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Imax Corporation (NYSE:IMAX)

Goldman Sachs 21st Annual Communacopia Conference Call

September 19, 2012 2:55 am ET

Executives

Richard L. Gelfond – Chief Executive Officer

Analysts

Drew Borst – Goldman Sachs

Drew Borst – Goldman Sachs

Great, I think we’ll get started with our next session. It's my pleasure to introduce IMAX. Our next guest is Rich Gelfond. He is Chief Executive Officer of IMAX. Rich has served as CEO of IMAX since May 19, 1996, and he is a member of the Board of Directors since 1994. Rich, he serves as Chairman of the Stony Brook Foundation, he is on the Board of Directors of Brookhaven Science Associates as if he is not busy enough running IMAX his global business, but thanks for being here. Rich, I appreciate it.

Richard L. Gelfond

Thanks for having us, Drew.

Drew Borst – Goldman Sachs

It’s my pleasure. We can start off with talking about the sort of the big picture in IMAX’s strategy over the next several years, where do you see that the biggest opportunities for growth and returns in your business?

Richard L. Gelfond

So we set out a strategy a number of years ago, which was to build as larger global footprint as fast as we could, and we've been very successful over the last number of years doing that. So to put it in context, when we opened The Dark Knight in 2009, it opened at a 150 commercial theatres in the world, and when The Dark Knight Rises opened three years later, it opened at roughly 600 commercial theatres. So our network grew by four times over a three-year period of time, which is considering, we’re a 45-year-old company, there’s not many companies that between its 42nd and 45th years, grow four times.

We have a backlog of around 280 theatres today, which is theatre signed and set to open over the next several years. We've been signing at a fairly rapid pace, last quarter we had around 40 signings, and our pace of business is still remains strong. So priority number one making too long and the answer is grow the global network and continue to grow it, hopefully as aggressively as we have over the last number of years.

We’ve targeted about 1,700 potential IMAX zones in the world, and penetrate as much as that as fast as we can I am going forward, that would be number one. A second priority would be to develop our next-generation technology, which is laser technology. Right now all projection is based on xenon bulbs, and although we’re digital and we’ve evolved from film to digital about the time that our growth accelerated, I’m kind of the next quantum leap and the movie going experience will be laser.

And we acquired some patents from Kodak, before it went bankrupt. We’re spending a significant amount of R&D and we’re developing this new system, which will be able to light screens up to a 120-feet wide. It will provides the equivalent of kind of a film experience rather than a digital experience at very large theaters like Lincoln Square, or the British Film Institute, or including institutions Boston Science Museum places like that. And then I’d say, the third major objective is to further develop the brands. One of the incredible things about the IMAX brand is, we didn’t have a Chief Marketing Officer, we spent almost nothing on marketing and when you look at the reach of the brand.

So in China, Nielsen did a study and we have 96% brand awareness, in the U.S. it’s not quite that high, but it’s clearly a major global brand that evolve because of the experience. And we think especially as we think much longer-term what other businesses IMAX might want to go into, what platforms other ways to leverage our company, I think more strategically developing the brand is very important and we started that this year and we’ll continue that.

Drew Borst – Goldman Sachs

You mentioned this next-generation of lasers and you mentioned sort of patents, maybe you can help people understand with the current technology that you have is, is that sort of patented? Is there some differentiation you have over some of the copycats or knock off, so I will call them that are deployed by various exhibitors around the world?

Richard L. Gelfond

Yes, some of it is patented, a lot of it is patented. But I mean, that that’s almost irrelevant, it almost has very little to do with it. In a way, I was in China last week and I was using this analogy in the way, we’re building a Mercedes and a BMW and the competitors are building a Chevrolet, or Volkswagen. And reasons for that is, we’re an end-to-end solution, so we capture content either through our cameras, or we converted digitally through proprietary algorithms we have. We then we work with the filmmakers in our offices like a lot of people don’t know this. But the week before Avatar came out and Jim Cameron was in our offices, a year and half before, The Dark Knight Rises came out, Greg Foster, our Head of Film and myself met with Chris Nolan a number of times to scheme out different plans on how it was going to be released.

