IMAX (IMAX) Richard L. Gelfond on Q2 2016 Results - Earnings Call Transcript

| About: IMAX Corporation (IMAX)

IMAX Corp. (NYSE:IMAX)

Q2 2016 Earnings Call

July 20, 2016 4:30 pm ET

Executives

Jessica Kourakos - Senior Vice President-Global Investor Relations

Richard L. Gelfond - Chief Executive Officer & Director

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

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Analysts

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

Darren Aftahi - ROTH Capital Partners LLC

Eric O. Handler - MKM Partners LLC

Benjamin Mogil - Stifel Nicolaus

James Charles Goss - Barrington Research Associates, Inc.

Michael Hickey - The Benchmark Co. LLC

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Alexia S. Quadrani - JPMorgan Securities LLC

Robert Peters - Credit Suisse Securities (Canada), Inc

Steven Frankel - Dougherty & Co. LLC

Operator

Good day, and welcome to the IMAX Corporation Second 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.

Jessica Kourakos - Senior Vice President-Global Investor Relations

Thanks operator. Good afternoon and thanks for joining us on today's second quarter 2016 earnings conference call. Joining me today in our New York office is our CEO, Rich Gelfond; our CFO, Joe Sparacio and our Senior EVP of IMAX Corporation and CEO of IMAX Entertainment, Greg Foster, who will each have prepared remarks 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 a more detailed discussion of some of the factors that could affect our future results and outcomes.

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

The full text of our second quarter 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, and thank you all for joining us today. Taking a step back and looking at the overall quarter's performance on the signings and installation front, we simply had a stellar quarter. Signings lead to installs which also will lead to higher box office and more revenue. And from a box office standpoint, signings and installs also position us well to take advantage of the promising IMAX Film pipeline over the next 24 months.

The lighter box office the industry experienced in Q2 did put pressure on the stock in the short-term; however, it also afforded us the ability to repurchase roughly $41 million of stock in the quarter. We believe this was opportunistic on our part, given the strong level of installs and box office we expect to see moving forward.

Looking at our signings activity more closely, in Q2, we signed agreements for 95 new IMAX Theatres to bring our first half 2016 signings to 131 theatres. That's just about as many signings in six months as we had in all of 2015. This brings our total backlog to over 440 theatres, the highest backlog in the company's 50-year history. Once installed, this backlog alone will increase the total size of our existing network by roughly 45%. Based on historical assumptions, we project these theatres should yield roughly $1 billion in revenue for the company over the next 10 years. This increased signings activities likely the result of we call the Star Wars/Avatar effect, whereby we tend to see a big push in signings after extraordinary box office year.

In this case, an outstanding 2015 film slate was capped off with Star Wars, which delivered approximately $220 million in IMAX box office. The result of this was a big push by exhibitors to expand their IMAX footprint and as we look to the promising 2017 and 2018 film slates, we believe this elevated activity will continue.

From a geographic perspective, of the 95 new theatres sign in the second quarter, 27 theatres were from the domestic market, 8 theatres were from international markets outside of China and 60 theatres were in China.

I think it is important also provide some incremental color on China since the signings performance was particularly strong. In the first half of 2016, we signed 50 new full revenue-sharing deals with existing clients, JinYi and Lumière. JinYi now represents our second largest client in China with a total of 60 theatres installed and in a backlog. Our exhibitor partners appreciate that box office has its ups and downs based on the slate in any given quarter. The benefit that the IMAX business model provides is that over the course of the year the economics of an IMAX theatre are very attractive and typically drive PSAs that are roughly three times higher than the average private label theatre.

Take for example a movie like Warcraft, which was produced by Legendary Studios now a subsidiary of Wanda, while April and May so our year-over-year decline in the China box office primarily due to tough comparisons Warcraft which generated $30 million in IMAX box office, helped drive a strong finish to the quarter in China, with June box office up over 50% from last year.

I should also note that IMAX's indexing on Warcraft was 13% on less than 1% of the screens, which is particularly impressive when you consider 60% of the 32,000 screens in China were all playing the Warcraft at the same time.

The success of Warcraft also highlights the fact that not only do we have a very strong relationship with Wanda on the exhibition front, but our relationship with them extends far beyond that. We work hand-in-hand with them on their studio arm, which includes not only Chinese releases through Wanda Media, but also a number of Hollywood content versus Legendary. We also work closely with Wanda's real-estate arm on the build out and launch of new theatres in China, as well as new malls. We believe that our relationship with Wanda cannot be stronger and we are very encouraged by the increase Wanda installs scheduled for this year as well as AMC's recent agreement to add an additional 25 IMAX theatres in the U.S. which we announced last month. AMC has been a great IMAX partner for roughly 10 years, and we expect many more great years to come.

And as I look to signings momentum in other parts of the world, let me highlight the opportunities that are presented to us through the global consolidation currently taking place. In addition to the extension of our AMC partnership in North America, I'm sure many of you also heard on AMC's call that it is in the process of buying both Carmike in North America, and ODEON & UCI in Continental Europe. Realizing our biggest partners are the biggest consolidators in the industry, we are very encouraged by what this could mean for us as we look to accelerate our installation plans in these markets.

