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Imax Corporation (NYSE:IMAX)

UBS Global Media and Communications Conference

December 04, 2012 02:30 PM ET

Executives

Richard Gelfond - CEO

Analysts

Jon Cohen - UBS

Jon Cohen - UBS

I think we can get started here. Good afternoon my name is Jon Cohen; I am the PMT Investment Banking Group at UBS. It’s my pleasure today to introduce Richard Gelfond. Richard is the CEO of IMAX. He’s been the CEO of the company since 1996 and has really during his 10 year overseeing the transition from a kind of specialty theatrical provider and museums and specialty theaters to the premier provider of (inaudible) releases. So Richard thanks a lot for being here.

Richard Gelfond

Thank you.

Jon Cohen - UBS

Just to begin, maybe we can hear about the big picture at IMAX. What has really driven the growth and what is behind the transition that you’ve been leading for the past few years?

Richard Gelfond

Guess you have to divide it into timeframe, so I'll start early and make that very fast and then I'll get to the more recent. When I came to IMAX in 1994, it mostly did institutional films and institutional theaters. We called it bears, wells and seals films. Over the next decade, we transitioned it from a content point of overview mostly with proprietary technology which we invented which enabled the conversion of Hollywood films into IMAX films. We also figured out a way to penetrate the modern multiplex in a cost effective way instead of having to build your own building and we brought the cost of the theater operator way down whereas originally it cost them $5 million to get into the IMAX business to where now most of our deals are joint ventures and they put up a $150,000. So you just take that 15 years span and go from $5 million to $150,000 and documentaries to Hollywood films and that gives you sort of the global sense.

What's really driven our growth in the last four or five years was we transitioned from films to digital. So in a film world, one IMAX print that one theater, so since we’re in New York, we’ll talk about Lincoln Square which is a film theater would cost about $30,000 on average between 2D and 3D. Now in a digital world and there are still are some film theaters around but not very many, in a digital world that same one print cost $150. So we really wiped out a big financial impediment as we lowered the cost and other elements of the chain.

The second thing that happened is some of the most important film makers around the world really became interested in IMAX and it became sort of their showcase platform. So whether its Jim Cameron with Avatar or Chris Nolan with the Dark Knight and the Dark Knight rises in which he used IMAX cameras in his last film to film about half of the movie or whether its Steven Spielberg, Michael Bay, IMAX is really the way they want their content seen and in the hierarchy of Hollywood, the fact that directors really want an IMAX is very important to the studios and also has become important to a core audience which we call fan boys which is really the internet, mostly male, 15 to 30. IMAX has become sort of the cool thing to do.

And the final thing I would say is globalization. So whereas IMAX was originally primarily a North American phenomenon, now over half our revenues come from international markets, our second largest market in the world is in China. Our network has, this is perhaps the most interesting thing is when The Dark Knight opened, in the year 2008, it opened at a 149 IMAX theaters in the world. When The Dark Knight Rises opened four years later, it opened at around 600 theaters. So the network has grown by around four times in a four year period of time and we’re still growing at somewhere between 20 and 30% compound annual growth rate.

Jon Cohen - UBS

That’s great and I think we’ll pack probably each one of those items that you mentioned. But first maybe you can talk about the business model of the company. I know there is dual revenue streams and a third as well, so maybe you can just focus through the revenue model.

Richard Gelfond

Okay so as you said, there are really two revenue streams although one has a sub revenue stream. So let`s start with the easy one and that’s the revenue stream we get from the studios. So anytime an IMAX film plays at an IMAX theater, and I'll put an asterix because there are a few nuances but this is 90% true, we get 12.5% of the box office from the studio. So right now Skyfall is playing at IMAX theaters, the Bond installment, we get 12.5% of the box office, pretty much wherever that plays in the world. The asterix is China, its 9.5% in China, but everywhere else in the world its 12.5%.

Jon Cohen - UBS

Is that the gross box office or is that?

Richard Gelfond

That’s the gross box office. So if it does $50 million in gross box office from the world, we get 12.5% of that from the studios. The other side of that, is on the theater side and on the theater side, we have kind of two revenue models. Our newest revenue model which is about half our network is we give our equipment to the exhibitors and in exchange we get roughly 20% of the box office. So AMC, we have a 125 joint ventures with, Wanda in China, we have 75 joint ventures with, CJ in Korea I think we have 15 joint ventures with, in many other countries. So we get 20% of the box office in exchange for us contributing the equipment and the brand and training them which is about $500,000 in a onetime cost to us. So again, go back to what I said about the studio and go back to this JV model where we get 20% of the box office, so get 20% of the gross from the exhibitor, and we get 12.5% of the gross from the studio. So roughly a third. So again, if you go back to my Skyfall example where I using just by way of example that it does 50, if it does 50 and they were all joint ventures, we’d make a third of that or roughly $15 million, $16 million. So that’s the other side of it.

