month. And last you had a pretty notable pick up in signings around this time of year. So, can you comment more on the pipeline of -- that you're seeing and do you expect higher activity to continue in the months ahead?

Yes. I mean, the pipeline is generally good. I mean, it's -- the business environment is consistent with what it's been over the past several years. I wouldn't say it's gone down or picked up; it's very good. There's a lot of discussions underway.

I think what happened in the last two years is CinemaCon used to be in February or March and now it takes place in mid to late April. And that's a place where all of the exhibitors, or most of the exhibitors, from around the world come to Vegas and you sit down and you actually get into negotiations with them to try and finalize deals. And that's one reason why we've had a good month so far and there are a number of negotiations going on coming out of CinemaCon. So, I don't think the first 3 weeks were an accident for the quarter. I think CinemaCon helped crystallize some of that.

In terms of the year, the activity is good. I think I've said this before to you, Townsend, and to some others, is that there's a few more significantly-sized transactions this year that we're talking about and those are always binary. So, if they happen it could turn out to be a very good year. If they don't happen, it could turn out to be a year consistent with the last couple of years we've had. And it's just -- you're in the middle of negotiating a deal. And all of you are in that business to some extent or another, so you know it's subject to variability. But, I can tell you that, in general, the level of business activity is good.

So, you would say consistent with what you've seen in the last year or the years prior in terms of--.

Yes.

The signings you might expect for the year.

Yes.

Great. Thank you.

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

Great. Thanks very much. First, I just wanted to circle back on the JRSA split question that Ben had. Joe, did I hear you say that this is largely going to be a timing issue and we should see some type of bounce back there, much like we saw in I guess the third quarter of 2012, where it was sub-8% and then it bounced back to 11%-plus in the fourth quarter?

Yes, that's not uncommon, James. I mean, in the higher-volume periods you're going to see the rate go up. The other thing to bear in mind is that in the fourth quarter of last year we had some hybrid deals. So, don't forget to take that into account. I don't know if you factor that in. We had no hybrid deals this quarter and we had no hybrid deals last year as well.

Okay. That's helpful. And then I just had a follow up on Iron Man 3. Rich, I missed the number that you gave us on the per-screen numbers for the opening in international markets. And then, just related to that, what's the current status of presales in IMAX theaters? I know AMC and Regal and Cinemark are all kind of fighting with Disney right now and not doing advance ticket sales, but where do the IMAX theaters stand on that?

So, James, I had said $15,000 a screen for the opening day but, again, that was all international theaters that opened and it was only 30 markets. Again, it's very hard to generalize, but that's a very strong number for us. And as I said, we set a number of records in territories for any IMAX release. So, from the first day, whatever you can make of it it seems to be positive.

In terms of presales, internationally they're very strong. They open a week early internationally than they do in the US. There is a negotiation going on between Disney and a number of the major exhibitors, as you said, Regal, AMC and Cinemark and maybe others and it's over the terms of the release. For big movies like this, that's not unusual, as you know very well. The movie's gotten excellent reviews. And because the terms haven't been agreed to, there aren't presales. But, since IMAX sells out overwhelmingly on opening weekends on movies like this, we don't really think the fact that domestically if there are presales are not will really impact the ultimate box office.

Okay.

And James, I just want to correct one item, that we did have two hybrids last year and -- versus none this year.

Okay. Alright. Thanks, gentlemen.

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

Hi. Thanks for taking my question. I'm just curious; in China, with the Hollywood films wagging the local-language films thus far this year, are you getting a sense that the blackout periods that normally occur will be much shorter or maybe they won't have a blackout period at all? And are you getting any sense of will they be stacking films, or what type of read you're getting from the various agencies there?

Eric, I'm going to start by reminding you and the rest of the call of my overall view of China, which is I think over time China gets better and better if one has a perspective in terms of its overall box office, both Hollywood and local. And I emphasize that because, as you know, IMAX is in the business of doing Hollywood and local. So, we're not impacted by the blackout (inaudible) the way the studios are because we'll play local films in that.

