Imax Corp (IMAX) 2016 Q2 法說會逐字稿

Good day, and welcome to the IMAX Corporation second-quarter 2016 conference call. (Operator Instructions). Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Jessica Kourakos, Senior Vice President of Global Investor Relations. Please go ahead.

Thanks, operator. Good afternoon, and thanks for joining us on today's second-quarter 2016 earnings conference call. Joining me today in our New York office is our CEO, Rich Gelfond; our CFO, Joe Sparacio; and our Senior EVP of IMAX Corporation, and CEO of IMAX Entertainment, Greg Foster; who will each have prepared remarks and will be available for Q&A. Also joining us is Rob Lister, Chief Legal Officer and Head of Business Development.

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

During today's call, references may be made to certain non-GAAP financial measures, as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and the definition of these measures, as well as reconciliations to adjusted net income, adjusted EPS, and EBITDA, as defined by our credit facility, are contained in this morning's press release. The full text of our second-quarter release, along with supporting financial tables, are available on our website, IMAX.com.

Today's conference call is being webcast in its entirety on our website.

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

Thanks, Jess, and thank you all for joining us today. Taking a step back and looking at the overall quarter's performance, on the signings and installation front we simply had a stellar quarter. Signings lead to installs, which ultimately lead to higher box office and more revenue. And from a box office standpoint, signings and installs also position us well to take advantage of the promising IMAX film pipeline over the next 24 months.

The lighter box office the industry experienced in Q2 did put pressure on the stock in the short term. However, it also afforded us the ability to repurchase roughly $41 million of stock in the quarter. We believe this was opportunistic on our part, given the strong level of installs and box office we expect to see moving forward.

Looking at our signings activity more closely, in Q2 we signed agreements for 95 new IMAX theaters, bringing our first-half 2016 signings to 131. That's just about as many signings in six months as we had in all of 2015. This brings our total backlog to over 440 theaters, the highest backlog in the Company's 50-year history.

Once installed, this backlog alone will increase the total size of our existing network by roughly 45%. Based on historical assumptions, we project these theaters should yield roughly $1 billion in revenue for the Company over the next 10 years.

This increased signings activity is likely the result of we call the Star Wars/Avatar affect, whereby we tend to see a big push in signings after an extraordinary box office year. In this case, an outstanding 2015 film slate was capped off with Star Wars, which delivered approximately $220 million in IMAX box office. The result of this was a big push by exhibitors to expand their IMAX footprint. And as we look to the promising 2017 and 2018 film slates, we believe this elevated activity will continue.

From a geographic perspective, of the 95 new theaters signed in the second quarter, 27 were from the domestic market; eight were from international markets outside of China; and 60 were in China.

I think it is important to also provide some incremental color on China, since the signings' performance was particularly strong. In the first half of 2016, we signed 50 new full revenue-sharing deals with existing clients, JinYi and Lumiere. JinYi now represents our second largest client in China, with a total of 60 theaters installed and in backlog.

Our exhibitor partners appreciate that box office has its ups and downs based on the slate in any given quarter. The benefit that the IMAX business model provides is that, over the course of a year, the economics of an IMAX theater are very attractive and typically drive PSAs that are roughly 3 times higher than the average private-label theater.

Take for example a movie like Warcraft, which was produced by Legendary Studios, now a subsidiary of Wanda. While April and May saw a year-over-year decline in the China box office, primarily due to tough comparisons, Warcraft, which generated $30 million in IMAX box office, helped drive a strong finish to the quarter in China, with June box office up over 50% from last year.

I should also note that IMAX's indexing on Warcraft was 13% on less than 1% of the screens, which is particularly impressive when you consider 60% of the 32,000 screens in China were all playing Warcraft at the same time.

The success of Warcraft also highlights the fact that not only do we have a very strong relationship with Wanda on the exhibition front, but our relationship with them extends far beyond that. We work hand-in-hand with them on their studio arm, which includes not only Chinese releases through Wanda Media, but also a number of Hollywood content versus Legendary.

We also work closely with Wanda's real estate arm on the buildout and launch of new theaters in China as well as new malls. We believe that our relationship with Wanda could not be stronger. And we're very encouraged by the increased Wanda installs scheduled for this year, as well as AMC's recent agreement to add an additional 25 IMAX theaters in the US, which we announced last month. AMC has been a great IMAX partner for roughly 10 years, and we expect many more great years to come.