The third piece, the sub pieces, in certain countries we won’t do joint ventures or if we don’t really because of the transparency of the box office or the rule of law, where certainly we’ll do one offs with exhibitors, where just a small deal, the accounting is not worth it, in those theaters we sell the theater to the exhibitor rather than do a joint venture and we sell it, we get 1 and 2 million depends on where in the world, that’s roughly a 60% gross margin business for us and we usually get around 3% of the box office on an ongoing basis. So that’s more and we have some other ancillary businesses like post production and we own a couple of theaters but those are all round area, basically it’s a dual revenue stream from the theater side and the studio side.

Jon Cohen - UBS

And when you sell it, is there a recurring revenue stream associated with that or is that a onetime payment?

Richard Gelfond

Well as I said, there is a 3% ongoing royalty plus we still get 12.5% from the studio. So as I said, in the ones that are JVs, we end up with around a third of the box office, in the ones that are sales we end up with about 15% of the box office.

Jon Cohen - UBS

And what's the current mix today between sales and JVs?

Richard Gelfond

It’s around 50-50.

Jon Cohen - UBS

And do you view that as the optimal mix on board or do you try to go more towards JVs?

Richard Gelfond

Well from a financial point of view, the JVs on a present value basis are worth more to us and their recurring revenues. In fact our IRRs on our investments in the JVs not counting the films are about 60%. So I love doing those, those are terrific deals. On the other hand, as I said, we won’t do them in countries where we are not comfortable with the rule of law or the transparency, so Russia is one of our best markets in the world but that’s one where we don’t do JVs we do more of these lease type deals.

On the other hand, the box office in Russia is among the best in the world. So even though we only get 15% instead of 33%, if you look at what we’re taking on a recurring basis out of those theaters, its actually not that far off because the numbers are so good.

Jon Cohen - UBS

So given all the success that you’ve achieved to date, looking forward, where do you see the major growth areas for IMAX to entering new markets, is it expanding your presence overseas and some combination?

Richard Gelfond

I am going to bridge your last question, this one I mean one of the really attractive things about IMAX is, an analogy of sort of like an HBO. We have a fixed cost for content and every subscriber you add is a fairly significant incremental gross margin and it increases your operating margin. IMAX’s network as I said has been growing at this extremely rapid pace and if you look at it in general, we've been talking about somewhere between 110, 125 theaters a year, something like that. And if you just put that growth rate on, and you don’t have an incremental cost for content, you see really this operating margin expansion over time. So our primary focus right now is on growing the theater network and that’s gone very well. We've had besides all the openings we have; we have well over 200 theaters in backlog right now which is scheduled to open in the years going forward. In china which is our second largest market with 100 theaters open, we have 150 theaters scheduled to open. So I try not to over complicate this thing. I mean adding theaters around the world which is going pretty well increases your topline and increases your bottom line so you don’t want to over think it. So, that’s why I said, in a way that’s by far the most important thing for us.

Also obviously our per screen is important, how we do at these theaters around the world and what we've been doing more and more is programming for a specific regions and specific theaters. So whereas we used to have one movie playing at a time, all over the world, literally I don’t even know all the movies we have playing right now. I looked at a spreadsheet over the weekend, but in general we have Skyfall playing in most of our territories, in Japan, I just remember this morning, we’re playing a (inaudible) movie that Jim Cameron was involved and by the way that movie has done over $1 million for us just in Japan and one of the reasons we did that was because Skyfall hasn’t opened yet in Japan or is just opening now in Japan. In China, we are playing a film called 1942 which is directed by one of the most famous directors Feng Xiaogang and that did a $1.3 million weekend in China. We’re playing Life of Pi in India and in the Philippines and in Taiwan.

So we have the ability and I think we are fairly unique in this to be able to program whatever box there is in the world with the best content and increasingly, it’s not only Hollywood content but and Hollywood even takes on a new meaning right, because Life of Pi is a Hollywood film released by Fox but the director is Ang Lee who is Chinese and it stars mostly Indian characters and most of it was filmed in India. And I think you are going to continue to see sort of this trend of the globalization of content. So next year we’re doing a film called Stalingrad which is a Russian production, it’s an epic film and there is a lot of interesting territories outside of Russia, at the end of next year we’re doing a film called Dhoom 3, Dhoom 1 and 2 is the most successful franchise in the history of India and it primarily we are doing it for the Indian market but it’s also going to play well in Malaysia, in Indonesia it’s going to play well, in the UK and Canada and other places.

