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Edited Transcript of IMAX earnings conference call or presentation 27-Feb-18 9:30pm GMT

Q4 2017 Imax Corp Earnings Call

MISSISSAUGA Feb 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Imax Corp earnings conference call or presentation Tuesday, February 27, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Greg Adam Foster

IMAX Corporation - Senior EVP, Director and CEO of IMAX Entertainment

* Michael Mougias

* Patrick S. McClymont

IMAX Corporation - CFO and EVP

* Richard Lewis Gelfond

IMAX Corporation - CEO and Director

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Conference Call Participants

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* Eric Owen Handler

MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Research Analyst

* Michael Ng

Goldman Sachs Group Inc., Research Division - Research Analyst

* Steven Bruce Frankel

Dougherty & Company LLC, Research Division - Senior VP & Director of Research

* Yang Yue

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the IMAX Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions)

As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Michael Mougias. Please go ahead.

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Michael Mougias, [2]

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Thank you, Renee. Good afternoon, and thank you for joining us on today's fourth quarter and full year 2017 earnings conference call. Joining me today is our CEO, Rich Gelfond; our CFO, Patrick McClymont; and our Head of Entertainment, Greg Foster, who each have prepared remarks and will be available for Q&A. Also joining us is Rob Lister, Chief Legal Officer. Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our fourth quarter release and the slide presentation accompanying today's call have been posted on the Investor Relations section of our website.

At the conclusion of this call, our historical Excel model and guidance information will be posted on the website as well.

I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to questions on this call as well as the accompanying slide deck 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 adjusted EBITDA as defined by our credit facility are contained in this afternoon's press release. With that, let me now turn the call over to Rich Gelfond.

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [3]

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Thanks, Mike. During the second half last year, we made efforts to refine our global programming strategy, reduce our cost structure and reanalyze our new business efforts.

Our primary objective was to facilitate more operating leverage throughout our business.

I'm pleased to say that several refinements across various areas of the company have had encouraging early results, as demonstrated by our stronger box office performance in the second half of '17 and into '18. More specifically, in the second half of last year, following our refinements, IMAX domestic box office grew 17% compared to an exhibitor industry decline of 6%.

In China, box office grew roughly 7% and in our international ex-China segment, box office was up over 19%. Overall, IMAX fourth quarter global box office was up roughly 13% compared to the prior year. And more recently, we broke company records with the release of Black Panther, which achieved $34 million of IMAX box office in its 4-day opening weekend and another $15 million last weekend. The film has grossed more than $50 million in IMAX screens worldwide and that doesn't include key markets such as China and Japan, which will open the film shortly.

In China, during the recent Chinese New Year holiday, we grew box office 60% over the 4-day opening weekend compared to the prior year. And even more encouraging, over the 7-day holiday period, our box office grew to $27 million, up 74%.

Interestingly, the performance of the 3 films varied day-to-day. Monster Hunt 2 started out the strongest, however, Operation Red Sea quickly gained ground, while Detective Chinatown (sic) [Detective Chinatown 2] held steady throughout the holiday. The varying performance of these films over the course of Chinese New Year highlights the significance of our multi-film strategy in China.

Had we played just 1 film, we do not believe our performance would have been nearly as strong. It is also worth mentioning that the past 2 weekends, our network has exhibited all of the top 4 global films in the world.

Overall, our box office results over the past 8 months underpin our continued value proposition for blockbuster movies and highlight that overall industry box office performance is not always indicative of our performance.

The blockbuster IMAX business can be quite different than the conventional cinema business. In addition to compelling content, a key component of our recent performance, our results also reflected tangible benefits from several of our recently announced revenue and cost initiatives.

You may recall that one of our initiatives was to program more 2D versions of films across our domestic network rather than 3D.

To that end, Blade Runner 2049 and Justice League were programmed exclusively in IMAX 2D last quarter and more than half of Thor: Ragnarok and Star Wars: The Last Jedi were programmed in 2D. Recently, Black Panther had about 80% of its domestic showings in 2D. While we only recently implemented this strategy, the preliminary results of this decision have been encouraging and our intention is to continue to play more 2D versions of films across our domestic slate.

Additionally, we've been focusing on increasing our programming flexibility, particularly in China. As outlined on our last earnings call, we are remastering an increasing number of Chinese titles, specifically during bigger box office weekends or weekends where there's no single dominant film, such as during Chinese New Year.

For example, we played 4 local language titles across our network during the blackout period in December, and as previously mentioned, we exhibited 3 local language titles during Chinese New Year. We believe providing our exhibitor partners with optionality will increase the revenue power of our network and enable us to be more nimble, reducing the chances of missing potential hits.

In addition to our revenue initiatives, we have continued to streamline our cost structure. We believe that this effort has already had a positive effect on our ability to drive operating leverage.

OpEx for the fourth quarter, which includes SG&A and R&D excluding stock comp, was down slightly year-over-year. For the full year 2017, OpEx was flat compared to 2016. And as we look to 2018, we intend to continue with our disciplined approach to cost manager. For instance, we anticipate this year's consolidated OpEx to be essentially flat with that of '17 and '16.