On the AMC conference call last week, it was highlighted that they've already identified at least 40 additional theatres in the ODEON & UCI network that are ideal candidates for IMAX theatres. In all likelihood that figure will increase over time. AMC has been really a great partner for IMAX.

Our robust signings activity has not only afforded us more confidence in the pace of future installs, it has also improved the pace of this year's installations as well. As a result, we are yet again increasing our guidance for 2016 to 155 new installs, up from our prior range of 135 to 140 theatres and even further up from our original guidance of 115 to 120 theatres. This increase in guidance throughout the year is unprecedented at IMAX. This positions us as well as we enter into what should be a stronger box office environment in 2017 and 2018.

So while Q2 box office results did not meet initial expectations for the industries at-large, we had exceptional first quarter and we are still on pace to deliver a PSA relatively in line with our historical average, given our portfolio approach. Nonetheless, and as I mentioned earlier, what ultimately drives revenues and earnings growth over the long-term is theatre signings and network growth, and from that perspective, we are simply knocking it out of the park.

So, in summary, we believe it is an exciting time at IMAX. Our core business is doing extremely well around the world, and we've never had better visibility into our network growth than we do today. And as Greg will discuss, we are entering into what should be a prolonged period of stronger box office over the next couple of years, and our brand has never been more widely revered. And perhaps most importantly, we've never been more focused on what we need to do to drive stronger top and bottom line performance. Ultimately, it's about building out our core cinema network and strategically investing in new areas like film and virtual reality.

With regard to original content, we recently closed a $50 million seed round in our China Film Fund with China Media Capital and are now opening the fund to new limited partners. We look forward to updating you as this investment vehicle potentially grows in size and as we begin to invest in interesting new Chinese films that we believe have significant box office potential.

On the virtual-reality front, we're very excited to leverage our brand and know-how of what immersive entertainment experiences our consumer base wants. We aim to use the next 12 months to 18 months to build a strong pipeline of VR content and to create a lean-enough business model that we can license to our business partners on a global basis beginning in 2018.

Once again, the idea is to only invest in areas that we believe will yield meaningful returns, and that's where I think we can speak to a changing of the guard at IMAX. As many of you know, our current CFO, Joe Sparacio, is leaving IMAX to pursue new opportunities. He has led us through an amazing nine years, and I'd just like to say thank you and tell you that it's been a remarkable pleasure to have worked with you, and Joe, you definitely will be missed. Joe will stay on with us for the next few months to assist in the transition, and we are grateful for all his efforts over the last almost decade.

Now I am very pleased to welcome our new CFO, Patrick McClymont, who will formally join us in a couple weeks to assist us in ushering in another era of growth for the company with a major focus on scalable expansion of our core business into international markets beyond China, as well as striking the first licensing deal for original content and virtual reality. No pressure, Patrick.

With that, let me now pass the call over to Greg Foster, CEO of IMAX Entertainment, who will take you through our box office outlook in more detail. Greg?

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

Thanks, Rich, and hi everyone. In the second quarter, we delivered global box office of $261 million, which resulted in a per screen average of $268,000. As we mentioned frequently over the past year, 2016 differs from 2015, as it's made up of predominantly singles and doubles, thereby making the year's box office more evenly distributed.

As we've said before, we rely on a portfolio of titles which over a 12-month span tends to adjust to a mean that has been fairly consistent over the past several years. Along those lines, we should face more favorable comps in the third and fourth quarter, as we have a number of prominent titles yet to be released. They include, STAR TREK BEYOND which opens on Friday from Paramount and has a 94% Rotten Tomatoes score; the much-anticipated Suicide Squad from DC and Warner Brothers; Sully filmed virtually entirely with IMAX cameras by Director Clint Eastwood; Magnificent Seven from MGM and Sony; Marvel's Dr. Strange, which screened about 15 minutes of very well received footage at the Cinema Europe Conference in Barcelona last month; Fantastic Beast, The Harry Potter spin-off; and the Chinese co-production The Great Wall from Legendary and directed by Johnny Mo; and of course Rogue One: A Star Wars Story. And these are just to name a few.

With regards to 2017 and 2018, they're shaping up to be one blockbuster after another. In fact, although were still firming up our schedule, it appears likely that we will have a tent pole title virtually every month over the next couple of years.

In terms of films we've already announced next year they are, Wolverine from Fox, the new King Kong film Kong: Skull Island; Guardians of The Galaxy Vol. 2; Pirates of the Caribbean 5; Transformers 5; Spider-Man Homecoming; Chris Nolan's Dunkirk, which was largely filled with IMAX cameras; Thor: Ragnarok; Justice League from DC and Warner Brothers, and again Star Wars: Episode VIII.

