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Executives

Rich Gelfond - Chief Executive Officer

Joe Sparacio - Chief Financial Officer

Rob Lister - Chief Legal Officer

Teri Loxam - Vice President of Investor Relations

Analysts

Townsend Buckles - J.P. Morgan

Drew Borst - Goldman Sachs

Ben Mogil - Stifel Nicolaus

Eric Handler - MKM Partners

Vasily Karasyov - Susquehanna Financial

Colin Moore - Credit Suisse

Rich Ingrassia - Roth Capital Partners

James Marsh - Piper Jaffray

Steven Frankel - Dougherty

Aravinda Galappatthige - Canaccord Genuity

IMAX Corporation (IMAX) Q4 2012 Earnings Conference Call February 21, 2013 8:30 AM ET

Operator

Good day and welcome to the IMAX Corporation, fourth quarter 2012 earnings conference call. All participants are currently in a listen-only mode. (Operator Instructions)

At this time, I would like to turn the conference over too Ms. Teri Loxam, Vice President of Investor Relations. Please go ahead.

Teri Loxam

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

I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking and that they pertain to future results or outcomes.

Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes.

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

The full text of our fourth quarter earnings release, along with supporting financial tables is available on our website imax.com. Today’s conference call is being webcast in its entirety on our website.

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

Rich Gelfond

Thanks Teri. We’ve often discussed how our business model is quite straightforward; grow the network, maintain per screen averages and control costs, which results in higher recurring revenues, margin expansion and bottom line growth. In the fourth quarter we executed on all key aspects of our business, forging a strong finish to a successful year and proving the operating leverage inherent in the business model.

A key driver of our growth is the expansion of our network and we continue to see significant demand for new IMAX theaters in regions around the world. In the fourth quarter we signed deals for 28 new commercial theaters and installed 43 new theaters, bringing our total commercial network to about 600 theaters operating in 53 countries.

To give you some perspective on the rapid rate of growth in our network, we opened The Dark Knight in 2008 on 135 screens and four years later we played The Dark Knight Rises on over 550 screens.

In addition to reaching an important network scale in 2012, we also achieved scale in our film portfolio, having released a total of 35 movies, with 15 of them on screen in the fourth quarter. Importantly, in 2012 we increasingly focused on the strategic programming of our global theater network. This includes optimizing the film slate to fill gaps in international release calendars and to cater to cultural preferences in each market, including Hollywood films, as well as local language films.

This emphasis on maximizing the gross box office for our international film portfolio is critical for IMAX, as the international markets are drivers of our network growth going forward. This global approach helped propel our portfolio of films to deliver a record $152 million in box office in the fourth quarter and $621 million in box office for the full year 2012, an increase of almost 50% from 2011.

In addition, our average global per screen average rose to approximately $1.2 million in 2012 from about $1.1 million in 2011. A combination of both network and box office growth helped to drive strong recurring revenues from our joint revenue sharing and DMR businesses in 2012 and resulted in a 20% total revenue growth compared to the prior year.

The solid top-line, along with disciplined cost control, translated to $107 million in EBITDA in 2012, which was 58% higher than the 2011 and full-year adjusted EPS than 2011 and full year adjusted EPS of $0.80, a 95% increase over 2011. Just as important, the scale of our business also translated into significant free cash flow.

But 2012 was not only about financial accomplishments. Theatre also proved successful on a number of strategic fronts. We further strengthened our studio relationships both in Hollywood, as well as with local studios in international market and intensified our focus on our global film strategy.

In addition, China entered into an agreement with the WTO, which led to both higher DMR rates for IMAX and specifically increased the number of IMAX films that can be released to the country.

We also rolled out our IMAX brand campaign and we saw an increased demand and use of IMAX differentiation in films, including the use of our proprietary IMAX cameras, our unique aspect ratio, which is specifically formatted exclusively for IMAX theaters and early release windows.

These are just a few of the strategic successes from 2012 that have laid a strong foundation for which we can continue to execute our business plan in 2013 and drive growth over the long-term.

Now let’s turn to 2013. I have laid out three key priorities for IMAX this year; penetrate, differentiate and scale. First penetrate: In terms of penetration we’ve quadrupled our commercial network over the last five years, where we still have plenty of runway for growth with almost 65% of our 1,700 identified zones still available, the majority of which are in under-penetrated international markets.

