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IMAX Corporation (NYSE:IMAX)

Q4 2013 Earnings Conference Call

February 20, 2014 8:30 AM ET

Executives

Teri Loxam – VP, IR

Richard Gelfond – CEO

Joseph Sparacio – EVP and CFO

Greg Foster – President

Analysts

Townsend Buckles – JP Morgan

James Marsh – Piper Jaffray

Eric Handler – MKM Partners

Ben Mogil – Stifel Nicolaus

Aravinda Galappatthige – Canaccord Genuity

Colin Moore – Credit Suisse

Steve Frankel – Dougherty & Co.

Vasily Karasyov – Sterne, Agee & Leach

Jim Goss – Barrington Research

Eric Wold – B. Riley & Co.

Operator

Good day ladies and gentlemen and welcome to the IMAX Corporation’s Fourth 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). As a reminder, today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Teri Loxam, Vice President of Investor Relations. Please go ahead Ms. Loxam.

Teri Loxam

Thanks Valerie. Good morning and thanks for joining us on today’s fourth quarter 2013 conference call. Joining me today is our CEO, Rich Gelfond and our CFO Joe Sparacio with prepared remarks. Also here today to join us for Q&A portion of the call is Greg Foster, CEO of Entertainment and Rob Lister, our Chief Legal Officer and Head of Business Development.

I would like to remind you 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 in certain non-GAAP financial measures as defined by Regulation G under the Securities and Exchange Commission. Discussions of management’s use for these measures and a definition of these measures as well as reconciliation to the adjusted EPS and adjusted EBITDA as defined by our credit facility are contained in this morning’s press release. The full text of our fourth quarter earnings release along with important 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 over to our CEO, Rich Gelfond.

Richard Gelfond

Thanks Teri. We delivered really strong results in the fourth quarter with record breaking box-office of $244 million, the installation of 58 theaters and 119 new signings, which resulted in Q4 EBITDA growth of over 90% compared to Q4 of last year. The IMAX business model is all about growing the network, maintaining our per screen averages and controlling costs which overtime will result in continued bottom-line growth.

In 2013, we executed on all key aspects of our business, resulting in margin expansion, operating leverage and cash flow for the year. At the beginning of last year we laid out three key priorities to better position us for the future. They were scalability, differentiation and penetration. Scalability was aimed at controlling our SG&A cost and becoming increasingly more efficient. In the past several years, our primary focus was on growing our business in a rapidly growing environment.

In 2013 however, we implemented several changes to ensure increased efficiency as well as growth. We adopted new channel policies; put together a hiring committee and more effective management controls and began restructuring certain internal groups all of which contributed to a more disciplined approach to running our global business.

Importantly these efforts were reflected in our SG&A for the year which grew only 3% over 2012, not including stock-based compensation despite a significant increase in business activity in 2013, particularly theatre signings and new business initiatives. And we are committed to continuing our cost discipline approach moving forward including through further implementation of SAP which we began building out last year.

In terms of differentiation, our technology and our brand and our film presentations were all areas where we saw improvement in 2013. We continued making progress on our laser projection initiative which I will talk more about in a minute. We also further built our brand and provided differentiated viewing experiences to our audiences. Two of our movies last year, Star Trek and Hunger Games: Catching Fire, had portions filmed with IMAX cameras, and we continue to see strong demand from filmmakers eager to use both our film as well as our digital cameras.

In fact Michael Bay used our new 3D digital camera to film a significant portion of the upcoming Transformers 4 movie which will be released in June of this year. And Chris Nolan is using our film cameras for his new movie Interstellar which will be released this November. During 2013, we signed or opened IMAX theatres in several iconic locations including the TCL Chinese Theatre in Hollywood formally the Grauman’s Chinese Theatre as well as a new theatre in Potsdamer Platz in Berlin.

An IMAX theatre will open at Leicester Square in London in the coming months and we have our eye on several other prominent locations around the world. The central location sites and historic nature of many of these theatres means they are often the site of countrywide or even worldwide film premiers with significant media coverage. This exposure ensures IMAX will remain front and center in consumers’ mind in key markets around the world.

Last week we hosted the U.S. premier of Robocop at the TCL IMAX Theatre in Hollywood and the international debut at the BFI IMAX theatre in London. In addition to these notable theatres, we penetrated many new markets in 2013 and broadened our reach globally. We achieved a tremendous 277 signings during the year, our best signings year ever, almost doubling 2012 and those signings span 31 different countries.

This has resulted in our largest backlog in history of 407 theatres providing us with a solid pipeline for future network growth. In addition we installed 112 new theatre systems in 2013, 110 of which were for new commercial theatres across 23 countries. With the continued build out of the international theatre network and an increased number of local language film releases in 2013, we are now more globally diversified than ever before.

We have IMAX theatres operating in 57 countries and in fact there is now an IMAX theatre system operating somewhere in the world 24 hours a day with many different films playing across our network at any given time. Our global portfolio films generated $727 million in box-office in 2013 and delivered a global per screen average of approximately $1.2 million.

In fact with the exception of 2010 only where we had a higher per screen average driven by Avatar, our per screen averages over the past five years have been in a tight range of approximately of $1.1 million to $1.2 million, further evidence of the success of our annual portfolio approach to our film slate. And for the first time, more than 50% of revenues in box-office in 2013 were generated from international markets, a trend we expect to continue as we further expand our international theatre network.

