IMAX Corporation
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Good day, and welcome to the IMAX Fourth Quarter and Full-Year 2017 Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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.

[Michael Mougias:]

Thank you, Rene. 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 your 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.

[Richard L. Gelfond:]

Thanks, Mike. During the second half last year, we made efforts to refine our global programming strategy, reduced our cost structure and reanalyzed 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 2017 and into 2018. 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 the IMAX box office in its four-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 we'll open the film shortly. In China, during the recent Chinese New Year holiday, we grew box office 60% over the four-day opening weekend compared to the prior year, and even more encouraging over the seven-day holiday period, our box office grew to $27 million, up 74%. Interestingly, the performance of the three films vary day-to-day. Monster Hunt 2 started out the strongest. However, Operation Red Sea quickly gained ground, while Detective Chinatown (sic) [Detective Chinatown 2] (00

[Greg Foster:]

Thanks, Rich, and good afternoon. We generated global box office of $977 million in 2017, up slightly from 2016. 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 versions 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 made is to re-master more titles. As we pointed out on our last call, most of our films will be allotted just one week runs. We believe this reduces our exposure to potential drops in week two, 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 one or two weeks. Moreover, the films that are generally being targeted by initiatives such as PVOD, are generally not the tentpole/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 re-master 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, tier 4 and tier 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 this 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

[Patrick S. McClymont:]

Thank you, Greg, and good afternoon, everyone. As Rich highlighted 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 identified several areas for improvement. While we continue to evaluate additional ways to optimize the business, we believe the company is better positioned today because 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 theatres 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 two arrangements, which represented over three quarters 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 with 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 business revenue was $54 million; theater business revenue was $56 million; and new business revenue, primarily related to ABC airing the last seven 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 one-time 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 one-time charge resulted from the provisional re-measurement and write-down of the company's U.S. deferred tax assets and liabilities. Excluding this one-time 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 one-time restructuring and tax charge and 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 one-time restructuring charge, was $75.2 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 amortization expenses associated with Inhumans are treated as add backs in determining adjusted EBITDA. However, we believe that excluding any impact of our investment in 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 on 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 eight sales type, two full JV and one 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 re-mastered 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 opportunity 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 seven pilot VR centers in 2018 and our home initiative, is expected to have a pre-tax impact of $8 million to $9 million. This compares to the pre-tax impact of $31.5 million last year, which primarily reflect 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%, our 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 of 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 received 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.

[Operator:]

Thank you. And our first question comes from Julia Yue with JPMorgan.

[Julia Yue:]

Hi. Thank you. As you mentioned, the China box office performance over the New Year period was extremely strong. And 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 do you think that there's any other factors that we should know about that should have pushed the box office this year?

[Richard L. Gelfond:]

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 three films instead of one 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 Operation Red Sea, sorry got my Chinese titles, Hónghǎi, Operation Red Sea kept building and building. So, if we have picked any one of them instead of all three, we wouldn't have achieved the results. Also there're 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. 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.

[Julia Yue:]

Got it. And then I'm curious on the – I think, of the 145 instillation guidance for this year. IMAX is obviously had such strong signings momentum inflation in the past couple years. I do appreciate. It has 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.

[Patrick S. McClymont:]

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. It's not intended to be any more conservative, it just reflects reality.

[Richard L. Gelfond:]

Although the one thing I would add is that because the JVs in China in the lower tier cities 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's that it reflects those conversations, however, we're shaping them a little bit more.

[Julia Yue:]

Right. Thank you so much.

[Operator:]

Thank you. Our next question comes from Eric Handler with MKM Partners.

[Eric O. Handler:]

Yes. Thank you very much for the question. And very happy to see the outlook for operating expenses remaining flat. So, good news there. 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 two, three years ago.

[Richard L. Gelfond:]

So, Eric, I would say that as I said in my prepared remarks, there is always a tradeoff, 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 IMAXs overall revenues and earnings. So, I think those are the things we're going to sort it through. At the same time, remember, you have the film programming changes going on, 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.

[Eric O. Handler:]

Okay.

[Richard L. Gelfond:]

Patrick, do you want to add anything?

[Patrick S. McClymont:]

No, I think that's...

[Eric O. Handler:]

No. 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. Just curious if what you're hearing on that end.

[Richard L. Gelfond:]

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 on the films, it 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 it's not much we can do about it.

[Eric O. Handler:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from Steven Frankel with Dougherty.

[Steven Frankel:]

Good afternoon. I'll 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?

[Richard L. Gelfond:]

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, maybe you do a hybrid, maybe you do an STL. We don't have to do a lot of these locations. So, there many of them are in the 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 who are 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.

[Steven Frankel:]

Okay. And are those same kind of discussions happening in other parts of the world or is this more a specific China issue today, because of the ticket volume difference?

