IMAX Corporation (IMAX) Q3 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the IMAX Third Quarter 2017 Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Michael Mougias, Director, Investor Relations. Please, go ahead.

Thank you, Michelle. Good morning, and thank you for joining us on today's Third Quarter 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 and Head of Business Development. 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 third quarter release and the slide presentation accompanying today's call have been posted on the Investor Relations section of the website. At the conclusion of this call, our historical excel model and guidance information will be posted to the website as well. I would like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that may 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 or outcomes. During today's call, references may be made to certain non-GAAP financial measures, as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and the definition of these measures as well as reconciliations to adjusted net income, adjusted EPS and adjusted EBITDA as defined by our credit facility are contained in this morning's press release. With that, let me now turn the call over to Rich Gelfond.

Thanks, Mike, and good morning, everyone. Last quarter, moviegoers around the world demonstrated their appetite for seeing compelling content in IMAX. Hit titles such as Chris Nolan's Dunkirk, Spider-Man: Homecoming and It helped grow our global box office 17% to $219 million, our highest grossing third quarter ever. Our recent box office performance reinforces the strong IMAX consumer value proposition. On just 400 screens, IMAX represented a record 23% of Dunkirk's domestic box office. And this month, 16% of Blade Runner 2049's domestic box office. In fact, last month was the company's strongest grossing September ever, a meaningful achievement considering recent headlines surrounding the industry's lackluster summer box office. While industry sentiment may swing film to film, as a company, we focus on areas of our business that are both within our control and have implications beyond any one quarter's box office. On our last earnings call, we laid out several revenue and cost initiatives, aimed at delivering and improving financial performance. While we are still in the early stages of implementing these initiatives, we've already begun to see benefits. On the revenue side, we highlighted several strategies aimed at better monetizing our theaters. This included efforts such as programming more 2D films rather than 3D; playing multiple films in the same IMAX theater; reseating more theaters; and increasing the number of films that use proprietary IMAX DNA, such as aspect ratio or IMAX cameras. We also focused on driving revenue and further differentiating IMAX to a range of integrated, holistic marketing initiatives. To that end, we recently hired a new CMO, JL Pomeroy, who's leading our branding efforts, leaning into the power of the IMAX brand and building deeper relationships with IMAX's fans. We will be taking a wider and more disciplined approach to maximizing our marketing spend with it focused on the highest areas of return for the business. Greg and Patrick will get into the specifics on these initiatives, however, I'd like to briefly highlight some areas where we've already seen tangible results. On the revenue side, we announced our intent to show more films in 2D domestically. In the third quarter, 2 of our most successful films, Dunkirk and It, were shown exclusively in 2D. More recently, Blade Runner 2049 was shown in IMAX 2D, while we had the option to show it in 3D, but because of strategy, chose to show it in 2D, and we over indexed on that film as well. Considering our box office on these titles and domestic consumers' preference for 2D, we intend to continue to emphasize 2D versions of films in our domestic film slate. With that said, we will take an opportunistic approach to which markets play 2D or 3D versions, given different consumer preferences globally. We also announced our commitment to play multiple titles on the same screens more often. This enables us to optimize our programming schedule and facilitates greater flexibility for various segments of moviegoers. And certain titles may perform better or worse in different cities at various times of the day or as word of mouth begins to influence attendance. The benefits of this strategy recently showcased in China. During the recent October holiday, we chose to DMR 2 local language titles: The Foreigner and Never Say Die. We began by splitting the screens evenly, however, as buzz for Never Say Die picked up, that became the stronger title, and thus we pivoted and programmed with more showings of that film. We believe these changes to our programming strategy could ultimately have a meaningful impact to our business over time. We intend to continue to implement this screen-sharing strategy going forward, primarily in international markets and, specifically, during bigger box office weekends and weekends where 2 titles will share the bulk of the box office. Another important focus of our recent efforts is cost. Patrick will highlight the recent results in more detail, but, as you know, in June of this year, we announced a cost-reduction initiative, which was designed to streamline our business and remove nonessential cost from the company. In light of this initiative, our OpEx for the third quarter came in 9% lower than last year. Moreover, our full year 2017 OpEx guidance remained significantly lower than originally anticipated. While we are not yet in a position to provide formal 2018 guidance, we're keenly focused on maintaining a more modest cost structure going forward. While we are still in the early innings of these initiatives, we believe the combination of recent revenue improvements, coupled with a greater focus on cost