So filmmakers involved and we have a proprietary projection system, which has a lot of patents and there is higher quality, and then finally this is the brand in the marketing. But also it’s not just the first day that the movie opens in IMAX that we care about it. We have a facility in Toronto, it’s like a air traffic control panel, where we know what the brightness is on every bulb and every IMAX theater in the world. And if the bulb is getting dull in Beijing, we call them up and we tell them to change the bulb.

And if they don’t change the bulb, we get someone from China to go change the bulb, and we go to these theaters on a regular basis and we inspect them and we have a Chief Quality Officer and we look at the glasses, the 3D glasses to see if they’ve been used too much. Every part of it is an end-to-end solution. Basically, what the copycats do pretty much everywhere in the world is, they buy two projectors. They put up a big screen and they play the same movie everyone else’s on the screen.

So, they’ve never talked to a filmmaker, they don’t do anything to the film, it is nothing proprietary about it. The public is very much understood that and in fact, if you look at the big players in the U.S. like Regal and AMC, they tried their own for a while. They worked with some success in some places, but then they came back and didn’t work with IMAX, in Canada it’s particularly noteworthy, because Cineplex has a huge market share in the country. And they experimented with going away from IMAX and going to their own brand AVX, and then they came back to IMAX and our Canadian presence is quite large.

So I think like in any industry, there is room for more of a commodity type going back to my original comment Volkswagen, or Chevrolet, but I don’t think they approach the business like we do.

Drew Borst – Goldman Sachs

All right. So it’s definitely kind of a quality separation between what you guys are doing and some of the other in this format?

Richard L. Gelfond

Well, I wouldn’t even use the word separation, I would say, we have a quality mentality. They have sort of a, make it look like an IMAX, and for 10 people, we’ll pay a price premium when it isn’t.

Drew Borst – Goldman Sachs

So maybe we can talk a little bit about international expansion, which is a really critical part of your story. And I think right now your global penetration is about 30%, but can you talk about where you see opportunities to really drive that, the penetration higher like which markets are particularly exciting for you?

Richard L. Gelfond

Well, in the last few years, we’ve been incredibly successful in China and Russia, so when Avatar opened in 2009, we were on, I think it was 13 screens. And now in Greater China, we have a, by the end of this year, we have around a 100 screens open and including backlog it will be about 230 screen, so that’s obviously a crazy growth rate over a short period of time.

In Russia, we have I don’t know, four or five and now we will be approaching 30, 35 soon. So those have been really great opportunities for us. And I think they will continue to be. There is a lot of dialogs still going on in China.

With Wanda which is a company that just purchased AMC, is our largest partner in China. They have 51 of their Wanda Plaza malls and we’re in 49 of them. And I think there is potential there to expand that relationship, there as I said a number of ongoing dialogs there. Two places we haven’t done as well as I would like, our Latin America and Western Europe and we’ve been addressing those areas fairly aggressively this year.

In Western Europe, we hired someone named Andrew Cripps, who is the President of Paramount International and as well known as any international film executive. And we have already started to see the results there. We’ve added some personnel in that market, last year we had minimal signings and it’s certainly tracking far better than that this year.

In Latin America the way we decided to approach the market years ago was with a partner. And the partner really didn’t have the kind of resources to really grow that rapidly. And at the time the economy wasn’t doing that well either in Latin America, but obviously, we all know the story about 5% compound at GDP growth in South America particularly in Brazil over the last couple of years. So we restructured that agreement at the end of last year.

And we’ve played a more active role in Latin America and we will continue to play more active role. There is something like 60 malls being built right now in Brazil. We have four theaters, three, or four opened in Brazil, and the results of those theaters are very strong, they are averaging over $1.5 million per screen, which is a large number.

So I think the pace of development combined with the kind of a reference sale that we have now, we’ll start to see results out of there, but I think it probably more of 13 than in 12 where it will pick up. And then a final thing I should just briefly mention is the India, which has been a difficult market for us for three reasons, one 85% of the films are Bollywood films. Two, there hasn’t been a lot of multiplex development, and three, low ticket prices. The second is mall development going on and there is some signs of ticket prices are stabilizing particularly for a better experience.