And as I look to signings momentum in other parts of the world, let me highlight the opportunities that are presented to us through the global consolidation currently taking place. In addition to the extension of our AMC partnership in North America, I'm sure many of you also heard on AMC's call that it is in the process of buying both Carmike in North America, and Odeon and UCI in continental Europe. Realizing our biggest partners are the biggest consolidators in the industry, we are very encouraged by what this could mean for us as we look to accelerate our installation plans in these markets.

On the AMC conference call last week, it was highlighted that they have already identified at least 40 additional theaters in the Odeon-UCI network that are ideal candidates for IMAX theaters -- in all likelihood that will -- that figure will increase over time. AMC has been really a great partner for IMAX. Our robust signings activity has not only afforded us more confidence in the pace of future installs; it has also improved the pace of this year's installations as well.

As a result, we are yet again increasing our guidance for 2016 to 155 new installs, up from our prior range of 135 to 140, and even further up from our original guidance of 115 to 120. This increase in guidance throughout the year is unprecedented at IMAX. This positions us as well, as we enter into what should be a stronger box office environment in 2017 and 2018.

So, while Q2 box office results did not meet initial expectations, or the industry's at large, we had an exceptional first quarter and we -- still on pace to deliver a PSA relatively in line with our historical average, given our portfolio approach.

Nonetheless, and as I mentioned earlier, what ultimately drives revenues and earnings growth over the long-term is theater signings and network growth. And from that perspective, we're simply knocking it out of the park.

So in summary, we believe it's an exciting time at IMAX. Our core business is doing extremely well around the world, and we've never had better visibility into our network growth than we do today. And as Greg will discuss, we're entering into what should be a prolonged period of stronger box office over the next couple of years, and our brand has never been more widely revered.

And perhaps most importantly, we have never been more focused on what we need to do to drive stronger top- and bottom-line performance. Ultimately, it's about building out our core cinema network and strategically investing in new areas like film and virtual reality.

With regard to original content, we recently closed a $50 million seed round in our China film fund with China Media Capital and are now opening the fund to new limited partners. We look forward to updating you as this investment vehicle potentially grows in size, and as we begin to invest in interesting new Chinese films that we believe have significant box office potential.

On the virtual reality front, we're very excited to leverage our brand and know-how of what immersive entertainment experiences our consumer base wants. We aim to use the next 12 to 18 months to build a strong pipeline of VR content and to create a lean enough business model that we can license through our business partners on a global basis beginning in 2018. Once again, the idea is to only invest in areas that we believe will yield meaningful returns.

And that's where I think we can speak to a changing of the guard at IMAX. As many of you know, our current CFO, Joe Sparacio, is leaving IMAX to pursue new opportunities. He has led us through an amazing nine years. And I'd just like to say thank you, and tell you that it's been a remarkable pleasure to have worked with you. And, Joe, you definitely will be missed. Joe will stay on with us for the next few months to assist in the transition, and we're grateful for all his efforts over the last almost decade.

Now I'm very pleased to welcome our new CFO, Patrick McClymont, who will formally join us in a couple weeks to assist us in ushering in another era of growth for the Company, with a major focus on scalable expansion of our core business into international markets beyond China, as well as striking the first licensing deal for original content and virtual reality. No pressure, Patrick.

With that, let me now pass the call over to Greg Foster, CEO of IMAX Entertainment, who will take you through our box office outlook in more detail. Greg?

Thanks, Rich, and hi, everyone. In the second quarter, we delivered global box office of $261 million, which resulted in a per-screen average of $268,000. As we have mentioned frequently over the past year, 2016 differs from 2015, as it is made of predominantly singles and doubles, thereby making the year's box office more evenly distributed. As we've said before, we rely on a portfolio of titles, which, over a 12-month span, tends to adjust to a mean that has been fairly consistent over the past several years.

Along those lines, we should face more favorable comps in the third and fourth quarter, as we have a number of prominent titles yet to be released. They include Star Trek Beyond, which opens on Friday from Paramount, and has a 94% Rotten Tomatoes score; the much-anticipated Suicide Squad from DC and Warner Bros.; Sully, filmed virtually entirely with IMAX cameras by director Clint Eastwood; Magnificent Seven, from MGM and Sony; Marvel's Dr. Strange, which screened about 15 minutes of very well-received a footage at the Cinema Europe Conference in Barcelona last month; Fantastic Beasts, the Harry Potter spinoff; and the Chinese co-production The Great Wall, from Legendary, and directed by Zhang Yimou. And of course Rogue One, a Star Wars Story. And these are just to name a few.