Turning to our network growth, we signed deals for 23 new theaters in the fourth quarter, bringing total new theaters signings for the year to 170. Keep in mind, this is our top of the record 314 new signings that we achieved in 2016. These signings not only facilitate future network growth in earnings, they also serve as a testament to our exhibitor partners' continued demand for IMAX.

As a result, our backlog consisted of 494 new systems at year-end. Of this backlog, roughly 63% is in China and roughly 28% in other international markets.

Additionally, we're optimistic about our opportunities to expand into newer markets. For example, Saudi Arabia has recently lifted its ban on commercial movie theaters, which could make that an attractive market for us.

We also recently signed our largest single deal in Ecuador, a 5-theater agreement with Supercines, a top exhibitor in the country.

We also continue to make progress in India. Our backlog in the country now consists of 13 screens, on top of the 12 existing in that market. And we're continuing to field interest from exhibitors in that market.

Furthermore, exhibitor consolidation has, in the past, served as a conduit to future signings activity. And to that end, we think Cineworld's acquisition of Regal could facilitate not only additional signings but other strategic benefits as well.

We have a longstanding relationship with Cineworld and they clearly understand the benefits of IMAX in bringing incremental revenue to a multiplex, leveraging our product as a core component of their strategy.

All-in-all, we remain encouraged by our continued signings momentum as well as our prospects for future signings.

On the installation front, we installed 69 new theaters in the fourth quarter, bringing our full year 2017 installs to 165.

As a result, our commercial network now consists of 1,272 screens, within 2/3 of which are in international markets. I think it's also worth noting that Wanda represented 57 of our installs last year, roughly twice their targeted amount.

This continued expansion, coupled with the recent investments in Wanda from the likes of Tencent and Alibaba, underscores our continued optimism in our partnership.

Overall growing the network continues to be a foremost priority. We believe a bigger footprint is essential to generating more box office and ultimately, more earnings long term.

This is particularly true given the various deal structures we offer clients. For example, sales-type leases and hybrid arrangements which represent 57% of our backlog, come with little or no upfront investment, thus the ongoing contribution margin is almost completely incremental.

And when analyzing full JV opportunities which do require a capital investment, we clearly weigh the potential ROI against our cost of capital for each location. We believe if we can provide an ROI in excess of our cost of capital, we will pursue that investment.

Nonetheless, it is important to recognize the impact that our growing presence in emerging markets such as China, India, Russia and Latin America has had on metrics, such as per-screen averages. For instance, our average ticket price in China is roughly $8, a 45% discount to our average domestically.

In India, the average IMAX ticket price is roughly $7. While these markets present us with different economics, we view them as attractive opportunities to grow box office, regardless of their potential impact on global PSAs.

Remember, box office, not PSAs, drive revenue. Our focuses in organization therefore needs to be on generating more box office, in absolute terms. If we are effective at maintaining a stable cost structure, every additional box office dollar we generate should come with very little incremental cost.

Turning to new business, we currently have 7 pilot virtual reality centers open around the world. Our plan is to use these pilot locations to collect data, test different technologies and experiment with various types of content, before making any formal decisions on the future of this initiative. At this time, we do not anticipate opening additional VR Centers or making meaningful future investments in the initiative.

And on the original content front, we continue to believe that leveraging our network as a platform to launch and distribute content remains an attractive opportunity, particularly during shoulder periods. However, we recognize the hit-and-miss nature of the content business and therefore, we'll aim to serve as more of a distributor rather than a principal when looking at alternative content, similar to what we've done in 2016 with Game of Thrones.

While there may be select opportunities to invest in content, namely through funds such as the China Film Fund, we do not anticipate making big financial investments in content going forward.

All-in-all, our approach to new business going forward will be less capital intensive in nature. We continue to believe there are attractive ways we can leverage our network, brand and global awareness that do not require upfront capital. Potential opportunities that we find attractive would include distributing and premiering content or potential licensing opportunities. Nonetheless, we anticipate significantly less spend on new business this year.

And on the marketing front, we're in the midst of finalizing an updated brand campaign, and we look forward to sharing it with you in the near future.

Lastly, I would also like to mention that IMAX China, which just published its full year results, also announced it received board approval to initiate an annual dividend in the amount of $0.04 per share or roughly $14 million per year at the current share count. This announcement underscores IMAX China's strong cash position and our confidence in the company's long-term growth prospects and cash flow generation.

Keep in mind IMAX Corporation owns roughly 70% of IMAX China and as a result, we'll receive an annual dividend payment in the range of about $10 million.

In summary, the initiatives we began implementing in the second half have had encouraging early results over the past 8 months.

Looking ahead, our primary focus remains profitably growing our footprint of theaters and seeking ways to further differentiate our format amongst consumers. While growth in smaller markets could pressure average network PSA's, we anticipate the asset-light nature of our business, coupled with our cost control efforts and continued demand for new IMAX theaters, positions us well to drive future operating leverage.

And on the box office front, our domestic performance over the past 8 months coupled with our recent results in China following our programming refinements help demonstrate that for the right film, IMAX is the place to be. With that, I'll turn it over to Greg.

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Greg Adam Foster, IMAX Corporation - Senior EVP, Director and CEO of IMAX Entertainment [4]

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Thanks, Rich, and good afternoon. We generated global box office of $977 million in 2017, up slightly from '16.