I’m going over in November, our Head of Film is over there now, and we are exploring the possibility of some Bollywood content releasing in IMAX, and hopefully that will break that market loose, but again I think that’s a little longer-term.

One point I should just make is that, we also do local language films in different countries, so this year, we’re doing four Chinese films in IMAX in china. We have a Russian film called Stalingrad that we’re doing in Russia. Next year, we did a French film called Marsupilami this year in France. So we’re in 54 different countries. And one of the things that makes IMAX unique is, when you look at the exhibition world, I mean there is no one who has sort of a scope we do. When you look at the kind of distribution production world, I mean the studios care. We have the ability to program theaters in these 54 countries, so at anyone time although you might think we have one movie out, The Dark Knight Rises.

This last weekend we had like seven movies out, because we are playing [born knight] that over the born new one is somewhere we are playing Total Recall somewhere else, we’re playing The Dark Knight, we are playing the Spiderman, we are playing Avengers, in Russia, we are playing Resident Evil, in the US, so that's one way we’ve really been able to, I think distinguish ourselves from anyone in the entertainment industry is that, we are the only ones who can really maximize a box in a region through a combination of the theatrical experience, the technology on the programming side.

Drew Borst – Goldman Sachs

I think that’s a very fascinating point, because there is still a lot of focus on what is the IMAX box office, how is it tracking, people were kind of myopic, focus on the short-term. But the point you just made is really interesting, I mean that’s where we set our movies globally that most investor maybe unaware, but everybody focuses on what’s the new release, what did you do that weekend in the U.S., but it's more than just the opening weekend, you guys are showing stuff pretty consistently, constantly, and there is different types of films, it could be local films have been shown in these markets that we just don’t have the ability to really track?

Richard L. Gelfond

And even building on your point when we look at the box office for the last three years, we kind of built it from a bottoms-up approach like we said, what are these films going to do? And in all three years it won’t surprise you, we missed their number. I mean two years we were higher, the results were better, and one year, the results were worst, but actually we looked at it over a three-year period of time, and we were 5% higher than we predicted over the three-year period of time, which means at any given year, we could be off, but the portfolio theory really works.

So when we did our 2012 budget, we did it in a different way rather than doing in bottoms up. We kind of said, what's the three-year rolling average and then we adjusted for things like, we are opening a lot of international theatres this year. So they perform better than domestic and we are spending a little bit on marketing. So we adjusted in those ways and in fact, despite the fact some movies like Avengers have done a lot better and some other movies have done not what we’ve thought, we’re pretty much tracking within a range of our budget. So it is exactly what you said, it’s really a portfolio now rather than a hit driven sort of business.

Drew Borst – Goldman Sachs

All right. You are just digging in on China a little bit, I think right now China is 20% roughly of your installed screen count. When you look at the backlog, it’s closer to 50%, so there is still, it seems like a big runway. I guess the question is, how do you think about, how is that 50% get deployed like over what time period do you see that kind of getting installed?

Richard L. Gelfond

I don't know specifically to answer that question specifically, but in general it’s a two or three-year time period worldwide. And I know there has been a lot in the newspapers about a China slowdown, but I have to say, we budgeted for a certain rollout this year, and we’re going to hit what our budget was for the rollout and I was just there last week, and we went through with our clients and the clients are building the multiplexes, so I think it’s going to rollout pretty much the way we thought it would rollout.

Drew Borst – Goldman Sachs

Yeah, that’s interesting, but I think there has been some concern among some investors that, the slowing GDP growth in China might slowdown construction, because I think that’s a big part of the installs on screen is a new build in that market, but you don’t think you’re not really seeing that today?

Richard L. Gelfond

No, and it’s a matter of fact, I spent a lot of time with Wanda last week, and I asked them if there was any slowdown in their build schedules, and they said not at all, and they budgeted fairly aggressively for their rollout and that’s been our experience with the other exhibitors as well. Remember also, we retrofit a number of our theaters, so they go into existing multiplexes, so that’s completely separate. But you have to remember and whether you agree with the exact statistics that are being published or not, I mean China is not in a recession, whether it’s going at 5% or 7%, or whatever it is, it’s certainly not a place where people are running scare.