So we have this model where most of it is Hollywood content and most of it is blockbuster Hollywood content, but over time we’ve been branching out sort of to take advantage of what I call this globalization of entertainment. I'd say, that would be the second priority after the first one growing the network.

Jon Cohen - UBS

Maybe let`s dig a little bit into China. You guys have been extremely successful in that region even mentioned in the increasing quota to 34 films earlier this year. What has been your strategy in China and how have you been able to achieve such success?

Richard Gelfond

That’s one we can spend a whole hour on but I'll make it as good to summer, I'll give the cliff notes version which is we started going to China about 13 years ago. We had a very long term outlook to china so we moved our Asian headquarters from Singapore to china. When we went on those meetings, we said what could we do for you rather than what could you do for us and we accommodated their needs. So they wanted us to do things like local Chinese content and help them export which we've done. We've worked with Chinese local partners, we've had documentary films as well as Hollywood films, we've had seminars where we've talked about our technology and helped Chinese filmmakers use our technology and we really created a win-win scenario. So that was from a tactical and strategic point of view and I think that’s paid a lot of benefits because I think the Chinese know we’re not there for a quick buck and they know we are part of the fabric of what they do over there not only from an entertainment point of view but from a broader philosophical point of view.

I also think in China we were well positioned to get lucky and what happened was, I am trying to think how many years ago, like in around 2002, there were 1,000 screens in all of china and three years ago there were 3,000 and now there are 10,000 screens in China. So there is nothing like momentum to make your look smart. So we were well positioned but we also manage to really catch this massive way and I think in China we became part of the fabric of the movie going experience. So in Western Europe and the US, IMAX was known as somewhat of a niche documentary company. In China people who grow up with movies knows IMAX is kind of a cool fan boy premium way to see Hollywood films, so I think in a film like The Dark Knight rises comes out, everybody says let`s just go see at the IMAX and our ticket prices are higher in China than they are in the US, our per screen revenues are higher than they are in China than they are in the US. I mean the sound is unbelievable but we were lumped in one of these brand studies and something like 90 or 95% of the people in the study had awareness and a positive impression of IMAX and you don’t really see results like that.

Jon Cohen - UBS

And what challenges have you see in the Chinese market and breaking in there?

Richard Gelfond

I'd say the biggest challenge is really the regulatory environment. As you mentioned, there was a quota of 20 foreign films a year, and the good news for us was that of those 20 since we concentrate on blockbusters, most of the blockbusters got in, but clearly it wasn't as good as it was in other territories where everything got in. as you alluded, that's since been revised and now there are still 20 films allowed in, but literally in the language of the import it says 20 regular films but an additional 14 IMAX and/or 3D films are allowed in. so that's helped us a little bit because we have to carve out in the quota. But clearly it’s not the same as you can just program anything the second challenge is days and days when films opened are set by the regulatory authorities. They are not set by the theater owners themselves. So that’s always subject to some ambiguity so we’d probably would like to have opened Skyfall when we opened it on the rest of the world but in fact now it looks like it’s going to open up in late January in China and we still don’t have an exact date when it’s going to open up. So I think the regulatory issues are definitely challenging.

Jon Cohen - UBS

Another large theatrical market in that region is India and obviously there is a much larger local component there. What has been your experience in like India and what do you see is the potential for IMAX there?

Richard Gelfond

Well that’s an incredibly timely question since I arrived back yesterday at 4.30 AM and I have been there the last 10 days so I feel somewhat qualified to answer it. So there were a number of challenges in India for us and one was that the ticket price in India is very low. The second is that the modern multiplex is a fairly new trend in India. Most of the multiplexes were four screens so there wasn't over capacity, they had high utilization rates. But in the last few years that’s begun to change. So whereas a ticket price in India is like 150 rupees, $1.50, $2, if you look at the average ticket price in a modern mall at a multiplex, it’s closer to $7 or $8. So ticket prices have started to move. There are a couple of very large chains there. Our biggest partner in India PVR just bought another chain so they’ve become by far the largest operator in the country. So there are definitely positive moves at foot.

In terms of IMAX, we only had two commercial theaters in India as of a month ago and they both did very well but again it was extremely limited. So since then a month ago, we opened a theater in Bangalore and the numbers were extremely good. By March we have seven that are scheduled to open and we think we’ll have 10 to 15 by the end of next year and as I said to you the performance is pretty good in those theaters. So I think where you have good performance and you have a number of theaters opened, and our clients are all different of exhibition change. So if you just have one partner, you haven't created a sense of competition, there will be a sense of competition plus this mall development is going on there plus as I mentioned, we’re also doing Indian content, this film Dhoom 3. So I actually feel pretty good about India. I came from the trip I think much more optimistic than I was about IMAX. To be clear, I don’t think India is another China for us, meaning, where we went from in 2009 13 screens to 100 today, I don’t think we are going to go from 10 or 12 to 100 in that period, but I could see going a 50 or something like that over a five period of time.