Our signing activity continues to be strong with 142 total signings in 2012, 121 of which were for new commercial theaters. This resulted in a robust backlog of 276 screens, compared with 263 at the end of 2011, and we have started off 2013 with a lot of activity and opportunities around the world as well.

We expect the Asian market, including China, to continue to be a source of growth for us in 2013 and beyond. We are pleased with the pace of new installs and signings, with almost 50% of our signings last year from the Asia market and about 30% of them across 13 different partners in China. We ended the year with a 108 commercial theaters operating in Greater China and 122 more in backlog. This brought our total number of commercial theaters open or in backlog in Greater China to 230 theaters.

Our PSA in Greater China in 2012 of $1.2 million was slightly lower than expected, impacted by delays in release dates in China and the release of multiple major Hollywood movies on the same day in China. At the same time we remain optimistic about our long term potential in China. We believe that favorable market trends in China, including government initiatives to foster cinema screen growth in China and per the WTO agreement, they increased the number of Hollywood films, particularly IMAX and 3D released into China, bode well for additional IMAX growth long-term.

Moving on to Europe, we saw a strong network growth and per screen averages for both the U.K. and Russia in 2012. We finished the year with 20 theaters in the U.K., which averaged an impressive PSA of over $2 million each, up 45% over 2011. With strong partnerships with exhibiters such as Odeon and Cineworld, we expect this region to provide further growth for us.

Our network in Russia also continued to deliver strong growth. We ended the year with 32 commercial theaters in Russia and the CIS with a PSA of about $1.8 million. Given our 105 identified zones in this region, we expect to see continued penetration in 2013. We also think there’ll be a continued opportunity in other European countries and regions such as Scandinavia and many other areas where we are currently under-penetrated.

Latin America is another area of focus for 2013. To begin with, we have further restructured our agreement with RACIMEC, our South American partner. As a result, IMAX will now be directing the sales activities in Brazil, Colombia and Ecuador, and RACIMEC will have direct sales activity in the remaining Latin American markets.

As part of our zone analysis, we've identified 175 potential zones in Latin America, with 54 in Brazil alone. At the end of 2012, we had six theatres in Brazil, which delivered a PSA of about $1.5 million. Given the strong results we’ve seen so far from these theatres, we expect they will act as reference theaters and help us further penetrate this market.

Turning to India, we had three commercial theaters opened at the end of 2012 and expect to open several more or before we schedule to play our first Bollywood title, Doom 3, near the end of this year.

My trip to India last November and December was very enlightening. Although India comes with its own challenges, I came back more optimistic about the long term potential for IMAX in India. We are in business with four of the best exhibitors in the region and they are building world-class malls in more upscale areas. These areas seem to garner significantly higher ticket prices than the averages we generally hear about. In fact the average ticket price at our IMAX theaters in India are closer to $8 in U.S. dollars and they've been doing strong business so far.

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

The next of our goal for the year is differentiate. In 2013 the company will try to further differentiate in terms of technology films and our brand. We remain excited about the development of our laser technology. We continue to expect to have systems to demo by the end of the year, with the full commercial rollout expected to begin in the second half of 2014.

As you know, one of the big drivers for laser has been to transition our largest film based commercial theaters to digital, so that they have the ability to play our full portfolio of films. Many of these large film based meters are some of our most profitable in the network, even while playing only a handful of films each year.

In 2012, the film theaters missed out on some of the biggest titles, such as Avengers and Hunger Games, which were digital only releases. In addition, due to the proliferation of digital, film stock is becoming more limited.

So in an attempt to get these theatres to digital as soon as possible, we've created an interim solution to convert a number of these theaters, the film based theatres to our existing xenon based digital projection system, before ultimately upgrading them to our laser system once it becomes available. We've piloted this effort late last year with the BFI in London, as well as with our theater in Jordan's Furniture in Boston.

Given the success of this interim solution at these two venues, we've decided to roll it out further to some of our other high grossing film theaters in the first half of this year. We have five theatres that have already installed the interim solution and we currently have agreements with nine additional film theaters to transition to the interim digital solution this year.

In addition we have recently begun our laser sale efforts and we have signed seven laser deals so far, including the three-theater deals with the Smithsonian that was announced last month.

Further IMAX’s differentiation of films that we present is also important to us, as being embraced by more and more filmmakers to bring their artistic vision to life. For Star Trek Into Darkness, JJ Abrams film themed outside of the Starship Enterprise with IMAX cameras. For catching fire, the next Hunger Games series, Francis Lawrence shot scenes inside the Hunger Games arena with our cameras.