Drew Borst – Goldman Sachs

Yeah. And then in terms of the, when you look at the per screen averages, I think you’ve alluded to it before that, it seems like consistently there is higher per screen averages internationally than domestically, what are the main sort of differences would drive that discrepancy?

Richard L. Gelfond

I think part of it is that, IMAX grew up with the movie going culture in a lot of countries outside of the United States. So in Russia there wasn’t a lot of movie infrastructure until the time IMAX came along. So when modern multiplexes were being built, IMAX is part of the movie going experience. So when Avengers opens, when The Dark Knight opens, or a special blockbuster movie and you want to see in a special way, it’s second nature for you, you just say, let’s go see at the IMAX, because that’s the way you’ve always thought of the movie going experience.

I think in Western Europe and in the U.S., you had an infrastructure, you had a pattern, and we obviously came out of a niche about a decade ago, where we were a more science museums and that sort of thing. So I think, we’re doing well in the U.S., but I think we have to convince people and you will be surprised how many people still say to me, oh, I saw the last fish movie, and then, no, not a fish movie, that’s not we’re doing right now.

But I think that’s a matter of having a change patterns in the U.S. whereas another countries we didn’t have to change patterns, another thing is definitely dollar weakness. I mean, because if you look at some countries like Japan and England, I mean when you translate it, we’re getting like $24 a ticket for IMAX, but obviously, they pay in yen, or they pay in pounds, or whatever it is, but that definitely is a factor.

Drew Borst – Goldman Sachs

And sticking with the China’s theme, it’s a tough market to compete in, so obviously heavily regulated film market, and there has been some improvements recently earlier this year. But then you have this incident recently where Spiderman, Dark Knight Rises were sort of forced to release simultaneously. I mean, do you think that that’s going to be a recurring problem, or do you think that there were some unique circumstances? How do you think about that potential problem?

Richard L. Gelfond

I actually spent a lot of time last week when I was in China, not only thinking about it, but talking to people about it, including the number of government officials. So what happen in China this year is that for the first six months, the U.S. box office was about 74% of total box office in China, meaning that the Chinese box office was 26%, and the goal is to get it to 50/50, that’s really the way they would like to manage it.

So what they were trying to do was open more slots for Chinese films. So if they put Lorax and Ice Age together, or Spiderman and The Dark Knight together, it meant instead of that stretching out over two months, they would have one month to play Chinese films.

I don’t think it really was intended by them to lower the box office as much as to open the slots and in fact, after meeting the decision makers in this, I think they weren’t really pleased with that side effect, because China film, which isn’t the government, that’s an agency, which charges a fee to import made a lot less money, because those films were bunched and that’s not something they inspired to do. The exhibitors made less money, which since China has gone from 2,000 screens five years ago to 15,000 screens at the end of 2013, because they certainly don’t want to hurt their own exhibitors.

And I think also a lot of the exhibitors as we talked about before in malls, and I think their focus is very much on the economy. And I think they want people going to malls more than they’re worried about the market share of Chinese films versus U.S. films. So I think they were unintended consequences, and my guess is that, they’re going to rethink that. Now that, with that said because of the transition in China in the next month or so, I don’t think a lots going to change one way or the other. But I do think next year, it’s going to go back to a more normal pattern, and they’re going to look at this as an experiment, which didn’t work exactly the way they wanted it to work.

Drew Borst – Goldman Sachs

And in terms of your strategy, are you able to kind of, have you elongated the release time, are you keeping those two films in your theaters longer, I mean can you rotate the one that had Spiderman, maybe shift, I mean is that kind of a strategy?

Richard L. Gelfond

That’s exactly what we’re doing. So instead of having, each one for two weeks, we have both of them for four or five weeks. On the other hand, you’re still to be clear, you’re still not recouping the loss box office. That theory was my theory and the Chinese government’s theory. But it didn’t workout that way, which is why I think they’re going to go back for the way it was done before.