Jon Cohen - UBS

And what other markets are you focused on and how do you look at emerging markets such as Latin America, you touch on Russia versus more established markets like Europe.

Richard Gelfond

Well Russia this morning we announced another four theater deal which gives us about 40 including our backlog in Russia and as I mentioned to you, Russia is our highest per screen market in the entire world. Western Europe, we were a little bit slow in developing and I wasn't really pleased with the pace but about a year ago we hired the President of Paramount International, his name is Andrew Cripps. He had also been the President of UIP before that and we've started to have a very good pickup this year in Europe. So whereas maybe three or four years ago we had four or five theaters in the UK, including our backlog and open now we’re at about 25 theaters in the UK. The Netherlands is a terrific territory but so Western Europe has really started to pick up for us in a decent way. So we’re looking at that.

Latin America is definitely a target for us. Again, it’s a very long start but we had a partner in Latin America who kind of had like a master license agreement and for a variety of reasons that hasn’t been penetrated as likely as quickly as we wanted it to be. So at the end of last year, we renegotiated that agreement and we started to share the market. We’re in the process of I think renegotiating it further where we’ll play a more active role. Of the top five multiplexes, now I think we only have four theaters in all of Brazil, but of the top five multiplexes, three of them have IMAX theaters. It’s a record of success there. The exhibition partners really like us there and I think I feel pretty good about it.

But again, I don’t think Latin America is another China. I don’t really think there is another China. I think Latin America is another one of those where you could have 50 theaters in five years or something like that.

Jon Cohen - UBS

And then how about the US market? What do you think are the major growth opportunities in the US and typically how do theaters perform kind of urban versus rural areas? What is the key focus of IMAX domestically?

Richard Gelfond

Somewhat to my surprise, the US this year was either the number or number two region for new theater signings, I think we signed like 45 theaters this year in the US and they have been more regional, they have been more in smaller markets. Now the good news for us is that those markets which I was originally somewhat concerned bout have operated so much if you think of a sports team. So if you are going to draw a map of the world, Green bay, Wisconsin wouldn’t be a place where you would think have this wonderful profitable sports franchise, nor would I have thought Wichita, Kansas or Oklahoma City would have two of probably the top 10 IMAX theaters in the United States. So bemuse there is a lack of entertainment in some of these smaller markets and because I think IMAX is sort of special and has that cache, we've been doing better than I expected. Canada is a terrific example and Canada I think we had like eight theaters something like, maybe four or five years ago and now we’re in the mid-30s and signing at a record pace. We even have some multiplexes in Quebec because of the language differences, where there are two IMAXs in the same multiplex, one that plays the movie in French and one that plays the movie in English. They are doing very well. So I think these smaller markets, I think there is a small opportunity in putting second theaters in existing multiplexes and I think markets where we’re just not represented.

Jon Cohen - UBS

And given your 10 fold focus than premium value of an IMAX ticket, you feel like you're insulated from the changes in box office that occur year-over-year or are you still subject to kind of the same level of variance that occurs?

Richard Gelfond

Well over the last several years, our Box office has been surprisngly consistnet and I think the reason for that is we have a fairly significant portfolio of films, north of 20 films playing in any theater. So if you look back on this year, there were certain films that underperformed that was supposed to be really breakout and there are other films that over performed, Avengers is the most obvious example that weren't projected to perform as well as they did. And if you look back over the last several years and you kind of model it out, in IMAX it’s been surprisingly consistent. Now I think one reason for that is because we are in the blockbuster business, something like four or five films is about 60% of our box office in any given year and if you look forward to 2013 again, we’re doing many of the predicted, most important films.

And also we have a special thing, we do differentiation in IMAX where it may be filmed with IMAX cameras, it may come out early in IMAX, it may be a special IMAX aspect ratio. So again if you go to 2013, Star Trek is being filmed in part with IMAX cameras and the last Star Trek did incredibly well in IMAX, Hunger Games is being filmed with IMAX cameras, we have the next version of the Hobbit coming out next year, we have Man of Steel which is the new Superman movie directed by Zack Snyder and Chris Nolan is producing the film, we've got Pacific Rim, (inaudible) and many other films. So I think as I look forward, it has the same characteristics which are eight films which are possible, four or five should be that blockbuster and a good slate around it.

