Imax Corp (IMAX) 2014 Q1 法說會逐字稿

Good day, and welcome to the IMAX Corporation First-Quarter 2014 Earnings conference call.

(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 First-Quarter 2014 conference call.

Joining me today is our CEO, Rich Gelfond, and our CFO, Joe Sparacio, who will have prepared remarks. Also here today is Greg Foster, our Senior Executive VP of IMAX Corp, and Rob Lister, our Chief Legal Officer, who will be part of our Q&A.

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 First-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.

The first quarter was about setting the foundation for the remainder of the year and driving continued progress for our long-term growth strategy. In particular, we made significant progress in Europe and shored up some key films with our long-term Disney partnership.

From a financial perspective, the first-quarter box office was seasonally light as, is typically the case given the lack of 10-poll films released during this time of the year. We also have fewer sales type installations scheduled for the first quarter due to timing differences in install schedules compared to last year.

On the strategic front, I'm very pleased with our achievements for the quarter, which we believe will continue to contribute to IMAX's future growth. In particular, it was a strong quarter for theater signings.

We had 36 new theater deals, 23 of which were for locations in Europe. Some of these signings will translate into installations this year, while others will build our pipeline for future deals.

It was also a strategically important quarter for our film business. We signed a multipicture agreement with Disney that includes their most highly-anticipated pillar titles including Marvel's Captain America 2, Guardians of the Galaxy and Avengers 2, as well as Lucasfilm Star Wars: Episode VII.

On the technology front, we achieved an important milestone in the development of our next generation IMAX laser projection systems.

Also at the start of the second quarter, we announced a deal with strategic investors to help maximize the growth and future success of IMAX China. Let me discuss each of these in a bit more detail.

In terms of our network, the 36 signings in the quarter represented a good level of activity for us. And of significance, these signings were across 17 different countries and were with both new and existing customers. Even more noteworthy is the fact that 23 of the signings were in Europe.

Historically, we have struggled to gain traction in Europe. However, we have really started to breakthrough over the past couple of years.

As we've mentioned before, typically our strategy has been to open a reference theater in a particular market which will showcase IMAX differentiation and a value to the exhibitor. This theater often acts as a catalyst for additional signings, as the exhibitors in that area see the incremental benefits of the IMAX theater to their complex and the box office potential of our theaters compared to what they could do with their own theaters.

We used this buildout strategy in North America, then moved onto penetrating Asia and particularly China. And now we are seeing progress throughout Europe.

In addition to the discussions that develop organically, as exhibitors see the success of our theaters, we also had a full schedule with new and existing partners at CinemaCon. A global entertainment conference that we attended in March where many deals were discussed with new theaters around the world.

In addition, we hosted an exclusive industry summit this quarter. Where executives from top exhibitors around the world, studios, and industry leaders gathered to discuss the state of the industry and key trends.

Based on these discussions we feel strongly that IMAX is well positioned to continue helping studios and exhibitors capture and grow the premium entertainment market globally.

Moving onto the partnership with Disney, this agreement is strategically significant for a number of reasons. First, rather than a series of one-off arrangements which we've done in the past, this more comprehensive agreement helps our two companies coordinate marketing strategies for the films well in advance.

Second, it allows the filmmakers additional lead time that enables them to design and create the vision for their movies with IMAX differentiation in mind. And third, visibility into the IMAX film slate helps us coordinate dates and releases within the Hollywood ecosystem and also helps existing and potential new exhibitor partners plan their businesses.

We are very pleased to strengthen our partnership with Disney and Marvel. And we look forward to working with some of the most talented directors, who work on some of the industry's biggest brands and who value the quality differentiation and the incremental revenue that the IMAX experience brings to their films.

During the quarter, we also made progress on our laser initiative. IMAX has always been an innovator, leading technological change for the past 40-plus years and pushing the industry to new levels.

It is with this spirit of innovation that we are driving yet another leap in technology with our new laser projection system. It's important to note that the IMAX laser projectors go beyond just replacing the light source. It is a ground up entirely new system.

And in addition to improving the brightness, we're also leveraging patents that we purchased from Kodak a few years ago to enhance the contrast and color gamut even beyond what we could do with our current leading projectors.

Our first-generation laser projector is focused on the largest screens in the network, those with sizes greater than 80 feet in width. These theaters represent some of the largest, most profitable theaters in our network.

While the rest of our network was upgraded to digital, over the past several years, these large theaters had to remain film-based as the current generation of digital projections can't generate enough light to illuminate screens that large.

Our laser system will allow us to convert these large theaters to digital with the quality that we expect from IMAX. And allow them to play our full portfolio of films each year without the high cost of film prints.

I'm happy to say that we achieved an important milestone in our laser development in Q1. We assembled a critical component of the projector for the first time; and we were very pleased with the preliminary results, which exceeded our original specifications.