With regards to 2017 and 2018, they are shaping up to be one blockbuster after another. In fact, although we're still firming up our schedule, it appears likely that we'll have a tent pole title virtually every month over the next couple of years.

In terms of films we have already announced, next year they are: Wolverine, from Fox; the new King Kong film, Kong: Skull Island; Guardians of the Galaxy 2; Pirates of the Caribbean 5; Transformers 5; Spider-Man: Homecoming; Chris Nolan's Dunkirk, which was largely filmed with IMAX cameras; Thor: Ragnarok; Justice League, from DC and Warner Bros.; and again, Star Wars, Episode VIII.

There are also a number of other franchises which we're looking at as we round out our calendar for next year. Some other exciting titles for 2017 include -- that we are pleased to now add to the IMAX schedule are: Beauty and the Beast from Disney; the next installment of the Fast and Furious franchise, Fast 8; Wonder Woman; and The Mummy. Clearly there should be no shortage of great content next year. And as Rich mentioned, our accelerated installations and robust signings will position us very well to take advantage of such an exciting film slate.

As we look to 2018, we have another round of what should be mega blockbusters, with titles such as Lego Batman -- and let me correct myself; that's actually in 2017. Now back to 2018. Steven Spielberg's Ready Player One, which we're really pleased to be doing; Tomb Raider; Avengers: Infinity War, which is directed by the Russo brothers -- and that's part one, which was shot entirely with IMAX cameras; and the Jurassic World sequel, which we are also very pleased to announce today.

Hollywood's growing reliance on the largest-scale megafilms based on renowned IP will have a clear benefit to our Company and partners going forward, since both thrive in blockbuster-rich environments. That's why we proudly have long-term slate deals with every major studio, which in no particular order, range from Disney to Warner Bros. to Paramount to Universal, Fox, Sony, Lionsgate, MGM and more.

With that, I will turn it over to Joe, who will review our financial results.

Thanks, Greg. Looking at the second-quarter box office in a bit more detail, we generated total box office of $261 million, which resulted in a second-quarter PSA of $268,000. From a geographical standpoint, $89 million came from the domestic market, while $75 million and $97 million were generated in international and China markets, respectively. As Rich had mentioned earlier, we faced particularly difficult comps in the second quarter, given the record-setting box office performance we faced in the year-ago period.

Also, changes in exchange rates, namely the renminbi in China and other markets, diluted the box office by roughly $10 million, or 4 percentage points in the second quarter. Nonetheless, for the first half of 2016, our global box office was $533 million, which resulted in a first-half PSA of $551,000. As Rich mentioned earlier, we think the portfolio effect of our annual film slate should put us at our historical range for annual PSAs.

Moving along to installations, we installed a total of 38 new theaters this quarter, and two upgrades. Of these installations, 13 were for sales type arrangements, 17 were for full JVs, and eight were for hybrid JV arrangements. This was slightly above our original expectation for Q2 installs, as we had a couple of theaters sneak in a few weeks early. These 38 theaters were located across 12 different countries.

For the third quarter this year, we anticipate installing approximately 40 new IMAX theaters, which would be a record number of installs for the third quarter. Of these 40, we expect 10 to be sales type arrangements, 23 to be for full JVs, and seven to be for hybrid JVs. As Rich mentioned, we are also increasing our annual installation guidance range to approximately 155 theaters from the 135 to 140, reflecting our signings momentum.

Do keep in mind that all of this increase in guidance is the result of additional full JV theaters being installed. As many of you know, while this will drive up initial launch costs in the second half of this year; however, these additional JV theaters should benefit the P&L more meaningful next year and beyond.

Speaking of signings, Rich noted that we signed agreements for 95 theaters in the second quarter, bringing our first-half signings total to 131, and resulting in a record backlog of 442.

With most of this theater backlog expected to be installed over the next 3 to 4 years, visibility into our network growth over the next several years is quite clear, and is why we are confident in raising install guidance yet again this year. A variety of exhibitor partners are looking into either -- to get into the IMAX business for the first time, or expand on existing relationships. Box office is very short-lived, and the fact that our network is growing at the rate it is should lead to outsized performance when we have more robust box office periods, as we are expecting to achieve over the coming years.

