IMAX's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: IMAX Corporation (IMAX)

IMAX Corporation (NYSE:IMAX)

Q3 2013 Results Earnings Call

October 24, 2013 8:30 AM ET

Executives

Teri Loxam - Vice President, Investor Relations

Richard Gelfond - Chief Executive Officer

Joe Sparacio - Chief Financial Officer

Greg Foster - CEO, Entertainment

Rob Lister - Chief Legal Officer

Analysts

Townsend Buckles - J.P. Morgan

Eric Handler - MKM Partners

Eric Wold - B. Riley

James Marsh - Piper Jaffray

Ben Mogil - Stifel Nicolaus

Steve Frankel - Dougherty

Aravinda Galappatthige - Canaccord Genuity

Vasily Karasyov - Sterne Agee

Jim Goss - Barrington Research

Daniel Ernst - Hudson Square Research

Martin Pyykkonen - Wedge Partners

Operator

Good day. And welcome to the IMAX Corporation Third Quarter 2013 Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions)

Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Teri Loxam. Please go ahead, Ms. Loxam.

Teri Loxam

Thanks Michelle. Good morning. And thanks for joining us on our third quarter 2013 conference call. Joining me today is our CEO, Richard Gelfond; and our CFO, Joe Sparacio, who will have prepared remarks. Also here today to join us for the Q&A portion of the call is Greg Foster, CEO of Entertainment; and Rob Lister, our Chief Legal Officer.

I’d 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 maybe 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 a definition of these measures, as well as reconciliations to adjusted EPS and adjusted EBITDA, as defined by our credit facility, are contained in this morning’s press release.

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

With that, let me turn it to our CEO, Richard Gelfond.

Richard Gelfond

Thanks Teri. We had several employment accomplishments in the third quarter that helped us advance our three key strategic initiatives, penetration, differentiation and scalability, including strong signings, a record high backlog, strong film indexing and continued SG&A cost control.

Since installations and film releases are not always evenly space throughout the year, quarterly comparisons are difficult. For instance, in the third quarter we have fewer sales type installations compared to those in the prior year period and we are up against the tough comp of Dark Knight Rises.

In contrast, the fourth quarter box-office is off to a great start with Gravity and we are scheduled for a large number of installations this quarter. So we continue to manage our film slate as an annual global portfolio and focus on building out our network throughout the year to further bolster long-term growth and operating leverage.

Theater signings have been very robust this year. In the third quarter, we signed agreements for 99 new theaters, bringing our total signings so far this year to 158, already about the 142 signings from all of last year.

As a result, our backlog is at a record high, with 356 theaters under contract at the end of the quarter, which gives us greater visibility into our pipeline for future growth and these numbers don't include the option that Wanda has for an additional 80 theaters in China.

Importantly, a number of our signings and installations this year have been for new reference theaters and iconic locations. We have recently entered markets including Germany, Turkey, Portugal and South Africa, and have also signed deals for several new reference theaters, which will open in the near future, including Switzerland, Chile, Bahamas, Jordan and Bahrain.

Opening the reference theater in new region often acts as a catalyst for future growth in that area, once an exhibitor realizes the incremental effects of our business model and the box-office potential of our theaters we typically see additional signing activity from that exhibitor and often times their competitors as well.

Markets don’t explode overnight. The laying the groundwork establishing a brand presence and proving our format have historically been quite successful for us. We've also added IMAX theaters in several iconic locations this year, including the TCL Chinese Theater in Hollywood, which used to be known as the Grauman's Chinese Theatre, Potsdamer Strasse in Berlin and most recently, Leicester Square in London.

Having these landmark venues as part of the IMAX network provides us with locations that are big enough to host premiers, which we think is very beneficial to our business and our brand.

For example, in September we premiere the exclusive re-release of the Wizard of Oz at the TCL Chinese Theatre, the same location that the original Wizard of Oz debut 75 years ago.

Over the course of one week the film generated over $5 million of box-office for IMAX in the shoulder period when there are often fewer movies to choose from. More importantly, it generated a great deal of publicity and allowed our brand in that theater to reach a broader demographic.

Looking at box-office, we believe that the market share or indexing that IMAX has been generating indicate high consumer demand for the premium IMAX experience. For instance IMAX did over 20% of the domestic box-office for Pacific Rim in the third quarter and less than 4% of total screens and generated $55 million on this film globally.

Likewise, Elysium, index 15% domestically and generated almost $23 million worldwide. In addition, in contrast to last year, China accounted for a significant portion of our third quarter box-office, since there was no July blackout period this year. Meaning a lot more Hollywood titles were released into the country in Q3.

We played six Hollywood titles in the quarter in China, where we averaged 9% of the box-office across all those films, including 14% market share on Pacific Rim on just 1% of the screens. This is further evidence of the power the IMAX brand and experience in the worldwide and Chinese market.

In addition to the Hollywood titles, we released to local language films in China in the third quarter. As we have discussed before, an important part of our portfolio approach to our film slate is tailoring our slate for each individual market, release calendars often vary by country. So we pour gas with international-only releases of Hollywood films, as well as local language movies.

For instance in the third quarter we played several titles internationally that were not released domestically, including White House Down, Despicable Me 2 and The Lone Ranger.

We also just released Stalingrad, our first Russian language film which is the highest grossing Russian film ever made on its opening weekend, generating an IMAX per screen average of over $60,000, which is a record for us in Russia.

Moving onto expenses, controlling costs and maximizing the leverage inherent in the business model has been the top priority for the company this year. We've been making changes internally to create a culture that is mindful, deliberate and efficient in our spending.