control should increase our value proposition and enable more revenue to flow to the bottom line. Now I will discuss our core business performance. While we continue to look for ways to optimize our existing network and reduce cost, the company's primary focus remains profitability growth, growing our global footprint of theaters. Our network enables us to capture more box office and acts as a valuable distribution platform for content globally. During the most recent quarter, we signed agreements for 17 new theaters, bringing year-to-date signings to 151. Our continued signings momentum is encouraging for a couple of reasons: First, it demonstrates our partners' continued demand for IMAX theaters. In fact, almost 90% of our signings this year have come from existing IMAX partners. Second, it provides us with added transparency into our future installation schedule, which we believe is the primary component of future earnings growth. On that front, we installed 40 new screens last quarter, resulting in a global network that spans 1,200 commercial screens with an additional 545 screens in backlog. Of that backlog, over 350 screens are in China, a market we continue to view as a sizable long-term growth opportunity. And while several titles fell short of our expectations this year, seeing films like Wolf Warrior II achieve over $800 million in total box office in China and Never Say Die $300 million is encouraging, as it demonstrates the power of the Chinese market for the right film. While there are several factors influencing box office in China this year, it is worth highlighting recent ticket price trends. Over the past couple of years, both IMAX and the industry have expanded into cities producing lower ticket prices than their big city counterparts. This is a natural dynamic we faced in other markets, notably the U.S. It is important to recognize that many of our theaters require no upfront IMAX capital, they are almost entirely incremental to our business. As for the full JV theaters, which do require upfront capital, we continue to take a disciplined approach to where we agree to install these screens. It is worth noting that we're still generating attractive returns on theaters that may be producing lower than average box office. For example, a full JV theater in China generating box office of $600,000 per year, well below our current average is, still produces returns on investment of around 20%. Moving onto the new business front, we have a couple of developments. Last week, we had a soft opening of our third pilot VR Center, which is located in Shanghai with our exhibitor partner, JinYi. We also intend on opening our Toronto location at Scotiabank this week. We look forward to updating you when we have more complete picture on the potential performance of these locations. We expect to end the year with approximately 7 pilot VR locations. Keep in mind, our virtual reality initiative is still in a pilot phase, and we will continue to test markets, content, partners and initiatives before making any firm decisions on our long-term VR strategy. As we open additional venues and accumulate more data, we'll update everyone on our intent for the business long term. On the content side, last month, we launched Marvel's Inhumans in theaters worldwide. From a commercial standpoint, the opportunity was attractive to us for 2 reasons: Theatrical revenue and licensing revenue. On the first point, the theatrical release underperformed our expectations. We believe one of the biggest contributors to the less-than-forecast theatrical performance was a misalignment of customer expectations, which were for a production -- customers expected a production akin to a mega budget blockbuster movie rather than pilots for a television show. Moreover, the fact that this was Marvel IP set the bar at a level you wouldn't see from other pieces of content or IP because of the reputation and the high production value of Marvel movies. Nonetheless, the theatrical component is a relatively small piece of the overall economic potential of the series, which brings you to second and bigger revenue contributor, television licensing. The show aired on ABC on September 29 and appeared to perform consistent with network expectations. We'll see if ABC picks up this series for a second season, which will determine the long-term returns of the project. Outside of the revenue components, we viewed this initiative as having several potential strategic benefits as well. It helped fill a shoulder period in our film slate, in fact, a period of time when there was virtually nothing released. It brought alternative content to our exhibitor partners, and we believe it marked an innovative way to launch television content. Going forward, we continue to view alternative content as a potentially attractive opportunity for the company, specifically during slower periods at the box office. Regardless, we will be more conservative when considering whether to invest our own capital and, if so, to what extent. On one side of the spectrum, you have releases like Game of Thrones, which released in IMAX in January 2015 and required no capital investment from the company and in the other end, Marvel's The Inhumans, which came with a meaningful IMAX investment. Going forward, we intend to take a more conservative approach consistent with the Game of Thrones approach to capital investments in content. All in all, we were very encouraged by the robust box office results achieved in the third quarter. Our focus as a company remains on areas of our business that are both within our control and have implications beyond any one film. We continue to believe our global portfolio of films combined with the growing network, improvements to our programming strategy and a greater focus on cost control, will have a meaningful impact to the company's bottom line over time. With that, I'll pass the call over to Greg.