Jon Cohen - UBS

And what is the flexibility? I mean is it difficult to convert a regular film into an IMAX, say a Twilight comes out and you don’t know it’s going to be a huge hit but then also its everywhere. Can you kind of quickly make that transition and get it in IMAX theaters?

Richard Gelfond

We prefer not to because you like to be part of the marketing campaign and you also like to do special things like the camera but certainly we can and what I just mentioned this year is a pretty good example, because we weren't supposed to do either Hunger Games or Avengers when the year started, but as the year wore on and it was clear that they were going to be big successes, we were able to become part of those franchises. And in fact I think it took us only about two weeks. Recently Life of Pi got into China and Fox called us up and they know the footprint we have in China, so we were able to convert Life of Pi in a very quick amount of time as well. It did very well in China. In fact we were about 20% of the whole Chinese Box office on about 80 screens which is way over index for us.

Jon Cohen - UBS

And you talked about the IMAX cameras and some of the filmmakers you worked with and how active are you in the actual creative process and what does utilizing IMAX technology early on at the overall experience?

Richard Gelfond

Well there are two kinds of movies, ones that come in the last minute like I mentioned in the Life of Pi, there is no time for us to be involved in the creative process and to go to the other end of the spectrum which was The Dark Knight Rises, where (inaudible) had a film and I met with Chris Nolan about a year and half ago to plan out IMAX’s involvement in it and Chris spent days and days and weeks and weeks in IMAX’s offices tailoring his vision to IMAX. Somewhere in the middle is Sam Mendes who did Skyfall who actually didn’t use our cameras but used cameras that had more of an IMAX aspect ratio and regular films are letterboxed, they are 2:3:5 like a TV set, whereas IMAX films are more square. So what Sam Mendes did was he used a regular camera but he covered to a wider IMAX aspect ratio rather than just the letterbox ratio and when he saw, he loved it and he decided to release the IMAX version in that ratio and putting it in kind of simple terms, this 26% more Bond in IMAX, more content on the film, I am not talking about just the size, I am talking about more content because of the aspect ratio. So we work with filmmakers typically especially if there is a lot of time in advance, one example would be when Avatar came out even though Jim Cameron didn’t film it with our cameras he certainly, we were very involved and we were used as a marketing tool by Fox as part of that but Jim was in our offices for a couple of weeks throughout shooting and especially at the end putting it together. So the filmmakers are really part of the DNA of the IMAX movie and that’s part of what makes IMAX so special.

Just to add to that, one of the things that I always find interesting is, when new employees join IMAX, like I am telling you and I am telling everyone in attendance that IMAX we do stuff to the film, but I think most people think oh it’s just a bigger screen, they don’t exactly understand why IMAX is so much better. But when someone joins the company, we have them do an orientation program in LA, Toronto, New York, our main offices and almost every time I'll usually see them three or four weeks into that process and say, what have you learnt, and they said oh my god, all the work goes into releasing an IMAX film and you’ll probably get to this but there has been some competition for them and a lot of the exhibitors have formed these theaters that basically take two regular projectors and put it on a big screen and they all put an X in the name because they think that that’s what we do, we show movies and we have an X in it.

But their involvement with filmmakers is they get the disc and they put it in their projector. Our involvement is, we’re an end to end integrated solution. So it’s designed by the filmmaker, its proprietary image capture, the competition does an up-res, a top-res, the sound is special, the color is special, every segment of the end to end solution. So it’s not like if we pass out questionnaires, the audience will necessarily know all the aspects that went into it, but it’s very real. It’s not smoking mirror.

Jon Cohen - UBS

Right, maybe touch on competition. Is there any competition in the US or Canada that you are aware of. I know there is some international maybe you could talk about some in China and others that you’ve seen.

Richard Gelfond

There is competition in a lot of countries but in fact even theater chains that have competition like AMC and Regal who are two largest domestic customers recently committed to an increasing the number of IMAX theaters. So I think they think of it as good, better, best with IMAX being the top of the food chain and I think many of them primarily use the competitive technology where they can’t put an IMAX theater. So one thing I didn’t mention is, we give exclusive zones. So 40 seconds in New York is an exclusive zone that AMC has, Regal has a great theater across the street but they couldn’t put an IMAX in there, so they put one of their homegrown in there and I understand that and certainly offers a premium experience to the customer but it’s not IMAX and they would tell you that. So there is competition but so far obviously given our growth rates and everything I think we've been able to do very well despite the competition.

Jon Cohen - UBS

And has 3D been additive to your business more than taking away from competition?

