IMAX (IMAX) Richard L. Gelfond on Q1 2016 Results - Earnings Call Transcript

| About: IMAX Corporation (IMAX)

IMAX Corp. (NYSE:IMAX)

Q1 2016 Earnings Call

April 21, 2016 8:30 am ET

Executives

Jessica Kourakos - Senior Vice President-Investor Relations

Richard L. Gelfond - Chief Executive Officer & Director

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

Analysts

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

Steven Frankel - Dougherty & Co. LLC

Julia Yue - JPMorgan Securities LLC

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Eric Wold - B. Riley & Co. LLC

James Charles Goss - Barrington Research Associates, Inc.

Matthew Brooks - Macquarie Capital (NYSE:USA), Inc.

John Liu - HSBC Investment Bank Asia Ltd. (China)

Robert Peters - Credit Suisse Securities (Canada), Inc

Eric O. Handler - MKM Partners LLC

Operator

Good day, and welcome to the IMAX Corporation First Quarter 2016 Conference Call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Today's conference is being recorded.

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

Jessica Kourakos - Senior Vice President-Investor Relations

Thank you. Good morning, and thanks for joining us on today's first quarter 2016 earnings conference call. Joining me today in our New York office is our CEO, Rich Gelfond; and our CFO, Joe Sparacio, who will have prepared remarks. Greg Foster, our Head of Entertainment, is also with us and will be available for Q&A. Also joining us is Rob Lister, Chief Legal Officer and Head of Business Development.

I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking 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 more detailed discussion of some of the factors that could affect our future results and outcomes.

During today's call, references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and the definition of these measures, as well as reconciliations to adjusted net income, adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in this morning's press release. The full text of our first quarter 2016 earnings release along with supporting financial tables are available on our website, imax.com. Today's conference call is being webcast in its entirety on our website.

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

Richard L. Gelfond - Chief Executive Officer & Director

Thanks, Jess. First of all as many of you could hear I have a bad cold, so I'm going to do my best to speak clearly. But if you can't hear anything I say please feel free to ask me to clarify it.

2016 is clearly off to a great start. Strong box office signings and installations have allowed us to post Q1 results that exceeded expectations across virtually every key metrics. Revenues of $92.1 million grew 48%, driven by continued network growth and higher than expected global PSAs in the quarter.

Adjusted EBITDA of $31.5 million grew 97% and represented 37% in EBITDA margin. That's a 1,000 basis point improvement from last year. Adjusted EPS in the quarter was $0.22 and grew 214%. EPS growth was driven by a stronger box office, solid network growth and benefited from operating expense leverage in the quarter.

In addition, we bought back over $50 million worth of shares in Q1, at an average price of $30.98 per share and put in place a 10b5-1 programmatic stock buyback program. This buyback program enables the company to automatically repurchase shares during earnings blackout periods.

Our board has also increased our existing stock buyback authorization from $150 million to $200 million underscoring our ongoing commitment to returning value to shareholders.

Looking at our film performance in more detail, we generated $272 million in IMAX global box office in Q1, up 64% from last year. Q1 global PSA was $284,000, up 40% compared to the prior year and brought our rolling 12 month global PSA to $1.22 million. Not since 2010 and the release of Avatar have we seen a rolling PSA this high.

Looking at performance by region, while China posted another solid quarter. We were particularly pleased with the strength of the domestic box office. IMAX domestic box office grew 87% in Q1, benefiting from strong performances from Star Wars, Deadpool, Zootopia and Batman versus Superman.

Domestic PSAs of $281,000 grew 78% versus last year and highlight how stronger content and flexible programming can move the needle in our business during what we normally call our shoulder periods, when big event movies are not released as frequently in theaters.

IMAX box office and PSAs from international territories outside of China grew 79% and were driven by strong PSAs in regions like Japan, the Middle East and Continental Europe. Together domestic and international box office in Q1, excluding China, grew 84% and accounted for 69% of our global box, that's up from 62% last year. It is quite an accomplishment when you consider how strong China is growing overall.

Joe will get into more specifics on some of these other geographies and how they are tracking in just a moment; but suffice it to say, outside of China, we believe there is a significant opportunity ahead.

Greater China box office grew 33% in the quarter with box office growth of 39% in the PRC, driven by a healthy mix of Hollywood and local titles. Locally produced content deserves a special mention because it drove much of the record-breaking Chinese New Year week growing the holiday box office by 83% year-over-year.

Our screen network in China grew by over 30% since last year and yet saw virtually no dilution of per screen averages, which as many of you know is no small feat and is a testament to the strong consumer demand for movies in IMAX.

As we said last quarter, while there has been understandable concerns raised about the broader Chinese economy, the cinema, as an affordable form of entertainment remains very strong and on track to pass the U.S. by 2017.

With that, let me now review the slate, as it stands for the rest of this year and talk a little bit more about the years ahead. We now have a fuller picture of 2016, and as I mentioned earlier, we think there are many promising titles in the IMAX lineup.

For Q2, we're already off to a great start with the strong opening of The Jungle Book, which generated over $20 million in IMAX box office in its opening weekend. Captain America: Civil War, which includes roughly 30 minutes of footage shot with IMAX cameras is very highly anticipated with particularly strong presales activity, and an early Rotten Tomatoes score of 95%.

We also have Alice Through the Looking Glass (sic) [Alice in Wonderland: Through the Looking Glass] (7:12) and Warcraft based on the globally popular game and both X-Men: Apocalypse and Finding Dory, the sequel to Finding Nemo, are being released internationally through the IMAX network.