Moving along to our financial performance, our Q2 revenues came in at $91.7 million, with our JV and DMR revenues coming in at $23.9 million and $27.4 million, respectively. The resulting gross margins on the JV and DMR lines were 66% and 62.5%, respectively. The lower level of box office experienced in the quarter had a negative impact on gross margins in the JV and DMR lines, due primarily to the relatively fixed cost structure of those businesses. Our estimated DMR cost of goods for the year was previously estimated in the $32 million range. However, we now expect this figure to be roughly $34 million, due to an increase in the number of titles played and versioning costs.

Our gross profit for the quarter came in at $50.3 million, for a total gross margin of 54.8%. From an OpEx standpoint, our SG&A, excluding stock-based comp, was $24.2 million, just 1% higher than last year's $23.9 million. We continue to anticipate our annual SG&A expense to grow roughly 2% to 4% over last year.

Our R&D for the quarter was $3.4 million, and primarily reflects investments in the development of our commercial laser product. In addition to accelerating our investment in commercial laser, we are also implementing a new digital delivery system that will scale with our growing global theater network, will increase efficiency, and reduce distribution costs over the long-term. Together, with these two initiatives, we expect 2016 operating expenses to increase by $2 million to $3 million over 2015 levels.

Our stock comp for Q2 was $6.2 million. And we anticipate our full-year stock comp to total $32 million, which was consistent with our prior guidance. Our adjusted EBITDA came in at $29 million for the quarter. This compares to $50.4 million we had delivered in 2015, primarily due to the record box office achieved in that quarter. It's also important to remember that our China ownership is now 68.5%, whereas it was still at 80% in the second quarter of last year. So at face value, it is not an apples-to-apples comparison. The minority share of EBITDA this quarter was $4.9 million. And we now expect our full-year minority interest share of EBITDA to be between $24 million and $25 million.

Adjusted earnings, which is also impacted in the same fashion by our decreased ownership in IMAX China, came in at $12.1 million for the quarter. Our minority interest impact to earnings was $2.9 million in the quarter versus $2 million last year. We also continue to expect our full-year minority interest, as it relates to earnings, to be between $15 million and $16 million.

Looking briefly at the balance sheet, we ended the quarter with a cash balance of $228 million. This reflects the over $41 million we spent in the quarter repurchasing shares under our existing share buyback program. Year to date, we have spent $86 million under our share buyback program and repurchased a total of 2.8 million shares.

If you are looking a bit longer term, the achievements in the second quarter of this year, namely our signings activity, should have substantial benefits to the Company. We are signing a significant number of deals, installing a significant number of theaters, strategically expanding into ancillary business areas such as VR, and all in all have never been in a better position to take advantage of the robust film slate to come.

With that, I will turn the call over to the operator for Q&A. Thank you.

(Operator Instructions). Stan Meyers, Piper Jaffray.

I've got three questions: one for Rich, one for Greg, and one for Joe. Rich, congrats again on all the major signings in the quarter. Maybe you can provide some color on the signings in China and US -- where are those screens going in terms of city tiers in China, and maybe urban versus rural domestically? And I have two follow-ups.

So in China, the screens are going in a variety of cities in a variety of places. They are primarily Tier 2 and 3 cities. Just to remind everybody, only 14% of the existing IMAX network is in Tier 1 cities today. So that's consistent with the distribution of the existing theater network. We were really encouraged by the AMC deal in North America, because I think a lot of people thought we didn't have the potential to do a deal of that size. And in fact, there's still more territory available than we had thought, and there's still a number of discussions going on for North America.

So that was extremely good for us. We're really happy with the fact in China that a lot of our clients who had done STL kind of deals were now converted into JVs. That was one of the issues that people asked us a lot about was -- are people in China ever going to do JVs that provide more recurrent cash flow? So that's an extreme positive for us. And then, Russia, we had a couple of signings; and Europe was pretty good for us. Unfortunately, LatAm, because of their own financial problems really, were not ripe for transactions. But I was just extremely pleased.

And I should add, Stan, as I look into the third quarter at the number of discussions that are going on, it has shown no sign really of slowing down. So again, we will believe it when it is signed, but we have a lot of momentum.

Great. Thank you. And then for Greg, you guys recently expanded your relationship with Paramount. And I was wondering if there was any more formal slate flexibility arrangements in the new agreement that would allow you to swap out films in week two or altogether?

Well, I think, Stan, you've seen -- in fact, when I was with you in China, you saw it happen in the domestic market with Finding Dory coming in in a bigger footprint than it was supposed to be. And you also know that the same thing happened with Secret Life of Pets. So we have shown a flexibility. The flexibility happens based on the results. So, while we wouldn't preannounce something, we wait and see how a movie performs. If a movie performs, we're going to keep it going. If a movie, for whatever reason, is having a more difficult patch than we expected, we always have to be nimble and ready to make an adjustment.