To ensure we are fully capitalizing on global terms and opportunities abroad, our top priority for us this year is to think, act and operate more globally. This doesn’t just mean opening more theatres internationally. This means deeply understanding the countries and regions in which we operate and adopting that business approach accordingly.

We have already started to manage our film portfolios on a more global level by tailoring it to local preferences and strategically planning our film slates in each country to reduce gaps as Hollywood titles are often not released on the same day throughout the world and I think as you have seen our results over the past several years, you have seen the benefits of that programming philosophy.

To this end, we have continued to build relationships with local filmmakers and in 2013 we played nine local language films including five in China, one in France as well as our first in each of Russia, India and Japan. Our focus on globalization will involve looking at all aspects of our organization to make sure we are operating in an effective and efficient manner in every country.

As part of this work, we will have an increased focus on our brand. In the past we had three separate marketing groups, one for film, one for theatres and one for our brand. And each had its own independent plans and strategies that were largely focused on domestic marketing. Given how big an asset our brand is, last year we hired a new Chief Marketing Officer, Eileen Campbell, who has significant global experience marketing large brands and also a passion for data analysis and return on investment.

Her first step was to reorganize the marketing group to build a unified efficient marketing structure to better support our films, theatres and brand around the globe. The second step was to identify and supplement the team with additional talent which has largely being completed. The third step which is currently underway is the implementation phase executing our strategy.

Our goal for this year is to test new marketing initiatives in select markets around the world to determine their effectiveness and what their return on investment is. It will be a year of learning determining which levers best drive market share and revenue so we can optimize the allocation of our resources in the years ahead. Another key priority this year is the launch our laser product which is aimed at converting our largest film based theatres those with screens above 80 feet to digital.

We’ve signed 22 digital laser deals so far plus up to 40 additional laser deals as part of the most recent Wanda announcement. Inherent in any R&D project is risk, but we continue to work closely with our partners to ensure components meet our specifications and are delivered on time. The next step is to put all the pieces together for the first alpha prototype, based on the progress we have made so far, we remain on track to begin our laser roll out at the end of this year.

On the film side our portfolio of titles for 2014 is firming up. We have officially announced 14 films for this year but we expect to have a similar number of titles in 2014 to the 38 films we had released in 2013. There are many great movies in our slate this year with franchised titles like Spiderman, Transformers and The Hobbit, movies we know our fans are really looking forward to seeing in IMAX. Given our track record with Chris Nolan, his significant use of our cameras and his passion for the IMAX brand and most importantly the IMAX experience we are also really excited about Interstellar.

Looking further out to 2015 and 2016 film slates are shaping up to include more anticipated blockbusters than in most years. Films such as Star Wars, Avengers 2, Jurassic World the next James Bond are all currently scheduled for 2015, and Batman Vs. Superman and Avatar 2 are among the many films already started to be lined up for ‘16.

We believe that the progress we’ve made over the past couple of years will continue in 2014 and will position us well for 2015 with a vast global network of theatres and a very strong global brand. We expect to continue to deliver greater value not only for IMAX but also to our studio and exhibitor partners and most importantly to IMAX consumers around the world.

And we are not stopping there; we have our sight set on growth far beyond 2015 and ‘16. While we continue our focus on building our network to maximize our core strategy of out-of-home theatrical entertainment, we are also pursuing new business initiatives. As we previously announced, we began dipping our toes into the in-home entertainment market with the launch of our ultra-high end private theatre early last year.

We expanded our efforts later in the year with a goal of creating the next level of premium in-home entertainment with a lower priced home theatre through a joint venture with TCL and a strategic partnership with PRIMA. A joint venture is beginning to form and we expect R&D and product design initiatives to kick off in the near future with product roll out targeted for 2015. We are also keeping our eye up for other business opportunities where we could leverage our brand technology and capabilities to provide additional growth for the future.

And with that I’ll turn it over to Joe to go through some of the financial details.

Joseph Sparacio

Thanks, Rich. As Rich mentioned we finished off 2013 with a very strong quarter across our top and bottom-lines which translated to expanding margins and free cash flow generation. Total revenues of $105.1 million in the fourth quarter increased by 36% compared to Q4 of last year and helped to drive a 91% increase in adjusted EBITDA to 52.2 million and adjusted EPS to $0.44 in the quarter.

Our strong top-line results in the fourth quarter were driven by higher sales-type theater installations as well as strong up growth in our joint revenue sharing and DMR line items. Revenues from sales-type installations was 32.6 million in the quarter compared to 20.2 million in the Q4 of 2012 reflecting the installation of 23 full new theater systems and one private home theater under a sale and sales-type lease arrangement in the most recently completed fourth quarter compared to 14 in the fourth quarter of 2012.

The company also installed four digital system upgrades under sales and sales-type lease arrangements in the fourth quarter of 2013 compared to three upgrades in the period last year. Looking at our recurring revenue lines, the JV and DMR segments combined and grew 46% compared to Q4 of last year. These two segments made up half of our total revenues for the quarter. This revenue growth translated to significant margin expansion with our total gross margin percentage in the quarter increasing to 64.1% up over 900 basis points compared to 54.8% in Q4 last year.