Last year the first half of the year was extremely strong in China with Hollywood films and, as a result, in the second half of the year, I think under the impact quota, the number of Hollywood films let in was slowed down and there were things like films booked on the same weekend and bigger delays. In China, the first quarter was very strong for local Chinese films. So, I think certainly they would have less incentive to regulate the industry the way they did in the second half of last year because they're trying to get to more or less a 50/50 film spread.

With that said, predicting what's going to happen in China over a short period of time is a very low probability of success business. So, I'm not going to try and say where it's going to go, other than to say that the dynamic is in place to be more flexible on Hollywood films for the second half of the year.

Okay. And then as a quick follow-up, as you look at some of the local-language films coming out in this summer, do you have some optionality in case that there are some blackouts, that you have the ability to choose -- to install some of these films as needed?

We do. And in fact, there are a couple of really good Chinese films, I just don't remember if we've announced them or not yet. Teri's shaking her head no, we haven't. But, we have two or there that are kind of ready to go and if that happens, we feel pretty good about.

Great. Thank you.

Thank you. The next question comes from Rich Ingrassia of ROTH Capital Partners. Please go ahead.

Thanks. Morning, everybody.

Hi, Rich.

Good morning.

We spend a lot of time talking about China and India and South America and I don't think we talk enough about Western Europe. But, the Italy signing and the surge in PSAs in the UK this quarter I think begs the question. Can you, Rich, maybe give us a very brief history of IMAX in the region and talk about why these two data points or developments there are or aren't important long term?

No, I think they are. And in fact, Rich, I was in -- at CinemaCon in Vegas I had a meeting with Odeon and they told me their same-store sales were up 70% year over year '12 versus '11. And I said, no, you mean including the growth of the network and they said, no, we mean same-store sales. And in fact, Cineworld, which opened at several theaters last year but has a number that are opening right now, has also had extremely good success there.

And I think if you look at the IMAX model historically, success breeds success. And in fact, establishing a critical mass in a market, UK being a perfect example, the studios then get onboard for more marketing and more tagging and the word of mouth gets better. So, the UK is a great example of a market. Another would be the Netherlands, where I think we have about 6 theaters also doing extremely well.

I think historically there are a couple reasons we haven't done as well in Western Europe. First of all, it's less competitive environment so there's less incentive for exhibitors to change the way they've been doing business. Second of all, the infrastructure had been somewhat dated, so finding the right theaters to fit an IMAX into with height and width things were an issue. And third of all, I think from IMAX's point of view we didn't really have the right team on the ground. And I don't think we thought international enough. Maybe that's the most important point.

And we've really -- we hired Andrew Cripps who ran Paramount internationally, was the president. We've hired a marketing and distribution team in Europe. And we're thinking more globally. So, an example would be last year we played films like Life of PI and Les Mis in Europe, and UK specifically, that didn't play in North America. And as a matter of fact, this quarter we're paying -- we're playing Fast & Furious in territories and we're not playing it in the US and the reason for that is because it -- Star Trek starts a week earlier internationally. So, if we didn't wait until -- if we waited until the end of Star Trek in the US, we would probably leave them with a hole in their schedule.

So, I think the change in personnel, I think the change in programming philosophy where we're programming more internationally, I think the existence of reference theaters, the success of nearby countries in Europe, all will combine to see us be more successful than we've been in the past in Europe. And in fact, go back to the last question about tone of our business. Obviously, in different territories one year's going to be better than another or worse than another. But, I'd say the tone of our business in Europe is as good as I've seen it in a long time.

And do you think you have the opportunity to do local-language films, say in France or Italy?

Well, in fact, last year we did a film in France called Marsupilami and we're in negotiations now to do another film in France. I don't know if we'll get there or not, but we're definitely open minded about things like that.

There's also starting to be more of a buildout in some of the European territories with new theaters. In fact, in France there's a fairly aggressive buildout going on compared to what's gone on in the last couple of years. Obviously, the UK, and joke intended, we do local language films like Skyfall and things like that, but I know that doesn't count. I think in Italy and Germany we'd really have to get to a critical mass before we would think about something like that.

Okay. Thank you.