While this is evolving, the effort is starting to pay off, especially in SG&A. In fact we have been able to curtail spending more than originally planned and as a result, we will be lowering our SG&A guidance for the year. Joe will go through the details with you in just a moment.

On the R&D front, we continue to make progress with our laser projection system and these costs are reflected in our R&D cost guidance for the year. We remain on track to begin our laser rollout by the end of 2014. As most of you know, our laser initiative is geared toward the largest screens in our network, those that are greater than 80 feet in width and currently film-based.

As we've discussed before, film prints are expensive. It costs about $30,000 to $50,000 per movie per theater. As a result, we have chosen not to produce film prints for every title. Consequently, these theaters have missed out on playing a portion of our films for each year.

As an interim solution until laser is rolled out, we've been able to convert a number of these film-based theaters in our network over to digital -- digital using our xenon digital projection system. Most recently, we installed our interim digital solution into several AMC theaters, including Lincoln Square in New York and the Metreon in San Francisco.

As a result, these theaters were able to play Gravity over the past few weeks which they would not have been able to do had they remained film-based. In addition to the boost we should get in box office when these theaters being digital, another benefit is on the cost side.

In the past, we had to subsidized film prints for titles that were not necessarily expected to be big blockbusters in order to have product for these large film-based theaters. Now we could be more selective as to when we finance prints, which should result in lower DMR costs.

Our goal is not just to cut costs but to spend efficiently and spend in areas that can create long-term growth and cash flow for the company. We believe in our business model and expect expanding margins and cash flow over the long term. As we've said before, our top priority for cash right now is reinvesting in our growing JV network, which has high returns.

In addition, we are spending small amounts of cash to explore potential new business ideas that could supplement the growth in our core business over time. As you know, over the past couple of years, we've been doing due diligence on some in-home options. We’ve sold a few ultra high-end home theater systems, which has provided an entry point into the home theater market and is allowing us to gain a better understanding of the potential in this business area.

In parallel, we've been putting together the pieces to create an integrated end-to-end home theater solution at a lower price point market that would include hardware, software and content. To this end, we are in the midst of identifying the right partners for such an endeavor. Rest assured, however, the cash flow growth is our priority. So if we do anything, it will be done in a measured way that doesn't risk significant capital.

Looking ahead, we started the fourth quarter off strong on all fronts. Obviously, the breakout hit Gravity. It was a tremendous way for IMAX to kickoff October, which has historically been a slower month for movies.

We have indexed so far over 22% of the films domestic box office on less than 4% of the screens, which is particularly noteworthy, especially since this is not our typically fanboy focus film. To date, we have grossed over $50 million globally and are seeing great results from many of our theaters worldwide. Of particular note is that the U.K., Japan and China are still opening the movie.

In the U.S., Gravity has generated almost $1 million at Lincoln Square and another million between the TCL Chinese and the Metreon. Internationally, we’ve seen strong results from a number of places -- territories including places like Korea which set a new opening record and generated PSAs of over $100,000 on opening weekend. And there are still some important yet -- markets yet to open, including the U.K. and China.

The success of Gravity also show that there is a place for 3-D with the right movie. IMAX plays both 2-D and 3-D titles. We don't choose film titles based on this criteria. Instead we concentrate on whether the content can benefit from IMAX's enhanced visual and sound presentation. And Gravity is definitely one of those movies that takes full advantage of the immersiveness and vastness to the IMAX experience.

The success of this breakout hit in IMAX also benefits our studio and exhibitor partners as we drive incremental box office in theater attendance. We are looking forward to the rest of the fourth quarter, which will include the release of Hunger Games: Catching Fire, which is filmed with IMAX cameras and The Hobbit which will feature our expanded aspect ratio.

In addition, we continue to see strong signing activity in the fourth quarter, led by our announcement this week for a eight-theater deal with Cinepolis in Latin America, which will add theaters in Colombia, Brazil, Guatemala, Panama and Peru as well as a 10-theater deal in the U.S. with Carmike, the fourth-largest exhibitor in the United States.

Carmike had previously inherited some IMAX theaters as part of the acquisition of Rave and is now significantly increasing its commitment with us. This signing activity continues to demonstrate strong demand for IMAX theaters around the world.

And with that, I will turn it over to Joe to go through some financial details from the quarter.

Joe Sparacio

Thanks Rich. Total revenue of $51.7 million in the third quarter decreased 36% from the prior year period, primarily driven by lower sales type system installations and the tough box office comparison of the last years, The Dark Knight Rises, our second highest grossing film of all time which generated over $100 million in IMAX box office in Q3 2012.

Global box office of $132.5 million in Q3 was down 23% compared to the same period last year. The box office this quarter was skewed internationally with 62% or $81.6 million from international markets and 38% or $51 million generated domestically.

Mainland China accounted for much larger portion with 28% of the box office this quarter compared to 6% in the same quarter last year. This over performance from China was a result of more Hollywood films being allowed into the country this quarter as compared to the third quarter last year and the strong performance of Pacific Rim in China.

The domestic PSA was $150,000 for the quarter and international came in at $273,000, resulting in a global PSAs of $208,000. DMR costs were $6 million in Q3, primarily generated from 11 new titles, which played during the quarter. DMR costs were lower than average this quarter as we only released two new titles to our film-based network. We've announced 37 titles for the year and continue to expect that our average per title cost to be about 800,000 for the year.

Looking at specific line items. Our JV revenue was $12 million compared to $13.2 million last year and DMR revenue for the quarter came in at $14.5 million compared to $25.2 million in Q3 last year. In addition to a lighter box office, JV and DMR margins were also impacted by the geographical mix of box office this quarter. The JV margin was impacted by lighter domestic box office.