We saw healthy box office growth in regions such as India, which grew 78%; France which grew 36%; Russia which was up 29%; and Japan, which grew 18%, all compared to 2016.

In fact, our single strongest performing screen last year was in Japan, delivering box office of over $5 million in the 12-month period.

Looking ahead with almost 30% of our backlog slated for markets outside the U.S. and China, we expect these regions to become a bigger part of our overall box office results over time.

As Rich highlighted, we continue to see the benefits of programming more 2D version of films domestically. As you know, we began implementing this broad strategy in the summer of 2017 and have since ramped it up even more.

In fact, every domestic IMAX release since Dunkirk has been programmed either entirely in 2D or had a significant percentage of 2D showings in our domestic network. We believe this programming change has contributed to stronger market share across numerous films.

For our average opening weekend, indexing in the first half of 2017, was 9.6%. In the second half, after implementing these refinements, our average indexing jumped to 13.1%.

Another effort we've made is to remaster more titles. As we pointed out on our last call, most of our films will be allotted just 1-week runs. We believe this reduces our exposure to potential drops in week 2, while also keeping content on screen fresh.

One additional point that I'd like to highlight on this front is related to premium VOD. We're often asked by investors how the potential for shorter windows may impact our business. Overall, our belief is that it won't have a significant impact, provided we're playing most of our films for 1 or 2 weeks.

Moreover, the films that are generally being targeted by initiatives such as PVOD are generally not the tent-pole blockbuster titles that generate the abundance of IMAX box office. Regardless, premium VOD still remains a theoretical conversation at this time.

Moving along, in China, we intend to remaster roughly twice as many Chinese titles this year. This serves a couple of benefits. First, as Rich pointed out, it provides us with more optionality which is important given the difficulty in predicting the dominant title during certain weekends. And secondly, it allows us to program more local titles in Tier 3, 4 and 5 cities in China where consumers tend to prefer local content.

Another key effort is the use of IMAX cameras and expanded aspect ratio, specially formatted, if you will, for IMAX releases. We often refer to this as IMAX DNA. Working with filmmakers at the early stages of film production is an important component of IMAX's value proposition. It's something that only IMAX does and the benefits are clear. We tend to over-index on titles that leverage our proprietary cameras and/or aspect ratio.

Our best example of this is anything related to Chris Nolan, who has perfected the strategy for both his films and our benefit. On that front, we've seen many in the next generation of important directors start to take advantage of our exclusive DNA for their blockbuster films. For example, Denis Villeneuve, Director of Blade Runner 2049 and Taika Waititi, Director of Thor: Ragnarok, both leveraged IMAX technology for the first time last year.

This year, our new partner, Ryan Coogler, the director behind Marvel Studio's Black Panther, leveraged IMAX's exclusive aspect ratio for almost an hour of footage and the results have been fantastic.

Our exclusive DNA is such an important component of our offering which is why I'm thrilled to announce several pillar titles that will feature our exclusive DNA.

First, Venom, a Marvel title from Sony, will feature select sequences with expanded aspect ratio exclusively formatted for IMAX coming this October.

Secondly, Damien Chazelle, the director of La La Land, is directing Universal's First Man, the story of Neil Armstrong, which also comes out in October.

Damien filmed select sequences of First Man in IMAX, which gives the space-themed film a terrific look for our cinemas.

I'm also thrilled to announce that Disney's Lion King, which comes out in July of 2019 and is directed by our long-time partner Jon Favreau, will feature roughly 30 minutes of key sequences in our aspect ratio.

And lastly, I'm excited to announce that Wonder Woman 2, which comes out in the second half of 2019, will be shot with IMAX film cameras in select sequences. This Warner Bros. DC production, the sequel of the Global Juggernaut from 2017, is directed by Patty Jenkins and produced by Chuck Roven and Rebecca Oakley Roven, (sic) [Rebecca Steel Roven] and we couldn't be more excited that IMAX has been chosen to be a part of film's design.

And, of course, as we have already announced, Marvel Studios' Avengers: Infinity War, which is directed by the Russo brothers, is the first movie to be filmed entirely with the IMAX digital cameras and comes out this spring.

Our efforts to work with filmmakers and studios is a core aspect of our company strategy and rest assured, there's more to come.

Lastly, we continue to work with our exhibitor partners to reseat and modernize older IMAX theaters. Currently, we've reseated roughly 70 theaters across our domestic network and generally, we've seen improved performance from these screens.

We intend to continue to work with our partners on updating our network with more modern, comfortable seating. Importantly, new theaters that we install are generally coming with plush rockers or other premium seating from the get-go.

Turning to the film slate for a moment, I'm pleased to announce a number of additional titles hitting IMAX screens in the future.

On the Disney front, in addition to Lion King in 2019, I'm also pleased to announce that Frozen 2 and Artemis Fowl will be released in IMAX in 2019. And additionally, in select theaters this September, Warner Bros.' The Nun will come out in IMAX.

In 2019, Warner's and DC's Shazam! and It Two (sic) [IT: Chapter Two] will receive IMAX runs.