But one way we’re compensating is on, we’re doing more a local Chinese movies. So that’s why last week, when I was there, we announced we were doing four movies with Huayi Brothers and Huayi Brothers is a kind of both dominant studio in China, and these are four blockbuster kind of films. People here wouldn’t have heard of any of them, so one of them Jackie Chan stars in and directed, and obviously he is a big star there. So they are the Chinese equivalent of blockbusters.

We’ve done Chinese films in China before, and the last one we did was called Flying Swords, and we did 150,000 per screen, which is a very good number. Before that we did a film called Aftershock, which did about 200,000 a screen, those are the only two real commercial movies we’ve done.

So we’re hoping to hedge against this country, risk a little bit by doing Chinese films, which by the way also some of the same government officials that I met with over there have said, they’ve really appreciated, and I think that’s one of the things we have a very long-term view in China. We try and have a win-win view and I think that’s endured to our benefit over time.

Drew Borst – Goldman Sachs

Yeah, that’s interesting. You mentioned those kind of per film averages. Is that pretty comparable to the numbers you might see from Hollywood film, or is that a little bit less, or I realize its variability every film differently?

Richard L. Gelfond

Very comparable to a strong performing Hollywood film, not comparable to Avatar on the top…

Drew Borst – Goldman Sachs

Yeah.

Richard L. Gelfond

And not comparable, there are some really bad ones on the bottom. But if the U.S film did those numbers, we would be very happy.

Drew Borst – Goldman Sachs

Yeah, that’s interesting. I mean the local content can be just as popular and IMAX is the big Hollywood hit, yeah. And you mentioned before, you recently launched a new marketing campaign here in the U.S. And I was wondering, if you could talk about, how that’s played out, what kind of impact that have you seen from this, what are the benefits that you’re accruing?

Richard L. Gelfond

Well, what we’ve done is across on all platforms mostly social media, because the core IMAX audience is the fanboy/fangirl, a lot of online engagement, so that’s where we focus most of our efforts. But we came up with this tagline, which is IMAX is believing then we’ve got a whole series of posters around it so to say, I’m certainly not doing a justice, you need to see it. But it says, watch a superhero, or become one, IMAX is believing, have a car coming at you or haven’t see a car crash or pull glass out of your face, IMAX is believing. And it’s someone like the second one is geared more towards the fanboy obviously.

And we've gotten a very good reception from it, we’ve gotten our affiliates, which are exhibitor partners all over the world have liked it. We’ve gotten a lot of buoyant and we’ve gotten buoyant to the extent where a number of the exhibitors have said, they like it so much, they’ve taken money out of their pockets and they've advertised it, and they’ve marketed it aggressively in their theaters.

Our box office is up from last year significantly, domestically per screen and total around the world, some of that is network growth, some of that is same-store sales. But it's very hard to say how much of that is because of the branding campaign, because obviously, this year was Avengers and last year wasn’t Avengers, so there is no control group.

But anecdotally, I do think over time that will be a good investment for us. And but the one piece of data I have is, when we did Mission Impossible 4, we took over the YouTube homepage. And I forget the number, but it was crazy. It was like one of these you read and on line you don't believe, it’s like a 125 hits a second, 16 million hits for the day and that movie did $60 million in IMAX, so I think over time that will be a good thing.

Drew Borst – Goldman Sachs

Yeah, that’s interesting, because I guess you think there is still more growth within this core of fanboy and girl audience, and so that's what you are targeting rather than maybe trying to get people that historically maybe aren’t aware of IMAX, you then kind of get it, I mean, is that something that maybe down the line?

Richard L. Gelfond

I think it depends on the movie. So I will give you an example, we just did last week, we did Indiana Jones, Steven Spielberg, where we released it after 31 years and reedited, we just converted it to IMAX, and the movie did $2.5 million in a week. The first week of September is like the worst movie, week of the year there was nothing else out there, that’s kind of why we did it. But again that was partially for the reasons you are saying, because I think Harrison Ford and Steven Spielberg are different demographic than Josh Whedon and Chris Nolan.