DMR margin was almost 82% this quarter driven by strong box-office performance and lower DMR costs resulting from the scale of our DMR portfolio and the digital nature of the majority of the films in the quarter. The Q4 JV gross margin of 72.7% was significantly higher than the 52.6% margin in the fourth quarter last year driven by strong box-office as well as fewer JV hybrid installations. There were six JV hybrid installations in Q4 this year compared to 10 in the same quarter last year.

Moving on to our operating expenses, SG&A excluding stock-based comp came in at 20.1 million in the fourth quarter bringing our full year SG&A total to 70.7 million, a 3.4% increase over last year. We made great progress in 2013 towards improved cost controls and we expect to continue these efforts in to 2014. We are issuing full year 2014 guidance that we expect SG&A excluding stock-based comp to increase approximately 5% to 8% compared to full year 2013. In terms of SG&A phasing, we anticipate a similar cadence to 2013 with SG&A expected to be higher in Q2 and Q4 and a bit lower in Q1 and Q3.

Remember as you compare back to 2013, that last year’s first quarter included a $2.2 million one-time pension benefit which we don’t expect to reoccur this year and we incurred a loss of 700,000 in the fourth quarter due to foreign exchange translation. Stock-based compensation for Q4 was 3.2 million with the full year coming in at 11.9 million; we expect stock-based compensation for the full year 2014 to be approximately 16 million.

Q4 R&D was 3.5 million bringing the full year R&D expense to 14.8; we expect our full year R&D expense in 2014 to be around 15 million primarily driven by the continued development of our laser technology as well as other initiatives. We currently anticipate the phasing of R&D spending in 2014 to be weighted a little more heavily to the front-end of the year with about 60% of R&D spend expected in the first two quarters.

In terms of taxes, we finished the fourth quarter with a tax rate of 26.3% translating to a full year tax rate of 27.2%. We expect our full year 2014 tax rate to be around 27% including an estimated 10 million to 12 million of cash taxes. At the end of 2013, we had $24 million of remaining tax assets resulting from NOLs.

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 our JV network expansion. In the fourth quarter, we generated about 6.6 million in free cash flow bringing our full year 2013 free cash flow generation to 12.8 million after $22.8 million investment in JVs or 35.6 million before our investments in JVs.

During the fourth quarter, we also paid down our bank debt by 5 million resulting in no remaining bank debt at year end. The company finished the year with cash and cash equivalents of 29.5 million. In terms of our network, we installed 112 new theaters in 2013, 110 of which were for new commercial sites. We installed almost 50% of these in the fourth quarter with 54 new theater systems in Q4 including 30 JVs and 24 sales-type installations of which 22 were for new commercial theaters, one was for a new institution and one for new private home theater.

Our total commercial network is now 701 theaters of which 382 are JVs. In addition, in the fourth quarter we signed deals for 119 theaters bringing our full year 2013 signings to 277 theaters of which 246 were for new systems. As a result, our backlog at the end of 2013 was at an all-time high of 407 theaters, 384 of which are for new theater systems, almost 90% of these theaters in backlogs are new builds and 90% are scheduled for installations in international markets.

For 2014, we expect to install a similar number of theaters as we installed in 2013. As we talked about on our Q3 earnings call in October, we expect the pace of our 2014 installations to mirror that of 2013 with about 50% scheduled for the fourth quarter. Based on our current backlog, we expect about two-thirds of our installations in 2014 will be JVs and one-third sales-type arrangements.

As part of our JV installs for 2014, we currently have about 20 hybrid JVs in our backlog scheduled for 2014 installation with about 15 of them scheduled for the third and fourth quarters. We currently expect to install about eight new theaters in the first quarter, two of which have already been installed. We currently anticipate three sales-type installations in the first quarter and about five JVs one of which is currently expected to be a hybrid JV.

To give you some color on our box-office, we generated 244 million in global box-office in the fourth quarter, a 61% increase over the same period last year. Our box-office in Q4 was pretty evenly split between domestic and international markets. However, for the full year 54% of our total box-office of 727 million was generated from international markets which represents the first time in IMAX history where our annual international box-office exceeded our domestic box-office.

Our fourth quarter per screen average was 366,000 bringing our full year 2013 PSA to 1.15 million with the domestic PSA of about 1 million and international at about 1.4 million all consistent with last year. Also consistent with last year was our per screen average in China which was 1.2 million for 2013. A few other countries worth highlighting included the Netherlands with a PSA of 2.5 million; South Korea, 2 million; United Kingdom, 1.8 million and Russia at 1.6 million.

DMR costs for the year were 27.4 million resulting from the release of 38 films. We expect a similar level of DMR spend in 2014 as we had in 2013 assuming a similar number of films in our portfolio this year which is currently our expectation. A couple of other items you should be aware of this year, first as Rich mentioned we announced a joint venture with TCL Multimedia to expand our in-home initiative and develop a broader premium home theater offering. We are in the early stages of forming the joint venture and we expect that once the team in place R&D and other activities will begin.

We anticipate using equity accounting for the JV so our 50% of the initiative will be booked on the equity line of our P&L. Based on our current assumptions for the year, we estimate that the JV will be dilutive by about $0.05 in adjusted EPS in 2014 primarily driven by R&D costs and SG&A associated with staffing of the joint venture. We currently expect these costs to begin in late Q1 and to ramp up throughout the year. In addition, our lease in Santa Monica also expires early next year, after careful consideration and analysis we have decided to build a new facility in the Los Angeles area instead of leasing in a new location.