Richard Gelfond

Well what we’d like to say and its (inaudible) we don’t really care if its 2D or 3D as long as its IMAX but that’s what we believe and some of our greatest successes have been 2D including The Dark Knight Rises and including Skyfall recently, Mission Impossible, the first Dark Knight. So literally most of our theaters charge the same price for 2D or 3D. I think for us its more is it a blockbuster or isn't it a blockbuster. So if someone is doing like The Hobbit is in 3D, so we are doing The Hobbit, but we are not doing it because it’s in 3D, we are doing it because Peter Jackson’s movie and it’s The Hobbit. Now in some territories I think 3D does help particularly in the international markets, places like Russia, people really love 3D in Russia, other markets its beginning to season a little bit. I think strategically we made a good call when 3D came around, we didn’t run around saying it was the greatest thing since slice bread and we didn’t position our business that way and we didn’t bet our business that way. So I think its fine in certain markets it’s helpful but I don’t think we’re tied to it.

Jon Cohen - UBS

But none of the 3D is your own technology. Its third parties or do you have your own 3D technologies?

Richard Gelfond

No as a matter of fact, I sound like Al Gore with the internet but this is a slight overstatement but more or less on a commercial basis we did invent 3D and although 3D has been around in commercial theaters for a very long time this new generation of 3D, House of Wax and that 3D, the new generation we started filming films about 25 years ago and in fact before Jim Cameron made Avatar, he released two films to IMAX theaters that were in 3D and he actually spent months in our offices learning about how different characteristics of 3Ds and the case with the pupil far exceeded the teacher in terms of how he tools and what he developed in 3D, I don’t use the word lightly, the guy really is a genius at what he does. But we were really pioneers in the 3D business. We just again kept it in perspective. We saw it as one tool rather than an answer to an industry.

Jon Cohen - UBS

So clearly technology is really the core of the business, discuss publicly this new laser technology that you’ve acquired. Can you talk about how you think that could impact the business?

Richard Gelfond

Yes, so one of the limitations of our transition to digital which I talked about before, is that we can’t light the very largest screens. So Sony Lincoln Center here in New York, the BFI in London, the Metreon in San Francisco, the technology just doesn't exist to put an IMAX quality image on this full screen that size. So we've been doing diligence over a number of years and we discovered that Kodak had some patents that created this laser technology that could put a terrific image on a screen that size and we acquired those patents from Kodak about 18 months ago and we've been developing a laser based system. The laser based system is actually a lot brighter even than IMAX film, it provides a higher contrast ratio and you don’t have to replace bulbs and the 1000th viewing is as good as the first one because they don’t burn out. So we've been investing, 10 to 15 million a year in R&D to productize that. I think we’ll roll out products sometime in 2014 and that the first rollouts will go to the larger IMAX theaters like Lincoln Square. It’s a different technology path but I think eventually probably around 16-17 will start to look at a laser product for the smaller theaters, but I really do think it will bring the whole experience to another level. One small example the 3D one of the problems in 3D is that you wear the equivalent of sunglasses in order to get the 3D effect and screens today aren't really bright enough. And an example I take a lot about is Alice in Wonderland, the Tim Burton movie, if you took your glasses off you would see this colorful experience but with the glasses, you saw 3D but you just didn’t see the same quality of it and I think once we release our laser system we’re going to even have an added differentiated than we have today.

Jon Cohen - UBS

So it would be a 3D product without the glasses.

Richard Gelfond

No, no, it’s with the glasses. It’s going to be a long time before you see 3D. I mean you are going to be able to do 3D without the glasses on a cellphone I think not too long from now but I think on at a home IMAX type theater that’s a long time away.

Jon Cohen - UBS

I mean have you ever looked at other ways to minimize the IMAX brand name in the home, anything like that?

Richard Gelfond

We've looked at it a lot, we sort of looked at the low hanging fruit way which is just license our name and we've kind of rejected that and the reason for that is we have so much brand equity, we don’t want to dilute it and we think that we might considering doing that if we really added something to it, so you know we have all kinds of ideas that have come along so whether its headphones that have wanted to license our name. I mean we can make some money but I think we’d only do it if we felt we could add something proprietary and really make it very different. I do think the place we’re likely to go eventually is in the home. I think it will be at the very high end and we work quietly at the background of acquiring some or developing some proprietary technology. Because again, we’re not going to take a big TV set and put an IMAX name on it and get some kind of minimal royalty. If we do it, we’re going to do it right and develop a very special product. And that’s something, again, we’re just starting to toy around, and not spend a lot of money primarily because our core business has such an attractive financial characteristics but we are starting to look at that and I think at some point in the future you might see something like that.

Jon Cohen - UBS

Just on another potential revenue stream, given your experience on the film side and the content in general, have you ever considered investing directly in films, creating your own production entities, your is I think IMAX technologies, anything along those lines?