So I thought that, in invertedly we want to go make a lot of money that week, but if there is a way to really give a great experience that consumers make some extra money for exhibitors and brand there’s also a different demographic. The Hunger Games is another good example, again it's not fanboy, but it’s fangirl more so, and we did very well, and I think we brought Mel’s to the movie that otherwise wouldn’t comment on Lionsgate, we’re so pleased by that, that this year in the sequel that’s coming out in 2013, they are actually using IMAX cameras to film part of the movie and that's another thing we’re seeing more of this IMAX differentiation, which is where they use our cameras or, and start the next Star Trek is using our cameras.

You release early Oblivion, starring Tom Cruise is being released a week earlier in IMAX. So we’re trying not only to provide a technical sort of, better experience, first-class experience, but give our audience even more, or through differentiation.

Drew Borst – Goldman Sachs

Yeah. The earlier releases has been kind of interesting, because I had the chance to be at your Analyst Day in Paramount was very pleased with how that Mission Impossible 4 earlier release happened and that was the first time you guys had ever sort of done that and now you recently announced the second one, which actually with Universal, a different studio. I mean, how should we think about the, how often is that going to happen, I just sort of a maybe if you had one of this year, that’s kind of pretty good, or do you think it’s more aggressive than that?

Richard L. Gelfond

This is just a guess, but I think if we had two or three a year, that would be something I’d be really pleased about. I think, but again it’s part of a larger objective, which is differentiation. So I think to the extent, so next year we have Star Trek and Hunger Games using our cameras announced so far, I think there will be more, we have Oblivion coming early and using the aspect ratio. I think increasingly as more and more people decide to add IMAX features to it in general, that’s a bigger priority to us that necessarily adjust the early release window.

Drew Borst – Goldman Sachs

Yeah, and I guess the point for maybe people that aren’t fully familiar like, when you actually shoot an IMAX, what are the benefits that I guess it’s a better picture, it’s a better experience for the viewer?

Richard L. Gelfond

Well, the best image capture possible in a digital world today is called 4K, IMAX film is 16K. So the quality of the image is four times, what on the best cameras Jim Cameron is using and not everybody uses, so the clarity is and the richness of the image. IMAX also has a different aspect ratio. It’s more of a square experience than envelope, which is 35 millimeter now kind of the people called the letterbox image. So the way filmmakers have used it like Chris Nolan in The Dark Knight Rises is, for certain scenes it opens up. So the screen will open all the way up and as you probably saw in MI4, it makes a really dramatic statement.

For those of you who have seen the movie when Tom Cruise is kind of outside the tallest building in the world in Dubai, you’ll see the building kind of in one shot and then you see it open up like this, and it’s really quite a dramatic effect. And MI4 was by far the most successful of the Mission Impossible series, and it was the fourth one. And the third was least successful. So I don’t think it was a foregone conclusion that the fourth would be and as you said Paramount graciously has given us some of the credit for that.

Drew Borst – Goldman Sachs

And then in terms of, like the Indiana Jones sort of rerelease, what kind of response have you heard from the studio in terms of, are they excited about sort of doing that, I know that I think in this case they did it, because they were rereleasing on Blu-ray some of the prior movies, but I mean do you see more opportunity to do that kind of thing and these periods are typically maybe quiet box office periods?

Richard L. Gelfond

The studios are really excited and the exhibitors are really excited. But IMAX has run for a bottom line and it’s excited as I am about the branding benefits and bringing in the new audience with $2.5 million for week, which for slow week and September is fine, but I don’t really see that as our line of business. So I think, as a filler, we have nothing else and it’s good for your brand and you have the right partners, I think it’s something that we would consider doing again, but I just don’t think the rerelease business is a big business.

Drew Borst – Goldman Sachs

But is it profitable for you guys?

Richard L. Gelfond

The big exception was Titanic, obviously, which I think was a special case and then maybe other special cases like that.

Drew Borst – Goldman Sachs

But the economics of the rerelease I realize it’s a small number, but the whole economics, anything else is the same, right?

Richard L. Gelfond

We made money on it, but not enough to move the needle on a material way.

Drew Borst – Goldman Sachs

Yeah. Maybe going back to the laser technology that you’ve mentioned before, how should investors think about, how that gets deployed and over what time period and how can maybe impact the growth of the company?