Renewing our lease in the existing facility was not a viable option as our space needs have changed with the evolving business and the new LA train line is being built within a few feet of the existing office which we believe will interfere with our post production work. We expect to begin building this year with the new facility expected to open in 2015. We expect to finance a large portion of this project with a low interest rate construction loan. We believe the P&L impact will be neutral in the first few years and positive thereafter.

To recap 2013 was a successful year for the company on a number of fronts. Our commercial network grew 17% to 701 theaters globally. This along with consistent per screen averages drove growth in our recurring business lines resulting in expanding margins and increased cash flow.

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

Question-and-Answer Session

Operator

Thank you (Operator Instructions). And we’ll move to our first question from Townsend Buckles of JPMorgan. Please go ahead.

Townsend Buckles – JP Morgan

Thanks. Rich you clearly had a great year of new screen signings especially in China of course as you look at your pipeline ahead, is there still much activity in China and Asia and do you see the region continuing to read your signings ahead?

Richard Gelfond

The answer is yes Townsend there is a significant amount of activity in the area still going on. I think one country that we lost momentum in over the last couple of years was Japan, because obviously when the Tsunami happened and Fukushima happened, a lot of the positive momentum was going on which was going on there came to a halt. So I think that’s a market that we’ll see some progress in, some of the developing countries like Vietnam, and as you know Indonesia and Malaysia have been pretty good for us.

And in China itself there is a reasonable amount of activity, I mean I don’t think you are going to see another 120 theater deal like we had this year with Wanda come out of there, there is just no way that could happen, but I see that region as continuing to be pretty good.

I see also Russia as being a good year for us again, Joe just talked about the PSAs there and I think that’s going to drive growth. I think Europe is a place where we are underpenetrated. And I think we’ll especially with Leicester Square and some other things you’ll see some positive momentum coming out of there. LatAm I think we’ll just have to see what happens to the current C&E economic environment as well as India. But the ones that I mentioned first I feel pretty good about and those other markets I think are probably more susceptible to worldwide trends.

Townsend Buckles – JP Morgan

And in some of the other emerging markets like LatAm, I think in the past it’s been a bit of a challenge to get more developers to allocate enough space to allow for an IMAX screen, we’ve heard some are now giving some preference to an exhibitor bringing in an IMAX so if you could talk about how you’re seeing that dynamic and if you’ve got more developers now on board, are you seeing these markets opening up more now?

Richard Gelfond

Yeah we are Townsend very much so, and in fact we signed a deal for one of the best locations in all of Brazil recently over the last couple of weeks I am not sure whether we announced it or not we may not because it was a one theater deal. But again it was one of the best locations in all of Brazil and there is demand coming from there. But I’ll give you a sort of a parallel example on why on Brazil and India, I am a little bit cautious in India we kind of executed everything we could, according to our plan and we opened with competitive exhibitors, the PSAs in India were really good, they were around 1.5.

We think about ticket prices there and kind of incredible results, we opened Dhoom 3 which just really knocked the cover off the ball in India. There were parts of blank seats but yet in India last year we didn’t have a lot of signings and that was just because of the devaluation of the rupee as well as the economic environment so I think we are well-positioned in LatAm, it’s just a question of what the macro-economy looks like.

Townsend Buckles – JP Morgan

Thanks Rich.

Operator

Thank you. And we will move to our next question from James Marsh of Piper Jaffray. Please go ahead.

James Marsh – Piper Jaffray

Hi, thanks very much. Just two questions, first for Joe. Joe as you look at fourth quarter JV revenues as a percentage of the total IMAX box revenues, it looks like it was moderating a bit. And I guess not just in the fourth quarter but for the full year, looks like in the fourth quarter they were about 10% down from 11.2; I am just trying to understand what’s driving that I have a thought that with two-thirds of installed last year being JVs if that would naturally creep higher?

Joseph Sparacio

Well one of the impacts could be James that, don’t forget a lot of the installs that we had this year that in theory would have lifted it a bit happened later in the fourth quarter. So that may, that’s going to tweak that percentage as well in terms of what you may have expected coming through. So depending on when those units came online that will impact that percentage as well. Actually, when you look at it, overall I mean that percentage was actually up a bit from where we were last year and a lot of that was because the volumes were so great and in many of the deals we exceeded our fixed cost line.

James Marsh – Piper Jaffray

Okay alright thanks. And then my follow-up relates to your relationships with film directors, and obviously you guys realize that a lot of power in Hollywood resides there, I guess what caught my eyes recently was a trade press article highlighting how J. J. Abrams wasn’t going to be shooting Star Wars with IMAX cameras and obviously you are going to DMR it. But I thought the comments were a little bit negative there and I just wonder if you guys have any color on that?

And then in the past you talked about kind of growing your fold of directors that like to use IMAX, guys like David Fincher that hadn’t used it in the past but just wonder if there are any new developments on, up and coming or important directors that are starting to use IMAX?

Greg Foster

So James a couple of things, first of all regarding J. J.; J. J. and his company Bad Robot are really close friends of ours, partners of ours and have been a long-term partners of ours. IMAX, we are committed to their films, you feel free to ask they are very committed to IMAX as well and I think you’ll see over the coming years lots of J.J.’s films including those that he produces for Bad Robot in IMAX Theaters, some in fact that will be using IMAX cameras.