But we do have long-term commitments and we do honor the long-term commitments, but there are times where we will go to a studio and say, hey, this isn't performing exactly where we hoped it would. Can you show a little flexibility to allow someone else to come in and perhaps share part of the network? And we're finding that, because everyone has a relationship with IMAX now, there's a little bit more flexibility, and that makes us a little bit more nimble.

Great. And then just one last one for Joe. DMR margins came in slightly below expectations. Clearly that fluctuates with number of films DMR'd in the quarter. Just wanted to see if there was anything else in there, maybe some co-marketing or anything else that would impact the margin.

There was a heightened level of marketing this quarter. But, Stan, I think the biggest impact was the lower level of box office. Box office was, on a quarter-to-quarter basis versus last year, was significantly down. That's what had the biggest impact.

Okay, great. Thank you, guys.

Darren Aftahi, ROTH.

Thanks, guys, for taking my questions. I just had two. Can you speak more to the benefits of your new digital delivery platform, and what kind of cost will be involved in that? And then secondarily, do you guys see any material impact from the period of the Olympics and the elections in the second half of the year? Thanks.

In terms of digital delivery platform, we had developed a lot of that technology previously in connection with our IMAX at Home effort, so it was very little incremental investment to create the digital delivery. And what it will enable us to do will be to eliminate the cost of the hard drives and shipping the hard drives. Darren, it's not going to make a material difference to our bottom line. But it will increase our ability to deliver films quickly, to not have to depend on others, such as third-party servers. And in fact, there is a relatively quick payback. You should think of that as more of the benefits than the financial benefits.

And on the Olympic front, what we're seeing -- and for those that have been watching television in particular, and the online support of the Olympics -- you've noticed that there are tremendous IMAX marketing support. Look at Suicide Squad, where every time there's a commercial, it says, experience it in IMAX 3D. So, as we get towards the Olympics, and the pre-Olympic coverage and then the Olympic coverage, I expect to see continued tagging for Suicide Squad, for Ben-Hur, which has an IMAX footprint -- a limited one, but one nevertheless. And then we'll see who else jumps onboard for the fall slate during the Olympic advertising. But we've found that our marketing support of our titles in the past several months, particularly on the broadcast television, has never been stronger.

And, of course, were also very focused as a company, as is everyone else, on digital. And you can go on any website, mostly, and you'll see Olympic coverage. So I think, in a funny way, that benefits us from a marketing point of view.

Great, thank you.

Eric Handler, MKM Partners.

Two things. One, just to get Joe some more airtime on his final call: Joe, can you give us the PSA numbers for domestic versus international? And then I have a follow-up.

Yes, just give me a minute, Eric. Got it right here. So, PSAs for the quarter. Total network, $268,200; domestic, $225,900; China, $325,300; other international, $266,700. And if you take China and other international, the average is $296,900.

Thank you very much. And then, Rich, when you look at China in 2Q, the whole world had a weak 2Q because the Hollywood content did not perform anywhere near as well as what we saw last year. China had its slowest growth quarter in quite a long time. Do you see any issues going on in China now about the box office there? Or is this just, look, the content wasn't as good, and as a result there was a down month; and the overall quarter was up single digits, and it was a reflection of Hollywood. But did you see anything else that was at play there?

No. To the contrary, Eric. In June we knocked the ball out of the park. The numbers were fantastic. As you put it, I think it's just a function of the films having traction in China. The Hollywood films didn't have the same traction that they did the year before. I think that's it. I love joking with Greg how the media, after two films, says there's a trend. But it's really about the content. And I think in China, there's no question in my mind that it's not a trend. It's just a question of movies not performing.

Great. And then just one quick follow-up for you. With the virtual reality venture, you've got a little health club venture going on, how impactful are these ventures going to be over the next 12 to 18 months to operating expenses, or anything above the line?

I don't think they're going to be very impactful. We budgeted what the operating expenses are in those areas. IMAX Home, which is the home theater in China, our joint venture with TCL -- I mentioned on the last call that the install pace there has slowed down because of just general economic trends, having nothing to do with us. So we've tried to rationalize expenses there. So we're trying to match, the best we can, expenses but with revenues, so we're not going to get in front of ourselves.

Great. Thanks a lot, Rich. Appreciate it.

Ben Mogil, Stifel.