Joe Kosinski will utilize our unique expanded aspect ratio for Oblivion starring Tom Cruise, which will be released to IMAX theaters one week ahead of its broad release. Similarly Star Trek Into Darkness will open two days early in IMAX theaters. We believe the early release strategy increases the event nature and marketing around the film and ultimately translates to higher box office results for us, as well as our studio and exhibitor partners.

We've been talking a lot about our international film strategy and I think it is worth my spending a couple minutes to give you additional color on the strategy, since we think the global nature of our business further differentiates IMAX.

As I mentioned before, we have started to strategically program our global theater network by cherry picking the best movies for each country. This strategy has started to materialize in higher international box office for IMAX. As a result IMAX is no longer solely tied to the domestic performance of Hollywood titles and in fact for IMAX, you’d be misled if you are focusing too heavily on the domestic market.

The five things around the release of Die Hard just this past weekend provide an interesting data point. Die Hard did well in IMAX domestically, with about $4 million in IMAX box office over the first five days. But in fact, that is just a portion of the almost $10 million in total global box office for IMAX last weekend, which was driven not only by Die Hard, but also by the nine other titles that were playing across our network, including a local language film in China.

We've been playing the local film, Journey to the West in China over the Chinese New Year and while the film may be below the radar in North America, it is one of the highest grossing Chinese films ever made and has grossed about $7 million in IMAX so far, which equates to a PSA of approximately $70,000. Now that is not to say that every local movie will perform that well for IMAX, but I think it’s a good example of how we are strategically programming our theaters in the international market and the impact of globalization to IMAX.

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

Finally our third company priority for the year is scalability. Over the last several years we’ve dedicated our efforts to executing the rapid growth of our theater network and our film portfolio. We have now begun to further focus our attention on promoting efficiency in our business and to slow the growth of SG&A.

For example, we are more heavily scrutinizing our vacancies and hiring decisions. We are more closely managing our meetings and travel practices and we are implementing more effective systems to improve our data input and analysis. These are just a few examples of the ways we are becoming more efficient and more disciplined in our SG&N spending.

So to recap, 2012 was a great year, financially and strategically. We continue to grow the network, increase our per screen averages, and control costs, which translated into expanding margins, bottom line growth, and ultimately free cash flow generation. Our growth opportunity in under penetrated international regions, combined with our ability to program each of those markets individually, positions IMAX as a unique player in the global entertainment industry.

And with that, let me turn it over to Joe to go through some of our financial highlights for the quarter.

Joe Sparacio

Thanks Rich. We finished the year off in a very strong fashion, with quality growth in Q4 across our top and bottom lines, as well as margin expansion resulting in another quarter of free cash flow generation.

Total revenues of $77.8 million in the fourth quarter increased by 17% compared to last year. Helping drive a 42% gross margin growth, 29% growth in adjusted EBITDA to $27.4 million, and a 77% increase in adjusted EPS to $0.23 for the quarter.

We expanded our commercial network by 20% over the last 12 months, and this along with the strong PSA of $264,000 in the quarter resulted in $48.1 million in recurring revenues or growth of 58% over the same period last year.

Recurring revenues also drive an improvement in our total gross margin percentage in the quarter, which increased 254.4%, up nearly 1,000 basis points compared to 44.7% in Q4 of last year.

Margin expansion was primarily driven by the recurring DMR and joint revenue sharing business segments. DMR margin was 70.9% this quarter, driven by strong box office performance and lower DMR costs, resulting from the scale of the DMR portfolio and the digital nature of the majority of films exhibited in the quarter.

The Q4 joint venture gross margin of 52.6% also showed significant improvement over the 45.5% in the fourth quarter last year, even after accounting for a number of hybrid systems installed during the most recent quarter. On an absolute dollar basis, our JV margin of $9 million in the fourth quarter more than doubled from the $3.8 million in Q4 of 2011.

IMAX Systems revenue of $24.3 million in Q4 was down from the same period last year, reflecting the installation of 14 full new theater systems under sales and sales type lease arrangements in the most recent fourth quarter, compared to 17 in the fourth quarter of 2011. The company also installed three digital systems under upgrades under sales and sales type lease arrangement in the fourth quarter compared to one upgrade last year.