In Q3, we have to sequel to Independence Day, the next Star Trek, and finally Suicide Squad, which we're particularly excited about. In September, we're also releasing Clint Eastwood's new movie, Sully, which was shot almost entirely with IMAX cameras. Sully is about Captain Sully Sullenberger played by Tom Hanks, who you may remember did an emergency landing of his plane in the Hudson River and saved everyone a few years back. It's a great true story and the aerial footage in this movie is amazing in IMAX.

In Q4, we have Doctor Strange another character in the Marvel Universe and the buzz on the film, since the trailer was released appears to be very strong. Fantastic Beasts, an offshoot of The Harry Potter series by J. K. Rowling is then scheduled for release in November and is seeing strong interest for the Thanksgiving holiday that is consistent with the other successful Harry Potter films in the series.

And, of course, rounding out Q4, we have the new Star Wars prequel, Rogue One, which according to the trailer helps connects the dots for how R2-D2 got those original Death Star plans. You Star War fans will know what I'm talking about. And since we are a global company, it's also important to highlight some of the more important international and local language releases coming out this year.

In China, we'll be participating in the July release of Daniel Lee's highly anticipated film The Lost Tomb. We're also in active discussions on many additional titles; including Zhang Yimou's The Great Wall and Tsui Hark and Stephen Chow's blockbuster title, Journey to the West II.

In Russia, we're participating on the high-level profile local language film, The Crew, which releases today in Russia; as well as the September release, The Duelist from the Producer of Stalingrad, Russia's highest grossing film of all time.

And in Japan, we'll take part in Toho's eagerly anticipated reimagining of the Godzilla Classic, Godzilla Resurgence. It's not a coincidence that these titles have been spaced out fairly evenly across the year.

As many of you know, we work with the studios to ensure that we have not only the best content for our screens, but that each title has an optimal release window within our network. We believe stacking the schedule this way, with few lulls in between big event movies allows the box office to maintain momentum and is one of the reasons behind our strengthening PSAs.

As more blockbusters are produced around the world, and as we continue to play a role in the timing of those releases, we hope to see the concept of shoulder periods become a thing of the past with premium content that maximizes the potential of the entire IMAX screen network throughout the year and that's why you see that – the increase in trailing PSAs growing so solidly.

As I look to 2017 and 2018, I can't comment yet on exactly what we've committed to. Here is a view into the upcoming industry film slate.

In 2017 the list includes: Wolverine 3; Kong: Skull Island; Justice League: Part One; Guardians of the Galaxy 2; The Next Spiderman; Dunkirk by Chris Nolan, the next installment of the Fast and Furious franchise; The Next Four; The Mummy that stars Tom Cruise; Transformers 5; and of course, the next major installment in the Star Wars Saga: Episode VIII.

In 2018, big releases include Avengers: Infinity War Part 1; the Black Panther, which is another Marvel character in the Avenger series; Warner Bros., The Flash; Ready Player One by Steven Spielberg; a Han Solo Star Wars Anthology Film by Disney's Lucasfilms, another Transformers movie; Toy Story 4; The Jurassic World sequel; Ant-Man; and The Wasp, but even Aquaman is getting his own movie.

In short, we see a lot of blockbuster films to choose from over the next several years that have great IMAX potential. Also, importantly, we expect to see a significant increase in the number of films using our cameras beginning this year from a historical average of about two per year to up to five films per year, which typically helps our indexing and should allow us to continue to differentiate The IMAX Experience to audiences around the world.

Moving to our network. We believe the differentiated IMAX format coupled with highly anticipated film slates for the next several years continue to drive significant global demand for new IMAX theaters.

In the first quarter, we signed agreements for 36 theaters, that's a 71% increase over last year and we installed 19 new theater systems. The signings momentum we are seeing is particularly impressive in places like China, Japan and Continental Europe.

India is also beginning to show promise, as evidenced by a new five theater deal with INOX theaters, bringing our total number of theaters in India to nine with an additional 11 in backlog. Interestingly, India has very strong PSAs due to the sheer volume of cinemagoers in the region. And as that market evolves, we believe the opportunity there can be quite significant.

In North America, which many have discounted as a fully developed market, we're also seeing a lot of interesting activity in the form of exhibitor consolidation. We believe the global consolidation of exhibitors is, at least in part behind renewed activity domestically as well as in areas like Europe to Middle East, where we're significantly underpenetrated.

In addition to AMC/Carmike, we also have CJ CGV a long-standing client of IMAX acquiring Mars in Turkey. Vue Cinemas acquiring Dutch exhibitor, JT Bioscopen; and Wanda buying Hoyts in Australia.

Given that IMAX has strong relationships with these global consolidators, we view their expansion plans has a potential opportunity for us to accelerate our penetration in those market. In China, we continue to see great momentum with signings growth up 171% in the quarter versus last year. Our recent 10 theater deal with Shanghai Aurora is a great example of how we are engaging with new partners to break into new territories. And we expect to sign more multi-theater deals with both new and existing partners over the coming year that can grow our network footprint even further in the region.

We're also pleased to see progress for our home theater joint venture with TCL in China, which has accumulated over 130 system signings, since launching 10 months ago. And finally, while I never want to appear as if my head is in the sand with respect to competition, as we look to PLT performance for movies like Star Wars, Deadpool and now Batman versus Superman, IMAX continues to outperform PLTs by a significant margin.