Thanks, Rich, and good morning, everyone. We generated global box office of $219 million in the third quarter, which includes roughly $3.5 million from Inhumans. $80 million came from the domestic market, $60 million from China and $79 million from the other international markets. It's also worth highlighting that our domestic box office was up 17% over last year, despite the overall industry box office falling 14%. Leading the charge in the third quarter was Chris Nolan's Dunkirk, which generated over $82 million in global box office to date. In fact, IMAX represented over 15% of the film's global take, an impressive feat considering our screens represent a fraction of the worldwide screen count. There was also thrilling results with the box office success of It. The film was a late entry into IMAX's network, but still generated roughly $20 million on IMAX screens, and the movie, in general, went on to become the best grossing September release ever. A derivative benefit of It for the industry is that it could become a new release window for future releases, similar to what Gravity did for October and Hunger Games did for March. We're always looking for those big titles in times when big movies tend to not come out, and It accomplished that in September. I would also like to highlight our international ex China business for a moment. Our network internationally continues to serve as a growth driver for our overall box office. Last quarter, this segment of our network represented over 36% of our total box, a notable increase compared to prior quarters. This growth underpins the significance of our company's growing international presence. Our growth in markets like Western Europe, India and Japan were key to the recent box office quarters' outperformance, and for several reasons, I'd like to highlight. First, our theaters in Japan continue to produce attractive box office, in some cases in excess of $2 million per year per screen. Second, India, which has historically been less receptive to Western titles, more focused on Indian and Bollywood titles, has started to embrace more North American content. This is also important, as consumers tend to be more willing to pay for premium formats for foreign films. And third, several titles resonated really well in the international markets. For instance, Dunkirk continued to outperform international expectations, opening in Japan in September and doing $120-plus thousand per screen in that market. We also saw robust performance from Planet of the Apes, which excelled in a variety of international markets as well, including markets like Korea. Turning to some of our revenue initiatives, as Rich noted, on our second quarter earnings call, I articulated several strategies aimed at increasing the revenue generating power of our business. While it's still very early, I'd like to share a brief update on that front. First, we've begun programming more 2D films domestically and have been encouraged by the initial results. It's no coincidence that recent successes such as Dunkirk, It and Blade Runner 2049 were all shown in IMAX 2D domestically. Adding more 2D versions of films is important for a couple of reasons: First, consumers domestically continue to demonstrate a preference for 2D versions. Second, consumers who shy away from seeing 3D films are more likely to purchase a ticket for a PLT in 2D. However, if IMAX is showing the film in 2D, the consumer doesn't have to decide between IMAX and 2D. He or she can decide between IMAX or non-IMAX. For this reason, we continue to believe this strategy will facilitate stronger performance in domestic screens, and we will continue to seek out additional 2D-only versions for certain titles. In fact, DC Comics' Justice League will be presented exclusively in IMAX 2D domestically next month. Moving on, another initiative we've been implementing across the network is shorter release windows. Given the evolving cinema dynamics, where you have bigger opening weekends and smaller second weeks, it's in our best interest to keep fresh content on screen. While there are still pillar titles like anything Chris Nolan does or Star Wars or Jurassic World that warrant longer runs, most films will only be shown in IMAX for one or two weeks. In fact, there'll be roughly 24 full domestic runs in 2017 for IMAX, of which 20 will be for 2 weeks or less. And within that bucket of 20 films, roughly 12 will be for just one week. Another adjustment we've made to our programming strategy is specific to China. Given the difficult nature of predicting box office for local language titles, we're now DMRing multiple Chinese films during bigger weekends and holidays. So rather than sending our exhibitor partners one film during big weekends, we'll often send them two or three and let them program our screens based on presales and overall traction and give them the flexibility to pivot based on box office results. In fact, presales in China represent a disproportionate 70% of opening weekend results. So exhibitors often know where the box office is headed a few days in advance and can take advantage of that with a multiple-title programming strategy. Another initiative we spoke about was reseating. We've reseated roughly 60 screens to date and continue to work with our exhibitor partners to reseat additional screens. It's still a bit early to draw any conclusions, however, the initial results are encouraging. And lastly, we continue to work with big name directors to add IMAX DNA to more blockbuster titles. The performance of Dunkirk is a clear indication of why this is so valuable to IMAX and our partners. Our next film to leverage the IMAX cameras is Star Wars: The Last Jedi which, based on presales, continues to show the strong connection between Star Wars and the IMAX brand. Another exciting title with IMAX DNA is the highly anticipated Avengers: Infinity Wars from the Russo Brothers, which comes out next May and was shot entirely with our digital cameras. All in all, we continue to work closely with many of the biggest directors and will announce additional titles in 2018 that will contain IMAX's exclusive DNA, so please stay tuned to this important initiative. And before I turn it over to Patrick, I'd like to mention that we have a really exciting slate ahead of us. Next month, we launch Marvel Studios' Thor: Ragnarok, which is tracking quite well and features the IMAX expanded aspect ratio. Early results over the last 24 hours have also been encouraging. Following that, DC's Justice League will take over the IMAX network, this -- following this spring's successful run of Wonder Woman, who will be a key character in the film. And again, that will be exclusively in IMAX 2D domestically. And closing out the year is Star Wars: The Last Jedi. While you can see the complete list of our announced films in the 10-Q filing, some highlights for '18 include: Marvel's Black Panther; the Steven Spielberg directed Ready Player One; Avengers: Infinity Wars, I just mentioned; Solo: A Star Wars Story; and Jurassic World: Fallen Kingdom, to name just some of the highly anticipated titles in the first half of the year. Needless to say, with an exciting slate and encouraging results on our revenue initiatives, we look forward to the months ahead. And with that, I will turn the call over to Patrick.