Moving on to operating expenses, SG&A excluding stock based comp came in at $19.7 million in the fourth quarter, bringing our full year SG&A to a total of $68.4 million. Fourth quarter SG&A was $5.3 million higher compared to last year, primarily due to staff related expenses, as well as foreign exchange. If you recall in last year's fourth quarter, we had a $2.2 million foreign exchange benefit, which was not repeated this year.

We started to slow the growth of our SG&A during 2012 and we are looking to further slow it in 2013. We are issuing full year 2013 guidance that we expect SG&A, excluding stock -based comp, to increase approximately 5% to 8% compared to the full year 2012. In terms of phasing, we expect SG&A expense to be fairly evenly spaced across the quarters in 2013.

Stock based compensation for Q4 was $2.9 million, with the full year coming in at $13.1 million. We expect stock based compensation for the full year of 2013 to be approximately $13.5 million.

Q4 R&D was $3.8 million, bringing the full year R&D expense to $11.4 million. Our fourth quarter and full year R&D expenses were slightly lower than previously expected, due to the timing of some of the expenses related to our laser technology development moving into 2013.

We expect our full year 2013 R&D expense to be about $13 million to $15 million, primarily driven by continued development of our laser technology, as well as development efforts on additional IMAX cameras and other initiatives. We anticipate the phasing of R&D spending in 2013 to be weighted a little more heavily in the front end of the year.

In terms of tax, we finished the fourth quarter with a tax rate of roughly 22%, translating to a full year tax rate of approximately 27%. Our tax for Q4 and the full year were lower than expected due to a tax benefit resulting from a re-evaluation of certain tax accruals related to international withholding taxes.

We expect our full year 2013 tax rate to be in a range of about 28% to 30%, including an estimated $4 million to $5 million of cash taxes. At the end of 2012, we had approximately $36.5 million of NOL’s remaining.

Our strong financials translated to another quarter of free cash flow generation, as defined by operating cash flow minus investing activities, which includes our investment in the JV network expansion.

In the fourth quarter we generated about $7 million in free cash flow, bringing our full year 2012 free cash flow generation to $38 million, after $23 million in JV investment or $60 million before the JV investment. Probably worth mentioning is that the ROI in our JV investments is over 60%, including the DMR take. So we think this is an excellent use of our cash.

During the fourth quarter we also paid down our bank debt by $19 million, resulting in $11 million of bank debt remaining on our balance sheet. At the end of the year the company had cash and cash equivalents of $21.3 million, resulting in a net cash position of $10.3 million.

We recently announced that we expanded our credit facility, which increased to $200 million. Our expanded credit facility, our healthy balance sheet, give us the right level of capacity and flexibility to invest behind our growing business and allows us to make disciplined decisions around new opportunities and shareholder returns.

In terms of our network, we installed 43 new theaters in the fourth quarter, with 14 sales type installation and 29 JV’s, bringing our total commercial network to 598 theaters, of which 316 are JV’s. In addition, in the fourth quarter we signed deals for 38 theaters, bringing our full year 2012 signings to 142 theaters, of which a 121 were new theater systems.

As a result, our backlog remained at a healthy level, with 276 theater systems in backlog at the end of 2012, of which approximately 80% are scheduled to be installed in international markets. We continue to expect to install approximately 110 to 125 new theaters in 2013.

It is important to note that compared to 2012, we expect our 2013 installations to significantly skew towards the back end of the year, and also expect the installs to be much more weighted towards JV’s, as we have a number of planned installations in 2013 from backlog deals with AMC, Regal and Wanda, who are our big JV partners.

And finally to give you some color on our box office performance, we generated $152 million in global box office in the fourth quarter, a 56% increase over the same period last year. Our box office in Q4 tilted slightly more international with 51% of Q4 box office from the international markets.

Our fourth quarter PSA was $264,000 bringing our full year PSA to about $1.2 million with domestic PSA coming in at around $1 million and international PSA of $1.4 million. Given our encouraging box office and PSA results in 2012, we are looking forward to 2013 and our diverse global portfolio of films.

To recap, 2012 was a successful year for the company on a number of fronts. Our commercial network grew 20% to almost 600 theaters globally. This along with our global box office, which was up almost 50% year-over-year, drove strong growth in our recurring revenue business lines, resulting in a 20% increase in revenues and over 95% increase in EPS for the full year 2012 compared to 2011.