Richard L. Gelfond

So we’re targeting a prototype for the fourth quarter of 2013, that will rollout in early 2014. It is technology that needs some development. So it could slip, but it could be sooner, but that’s our best guess at the moment as to when it’s going to come. I think people haven’t focused on maybe one of the biggest benefits for us of doing this, which is going to be on the film side rather than on the hardware side.

And the reason for that is some of our best film theaters in the world, as I said Lincoln Square here in New York, Demetrio in San Francisco, the BFI in London, there is about 50 or 60 of those theaters that only are playing about six or seven movies a year instead of 20 to 25 a year, because for a certain movies, they’re just not making film prints available for lot of movies. So, Lincoln Square in New York didn’t play Avengers, it didn’t play Hunger Games, and that’s a big part of its box office.

And remember under our model, we get a piece of the revenue from the exhibitor and we also get a piece of revenue from the studio. So we typically get about 12.5% of the box office from the studio. So we did an internal analysis of about Lincoln Square and we’ve thought through August that they had probably lost about $1 million in box office, because they couldn’t play the digital only releases, so 12.5% of that would have gone to us. So you have to look at laser is not only opening an opportunity for us to sell to whole new markets, including our institutions, but it’s also way to make our existing boxes way more profitable, now we get a percentage of that profitability.

Drew Borst – Goldman Sachs

It’s kind of shocking in some place, that’s a huge theater, and they don’t have the biggest Avengers, one of the biggest movies in the summer, they just didn’t have it at all. And are they just not showing anything, or they filling the name with like other like…?

Richard L. Gelfond

They had whatever movie we’re showing before just to make a very long story, so Avengers was supposed to be only a one week run, because no one knew, it was going to be as big as it was. So we and the studios didn’t want to spend, what it cost $40,000 for one film print. So we took a pass on it and then when it turned into such a big success, it was kind of two way, it’s a backtrack and get it in there.

Drew Borst – Goldman Sachs

You’ve seen some consolidation among the exhibitors, you’ve touched on one of them obviously, Wanda purchasing AMC in the United States, also Cinemax in Europe was recently acquired. I’m wondering what kind of impact does that have on your business, does it have an impact?

Richard L. Gelfond

I think it depends on who it is and what the strategy is. I mean I think the Wanda acquisition of AMC was a positive for our business. Wanda is our largest client in China, and we have a wonderful relationship with them. I think, we know them as well if not better than anyone in the U.S., because we’ve been dealing with them for years.

AMC is our largest client here in the United States. And I think, Wanda is fantastic at branding and marketing their theaters among our best performing in the world. And right after they announced that the AMC announced additional theaters with IMAX. Wanda is also said publicly that it’s looking to acquire additional theater chains in Europe and maybe other places and they certainly indicated to me that, we are a part of their future. So I think, if it’s the right consolidation, it’s a good thing.

I also think consolidation kind of ad of family-owned hands is probably a good thing, because I think, families tend to be more reluctant to take risks, more reluctant to chain. So I think as that consolidation happens, that would be a good thing. I mean I think there is going to be a lot more consolidation, partly because many in the theater chains are owned by LBL firms, which was the case with AMC. And I think they’ve been in them for a while and they are looking for exit strategies. And I know of a number of chains around the world a lot actually that for sale, so I think it’s a trend you’re definitely going to see continue.

Drew Borst – Goldman Sachs

Maybe I’ll see if there is any questions from the audience. Yes, sir, thanks.

Question-and-Answer Session

Unidentified Analyst

Just describe your business model both the cost (inaudible) your interest in that (inaudible)?

Richard L. Gelfond

Sure.

Unidentified Analyst

And the economics (inaudible) through the chain?

Drew Borst – Goldman Sachs

Yeah, the question was just for those just describe that the business model from a high level, how does it work?

Richard L. Gelfond

I will put it in simplest quickest terms, which is that people have kind of two options historically, one is to lease our system, think of it as a sale and the price of that is around $1.2 million and we get roughly a 55%, 60% gross margin on that. The other option is a joint venture, where we give them the equipment and in exchange for giving them the equipment, we get a 20% of the box-office, the overall box-office 20%.