Thank you, Greg, and good morning, everyone. As Rich mentioned, a focus of our last earnings call was the cost-reduction initiative, which we announced in June. We implemented this initiative with the goal of streamlining the business, thereby facilitating more efficient growth and driving operating leverage. As discussed, we examined our entire cost structure, paying close attention to SG&A, R&D and cost of sales. I am pleased to report that some of the benefits of this exercise are reflected in our third quarter results. A significant focus of our cost savings initiative was on SG&A. Excluding stock-based compensation, SG&A came in at $20.3 million in the quarter, down 17% from the prior year. We also looked at streamlining our DMR costs. During the quarter, our DMR expense came in 14% lower than the prior year period. While the breadth and scope of films in any quarter along with marketing expenses and other miscellaneous costs influenced this line, reducing cost and complexity of our DMR process remains an ongoing focus of the company. Turning to network growth. As Rich outlined, our signings and installation momentum continued in the third quarter. We signed 17 new systems in the third quarter, 8 of which were in China. On the installations front, we installed 49 new theater systems and upgraded 2 systems. This compares to our Q3 guidance of 42 systems. The better-than-expected installations, 4 of which were sales type are the result of several systems being pulled forward from Q4, as exhibitor partners positioned themselves to capitalize on what looks to be a strong slate in November and December. Even though some theater systems installed ahead of schedule, I am pleased to note that we now expect to install approximately 160 to 165 new IMAX theater systems in 2017 versus our previous guidance of 160. Slide 5 of our earnings presentation breaks out our installations in more detail. Next, I would like to go through our overall financial performance for the quarter, starting with our consolidated results and then looking at our core and new business results. Please note our GAAP figures including a $3 million restructuring charge from our cost-reduction initiative, which we guided to on the Q2 call. During the quarter, we saw a GAAP net loss of $850,000, resulting in a GAAP net loss of $0.01 per share. On an adjusted basis, which adds back the exit costs, restructuring charge and stock-based compensation expenses, net income attributable to common shareholders was $5.2 million, resulting in an adjusted net earnings of $0.08 per share. Keep in mind, our adjusted earnings for the quarter reflects the $11 million charge from our participation in Marvel's Inhumans. Net of tax, this charge reduced EPS by approximately $0.13 in the quarter. Adjusted EBITDA for the quarter came in at $34.6 million. Adjusted EBITDA margin of 39.6% was up 780 basis points versus last year, primarily the result of a stronger box office, lower DMR costs and reduced SG&A expenses. Please note our adjusted EBITDA calculation for the quarter adds back the $11.1 million impairment charge from our participation in Inhumans. This add back was allowed by our credit facility's EBITDA calculation. However, the same charge was not added back to our adjusted earnings calculation. Turning to our core business. Network business revenue, which consists of revenue generated from sharing in box office, was $42.6 million in the third quarter and generated margins of 67% compared to $36.5 million and a 61.8% gross margin in the year ago period. The improved results were primarily driven by stronger box office performance year-over-year, coupled with the 14% reduction in DMR expenses. Also note, our take rate, which is our network business revenue divided by total box office, came in at roughly 19.5% in the quarter. This figure was elevated by the outperformance of our domestic and international ex China screens on films such as Dunkirk and It. Theater business revenue, which consists of our system sales and maintenance business, was $43.5 million in the quarter and generated a gross margin of 53.5%. This compares to revenue of $43.2 million and a gross margin of 49.4% in Q3 of 2016. The higher margin in our theater business segment was primarily driven from the installation of 4 additional systems under sales-type arrangements versus the prior year and 4 fewer hybrid installations. Total core business revenue for the quarter came in at $89.9 million, resulting in gross profit of $51.8 million or 57.6% of revenues, a margin increase of over 500 basis points versus the third quarter of 2016. Total core OpEx, which includes R&D and SG&A, excluding stock-based compensation, was down $3.4 million or 12.5% compared to last year. Again this reflects the initial impact of our June 2017 cost-reduction efforts. It is also worth pointing out our stock-based compensation expense is notably lower compared to last year. The heightened levels witnessed last year related to the timing of option grants resulting from Rich's contract renewal. We believe the levels seen this year are a more reasonable indication of future stock-based compensation expense. Our R&D expense of $4.6 million was essentially flat versus the prior year. Major projects during the quarter included our development of commercial laser and Google VR camera. Overall, we achieved solid margin expansion, especially across our film business, and that is despite per screen averages coming in lower than that of 2016. This growth underpins the incremental nature of our theater installations and the attractive returns our screens can generate, especially under a more modest cost structure. While we continue to explore strategies to increase the revenue generating power of our existing network, our priority as an organization remains growing our network. In our opinion, analyzing future network growth through the lens of the associated return on investment is more meaningful than focusing on overall network per screen averages, as we can continue to drive profitability and free cash flow generation, even in the face of lower PSAs, as evidenced in the most recent third quarter. Turning to new business, our performance in this segment was largely driven by the launch of Marvel's Inhumans television series. With regard to the series, we derived revenue from both the theatrical release and the television series, which consisted of 1 episode last quarter. Total Inhumans revenue last quarter was $8.7 million, which resulted in a loss of $11.1 million as expenses, which includes marketing, and amortization came in at $19.8 million in the quarter. On a pretax basis, the total new business came in at a loss of $14.5 million, largely the result of Inhumans. As Rich mentioned, the theatrical release of Inhumans underperformed our initial expectations. However, we do believe there's an opportunity to complement our slate with alternative content. Going forward, we will take a more modest approach with regards to our capital investment. Total operating expenses from new initiatives were $2.3 million. Slide 6 will provide a more detailed look at the financials I just highlighted, broken by core and new business. Turning to our financial outlook for the fourth quarter and full year 2017. We now anticipate DMR cost of sales will come in between $38 million and $40 million for full year 2017, which compares to our original guidance of $40 million to $41 million. On a restructuring front, we have recognized approximately $14 million of restructuring charges to date and continue to anticipate an additional $1 million charge in Q4 of 2017 and, finally, about $500,000 in the first half of 2018. With regards to OpEx, on our Q2 call, we guided to mid-single-digit growth on a consolidated basis and low single-digit growth on the core business. We now anticipate full year consolidated OpEx to be approximately flat versus last year, with core OpEx down low single digits. With regard to stock-based compensation, we continue to expect a full year 2017 expense of $23 million, down from our original guidance of $26 million, partially a reflection of the restructuring initiative. Moving on to installations. As I mentioned earlier, we now expect to install approximately 160 to 165 new IMAX theater systems in 2017. In the fourth quarter, we expect to install 64 to 69 new theaters, of which we anticipate 25 sales type, 12 hybrid JVs and 27 to 32 full JVs. Turning to new business guidance. As I recently highlighted at one of our conference presentations, we now anticipate our full year new business investment to come in at the high end of our previous range of a $16 million to $18 million cost on an after-tax basis, largely due to the Inhumans results. We now expect our full year 2017 tax rate to fall in the range of 20%, slightly above the 18% we guided to last quarter, however, below the original guidance provided on our Q4 2016 call. At the conclusion of this call, we will post a full breakdown of this guidance on our website broken out by core and new initiatives. I would also like to remind you, we posted an updated historical excel model broken out by core and new business on our IR website, which is available for download at investors.imax.com. In closing, the third quarter was encouraging on a number of fronts. Box office was strong, we sustained demand for IMAX systems worldwide, and we began to see tangible results from our revenue and cost initiatives. With that, I'll turn the call over to the operator.