We still need to let the system run for a longer period of time, test it across district scenarios, and fully assemble the prototype. While we are still in R&D, which comes with risk, we believe this milestone brought us an important step closer to the finish line; and we remain on track to begin our initial rollout at the end of this year.

In terms of IMAX China, we recently announced that two prominent Chinese investors -- CMC, one of China's leading media investment funds run by Li Ruigang, and FountainVest, one of China's largest private equity firms --bought an aggregate 20% in our IMAX China business for $80 million.

In addition to the cash that this transaction provides, which will give us additional financial flexibility, we believe the addition of these investors along with our other industry partners in China such as Wanda, TCL, Wasu and almost all of the local studios, can help us maximize the growth of our business in China and potentially lead to an initial public offering of the IMAX China business within the next five years.

I spent last week in Beijing, and I was very pleased and encouraged with the local reaction and the positioning this announcement has delivered for us so far. Together with our partners, we held a press announcement in China that garnered over 250 press members, which was driven in part by our partners' reputation and prominence in the country.

Switching to our film performance, we played nine new movies in the first quarter. And we also played nine additional previously-released films that we plugged into various markets at different times throughout the quarter to fill in the gaps in release schedules and to cater to cultural preferences across the 58 countries in which we operate.

We generated approximately $131 million in global box office, with two-thirds of our box office coming from international markets. In particular, China had a very strong quarter, generating over a quarter of our total box office.

We played eight titles in that country. Two of which were local-language films, including the Monkey King, which set a new opening-day record in China for IMAX at $1.8 million, breaking the previous record of $1.5 million set by Iron Man 3.

Local titles generated about one-third of the China box office, with Hollywood titles generating the remaining two-thirds. Hollywood standouts in the country included the second Hobbit and Disney's Need for Speed.

Another international region beyond China that stands out this quarter was Western Europe. Where markets including the UK, Netherlands, Germany, and France were also very strong. Newer markets for us, like Switzerland and Portugal, also delivered promising results in their first full quarter open.

As we look forward to the rest of the year and the blockbuster season ahead, we're excited about many upcoming films. Including The Amazing Spiderman 2, which has already opened quite nicely in several international territories including the UK, Australia, and Mexico, and which opens domestically next week.

Godzilla, which opens in May; Transformers: Age of Extinction in June, which was filmed in part with IMAX's new 3D digital camera; Marvel's Guardians of the Galaxy in late July; Chris Nolan's new movie, Interstellar, in November, which also had significant portions filmed with our cameras; and the final installment of The Hobbit in December.

In addition to these, we have many other exciting movies planned for both the domestic and international markets throughout the year to round out our annual portfolio. Including the recently announced DreamWorks Animation and Fox's How To Train Your Dragon 2, which were playing in some key international markets starting in June.

And with that, let me turn it over to Joe to go through some of the financial details from the quarter.

Thanks, Rich.

Total revenues of $48.2 million in the first quarter decreased by 3% compared to last year, largely driven by IMAX system revenue from sales and sales-type leases, which was $5.3 million less than Q1 last year, resulting in roughly a 4% impact on EPS.

The difference primarily reflects the installation of three full new theater systems under sales and sales-type lease arrangements in the most recent first quarter, compared to six in the first quarter of 2013.

The Company also installed two digital system upgrades in the first quarter of 2014, compared to seven upgrades in the same period last year. This was partially offset by higher recurring revenues from DMR and our joint revenue sharing arrangements, which together grew 10% compared to Q1 of last year.

Total gross margin of $26.4 million came in slightly ahead of last year's $26.2 million, resulting in a gross margin percentage of 54.8%. A 200-basis-point increase over Q1 last year.

The expansion in total gross margin was primarily driven by higher box office and lower DMR costs from having only released digital films this quarter, which drove an increase of almost 900 basis points in the DMR margin to 72.9% from 64.2% in Q1 last year.

Global box office of $138.5 million was up almost 8% compared to Q1 last year. As Rich mentioned, two-thirds of our box office, or $91.1 million, came from international markets in the quarter; and the remaining one-third were $47.4 million from the domestic market.

The international box office represents a 19% increase in comparison to Q1 of 2013, largely driven by network growth.

Our global PSA was $197,000 with an international PSA of $266,000, two times that of the domestic PSA.

We also saw margin expansion on our joint revenue sharing lines this quarter, with our JV margin increasing from 65.7% in Q1 last year to 67% this year. In addition, we installed one hybrid JV this quarter, which comes with a relatively low margin.

If we exclude the hybrid to be consistent with Q1 last year, where there were no hybrids installed, the JV margin for this year's first quarter would've actually come close to 70%. This margin improvement primarily resulted from higher revenues generated by continued network growth.

Moving on to operating expenses, SG&A excluding stock-based comp was $18.1 million in the first quarter this year versus $14.7 million last year. Or, $16.9 million after excluding the one-time $2.2 million benefit related to the curtailment of our Canadian post-retirement plan gain.