As we have discussed before, a number of our older JV arrangements are based on a more complicated net profit formula, which includes a fixed cost component that puts pressure on margins in quarters with lighter domestic box office. DMR margins were impacted by the higher mix of China box office where we typically get 9.5% of box office from the Hollywood studios, as compared to 12.5% we get in the rest of the world.

In terms of network growth, we installed 19 new theaters in the third quarter with five sales-type installations, one short-term lease that we will later transition to laser and 13 JVs, two of which were hybrids. This brings our total commercial network to 653 theaters, of which 351 are JVs.

Revenue from sales-type installations was $6.4 million in the quarter compared to $21.9 million in the third quarter of 2012. The reduction was largely due to a lower number of sales-type installations from 14 last year through 5 this year. The gross margin from full new sales-type systems was 63.8%, up from 62.4% in Q3 last year.

The company also installed nine digital upgrades this quarter, one of which was converted from a sales type to a hybrid compared to five in the same quarter last year. As Rich mentioned, a number of the upgrades this quarter were in our large film-based theaters where we have installed an interim digital solution until laser rolls out.

We also signed deals for an outstanding 99 theaters this quarter, of which 88 were for new systems and 11 were for upgrades. Our signing activity and pipeline continues to be robust as our backlog has grown to a record 356 theaters, of which 333 are for new theaters and 23 are for upgrades including 18 laser systems. It is important to note that the 333 new theaters in backlog are contracted to be rolled out over the next several years, as 84% are contracted for installations within new builds.

Although, IMAX has the capacity to install many more theaters in a given year and we would love to accelerate the rollout of our backlog, our pace of installs is often dictated by the timing of new construction projects that we are in various parts of the world, many of which are in emerging markets.

From a geographical perspective, 83% of the backlog is slated for international markets. We continue to expect to be within our previous 2013 guidance range of 110 to 125 theaters this year. However, due to a number of the remaining installs being new builds in international markets and scheduled for December, we anticipate that we will likely end up in the lower end of that range. We continue to expect that two thirds of the installations for the year will be JVs and one third sales-type leases.

As we look at our installations for 2014, we are currently estimating a similar number of installations compared to 2013. For modeling purposes, the mix look similar to this year, with about two thirds of our installations been JVs and one third sales type next year. In addition, it looks like 2014 installs will have a similar rollout cadence to what we have seen in 2013, with a significant number of installations likely in the fourth quarter next year.

Moving on to operating expenses. SG&A excluding stock-based comp came in at $16.9 million for the quarter, roughly comparable to Q3 last year. As Rich mentioned, we have been working diligently throughout the company to control costs and we are on track to beat our original full year SG&A estimate.

As a result, we are lowering our SG&A guidance for the year. We now expect our SG&A excluding stock-based comp to be up about 1% to 2% compared to the full year of 2012. This estimate includes the one-time SG&A benefit of $2.2 million that occurred in the first quarter, which implies full-year SG&A excluding stock-based comp to be about $69 million to $70 million.

Excluding the one-time $2.2 million benefit which was not part of our original guidance, our new SG&A guidance implies an increase of 4% to 5% over the full year, which is below our original guidance range of 5% to 8% growth. Stock-based compensation for the quarter was $2.8 million and we expect about $13 million in total stock-based compensation for the year.

R&D expenses for the quarter came in at $4 million compared to $2.5 million in Q3 last year. We are still on track to meet our guidance of $13 million to $15 million for the year, but believe we will be on the higher side of that range closer to $15 million as we continue development of our laser projection system.

We finished the third quarter with a tax rate of 28% and continue to expect our full-year 2013 tax rate to be in the range of 28% to 30%, including an estimated $3 million to $4 million of cash taxes. At the end of the third quarter, we had $31.1 million of tax NOL assets remaining.

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

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from Townsend Buckles of J.P. Morgan. Please go ahead.

Townsend Buckles - J.P. Morgan

Thanks. Rich, you mentioned in the release having a lot of screen deals this quarter, either sign or in discussions. And we, of course, already seen a fair amount of activity between Cinepolis and Carmike. So can you give a sense of how much that comment applies to those deals you’ve announced versus what might still be to come?

Richard Gelfond

I mean, obviously, Townsend, things are upside until they’re really signed. So we’re going to help them when they happen but certainly there is a lot more in discussion right now. I mean, I can’t really quantify it because that would be unfair but there is certainly a lot more potential ahead of us then has happened behind us.

Townsend Buckles - J.P. Morgan

Got it. On the Carmike deal, I think you’ve historically shied way from going into lot of their smaller markets with JVs. So any demand characteristic you’re seeing differently that have given you the confidence to do these deals now. And do you see potential for that relationship to expand further or maybe the 18 screens you have with them now kind of covers the addressable market?

Richard Gelfond

Well, I think yes. We see the potential to expand with them farther. I think they’ve done a tremendous job, the management team with that company. And I think that what we look at is the volume of the box, in terms of what the box office is for any particular multiplex. And we analyze all these JVs on a case-by-case basis and we look at our potential expected return.

Now, if you go back five years, obviously we were less penetrated in the world. So you could afford to be picky and going to this very high grossing boxes as those boxes have been penetrated as long as you get an adequate IRR that meets you rthreshold, you’re more flexible in terms of the boxes that you go into.

We wouldn’t do a deal if we didn’t think we can make an attractive return on it, but obviously as your markets get more penetrated, you need to be more open minded and we think this the Carmike boxes have a chance for very good returns for us.