[Operator Instructions] Our first question comes from Michael Ng of Goldman Sachs.

Great. I just have a few. My first one is on the DMR rate. So DMR revenue over the box office, it was up pretty substantially this quarter. I was just wondering if you could help explain what drove the strength there. Was it mostly the local language or mix? And if that was the case, could you help us understand how much local language is up year-on-year?

Sure, Michael. It's Patrick. A lot of it is mix of films, and we had a very strong performance domestically and international ex China. As you know, our DMR rate in China is lower than elsewhere in the world. And so in the quarter, the very strong performance of Dunkirk and how well that did domestically and international ex China really helped a lot from a DMR standpoint.

Great. And Rich, thank you for the information about the China PSA returns, even in the case of a declining PSA. I was just wondering, you mentioned that a $600,000 PSA still produces an ROI of 20%. Could you help us understand a little bit about what the upside bound of that will be? And also how are you thinking about international PSAs over the longer term? Should they be flat-to-down or up? Just, if you could help frame that?

Sure. So first in terms of the color around the returns. We've been doing a lot of analysis because as we've discussed on these calls and otherwise, in some of the third and fourth, fifth-tier cities, obviously, they have smaller PSAs. And what they do is, they bring down the average. So we face the question, was it worth doing a lower PSA, it brings down the overall average. So it makes it look like your market is doing less well. But in fact, if you go into the details, the way, way vast majority of our theaters, in general, and our JVs in China are profitable. The number of theaters that are not profitable is just a very, very small percentage of the market. So we felt that analysis would help us understand and our investors understand that even though opening some of these smaller theaters might lower the overall average number, they still will contribute to our earnings and are a good thing for the company. And I think on future calls, we'll give you more detail around that, Michael, so you could understand the same analysis we have. In terms of international PSAs, it's a really hard one to say because there's a couple of factors: One is, obviously, the performance of the films, but another one is really where you're opening new theaters and at what pace? So when you open them like, for example, Japan, has been an incredible market for us, and some of those theaters are either doing $2 million or approaching that. So that brings up your PSA. But when you open theaters in countries like India or maybe in Vietnam, some South American countries, they'll lower it. So it's a combination of those factors, and it's too difficult to really calculate. On your upside down question, I really didn't understand what you're asking.

I was just wondering, when you have a theater that has really strong PSAs, what does the ROI look like for those?

Oh, then, you can look at numbers on an IRR basis that are 40-plus percent. I want to clarify one thing. When Rich said that almost all the theaters are profitable, he's focused on the right metric, which means returns to us. On a contribution basis, 100% of the theaters are profitable. But what we've done is we've looked at each theater and said, if you also include a capital charge for those theaters where we get capital investments, that's the metric that Rich was focused on, that almost all of them produced positive economic value.

Great. And just the last one for me. I think this was the first quarter on record where there were no JRSA theater signings. I was just wondering is that indicative of a preference for theaters to do more sales type? If you could provide some color on that, that would be helpful.

Michael, as we've said in great quarters and mediocre quarters, you can't analyze signings on a quarter-by-quarter basis. We've already beaten our budget for the year in signings. The activity was so great in prior quarters. And I think it was just the coincidence of what got signed this quarter versus other quarters.

The next question comes from Eric Handler of MKM Partners.

So Rich, I appreciate the color on China that you gave. I'm just curious since you've had so many openings in China in the last couple of years and you talked about a cure period that goes on from when they first open until they're fully mature. What are you seeing from those theaters and understanding that there's volatility on a quarter-to-quarter basis, but are you starting to see improved results from those theaters? And then secondly, as you look at your signings in the quarter as well as negotiations that are going on, outside of China, where are you seeing the most activity, in what countries?