Included in SG&A this quarter was an FX translation charge of approximately $700,000, largely related to the weakening of the Canadian dollar in the first quarter. If you back out the impact from FX, the year-over-year increase in SG&A would've been around 3%.

We continue to expect our full-year 2014 SG&A, excluding stock-based comp and curtailment benefit, to increase by 5% to 8% compared to the full year in 2013. In terms of phasing, we continue to expect SG&A expense to be pretty evenly spaced across the remaining quarters in 2014.

Stock-based comp for Q1 was $3.2 million, and our full-year expectation for stock-based comp is approximately $16 million.

Our R&D expense for the first quarter was $3.6 million, primarily reflecting our continued development of our laser projection initiative. We continue to expect our full-year 2014 R&D expense to be about $15 million.

In terms of tax, we finished the first quarter with a tax rate of 27.3%. We continue to expect our full-year 2014 tax rate to be around 28%, and an estimated $10 million to $12 million of cash taxes. At the end of the first quarter, we had $24.4 million of tax assets remaining.

Also note that starting in the second quarter, we will be introducing a non-controlling interest line on the P&L, below net income, to account for the minority interest resulting from the 20% sale of our IMAX China business. As we discussed at the time of the announcement, this transaction will close in two equal parts, with the first closing having occurred on April 8 and the second closing expected to occur in February 2015.

Therefore, the non-controlling interest line for the remainder of 2014 will reflect the 10% minority interest, which will change to the full 20% starting next year when the final closing occurs. We anticipate roughly a penny in dilution per quarter for the remainder of 2014 as a result of the China investors' minority interest.

I would also like to remind everyone that in addition to the proceeds that IMAX Corp will receive from this transaction, IMAX China will also pay to IMAX Corp an ongoing technology and trademark royalty equivalent to 5% of gross revenue, along with several other fees, including cost plus 10% for equipment, maintenance, and local DMR content.

In terms of our network, we installed eight new theaters in the first quarter, with three sales-type lease installations and five JVs, of which one was a hybrid. This brings our total commercial network to 707 theaters, of which 388, or 55%, are JVs. In addition, we signed deals for 36 theaters, of which 35 were for new systems and one upgrade. Twenty-three of these signings were for theaters in Europe, six in Asia-Pac, three in Latin America, two in the Middle East, and two in the US.

As a result, our backlog has increased to a record 431 systems, which gives us visibility to many years of new installations. About 90% of the theaters in the backlog are slated to be installed in international markets. And about 90% are also new builds.

For the full year, we continue to expect to install a similar number of new theaters in 2014 as we did in 2013.

As we discussed on the Q4 call in February, we expect the pace of our 2014 installations to be similar to that of 2013, with roughly half the installs scheduled for the fourth quarter.

We also continue to anticipate about two-thirds of our full-year installs to be JVs, including 20 hybrids with about 15 currently scheduled for the third and fourth quarters.

For Q2, we currently anticipate installing around 20 new theaters with about 5 of them currently expected to be sales type and about 15 to be JVs, of which we currently expect five to be hybrids.

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

(Operator Instructions)

Townsend Buckles, JPMorgan.

Thanks. Great to see the breakthrough in Europe.

Can you talk a bit more about which countries these deals have come in and where the pipeline stands now? Do you see a good signing pace continuing or was this more of a spurt?

Before I answer that, Townsend, Joe just wanted to add one little thing.

Yes. At the opening, I had indicated that the reduction in systems revenue at $5.3 million resulted in a 4% impact on EPS. That should have been a $0.04 impact on EPS. I apologize for any misunderstanding.

So Townsend, I mean, a lot of the signings in Europe were in different countries. But the biggest one of all was the UK where we did seven additional theaters. And what was -- seven or eight I think it is -- and what was noteworthy about that is a company called IT International, which is run by Mooky Greidinger and had been a partner of ours for close to 15, 20 years, acquired Cineworld.

And after the acquisition, they introduced all of those new theaters. In addition to theaters in other countries. So they had never participated before. Cineworld had but IT had not participated in the UK, and so that was really good to see that going on.

We have two theaters operating in Germany right now. One of which is doing okay. One is doing really well.

During the quarter, I'm just trying to remember where else in Europe the territories were, Russia was a very big territory for us. I think we had maybe seven or eight signings in Russia. There was one in Eastern Europe.

But it was spread out pretty nicely. And what makes that even more noteworthy for us is that, not only -- as I talked about in my script, does that lead to more theaters in those signings, but there's lots of other activity going on. So in regions like Scandinavia, where we have no theaters, there's been a fair amount of activity going on. In Turkey, where we just opened a number of theaters, there's more activity going on. In France there's a number of things we'll look at.

Again, just to be clear, I'm not promising that any of this is going to happen or happen overnight. But in Italy where we just have a few theaters there's discussion going on.