Thank you. The next question comes from Vasily Karasyov, sorry, of Susquehanna Financial. Please go ahead.

Thank you. Good morning. Rich, I have a longer-term question. If one were looking at the installations trajectory, and I think the common sense now that they will remain pretty stable over the next two to three years. But, if one were thinking about a downside and an upside scenario on installations, what kind of drivers do you think that person would need to consider to think -- what could surprise to the upside, what could surprise to the downside? Can you just probably reflect on that?

I think that the one thing that would come to mind immediately in my mind would be film performance. So, when you look at the Avatar effect, when Avatar just blew away all expectations, it did about $250 million in IMAX business alone. That created a tremendous amount of demand. And like everybody in the world, theater exhibitors are sometimes both long-term and short-term oriented. And I think if there were either one blockbuster movie or a series of them, that could really drive the upside. I'm hoping, and again, I don't want to predict, but hoping in 2015 we should have both Star Wars and Avatar 2 and that could be the kind of year that leads to those results, although we'll see.

In terms of the downside, I guess one thing could be the same thing, if the slate just fell apart and we didn't deliver the economics that we've historically delivered. Or I suppose some kind of crisis in some of our key markets like China and Russia and India, which are really growing extremely rapidly, that could be the downside of it.

Alright. Thank you very much.

Thank you. The next question comes from Eric Wold of B. Riley. Please go ahead.

Thank you. Good morning. A couple questions. One, I know the Chinese government's been pretty open about wanting to get to a 50/50 split with their box office kind of country wide. Maybe give a -- I know it's -- I don't want you to get in the game of predicting box office, but where do you think IMAX screens will start to shake out in terms of their mix maybe in the next year or two? And then kind of longer down the road, where do you see the annual mix shifting between Hollywood and local content there?

Eric, I'm not really sure about that. I think because historically, if you look back in time, the Hollywood films on a per-film basis have out-grossed the local films. You would probably see more Hollywood films than local films in the near term just because the grosses are higher. However, that's starting to change rapidly. And one of the reasons it's changing is the increased screen count, not just in IMAX, but everywhere in China, has led to higher production budgets on Chinese films and higher-quality films and better value. And I think as the value increases and as the Chinese-only box office increases, my guess would be we'd start to shift more to Chinese language films from Hollywood films.

So, although I don't know the ultimate numbers, I think you'll see that mix continue to develop more weighted towards China. And I think if you look at 2013, you'll see us release more films that are Chinese language than 2012. And we released more than -- in '12 than in '11. So, there's no doubt that's the trend, but it's really hard to predict the endpoint.

Okay. And then the last question. Kind of coming out of CinemaCon, obviously Cinemark had some pretty public comments about their plans in Latin America on large format. Maybe give a sense -- I know that they're not the only operator down there, so give a sense of attraction you've had down in Latin America since changing the distribution agreement down there.

First, a comment on Cinemark. I had a very productive meeting with Tim Warner and Rob Copple and we're talking to them and I don't know where it'll end up, but I think -- they recently put two IMAX theaters in North America and they've become among Cinemark's best in North America and among our best in North America. So, we're good partners with them here and I think it could be mutually beneficial. I'd like to see that expand to South America, but I'm not betting on that. And in fact, we're partners with UCI, we're partners with Cinepolis. We have local partners down there. So, there's enough market share to go around if Cinepolis decides not to be in the IMAX business.

Part of our strategy has been real estate developer based. And in fact, that's something we did very well in China and we're doing in India, which is to go to people building new malls and saying, hey, IMAX is a good anchor tenant for the mall and a good draw. And what they're doing is they're starting to write in their specs saying they want an IMAX presence in the mall and that becomes a condition of the cinema operator bidding. And we're just seeing the beginning of that, but I think that's going to happen. In fact, we're in three of the top five multiplexes in all of Brazil.

So, I expect to do well there, hopefully with Cinemark. If it's without Cinemark, I think there's plenty of competition and that'll work. And I know there's a lot of focus on -- in the US investor market on Brazil, but it's the seventh largest film market in the world. And besides Brazil, we're doing pretty well in the other six. So, it's not like we're betting the farm on Brazil.