Two questions. First one, I'm not sure for Rich or Greg. We have had obviously a good year so far this year in kids' films, and in animation. A bunch -- the better performing titles have all been in that genre. I know you've been opportunistic when something else hasn't worked and you filled in. I think Dory had some dates, and I think Life of Pets had some dates. But any more thoughts to revisiting having one or two major kids' films, i.e., animated films, actually as part of the standard slate going forward?

Yes; the short answer is yes. We've had conversations about -- all you have to do is look at the box office and see that the two biggest movies in the last six weeks have been those two films. And we did really well with Zootopia, which we were a part of. We did really well in China. We did really well in the domestic market. We had other commitments that, for whatever reason, those movies just didn't work out quite as well as we would've hoped, in those time frames of when Dory and Secret Life of Pets -- and I'm not knocking the performance, because Warcraft, for instance, particularly in China, was incredibly successful.

But in terms of more long-term planning, it's not something that we're going to all of a sudden turn our slate into a PG-oriented slate. That's just not what we're going to do. And we have other examples of where -- ultimately, it's just the movie; that's what it really comes down to. And it's the quality of the movie, and sometimes it's the genre of the movie. But if there's a movie that just looks like there's no stopping it, and it's an animated movie, we should be a part of it. And it is something that we have more focus on, especially over the last six weeks.

So that would be -- I'm not asking for specific films -- but the sort of thought there would be -- you'll know that your share of box office will be lower than it would be for a live action movie, but the share of box office makes it more than worthwhile, from that perspective. Is that the right way to think about it?

Correct. Again, I'm giving domestic focus, but it applies to everywhere. I'd rather have 5% of $300 million than 10% of $75 million.

For sure, for sure. Okay, that makes sense. And then, Joe, I guess this one is for you, and congratulations. It's been a lot of calls on with you, so I hope whatever the next venture is, it is equally successful as the one you are coming from.

When you look at the -- you made a comment about $2 million to $3 million above last year. Is that total OpEx, or is that just related to R&D? I missed the verbiage around that.

That would be total OpEx.

Got it.

So that includes both SG&A, excluding stock comp, plus R&D.

That's great. Thank you very much. I appreciate it.

Jim Goss, Barrington Research.

Greg, a little bit more on what Ben was asking about with animation. Was there anything in particular about those films, other than the sheer size of the box office, that got parents over the hump to pay the price to go to it? Because that seemed to be one of the issues in the past. Or is it just a matter of just how big the film is?

Again, Jim, it's the quality. Phil Groves, our Head of Distribution, is always saying, it's the movie, stupid. And that's really what it's about; the quality of those two movies were just exceptionally strong. And while there's track records with those two companies, Illumination and Pixar, you can just -- you can never bet that something -- that movies are going to be that strong. I guess you can stack the deck in favor of it, given their track record. But I think people are willing to pay high prices for something that's of the highest quality. And what we need to do is spot those high-quality movies.

And we have taken our focus from being more religious, for lack of a better expression, about fanboy titles to when there are very, very high-end, quality animated movies, saying we need to be a part of that. And again, we hear the message. We definitely hear the message. And it is something that I think you'll see a focus on. And even in some of the titles that we announced today, you'll see that some of them are more family-oriented kinds of films. And that is something that we're going to pay attention to. By the way, no more family-oriented movie than Star Wars: Episode VII, and that did okay in IMAX.

I guess so. And for either Rich or Greg, we've talked about flexibility in terms of screen usage. Is there any move toward maybe a split screen in daytime and nighttime, with family versus fanboy? I think we'd talked about it over the past couple of years, but I wonder if you're getting to more of a position to be able to dictate some of those terms, as well.

Jim, in territories outside the US, particularly Europe, they've done that for years, and it maximizes box office. The US exhibitors are generally reluctant to do that, although there's been a couple instances where we've been able to do that. But that's really up to the exhibition community, not up to us, where they're willing to share their screens.

Okay. And one little nit. Does Warcraft count as Chinese or US? I know that's been an issue in the Chinese box office mix. How does that work with you?

It counts as a US project, but the almost $30 million goes against the China box office, because that's what it did there.

Okay. I didn't know. It's been an issue in the past of keeping some sort of balance between the two.

I think, Jim, he means the (multiple speakers).

Oh, you're talking about for the quota, for the quota.

For the quota.

For the quota, yes. Yes.

I'm almost positive -- we'll follow up, but I'm almost positive it goes against the US quota, or the non-Chinese quota.