And in 2020, Godzilla versus Kong will hit IMAX screens. Keep in mind these are all new releases on top of the films that we've already announced.

Overall, we remain optimistic that a combination of better and differentiated content coupled with a refined programming strategy and a growing international presence will have tangible benefits to our box office results. With that, I'll now turn the call over to Patrick.

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [5]

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Thank you, Greg, and good afternoon, everyone. As Rich highlights in his opening remarks, we invested a considerable amount of time last year evaluating and addressing several challenges facing our business. We focused on revenues, cost of sales, SG&A and new business spend and identified several areas for improvement. While we continue to evaluate additional ways to optimize the business, we believe that the company is better positioned today because of the efforts we made last year.

Looking at our results, we continue to see strong installation and signings activity as demonstrated on Slide 5.

We installed 69 new theaters last quarter, bringing our total new installations for 2017 to 165.

We signed agreements for an additional 23 new theaters in the fourth quarter, bringing our total 2017 new system signings to 170 new systems.

Broken down by deal type, we signed agreements for 35 full JVs, 50 hybrid JVs and 85 sales type leases in 2017.

As you know, under the latter 2 arrangements, which represented over 3/4 of our total signings, we are not required to invest any upfront capital. In fact, we make a margin upfront and then benefit from the ongoing box office performance, which comes at limited costs and no capital charge to cover.

We generally seek out hybrid JVs and sales-type deals in emerging markets or markets with reduced box office predictability.

And with regards to full JVs, which do require IMAX capital, we continue to weigh the potential returns of these screens against our cost of capital.

To quantify our approach, if we assume our cost of capital is around 15%, we estimate that a full JV theater needs to produce at least 500,000 in annual box office to achieve returns in excess of our cost of capital.

We are often compared to our exhibitor partners, however, it is important to remember IMAX is a different business model with different financial attributes. We believe our asset-light, network growth approach is attractive particularly as we continue to control the cost side of the equation.

Turning to our financial results, please flip to Slide 6.

Total revenue in the fourth quarter came in at $126 million. Network revenue -- network business revenue was $54 million, theater business revenue was $56 million and new business revenue, primarily related to ABC airing the last 7 episodes of Inhumans, was $13 million. Excluding the impact from new business, our core gross profit for the fourth quarter came in at $63 million or 56% of revenues.

On Slide 8, you can see our 2017 total revenues were $381 million. Full year revenue from our network business was $183 million; revenue from our theater business was $155 million; and new business contributed $25 million last year. Excluding the impact from new business, our total revenue was $356 million and gross profit was $201 million or 56% of revenues.

In the fourth quarter, SG&A, excluding stock-based compensation, was down 12% to $21 million. This decrease is largely attributable to the cost reduction exercise we announced in June.

R&D for the quarter came in at $6 million, a $1.5 million increase over 2016, which reflects the continued development of our commercial laser product.

We also recognized a restructuring charge related to our cost reduction initiative of $2 million in the fourth quarter. This was roughly $1 million above the guidance we provided on the Q3 call and reflects several contractual agreements that actualized at the high-end of our initial estimates.

Our full year SG&A, excluding stock-based compensation, was down 4% to $90 million. R&D came in at $21 million, an increase of $4.5 million over 2016. In addition to laser, we also recognized expenses related to the development of the VR camera over the year.

Our tax rate for the quarter was 65%, which resulted in a year-end tax rate of 56%. Please note, these figures reflect the onetime impact from U.S. tax reform enacted in December. As a result of this legislation, we incurred a discrete tax expense of $9.3 million. This onetime charge resulted from the provisional remeasurement and write down of the company's U.S. deferred tax assets and liabilities. Excluding this onetime charge, our effective tax rate for fourth quarter would have been 26.9% and full year 2017 would have been 24.9%.

Consolidated GAAP net income, which includes the impact from new business, came in at $4.8 million or $0.08 per share in the quarter. For the year, our consolidated GAAP net income was $2.3 million or $0.04 per share. Please note, our GAAP net income figure include charges as a result of our cost restructuring initiative and the recent tax reform. These charges impacted our full-year GAAP net income per share by $0.25 and $0.14 respectively.

Our adjusted net income for the quarter, which adds back the onetime restructuring and tax charge in stock-based compensation, was $21.8 million in the quarter or $0.34 per share. For the year, adjusted net income was $40.5 million or $0.62 per share.

Core operating income excluding the impact from new initiatives and other onetime restructuring charge was $75.2 (sic) [$74.2 million] in 2017 and $1.15 per share, a 15% increase over 2016. The net impact of our new business investments was $19.8 million in 2017, $1.8 million above our previous guidance. This was primarily the result of our recognizing higher-than-anticipated losses associated with Inhumans and our VR initiative. For a breakdown of our adjusted net income calculations, please refer to Slide 13.

On Slide 14, you can see adjusted EBITDA for the quarter came in at $56 million. This resulted in full year adjusted EBITDA of $138 million. Please note, pursuant to the terms of our credit agreement, impairment and the amortization expenses associated with Inhumans are treated as add backs in determining adjusted EBITDA. However, we believe that excluding any impact of our investment Inhumans provides a more meaningful evaluation of the company's adjusted EBITDA. As a result, we presented both metrics to facilitate comparisons against future and prior periods.