Our relationships with film makers I don’t think has ever been better, whether its Zack Snyder who we know do a lot of movies with including The Batman versus Superman movie. The Marvel filmmakers that we’re working quite extensively with, we continue to have our complemented film makers like the Chris Nolan’s and the Michael Bay’s and our great relationship with Jim Cameron. But as we continue to expand our business we’ve been having lots of interaction with new filmmakers who have perhaps done IMAX films but haven’t used our cameras who would like to.

The big issue that we have with our cameras is there is a way more demand than supply. And we’re very careful to not overdo it; we don’t want everyone shooting with an IMAX camera. It’s something that we have an exclusivity on that we want to make sure that the people that use it are the people that really understand our technology and really understand how to create a differentiated experience. So, the summary is, there is more conversations with filmmakers than we’ve ever had and in fact the supply of cameras is the biggest issue addressing the demand which it currently exceeds the supply.

James Marsh – Piper Jaffray

Okay thanks a lot Greg.

Operator

Thank you. And we’ll move to our next question from Eric Handler of MKM Partners. Please go ahead.

Eric Handler – MKM Partners

Yes good morning. Thanks for taking my question. I wondered if you could talk a little bit about the regulatory climate in China. A week ago there was an article in the Hollywood Reporter talking about the government actually increasing the number of films that they were going to import in a year but then that was refuted but I just wonder do you see any changes going down in China that you expect over the next 12 to 24 months?

Richard Gelfond

I think the answer is yes we do see changes coming. I think they will be mostly positive. Many of you have heard my overall take on China which I will repeat again which is that I think it’s almost like a stock chart where it goes down and it goes up but it trends over a period of time to be upward and I think that’s definitely been the case. So something like the last 10 IMAX films that we have tried to get into China have all gotten in and we have never been in a period of time where that’s happened before.

On the other hand I am sure there will be a period of time where that won’t be the case and I don’t want to over-state this but I think the number one thing everybody needs to do is be a little calm and look at on our long-term perspective. Again we didn’t put out a press release saying 10 in a row have gotten in but should one not get in that tends to be a lot of noise in the background so first that’s kind of the overall perspective, things have definitely been getting better.

At a second level, I think you see the focus in China at a high level on consumerism and the shift in economy from exporting to consumer economy and certainly movie going which has grown about 30% a year at the box-office and IMAX itself is part of that consumer movement, so I think you are going to see the macro politics there favor consumer issues such as IMAX so that’s another reason.

And then on more micro reason there have recently been some changes in the makeup of China Film Group and again China Film Group is the state-owned enterprise that controls the importation of films. China Film Bureau regulates China film group. But recently a number of the people because of age have retired in China Film Group and they are replaced by a new generation and I think that new generation has experience of IMAX, get IMAX and I think overtime that will continue the positive momentum that we have been seeing.

Eric Handler – MKM Partners

And just one quick follow-up on China, I am just curious what type of, with the increase in number of theatres that are operating there now, what in general has been the market share range that you are getting for a Hollywood film versus a China local language film?

Richard Gelfond

I’d say it’s been somewhere in the 7% to 12% range, the best ones are 12, the lower ones are around 7 and I think it’s been fairly similar for the Hollywood films as well as the Chinese films.

Eric Handler – MKM Partners

Great, thank you.

Operator

Thank you. And we’ll move to our next question from Ben Mogil of Stifel. Please go ahead.

Ben Mogil – Stifel Nicolaus

Hi, guys, good morning and thanks for taking my question. So on the 38 films that you plan to release in this year, how many do you think will be the language maybe give us a sense of how many by country and if you want to be just sort of even range I understand that as well?

Greg Foster

They will be in the eight to 10 range.

Ben Mogil – Stifel Nicolaus

Okay.

Greg Foster

This year for instance if you look and you see in the beginning of the year where we have already had a movie The Monkey King in China and then we’ll have probably four to five from China alone and we’ll continue to supplement with additional markets. It’s an important gap filling strategy but it’s also a very important strategy in terms of nurturing relationships with filmmakers. One of the questions that was asked earlier by James we talk a lot about the Hollywood filmmakers there is also tremendous interest for our cameras from non-Hollywood filmmakers as well, the big filmmakers in markets in Europe, in China, Asia-Pacific et cetera.

Ben Mogil – Stifel Nicolaus

Okay, thanks. And then one to Rich, Rich as you guys grow more abroad and this year’s signings and you look at 31 countries sort of in the signing pool, are there some countries that used to be straight sales that you are now feeling comfortable enough to do JVs with?

Richard Gelfond

China is really the only one that I could think about otherwise no, we’re pretty much following the policy we did.

Ben Mogil – Stifel Nicolaus

That’s great. Thank you, guys.

Operator

Thank you. And we’ll move to our next question from Aravinda Galappatthige my apologies. Please go ahead.

Aravinda Galappatthige – Canaccord Genuity

Good morning. Thanks very much for taking my question guys, great quarter. Just a couple from me, first of all on the systems sales, very sharp upswing in Q4 ahead of last year’s Q4 and probably ahead of everyone’s expectations. I was just wondering what drove that. Was it just simply the timing of the installations the way it was scheduled or if they come from particular region or particular area and were there perhaps some sort of spilling over earlier from 2014 into ‘13?

And my second question was on the China films. I was just wondering maybe Greg can give us an update on what the blackout periods are here and what are the timing is of the key releases of 2014, the big Hollywood titles?