Sure. On your first one, in terms of the aging effect on the theaters, we've done a fair amount of analysis looking at vintages of theaters and what happens over time. And that's where we conclude, that it takes about 18 to 24 months for a theater to reach its potential. In terms of what we're seeing this year in specific theaters, I mean, it's way too early to say, especially in light of the fact that the box office, sort of, had record weaknesses in some months earlier this year. So I think the trend line holds, but I can't comment on the specific vintage and how it's holding up. In terms of signings, we're seeing continued strong activity in Japan, lots of backlog, and that's no surprise because the theaters there are doing so well. You mentioned it, but we're still seeing a lot of momentum in China. India has been sort of a pleasant surprise for us. I just can't recall the exact number, but not only have we signed a lot in the last 12 months compared to historical, but there's still a lot of discussions and backlog going on there. Europe, we're hoping that our deal with Odeon where we're beginning to install in countries like Germany and Italy, where we don't have a lot of backlog, will follow our historic pattern, which is we open theaters in new countries, the reference theaters perform and then when they perform, that leads to more signings in the territory. But those would probably be the biggest markets right now I see are.

Great. And then just one last question. In terms of your new business initiatives, as you sort of look forward over the next 12 months, it is safe to say most of that capital is going to go towards the VR facilities. And maybe you can give us an update on the 2 that are open, how they're performing? What are some of the positives and negatives that you're seeing from this business?

So the two that are open, their performance is fairly consistent with what we've reported before, which means on the revenue line, the Fairfax facility is continuing to do pretty well. Obviously, that's not modeled to operate as a stand-alone. So we analyze it really more on a revenue line. In terms of Kips Bay in New York, we haven't seen significant changes in revenues, and that's been a little bit more challenging. One of the things we're looking at is since we just brought in a new CMO and a new marketing department, we're looking at, kind of, different ways to market them, different ways to activate them and, in fact, in Fairfax, we're now putting in place a plan over the next 6 weeks. And again, Eric, just going back, I keep emphasizing on these calls the word pilot, and to me pilot means learning. So we're going to try different things to see what works and what doesn't work. So that includes a lot of new content, which is coming online in the next month, and we'll see what impact that has that will include, as I said, several new centers coming online, new approaches with different exhibition partners, and we'll report back. But there really haven't been marked changes from our last calls.

Our next question comes from Stan Meyers, Piper Jaffray.

Rich, maybe you can take a few minutes, sort of, more of a broader question, IMAX positioning, especially now with JL and Denny, kind of, focusing on the value proposition. I mean, clearly IMAX screens have outperformed on a number of films this summer. But we are continuing to see growth in competing PLFs and sort of accelerating pace of reseats. What steps are you taking to preserve the gap, sort of, between IMAX and the rest of the screens to justify the premium surcharge. And I have one more for Patrick.

I think -- Stan, very good question. I think that we'll be more proactive. So I think, in the past, a lot of our marketing was consistent with the films that we're going out. So a typical film will be launched in the city, I will say, see it in IMAX. And I think maybe that was more consistent with us believing everyone knew what IMAX was and what IMAX meant. And I think, we're going to retool in a way and, kind of, as part of our marketing, re-explain what our advantages are. So for existence, we've been -- this year is our 50th anniversary. I don't want to exaggerate, but probably the oldest PLF is 5 years old or something like that, and most even put up in the last year or 2. And over the last 50 years, we've learned a lot of things about film, about projection technology, about digital. We're not going to do it in a technical way, Stan. I think we just have to refresh and make sure people understand that there are amazing real differences and create an emotional sell as well as a technical sell. JL and I were watching some footage of dozens of astronauts talking about how going to an IMAX theater convinced them to become astronauts when they were kids. And JL looked at me and said, "wow, IMAX is a powerful enough medium to convince people to become astronauts." And I'm not saying that's the words we're going to use, in fact, they're not. But I think we have to reconvey that sense of swagger and that sense of place. And I don't think -- I'd try to be fair, but I don't -- haven't met too many kids who have seen a PLF and say, "wow, that convinced me." PLF is basically a large movie screen. IMAX is a lot more than that, and I think we really have to capture that and communicate that, and I think you're going to see us do that much more aggressively.

Okay. And then, Patrick, obviously, in June, you guys announced the cost-cutting initiative. The SG&A came down nicely. Maybe you can, kind of, discuss the cadence going forward. And also on DMR costs, you mentioned that's going to come down as well, but at the same time you guys are shifting strategy to increase the number of DMRed films going forward in China, even have more runs in U.S. Maybe, kind of, talk about those 2?

Sure. In terms of cadence, as we said, you've seen -- the initial phases and benefits showed up in Q3, there'll be more of that in Q4. And then -- and you see this in the restructuring charge, just a little bit of a tail that hits next year. But pretty much everything will be -- on a run-rate basis, by the time we get to the end of this year, we should be achieving sort of the full benefit. So all of next year and the cost guidance that we provide on our Q4 call will reflect the benefits of the restructuring and then, of course, other decisions that we're making now in terms of the budget for next year. So it's pretty much in the rearview mirror, and we're enjoying the benefits now. In terms of DMR costs, yes, we are going to do more films, and Greg talked about the strategy in China. Importantly, we focused a lot on the DMR process, trying to find efficiencies, trying to take out cost, and we've had some successes there, there's more work to be done. And then also, depending on the film, there's different levels of activity, both on our end and, importantly, from the creative side, and so that really drives some of those DMR costs. And when we're DMRing multiple versions of -- multiple local language films to have optionality in China, those typically are going to be on the low end in terms of what we're spending. But certainly, we're focused on it. We need to be careful that we don't let those costs continue to grow.