Okay. All right, thank you.

Mike Hickey, The Benchmark Company.

I guess the first question on your installation guidance. Obviously a lot of success this year, a big pickup from what you were originally thinking. Curious your view if that momentum -- and I think you mentioned it -- but maybe clarify, if you think that momentum can carry through in 2017. Or are you pulling forward deals maybe that you'd have in 2017, given obvious growth opportunity in 2017, 2018, given the slate? And then I have a follow-up. Thanks.

Mike, I think it's the latter. Well, it's new deals being signed at the record pace. So we're not pulling forward things. Look, it's 450-plus backlog at the moment. I do think it's going to go forward. I don't think it's a one-year phenomenon. I think we've got so many signings, and as you know, most of the backlog is typically installed in a three-year period, 3 to 5 years. So I think it's going to translate into higher installs going forward.

Okay, good. Thank you.

You have to remember though, Mike, for the long run it's great, because a lot of these are JVs. But in the short run, in the quarter they are installed, there are some upfront charges with them. So you don't get an immediate pop on that happening, but all those theaters being open for the terrific 2017 slate are going to translate into 2017 more than they will into 2016.

Okay. Fair enough, thank you. And then on the -- I guess you all sound excited over 2017-2018 from a slate perspective. Obviously [getting through] 2016 is going to be a relief. And, Greg, you also mentioned that film spacing looks to be very good, saying one blockbuster per month. So, I'm curious how that could impact your film count for 2017. And then I'm also curious how we should think about DMR expense in 2017, given the blockbuster slate, and whatever you say on film count, whether it's down or normal. Thank you.

Yes, I think it's probably too early to talk about that, to know that. There's so many other things that can come into play. Schedules always change. On paper, it looks like it's going to be evenly spread. But talk about the film costs at this point when we don't really know what the delivery is going to be -- sometimes movies are given to us six weeks before they come out. Sometimes they are given to us 10 days before they come out. And that really is such an important part of the cost structure. We've given guidance on what we traditionally spend, and I don't see much of that changing. But we always have to be flexible, depending on how the movies come in and what other adjustments are made. So talking about that for next year, and the year after that, is just speculative. So I don't think there's any reason to do that.

Okay. So last question for me -- thanks, Greg -- for Joe. Good luck, Joe; it's been awesome working with you. Curious on the 155 installs. I think the new ones were all JVs; I'm not sure. But what's the split between sales and JV for this year on the 155? Thank you.

Mike, I'm going to have to get that (technical difficulty) you. Let me get that to you later.

Okay. No problem. Best of luck, guys.

(Operator Instructions). Aravinda Galappatthige.

Just one remaining, actually, for me. Obviously very good quarter in terms of signings. Rich, I was wondering if you can talk to the economic terms of these signings. Is it fair to assume that the terms aren't in any way materially different from what we have been seeing over the last couple of years? [Bead] for system sales or JVs, obviously most of them were JVs. In terms of the take rates, I guess just wanted some assurance that the numbers really haven't changed that much as you ramp up signings. Thanks.

They really haven't changed at all from a material point of view, Aravinda. And also, as I said earlier, the fact that we had deals with a lot of players in China which were sales type leases, and now they are JVs where we have recurring revenues. So one can argue that the type of transaction is better for us, but the terms are similar.

Great, thank you.

Alexia Quadrani, JPMorgan.

Just one question for me. Could you please talk a little bit about the local language films coming up in China in this coming quarter? And given that there isn't a typical Hollywood blackout period, how much flexibility do you have to move between Hollywood films and Chinese local films in real-time?

Well, first of all, China tends to be one of the territories where there is more flexibility and screen sharing. So that's a good thing. And we've seen that over a period of time, particularly during the local language period, and now with local language in some of the Hollywood titles melding together. There are two particularly exciting titles, at least again on paper. It all goes back to the quality of the films that will be coming out in the next few weeks. One is a movie called Skiptrace. That is a Jackie Chan movie. And then a few weeks after that is -- actually two weeks after that -- is a title called Time Raider. And those are two titles that the marketplace seems quite looking forward to.

So, I think will be able to have -- Tarzan is interspersed and there, and then there will be some other titles that will be coming in as well. Ice Age 5 is coming soon. We just found out that Star Trek will be coming in in early September. So, there's going to be a lot of product in China, and the local language films will play during this period. And then as we move past that, we will get the Hollywood films as well. So we are a full-service shop in that we look forward to the highest-grossing movies, and are less focused these days on whether they are Hollywood titles or local language titles. We're focused on which ones we think are going to do the best in our network.