Remember with Star Wars, we accounted for over 10% of the worldwide box office and yet accounted for less than 2% of the screens. With Deadpool, the stats are similar with our global network continuing to contribute a disproportionate percentage of the box office.

I wouldn't underestimate the power of the IMAX brand and the consistently great experience the brand represents to consumers and particularly those covered in millennials and fan boys that the studios love to attract. I'd also point to the strong economic results we consistently deliver to exhibitors and studios, which is another big driver of our installations and our signing success.

To close, the first quarter had significant accomplishments and fuel significant momentum upon which we hope to continue to build throughout the year. We believe we are performing exceptionally well and we look forward to audiences continuing to get up off the couch and into IMAX theaters to experience this year's anticipated blockbuster films in the way filmmakers intend them to be seen, in the most immersive format available.

With that, I'll turn it over to Joe for more details about our financial performance.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Thanks, Rich. We are very pleased with the operating results posted for the first quarter. Not only did we show strong performance across virtually every key business and financial metric, we also showed significant operating leverage in the quarter with adjusted EPS of $0.22, up 214% over last year.

Adjusted EBITDA margins of 37.4% increased over a 1,000 basis points versus last year and underscored the significant margin expansion opportunity that is still inherent in the business.

Looking at our film performance, we ended the quarter with total box office of $272 million, up 64% from the year ago period. By geography, the domestic market accounted for $111 million, while $161 million was derived internationally, including $83 million from China.

Our robust box office in the quarter was driven by the release of 17 films with the biggest drivers, of course, being Star Wars, which received a January release in China; Deadpool; and Batman versus Superman.

Per screen averages were up considerably. Our Q1, global PSA grew 40% to $284,000, driven largely by growth in the domestic market. Our North American PSA was up 78.3% to $281,000. While our China PSA came in at $290,000 and showed impressive consistency, given the significant growth in that market's network footprint over the last year.

International PSAs, excluding China grew 48% to $284,000 and was also a solid contributor to the overall PSA growth this quarter. We are very pleased with the consistency of PSAs across the global network, especially as we expand into new territories.

Looking at a few markets in a bit more detail, we continue to make progress in Japan with our PSAs in that market up 100% year-over-year. In Sweden and Denmark, two entirely new markets, we saw PSAs in the quarter of over $2.3 million and $900,000 respectively, and experienced strong double-digit PSA growth across several other key markets including Australia, Argentina, and France. We also saw triple-digit PSA growth in markets like Egypt and Germany and The United Arab Emirates.

Our average penetration in these markets is currently only between 30% to 40%, so seeing PSAs that are tracking well in excess of $250,000 per quarter and growing at these types of rates is very encouraging, as it typically leads to exhibitors wanting to sign for more theaters with us down the road; especially in light of the exciting film slate over the next 12 months to 24 months.

Turning to installations, we installed 10 new theater systems and nine upgrades this quarter. Of the 10 new installations, five were sales tied, four were hybrid, and one was a full JV. Out of the 10 new systems, half were installed in China; while the other half were installed in other international markets.

We continue to expect 135 to 140 new theater installations for the year and anticipate the installation of roughly 50 sales type, 60 full JV, and 28 hybrid JVs. For the second quarter, we concurrently expect to install 11 sales type, 12 full JVs and eight hybrids.

We also signed agreements for 36 new theaters in the quarter with roughly 50% in China and 50% in the rest of the world. Our backlog at the end of the first quarter was 388, which grew sequentially from 372 in the December quarter and reflects the sustained demand for IMAX systems worldwide.

Moving to our financial performance, our Q1 revenues grew $92 million to $92.1 million, up 48% over Q1 last year, driven by an increase in systems revenue and the impact of robust box office performance, which drove our JV and DMR revenues up 47% and 69%, respectively.

Our revenue from sales type installations came in at $18 million, which reflects the installation of five new theater systems and nine upgrades. Remember, these upgrades come at low margins, so they reduce our gross margin percentage in the quarter that they are installed.

Our gross profit for the quarter came in at $52.2 million for a total gross margin of 56.6%, down slightly compared to the 57.8% last year. If we exclude the low margin for digital upgrades, our gross margin was 63.4%, up 480 basis points over the prior year. We expect relatively few digital laser systems to be installed for the remainder of the year and for system margins to return to more normal levels.

JV and DMR margins both came in at 77%, a significant increase year-over-year for both businesses. DMR cost of goods for the quarter were $7 million and we expect our full-year DMR cost of goods to be in the $30 million to $32 million range consistent with our guidance, but likely trending towards the top end of the range.

Moving to operating expenses. We are pleased to report that OpEx defined as SG&A, excluding stock-based comp plus R&D were lower compared to Q1 of last year. SG&A excluding stock-based comp was $23 million, up 1% from last year.

On a percentage of revenue basis, our SG&A was roughly 25% of revenues this period, which compares to 36.6% in the same period last year. In terms of guidance, we continue to expect our full-year SG&A expense, excluding stock-based compensation to grow 2% to 4% over 2015.

Our stock comp for the quarter was $8.5 million, and we anticipate our full-year stock-based comp to total $32 million. R&D for the quarter was $3.7 million, down from $4.5 million last year. As we highlighted last quarter, we believe we can keep overall operating expenses virtually flat with last year.

As mentioned, adjusted EBITDA was $31.5 million, up 97% from last year and resulted in margins of 37%, which represented an over 1,000 basis point improvement from last year. You should note that our stake in IMAX China was reduced to 68.5% from 80% following its successful IPO in October causing an uneven comparison to last year's Q1 adjusted EBITDA levels. For example, the minority interest impact on EBITDA this quarter was $4.4 million versus only $1.9 million last year.