Greg Foster

Aravinda I will take the first question on the installations. If you recall I mean we have been saying all along that our installations will be back-end loaded and part of that was the anticipation that a number of these sales-type leases would come in the fourth quarter. There was a little bit of movement as you would have in any year between periods but nothing very dramatic and we didn’t really shift our guidance that much.

So we are pretty much in the mode of one-third to two-thirds in terms of our sales to JV mix, I think that’s pretty much where we have been so there was nothing really unusual. I think in terms of where we have installed, we have installed in a bunch of different markets but one of the real positives was you know we had a number of sites in Latin America this year which was great.

Richard Gelfond

And on the China side Aravinda what’s been, what always happens in china is that you really never know until a month to six weeks prior to a film coming out whether it’s going to get in there or not. There are censorship issues, there’s timing issues, they obviously have a quota but what we have done with our foreign language development program is we have been very careful about making sure that at any given time we always have a local film ready to slot in if one of the “blackout’ periods shows up.

To give you an example of the piecing of our Chinese releases not just of the Mandarin titles but of the U.S. titles, by the end of the month of February so for the first two months of the year IMAX will have released nine titles in China some of which are Hollywood titles, some of which are local language titles.

So we feel we have a really nice sequencing going on there and there’s no reason to suggest that, that won’t happen. I can’t tell you when Transformers 4 is opening up or when Spiderman is opening up but we certainly anticipate those movies being a part of the release slate in China just like they have been in the past. They are important franchises and China Film Group is interested in maximum the revenue of all of the theatres there.

Aravinda Galappatthige – Canaccord Genuity

Great, thanks a lot. I will leave it there.

Operator

Thank you. And we’ll move to our next question from Colin Moore of Credit Suisse. Please go ahead.

Colin Moore – Credit Suisse

Thank you. Good morning. Just have a follow-up on Ben’s question with regards to your record backlog including a lot of international, it maybe early but do you have any sense as you look at that backlog on what the potential PSAs might be for that backlog whether they could be equivalent to your existing network or is there a chance, even though they are great returns, the increased penetration may just cause a weighted average decline in your international PSA?

Richard Gelfond

That’s a really interesting question Colin. I think the answer is we’ll all learn that together but I think what we are trying to do is look at our PSAs on a global basis and 80% of the backlog is international and as you know our international PSAs are higher than our domestic PSAs. So I think where our range has been approximately between 11 and 12 for four out of the last five years are better than that in the 50.

I think we are comfortable saying that the opening of the backlog will keep us in that range over the next couple of years most likely despite whatever the ups and downs and I will talk about that in a second. But I think given that they are so focused internationally, I don’t think that they are going to be low enough that it’s going to bring down our overall worldwide average and that’s certainly the way we model it internally.

There are also other moving pieces going on and you have got to remember that at the same time. One is we are reinvesting a lot in our brand which we haven’t done as much before and I don’t know what the return is but I would expect there will be some uptick in terms of brand investment, in terms of bringing people through the turn styles. It’s low but over time obviously there will be some price appreciation whether it’s because developing markets do better or whether it’s because you know some kind of inflation comes in but that will be a factor. So I think they are really cross currents and the safest bet is to model it where it historically fell within the last five years.

Colin Moore – Credit Suisse

Thank you. That’s helpful. And maybe just a quick question for Joe, in addition to some of the dilution from the JV ventures on the P&L, should we also consider that there may be some additional investments within the cash flow statement in 2014?

Joseph Sparacio

You mean from the PCL joint venture. The way that the investments will appear is to the extent of our equity contributions into the joint venture. So you will see that appearing as an investment and our investment in that joint venture is fairly limited on a cash basis. In terms of the P&L, our share 50% of the P&L will flow through our equity earnings line.

Colin Moore – Credit Suisse

Great. Thank you.

Richard Gelfond

Colin, I think I will add just one thing which is, I don’t think you can necessary equate the size of the market to what the PSA is. There is so many other variables that go in it including marketing and positioning and so on. Greg should tell you the story about this weekend in Nevada.

Greg Foster

So one of the things we’ve spend a lot time focusing on our – let’s call them smaller market, C markets, you have heard us talk about Bill Warren and [inaudible] Home and Wichita, Kansas. So there is a regional exhibitor in Southern California called Galaxy and they opened a theatre in Sparks, Nevada, marketed it beautifully, really spent a lot of time and effort with our team and their own team making sure that it was fun center, and it was the highest grossing engagement for RoboCop this last week end.

Now at the opening week end I realized but with all due respect it’s also Sparks, Nevada not that it’s a multi-million population zone. So the point is that if someone uses regional movie-going as a hub and anchors it with IMAX like Bill Warren has done, like the guys at Galaxy are doing and like several others are, we think we can play a significant role in those territories and we think that can have a very positive impact on our overall PSA expansion.

Colin Moore – Credit Suisse

Thanks for that color.

Operator

Thank you. (Operator Instructions). We will move to our next question from Steve Frankel of Dougherty & Co. Please go ahead.

Steve Frankel – Dougherty & Co.

Good morning. Greg I wonder if you might give us some comments on the China Film Giant Screen RoboCop situation?

Greg Foster

I think I am going to answer that on – Steve which is China Film so you know has a quota in addition to the normal number of films let in additional films are let in under the 3D bucket. So China Film has encouraged some of the studios to convert their films to 3D in order to get into China, and in fact this is not the last one and you will there are others that you are going to see are going and also being converted into 3D.