There also a number of other franchises which we are looking at as we round out our calendar for next year. Some other exciting titles for 2017 include that we are pleased to now add to the IMAX schedule are: Beauty and the Beast from Disney; the next installment of the Fast and Furious franchise; Fast 8; Wonder Woman; and The Mummy. Clearly, there should be no shortage of great content next year, and as Rich mentioned, our accelerated installations and robust signings will position us very well to take advantage of such an exciting film slate.

As we look to 2018, we have another round of what should be mega blockbusters with titles such as Lego Batman, and let me correct myself, that's actually in 2017. Now back to 2018 Steven Spielberg's Ready Player One, which we are really pleased to be doing; Tomb Raider, Avengers: Infinity War, which is directed by the Russo brothers and that's part one, which was shot entirely with IMAX cameras and The Jurassic World sequel, which we're also very pleased to announce today.

Hollywood's growing reliance on the largest scale mega films based on renowned IP will have a clear benefit to our company and partners going forward since both thrive in blockbuster rich environments. That's why we proudly have long-term slate deals with every major studio, which in no particular order range from Disney to Warner Brothers, to Paramount, to Universal, Fox, Sony, Lionsgate, MGM, and more.

With that, I'll turn it over to Joe, who will review our financial results.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Thanks, Greg. Looking at the second quarter box office in a bit more detail, we generated total box office of $261 million, which resulted in a second quarter PSA of $268,000. From a geographical standpoint, $89 million came from the domestic market, while $75 million and $97 million were generated in international and China markets respectively.

As Rich had mentioned earlier, we faced particularly difficult comps in the second quarter, given the record-setting box office performance we faced in the year-ago period. Also, changes in exchange rates, namely, the renminbi in China and other markets diluted the box office by roughly $10 million or 4 percentage points in the second quarter. Nonetheless, for the first half of 2016, our global box office was $533 million which resulted in a first-half PSA of $551,000. As Rich mentioned earlier, we think the portfolio effect of our annual film slate should put us at our historical range for annual PSAs.

Moving along to installations, we installed a total of 38 new theatres this quarter and two upgrades. Of these installations, 13 theatres were for sales type arrangements, 17 theatres were for full JVs and 8 theatres were for hybrid JV arrangements. This was slightly above our original expectation for Q2 installs as we had a couple of theatres sneak in a few weeks early. These 38 theatres were located across 12 different countries.

For the third quarter this year, we anticipate installing approximately 40 new IMAX theatres which would be a record number of installs for the third quarter. Of these 40 theatres, we expect 10 theatres to be sales type arrangements, 23 theatres to be for full JVs and 7 theatres to be for hybrid JVs.

As Rich mentioned, we are also increasing our annual installation guidance range to approximately 155 theatres from the 135 theatres to 140 theatres reflecting our signings momentum. Do keep in mind that all of this increasing guidance is the result of additional full JV theatres being installed. As many of you know, this will drive up initial launch costs in the second half of this year. However, these additional JV theatres should benefit the P&L more meaningful next year and beyond.

Speaking of signings, Rich noted that we signed agreements for 95 theatres in the second quarter, bringing our first half signings total to 131 theatres and resulting in a record backlog of 442 theatres. With most of this theatre backlog expected to be installed over the next three to four years, visibility into our network growth over the next several years is quite clear and is why we are confident in raising install guidance yet again this year.

A variety of exhibitor partners are looking into either to get into the IMAX business for the first time or expand on existing relationships. Box office is very short-lived and the fact that our network is growing at the rate it is, should lead to outsized performance when we have more robust box office periods as we are expecting to achieve over the coming years.

Moving along to our financial performance, our Q2 revenues came in at $91.7 million with our JV and DMR revenues coming in at $23.9 million and $27.4 million respectively. The resulting gross margins on the JV and DMR lines were 66% and 62.5%, respectively. The lower level of box office experienced in the quarter had a negative impact on gross margins in the JV and DMR lines due primarily to the relatively fixed cost structure of those businesses.

Our estimated DMR cost of goods for the year was previously estimated in the $32 million range. However, we now expect this figure to be roughly $34 million due to increase in the number of titles played and versioning costs.

Our gross profit for the quarter came in at $50.3 million for a total gross margin of 54.8%. From an OpEx standpoint, our SG&A excluding stock-based comp was $24.2 million, just 1% higher than last year's $23.9 million.

We continue to anticipate our annualized SG&A expense to grow roughly 2% to 4% over last year. Our R&D for the quarter was $3.4 million and primarily reflects investments in the development of our commercial laser product.

In addition to accelerating our investment in commercial laser, we are also implementing a new digital delivery system that will scale with our growing global theatre network, will increase efficiency and reduce distribution costs over the long term.

Together, with these two initiatives we expect 2016 operating expenses to increase by $2 million to $3 million over 2015 levels. Our stock comp for Q2 was $6.2 million and we anticipate our full year stock comp to total $32 million, which was consistent with our prior guidance.

Our adjusted EBITDA came in at $29 million for the quarter. This compares to $50.4 million we delivered in 2015, primarily due to the record box office achieved in that quarter. It's also important to remember that our China ownership is now 68.5%, whereas it was still at 80% in the second quarter of last year.