However, if you look at our business on a gross EBITDA basis that normalizes the changes to our equity ownership, our EBITDA was roughly up 100% versus the first quarter of last year. That being said, no matter how you slice it, 97% growth or 100% growth, it underscores how well we are doing in China as well as around the globe.

The IPO allowed us to unlock significant value and strengthen our balance sheet in meaningful ways. And while we continue to expect our full-year minority interest impact on adjusted EBITDA to be between $25 million and $26 million, we anticipate China to continue to see strong box office and network signings as well as installation momentum for the remainder of the year and for most of that performance to contribute positively to our consolidated results.

Moving down the P&L, tax expense for the first quarter was $4 million or 23%. For the full-year, we continue to anticipate our effective rate to be between 23% and 24%. Our adjusted net earnings after accounting for $2.7 million in minority interest was $15.5 million or $0.22 per share, which is over three times higher than the year ago earnings; again, despite the higher minority interest levels.

We continue to expect our full-year 2016 minority interest impact on net income to be between $17 million and $18 million. We ended the quarter with a total cash balance of $260 million. In addition, during the quarter, we repurchased more than 1.6 million shares for a total value of $50 million at an aggregate price of $30.98.

We will continue to evaluate our buyback program and other capital allocation priorities on a quarterly basis with an eye to only investing in areas that we believe will generate the absolute highest shareholder returns. All-in-all, we are off to a great start in 2016, and with so many exciting films still to come, we are excited about the prospects 2016 has in store.

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

Question-and-Answer Session

Operator

Thank you. And your first question will come from the line of Ben Mogil of Stifel. Please go ahead.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

Hi, good morning and thank you for taking my question. So, first question, in the past you've talked a lot about sort of almost excess demand or requests for IMAX spots from the U.S. studios in terms of the North American and non-China spots. When you're now talking to Chinese producers and distributors, are you seeing any of that same sort of favorable dynamic come to play?

Richard L. Gelfond - Chief Executive Officer & Director

Greg, why don't you answer that?

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

Yeah, hi Ben. Actually quite a bit of it and it's very parallel to what we're doing in the United States. So, we have a fantastic team in China that's obviously doing a great job. We also have our local language group in Los Angeles led by Anthony Vogels, who is constantly in China. And we've built terrific relationships not only with filmmakers, but with the studios who are constantly seeing during Richard's trips and my trips as well.

And we're turning down about five movies in China; for every movie, we say, yes too, just like we are in the U.S. We have defined periods of time like the Chinese New Year, whether six or seven titles to pick from and we're able to pick one, maybe two.

So, we are seeing an increase in demand and we're also seeing a huge demand for differentiation like IMAX cameras, which will be something that we'll be employing in China over the course of the next six months to a year. So, my long-winded answer to your question is, yes.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

That's great. Thanks. I'll just ask one more and then let someone else get the queue. When you look at North America, where you're seeing exhibitor consolidation, which is clearly favorable, given the consolidators and just given the fact the market is proven to be deeper, I think than anyone would have thought, any thoughts given some of the zone sizes to going back and trying to sort of work out deals, where you can shrink the zone size for one and compensate them somewhere else or any thoughts on selective second screen opportunities?

Richard L. Gelfond - Chief Executive Officer & Director

Ben, on second screens, the jury is still out, but there are number of empty zones and the way you phrased it was pretty correct in terms of putting second theaters in existing zones, we're making trades on existing zones.

In my prepared remarks, I gave kind of a short-hand version, but I think we all believe right now that there's more opportunity in North America than we had expected. And I think consolidation will unlock some of that, but also I think the high PSAs and the good returns are going to unlock some of that. And I think, we'll all be pleasantly surprised that there's more in North America than we have thought.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

That's great. Thank you very much. Rich, feel better.

Richard L. Gelfond - Chief Executive Officer & Director

Thanks.

Operator

We'll now go on to our next question from Stan Meyers of Piper Jaffray. Please go ahead.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

Thanks guys. Rich, I wanted to talk about the new theater signings. Obviously, you've seen some meaningful acceleration here in Q1 and then more so in April. Maybe you can provide some color what are the drivers behind the demand as the box office, your new structure, your hybrid structure or JV or anything like that that you can just provide some color there? And then I have a follow-up.

Richard L. Gelfond - Chief Executive Officer & Director

Stan, I think it has to do with theater performance. In 2015, as you remember, we were up over 30% versus the prior year in terms of box office. So, I think our theater operators are getting really good return on investment all over the world.

And we had talked about the Avatar effect years ago, but I think there was a Star Wars effect coming off last year. And this year, we have such again in the first quarter, a dynamic growth in PSAs and box office I think that our customers are understanding what the returns are and they're really valuating the IMAX brand.

So, I do not want to overstate it, because not everything is signed, but a level of activity in the number of deals and play, since I've been here for 22 years, I haven't really seen that kind of activity, but I think it must be coming off of the IRRs they're making and the financial returns in the box office growth.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

Thanks. And then Greg, I just wanted to talk a little bit about the family content in your slate. Historically, family content had some poor performance across the network particularly, domestically.

And you guys obviously at some point, even canceled those films and now recently have changed your policy and those have delivered solid results, most recently is Zootopia and The Jungle Book. So, I just wanted to see, if you can talk about the shift in consumer behavior and demand for IMAX?