In this case, the conversion was done by a company that we’re in litigation with involving a former employee of IMAX that we believe stole some of our intellectual property related to the conversion and we have elected to play it in 2D in China not in 3D because obviously we are not going to play something which we believe was converted using technology that was taken illegally from us.

Out market intelligence is that in some of these other movies and this technology and this company is not involved. So I think if China Film decides that films needs to be converted from 2D to 3D and it’s converted by the company that has a technology lawfully, we will happy to play in 3D provided the quality is pretty good.

So we view this as what happened with RoboCop in some senses as somewhat of a one-off but I think you will see a pattern from 3D done by different companies and for example Hobbit 3D is opening in China shortly in the next couple of weeks and we are playing it in 3D.

Steve Frankel – Dougherty & Co.

Great. Joe, a couple of questions for you. What was the PSA domestically and internationally in the quarter?

Joseph Sparacio

For the quarter, the overall PSA was 366,000, domestic was 343,000, international was 392,000.

Steve Frankel – Dougherty & Co.

And could you clarify for me whether or not the optional 80 Wanda screens are in the backlog or not at this point?

Joseph Sparacio

They are in the backlog.

Greg Foster

They are not optional. In the fourth quarter we put out a press release where they went firm. So let’s be clear, we only put firm deals in the backlog and they are firm deals and they are in our backlog.

Steve Frankel – Dougherty & Co.

All right. Thank you for clarifying that for me. And then one last question on China, as you look at your package today of installs and existing backlog, roughly kind of what percentage of is in Tier 1 and Tier 2 cities versus the next level of target?

Greg Foster

I don’t know the answer off hand. You certainly can follow up with Teri and we’ll try to get answer to that.

Steve Frankel – Dougherty & Co.

Okay, great. Thank you.

Operator

Thank you and we will move to next question from Vasily Karasyov of Sterne, Agee. Please go ahead.

Vasily Karasyov – Sterne, Agee & Leach

Thank you. Good morning. Joe, I have a big picture financial question for you. So your adjusted EBITDA grew in mid-single-digits this year but the free cash flow conversion rate dropped. So given that the trend that you guys are talking about longer term trends in terms of the network growth and the PSA, can you tell us about puts and takes that could result in high free cash flow conversion rate?

Joseph Sparacio

I think Vasily, one of the big impacts that we had this year is that, if you look year-over-year, we had a 36% increase in top line growth year-over-year in the fourth quarter. Much of that is going to liquidate in the first quarter of 2014. So there is a – you will see in our financials and our balance sheet a fairly high receivable balance at the end of the year. A big reason for that is the timing of when we receive payments from the films studios and example of that would be the Hobbit where released the film in mid-December we are not going to see that until January, February, same thing with Catching Fire.

So you have a timing difference there and number of our JV arrangements. It’s also on a one quarter lag so we are actually liquidating those receivables in this first quarter.

Vasily Karasyov – Sterne, Agee & Leach

So would you be willing to tell us what is the 10(b) potential is let’s say on a long-term basis when you keep growing according to the plan, how much of the EBITDA can converted into free cash flow?

Joseph Sparacio

I mean in an ideal world, year-over-year you wouldn’t have a working capital difference like this, but it’s hard to predict Vasily and I would hope that overtime it’s just balances from year-to-year. I mean the important thing is now we continue to grow our top-line and continue to expand our margins. I mean conversion of that to cash is just a matter of timing.

Vasily Karasyov – Sterne, Agee & Leach

All right. Fair enough. Thank you very much Joe.

Operator

Thank you and we will move to our next question Jim Goss from Barrington Research. Please go ahead.

Jim Goss – Barrington Research

Thanks. This is probably Rich or Greg question. Sort of couple of them together. I was wondering if are making any headway in the screen sharing notion during block buster season? And sort of on a related basis, when you move into an late August, September period where there are typically can be holes in the schedule, and last year if them work out so well and I was wondering if that were any lessons taken that have resulted in some new strategic when holes might develop alternatives like [classic] or some other franchise you guys might have in that regard?

Richard Gelfond

Jim, so on the first part of the question, screen sharing. As you probably know internationally screen sharing is a lot more prevalent then it is domestically and there is more of that going on so even this week end in the UK we are playing in some case on the same screen RoboCop and Gravity. There are three film sharing. In the U.S. it’s really not part of the way the exhibition screen the other studio community work here.

So I think it might be good for the business in certain respects but we really have to honor our partners wishes and honor precedent it will take that – break that apart right now. So, I think you need to think about in two pieces separately internationally and domestically.

Greg Foster

On the core seasonality issue which you were talking about late August and September, a couple of things to note. First of all, the summer which in my opinion really starts on the 7th of March which is sort of ironic with 300 and then you’ve got basically a movie every two to three weeks that looks like it could be a pretty big movie, continues all the way through into August. In fact there’s a big movie coming out which they recently announced the trailer, shown the trailer of and has got some huge social media reaction which is the Marvel title Guardians of the Galaxy.

When you get into September we are paying close attention to the release of some classic films that we think have DNA that can translate into IMAX. So more to follow on that. It is not been lost on us that September and the end of January and February are often tricky months. We are in the blockbuster business and that’s not usually when blockbusters are released. So we are coming up with alternative content to be able to kind of address those months.