The other side of the model is that we repurposed the film at the studio provides so whether it’s Avengers or whether it’s The Dark Knight Rise or whatever it is. And we get 12.5% from the studio for doing that. So it’s a dual revenue stream. So if it’s a pure joint venture, we get 20% plus 12.5%, so we get roughly a third of the box-office. If it’s a lease deal, actually we get a small royalty, it’s around 3%. So we get the 12.5% and a 3%, so we get 15%.

There is other kind of Raining Arrows stuff is maintenance that we make a small margin on and we sell replacement things and ancillary products. If you understand that and one way to cut through the whole model, if you look at in a very simple way around 20% to 22% of the box-office is kind of a pretty good gross margin number.

Unidentified Analyst

So your cost standard, you’re saying that…

Richard L. Gelfond

Our cost is around 450.

Unidentified Analyst

About 450…

Richard L. Gelfond

Projector, right.

Unidentified Analyst

Okay.

Richard L. Gelfond

Yes. That’s were the recurring, the growth of the network. I’m really glad, you asked because that goes back to the first question, because as you build your network out, you have 12.5% from the studio becomes a 100% margin right. There is no incremental cost in doing it. So in a way it’s like the HBO model, if you think about a fixed cost of content every new subscriber is incredibly profitable to you. So that’s why the growth of the network is really the key to our profitability or the growth in our profitability.

Drew Borst – Goldman Sachs

Yes, over here.

Unidentified Analyst

Could you give a typical IMAX ticket price in U.S., Europe and China and how that compares with a normal ticket price?

Richard L. Gelfond

I think in the U.S. it’s around $13, yeah and I think that’s probably a normal ticket price probably averages around $9. I think in China, it’s around $15 and a typical ticket price is around $6 or $7. And I think in Europe, it vary so much again because I’ll keep England out of it because England is way high. But I think in Europe, it’s probably around €11, €12 something like that again €8 or €9 for regular movie that’s close.

Unidentified Analyst

Okay that movie take the €12, but…

Richard L. Gelfond

I guess the answer is because people think of pounds as a dollar, so if you charge £14 instead of $14. For us it turns into $22, but the consumers always thinking of it is $14 like, but thank God for the British on that one.

Drew Borst – Goldman Sachs

Yeah, another question over here?

Unidentified Analyst

Yeah, could you tell us a little bit about how you think about really a development slate of your own that sizable for instance? You probably have a very good idea of what works inside of theaters that are IMAX enabled, IMAX theaters in general globally by region et cetera and if IMAX had a very large budget to develop its own films, and not have to take a 20% of box. But really own rights because they went through your optimizing and your own experience, can you tell us how you think about that?

Richard L. Gelfond

The answer is, we think about it only in a longest term future, not at all in the short run, because the movie production business historically is in a great business and you risk a lot of capital on the ROIs aren’t that grade on it. So the only production we do now was generally we do co-productions with Warner Brothers. We do one documentary year or something like that probably do a little bit, more of that has the institutions install the laser system because it will be more profitable for us to do that. So that’s not something on our radar screens.

On the other hand if you look at like HBO, once it got to a certain point and it had programming rights to a network, obviously its own production, it changed then it made different sense and that the extend we thought about it, that some day if we got to that point, we should look at it again, but we have no intention of doing that in the short run.

Drew Borst – Goldman Sachs

Sure, back here.

Unidentified Analyst

You’ve mentioned the laser technology you guys are building. Is that going to be better quality film or is it that you guys have access to more films you can play?

Richard L. Gelfond

I think the quality will be comparable to IMAX film in certain ways and better in certain ways because the image will be brighter, especially in 3D, it’s way brighter than film. So I think it will provide a better experience, it will enable us to do bigger theaters, but the biggest benefit is going to be able to have that quality on many more films in those large theaters than we have today.

Drew Borst – Goldman Sachs

Okay. It looks like we’re out of time. Thanks very much, Rich, I appreciate it.

Richard L. Gelfond

Okay, thank you very much.

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