So, at face value, it is not an apples-to-apples comparison. The minority share of EBITDA this quarter was $4.9 million and we now expect our full-year minority interest share of EBITDA to be between $24 million and $25 million.

Adjusted earnings which is also impacted in the same fashion by our decreased ownership in IMAX China came in at $12.1 million for the quarter. Our minority interest impact to earnings was $2.9 million in the quarter versus $2 million last year. We also continue to expect our full-year minority interest as it relates to earnings to be between $15 million and $16 million.

Looking briefly at the balance sheet, we ended the quarter with a cash balance of $228 million. This reflects the over $41 million we spent in the quarter repurchasing shares under our existing share buyback program. Year-to-date, we have spent $86 million under our share buyback program and repurchased a total of 2.8 million shares.

If you're looking a bit longer-term, the achievements in the second quarter of this year, namely our signings activity, should have substantial benefits to the company. We are signing a significant number of deals, installing a significant number of theatres, strategically expanding into ancillary business areas such as VR and all-in-all have never been in a better position to take advantage of the robust film slate to come.

With that, I will turn the call over to the operator for Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. And the first question comes from the line of Stan Meyers from Piper Jaffray. Please go ahead.

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

Thank you. So I got three questions, one for Rich, one for Greg and one for Joe. Rich, congrats again on all the major signings in the quarter, maybe you can provide some color on the signings in China and U.S., where are those screens going in terms of city tiers in China and maybe urban versus rural domestically? And I have two follow-ups.

Richard L. Gelfond - Chief Executive Officer & Director

So in China, the screens are going, kind of in a variety of cities, in a variety of places. They are primarily tier 2 and tier 3 cities. Just to remind everybody, only 14% of the existing IMAX network is in tier 1 cities today. So that's consistent with the distribution of the existing theatre network. We were really encouraged by the AMC deal in North America, because I think a lot of people thought we didn't have the potential to do a deal of that size. And in fact there's still more territory available than we had thought and there is still a number of discussions going on for North America. So that was extremely good for us.

We are really happy with the fact in China that a lot of our clients who had done STL kind of deals were now converted into JVs, and that was one of the issues that people asked us a lot about was, are people in China ever going to do JVs that provide more recurrent cash flow. So that's an extreme positive for us.

And then Russia, we had a couple of signings, and Europe was pretty good for us. Unfortunately, LatAm, because of their own financial problems really, were not right for transactions, but I was just extremely pleased, and I should add, Stan, as I look into the third quarter, the numbers of discussions that are going on, it's showing no sign really of slowing down. So, again, we will believe it when it's signed, but we have a lot of momentum.

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

Great. Thank you. And then for Greg, you guys recently expanded your relationship with Paramount, and I was wondering if there's any more formal slate flexibility arrangements in the new agreement that sort of would allow you to swap out the films in week two or all together?

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

Well, I think Stan, you've seen – in fact when I was with you in China, you saw it happen in the domestic market with Finding Dory coming in, in a bigger footprint than it was supposed to be in, and you also know that the same thing happened with Secret Life of Pets, so we've shown a flexibility. The flexibility happens based on the results. So, while we wouldn't preannounce something, we wait and see how a movie performs; if a movie performs, we're going to keep it going. If a movie for whatever reason is having a more difficult patch than we expected, we always have to be nimble and ready to make an adjustment.

But we do have long-term commitments, and we do honor the long-term commitments. But there are times where we will go to a studio and say, hey this isn't performing exactly where we hoped it would, can you show a little flexibility to allow someone else to come in and perhaps share part of the network. And we are finding that because everyone has a relationship with IMAX now, there is a little bit more flexibility, and that makes us a little bit more nimble.

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

Great. And then just one last one for Joe, so the DMR margins came in slightly below expectations, clearly that fluctuates the number of films DMR in the quarter. Just wanted to see if there is anything else in there, maybe some co-marketing or anything else that would impact the margin?

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Yeah. I mean, there was a heightened level of marketing this quarter. But Stan, I think the biggest impact was the lower level of box office. Box office on a quarter-to-quarter basis versus last year was significantly down. That's what had the biggest impact.

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

Okay, great. Thank you, guys.

Operator

Thank you. And we will take the next question from the line of Darren Aftahi from ROTH. Please go ahead.

Darren Aftahi - ROTH Capital Partners LLC

Thanks guys for taking my questions. I just had two. Can you speak more to kind of the benefits of your new digital delivery platform and what kind of cost will be involved in that? And then secondarily, do you guys see any material impact from the period of the Olympics and the elections in the second half of the year? Thanks.

Richard L. Gelfond - Chief Executive Officer & Director

So in terms of digital delivery platform, we have developed a lot of that technology previously in connection with our IMAX at Home effort. So it was very little incremental investment to create the digital delivery. And what it would enable us to do will be to eliminate the cost of the hard drives and shipping the hard drives. You know, Darren, it's not going to make a material difference to our bottom line, but it will increase our ability to deliver films quickly, to not have to depend on others such as third-party servers, and in fact there is a relatively quick payback. You should think of that as more of the benefits than the financial benefits.