[Richard L. Gelfond:]

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, unless they're one-offs in the rest of the world, there's nothing more systemic.

[Steven Frankel:]

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?

[Richard L. Gelfond:]

I don't think so other than to always keep your eyes open, Steve, because you look – remember the PSAs in 2015 and China where 1.3 million a screen. And I think the changes happened extremely quickly. And I think the declines and there're a couple reasons for that as you know, they had to do 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.

[Steven Frankel:]

And let me 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 you're looking at as that business ramps up?

[Richard L. Gelfond:]

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 could 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.

[Steven Frankel:]

Great. Thank you.

[Operator:]

Thank you. And our next question comes from Michael Ng with Goldman Sachs.

[Michael Ng:]

Thank you for the question. Given your comments about refocusing on the core and reducing spend on some of the non-core businesses and 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?

[Patrick S. McClymont:]

Sure. It's Patrick, Michael. The way we're thinking about 2018, very much focused 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'll be back to a level that's more consistent with 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 your question?

[Michael Ng:]

It was about how you were 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.

[Patrick S. McClymont:]

Well, for this year, VR is still very much in the pilot phase. And so we've got seven centers that are open. And we're now at a point where we're starting to experiment with different things, working with our partners. We'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 seven 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. 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.

[Michael Ng:]

Thanks. 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 optimal mix of sales type and JRSA screens? And then just as a quick follow-up, could you comment on the sales installs in the quarter? It came in a little bit light. I was just wondering if there was anything unusual. Thanks.

[Richard L. Gelfond:]

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. And, Patrick, you want to talk about the installs?

[Patrick S. McClymont:]

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

[Michael Ng:]

Okay, great. Thank you very much.

[Richard L. Gelfond:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jim Goss with Barrington Research.

[James Charles Goss:]

Thanks. 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?

[Greg Foster:]

This is Greg, Jim. Hi. 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 years ago. The same is true today, where moviegoers are realizing that not every movie should be seen in 3D. And when there is 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 is a specific reason for playing it in 3D, we're going to play it domestically in 2D.

[James Charles Goss:]

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 day time and night time and rearrange to only one week or two weeks instead of more for almost all the films. Are you getting much a better sense of control over this issue in partnership with the studios than you used to? And what would you say about that sort of trend?

[Greg Foster:]

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 six months from now that's working so much better than anyone expected, and they'll end up getting a bigger share of our one screen auditorium network. So, it's a fluid process, but we are finding that there's more flexibility going forward.

[James Charles Goss:]

Okay. And one last thing, Rich, 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 talk about that conversion process.

[Richard L. Gelfond:]

Well, I think, first of all, Jim, I'm always wary of India from a financial risk point of view, and all 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.

[James Charles Goss:]

All right. Thanks very much.

[Operator:]

Thank you. We move now to Mike Hickey with The Benchmark Company.

[Mike Hickey:]

Hey, guys. Thanks for taking my questions. I guess, the first one just back on your installation guidance. I think a little bit live than we're looking for. And certainly, it looks your backlog is kind of flat maybe up one theater from 2016 ending period which is sort of curious. But obviously, signings in the current year I think are also part of the installation guidance. So, does this sort of suggest that we might see a continued deceleration in your signings in 2018?

[Richard L. Gelfond:]

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 was a phenomenal year. Signings you don't judge on a quarter, because at one quarter we had over 100 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 two months a five-theater deal in Ecuador, last week we announced a five-theater deal in India. There is a lot going on. So, no, I don't think there's been any slowing. And in terms of the installation guidance, I think where as I said an answer, I think 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.

[Greg Foster:]

I also think 145 relative to last two 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 plans of the network.

[Mike Hickey:]

Okay. Thanks. And the last question, I guess, or second to last, I think before you had been experimenting domestically was putting recliners in your theaters. I'm not sure I heard you mention that in your prepared remarks today. So, sort of curious how the testing of those theaters of the recliners has been and if you expand to continue to rollout recliners.

[Richard L. Gelfond:]

So, 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, recliner has really reduced the capacity. And if you look at a weekend like the last two 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, looking at continuing to reseat those in a timely and prudent fashion. I think we'll still continue to do that.

[Mike Hickey:]

Okay. And thank you. And last question, obviously, you pointed back in some money is related to new business ventures. Especially looks like content this year, we are 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 paid the (00

[Patrick S. McClymont:]

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'll have a pretty meaningful influence on free cash flow for the year. And so, consistent with how we 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've 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.

[Mike Hickey:]

Okay. Thanks, guys. Best of luck.

[Operator:]

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

[Richard L. Gelfond:]

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, 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 saying, up's the world change, 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.

[Operator:]

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