Townsend Buckles - J.P. Morgan

Thanks and lastly your film share has looked to really picked up lately aside from just the great Gravity performance. Is there anything being done differently in terms of maybe marketing that’s helping these results, or would you just say that the brand is continuing to gain traction?

Richard Gelfond

That’s a good question, Townsend. As a matter of fact as you know because we’ve talked about it for long time, we’ve revamped our marketing efforts over the last several months. So we brought in a new CMO, we had three marketing groups. We consolidated them into one and we brought in new personnel and we assigned some people in that area.

I’d like to think that some of it is having an impact. And in fact, we have something call behind the frames in IMAX where they interviewed Alfonso Cuarón in Gravity and said that IMAX is a way you have to see the film and typically will get about 10,000 hits on those kinds of things. This time we’ve got close to a million hits on it.

So I mean that some concrete evidence set the marketing is starting to take hold. And going forward, obviously, we’ve invested a lot in that effort. And I think it will make a concrete difference and we have significantly more detail plans going forward. As per Gravity, I think that was one of many factors and maybe Greg wants to add to that.

Greg Foster

I think there is a space connection that we’ve had. I think there is quality connection that we have with the film like Gravity. We’ve been involved with the film makers for many other movies. In fact, David Heyman who is the producer of Gravity is the most prolific producer in IMAX between all the Harry Potter movies, I Am Legend and now Gravity. He has done nine films.

Warner’s had obviously supported it. And I can only tell you anecdotally when I look at the advertising not only for Gravity but for a lot of movies that have come out in the last several months and they’re coming out, the IMAX presence in the advertising seems to be even more present than it’s been in the past. It’s a cleaner message.

I have had many people come up to me and say man, I see IMAX every time I turn on the television, every time I go online. And I think that’s helping reinforce it. We’re also a part of the trailers earlier on these days. And I think that the habit of going to the movies and having a good experience, creates more interest and continuing to come back.

So I think it’s a cumulative process, Townsend. And I think that’s why our indexing as Rich noted in the call has continued to rise to a pretty significant level better than we’ve ever had before.

Townsend Buckles - J.P. Morgan

Sounds good. Thanks.

Operator

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

Eric Handler - MKM Partners

Yes. Couple questions for you. First, when you look at 2014, you gave some color on installs, how should we think about SG&A growth as well as R&D growth for the year and then I have a follow up?.

Joe Sparacio

I think, we’re going to outline that in the year-end call, probably February. So I think in general, you can look at trends over this year and say certainly, we’re going to try and manage the same general areas, but we haven’t completed our budget yet. So it’s premature.

Eric Handler - MKM Partners

Okay. And then secondly, one of you could sort of give a little bit of a recap with the impact of the laser systems, how many film-based theaters do you currently have now, how many of those theaters are working on an interim solution. And then in your backlog with the laser what is the -- what do you think the opportunity is for new built screens that for systems that just want to have larger than 80 foot screens?

Richard Gelfond

In the commercial market, there is about 20 film-based theaters left. In the institutional market, it’s larger, its about 150 theaters and that’s part of the opportunity around laser. But just amplifying the remarks I made earlier, a lot of the really big theaters including Universal City Walk, Lincoln Square, Metreon, they needed to have film prints otherwise they couldn’t play movies.

But using the interim solution, we were able to get digital prints in and Gravity is a perfect example. And we wouldn’t have play our biggest theaters had we not been able to put digital in there.

The point I was kind of getting at during the prepared remarks is we used to have to pay for prints for a lot of title that we didn’t think would that well, just because they needed to keep something on the screen. So this interim solution before we get all of them done carry -- covers most of the really big theaters.

So we’re going to be able to do DMR, if we elect to do it, on films like The Hobbit. And in most of those instances, we’re not going to pay for film prints because the studio will and in some of them we may choose too. So during the quarter, we’ve really accomplished a lot in terms of minimizing our need to pay for film prints.

Eric Handler - MKM Partners

Got it. That’s helpful. But do you think there is a decent size markets for operators who -- commercial operators who would actually want a larger than 80 foot screen?

Richard Gelfond

Well, that’s working on as you know which is that the digital screen when converted over the laser will be able to throw a larger image probably around 90 feet in the first generation. And that’s what we’re hoping to introduce at the end of 2014 and that’s why all those -- some of these signings as we characterize has “upgrades” that really transitions to laser, which are going to able them to play more movies and enable us to get lower box office and enable the consumer to get a better experience.

Eric Handler - MKM Partners

Great. Thanks a lot.

Operator

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

Eric Wold - B. Riley

Thanks and good morning. Couple of smaller questions, one on the Carmike deal. I know you have had some great success kind of movies into smaller markets and kind of expand the footprints into dairies of previously thought you may have been successful for IMAX.

With the Carmike deal, can you give us a sense of what you are seeing with performance of some of your peers in markets that you maybe don’t have a lot of competition in the area similar to the Carmike model where they may be the only theater in town for quite a while, does that make a difference to your way in terms of the IMAX screen performance?

Richard Gelfond

I would say, Eric, that makes a difference and also what makes the difference is the quality of marketing by the IMAX theatre operator. So we have a partner in Wichita, Kansas and in Oklahoma City, named Warren Theatres that has done a phenomenal job of marketing in those smaller markets and there aren’t a lot of entertainment options other than basketball obviously in Oklahoma.

But the brand recognition and the marketing and the lack of options, those theatres have done very, very well. So, I don’t know right now about the specific Carmike markets but I do know that as you say they have a history of having a strong market position there and good marketing. So they have the potential to do very well certainly.