While we may continue to see quarter-to-quarter variability going forward, due to the timing of installs or movie release dates, our portfolio approach to our films, along with our growing network globally drives growth on an annual basis.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Townsend Buckles of J.P. Morgan. Please go ahead.

Townsend Buckles - J.P. Morgan

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

Richard Gelfond

This is Rich. I’ll take about the cost and then Greg will talk about the number of films and the strategy.

On the cost side, one way to think about it is, we have roughly around $30 million, $25 million to $30-million fixed cost for DMR that we amortize over a number of movies. So if you look at our slate of static, that’s where you got the number of about $1 million of title. But as you do incremental titles and Greg will go into the numbers, but this year we’ll do 35-ish or maybe a little bit more, then the cost per title starts to come down.

So I think you’ll see when you balance all that out given the number of films that come out, in about the $800,000 year title area, assuming we do that number of titles this year Townsend.

Greg Foster

Townsend, this is Greg. What we are trying to do is balance the portfolio as much as we can, paying close attention to the individual territories and what works for them. So for instance to give you an example, not only do we have local language titles like Journey to the West or Jackie Chan’s CG12, but we also are taking some Hollywood titles that we haven’t had the opportunity to play domestically and playing them internationally.

And the example of that for instance would be in 2011 we released two movies that were Hollywood titles that were not released in the U.S. One was Tangled and the other was Cowboys & Aliens and our box office in 2011 on those two titles was a little more than $4 million.

In 2012, we released eight titles and our box office; those are movies like Life of Pi, Les Mis, Twilight, Bourne Legacy, Total Recall, Battleship, etcetera and our box office is closer to $36 million. So having the opportunity to focus on the needs of various territories has made a big difference.

We also as you know are no longer playing animated movies domestically, but we are playing them opportunistically in certain markets internationally and that’s just helped us come up with a wide variety of flexibility, and that includes DMR local language titles in places in the next year in 2013, our first in India, our first in Russia, Japan, etcetera.

Townsend Buckles - J.P. Morgan

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

Rich Gelfond

Well, as Joe mentioned during his presentation, the JV’s are getting us ROI’s of about 60%. So as long as we can create 60% return on investments or even lower than that attractive investments, as a shareholder I’m quite comfortable all day long making those investments.

So I think we have that facility there. I think that once we don’t find attractive investments, the concept of dividends or buybacks will become higher on our radar screen. I also think the facility is there, because there are also macro events you can’t control.

So for some reason our stock price doesn’t reflect the business performance. That’s there as kind of dry powder to deal with. So I wouldn’t say we have a current plan to use that right now, but I think it’s there if and when we need it.

Townsend Buckles - J.P. Morgan

Okay, thanks.

Operator

Thank you. The next question comes from Drew Borst of Goldman Sachs. Please go ahead.

Drew Borst - Goldman Sachs

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

Rich Gelfond

I think it’s a very attractive market for us. As I mentioned, in Brazil we only have six theaters open. We spent this last year working with our partner, RACIMEC and starting to transition to some relationships which we took more of a lead role on.

We signed deals this year with UCI and with Cinepolis, which are two of the biggest players in Latin America and Brazil. So based on my experience, when you have multiple parties in a market and you have good reference theaters, good per screen averages and in fact I think three of the top five complexes in all of Brazil have IMAX theaters in them.

Those are the ingredients for success and an example I’d give you is England, where a couple of years ago we had eight theaters, but then we had two major players in it, ODEON and Cineworld, and now we have 20 theaters open and some more in backlog. So I think the ingredients are there for them to be a big success over time.

I think when you look at the world you have to realize that Brazil doesn’t have the number of zones that a place like China does; maybe it is closer to Russia or India. So I think its a terrific opportunity for us, but I just think that we should keep in mind that there are other really good opportunities as well, some of which I mentioned, including India, including Western Europe.

We have no theaters in Germany. We have virtually no theaters in Italy, Greece, Scandinavia. So I’m very excited about the opportunity in South America, but I’d say I’m equally excited about the opportunities in India and Western Europe and some other areas.

Drew Borst - Goldman Sachs

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

Rich Gelfond

I do think it’s sustainable over the long term. I mean some of the factors are kind of obvious; one is higher ticket prices based on exchange rates. So in places like Japan and in England, you talk about ticket prices that are over $20 a piece. So all that rates start to vary dramatically. I think that is sustainable.