The next question comes from Alexia Quadrani of JPMorgan.

As you highlighted, your success in the quarter is particularly impressive, given the weak overall box office. And I guess, given that, do you think some of the standout performance of films like Dunkirk on IMAX will influence other studios approach to your business to maybe try to make more of these types of films that are really meant to be seen on these large formats? And then I have a follow-up.

I think we always talk about something called the Avatar effect, Alexia, which is when Avatar came along, it ushered in a new kind of film. And Greg and I have certainly discussed whether this's going to trigger an era of more IMAX films, and Greg will address on that in a second. But I think there's no doubt Dunkirk helped the quarter, but I think that would be a vast oversimplification. I mean, you know as Patrick just answered, I think what management can only control what it controls, and one of the things we can control is cost. And I think, we started to see the results of that. We were very fast and very aggressive in that way, in a way that I don't think anybody else in the business was. And I think that came across. The other thing is, I think, we provide experiences. And I know a lot of people like to look at us as an exhibitor because they don't want to dig deeper, but we're not. We're global, we're involved in making film, we're involved in adding DNA to film, we're involved in postproduction, we've large presences, I said global, but you look at the domestic box. If you look at the international box office, this quarter it almost beat the domestic box office. So Dunkirk was part of it. But when you dig deeper in IMAX, it's a different kind of business that has different correlations to box office. And remember, we do blockbusters. So as other forms of entertainment chip away at the non blockbuster business, I think people still want to get off there couch and go see Star Wars and go see IMAX and go see a lot of these kinds of movies. And I think we benefit from that, and Greg can talk specifically about the Dunkirk effect.

So I think, the Dunkirk effect starts and stops with someone like Chris Nolan. But that's ultimately a huge part of our business, is the relationships that we've build with some of the world's finest directors and not just domestically, but literally all around the world. That's something we continue to push and focus on with our DNA, our aspect ratios, our cameras, our proprietary sound system, is creating an experience that you literally can't get anywhere else expect in an IMAX theater. Also I can't overstate the, I don't think, coincidence of the 2D notion. I think that's really helped us. The feedback when we announced that we were making a shift domestically into being more 2D focused than we've been in the past, 100% of the comments that we received on social media directed to us were positive. And so I think that has something to do with it as well. But we're trying to separate ourselves, as Stan, kind of, -- as Rich noted -- asked a really good question, from the rest of the pack. And I think by focusing on filmmakers, focusing more on 2D and being more nimble when we need to be, that's part of the reason why this is all happening and the luck of the movie Gods who -- the average person would not have thought that Dunkirk would have become what it became were it not for the fact that Chris Nolan was the filmmaker behind it and Warner Bros. supports him so significantly. So there is a little bit of luck in the timing of it, too. But when something like that happens, we were in the position to pounce on it and, obviously, that boded well for the earnings for the quarter.

And just a quick follow-up. Regal earlier this week announced they're planning on doing some ticket pricing test probably early next year. I guess, what are your views on dynamic ticket pricing? Is there something that -- is it something you think can increase attendance or total box office for the -- in the industry, in general?

Clearly, it's worth the test. I mean, the industry has had its ups and downs. And to the extent people don't want to sit in the first row for the 10 a.m. show, and then you get people in excess capacity by lowering price, I think it's worth the test to see if it works. I personally think there are a lot of virtues to it. I don't think selling that 10 a.m. ticket in the front row is going to take away from the Saturday night opening weekend blockbuster business. So I think it's a good idea of Regal, and I hope it proves to create incremental business.

The next question comes from Steve Frankel of Dougherty.

So Greg, you talked a lot about going to shorter runs and screen sharing. What happens on the studio side with their pressure on you to put in marketing funds? Do those get scaled back with the shorter runs or spread across more films? What's that dynamic like?

It depends on the length of play that we've committed to. And when you look at, Steve, at the marketing support that we provide, it's not -- we're providing it as an investment in the success of the film in IMAX. So if the film has a 2-week window and we anticipate, I'm just being arbitrary, that it's going to do $20 million in global box office, we're going to make an investment based on that forecast. If it's a 3-week run and it's a Marvel title, and we think it's going do triple that, we make an investment in accordance with that expectation. So it's not an arbitrary amount, and it's also not just here's a check to do this. We're investing in the success of what we hope will be these titles in IMAX. Some of them have a higher investment, some of them have a smaller investment. So it's scaled, I guess, is the best way of putting it.

Okay, and then Rich, maybe an update on what's happening in Latin America. Has there been any uptick in activity there?

Not really, Steve. It's been pretty constant. As you know, some of the economies have more recently done better, such as Brazil. But I think the twin effects of the weaker currencies there and the tax regimes created slow growth over the recent period of time. As I say, the equity markets are up there, it's looking a little better, but we haven't really seen the flow through yet.

The next question comes from Eric Wold of B. Riley.

Couple of questions for Patrick first and, I guess, one for Greg. I guess, Patrick, on that quick modeling number, how many total films were there in the quarter that went into DMR cost?

It was -- it's 24.