Eric Wold - B. Riley

Okay. And then, congrats on backlog, I’m not sure you gave us number before but can you remind us if you have, how much of the 2013 installed plan was from backlog at the end of 2012 and how much of the initial kind of ’14 mark is currently in backlog at this point?

Richard Gelfond

Okay. Last year, at this time, we had roughly a similar number in backlog as we have this year, was around 95 something like that, which is why we kind of made the statements we did.

Eric Wold - B. Riley

Okay. Perfect. Thank you, guys.

Operator

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

James Marsh - Piper Jaffray

Just a couple of quick ones here. Just a follow-up on Carmike, are those treaties going to be retrofits of their Big D large format generic screens? Are they just new builds? And then I just want to also just touch base on the China market. Do you expect a December blackout this year that would limit Gravity and Hunger Games 2 from plan and then I have one final follow-up?

Richard Gelfond

On the first question, James, I don’t remember the exact answer. Although, I know some of them are certainly retrofits and a couple of them are going to get installed this year even. But I don’t know if any of them are new builds but a lot of them are retrofits. In terms of the blackout period, in China, again in July there was going to be a blackout period and there wasn’t a blackout period.

We are planning, as if there is going to be a blackout period and we are working on looking at local Chinese titles for that period of time. But we will see as you know and I’ve repeatedly said things change relatively quickly in China but we won’t get caught flat footed without movies if that doesn’t happen.

Joe Sparacio

Yeah, an example of that, James, if you look for instance at the top five movies this year in China so far, we have always said that we will cover ourselves whether it’s a Hollywood movie or a local language film and of the top 5 movies, IMAX has been a part of four of them.

The top one is Journey to the West which we were a part of, the second is Iron Man 3 which we were part of, the third one is So Young which we weren’t, but we were part of the fourth which is Pacific Rim and the part of the fifth which is Young Detective Dee. So we have covered ourselves with local product as well as Hollywood product, having four of the top five films of the year in that market.

James Marsh - Piper Jaffray

That’s very helpful. And then just quickly, Rich, a follow-up on -- I heard you say on Lincoln Square was the Gravity and done million dollars of IMAX Box in that theatre alone?

Richard Gelfond

Almost James, but at the end of its run, it will get to just about a $1 million.

James Marsh - Piper Jaffray

Okay. 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. Moving over to Europe. So Europe seems to be getting somewhat better on the macro front. You have obviously announced a couple of signings in Germany and a couple of other places in Switzerland as well.

Can you talk about maybe where you are for next year, when you look at your installations or the guidance? Are you seeing better traction in Europe? Can you talk about where you are in Europe signings? Are you seeing in Europe theatres being sort of once again being developed and are you part of those conversations so to speak?

Richard Gelfond

Yeah, I mean I wouldn’t necessarily tie it to the turnaround as much as I would tie it to changes in our strategy. So, as you know a couple of years ago, we would release films worldwide based on the Hollywood strategy. And then about a little over a year ago, we brought in Andrew Cripps from Paramount to run that international effort for us and we did a few things.

One thing we did was starting to program different countries differently based on the release schedule and I said that during my prepared remarks that there are films that are playing international only to fill those gaps. So, I think that was a very significant thing, breakthrough for us because the theaters were dark at times and were playing films for a long period of time when there wasn’t a U.S. release time, day and date with the European. So that was one thing.

Two, we began to think much more globally, so we have our marketing staff in Europe based out of London. We have distribution gear to there. We have hired a sales team over there and we’ve made significant inroads. An example I would use is actually the U.K. where several years ago, we had only one exhibitor partner really there which was ODEON and we had around eight theatres. I don’t remember the exact numbers but two or three years later, we are now up to about 30 theatres including our backlog and we have Empire which is Leicester Square.

We have Cineworld and we have ODEON. And as a matter of fact it’s not material. So, I will say that we have another operator. We have announced the deal in U.K. that’s also in the IMAX business. So we now have four operators in there and the market has grown very rapidly. And I think what we are trying to do is similar things in other countries and that’s why the camel under the tent is probably a better analogy than that in places like Germany and these other markets is a good thing, because we get a reference theatre you bring in competition and it will tend to grow the market fairly quickly.

So there is a lot of activity, for example we have no theatres in Scandinavia and there is a lot of activity going on in Scandinavia. It is probably not the best economic example, but we are opening our first theatre in Greece and Portugal. We opened a theatre with Lusomundo and it’s very successful, extremely strong numbers.

Russia has obviously been a place that’s been very strong for us all along but the Stalingrad movie with, as I mentioned in the call per screen per week an averaging over $60,000 a screen. I mean those are really strong numbers. So, I think it’s a combination of the tactics that we have used, the personnel we have recruited and certainly the economic recovery won't slow things down.

Ben Mogil - Stifel Nicolaus

Are you seeing U.K. as a good example, are you seeing in the UK sort of what we call B&C markets, kind of really aggressively looked at the format, not the way we have seen in the states. We think that the U.K. being your kind of high most developed European market.

Richard Gelfond

I think in Russia, we have more theaters than we do in the U.K. So, I think in terms of growth in a short period of time, the U.K. is on a very good trajectory. And also during the comments I talked about the iconic theater effect and I know it sounds like words, but I think it’s hard to overestimate what that means. I mean, I think the TCL in the LA community is a very big deal and you are going to start to see premiers happening there and big deal premiers. And you are going to start to see the media outlet showing people coming out of the IMAX Theater and I think similarly I think Leicester Square is, is a really big deal for the U.K. I think the BFI is obviously been iconic and tremendous from a box office point of view, but almost every year European and certainly many worldwide premiers are held in Leicester Square. And I think you know that’s going to boost not only our presence in the UK but also throughout Europe.