So it's pretty much continent-wide and maybe more impressively, as I mentioned in the remarks, some of the new markets like Switzerland and Portugal are posting really impressive numbers. So as you've said, it's taken us a while to crack it, but I think we're cracking it at two levels. One with exhibitors getting more theaters out there, and most importantly with the consumers where the numbers are pretty good.

Good to hear.

And for Greg, if you could give an update on the local side of the film pipeline, both China which has clearly been a big boost, as well as other markets where last year I think you had some success with Stalingrad and Doom. Are you seeing IMAX-worthy local films in countries outside of China?

Well, first of all, China is obviously the big producer of those films for us and we'll continue to do that. But as you ask about other countries, yes. We'll continue to have sourcing in markets like Japan, Korea. And also Russia becomes an important market for us that we are spending a lot of time focused on.

We have a meeting in a couple of weeks regarding Russia in particular. There are a couple of titles that look very promising for the next -- not this summer but starting in the fall.

So I think you'll be able to, over the course of the next year, see us consistently generate between 8 and 10 local-language titles globally. The vast majority of them will be in Asia. But you'll also see three or four coming from other parts of the world -- that we continue to look at Bollywood, although Bollywood we look at in a little bit of a different way because of everything that's been going on in the market.

I think again the focus is more going to be on Russia, Asia, and then a pickup here or two in some other markets.

The only thing I'd like to add is in China when we have announced films that we kind of have handshakes on, some of those are really exciting. And when I was over there last week, people were talking about one or two of the ones that I think we're going to do as being on a par with the Hollywood blockbusters and in terms of their box office potential in China.

Great. Thank you.

Eric Handler, MKM Partners.

Yes. Good morning. Thanks for taking my question. I have a question for Greg.

Can you talk about how the World Cup might impact the number of your theaters globally and is this mostly going to be a European, Latin American phenomenon? How big of an impact it might have on the film slate in Asia?

And then secondly, just wondering if you could talk a little bit more about Indiana -- Rich, this is an area that you've been very intrigued by quite a bit over the last -- talking a lot more about in the last 12 to 18 months. What's your view on how big of a potential this market could be and what you've seen following Doom 3?

So first of all on the people World Cup impact, it's always been there. It's been there for the last 20 years that I've been aware of it. And it will continue to be in some degree.

However the studios all get the joke. And clearly in Latin America, and Europe in particular, they program around it.

So some exhibitors ask for and get family oriented films. Which is part of the reason why we're very excited that we're doing How To Train Your Dragon part two because How To Train Your Dragon part two is going to continue to come out during World Cup times in certain market.

Some markets that will move to late July and early August but others it will be in June and July. So that'll help fill a gap and it's nice to be back in business with Dreamworks Animation. And it's nice that -- it's only an international release for us, but it's also nice that it's a Fox title.

Other titles will move around accordingly depending on the degree that the World Cup they think will affect a certain territory. So you have Transformers opening up in some markets in as early as -- I think it's June 25. And then you have other Transformers 4 markets that are opening up the very end of July or early August.

Of course it'll be some kind of impact, but we'll always fill it in with additional titles, because it's not like the business is going to go away. But there's going to be a little bit of a period of time wherein those markets and those territories that are football crazy, they'll be watching their movies and we'll counter-program with movies that won't necessarily appeal to that exact same crowd.

So in terms of India, Eric -- as you know, we have a kind of a strategy that we attack every territory in the world. Which is, first, build reference theaters then get the PSAs to a point where they're going to be attractive to that exhibitor. Then bring in competitors to that exhibitor and then release local-language films.

So in India, we did all of those four and we did them all very successfully. Unfortunately last year, because of the decrease in the value of the rupee, and also because the election was coming up -- in fact as you know it's going on right now -- the market more or less came to a halt.

We didn't follow on as we have in every country all the time. The encouraging thing is that this year as the election winds down, we seem to see activity picking up again.

One anomaly is, two beautiful theaters were built by one of our partners called Sathyam Cinemas, and they were done a year ago Thanksgiving. And for a lot of political reasons that only people in India could really understand, the theaters haven't opened and they are among the nicest IMAX theaters in the world.

I believe they are supposed to open in the next couple weeks. And that operator is also expanding in other places in India.

So the pieces are all in place, Eric. I think at some point once the economy stabilizes, we should do pretty well there. In terms of our model, I think we've said the territory can support up to 70 theaters. In either open or in backlog now, we probably have about 15. So that gives you an idea. However, I think if India gets its act together in the way China did, I think we probably could do better than that, but that's what we've modeled out.

Great. Thank you very much.

Aravinda Galappatthige, Canaccord Genuity.

Good morning. Thanks for taking my questions. Just a couple from me.