Adjusted EBITDA in the fourth quarter and full year came in at $42 million and $126 million respectively, excluding any impact from Inhumans. Please note, our net income figures include the full dilution from Inhumans and thus only EBITDA reflected add backs associated with the investment.

Lastly, I would like to run through our guidance for 2018 and remind you that a summary of this guidance as well as an updated, historical Excel model will be available on our IR website at the conclusion of this call.

Beginning with installations. We anticipate installing roughly 145 new theaters this year. Of this, we expect roughly 55 to be sales type, 65 to be full JV and 25 to be hybrid JV. For the first quarter, we expect to install roughly 11 new screens, of which we expect 8 sales type, 2 full JV and 1 hybrid JV. We continue to believe our installations for the year will follow historic patterns and be weighted towards the back half.

On the expense side, we anticipate DMR cost of sales to be between $40 million and $42 million this year. This increase over 2017 is primarily due to our projecting more remastered films during the year.

On the OpEx front, which includes SG&A plus R&D less stock comp, we expect to be essentially flat compared to 2017 despite strategic investment in areas such as marketing and systems infrastructure.

Stock compensation is expected to be around $22.5 million for the year. We remain actively focused on cost containment and continue to pursue additional opportunities to reduce our expense structure. We expect to incur less than $1 million of additional charges this year related to our June 2017 restructuring.

Investments in new business, which will primarily consist of the operation of our 7 pilot VR centers in 2018 and our home initiative, is expected to have a pretax impact of $8 million to $9 million. This compares to the pretax impact of $31.5 million last year, which primarily reflected the dilution from Marvel's Inhumans. In effect, we expect the impact of new business on operating income to be down almost 75% compared to last year.

Turning to our tax expense, we anticipate our full year effective tax rate to be approximately 24%, largely in line with prior years. Included in this 24% are potential discrete adjustments in the neighborhood of $1 million, a large portion of which we anticipate recognizing in the first quarter.

Given we are a Canadian domiciled company, and earn a small percentage of our revenues in the U.S., going forward, we do not expect to see a meaningful impact to our P&L as a result to the recent tax reform.

I'd also like to briefly address the impact of FASB's recent revenue recognition standard on IMAX. For the most part, we do not anticipate the new standards to have a material impact on our reporting. The biggest change for us will occur on our IMAX systems' contingent rent line within the network business. This item is related to overages we receive from certain sales-type theaters. Going forward, we'll have to present value the estimated impact and book these revenues upfront in the sales and sales-type lease line.

This could slightly increase the average sale price recognized on our STL line, while slightly reducing the revenue on the contingent rent line in the network business. There will not be any changes to DMR, full JVs or hybrid JV revenue recognition.

To close, our focus in 2018 is on increasing the earnings power of our core business. We expect the combination of our revenue initiatives, continued focus on cost control and less new business spend to improve our ability to generate operating leverage. We continue to seek ways of enhancing our business and believe there are still areas we can optimize. Nonetheless, we are encouraged with many of the early results and look forward to the year ahead. With that, I'll turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Julia Yue with JPMorgan.

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Yang Yue, JP Morgan Chase & Co, Research Division - Analyst [2]

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As you mentioned, the China box office performance over the New Year period was extremely strong. I'm curious, do you think that there was other particular factors besides just the quality of content that led to the growth we saw? And if you think that there's any other factors that we should know about that should affect the box office this year.

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [3]

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Yes, Julia, thanks. Well, first of all, it wasn't only the quality of the content. As both Greg and I said, it was the quantity of the content. So it's the fact that we played 3 films instead of 1 of the films, because as I said in my prepared remarks, the films had different trajectories. The opening film, Monster Hunt 2, went down after the first day and Red Sea -- sorry I've got my Chinese titles tongue-tied -- Operation Red Sea kept building and building. So if we had picked any one of them instead of all 3, we wouldn't have achieved the results. Also, there are certain indications that some of our marketing changes were helpful. For example, we did some partnerships with different companies in China to bring more people into the theaters. And we focused on lower-tier cities with stronger marketing efforts than we did before. And we also dealt with some of the ticket suppliers that provide subsidies to work with us. So I think some of that also was a factor in it, but frankly, I'm very encouraged. I think, not only Chinese weekend, but the days that followed continued to be very strong and even -- this is the week after Chinese New Year. The results are still holding up relatively well. So I don't think we've completely cracked the code on China and things we can do going forward, but I think it's very promising where we are.

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Yang Yue, JP Morgan Chase & Co, Research Division - Analyst [4]

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Got it. And then I'm curious on the -- I think, it was the 145 installation guidance for this year. IMAX has obviously had such strong signings momentum in installations the past couple of years, so I do appreciate it's been a bit elevated. I'm wondering if the 145 is a bit more conservative or just impacted a bit by the timing of contracted rollout?

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [5]

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That's based upon our conversations with our partners and how they're thinking about their own requirements and schedule. Our team internally works through that partner by partner, so it really just reflects what we're doing with our partners. There's no -- it's not intended to be any more conservative. It just reflects reality.