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

And on the Olympic front, what we're seeing and for the others that have been watching television in particular, and the online support of the Olympics, you've noticed that there are tremendous IMAX marketing support. Look at Suicide Squad, where every time there's a commercial, it says experience it in IMAX 3D.

So as we get towards the Olympics, in the pre-Olympic coverage and then the Olympic coverage, I expect to see continued tagging for Suicide Squad, for Ben-Hur, which has an IMAX footprint, a limited one, but one nevertheless. And then we'll see who else jumps on board for the fall slate during the Olympic advertising.

But we found that our marketing support of our titles in the past several months, particularly on the broadcast television has never been stronger. And, of course, we're also very focused as a company as is everyone else on digital, and you can go on any website mostly, and you'll see Olympic coverage. So I think in a funny way that benefits us from a marketing point of view.

Darren Aftahi - ROTH Capital Partners LLC

Great. Thank you.

Operator

Thank you. And we'll take the next question from the line of Eric Handler from MKM Partners. Please go ahead.

Eric O. Handler - MKM Partners LLC

Thank you very much for giving me a question. Two things, one, just to get Joe some more airtime in his final call. Joe, can you give us the PSA numbers for domestic versus international? And then I've got a follow up.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Yeah, just give me a minute. I got that right here. So PSAs for the quarter: total network $268,200, domestic $225,900, China $325,300, other international $266,700 and if you take China and other international, the average is $296,900.

Eric O. Handler - MKM Partners LLC

Thank you very much. And then, Rich, when you look at China in 2Q, the whole world had a weak 2Q because the Hollywood content did not perform as anywhere near as well as what we saw last year. China had its slowest growth quarter in quite a long time. Do you see any issues going on in China now about the box office there or is this just look – the content wasn't as good and as a result, there was a down month and the overall quarter was up single-digits and it was a reflection of Hollywood? But did you see any anything else that was at play there?

Richard L. Gelfond - Chief Executive Officer & Director

No, to the contrary Eric, I mean June, we knocked the ball out of the park, the numbers were fantastic. So I think it – as you put it, I think it's just a function of the films having traction in China. The Hollywood films didn't have the same traction that they did the year before. So I think that's it. I mean, we don't – I love joking with Greg how the media after two films, says there's a trend, but it's really about the content. And I think in China there's no question in my mind that it's not a trend; it's just a question the movie is not performing.

Eric O. Handler - MKM Partners LLC

Great. And then just one quick follow-up for you, with the virtual reality venture, you've got a little health club venture going on, how impactful are these ventures going to be over the next 12 months to 18 months to operating expenses or anything above the line?

Richard L. Gelfond - Chief Executive Officer & Director

I don't think they are going to be very impactful. I mean we budgeted what the operating expenses are in those areas, IMAX Home, which is the home theatre, in China our joint venture with TCL, I mentioned on the last call that the install pace there has slowed down because of just general economic trends, having nothing to do with us. So we've tried to rationalize expenses there. So China matched the best we can, expenses with revenues, so we're not going to get in front of ourselves.

Eric O. Handler - MKM Partners LLC

Great. Thanks a lot, Rich, appreciate it.

Operator

Thank you. And we'll take the next question from the line of Ben Mogil from Stifel. Please go ahead.

Benjamin Mogil - Stifel Nicolaus

Hi, guys. Good afternoon. Thanks for taking my question. So two questions; first one, I'm not sure for Rich or for Greg. We've had obviously a good year so far this year in kids' films and the animations sort of a bunch, the better performing titles have all been in that genre. I know you've been opportunistic when something else hasn't worked and you sort of filled in, I think Dory had some dates and I think Life of Pets had some dates. But any more thoughts to kind of revisiting having one or two major kids films i.e. animated films actually as part of the sort of standard slate going forward?

Richard L. Gelfond - Chief Executive Officer & Director

Yeah. The short answer is, yes. We've had conversations about – all you have to do is look at the box office and see that the two biggest movies in the last six weeks have been those two films and we did really well with Zootopia, which we were a part of, we did really well in China and we did really well in the domestic market. We had other commitments that, for whatever reason, those movies just didn't work out quite as well as we would've hoped in those time frames of when Dory and Secret Life of Pets, and I'm not knocking the performance because Warcraft for instance, particularly in China, was incredibly successful.

But in terms of more long-term planning, it's not something that we're going to all of a sudden turn our slate into a PG-oriented slate, that's just not what we're going to do. And we have other examples of where – ultimately, it's just the movie, that's what it really comes down to, and it's the quality of the movie, and sometimes it's the genre of the movie. But if there is a movie that just looks like there's no stopping it and it's an animated movie, we should be a part of it and it's something that we have more focus on, especially over the last six weeks.

Benjamin Mogil - Stifel Nicolaus

So, like that would be – I'm not asking for specific films, but the sort of thought they would be, you'll know that your share of box office will be lower than it would be for a live action movie, but the share of box office makes them more than worthwhile from that perspective, is that the right way to think about it?