First of all on -- with respect to the North American market, the recent signings have being mainly extensions of the original AMC-Regal deals. Maybe just talk to the potential to grow in North America, specifically with respect to the in-filling opportunities with the smaller regional chains that you get in the market there.

So I'll take this one. This is one of my favorite topics because you guys heard me talk about it last quarter, and I'm going to do it again because they just keep going.

The Galaxy Theater in Sparks, Nevada, is the best example of what can happen with a small regional player. As well as what we've talked about over the past with Warren Theaters in Wichita, Kansas, and Moore, Oklahoma. So these guys -- the Galaxy guys, Rafe Cohen in particular who runs that company, have come in and completely changed the market.

And they now own the product in Sparks, Nevada. They're getting all the films. It's a competitive zone. Their per screen averages are huge for the IMAX theater. They're using IMAX theater as the hub not only for movie-going in that complex, but literally for movie-going in that DMA. And that DMA has moved in terms of ranking. From something like 125th in the country to the top 5, 10, 15, almost every movie -- not almost every movie -- every movie that we've played.

It's a great example of what can happen when someone has a strategy, implements it and markets it appropriately. And really makes their theater, particularly their IMAX theater, look different from every other theater in that market. So it's a strategy in a lot of different areas that we're focusing on.

I know our sales guys are particularly focused on it in a certain Midwestern region and in the West where we maybe have some underrepresentation in places like Missoula, Montana; and Lincoln, Nebraska; and Fargo, et cetera. It's proven to be a very good strategy and one that I think we're going to execute on very nicely over the next couple of years.

Yes. And what Greg means by a competitive zone is, in certain zones everybody gets the film product. And in a competitive zone, it goes to different exhibitors. Like one will be across the street from the other and it rotates back and forth. But in this case, the theater's done so well that they've gotten a way disproportionate share than in this case at Cinemar, but it could be anybody.

A disproportionate share than they'd otherwise gotten, so it's a double benefit. It's not only that the IMAX theater's doing well. But they're also getting the product that the regular theaters and increasing their market share.

Thanks for that. And just on the -- also just switching gears to the TCL joint venture. Looking at the recent press releases you're making progress there.

Maybe just touch on the roadmap from here to a point where you would be able to launch the product together with TCL. I just wanted an update there. Thanks.

Sure. So we're in the process of finalizing the specs and putting out a demo of what the product looks like and we're aiming to do that sometime in the middle of the summer. Once we have the product all spec'd out and then we plan on doing some limited showings of the product.

We announced as you know, Aravinda, that we partnered with Wasu several weeks ago when I was in China. And Wasu is a content provider. So in China, if you want to put through content, it doesn't work that you just hook it up to a cable and anyone puts it in. There are licensed content providers and Wasu is one of the best of them.

In fact, part of Wasu is owned by Jack Ma and Alibaba. They're really a very top operator. And so we're in the process, besides doing the hardware, of integrating that software into the system -- not only software which they currently distribute but day-and-date movies in Hollywood and in China through Prima. And over the second half of this year we'll be putting that together and then I think, provided everything goes okay, we'll launch the product in 2015.

Great. Thanks. I'll pass the line.

James Marsh, Piper Jaffray.

Great. Thanks for very much. Just two quick questions here.

First, I was hoping you could discuss the PSAs -- I guess I'm trying to understand the decline here. Is there anything in particular that you guys would highlight in trying to reconcile it -- is it timing of films or the nature of the films or some type of mix shift?

And then the follow-up, Rich, on your comments regarding laser, you mentioned a key component or a key assembly that you guys have put together for the first time. Are there any other key components or manufacturing milestones that we should think about for laser in the coming months or at this stage it's simply testing the prototype you have?

Sure. So on your first one, James, as you know, over the last five years we've averaged between $1.1 million and $1.2 million in PSA. Except for one year where we're significantly higher because of Avatar.

And when you look at where the first quarter ended out, we did an analysis of what the last nine months did for the last three years. And the last nine months for the last three years did $900,000. So you look at where we are and we're still on target under that portfolio theory for getting in the same rate. So the slight reduction in domestic PSA and the mix, really, I don't think is material to the year on the portfolio theory.

If you asked me why North American PSA wasn't a little bit stronger, I think it has to do with the fact that the two leading movies of the quarter were Frozen and The Lego Movie. And looking at our historic criteria, you know that neither really plays or theoretically plays to our strengths because they're more family animated movies and traditionally we don't do those.

With that said, the breakouts success of Frozen, if -- would we look at a Frozen 2 right now? We probably would. Just given how much more that achieved than its peers and even if we index lower we'd still probably get a better result. But that's the primary reason that the way biggest two movies were movies that didn't hit our demographic.

In terms of the laser, I'm going to try to explain it in maybe simpler terms than I did during the script. But there are two parts to the laser. One part is the optical path and that uses a lot of our proprietary technology. It uses the Kodak technology and that does things other than brightness, which the laser is key on brightness so that makes the contrast better. That makes the blacks, blacker. That makes the color gamut brighter. And that's the part that we've been focusing our development on and that's the part that has performed very well. That was the milestone that I referred to.