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [6]

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Although the one thing I would add is that because the JVs in China in the lower-tier cities, and some of them haven't performed up to expectations I'd say, we're being fairly careful, even more careful than in the past, to open JVs where we don't think they have a very good chance of success. So I think that plays into it as well. I completely agree with Patrick that it reflects those conversations, however, we're shaping them a little bit more.

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Operator [7]

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Our next question comes from Eric Handler with MKM Partners.

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Eric Owen Handler, MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst [8]

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Two quick questions for you on China. First, maybe you can help us think about directionally how we should be thinking about the average revenue per screen in China in 2018 as you balance a greater number of films against more theaters opening up in lower-tier markets and how you're thinking about the cure periods of those theaters that were installed 2, 3 years ago?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [9]

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Eric, I would say that, as I said in my prepared remarks, there's always a trade-off, right? When you go into smaller markets where the ticket prices are lower, they may be below what your average is and they may bring your average down a little bit. But on the other hand, especially in an environment with cost control, if they have a positive return on investment and they're growing your revenues, they're incrementally beneficial to IMAX's overall revenues and earnings. So I think those are the things we're going to sort through. At the same time, remember, you have the film programming changes going on and you have the marketing changes going on. So I feel very comfortable telling you we think there'll be incremental profit coming out of opening those theaters based on the way that we're looking at them, but what they do to PSAs is a harder one to predict.

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Eric Owen Handler, MKM Partners LLC, Research Division - MD, Sector Head & Senior Analyst [10]

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That's very helpful, Rich, and that's a good way to think about it. Then as a follow-up, in China, things have been very quiet seemingly with the government in terms of changes to policies about additional films coming in or changes in revenue share with studios and I'm just curious if -- what you're hearing on that end.

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [11]

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I think that's a fair observation, Eric. Remember that China lost the case at the WTO and the agreement on what the rates are now in the films was an interim step. The studios are negotiating going forward, for a result which would likely be much more favorable than it is today. But I think you hit it on the head, it's going slow and there's not much we can do about it.

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Operator [12]

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Our next question comes from Steve Frankel with Dougherty.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [13]

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Let's go back to that notion of looking at JVs a little more carefully. As you have these discussions with customers, are you able to move them from a JV to a hybrid or an STL? Or is this basically meaning that the customer, in some cases, is walking away from that potential location?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [14]

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Let me be clear. There's not one customer who's walked away from one commitment in our backlog. Period. But I think it's -- the discussions are probably more financial than anything else and they're along the lines you're saying. So you want to keep the location, maybe put up a little more capital and maybe do hybrid, maybe do an STL. We don't have to do a lot of these locations. So there -- many of them are in a TBD category. So I think we're trying to work it out in a way -- again, these aren't one-offs, Steve, right? I mean, these are people we're in business with especially in the JV area. And I think we both try and work it out in a way that will be advantageous to both of us.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [15]

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Okay. And are those same kind of discussions happening in other parts of the world or is this more China -- specific China issue today because of the [technology]?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [16]

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I'd say a specific China issue. I want to remind you again that the vast majority of our JVs in China are profitable. It's only a small percentage that aren't. But we're just trying to avoid going into situations where -- with our capital where it would be a very small margin of error. But no, those aren't -- unless they're one-offs in the rest of the world. There's nothing more systemic.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [17]

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Okay. And then, I'm very impressed by these tactical changes in China and the impact they've had early on. Are there any lessons learned there that you can apply to other markets in the world?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [18]

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I don't think so, other than to always keep your eyes open, Steve. Because you look -- remember, the PSAs in 2015 in China were 1.3 million a screen. And I think the changes happened extremely quickly, and I think the declines and -- there are a couple of reasons for that, as you know. They had to deal with the pace of the build-out a conventional cinema. It had to do with ticket subsidies going on in China, with a lot of things. So those trends aren't really relevant in any other markets, but if there is a learning, I think it's, "Don't rest on your laurels and be flexible" and I'd say the same thing about the U.S. Remember when 3D was the magic bullet for a short period of time, but you can't really change strategy too quickly because trends aren't one movie and you don't know whether it's content, or you don't know whether it's market dynamic. But I think we'll continue to be not arrogant about it and make the changes we need to, to adapt as the marketplace changes.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [19]

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And I want to slip in one last quick one. So instead of talking about premium VOD, let's talk about MoviePass and given how well you've been doing this quarter, it looks like that isn't having an impact on the business, but is that something that you're looking at as that business ramps up?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [20]

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So I would agree with you, Steve. As a matter of fact, since MoviePass doesn't take IMAX, one would expect our indexing to not be as high as it is, right, if MoviePass was having a big impact, but apparently it isn't on our box office and you can see that. Yes, we've taken a look at it. The same non-arrogance we want to apply to all markets will apply to MoviePass if the dynamic changes and it's to our benefit we'll look at it, but I don't think right now it works for either the movie industry or for IMAX.

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Operator [21]

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(Operator Instructions) And our next question comes from Michael Ng with Goldman Sachs.

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Michael Ng, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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Given your comments about refocusing on the core and reducing spend on some of the noncore businesses in R&D as well as improving operating leverage. Can you talk about whether you expect margin expansion in 2018 and beyond? And then, how are you balancing core business growth with investing in the future with new business initiatives?