Richard L. Gelfond - Chief Executive Officer & Director

Correct, like again I'm giving domestic...

Benjamin Mogil - Stifel Nicolaus

Sure.

Richard L. Gelfond - Chief Executive Officer & Director

...focus; but it applies to everywhere. I'd rather have 5% of $300 million than 10% of $75 million.

Benjamin Mogil - Stifel Nicolaus

For sure. For sure, okay, that makes sense. And then Joe, I guess this one is for you, and congratulations, it's been a lot calls on with you, so I hope whatever next venture is it's equally successful as the one you're coming from. When you look at the – you made a comment about $2 million to $3 million above last year, is that total OpEx or is that just related to R&D, I sort of missed the verbiage around that.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

That would be total OpEx.

Benjamin Mogil - Stifel Nicolaus

Got it.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

So that includes both SG&A excluding stock comp, plus R&D.

Benjamin Mogil - Stifel Nicolaus

That's great. Thank you very much. I appreciate it.

Operator

Thank you. We'll take the next question from the line of Jim Goss from Barrington Research. Please go ahead.

James Charles Goss - Barrington Research Associates, Inc.

Thanks. You know Greg, a little bit more on what Ben was asking about with animation, was there anything in particular about those films other than the sheer size of the box office that got parents over the hump to pay the price to go to it because that seemed to be one of the issues in the past or is it just a matter of just how big the film is?

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

Again, Jim, it's the quality, it's Phil Groves, our Head of Distribution, is always saying it's the movie stupid and that's really what it's about. The quality of those two movies were just exceptionally strong and while there's track records with those two companies, Illumination and Pixar, you can never bet that something – that movies are going to be that strong. I guess you can stack the deck in favor of it given their track record, but I think people are willing to pay high prices for something that's of the highest quality and what we need to do is spot those high quality movies. And we have taken our focus from being more religious for lack of a better expression about fanboy titles to when there are very, very high-end quality animated movies, saying we need to be a part of that.

And again, we hear the message, we definitely hear the message and it's something that I think you'll see a focus on and even in some of the titles that we announced today, you'll see that some of them are more family oriented kinds of films and that's something that we're going to pay attention to. By the way, no more family oriented movie than Star Wars: Episode VII and that did okay in IMAX.

James Charles Goss - Barrington Research Associates, Inc.

I guess so. And for either Rich or Greg, we've talked about flexibility in terms of screen usage. Is there any move toward maybe a split screen in daytime and nighttime with family versus fanboy. I think we talked about it over the past couple of years, but I wonder if you're getting to more of a position to be able to dictate some of those terms as well.

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

Jim in territories outside the U.S., particularly Europe they've done that for years and it maximizes box office. The U.S. exhibitors are generally reluctant to do that, although there's been a couple instances where we've been able to do that, but that's really up to the exhibition community, not up to us, where they're willing to share their screens.

James Charles Goss - Barrington Research Associates, Inc.

Okay. And one little nit, does Warcraft count as Chinese or U.S. I know that's been an issue in the Chinese box office mix. How does that work with you?

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

It counts as a U.S. project, but the almost $30 million it comes against the China box office because that's what it did there.

James Charles Goss - Barrington Research Associates, Inc.

Okay. I didn't know – I mean, it's been issue in the past of keeping some sort of balance between the two. I wonder if that helped.

Richard L. Gelfond - Chief Executive Officer & Director

I think Jim means the 50 – you mean, the...

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

Oh, you are talking for the quota?

Jessica Kourakos - Senior Vice President-Global Investor Relations

For the quota?

James Charles Goss - Barrington Research Associates, Inc.

For the quota yes, yes.

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

I am almost positive, we will follow-up, but I am almost positive it goes against the U.S. quota or the non-Chinese quota.

James Charles Goss - Barrington Research Associates, Inc.

Okay. All right, thank you.

Operator

Thank you. And we will take the next question from the line of Mike Hickey from The Benchmark Company. Please go ahead.

Michael Hickey - The Benchmark Co. LLC

Hey guys, thanks for taking my questions. I appreciate it. Just, I guess, the first question on your installation guidance, obviously, a lot of success this year. A big pick up from what you were originally thinking. Could you just review if that momentum – and I think you mentioned it, but maybe clarify if you think that momentum can carry through in 2017 or are you sort of pulling forward deals maybe that you would have in 2017 given sort of obvious growth opportunity in 2017, 2018 given the slate? And then I have a follow-up. Thanks.

Richard L. Gelfond - Chief Executive Officer & Director

Mike, I think it's the latter. Well, it's new deals being signed at the record pace. So, we are not pulling forward things. I mean look it's 450-plus backlog at the moment. I mean, I do think it's going to go forward. I don't think it's a one-year phenomenon. We've got so many signings and as you know that most of the backlog is typically installed in a three-year period, three years to five years. So I think it's going to translate into higher installs going forward.

Michael Hickey - The Benchmark Co. LLC

Okay, good. Thank you.