I think there is also more flexibility on the exhibitor side in a lot of those territories, so there’s screen sharing. So whereas in the U.S. if you are playing a film and then another film comes along, I mean the first one comes off the screen. In many international territories, they share screens, so you can play both films and that’s particularly good if you have one film that plays to a certain demographic during the day and another film that plays to a different demographic at night. So I think the existing of that screen sharing is also inherent in that.

Also I think, although it’s hard to quantify this, our brand in certain foreign areas has a much more resonant than it does in North American. An example I’d give you is China and the reason is, in North America there was an established multiplex infrastructure. So people went to movie theaters and 10 years ago they went to IMAX’s for kind of science and other documentary kind of films. So you had too re-train them.

In a place like China, we got in on the ground floor just when multiplex building was expanding rapidly. So I think when people in China think of blockbuster movies, they think of IMAX, and I think that’s driving the numbers. So I do think it’s sustainable and in fact as we mentioned, we’re starting to spend more marketing dollars internationally, so I hope that will have a positive impact.

Greg do you want to add anything?

Greg Foster

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

Drew Borst - Goldman Sachs

Okay guys. Thanks very much.

Operator

Thank you. The next question comes from Ben Mogil of Stifel. Please go ahead.

Ben Mogil - Stifel Nicolaus

Hi, good morning, and thanks for taking my question. I’m not sure if I can sort of totally get it from the release. How many hybrid upgrades or hybrid JV’s did you install in the quarter?

Rich Gelfond

There were 10, Ben.

Ben Mogil - Stifel Nicolaus

Okay, there were 10. So when you look at that, is the 10 you installed in the quarter the bulk of -- I mean tell me more of what you think you have going and is that sort of some of the better hybrid JV opportunities in the network work down in the quarter?

Rich Gelfond

I wouldn’t say the better ones; I just think it was what was schedule. I mean there were a number of them and a couple in China, there were a number that were in the U.K. and we have a number going forward. So I think you’ll expect a similar number in 2013. But again, it’s not going to move the needle that much on an immediate financial basis.

Ben Mogil - Stifel Nicolaus

When you are looking at Latin America, so Cinemark on their call last night was pretty bullish in terms of how much CapEx they were spending on XD. They didn’t delineate between Latin American and U.S., but obviously a lot of its going to be Latin America.

When you are talking to exhibitors in the region, can you talk about how they view XD, in terms of when you are talking about things, how they are viewing the two formats? Are you seeing ironically Cinemark ruling out XD as being helpful to you in terms of your sales pitch in Latin America?

Rich Gelfond

No one ever mentioned that XD still its in Latin America. As I said, we are in business with UCI, we are in business with Cinepolis. We are talking all the exhibitors, literally in any discussion I have been involved with, the word XD hasn’t come up.

Ben Mogil - Stifel Nicolaus

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

Joseph Sparacio

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

Ben Mogil - Stifel Nicolaus

Okay. I think that’s it from me. Thank you very much.

Rich Gelfond

Thanks.

Operator

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

Eric Handler - MKM Partners

Hi, thanks for taking my questions. There are two questions for you. First, when you look at China, you had some very good local language results of playing with Journey to the West, CG12, even Grandmaster. Can you talk about, you seem to be getting about 3% share of the overall screens, but on average what type of revenue share are you getting in China for some of those films?

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

Greg Foster

For China, this is Greg. For China we are getting 12.5% on local language films. Joe, do you want too?

Joseph Sparacio

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

Eric Handler - MKM Partners

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

Joseph Sparacio

It’s anywhere between 6% and 9%.

Eric Handler - MKM Partners

Okay. Thank you very much.

Operator

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

Vasily Karasyov - Susquehanna Financial

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

Rich Gelfond

The only reason for that decline last year was China, and as I mentioned during my remarks and I could modulate, I could spend a lot of time talking about this. What happened in China is with the changes of the WTO that opened up the more importation of Hollywood films, for the first half of the year the per screens were well ahead of what they were in previous years.

Because the Chinese government elected to try and promote Chinese market share versus Hollywood market share, in the second half of the year they double dated some films, which means they released The Dark Knight Rises and Spiderman on the same day. So obviously that decrease the box office potential significantly. So that change in the second half of the year is literally the only reason that the international PSA’s are lower.