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [23]

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Sure, it's Patrick, Michael. The way we're thinking about 2018, very much focus on the core but that includes making sure that we're investing in building the core and so expanding the network. And also, we'll be spending more money on marketing this year than we did last year. And it will be back to a level that's more consistent than what we've done historically, but that's a meaningful bump from what we did last year. And it's part of our overall effort to really redefine IMAX in the eyes of our customers. And so I think we're going to take a bunch of the savings from the new businesses and reinvest that in the business. And we'd expect, over time, to get real benefits from that. What was the second part of your question?

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Michael Ng, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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It was about how you're thinking about balancing the core business with investing in the future with new business initiatives. It seems like IMAX is pulling back on some of the things that they've tried in the past like VR and content ownership.

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [25]

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Well, VR -- for this year, VR is still very much in the pilot phase and so we've got 7 centers that are open, and we're now at a point where we're starting to experiment with different things, working with our partners. You're seeing if there are things that can increase revenue throughput. So I think that one's very much still an open question. We're not expanding it. We're not going to do more this year but we will continue to operate those 7 centers. Home is the other area, where we've been pretty clear that on the home theater business, we're looking to raise outside capital and that's still an ongoing effort. We've still got a home premier business that we're looking at. So I think those are still questions that we want to give them a little bit more time. What we're not doing in 2018 is adding something else to the mix. We're not adding another Inhumans or some other new initiative. We think it makes more sense to really focus on the core. And we've got this wonderful, beautiful core business that continues to grow, 145 additional theaters this year. And so we think pressing our advantage in the core makes a lot more sense.

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Michael Ng, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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And it seems like there's been a little bit of a change in tone in the preference for the recurring revenue streams associated with JRSA screens versus sales type. Could you talk a little bit about IMAX's preference and the optimal mix of sales type in JRSA screens? And just as a quick follow-up, could you comment on the sales installs in the quarter? I came in a little bit late. I was just wondering if there was anything unusual?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [27]

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I'll answer the first part. I don't really think there's been a change in preference, with an asterisk. So in general, we always would prefer to do a revenue share if we think it's a really great location with a great partner in a good territory with not a lot of risk. And I don't think we've changed the way we look at that. The asterisk is, in China in particular, where the climate change in terms of the shift to more local content and the building in the industry. I think we're just going to look at it through maybe sharper vision and sharper glasses. So I think philosophically, we feel the same way, but where the market's changed around us, I think maybe that is going to cause us to look at it a little bit differently. Patrick, do you want to talk about the installs?

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [28]

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No, it's just timing. There was no -- nothing out of the ordinary in terms of the fourth quarter on the sales installs. It continues to go pretty much in large with -- in line with what we'd expected.

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Operator [29]

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Our next question comes from Jim Goss with Barrington Research.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [30]

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A couple of them. One, regarding the focus on 2D rather than 3D. Since there isn't a price motivating factor to the consumers, I'm sort of curious why you think -- to what do you attribute that shift in preference?

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Greg Adam Foster, IMAX Corporation - Senior EVP, Director and CEO of IMAX Entertainment [31]

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This is Greg, Jim. It's a consistent trend. When 3D happened, we said at the time that we didn't think it was a panacea and particularly when a movie was designed to be made in 3D and experienced in 3D we were going to support it, like we did with Avatar, et cetera. The Jungle Book with Jon Favreau a couple of years ago. The same is true today, where moviegoers are realizing that not every movie should be seen in 3D. And when there's a film that, again, demands to be seen in 3D, we'll play it in 3D. So it's not like we're not doing 3D. What we're doing are taking those titles that are not necessarily designed as 3D and providing them to moviegoers in 2D, because we think 3D can be a deterrent for some people. Some people just simply don't want to go to a movie in 3D. And so unless there's a specific reason for playing it in 3D, we're going to play it domestically in 2D.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [32]

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Okay. And separately, to the extent that the IMAX experience in the latest quarter separated from the rest of the industry in a good way, but it doesn't always work out in a good way. And I'm wondering about the screen flexibility issue, especially in the United States. Over recent years you've found a way to split the screens daytime and nighttime or -- and rearrange to only 1 week or 2 weeks instead of more for almost all the films. Are you getting a much better sense of control over this issue in partnership with studios than you used to? And what would you say about that sort of trend?

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Greg Adam Foster, IMAX Corporation - Senior EVP, Director and CEO of IMAX Entertainment [33]

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So certainly, screen sharing has been more accepted internationally than domestically. But at the same time, domestically we've had ample examples of when we opened a movie and for whatever reason it didn't work, where our studio partners have been open-minded to us switching the commitment that we made. They don't want the exhibition business, the IMAX screens, particularly, their premium ones to underperform. That doesn't help anyone. So if there's a reason that something's not working and the screens are empty, in most cases, they're going to be flexible and agree to some sort of screen sharing. They're not going to take the movie and say, "Don't worry, you don't have to play it anymore," and we understand that, because they have a big commitment to that film. But in the spirit of partnership, we're finding that there's a rhythm to sort of what goes around comes around and if one thing doesn't work for one company, they'll have a movie 6 months from now that's working so much better than anyone expected and they'll end up getting a bigger share of our 1-screen auditorium network. So it's a fluid process, but we are finding that there's more flexibility going forward.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [34]