Thank you very much.

Robert Peters, Credit Suisse.

Just as an aside to Joe, it's been great working with you over the years. Rich, when we look at the stronger install guidance, just wondering if you can provide some updated thoughts on having multiple IMAX screens in a given zone, particularly with some of the consolidation you are seeing in the marketplace today.

I'd say, Robert, that we are open to thinking about it, but I certainly don't think it's a panacea. There are a lot of technical issues, which is -- you wouldn't want to have a one big screen and one smaller screen. Certain times of the year, the capacity will be high, but other times of the year the capacity will be low, and they'd have to play other things. There are branding issues involved. So I think there are some theaters where you could do it, but I don't think it's a huge opportunity for us.

Okay. Thank you very much. I'll hop back in the queue.

Steven Frankel, Dougherty & Company.

Rich, you?ve talked about Japan in the last couple quarters as being the next hot market. Maybe give us an update on what transpired there in Q2, and what the signings outlook looks like between now and the end of the year.

So, before I go to that, I'm going to go back to Robert's question. Before, Robert, I thought you were talking about in the same theater or complex. If it's in the same zone, that is something we're very interested in, and it's something we're doing more and more of. And I do think that's a decent sized opportunity.

In terms of Japan, we opened three really high-profile locations in Japan, all on the same day, around the opening of -- what movie was it, Greg? I don't remember.

Independence Day.

Independence Day in the last couple weeks. And all three of them have gotten off to a really good start, really good box office. As you know, we signed a 10-theater deal with Toho. We signed a deal with AEON, all the big exhibitors in Japan. There's still a lot of interest in the box office doing very well. I don't have offhand how many we signed in Japan in the quarter. If you can find that, Joe. But in the meantime, while he's looking, I still feel very good about that market. Because the keys to a successful market for us are having good reference theaters, which we really have in Japan; having competition, which we have in Japan; and good product in Japan, which we have somewhat in the local language context as well as the Hollywood context. So I'm still optimistic on that market.

Okay. And maybe a quick update on costing down the laser and the glidepath to commercial deployment.

Yes, so we've made a lot of progress towards costing it down. And we're hoping to have the laser for the more multiplex theaters versus the larger laser, which is the one we've been deploying, at a similar cost of goods sold to what the cost of goods sold is for xenon system. One reason you've seen our R&D skew a little bit more than last year?s because we're investing exactly in that effort. But I'm feeling good that we'll be able to deliver a product within the cost parameters of our existing xenon product, and probably in the next couple of years.

Great. And Joe, good luck to you. Again, it has been great working with you.

Thanks.

Robert Peters, Credit Suisse.

I wasn't sure I was going to get back in that quickly. But maybe just to Greg: when we talk about adding new films into the quarter, and when you have the flexibility of doing that when you have a film that maybe doesn't perform up to what was the initial expectations, how do you balance the incremental DMR costs versus adding those films in at the last minute? Is there a tipping point in terms of box office that you guys look at? Or any kind of color around that would be fantastic.

That's a good question. But the good news is that most of these films are already being DMR'd for international releases in markets where the release schedule is staggered, and so they were already going to play. So for instance, Dory was a movie that we were already doing. And Secret Life of Pets was a movie that we had an expectation that we would probably do in some of the markets. Because again, given the Euro Cup, we knew that Secret Life of Pets was going to have certain territories that needed an IMAX release. So it doesn't always work out that way. And when we get surprised by something, then we just hustle and do it as fast as we can. But the good news, Robert, is that most often we're already in the process of DMRing these titles.

Perfect. Thank you very much.

Thank you. And there are no further questions at this time.

Mr. Rich Gelfond, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you, operator. The first thing I'd like to say is I again would like to thank Joe for his nine years of service to IMAX. And we'll really miss him, and we wish him the best in everything going forward. In terms of the quarter, if you are short-term focused, I understand how box office didn't live up to your expectations or our expectations. But you need to put it in the context of we're still tracking to our historic averages. And that has very little to do with the long-term prospects of the business.

If you are a strategic investor in IMAX, it was just a fantastic quarter because we built out our network into the future, our backlog is at record levels, and our deals trended away from SPLs into joint ventures. So, as someone who runs this business for the long run, I couldn't be more pleased. And the tone going into Q3 for network growth and installs is also looking very positive. So, for our long-term investors, thank you, and we're quite certain your view will pay off in the long run. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.