Ben Mogil - Stifel Nicolaus

That’s great. Thanks Rich. Appreciate the color.

Operator

Thank you. The next question comes from Steve Frankel of Dougherty. Please go ahead.

Steve Frankel - Dougherty

Good morning. I want to go back to China for a minute? There has been some reports in the trade that Gravity and Hunger Games are going to be released basically on top of each other? You have been to that situation before? If this happens again, is there anything that you might do differently to help optimize the box-office?

Richard Gelfond

I think, a couple of think, first of all, I think, we’ll have to make a decision on with our exhibition partners on which film is likely to play stronger. And I think they want adjust the schedule, so one really good think in China is the screen sharing which there isn’t in the U.S. So in the U.S. if you have two movies opening at the same time, you could only play one of them. In China you could actually play both of them.

And Gravity in particular, it’s a short film also. It’s only around 90 minutes. So when you look at it, you probably can get an extra show in there. So I think you will be able to, when you look at the total box-office, I don’t -- obviously rather they not open on top of each other. But I think there are ways to minimize the fall out from that.

I also think you have to kind of look at upon intended the bigger picture which is the fact that Gravity kind of came out of nowhere and performed so well and it got into China and Hunger Games got into China, and I think there are other films that I can’t comment on yet, but I think there going to get into China that we hadn’t counted on. So, on this one, I look that the glass is way more half full than what it could have been in an ideal world. Let’s remember neither of they’ve kind of got in also.

Steve Frankel - Dougherty

Okay. And then on the domestic market share gains? Do you think some of this incremental share gain is coming from the generic PLS or do you think it more likely is just coming from customers moving from the regular ticket to the premium experience?

Richard Gelfond

I think that, well, first of all, I wouldn’t use the word premium experience. I think it’s a number of patches. I think its people wanting to go to the IMAX experience. And I think you are bringing some people off the couch who wouldn’t go to the movies. You are bringing people who would otherwise watch at similar to what I just said on there mobile device or in their home TV set. I think you are bringing particularly in the film like Gravity because of the 3D element and IMAX’s role in the visual experience. You are bringing people who otherwise wouldn’t go to the movie.

I think, I don’t know if you are aware but versus the PLS IMAX is doing just way-way better per screen on it, somewhere between around three times what the PLS are doing. So I don’t, even how well Gravity has done, I wouldn’t -- want to knock the PLS and say, they are not doing badly for it, but people are seeking out the IMAX experience because it just the best way to see the movie.

Greg Foster

And they are seeking it out everywhere, Rich, was talking about how well we are doing in places like Lincoln Square. Earlier in the call when someone was talking about, I think it was Eric, who was talking about Carmike and asking about smaller markets and Warren Theater was mentioned, and I went and looked at my computer.

This is October. The Warren Theater is in one in Oklahoma and one in Wichita have both done approximately a quarter of a million dollars on Gravity in October. So something is going on, that -- right that’s a fifth of our per screen average that we have talked about in a $1.2 million or so on an average that they are getting in October. So there is definitely something going on in the connection that’s happening between that movie and the overall experience and IMAX is penetrating the marketplace.

Steve Frankel - Dougherty

Great. Thank you very much.

Operator

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

Aravinda Galappatthige - Canaccord Genuity

Good morning. Thanks a lot. Just a couple from me, just to go back to the laser projector for a second, when you think of where you are in terms of the development, is it safe to say that we are at the later stages, instead of focusing merely on the tweaks instead of the testing phase? Can we set of assume that much of the technology risk is now behind us or always -- are we still sort of the in the middle there?

Richard Gelfond

No. I would say we are still in the middle, Arvavinda. Obviously, in terms of time, we are in the later stages. But this is technology development and you have pieces, custom-made and you have approaches that are theoretical that you put into the real world and until you put them into the real world, thinks can go wrong. We are doing our best and keeping everybody appraised as to what we think but it is not without risk.

Aravinda Galappatthige - Canaccord Genuity

Okay. And just a quick one for Joe, the JV number that we saw this quarter, are there any hybrids in there? And could you just remind us how much of the backlog is hybrids?

Joe Sparacio

There is -- in the numbers for the quarter, there is two new hybrids plus one additional hybrid which was actually previously sales system. Last year we had two such installs. In terms of the backlog, I don’t have the exact number, but I would have to say it’s probably in the 70 range number with (inaudible).

Aravinda Galappatthige - Canaccord Genuity

Okay. Good. Okay. Great. Thanks. I’ll leave you there.

Operator

Thank you. The next question comes from Vasily Karasyov of Sterne Agee. Please go ahead.

Vasily Karasyov - Sterne Agee

Thank you. Good morning. I apologize if I missed it, but did you guys given update on the PSA for the year? What you expected versus last year’s 1.2 roughly? And then if you could, Rich, reflect on what this year is telling us about the slate strategy which work so well in 2012 and had a couple of surprises this year with the Despicable Me taking the outside share of the box-office and now Gravity being a positive surprise? Are you expecting to make any changes or tweaks domestic or internationally and anything on that would be helpful? Thank you.

Richard Gelfond

Great. On the PSA, we don’t give guidance on a quarterly basis on PSA and I guess there are good reasons for that because who expected Gravity to do the numbers that’s doing now or there are some films that obviously didn’t work on the other side. So no we don’t do that for the current year. I think we’ll think about it when we get into next year and we’ll certainly give you our thoughts in general at the end of the year conference call.