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

Sure. So, first of all, we're being very selective and opportunistic about the family-oriented movies that we pick. I would say it's not a coincidence that we've done Zootopia, Jungle Book, and have a window for Finding Dory. Those are all Disney movies. No one really does it better than Disney, on family-oriented movies. There are some others that we're definitely looking at in the Lego Universe, which we're quite excited about.

But again they're opportunistic. You don't see them in the middle of, let's say, Thanksgiving et cetera or Christmas when we would have a Marvel title or a Star Wars title et cetera. But we do feel that there is demand for them and there's definitely demand for them in China.

Zootopia, in particular was hugely successful in China. And I think it's helped to contribute to our rolling 12-month PSAs, which as Rich pointed out have gone up significantly and in fact every month over the last six months, our PSAs have gone up every single one sequentially.

So, I think the flexibility of the programming has had a lot to do with that. And I think family-oriented movies are part of the mix. We're certainly not going to monopolize the mix, but they are definitely part of it, and part of the flexibility that we need to show.

Stan X. Meyers - Piper Jaffray & Co. (Broker)

All right. Thanks guys.

Operator

Your next question will come from the line of Steven Frankel of Dougherty. Please go ahead.

Steven Frankel - Dougherty & Co. LLC

Good morning. First, for Joe. How many more of the old film locations that were moved to temporary digital or left to convert to laser?

Joseph Sparacio - Chief Financial Officer & Executive Vice President

There's really only a handful of commercial sites that remained, Steve. Most of the sites that would be upgraded at this point would be institutional sites.

Steven Frankel - Dougherty & Co. LLC

Okay. And for Rich, in Japan, how many more installs do you think you need to get before you reach critical mass in that market or do you think you're there today?

Richard L. Gelfond - Chief Executive Officer & Director

Well, we have over 20 opened. And with backlog now we're close to 40, Steve. So, I think that's a market that's the size of the UK almost a little bit smaller size of Russia. So, I think we are at critical mass today.

And I think it's something like four out of the top five or five out of the top six exhibitors are in our business. And if you look at the install patterns, I think, this July, three huge theaters in Tokyo and other prime locations are opening.

So, I think through my prepared remarks, I mentioned Godzilla being released in Japan. I think the network is either add or approaching the size, where we can support local language. It's a market that has me as excited as any in the world. We had targeted I think for 90 zones to 100 zones. But I think when we go back and look at it again, since it's the third largest film market in the world, we probably can do better than that.

Steven Frankel - Dougherty & Co. LLC

Okay. And then on Wanda, any update on maybe the next phase of your relationship with Wanda and kind where they are in working through their backlog?

Richard L. Gelfond - Chief Executive Officer & Director

Well, this year because they've accelerated their growth, they accelerated our install. So, we're installing roughly 60 theaters with Wanda. And we are in preliminary negotiations with them now about how and when to extend their commitment.

Steven Frankel - Dougherty & Co. LLC

Great. Thank you so much.

Operator

Our next question will come from the line of Alexia Quadrani of JPMorgan. Please go ahead.

Julia Yue - JPMorgan Securities LLC

Hi, thank you. This is Julia Yue on for Alexia. Could you help us better understand the PSAs in China that were down slightly in the quarter, given the significant increase that you guys called out in screen growth. Do you think that PSAs in China can continue to grow over time or do you think it might be a bit more muted near-term with the significant screen rollout?

Richard L. Gelfond - Chief Executive Officer & Director

I mean, just to put it in context, it was down less than $5,000 on roughly $300,000 base. So, I don't really think of a 1.5% move when you have different movies is material. China has some of our highest PSAs in the world and I think this is consistent with what it was last year.

I think the only reason it didn't go up more is because Deadpool didn't get into China. It played really well in Taiwan and in other territories, but I see no fall off in the China PSA. Especially when you consider the amount of growth there, which was a significant amount of growth and theaters don't mature until their second year or third year. I thought the results were outstanding there.

Julia Yue - JPMorgan Securities LLC

Okay. Great. That's helpful. Thank you.

Operator

Your next question will come from the line of Aravinda Galappatthige of Canaccord Genuity. Please go ahead.

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Good morning. Thanks for taking my questions. Rich you've obviously had a nice string of signings outside of China as well recently Germany, Japan and India. You've talked about Japan. I was wondering if you can just touch on the outlook for India you alluded to it in your prepared remarks.

I know historically you were a little bit concerned about the regulatory and the legal framework. I mean what are the impediments today as you think about the outlook in that market and the ability to really sort of expand your presence there?

Richard L. Gelfond - Chief Executive Officer & Director

I'm smiling because you kind of answered it. I still think the regulatory and legal framework are impediments in India. I'm more optimistic, because we have three or four chains now signing agreements with us in India. And the PSAs are very strong in India. And usually those are the conditions that lead to breakout growth. That's kind of what happened in Japan and happened in England. There were multiple competitors and very strong box office.

So that makes me a little bit more optimistic. But the lack of transparency and the regulatory framework makes me cautious in my optimism. I think things are getting better under Modi, but they're not happening at lightning speed. There is a lot of history in India, and I would have been wrong before getting too excited, too early.

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Great. Thanks for that Rich. And then quick question for Greg, as we look beyond the Q2 slate, there's some titles that maybe for some investors are fairly new titles lesser-known, I think, Doctor Strange, Suicide Squad et cetera, any sleepers in that film slate that you think can surprise to the upside? And also on the international slate as well that you care to touch on? Thanks.