The other part is more the laser light engine and more of that is on Marco's shoulders as our joint venture partner than on our shoulders. And that's where you -- the front end of it, where you turn on the laser and it takes this data that we're feeding it and turns it into this laser-driven brighter image. So technically when you sketch it out, it all seems to be fine and we should be able to make the deliveries by the end of the year.

But the reason this milestone is so important -- and I apologize for the length of this answer but it's important -- is that what you do is you spec out all kinds of pieces and then you subcontract them out and you hope that you got the specs right. And you hope that they interrelate right and then they get delivered, which they did, and you turn on the switch and it works.

But until you get the pieces back from the subcontractors, and until you turn the switch on, you're not sure you designed them all properly. And you're not sure how they fit altogether. So theoretically we should be in very good shape now and a light engine should be able to be built, and it should fit together and it should all work.

But one reason I took my time is there's a difference between it working in a theoretical universe where you design specs versus where you fit the two pieces together and you turn the switch on.

Understood. Thanks very much. That's helpful, Rich.

Eric Wold, B. Riley & Co.

Good morning. Just got a follow-up question on the film slate.

Looking at the press release obviously still you're -- the announced official film slate for Q3 remains light, maybe just give us a sense of how many titles maybe you've soft penciled with the studios, working out the various international reasons they'll move into and/or I think, Greg, you also mentioned seeing more local-language content films around the falls. Just maybe give more comfort and sense of how Q3 will shape up as you get closer towards it.

So, first of all, strategically we made a decision that in, let's call them the shoulder periods, we're going to be a little -- do a little bit more diligence and take a little bit more time to pick the titles since those aren't necessarily blockbuster times. So there's really no reason to announce a September title a year before it comes out.

Why not wait several months. Actually be able to see the films to pick from because we're offered all the movies. And be able to go with the ones that we know we're going to do the best because we've actually seen them with our own eyes.

So I think you're going to find going forward in the Septembers and the Octobers and the Januaries and the Februaries that we'll be announcing those titles later in the process. So we're able to again have a little bit more intelligence on which ones we want to pick.

As it relates to the summer, there are a handful of titles that are available to us for July and August and we'll be announcing those titles probably in the next 2 to 4 weeks. We've got plenty of time. I think everyone knows that obviously we're doing Transformers 4. We're very excited about it. Michael shot a whole bunch of the movie with our new 4K 3D camera. He's really happy about it. The footage, by the way, that everybody saw on CinemaCon on that movie looked great.

Obviously our Guardians of the Galaxy title, the Marvel title, we're very excited about as well. But I think you'll see a couple of other titles that will be announced for the July and August timeframe. So we'll have the same number of titles that we've had in the past. In fact, maybe even in July more than we did last year. Because remember we played PacRim for the vast majority of July and we'll have more than one this year.

We're also going to play the Transformers 4 probably for a little bit longer than a traditional two-week period. Again, because we're so excited about the movie and because it looks -- because it features the IMAX cameras.

For the fall on the local-language stuff we'll definitely have a Chinese title. I think there's a very good shot that we're also going to have a Japanese title. But again, we're going to make those decisions going forward after we've actually seen the movies, which I think gives us a lot more cover on making sure that they work.

So I hope that answers the question.

No. That's perfect. Thanks, Greg.

Ben Mogil, Stifel.

Hi. Good morning and thanks for taking my question.

I wanted to look at the gross margins a little bit. So we saw really good gross margin improvement in the quarter and certainly looking back comparing to other shoulder season quarters. Again very good gross margins. But looks like depreciation was a lot lower in the quarter.

Is there anything in the quarter that helped depreciation? Is that a new run rate going forward, I'm trying to get a sense of that.

I think with the lowering of our DMR cost because of moving to digital-only releases, I think you're seeing that work its way through the P&L, and lowered depreciation, and amortization.

Also, I'll mention that, in the JV business, the incremental depreciation on new installs from last year was almost completely muted because of the extension of the terms with AMC and Wanda last year. So if you look at the JV business, we had an increase in box office and the result in revenue. But really our costs were pretty flat year on year. So I think those are the two primary factors.

Not trying -- Joe, not trying to ever compete with guidance but is it fair to say just qualitatively going forward that the depreciation number we saw this quarter holds going forward at the same time you start to see the same thing on the -- you see the corresponding of those margins if you will?

I think on the JV business it will normalize towards the middle of the year once you're on apples-to-apples basis. As it relates to DMR, that's really going to be a transitional item. And our movement away from print only -- print and digital releases to just solely digital.

I think we've talked in the past that over time our cost they should reduce as we move away from print releases. So I don't want to give a hard and fast answer on this because we may decide to do prints on a particular movie. But certainly we're moving in the direction that we've tipped off in the past.