Perfect. Thank you, guys.

Thank you. The next question comes from Colin Moore of Credit Suisse. Please go ahead.

Thanks. Good morning, everyone. I apologize if I've missed this already, but I think at your opening comments you made some comments in respect to the financials around the laser, I think something in regards that the laser upgrades are comparable to sales type and longer-term contracts. Maybe you could just provide some further insight on that. That'd be great.

Yes, the laser deals are 10-year deals. What we're saying is that, under our previous upgrade cycle where we upgraded from film to digital, we pretty much made no margin or a small margin to facilitate that transition. And the periods of time varied; in some cases they could have been 10 years, in some cases they were much shorter.

In terms of the laser upgrade cycle, we're charging pretty much a full margin on those. The margin is a little bit subject to projection because we're not completely sure what the cost of goods is going to be of laser, but we're pricing off a prospective cost of goods, so we're not pricing them at a minimal cost, which we did with the last upgrade. And those are 10-year deals as if they're new theaters. So, you need to look at them very differently than you looked at our last upgrade cycle.

Alright. And just a follow-up on that. Are you still seeing -- I know your focus initially is getting those film screens to digital and laser. Are you still seeing some interest -- is that incremental interest as far as potential new builds taking advantage of that laser in the future?

Yes, absolutely. And in fact, we probably wouldn't have done the deal with the Chinese theater in Los Angeles if not for laser. So, the Chinese is going to open up with an interim digital solution but, as soon as laser's available, it's going to become a laser site. And a number of the institutional theaters which we've signed laser for was in anticipation of the release of laser. So, those are incremental things that would not have happened but for laser.

Alright. Thank you.

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

Good morning. Rich, about how many more commercial film theaters would you expect to convert to interim digital between now and the end of the year?

I don't know, there's about, what, 30 left or something like that. And we're out there with a lot of proposals. And frankly, the experiment's gone pretty well. The BFI in London, which is kind of one of the largest and most successful film theaters in the world, since they've converted to digital they're doing very good business and I think the public is understanding that and accepting.

In the first quarter, and Joe correct me, but I think we converted three Regal theaters to --.

Two in Australia.

And two in Australia to digital. So, we're starting to do that and it's working. And we have proposals out to pretty much everyone in the film business to try and convert them over on an interim basis until we get to lasers. I can't predict the number, Steve, but I think you'll see more of it.

Great. And then on the AMC, Wanda has been known for its great marketing and the great marketing they've done for IMAX in China and we really haven't seen that in the US. Do you have a sense that that's something that we might see between now and the end of the year?

Our relationship with AMC is very good. It's been good. I think even with the addition of Wanda, because we're all partners, it's probably continued even more in the right direction. And we meet regularly with AMC to talk about marketing initiatives. And I think you will see more marketing initiatives come out of AMC and IMAX.

Okay. And then, Joe, what was the prelaunch expenses for JVs in the quarter?

Let me look that up. Just give me a minute. It's in the MD&A here, so -- what we could do, we'll give that to you offline. It's in the Q so anybody could access it.

Great. Thank you so much.

Thank you. The next question comes from Aravinda Galappatthige, Canaccord Genuity. Please go ahead.

Good morning. Thanks very much for taking my question. You talked earlier about the hybrids for the -- under the JV model. Could you maybe comment on what you have lined up for the -- for all the installations this year? I mean, is there a meaningful component of hybrids in there similar to last year or is it more or less?

I would anticipate something fairly similar, but it's going to be skewed much like it was last year.

He means the second half of the year.

Yes, into the second half of the year.

Okay. Thanks for that, Joe. And a quick question for Rich. I was wondering if you can talk a little bit to the opportunity in India, sort of remind us what the market size there is. And sort of what the roadmap is and sort of what needs to happen before we start to see sort of more meaningful growth coming out of India in terms of signings and installations.

So, going back in time, Aravinda, the obstacles were very low ticket prices, the fact that we didn't show Bollywood films only Hollywood films, and the fact there wasn't a lot of real estate development and there weren't a lot of existing reference theaters.