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

So, Aravinda, I think you just touched on the two. I think Suicide Squad and Doctor Strange both look extremely strong. There was the industry conference in Las Vegas last week and both films were very well represented. The trailers played, the Suicide Squad team was there for the Warner presentation, which by the way was an excellent presentation and particularly encouraging about Warner Bros. slate going forward over the next year or so, but I think those are two that look particularly good. Rich touched on the Clint Eastwood movie, which is a great title, particularly for the September shoulder period.

And in the international side, as we know December is always a great month in China, because it's a local language film. There are many films to choose from. There is a title that I'm fairly confident we're going to pick. I'd rather not announce it yet until we know that that's for sure the date. But I think you'll see a blockbuster or two from the Chinese side in the October holiday and also in the December blackout period.

So, there's several titles; and again, one of the things that's best about this year is the consistency of the sequencing or spacing of the IMAX titles, which is, again Rich pointed out, is not a particular coincidence.

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Great. Thanks, Greg. I'll pass the line.

Operator

Next question will come from the line of Eric Wold of B. Riley. Please go ahead.

Eric Wold - B. Riley & Co. LLC

Hi, good morning. Two questions, I guess. One, I guess kind of both related, as you think about – as you move into some of these newer markets like India and others or even ramp expansion into markets where you've had a kind of a minimal presence. How should we think about the education process with consumers? Clearly, the exhibitors themselves take an assistance don't need to be educated in the value of IMAX, but how involved is IMAX or the studios or exhibitors in educating consumers into IMAX format?

Richard L. Gelfond - Chief Executive Officer & Director

Well, Eric, typically you do have an additional marketing to make that happen. But I've been very shocked sort of, and that's not an overstatement, because we just opened two theaters in the last year; one in Sweden and one in Copenhagen, Denmark.

And the one in Sweden, since November is like $4 million or $5 million and the one in Copenhagen in its first year has done over $4 million, and those are markets where we didn't have a theater and didn't have a brand presence.

So, I think, increasingly because of social media and globalization, even though we don't necessarily have a theater in the market, we clearly have a reputation and a name in the market. And as I said, what your question would have been kind of one for more concern for me, but you look at, another one would be in the Middle East, in Dubai.

We have a theater that's tracking towards four million or five million people, just opened in the last year. So, the recognition of the brand in territories we're not seems to be really high, particularly if the demographic works. And I don't think we necessarily need to do a lot of education.

Eric Wold - B. Riley & Co. LLC

Thank you. And then just a follow-up on previous question on India, assuming that ramp there continues, kind of what level of penetration do you think would be necessary to be able to more effectively monetize or effectively monetize, your local language, Bollywood films or local language films and markets showing what they can do in China?

Richard L. Gelfond - Chief Executive Officer & Director

I think you kind of need about 40 theaters or 50 theaters before you reach sort of a critical mass and you can make a more concerted push into local language films. I think before we get to there, now including backlog, we're around 20 theaters. I think you'll see us do one or two just to test it out. Not really lose money, but I don't think you make money until you get to 40 theaters or 50 theaters.

Eric Wold - B. Riley & Co. LLC

Perfect. Thanks, Rich.

Operator

Your next question will come from Jim Goss of Barrington Research. Please go ahead.

James Charles Goss - Barrington Research Associates, Inc.

Thanks. I've got a couple also. One, regarding PSAs and the discussion you've had, it seems like domestic PSAs have tended to lag some of the international markets at least. This quarter, you pretty well matched, I'm wondering if that's viewed as unusual or is it sustainable relative to some of the issues you've raised about some of the slate and how it might go on?

Richard L. Gelfond - Chief Executive Officer & Director

It's hard to predict, Jim. I think some of the reasons were a lot of the films, particularly Deadpool and Zootopia, played so well domestically as well as on a worldwide basis. We are investing a fair amount of marketing, particularly North America and mining big data. So, I'd like to think that that has something to do with it; but not sure yet, not enough data points to conclude.

James Charles Goss - Barrington Research Associates, Inc.

Okay. And the other question I have is, recognizing that you have pretty comfortable seats already, and you have specific geometry in the IMAX theaters. One of the things that some of the PLS will throw against you is (45:36) and some other initiatives like that. I'm wondering, if any of those elements could be incorporated within the IMAX geometry that might further enhance your appeal?

Richard L. Gelfond - Chief Executive Officer & Director

We're testing some of those, Jim. The problem is like using recliners for example, we lose 50% of your potential seats. And on weekends and busy periods, IMAX is much higher percentage of capacity than other formats.

So, I think we're reluctant to go all the way to recliners. But other forms of seats that are more hybrid. We've tested in a few facilities and the results are a little bit encouraging, where we've actually improved performance dramatically. So, that is something that we're testing a little bit.

James Charles Goss - Barrington Research Associates, Inc.

And with (46:33) and those sort of things tie into your action movies where that might be the appropriate audience?

Richard L. Gelfond - Chief Executive Officer & Director

I don't think those are the kinds of things that we're going to do. Jim, I think those are more one-trick pony kinds of things. And we don't think they have the staying power.

We think people go to IMAX theaters to really appreciate movies, because they love movies and they love the experience. And we work with the kind of directors who generally are and into one-trick pony. So, I do not think that's the direction we go, but the seating might be.

James Charles Goss - Barrington Research Associates, Inc.

All right. Thanks very much.

Richard L. Gelfond - Chief Executive Officer & Director

Thank you, Jim.

Operator

Your next question will come from the line of Matthew Brooks from Macquarie.

Matthew Brooks - Macquarie Capital (USA), Inc.