Richard Gelfond

We do invest in documentary films. So we had a film called Born to be Wild, we have a film now called To the Artic and they are more like the traditional IMAX film. And those are played mostly in our museum science center network and we do that for a variety of reasons, its part of our legacy, its part of our brand. We desire to provide content to that segment of the network and it also happens to be quite profitable. I mean it’s not like a typical film where a three day weekend you either, you’re taking a write down or you write it up, you tend to play over two or three years or more and ancillary. So that’s a good small business for us. We make money off that business and you should expect to see us do more of that.

In terms of big budget films, I think that’s really highly unlikely and as I went through the IMAX economics, as I said to you, by investing our brand and our technology and converting the movies we are pretty much getting in the JV situations around a third of the box office investing in a different direction. So we just think that’s more attractive model than kind of betting on particular blockbusters.

Unidentified Analyst

Do you point any pushback from the studios as a result of the revenue share that you have or from the theaters I mean is there any concern or [Question Inaudible].

Richard Gelfond

The answer is absolutely. I mean if any business is pushed back from the other side, when you go to a restaurant, you rather pay less and the restaurant wants you to pay more. But the 12.5% has held for a decade and we just signed of 20 picture deal with Warner Brothers which is at 12.5% and every deal we’re doing next year is at 12.5%. so I'll tell you one anecdote which is about two or three years ago one of the studios called about a blockbuster movie and said, we won’t be paying you 12.5%, we’ll be paying you 10% and we said no, thank you. We’re not really interested in doing your movie and they said fine, they went away. And then the director who’s an A list director, someone you’ve heard of, called our head of film and said well you know, why aren't you working on the movie and he said because the studio said they weren't going to pay the price and we decided not to do it. So he said give me five minutes and literally five minutes later the studio called back and said there was some confusion I don’t know how you didn’t understand we were always willing to pay 12.5%. and that I think so I think two things protect the margins, one is that there is a price premium remember. So the studio is paying us 12.5% but they are getting an average ticket price of $7 or $8 from everyone else. From IMAX they are getting an average ticket price of $13. So they end up making more money by paying is 12.5% than if there is a release.

Actually three things, the second is the directors, which are really important to studios and they really love IMAX because it looks like an artist painting on the biggest canvas in the world and the highest quality. They really want to do it and that’s important and the third thing is competition. So last year, in the fourth quarter there were four films coming out that could have been the Christmas blockbusters and they were The Girl With the Dragon Tattoo, Mission Impossible 4, Sherlock Holmes and I don’t remember the fourth one, there was another one. No one would have predicted that Mission Impossible 4 would have been the winner of that season but what happened, Mission Impossible 4 was the one that came out in IMAX, we did $60 million globally in IMAX, it was promoted in IMAX. So I think the studios really understand the value proposition.

In terms of the exhibitors, they push back too but they don’t have to be in our business and fortunately in most markets in the world, its competitive enough where if they don’t want to do it, the guy across the street will do it or someone up the road will do it. So it’s always about all but the split is pretty much haven't changed and I don’t see anything foreseeable. The only thing I would add is, someone like Regal or AMC who will have a large footprint, obviously we’re willing to do a slightly different deal with them than we would do with someone who had a one-off or two theaters. That’s why I said when it’s about 20% it’s in terms of what the opportunity is and it comes down to negotiation.

Unidentified Analyst

[Question Inaudible]

Richard Gelfond

When you say, the technology, you mean the laser technology we’re developing or the current technology?

Unidentified Analyst

[Question Inaudible]

Richard Gelfond

It does work in smaller spaces but we won’t go into spaces that are too small. So we have the scientific test that’s called the wow test, so if you don’t come into an auditorium and say, wow, we won’t do it. And in fact, we have one exception to that which is in Moscow, we’re about to do a second one in Saint Petersburg, we have an IMAX VIP theater which I think costs $75 a ticket and it’s a smaller theater but there are less seats and the theater is actually, frankly I asked our sales team to make them sign every disclosure in the world because I wasn't sure what the market for a $80 tickets but it’s actually doing well and they are doing a second one. But yes, it does work.

Unidentified Analyst

Something that I am actually which is pretty cool was the early release of Mission Impossible 4. And also you guys used IMAX cameras specifically for that movie, so wanted to know if that’s a strategy that you guys plan on using going forward? Is that a way that you might incentivize filmmakers to use your cameras and if so, if you’re going to use that strategy any potential risk involved to that? Thank you.