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Okay. And one last thing. Rich, you have -- you were somewhat wary of India a number of years ago, but in recent years, it seems like you've had a bit of a change of heart. I wonder if you can talk about that conversion process?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [35]

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Well, I mean, first of all, Jim, I'm always wary of India from a financial risk point of view and all of these deals have been sales-type leases, so we're not investing our capital in India. I think what's really changed is we've gotten traction and our box office and our open theaters has been very good. We've also gotten multiple partners there. So I think when we had one partner, they were going to do it in just their time only, but I think now we've established a dynamic where -- which we've seen in other areas, which is a reference theater that generates high box office and multiple players and consumers who want it. And I think that's all interacting where we've still got a bunch of other things going on in India. I think that could come on as a pretty good market for us.

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Operator [36]

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We move now to Mike Hickey with The Benchmark Company.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [37]

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I guess the first one, just back on your installation guidance, I think a little bit lighter than we were looking for. Internally, it looks like your backlog is kind of flat maybe up 1 theater from '16 ending period, which is sort of curious. But obviously, signings in the current year, I think, are also part of your installation guidance so does this sort of suggest that we might see a continued deceleration in your signings in '18?

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [38]

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So first of all, the value of the backlog is up $50 million year-over-year, even though the number is similar. So that suggests people are signing STLs and deals with the minimums, things like that. Second of all, I think the signings were 177 theaters, which is a phenomenal year. You don't -- signings you don't judge on a quarter because in 1 quarter we had over 100. It doesn't mean we're going to have 400 for the year. These are long-lead kinds of things. No, I don't think signings have slowed at all. I think we're feeling very good about the level of deal activity out there. I mean, we announced, in the last 2 months, a 5-theater deal in Ecuador. Last week we announced a 5-theater deal in India. There's a lot going on. So no, I don't think there's been any slowing out of -- and in terms of the installation guidance, I think we're -- as I said in answer I think it was Eric's question, that especially in China we're just being a little more selective. But no, I don't see any slowing in our business.

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [39]

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That's the thing. 145 relative to the last 2 years looks like it's down relative to prior to that, it's up, when we were doing 110, 120. So we think that this is very consistent with the long-term build-out plan for the network.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [40]

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Okay. And the last question I guess or second-to last, the -- I think before you'd been experimenting domestically with putting recliners in your theaters. I'm not sure if I heard you mention in your prepared remarks today. I'm just sort of curious how the testing of those theaters with recliners has been and if you expand to continue to roll out recliners.

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [41]

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Mickey, Greg briefly mentioned it in the context of reseating. We've reseated about 70 of our theaters so far. We're not particularly focused on recliners as much as we are newer seats. And the reason is, recliners really reduce the capacity. And if you look at a weekend like the last 2 we've just had with Black Panther, and we're in the blockbuster business where you get a lot of your revenues over a limited number of films, you really don't want to decrease capacity for those peak periods. With that said, there is a little bit of a strategic initiative going on, where we're looking at our highest grossing theaters with our exhibition partners. And we're looking at continuing to reseat those in a timely and prudent fashion. And I think we'll still continue to do that.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [42]

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And last question. Obviously, you're pulling back in some monies related to new business ventures, [especially] to reflect content this year, VR sort of holding steady. But how do you think about, I guess, your capital allocation strategy? Overall, I think you noted that IMAX China has (inaudible) dividend but I'm curious how you think about your strategy.

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Patrick S. McClymont, IMAX Corporation - CFO and EVP [43]

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Sure. It's Patrick. So it's an ongoing discussion. We actually think that with the reduction in investment in new business this year, that, that'll have a pretty meaningful influence on free cash flow for the year. And so consistent with how we've thought about it in the past, when we have excess capital, returning that shareholders via stock buybacks typically makes the most sense. Last year, we renewed our authorization. We've got a $200 million authorization. And sort of when we see opportunities, that's probably what we'll do in terms of returning capital.

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Operator [44]

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That concludes the Q&A portion of our call. I will now turn the call over to Rich Gelfond for any closing remarks.

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Richard Lewis Gelfond, IMAX Corporation - CEO and Director [45]

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Just from a very high level, we continue to see a lot of signings on a global basis. We have really broken out in a number of countries such as Japan and India. I think there are a number of new promising territories. We're opening a lot of theaters in Europe this year where we don't have reference theaters and the opening of Saudi Arabia. So I think in terms of momentum and new markets for us, particularly internationally, it looks quite positive. At the same time, the world has changed around us and rather than sticking our head in the ground and say, "Oops, the world changed," as a company, we went from 3D programming to more 2D programming. In China, we program more titles, we're spending more money on marketing and less money on new businesses. The second half, which we just reported, was significantly better than the regular exhibition industry, our cousins. And at the same time, 2018 has gotten off to a good start. So I'd say we're feeling much better about our business than we were a year ago. There's still things we could do to make it better but in general, I think the business is pretty good.

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Operator [46]

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Thank you. That does conclude today's presentation. We thank you for your participation.