Going to the present, the Western multiplexes definitely arrived in India and the typical price is somewhere between $6 and $8. So, the price issue's been dealt with. We're starting to do some Hollywood -- Bollywood films, excuse me. We're doing DHOOM 3 this year and another film next year. And certainly, as the network grows, there's -- the studios are very interested so we could add more films there. There's a lot of multiplex development there.

My understanding from talking to our potential partners are the margins are pretty good in the exhibition industry in India. And I think people are anxious to build more theaters there. It's very, very under-screened. I could be way off, Aravinda, so I apologize. But, my recollection is there's something like only 1,500 screens in modern multiplexes in India with 1.2 billion people. Again, I could be off a little, but I'm not off by that much. So, there's going to be a lot of building going on there.

So then the final thing is really reference theaters, having theaters open. And I think we have only three open today. We recently opened one in Bangalore with PVR, which is the largest exhibitor and it's doing extremely well there. The -- another one we have with Reliance in Mumbai does very well. We have another one in Hyderabad which does very well. There are two theaters in Chennai that are awaiting final government approval and should open any week now. So, that would get us to like five or six.

And then, I think we think by the end of the year, and again, as you may know, in India getting approval is a unique proposition. But, we should have about 10 open by the end of the year. The ones in Chennai in particular are like palaces. Our partner there has done a phenomenal job of just building beautiful branded theaters.

So, I think that's the last piece in the puzzle. I think as more of them open and the numbers come in strong, I think it's going to be a good market for us. We've tried to be conservative. So when we did our zone analysis, I think we have something like 85 zones for India or something like that, but we had 85 zones for China originally and now we're up to 250, including our backlog there. So, that's kind of an overview of India.

Thanks for that, Rich. And lastly, just a quick clarification. Did you say that in China you expect Iron Man to open day-and-date with North America?

We do, yes. As a matter of fact, while we were on this call Deadline just put out a note saying that they confirmed that. Again, we haven't heard that directly, but it just came across.

Okay, great. Thanks, Rich. I'll leave it there.

Thank you. The next question comes from Daniel Ernst of Hudson Square. Please go ahead.

Yes, good morning. Thanks for taking my call. Two questions, if I might. First on China. You had mentioned that there's two or three films later this year that you might add to the slate of local-language films. But more broadly, what does the pipeline look for tentpole films and has conversations around projects like that been more fluid since the success of Journey West, which did very well both domestically and in particular in IMAX?

And then second, on the broad category of differentiation, clearly you're doing a lot with the format and with the laser projections. Is there anything else that IMAX can do to ensure differentiation relative to some of the other large viewing formats, like (inaudible) where it's on your screen, but have also upgraded all the seats and it's just a very nice experience. Does IMAX have the ability to control that level of quality of the experience? Thanks.

Yes. First, in terms of China. The good news is there hasn't been much change in the availability of blockbusters since Journey West, because I think that Chinese Studios we have very good relationships with and I think they understand how helpful we can be in terms of the marketing plan and the release. So, I think we can negotiate to be involved in almost any film in China we want and I don't think that's changed. I think maybe the thing that's changed is people looking at production budgets differently. So, maybe you'll get more and better special effects and higher production value. I certainly think there'll be more studios built in China and I know of a number of those kinds of things floating around right now.

So, we have the ability to do most of the films in China. I think you'll see us doing that. And I think if the blackout period becomes longer, we'll just have to pivot and do more Chinese films, which I -- it's fine as long as we continue to pick the right ones.

In terms of differentiation, there's always things we can do and we're obsessed about that. And we have a management meeting next week and every management meeting we have questions about differentiation.

So again, IMAX is an end-to-end solution. We probably don't spend enough time talking about what that means, but it not only means the working with the filmmaker in tailoring the film to IMAX and people think about it as the end product, the laser, whatever the projection system is at the end. But, we have a team of people that goes around and looks at the glasses in theaters. And if the glasses have striations in them that interfere with the image, we ask the theater operator to replace the glasses and we replace them to make sure the image is great.