Okay. Thanks.

And then I guess either for Rich or for Joe, as you look in the second half of the year and the transaction with China closes, have your thoughts regarding capital structure allocation, et cetera changed at all?

No. I don't think so. I think that the only issue is maybe it's a good opportunity to take your question and just answer it slightly different way. Which is that I think access to the capital markets in China, within the five year period of time, is something that we're going to do when that's available to us. And I think it's a very nuanced hard situation to explain.

But, for example, in mainland China, you need to get in a queue to do an IPO. And if we walked in from New York and Toronto and raised our flag and said we want to get in a queue, we wouldn't rush necessarily to the front of the queue. We have local Chinese partners and you meet the test. And you go in and you say I want to go to front of the queue, you suddenly go to the front of the queue. So I think what we did in China gives us an opportunity to obtain additional liquidity hopefully at a significantly higher valuation sooner than we wanted to.

In terms of the cash from the deal, roughly half of it is going to come back to Canada, to the parent Company, I think a little bit more. And the rest will stay in China and that has dual implications. In China it's unlikely we're going to have to put more cash in there and that'll be completely self-funding. Even though we have a significant number of JVs to invest in.

In North America, I've said for a long time that at some point we'll look at different ways to deploy that cash and whether -- assuming we can fund the JVs completely and everything is on the table in terms of what the ideas might be to do with the cash. I think the fact that we'll have an extra $40 million or $50 million will give us more comfort as we go down those roads.

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

Steven Frankel, Doherty.

Good morning.

Greg or Rich, wonder if you might give us some insight on these pending distribution changes in China and how that might impact either the volume of films or the film rents that you and your partners would see.

I think it's really unlikely that there are significant distribution changes in China.

As I mentioned a few times, I was there last week. And I met with China Film Group, which is a state-owned enterprise, and I met with the China Film Bureau which is the government regulatory scheme. And I think it's very unclear that there are going to be changes in distribution.

I think a lot of information comes out of there. Some of it's true and some of it's not true. But I just didn't have the sense that there were going to be significant changes.

Okay. And how about an update on Latin America? Have things got any clearer there?

Yes. I think we're doing better than we've done previously in Latin America. Actually I don't remember, but either included in the numbers or early in the second quarter, we signed somewhere between two and four deals in Latin America. So I think that's a place, like Europe, where we've been going relatively slowly.

We put a lot more resources behind it and it's going better. We have a bunch of reference theaters there. Almost every IMAX theater that is open is doing really well, really strong. PSAs, you have a competitive environment there where there are a number of players and I think we'll continue to do pretty well down there.

Okay. Thank you.

Vasily Karasyov, Sterne Agee

Thank you. Good morning.

Rich I wanted to follow-up on your comments on family films. You said that the PSA in the quarter wasn't affected by you not participating in Frozen and The Lego Movie. And as you remember last year, Despicable Me 2 had a similar kind of impact, probably a little smaller, so I was wondering -- and now you have long conversations with Disney.

Did they say anything to you that could change your mind maybe not all family films are created equal? Or, could you be more flexible if it opens really big and can you go and play it after it's already opened and it's clear that it's going to be a big title? So I was wondering if there's a way to minimize going forward these kind of fluctuations in PSAs because of family films outperforming?

So this is Greg, and I'll take that one. And the short answer to both of your questions are yes and yes. We have had conversations with Disney about it. We've had conversations with DreamWorks about it. We've had conversations with Universal about it. And, of course, it makes sense.

One of the things that we really try to do is be introspective and evolve. We used to be almost exclusively in the family business. We've now built up this pretty amazing fan base in the Fanboy world.

But as our network grows, and particularly with international being such an important part of the box office, it makes sense for us to take a look back, which is what we're doing at family oriented films. And it's certainly not going to become a huge chunk of our business. But I think it can become an important part of our business, especially opportunistically when there's a title that has breakout potential.

So the obvious question which you're kind of getting at is, on an indexing basis, would we rather do 5% or 6% of a $200 million title or 15% of a $50 million title and obviously the math is the math. So the longer answer goes back to the short one, which is yes. It is something that we have spoken with our partners about and we'll be looking into going forward.

And I have a quick follow-up. I know that you have been undertaking a series of market studies recently.

Anything interesting come up? Do kids care about whether it's IMAX or not IMAX? Does IMAX mean some added appeal for children or not? I was wondering if you have any early results of that?

We really don't. We're in the middle of still doing some of those studies.

But I can tell you anecdotally if you walk to Lincoln Square on the opening night of a Fanboy movie, lots of people plan for weeks if not months going to those early evening opening showings. And a very good friend of mine, who is probably around 80 years old, said he felt like a fish out of water because everyone was reunited. It was like their thing to do, was when a blockbuster Hollywood movie comes out, to go to those early screenings. But that's still anecdotal. We're still gathering the data.