Richard L. Gelfond - Chief Executive Officer & Director

You have to remember though, Mike, that for the long run it's great, because a lot of these are JVs. But in the short run, in the quarter they are installed, there are some upfront charges with them so you don't get an immediate pop on that happening, but all those theatres being open for the terrific 2017 slate are going to translate into 2017 more than they well into 2016.

Michael Hickey - The Benchmark Co. LLC

Okay, fair enough. Thank you. And then on, I guess, you all sound excited over 2017/2018 from a slate perspective. Obviously, getting into 2016 is going to be a relief. And Greg, you also mentioned that films spacing looks to be very good, say, one blockbuster per month. So I am curious how that could impact your film count for 2017? And then, I am also curious how we should think about DMR expense in 2017 given the blockbuster slate and whatever you say on film count whether it's down or normal? Thank you.

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

Yeah. I think it's probably too early to talk about that to know that. There is so many other things that can come into play, schedules always change. On paper, it looks like it's going to be evenly spread but to talk about the film costs at this point when we don't really know what the delivery is going to be. Sometimes movies are given to us six weeks before they come out, sometimes they are given to us 10 days before they come out, and that really is such an important part of the cost structure. We've given guidance on what we traditionally spent, and I don't see much of that changing. But we always have to be flexible depending on how the movies come in and what other adjustments are made. So, it's talking about that for next year and year after that is just speculative. So I don't think there is any reason to do that.

Michael Hickey - The Benchmark Co. LLC

Okay. So last question for me, thanks Greg, is for Joe. Good luck, Joe, it's been awesome working with you. Curious on the 155 installs I think the new ones were all JVs. I am not sure, but what's the split between sales and JV for this year on the 155 installs? Thank you.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Mike, I am going to ask to get that to you. Let me get that to you later.

Michael Hickey - The Benchmark Co. LLC

Okay. No problem. Best of luck, guys.

Richard L. Gelfond - Chief Executive Officer & Director

Thanks.

Operator

Thank you. And we will take the next question from the line of Aravinda Galappatthige. Please go ahead.

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Thanks for taking my questions. Just one remaining, actually for me. Obviously, very good quarter in terms of signings. Rich, I was wondering if you can talk to sort of the economic terms of these signings. Is it fair to assume that the terms aren't any – in any way materially different from what we have been seeing over the last couple of years, be it for system sales or JVs? Obviously, most of them were JVs. In terms of the take rates, I guess, just wanted some assurance that you know that the numbers really haven't changed that much as you ramp up signings. Thanks.

Richard L. Gelfond - Chief Executive Officer & Director

They really haven't changed at all from a material point of view, Aravinda. And also, as I said earlier, you know the fact that we had deals with a lot of players in China, which were sales type leases and now they are JVs where we have recurring revenues. So one can argue that the type of transaction is better for us, but the terms are similar.

Aravinda Suranimala Galappatthige - Canaccord Genuity Corp.

Great, thank you.

Operator

Thank you. And we will take the next question from the line of Alexia Quadrani from JPMorgan. Please go ahead.

Alexia S. Quadrani - JPMorgan Securities LLC

Hi. Thank you, just one question for me. Could you please talk a little bit about the local language films coming up in China in this coming quarter and, I guess, given there isn't any typical Hollywood blackout period, how much flexibility do you have to move between Hollywood films and Chinese local films sort of in real time?

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

Well, first of all, China tends to be one of the territories where there is more flexibility and screen sharing. So that's a good thing and we've seen that over a period of time, particularly during the local language period and now with local language and some of the Hollywood titles melding together.

There are two particularly exciting titles at least again on paper. It all goes back to the quality of the films that will be coming out in the next few weeks. One is a movie called Skiptrace that is a Jackie Chan movie, and then in a few weeks after that is that – actually two weeks after that is a title called Time Raider, and those are two titles that the marketplace seems quite looking forward to.

So, I think we will be able to have Tarzan is interspersed in there and then there will be some other titles that will be coming in as well. Ice Age 5 is coming soon. We just found out that Star Trek will be coming in in early September. So, there is going to be a lot of product in China. And the local language films will play during this period, and then as we move past that, we will get to the Hollywood films as well.

So, we are a full-service shop in that we look forward to the highest grossing movies and are less focused these days on whether they are Hollywood titles or local language titles. We are focused on which ones we think we are going to do the best in our network.

Alexia S. Quadrani - JPMorgan Securities LLC

Thank you very much.

Operator

Thank you. And we will take the next question from the line of Robert Peters from Credit Suisse. Please go ahead.

Robert Peters - Credit Suisse Securities (Canada), Inc

Perfect. Thank you very much for taking my question and just to – as an aside to Joe, it's been great working with you over the years. Rich, maybe just – you know when we look at the stronger install guidance, I'm just wondering if you can kind of provide some updated thoughts on having multiple IMAX screens in a given zone, particularly with some of the consolidation you are seeing in the marketplace today?