In terms of the slate strategy, Greg, can add to this, but I think that we haven’t really changed our view overall with the couple of caveats. One, as you know, we don’t think animation particularly works well for the IMAX audience and we still believe that and I don’t think you will see us change to do that despite the success of Despicable Me, which we did playing some international markets.

A second thing I would say is, again more our strategy international-only releases we’ll still do that. And then, the third thing I would say is this concept of having backups if a film doesn’t work in a particular way. It’s something that we have been kind of successful at and I think we will do more of that, which means, also film we expect to play for a long period of time, turns out after a week or two just not an audience for it, but we have an international-only release in that time period, that gives us the flexibility to back film and I think that something that we will do more of. Of course, we wouldn’t agree to do movies for two or three weeks or whatever the period of times as if we didn’t expect them to do well, but we want to be nimble in case we don’t.

Greg Foster

I think the other part to add is that the portfolio effect is definitely what drives our business. It’s the movie business. There is going to be some movies that work and there is going to be some movies that you think are going to work and that they don’t. And so by having a wide portfolio with films, it gives us an opportunity to kind of smooth things out.

The other thing that’s important for 2013 and I have said it before. But I think, it’s worth repeating is that 2013 was the first year in many, many, many years, where there wasn't for any point of the year a Batman, a Spiderman, a Bond, a Harry Potter or Transformers.

It was a very unusual year which is, what makes a film like Gravity that much more exciting. I think you will find in 2014 that there will be a few more kind of short thing blockbusters that we are all expecting, whether that’s the Transformers of the world or the Spidermans of the world, the other Hobbit, they are just, Interstellar Chris Nolan's movie. There is just some incredible films in 2014.

In terms of the programming, the other thing that I want to add, lastly, is that we have enjoyed the shoulder period exclusive windows of the movie like Wizard of Oz. Did it ultimately have a massive impact on our bottom line? Of course not, we did $5 plus million with the film.

But to release a movie exclusively in IMAX for a week that people really loved and then had an opportunity to do so really good for the brand. I know that Eileen Campbell, our Chief Marketing Officer commented frequently about how many positive things were being said about that film. Again, it’s a 75-year-old movie, so it’s now like it’s going to materially impact our P&L, but it was a good thing to do for a lot of other reasons.

Vasily Karasyov - Sterne Agee

Thank you very much.

Operator

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

Jim Goss - Barrington Research

Hi. I was sort of interested in something you started to get into about the backfilling notion. We’ve talked over time about the changing relationship dynamics between IMAX and the studios as you’ve demonstrated your value. And are you getting to a point where the studios are more agreeable to allowing for some contingency plans if expected hits failed to pan out?

For example, in the fourth quarter, you basically have I think five films for the period, all of which seem to be potentially big films but you never know. And if so, are you creating such backup contingency plans in association with the studios?

Richard Gelfond

I wouldn’t put it that way, Jim and I’m glad you gave me another chance to get out because I was afraid I may have overstated that. As I said, we don't do movies unless we think they're going to work and we expect everything to work. With that said, as Greg just said, not everything works and if you have the possibility of putting something in when it's not working, you do that in consultation and with the approval of the studio -- the initial studios film.

So, I think it would be more kind of a relationship thing. Since we are in business with virtually all of the studios and they are going to be on the winning side or their film underperforming at another point I think it's more from a relationship point of view, their understanding.

So at some point, one of their films is going to be doing really well and they are going to want some more play time. So, I think when their film isn't doing so well, they understand and they consent to it. But that's not part of any agreement. It's not part of anything formal. It’s just I think around world and the whole industry in a way works that way, as I'm sure you know in non-IMAX business and I think it’s just become part of the fabric of the IMAX business.

Jim Goss - Barrington Research

Okay. So the dynamics are getting a little better along those lines, so it’s little more of an equal partnership. And for example, you have Thor in international only in the fourth quarter. If you have something like that and potentially in your back pocket piece you didn’t have a spot during the domestic slate that you had lined up. That’s an option that you may deal with the studio to come in if something, if you need another slot.

Richard Gelfond

Jim, we have faith in the slate we have and we will see how it goes going forward. But we have a lot of faith in what we’ve chosen.

Jim Goss - Barrington Research

And last thing, the Dhoom 3 expectations and breaking into a new market if I'm not mistaken, pretty high hopes on this one?

Richard Gelfond

Dhoom 3 is a huge title in India and a lot of countries that support Bollywood films. It's not a movie that we are only going to playing in India. In fact, we have developed a tremendous relationship with Yash Raj Films in India and our intention is to play that film in markets outside of India as well, which would include Indonesia and parts of the Middle East, even in parts of Canada, United States and U.K.

So as we see the movie and as it gets closer to that window, we will make that decision. Bollywood is definitely something that is having a big impact in lots of locations, not just IMAX locations and we look forward to seeing how this first one does. It also great to note that in India, since you are talking about a Bollywood film, we’ve recently opened a couple of new locations with PVR and those locations including Gravity have done remarkably well in the last couple weeks.

And so what great is that we now like China are able to cover ourselves in India and countries that play the Indian films with both Hollywood films and Bollywood films and all you want are the options. If you're able to have both options, I think you're in a good position.

Jim Goss - Barrington Research

And to the extent that there is a significant population that is Indian or almost any other nationality in the melting pot of United States, you have opportunities to possibly take these films here and give them one of the screens in an area and perhaps draw from a wider base.

Richard Gelfond

That’s correct.

Jim Goss - Barrington Research

All right. Thanks much.

Richard Gelfond

Operator, I think we will only take two more questions to keep it on schedule.