The other thing however that’s nice is that because of Gravity October has now become fodder for big releases. That used to be a month that was considered great for Halloween movie and now that Gravity has done almost $300 million I think you are going to find that there is going to be some blockbuster titles coming out on an annual basis now in that month and that’s obviously great for us.

Jim Goss – Barrington Research

Okay, just one follow-up on which is response to the first question though. One thing I have noticed that as time has gone on and you have created more clout and more of an ability to maybe interact more evenly with the studios. I wondered if that might open the door to some changes in the nature that Hollywood has typically had in terms of the screen sharing idea. Along the lines of your ability to maybe pick up a movie sometime if it’s not working out and maybe giving it back to that studio at a latter point and having them all understand you are working in the best interest of all.

Richard Gelfond

Yeah, I think the second point you made Jim is more likely meaning that if a film isn’t working I think studios have become a little more flexible in saying it’s not in our interest and not in your interest and I think you have seen that happen going back in time and you will continue to see that happen going forward in time because they are partners and they want what’s best for our network and we want what’s best for them.

In terms of you know formal sharing of shows I think if we have a long term perspective that’s something you might see five to ten years from now but I really don’t think in the short run that, that slide could have changed overnight.

Teri Loxam

Dolly, I think we have got time for one more very quick question.

Operator

Thank you. We move to our next question from Eric Wold of B. Riley. Please go ahead.

Eric Wold – B. Riley & Co.

Thank you. Just on the wire, two question I guess the follow up for Greg on films like you talked about the same number of titles this year versus last year. First of all I am assuming that’s on a global basis and so should we assume a greater number of local titles this year than last year and then just kind of a follow-up on that as you get into negotiations with the studios on the release of a Hollywood title kind of globally and kind of go market by market, how much flexibility do you tend to have in terms of individual markets where you may think a local title at the same time being released may do better than the Hollywood title. It’s kind of take out certain markets to place something other than the Hollywood title you are currently negotiating with.

Greg Foster

So first of all Eric on the number of films we are literally looking at a complete mirror of what we did in 2013. We are expecting in the 25 range of global Hollywood titles, we are expecting seven to 10 local language titles which Anthony Vogels is working very hard on as we speak and in fact has some already nailed down and we are also working on five to seven Hollywood titles that we can play domestically because of an additional commitment but as a result of the staggered schedule especially this year with the World Cup have an opportunity to play internationally in 2014.

So it will be very, very, very similar around the 40 range. And in fact while we have announced a bunch of titles so far this year we already know the majority of them that you will be hearing about in the coming weeks and months. As it relates to the second question which is a really interesting question there are some markets that, that already happens. For instance the Monkey King in China came out at a time there were some other movies that we chose not to put ourselves on the paper work for because we preferred to play the Monkey King which has shown to be the right decision.

We would continue to do that as long as it doesn’t conflict with a big title of ours with the Hollywood partners. That’s not something that we would necessarily do however in a market where there is one or two or three IMAX theaters. The only way that we would ever do that would be if it’s a market with an international film maker who is impactful and someone who we want to be in business with and which isn’t going to burn a Hollywood title that we have already made a commitment to and there are several of those that we can do that with but we have to be very careful to find out right balance. So I hope that answers your question.

Eric Wold – B. Riley & Co.

Just one quick follow-up if I may on laser system. Assuming you kind of get few installed before the end of the year due to testing on couple of the movies what should we think about in terms of the cadence for how the remainder of the installations of laser system should happen in ‘15 kind of avoiding the core kind of summer holiday seasons?

Richard Gelfond

Yeah I think Eric that it’s still DVD because as I said during introductory remarks these are really alpha units the first ones which we are putting in but you know I would hope and again I am underlying that word it’s not a prediction that somewhere around 10 would go in next year in 2015 and in ‘16 that would really ramp up more. I will have to get back to you later in the year when we see how the development goes further long.

Eric Wold – B. Riley & Co.

Perfect. Thank you, guys.

Richard Gelfond

All right so thank you all for joining us on the call. Couple of takes just on the quarter one is one of our Directors at our board meetings uses a term that I really like, he says IMAX is not a quarter horse, it’s in the race for the long term and I think if anything was proven out of this year it was that the portfolio theory really worked and when we talk about the range of $1.1 million to $1.2 million obviously nothing is guaranteed and nothing is in the bag but the fact we have done it four out of five years, in the fifth year we beat it gives me significant confidence that when you model out IMAX into the future that’s a pretty good starting point.

And I think all of us, the company included when we have a film that doesn’t work and the team will tell you this I don’t get panicked and when we have a film that does work out I don’t run around singing songs. I just think that the portfolio theory works and it’s hard to think that way when you are on one end of the spectrum or the other but I think after five years that’s pretty good empirical evidence.

I don’t know too many other businesses that are that consistent over that period of time and I think if you take that PSA you look at the number of signings we had during the year, you look at the network growth we had and the prospective network growth, you look at our ability to control costs through slow growth in SG&A which we demonstrated this year, we would hope that we could continue to deliver very solid margins and expanding EPS and the business model is really that simple and I think the fourth quarter proved that out.

So with that thank you to all our investors and particularly our partners in the studios and the exhibitors for helping make it such a successful year. Thanks.

Operator

Thank you. Ladies and gentlemen this does conclude your conference call for today. We thank you very much for your participation. You may now disconnect your lines and have a great day.

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