We have something called a NOC center in Toronto which monitors every theater in our network online in real time. So, someone can show a great image on day one but their bulb starts to burn out and they don't have a culture of looking at the bulb every day, every week and replacing it. We have an automated system in Toronto where, if the bulb goes down, we call up the theater and we ask them to change it and if they don't change it someone in the field goes out and changes it.

So, quality isn't just a word with us, it's not just what it -- it's the way our organization thinks and the way it's geared. And a lot of the competitive theaters, while they have a (inaudible) specifically where you can't put an IMAX theater and we understand that, we just don't think that those organizations are geared and spend the money and have the infrastructure to emphasize quality in the way that we emphasize quality.

So, that's my first overall point about it. I think consumers know what they're getting and directors know what they're doing. You don't know any director that's made a film for an X brand theater rather than an IMAX theater. And there's a reason for that, because the proposition is better.

So, we're looking at projection through lasers, we're looking at glasses, we're looking at sounds, we're looking at marketing, we're looking at differentiation. Even though we have a leadership position and even through we don't really consider the X brands to be directly competitive, we're constantly trying to evolve ourselves because that's the way you say number one. And that's where we've been for 45 years and that's where we're going to be for the next 45 years.

So, if -- operator, if we could just take one more question.

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

Okay, thanks. One first question, just a point of clarification. The early discussion about the PSA averages focused on the China impact. Is that primarily what was the cause or was it -- was there also something about the domestic box office recorder and/or the content that wound up on your particular screens?

And then, I have --.

So, Jim, very good question. The PSAs in North America were down but, actually, we budgeted them to be down. So, that was expected from our point of view that there'd be a decrease and that had to do with programming and a number of other issues that we assessed going into the year.

In fact, China was more of the issue, Jim, and that was because of what I discussed before. Some of the tentpole films like Skyfall and like The Hobbit, they were delayed release and they were edited in certain ways. And obviously, because of the proliferation of piracy and even DVDs and things like that, a lot of people had seen those movies. So, they just didn't perform on the delayed release the way that we originally thought they were going to before we knew the release dates.

And the second thing would be, take a movie like Oz, which did really well in North America. It didn't really have franchise value in China. People didn't know what Oz was even though it was released closer to day-and-date. And again, that didn't perform as well as we would have hoped. So, that's really where you're seeing the changes in the PSAs, which you've correctly identified.

But, going into the second quarter now with movies like Iron Man and Oblivion, which -- and Star Trek, all of which -- Iron Man is confirmed in, the other two tentatively have been told they're getting in -- we think they're the types of movies which should do well. And obviously, Iron Man is day-and-date so you're not going to deal with the several month delay. So, it's our hope and expectation that we would go more to historical norms.

With the second and third quarter, meaning the schedule if you will, could you -- are they mainly two-week windows? And can you talk about the potential given the every week new big release type issue, how that might impact your ability to catch most of the hits and not be impacted by another stronger one topping out last week's best effort?

So Jim, actually, for two of our key releases this quarter, Man of Steel and Star Trek, we have either three or four-week release windows. We have broader windows. And in fact, if you look historically at some of IMAX's biggest performers like The Dark Knight, The Dark Knight Rises, Mission Impossible, Avatar, they've had longer windows and they've been able to put up really significant numbers over that period of time. So, movies that we think will be significant blockbusters we try to program them with more breathing room and I think have done the right thing.

On the other hand, as I mentioned earlier, if you take Star Trek, which is opening a week earlier in -- overseas, we felt like a five-week release window probably wasn't appropriate. So, that's why we did Fast & Furious international. And that's the kind of programming flexibility that we're moving towards, where in different markets, depending on the nature of the film, we can program them for different amounts of time and that's what we're doing.

Alright. Very helpful. Thanks.

Okay. Well, thank you all very, very much again. I think the only point I want to reiterate from the call is that, as we've said, and in fact it's the way we budget, is based off PSAs and yearly PSAs and we look at the year as a portfolio with different films. And we think we're going into the heart of that portfolio right now and we're very excited about this quarter and where we're going. And hopefully, when we talk to you next we'll live up to our excitedness. So, thank you all for your time and we appreciate your continued following of IMAX.

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