Operator

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

Daniel Ernst - Hudson Square Research

Yeah. Good morning. Thanks for taking my call. Rich, this quarter a year ago you made some comments that I thought were very interesting about the size of the network reaching an inflection point, which helps you eliminate a lot of the variability in earnings in your model. But this quarter despite almost doublings since 2009, I don’t think you’ve had an absolute earnings numbers this low since then. So can you speak to where you -- you think you are in that inflection point, may be you need to be at thousand screens, one is the kind of the number where we see sort of less variability in the model?

And then related to that with next year expecting another year of how we backend weighted installs. Is there anyway you can work with the theaters maybe there is a discount you can provide the theaters who can install when you have your over capacity periods for your install guys? Thanks.

Richard Gelfond

Well, I will answer your second question first. We don’t manage the business for quarters and that’s your guys’ job. We managed the business over the long term and we’re not going to take a hit on margins.

So we can have more installs in the second quarter than the third quarter that’s just not the way we run our business or going through run our business. We’re not going to destroy our pricing to kind of smooth out earnings. I mean I wish they were smoother but they are subject to variability like in many businesses and that’s just out philosophy in running it.

In terms of variability, I think it’s the movie business, and September and October although this year is different but in late August just aren’t at the same months that the summer is or Christmas is. And it’s been that way for 100 years and its going to be that way. Going forward now, we’re trying to smooth it out through things like Greg was talking about special releases, The Wizard of Oz, The Metallica film doing things like that.

But the fact is in July, the kids are out from school and they can go to the movies all they along. In September, they’re in school. There is -- we really can’t change that result. In terms of the inflection point, I think we’ve passed the inflection point and stay tuned, I think when we have a good films like that it will reflect itself.

Daniel Ernst - Hudson Square Research

Good color. Thank you.

Richard Gelfond

Operator?

Operator

Thank you. The last question comes from Martin Pyykkonen of Wedge Partners. Please go ahead.

Martin Pyykkonen - Wedge Partners

Yes. Thanks. Couple questions, I know this probably difficult to get precise on, but the comment about 28% versus 6% China in the quarter and some of that was lack of the [black] but obviously you have more screens operating. Is there anyway to sort of separate the two how much of it was just being able to have more film output in screening versus the number of screens in terms of that jump year-over-year first thing.

And then secondly, kind of longer -- much longer term picture as some of these JVs eventually start to come up for renewal. Should we be thinking of your digital laser strategy kind of tying into that. In other words, from exhibitor standpoint, is that going to be part of the incentive to get them to renew. I know none of these are coming up very soon but if you just sign back to Avatar days in the few years may come up, all this over the next five to seven years but just wondering if that’s part of the tying because I think obviously clearly stated this is more for the very large film screen locations today but -- because they have deeper down penetration of that too incent the exhibitor to renew a JV several years out.

Greg Foster

So as to your first question Martin, I don’t have that data off hand but certainly offline we’ll be happy to give you what our releases were, how many films of things like that in the quarter. And if you can discern, it will give you the raw data to figure it out but I just don’t know if off hand. And it’s not intuitive. You need to do it with a calculator and try and figure it out.

As to your second question, as you know we recently extended the AMC releases, the AMC leases and they don’t even start to expire until 2021. So and that’s a large part of our network and then in terms of other ones, I mean in bulk you really talk it about probably, I don’t know ‘19 -- 2020, some in 2018. So we really haven’t formulated a strong strategy around that right now. We think it’s a good business proposition for the exhibitors and us and just like AMC extended it’s leases. We think people want to extend their leases.

But certainly laser can be a component of what goes into the negotiation about at least renewal but since laser is not even developed to the big screens yet the biggest, let alone JV screens that are out there and given that the renewals are at least five years away, it’s not something we’ve really focused on.

Martin Pyykkonen - Wedge Partners

Okay. And if I can slip in one other maybe more for Greg on the -- mentioned with the brand in the IMAX trailers. And obviously just more presence so forth with Hunger Games coming up if I remember at Lionsgate for the first one did a lot of social media marketing kind of have a task force, if you will. So I guess question to you guys could you even personally accelerate or more with social media marketing which is relatively expensive to even further build the brand for movie like that that’s coming up as well as other films and other studios as you go forward?

Greg Foster

Well, again with Eileen Campbell joining IMAX, social media is the huge part of her initiative in campaign and it something that we’re going to be doing from going from untraditional -- from traditional media into what we’ll untraditional or new media. So I think you can continue to see that.

And I think what Rich said about the behind the frames piece on Gravity is a great example. But at the end of the day, what also really helps is just good all fashion PR. And Lionsgate has been a huge supporter of our release of Hunger Games that includes the behind the frames piece by the way as well as all of the advertising which has IMAX in it and of course, the most important in my opinion which is differentiation.

The part of this film was shot with IMAX cameras. Any time (inaudible) goes into the arena particularly at the end of the movie, it will be featuring the IMAX camera. And I think that’s also a critical part. So we have a layered campaign with that film and based on initial instincts, I think just like the last film, it’s going to do remarkably well. And I think will be a nice big piece of it. And we also have a very nice run way for it as I think you know it’s about Thanksgiving.

Martin Pyykkonen - Wedge Partners

Okay. Thanks.

Richard Gelfond

Thanks everybody for listening in on our call. I am taking a step back. We continue to see strong signings. The fourth quarter box office is off to a great start and we continue to streamline our cost. Taking together, we think this line is up to finish off the year strong and most importantly positions us well for the long term growth. And again, thank you all for believing in IMAX and we hope to return that belief with strong results.

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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