All right. Thank you.

Colin Moore, Credit Suisse.

Thanks. Good morning.

It doesn't sound like it, but it's just worth asking. If there's a -- given the political tension we're seeing in Russia and Ukraine, is there a reasonable fears scenario that would keep you up at night as far as any impact on your business in that region?

No. Let's just say if the world changed completely and it was the Cold War again, I might answer that differently. But in the current environment, the PSAs in Russia are very strong. It's an important part of their economy. Entertainment is an important asset in the country.

I've spoken to several of our exhibitors in Russia. There aren't even enough Russian films made to really fill the schedule in Russia. Basically they'd have to close the theaters or they have to show Chinese films, which I don't think would work that well. So I think as a practical matter the risks are very small.

Great.

You mentioned your backlog -- about 90% is new builds. That would suggest you maybe have an opportunity to optimize the size of the auditorium, the projection, and so forth. Are you seeing that benefit in being able to work with theaters that they build out from scratch? And maybe within that response if you could provide an update on how conversations with laser and new builds are progressing.

Yes. Absolutely.

You're making a completely good point. Which is, if you can build a theater you're not constrained by the limitations of the existing box. So you can build a bigger screen, you can build a more ideal aspect ratio. So yes, as a result you will have theaters that have better sight lines and more tailored sound systems and should provide overall a better experience.

The second part of your question was about laser and how that's going. It continues to go pretty well. There's some segment of our customer base that wants to see what it looks like on a screen before they sign a contract.

I think we have -- if you add Wanda, which is up to 40, I think we have around 60 signings. Something like that already, which by the way is more than the rest of the world that has announced by like 50. So we're really the only ones that have launched a product in any meaningful way.

But I think we're planning on having tests towards the end of this year. And I think once we can show those tests and people can look at them, and they can see it and feel it then I think you're more likely to see more signings come.

Thank you.

Daniel Ernst, Hudson Square

Good morning. Thanks for taking my call. Two questions if I might.

Rich, a couple years ago, you had talked a lot about how IMAX considered crossing an inflection point where the scale of your network allowed IMAX to not have to worry quarter to quarter, weekend to weekend, exactly how any given film is doing. And I think looking at your film revenue that's actually played out quite nicely.

But looking at your earnings progression, movements in the mix of installs quarter to quarter is always going to impact that but you're more trailing 12 or in progression we're not really seeing that scale. And I'm wondering if you have a perspective on what level of size of the network or growth rate do we have to get to that we see more consistent northward bound earnings?

And then second question. Obviously the install and backlog in international markets remains exceptionally strong. But we are seeing a slowdown domestically. Do you have any thoughts about reasons behind that? Or opportunities to regain growth and not just in installs but in terms of just revenues and performance for IMAX here in the US? Thanks.

Yes. So I would say in terms of your second question, international versus domestic, it's a question of market penetration. We're much more penetrated in the domestic market than we are in international markets. So it would be logical that you would have less ongoing sales in domestic markets than the international markets.

In terms of a box office in the domestic markets versus the international market, part of it relates to the last question. Which is the domestic markets have a disproportionate number of retrofit versus new builds so there are larger systems internationally. But purpose built -- I think that's one of the factors.

The other one, which I think we have a very good handle on, is I've been talking about the fact that we've put together a marketing department -- a top flight one over the last year or so. And we have some great plans, and we have campaigns, and we have social media, and lots of things ready to go. And the first quarter wasn't the time to do that, because as you point out, there was a lot of operating leverage in the business so you wouldn't spend your marketing dollars when the films just aren't going to perform. But I think you'll see that and I think that will make a significant difference in the domestic market. I'm looking forward to that, plus obviously what I talked about in the films.

In terms of your first question, you're asking about progression. In the fourth quarter last year, we beat by $0.10. This is a quarter that's historically weak the first quarter and I think everyone who covers the film industry -- all the analyst know that the first quarter is weak. I remember ending the last call I said we're not a quarter horse. We run a race that's a year.

I think if you looked at the results last year and you looked at the progression of earnings, you'd see very positive results. Finally, you've seen very low, very small contained SG&A growth, which we said we would do last year. We said we would get costs under control and we did. And if you saw the first quarter and you backed out special one-time charges you saw roughly a 2% growth rate which we did.

So I think the answer is we've passed that inflection point and we're now in that period of time and I think over the period of a year it'll play out.

I'd like to just make some closing remarks at this point. As we've said many times, in fact I just said it 30 seconds ago, we view our business as a yearly portfolio. There will always be seasonality in the install schedule, as well as film release timing, as was the case this quarter. But when managed on an annual basis as a portfolio, the business model drives expanding margins, as we saw this quarter, and bottom line growth, with which we expect will continue this year and into the future.

So with that, thanks everybody and we'll talk to you in a quarter.

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