Richard Gelfond

The answer is yes, that was a great thing for us and we’re thankful to Paramount and Brad Bird who directed the movie and I think it really helped the franchise a lot by releasing it a week early. We kind of have a policy which is we’ll only consider an early release if it has some IMAX DNA in it, meaning it’s used the camera or the aspect ratio. So Bond was released, Skyfall was released a day early in North America because Sam Mendes did the special aspect ratio, Oblivion which is also filmed with the aspect ratio stars Tom Cruise is coming out next year and that’s scheduled to be five days earlier, a week early in IMAX, Star Trek, it hasn’t been decided what they are going to do, but we wouldn’t do it just for any movie. It has to have an IMAX component to us.

The second part was, you asked is there a risk, there is definitely a risk to the studio and that’s if it isn't a really good movie. So if you’re opening it on 6,000 screens then in a way the public goes to see if it’s marketed well but if you are opening just an IMAX and it’s not a really good movie, and the word of mouth isn't so good, they are running a risk on it. So I think in a way the studio probably wouldn’t even decide whether to do it or not till close to the last minute because the upside wouldn't be worth to fit them if it didn’t get good reviews.

Unidentified Analyst

Yes I was just wondering as far as in home type environments or high end of the customer insight, I guess I was just trying to get an idea of what form you would see that taking or how it would enter the home.

Richard Gelfond

Well there are actually two forms and I don’t Terry will give me the dirty look, our Head of IR, I don’t know whether we've announced this yet but actually we've sold some real IMAX theaters in homes so a limited number so far but people who could afford it and we’re building spectacular homes, have ordered a few IMAX theaters, it’s a limited number, if anyone is on the cell side, don’t run out and change your models today. But there is a market for it. So we know it works at the really high end. I don’t think we've introduced that as a major product but the question would be, could you do something like a home theater in a box, could you engineer a product which is somewhat less than the $1.2 million cost, an IMAX that could appeal to a broader market and those are the kinds of things that we’re looking at.

Unidentified Analyst

What's your investment for new screens and how is it different in the United States versus other countries? What investment do you have to make and what's your payback on those?

Richard Gelfond

So it costs us about $500,000 per screen in terms of upfront cost which we depreciate over the length of the lease which is about 10 years. Our IRR is about 60% on that investment. It’s pretty consistent all over the world. It varies slightly as you would understand with some local install costs and construction costs but more or less it’s constant.

Unidentified Analyst

If you could frame the opportunity for a number of screens in the network that’s possible from your research and then secondly just with the incremental costs uptick is for a filmmaker to make a movie in IMAX.

Richard Gelfond

So in terms of the potential market, we've estimated over the next three years and I don’t mean literally we’re going to sell this many but I am saying the world is obviously changing, so we do it on an ongoing basis at about 1,700 IMAX theaters in the world and as I said there is about 650 or something like commercial open today and another 200 plus in backlog. In terms of the cost of filmmaker in IMAX, if in fact it’s just a converted film, meaning we convert it, so the filmmaker doesn't film with the camera or anything like that, on the cost to us is around $1 million which is against the 12.5% fee that we get so we absorb that cost. In some we try to automate it more in particularly in international markets and bring it down but domestically that’s the cost. If a filmmaker films with an IMAX camera then there is incremental cost of the camera rental from us, there is also incremental cost of the film stock is quite expensive. So that’s just an arbitrary number but it depends if you are doing 20 minutes or half hour which JJ Abrahams is doing in Star Trek or an hour and 10 minutes which is what Chris Nolan does in The Dark Knight Rises but that’s absorbed by the studio not by us.

Unidentified Analyst

Clearly there is a ton of growth opportunity here in the company that stands today, would you ever consider any inorganic growth, any acquisitions either theaters or technology or special effects or content to help drive additional growth?

Richard Gelfond

The answer is yes, we would consider acquisitions but probably not in any of the areas you’ve mentioned, certainly not I don’t think theaters, I don’t think content, that’s not who we are. I think more likely in your list would be something that was technology related especially if it was something if you talk about like for example in home if we could find something I think, it would more likely be small rather than something large if it was technology driven. The other thing we've thought a little bit about it is we occupy a very interesting place in kind of entertainment landscape, meaningful we’re like Switzerland, we work with every studio, we work with every exhibitor, 54 countries, a lot of the world, so I think our position at Switzerland puts us in a unique place. So I think if there were an acquisition that were to make sense it would be maybe something that would lever off that position but we’re really not looking at anything at the present time, we've looked at things over time. But again the internal dynamics and the potential returns from our existing business is so attractive that I really don’t want to take the organization’s eye off the ball unless there is something really that you can’t say no to.

Jon Cohen - UBS

Great thanks Richard.

Question-and-Answer Session

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