And then, try to help me to understand terminology around Inhumans. In the press release, it kind of notes the $11 million as an investment in Inhumans but in the prepared remarks on the call, it kept being referred to as a charge. Is there a difference there? Was there anything written down on that investment that you still projected Inhumans? Or do you project that Inhumans would be profitable for IMAX, even if it's not picked up for subsequent seasons?

The way to think about it is, the project was released during the quarter. And we have to go through a process of looking at, assessing what the future revenues will be. And it's pretty straightforward, right? We knew the box office outcome because it had its run. We know most of the answer for the first season television economics, we know the domestic license, we know what ABC sold internationally. There's some estimates for things like, if there may be additional downstream sales. But we pretty much know what the revenue looks like. We definitely know what the cost looks like. And so you have to assess that. And we did take a charge in the quarter, the $11 million, to reflect the loss on the project for us. On a go-forward basis, assuming we got those estimates correct, there'll be no further impact. We will have revenue because the -- in the fourth quarter, the episodes are airing. So we're going to book the revenue associated with that, we'll book the international revenue. But we'll also be amortizing the remaining investment that's on our balance sheet, and those should just offset each other. So assuming we got the estimates correct, pretty much the full economic answer is reflected in Q3.

And so if it is picked up for a subsequent season and IMAX chooses not to invest in the subsequent season, so you dilute it down from the 40-ish percent economics and theoretically that subsequent season would generate new revenue? Is that anticipated in your analysis now? Or do you assume that it's not going to be picked up?

This is just the season 1 analysis. And so season 2 will be effectively a separate project. So if there is a season 2, our first decision is, are we going to invest in it further? Or as you just described, get diluted down. Either way, we'll have to make an assessment of what we think the revenues and the cost associated with that, and it'll be a similar exercise.

Okay. And then for Greg, as you think about the -- there is a lot of question on the general market in this call about the -- being more flexible in the program, maybe, kind of, dual programming and giving some of the theaters -- or [indiscernible] kind of a choice -- of based on early demand. I guess, one, if you kind of use 2016 and this year as a gauge, how many times each year do you anticipate that would become a choice for them, kind of, how many times did you do that? And then two, how does that discussion go with the studios if you're seeing exhibitors have a choice between maybe a Hollywood-imported film and a local language title and maybe they move more towards local language based on demand. Is that something that studios are fine with, are you going to commit a number of screens ahead of time?

So I'll answer the second question first. Because China Film ultimately decides when studio films get in, what we would do is, we would -- we will pick a local language film well in advance of knowing a date of a Hollywood title. And if a Hollywood title happens to be picked on a date that also has a local language film, then the exhibitor will be able to decide between the 2. With that said, and the impetus for, I think, a lot of this is that Tier 3 and 4 cities in China often feel differently about local language films than Tier 1 and 2 cities, just like Tier 1 and 2 cities feel differently about Hollywood films often than Tier 3 and 4. So having the flexibility at any given time of having a Hollywood movie and a local language movie is probably a big advantage. Now it's not for the big pillar titles that are global and everyone knows about, but that rarely happens. So I think having the flexibility will be really helpful, not only in terms of 2 titles but potentially one Hollywood, one local language. The second -- the first question, Eric, was, how many times a year do we think this is going to happen? And the benchmark will be the holiday periods. So Chinese New Year, for sure, where it is already happening, and we'll discuss what those titles are soon; the December period where the last three weeks of December tend to be only local language titles, Hollywood titles don't get in; October holiday that we just had; and then the blackout period theoretically, even though they don't call it that any longer, in July and into August. During those periods of times, you can expect to have multiple titles that exhibitors and then moviegoers will have to choose from.

Our last question comes from Darren Aftahi from Roth Capital Partners.

There's two, if I may. Just following up on the multi-film-screening strategy. I know it's early, is there any way you could quantitatively provide, kind of, the relative lift you've seen in locations or the network in general versus how that would have performed under your prior strategy. And then, I just want to clarify a comment Patrick made. So you back that $11 million Inhuman charge out of adjusted EBITDA, but you included it in non-GAAP net income. Is that correct?

Sure. I'll take both of those. On the first one, it's really just too early to tell. We did have an initial case study in China where the indications are successful, and it did result in an uplift, and that optionality really had value to it. But that's one case study. We need to have some more examples before we determine what the benefit could be. And then yes, we just -- in my comments, I was trying to be very clear. From a net income perspective, earning per share perspective, the write-down in Inhumans is included as one of the cost to get to net income and EPS. But we do add it back for EBITDA purposes consistent with our credit agreement. So we're just trying to make sure people understand how those two calculations work.

There are no further questions at this time.

So I would like to just conclude the call by thanking you again for joining us. Obviously, the third quarter was a terrific step out of, kind of, a very challenging time in the movie industry. Despite the general issues, we continue to think that the public seeks out out-of-home, experiential entertainment. You look at other areas like live theaters, you look at concerts, lots of people want to do those things. And we think we're very well positioned. We're going to spend our time in the next several months focused on things that we can control, including our value proposition, our marketing, focus things like seating, programming. And on the cost side, we think we've got a good insight into how to drive the profitability and the leverage of this network. And we hope to continue to deliver good results. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line, and have a great day.