Good morning, guys. Greg, can I just ask you, just any thoughts on the different performance of the Marvel and DC Comics films in China. Batman was quite low – disappointing compared to like Avengers was, any thoughts about that? And follow-up on the movies, there is a few Avatar sequels that are coming out, do you think there's any chance you can get your DNA in there?

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

So, first of all, Matthew, in terms of your Batman versus Superman comment, I think it's all about the individual movies. I don't think – obviously, the Marvel brand is particularly strong in China. People, so to speak, grew up with it in the multiplex world.

The Batman, the Chris Nolan movies always performed very well in China. So, I think you just have to look at – you can't make a blanket statement about the difference between the DC Universe and the Marvel Universe in China.

I think it all comes down to the movies and for whatever reason people react differently to individual movies in different territories. Obviously, Batman versus Superman is now over $800 million globally, so it's been a substantial hit.

As it relates to Avatar, the only DNA in the Avatar movies is Jim Cameron DNA. And that's clearly worked for the last 30 years and whatever Jim Cameron is going to give, everyone's – I think probably in line to really love it. So, in terms of cameras or anything like that, I don't see that happening with Avatar. But Jim always – like he did on the last Avatar, found a way to make The IMAX Experience very unique and special.

There were some secret DNA ingredients that he put into the release of the film, which is why it's still our highest grossing movie ever. And we can't wait for those movies – the faster they get here the better the industry in general will be. And I know that when he announced them in Las Vegas, it was a tremendous amount of enthusiasm, not only online, but also from exhibitors. So, we can't wait for it.

Matthew Brooks - Macquarie Capital (USA), Inc.

Just one more question as well. On some of the new businesses you've been announcing recently, any update on the home business, whether in the China or in the Middle East? And sort of what you're thinking with the cycling studio, you sort of testing I think in Brooklyn?

Richard L. Gelfond - Chief Executive Officer & Director

On the home business, the TCL joint venture, I'd say, there's a little bit of cross currents. On the one hand, there's been a flourish of signings recently and a lot of activity. So, I remain optimistic about the potential to roll that out over time.

On the other hand, because of the slowdowns in construction and real estate related things, they are not being installed as quickly as we had expected. So, I think, the long-term remains intact. And I think in the short run, we're going to size the rollout accordingly. So, that way we'd love to invest money that takes more time to rollout. We're very cognizant of operating leverage and cost.

In terms of the IMAX shift, which is opening next week, we said all along, we think it's a very interesting concept. It has a lot of promise. You probably noticed it's got a tremendous amount of media appeal and you'll see a lot more coming out. But we're business people, so we chose the location in Brooklyn, because it was a very good test market and we'll see how the numbers go.

If the numbers work, we'll aggressively roll it out worldwide and it will be very promising. If the numbers don't work satisfactorily, we won't roll it out. So, we're approaching these in a very clinical businesslike way and fortunately it'll open soon, so we'll know soon.

Matthew Brooks - Macquarie Capital (USA), Inc.

And VR the fast-moving space, the products now being released and used in a lot of consumer applications, any updated thoughts there as well on your thinking?

Richard L. Gelfond - Chief Executive Officer & Director

We're actually – as you know, because we've talked about it. We have some optimism around the VR space and where IMAX can play in it. But you've been around us for a long time. You know we don't like to talk about things until our plans are button down. I know, we've dotted our eyes across the artiste. So, we are in the midst of doing some things, but we'll update you at a later time.

Matthew Brooks - Macquarie Capital (USA), Inc.

Okay. Thanks guys.

Operator

Your next question comes from the line of John Liu of HSBC. Please go ahead.

John Liu - HSBC Investment Bank Asia Ltd. (China)

Hello. Good morning. My first question is, how many Chinese language IMAX films to be released this year in Greater China?

Richard L. Gelfond - Chief Executive Officer & Director

Greg?

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

We'll have approximately eight. That's the anticipation. A couple in July, in October, and then in December and then one other spaced in. And as you know, we've already released Monkey King 2 and Kung Fu Panda 3.

So, I would say, the total amount would be about 10, it could be one or two more, it could be one or two – I don't think it will be one or two less, but I would say eight is about the right number.

John Liu - HSBC Investment Bank Asia Ltd. (China)

(52:49) last year, right?

Greg Foster - Senior Executive Vice President - IMAX Corp. & Chief Executive Officer - IMAX Entertainment

It's in line with last year, that's correct. We have the targeted windows and they're based on the periods of time where local language films are emphasized and they don't really change.

The other thing that could change is because the Chinese New Year was so incredibly successful, the window in July and into August in 2015 that's mostly for local language films may come down and not be quite as long.

So, there's a chance with that almost two-month period last year might become more like a month this year. And so that would mean instead of three or four titles in that two-month period only one or two. But it's all too early to tell.

The good news is, we're poised to take advantage of whatever the circumstances present themselves to. So, if it's a longer period of time, we'll have plenty of movies for that period of time. Our job is to provide compelling content, whether it's local language or Hollywood films in China and that's what we've done and that's what we'll continue to do and we'll also do it with differentiation. And as I mentioned earlier, we have more choices in China than we've ever had before.

John Liu - HSBC Investment Bank Asia Ltd. (China)

My second question is for the backlog of Wanda. I think, Wanda has 63 screens in the backlog at the end of Q1, right?

Richard L. Gelfond - Chief Executive Officer & Director

That sounds right. I don't know if it's exactly right, but it's in the ballpark.