There is some evidence that that was not a policy that’s going to be abided going forward. For example Skyfall was not double dated with another film. The Hobbit opened this week; it is not double dated with another film. While certain elements of the Chinese government had an agenda to promote Chinese film, a side effect of that was less people went to movies and less people went to shopping malls and it wasn't good for their overall economy.

So there’s no solid evidence of this, but my belief is there’ll be a lot less of that double dating and we're starting to see it. So if that’s the case, I think we’ll perform at the level that we performed at before.

In terms of going forward, I think it goes to what I said during my prepared remarks and Greg talked a little bit about it in Q&A, which is we are programming now for 53 different countries and that includes runs of Hollywood films, but it also includes runs of local films of those countries. So this year we’ll have six Chinese films in China, we’ll have a Russian film in Russia, we’ll have a Japanese film in Japan.

So since the release dates are on our day and date worldwide, I think that flexibility in our relationships with those international studios will continue to give us the leverage to maintain or hopefully increase our PSA’s in those markets.

Vasily Karasyov - Susquehanna Financial

Okay, thank you very much. And do you notice if there is a penetration threshold in a particular territory, after which it’s harder to grow PSA’s in that territory?

Rich Gelfond

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

Vasily Karasyov - Susquehanna Financial

Alright, thank you very much.

Operator

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

Colin Moore - Credit Suisse

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

Greg Foster

So there’s two parts to that, this is Greg. The first part is we continue to use our IMAX film camera, the same camera that JJ Abrams used, the same camera that Chris Nolan used, because it provides just an extremely high level of resolution and obviously, when we shoot something in film, we can still convert it over to digital.

With that said, we do have our digital prototype. It’s working very well. We just filmed a documentary movie that their working title is Madagascar. It’s about that Madagascar and the lemurs. It is a 40-minute IMAX documentary film and it’s the second one we filmed with that prototype camera and it was exceptional. The quality of the material is great.

We actually just did a test with the filmmaker who is making a Hollywood feature, who wanted to see what the IMAX digital camera look like for his film test, for his camera test and it was really strong. They were very, very encouraged by it.

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

Colin Moore - Credit Suisse

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

Rich Gelfond

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

Colin Moore - Credit Suisse

Great, thank you.

Operator

Thank you. The next question comes from Rich Ingrassia. Please go ahead.

Rich Ingrassia - Roth Capital Partners

Thanks. Good morning everybody.

Rich Gelfond

Hi Rich.

Rich Ingrassia - Roth Capital Partners

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

Rich Gelfond

Sure. The reason for the interim digital solution is that film stock is disappearing faster than we had anticipated, number one; and number two, the last and the price of film stock is going up. So in order to fully supply exhibiters that have film theaters with films would be somewhat costly for us to do that and that’s why these theaters last year were playing only six films a year instead of 20 films, which included the digital run.

So kind of, I won’t say accidentally, but we had two beta tests for this; one at the BFI and one at Jordan's furniture, where what we did was put in a xenon projector, which is our current digital projector. It can't fill the 100-foot screen, but it can go to about 80 feet and we masked the sides of the screen and we played some of the digital only releases, and it did well. It didn't look as good as the film did, but the audience understood that that was the only way to get the film.

So we’ve kind of become proactive in that and now I think we have five in and we have nine more under contract, but I think we have a target of something like 30 theaters, where we’d like to try and put in the interim digital solution, so they can play more films and keep audiences happy and we can get more revenues there.

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

Rich Ingrassia - Roth Capital Partners

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

Rich Gelfond

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

Rich Ingrassia - Roth Capital Partners

Okay, and then quickly on the laser, can you talk about production capacity for those systems? Are you yet – I mean have you scoped demand well enough to know that you can produce to meet it?

Rich Gelfond

Well, if you remember Rich, we are going to do the larger screens first, because those are the ones with the film prints that we've just been talking about, the ones over 80 feet. So we’ll start with kind of a moderately slow roll out. We are not going to install 40 of them in the first couple of months, because with any new product you want to get the kinks out of it and you want to sort of roll it out.

So I think our production, it’s less about capacity and more about managing the rollout. So I think what we’ll do is manage the rollout in a relatively slow way and then as we get more comfortable with the technology and ultimately when we develop other versions of that, we’ll roll it out faster.

Rich Ingrassia - Roth Capital Partners

Got it, okay. Thank you.