Richard L. Gelfond - Chief Executive Officer & Director

I'd say Robert that we are open to thinking about it, but I certainly don't think it's a panacea. There are a lot of sort of technical issues which is you wouldn't want to have one big screen and one smaller screen. Certain times of the year, the capacity would be high but other times of the year the capacity would be low, and you'd have to play other things. There are branding issues involved. So, I think there are some theatres where you could do it, but I don't think it's a huge opportunity for us.

Robert Peters - Credit Suisse Securities (Canada), Inc

Okay, thank you very much. I will hop back in the queue.

Richard L. Gelfond - Chief Executive Officer & Director

Thank you.

Operator

Thank you. And we will take the next question from the line of Steven Frankel from Dougherty & Company. Please go ahead.

Steven Frankel - Dougherty & Co. LLC

Good afternoon. Rich, you talked about Japan in the last couple quarters as being kind of the next hot market. Maybe could you give us an update on what transpired there in Q2 and what the signings outlook looks like between now and the end of the year?

Richard L. Gelfond - Chief Executive Officer & Director

So, before I go there, I'm going to go back to Robert's question. Before, Robert, I thought you were talking about in the same theatre complex. If it's in the same zone, that's something were very interested and something we're doing more and more of. And I do think that's a decent size opportunity.

In terms of Japan, we opened three really high profile locations in Japan, all on the same day around the opening of what movie was it, Greg, I don't remember but...

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

Independence Day.

Richard L. Gelfond - Chief Executive Officer & Director

Independence Day in the last couple weeks. And all three of them have gotten off to a really good start, really good box office. As you know, we signed a 10-theatre deal with Toho. We signed a deal with AEON, all the big exhibitors in Japan. There's still a lot of interest in the box office doing very well.

I don't have offhand how many we signed in Japan in the quarter. If you can find that, Joe, but in the meantime, while he's looking, I still feel very good about that market because the keys to a successful market for us are having good reference theatres, which we really have in Japan; having competition, which we have in Japan; and good product in Japan, which we have somewhat in the local language context as well as the Hollywood context. So I'm still optimistic on that market.

Steven Frankel - Dougherty & Co. LLC

Okay. And maybe a quick update on costing down the laser in kind of the glide path to commercial deployment?

Richard L. Gelfond - Chief Executive Officer & Director

Yeah. So, we've made a lot of progress towards costing it down and we are hoping to have the laser for the more multiplex theatres. First, the larger laser, which is the one we've been deploying at sort of a similar cost of goods sold to what the cost of goods sold is for xenon system you. One reason you've seen our R&D skew a little bit more than last year is because we're investing exactly in that effort but I'm feeling good that we'll be able to deliver a product within the cost parameters of our existing xenon product and probably in the next couple of years.

Steven Frankel - Dougherty & Co. LLC

Great. And then, Joe, good luck to you again. It has been great working with you.

Joseph Sparacio - Chief Financial Officer & Executive Vice President

Thanks, Richard.

Operator

Thank you. We have a follow-up question from the line of Robert Peters from Credit Suisse. Please go ahead.

Robert Peters - Credit Suisse Securities (Canada), Inc

Thank you. I wasn't sure I was going to get back in that quickly, but maybe just to Greg. When we talk about adding new films into the quarter and when you have the flexibility of doing that when you have a film that maybe doesn't perform up to what was the initial expectation, how do you kind of balance the incremental DMR cost versus adding those films in at the last minute? Was there kind of a tipping point in terms of box office that you guys look at or any kind of color around that would be fantastic?

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

That's a good question, but the good news is that most of these films are already being DMRed for international releases in markets where the release schedule is staggered and so they were already going to play. So, for instance, Dory was a movie that we were already doing. And Secret Life of Pets was a movie that we had expectation that we would probably do in some of the markets, because, again, given the Euro Cup, we knew that Secret Life of Pets was going to have certain territories that needed an IMAX release.

So, it doesn't always work out that way and when we get surprised by something then we just hustle and do it as fast as we can. But the good news, Robert, is that most often we are already in the process of DMRing these titles.

Robert Peters - Credit Suisse Securities (Canada), Inc

Perfect. Thank you very much.

Operator

Thank you. And there are no further questions at this time. Mr. Rich Gelfond, I would like to turn the conference back to you for any additional or closing remarks.

Richard L. Gelfond - Chief Executive Officer & Director

Thank you, operator. The first thing I'd like to say is I again would like to thank Joe for his nine years of service to IMAX and we will really miss him and we wish him the best in everything going forward.

In terms of the quarter, if you are short-term focused, I understand how box office didn't live up to your expectations or our expectations but you need to put in the context of we are still tracking to our historic averages and that has very little to do with the long-term prospects of the business.

If your strategic investor in IMAX, it was just a fantastic quarter because we built out our network into the future. Our backlog is at record levels and our deals trended away from STLs into joint ventures. So, as someone who runs this business for the long run, I couldn't be more pleased than the tone going into Q3 for network growth and installs is also looking very positive. So, for our long-term investors, thank you and we are quite certain your view will pay off in the long run. Thank you.

Operator

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

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