John Liu - HSBC Investment Bank Asia Ltd. (China)

Okay. The last question is, as we share box office with cinemas, is it possible for Wanda cinema to increase the share of the box office in future?

Richard L. Gelfond - Chief Executive Officer & Director

Yeah. I mean if they sign-up for more theaters. And as I mentioned to you, we were having preliminary discussions towards that end. So, it's possible for them to have more, but we have some other ongoing discussions in China.

You saw we signed a 10 theater deal and there's a lot of activity in China from entities other than Wanda. So, it's possible they can increase their share. It's possible they can increase their theaters. It's possible other people increase their theaters, a lot also we'll just have to see what their demand is and what demand is from other people.

John Liu - HSBC Investment Bank Asia Ltd. (China)

Okay. Thanks.

Richard L. Gelfond - Chief Executive Officer & Director

Thank you.

Operator

Your next question will come from the line of Robert Peters of Credit Suisse. Please go ahead.

Robert Peters - Credit Suisse Securities (Canada), Inc

Hi, thanks very much for squeezing me in. I'm sorry to tax your voice a little bit more Rich, but I was just wondering with the announcement of the expanded buyback in the quarter, I was wondering if you can provide an update as to how we should think about the use of IMAX balance sheet, particularly any thoughts you might have between your priorities – between any potential M&A, the new business opportunities you've been developing and then returning capital to shareholders?

Richard L. Gelfond - Chief Executive Officer & Director

We're totally driven by an ROI analysis. So, I think, we have just what UT does. I think it depends on the opportunities we're looking at and what the returns on capital are there.

As you know, our joint ventures have a return of excess of 50%. It depends where the stock price is. So, what we calculate to be the return on investing and buying stock, and it depends on some of these other initiatives and we're constantly reevaluating that.

I'm happy to say in the last quarter, we felt the stock had gotten to kind of ridiculously low levels and we're happy to buy it in as a use of our cash and we'll continue to monitor all those variables and decide to what's in the best long-term interest of our shareholders.

Robert Peters - Credit Suisse Securities (Canada), Inc

Perfect. Thank you. And Joe, if we look at the number of installs in the quarter, we saw four hybrid installs. Was there any specific event that drove the four in terms of, I think we're looking for originally eight or was it just timing related?

Richard L. Gelfond - Chief Executive Officer & Director

It's just timing related. As I mentioned the overall outlook for the year really hasn't changed.

Robert Peters - Credit Suisse Securities (Canada), Inc

Perfect. Thank you. And maybe just one last question from me and then I'll pass the line. When you look at the home theater signings, those are now up to 130, are those all in the Greater China region or are we starting to see expansion in other geographies on that front?

Richard L. Gelfond - Chief Executive Officer & Director

Pretty much right now in the China region. There are couple outside that region, but the vast majority are in that area. We haven't really set up a sales organization outside of there yet.

Robert Peters - Credit Suisse Securities (Canada), Inc

Perfect. Thank you very much.

Operator

And your next question will come from the line of Eric Handler of MKM Partners. Please go ahead.

Eric O. Handler - MKM Partners LLC

Thank you very much for the question. Rich, I'll give you a chance to rest your voice and throw this over to Joe. Joe, there is a lot of operating leverage in your model and as I think from a big picture standpoint, this year SG&A rising just 2% to 4%, R&D flat. As we think to some of your out years, what's a good normalized level of SG&A growth and what's a good normalized level of R&D growth?

Joseph Sparacio - Chief Financial Officer & Executive Vice President

You know, Eric, that's going to really depend on the business activity that we have going on, the pursuit of new business opportunities. But on a steady-state, I would think something in the 3% to 5%, if you are modeling. I mean, that doesn't seem unreasonable to me. Again, absent something nuanced.

Eric O. Handler - MKM Partners LLC

On a cumulative basis for both categories or just...

Joseph Sparacio - Chief Financial Officer & Executive Vice President

No, obviously if we enter into a new business that's going to be additive. I'm talking...

Eric O. Handler - MKM Partners LLC

No. No, no. I mean, is that just SG&A or is that SG&A and R&D combined?

Joseph Sparacio - Chief Financial Officer & Executive Vice President

I would combine them.

Eric O. Handler - MKM Partners LLC

Okay. And then as a follow-up, probably for Rich, when you look at North America, I think Fox recently talked about not getting involved with clearances anymore and obviously there's a lawsuit going on. But if clearances were to go away, would that have any impact on a potential install opportunity for you guys in North America?

Richard L. Gelfond - Chief Executive Officer & Director

It has a marginal positive impact Eric, because right now if it's a competitive zone they only get half the product. So, it's difficult to make an IMAX theater work in a competitive zone, because you would only get half the IMAX movies. So, if those restrictions go away, it would be a positive for us. But I'm thinking maybe 20 more theaters not 100 more theaters.

Eric O. Handler - MKM Partners LLC

Great. Thank you very much.

Richard L. Gelfond - Chief Executive Officer & Director

Thank you, Eric. I think we're going to wrap it up on that question. And I just like to summarize by saying, this quarter IMAX really impressively delivered on every matrix. Our PSAs were up, our box office grew really strongly, we had a lot of signings, we have a lot of momentum, we contain costs, all of that led to operating leverage that was apparent and very strong EBITDA and EPS growth.

So, I think we've been listening to questions and we've been listening to comments from our shareholders and we strongly feel this was as cleaner quarter as you get and we think we delivered on what we've been talking about for a long time. So, thank you for your involvement and thank you to our employees to make this possible and we'll talk to you next quarter.

Operator

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

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