Operator

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

James Marsh - Piper Jaffray

Great, thanks very much. It seems like there are a disproportionate number of screens that were deployed in the fourth quarter for 2012. So I was hoping you could just talk a little bit about how long it takes us to ramp up to average kind of PSA's? There’s a mix of new build in retrofit has an impact and maybe you could just differentiate maybe between the international and domestic ramp-up’s as well, just any color there would be helpful.

Greg Foster

James, I think as Rich said earlier and you take China for instance, it just takes time to see how we are going to hit. If the theater is a good theater, generally there is very little ramp-up. We’ll see the PSA’s hit a pretty high level fairly quickly.

In a new build situation, it depends. Some new builds will take a little more time to ramp up than others, but it’s no different than any other new theater opening.

As you are aware with our JV locations, we contribute with our partners towards a marketing campaign, which helps to promote the theater and the launch of the theater and that has certainly helped us to hit run rate fairly quickly in those location.

Rich Gelfond

It’s also somewhat film dependant James. So obviously some people want to get their theater opened for Star Trek by way of example. And since Star Trek was filmed in par with our cameras and I think it will be promoted the IMAX version, because that’s the way the filmmaker sees it. I think if you're opening your theater with that, you will get off to a faster start than if you're opening your theater with Hansel & Gretel. So I think you can't really generalize.

James Marsh - Piper Jaffray

Okay, and just one follow-up question here. What are the advantages of this laser technologies that could light up really large screens, may be up to 130 feet or so. Have you guys been in any discussions with these mega sized IMAX screens and just any update on how the pricing for the laser projectors might look.

Rich Gelfond

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

James Marsh - Piper Jaffray

Okay, great. Thanks very much.

Teri Loxam

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

Operator

Okay, thank you. The next question comes from Steven Frankel of Dougherty. Please go ahead.

Steven Frankel - Dougherty

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

Greg Foster

Later in the year, particularly in the fall we’ll likely fill in a title or two. But what we’ve done this year is for all intents and purposes starting March 1, with Jack and The Giant Slayer. We have a new title coming every two to three weeks and in some cases every week and it doesn't stop for quite some time.

There will always be opportunities to fill in other titles or something if schedules move or if something comes in in the third quarter again, and particularly in the shoulder periods and in the September and October, but we have a very, very robust slate right now and when you include some of the titles like Iron Man 3 and Star Trek and Man of Steel and Hobbit and Catching Fire, Pacific Rim, it’s going to feel like we are going to have a very nice couple of week run with each of these titles, in some cases again a little bit more, but the flexibility will be more in the second half of the year than the first half.

Steven Frankel - Dougherty

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

Rich Gelfond

Yes, it’s held up, it’s been very successful. Somewhat I’ve been pleasantly surprised.

Steven Frankel - Dougherty

Okay, great. Thank you.

Teri Loxam

Can I take the last question Michelle.

Operator

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

Aravinda Galappatthige - Canaccord Genuity

Good morning. Thanks for taking my question. Rich, just on the China film scheduling issue and the double dating, it seems that there is uncertainty now, given that The Hobbit and Skyfall were separated, there’s some optimism there. But just to that end degree, has that affected the signings there? I means is there sort of a wait and see approach on the part of the theaters, given that they really don’t know how the Hollywood box office is going to be impacted and particularly whether it has an impact on IMAX.

Rich Gelfond

Not at all Aravinda, because remember, we have a lot of local language films there also. So as we were saying, the one playing right now is doing extremely well. So no, it hasn’t had an impact on signing.

So I think with all due respect, I think when we look at it through the lens of the U.S., something that happens over a three month period of time, people get really nervous that it’s permanent or it’s going to be this way forever. People that grow up in China know that there are anomalous results in short periods of time, but in long periods of time, particularly where the government is really encouraging the growth of exhibition and entertainment that will be a way that’s its gong to work out. So I don’t really think it’s been an impact.

So with that, thank you all for being on the call. As I said at the beginning, I think this is a very gratifying quarter and a very gratifying year for us. It really proves out the business model. We’ve been talking about it for years. Build out the network, deliver the films and the recurring revenues, the earnings, the EBITDA and the cash flow will come, and it did. It all proved out, just as model during the quarter.

And I think as you look forward beyond the quarter, as you keep building out the network, you should have a positive impact on margins. As we develop new technology we should increase our differentiation and as we continue the globalization of our film slate, we should be able to attract audiences worldwide.

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

Operator

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

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