Good day, ladies and gentlemen, and welcome to the IMAX China's Full Year 2018 Earnings Conference Call. All participants are currently in a listen-only mode. Following the presentation, we' ll conduct a question and answer session, at which time you' ll be requested to press star one to ask a question. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Mougias, Vice President of Investor Relations. Please go ahead, sir.
Good morning, everyone, and thank you for joining us on IMAX China's Full Year 2018 Earnings Conference Call. Joining me today is our chairman, Rich Gelfond, CEO Jiande Chen, and Jim Athanasopoulos, our CFO and COO, who' ll have prepared remarks. Also joining us is Megan Colligan, President, IMAX Entertainment. For the purpose of this call, all financial figures will be provided in USD unless stated otherwise.
Furthermore, the financials we provide to you today will follow IFRS accounting standards, which may differ in some respects to U.S. GAAP. I' d also like to remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking and that they pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements.
The full text of our full year 2018 earnings release, along with supporting financial statements, are available on our website, imax.cn. Today's conference call is also being webcast in its entirety on our website. With that, let me now turn the call over to Rich Gelfond.
Thanks, Michael Mougias, and good morning, everyone. Over the last six months, our box office performance and revenue-generating power of the network has been on the upswing. The story is quite simple. Beginning in 2017, we made a series of strategic and tactical decisions to improve the performance of our business. We committed to increasing the differentiation of the IMAX experience through new technology and more effectively marketing the IMAX brand in China. The indications are, as evidenced by our box office success in 2018 and into the early part of 2019, are working and setting the stage for IMAX to have a blockbuster 2019. Notwithstanding the challenging macro environment in China last year, IMAX box office increased 19% in the second half and 9% in the fourth quarter.
Driving this growth were the record performances of The Meg, Venom, and Aquaman. For the full year, IMAX box office increased 16%, doubling the industry growth rate and delivering our highest box office year ever in China. More importantly, our momentum has continued into 2019. Year-to-date, our box office has already reached $78 million, up 61% from last year. Driving our recent box office growth was our success during the Chinese New Year holiday. During this period, we generated a record $32 million of IMAX box office, a 40% increase compared to the 2018 holiday. This is particularly encouraging when you consider that our 2018 Chinese New Year box office was up 75% compared to 2017. It is also worth noting that the industry was flat over the same period.
Moreover, our attendance over Chinese New Year increased 16% compared to an industry decline of 12%, illustrating the power of the IMAX experience, not just for Hollywood blockbusters, but Chinese blockbusters as well. On that note, The Wandering Earth, the local language film released over Chinese New Year, has become the highest-grossing IMAX film in China of all time, eclipsing Avengers: Infinity War. To date, the film has generated $45 million of IMAX box office, and IMAX screens accounted for roughly 10% of the total box office over the holiday period. Given the high production value, the film was tailored to experience in IMAX. We believe this film is a game changer for the future of local productions of science fiction films and will spur additional projects of both this genre and higher production value.
I' m also pleased to note that Alita: Battle Angel, which was released in China this past weekend, continued our recent momentum. The film delivered $9 million in box office in its opening weekend, representing 14% of the total box office. Overall, our recent box office success, which has spanned both Hollywood and Chinese titles, underscores the value IMAX provides customers looking for differentiated ways to experience their favorite content.
I'd now like to provide some additional color on the initiatives I opened the call with before moving into our positive outlook for 2019. Beginning with our new IMAX with Laser technology, which takes the IMAX experience to the next level, we' re extremely happy with the initial reactions from our exhibitor partners and the continued commitments they' re making to further expand their footprint of IMAX with Laser systems.
Since it was made available in China in late 2018, we have already installed 11 systems, including upgrades. The technology has introduced new first-time IMAX partners into the mix as well. For example, we signed a 14-theater deal with the Cinema Company of China Resources Land, one of the largest commercial real estate developers in the country. Our new technology also offers upgrade opportunities for our theater network through our existing deal structures and the ability to extend our contract terms for an additional 10- 12 years from installation. As we continue to increase the differentiation of our experience, it's becoming increasingly important that we need to continue to effectively educate consumers on the benefits of seeing their favorite blockbusters in IMAX. More effectively answer the question, why IMAX?
With that in mind, launching our new brand campaign was a key objective last year, and we're encouraged with the progress we have made so far. The campaign launched in July and has since been adopted by major studios, including The Walt Disney Company and Warner Bros. Entertainment Inc., who embraced our new brand efforts to help market some of their tent-pole titles last year, like "Avengers" and "Aquaman." Given the blockbuster slate of IMAX DNA titles ahead, we expect some of the most anticipated films of the year to feature exclusive IMAX DNA. Another initiative we've been focusing on is to work more closely with the key ticketing platforms. In China, 85% of all movie tickets are sold online and just two major platforms account for the overwhelming majority of those ticket sales.
With that in mind, these platforms represent an important opportunity for us to improve IMAX's positioning at the point of sale and work with big data as part of our marketing process for local and Hollywood films. While there' s still work to be done on the marketing front, we're encouraged with our recent progress and believe that our box office performance is due in part to a result of these marketing refinements. Before I move on, I'd like to mention that we participated in Maoyan Entertainment's recent public offering and are currently in strategic discussions with them. Maoyan Entertainment is the largest ticketing platform in China, accounting for roughly 60% of all movie tickets sold online in the country.
Not only does Maoyan Entertainment provide a great touchpoint to the consumer, it also collects valuable data and analytics on consumer behavior and trends, which can be leveraged to more effectively market future content to consumers. In the second quarter, we're launching a CRM platform with IMAX China and Maoyan Entertainment and are discussing other strategic alliances as well. Overall, we believe our achievements in 2018 better enable us to capitalize on the existing years ahead, starting with our optimistic outlook for 2019.
We further differentiated our technology, increased the awareness of the IMAX brand, fine-tuned our programming strategy, and forged new partnerships with various strategic stakeholders. Our strong balance sheet and cash flow from operations have provided flexibility to pursue such strategic opportunities, while at the same time returning over $27 million of capital in 2018 to shareholders via dividends and share buybacks that Jim Athanasopoulos will discuss in more detail.
I'm encouraged by our strong performance last year and believe the developments I mentioned on this call will continue to drive more box office dollars through our network and increase the earnings power of our business. We couldn't be happier with the start of 2019 and look forward to the year ahead. With that, I will turn the call over to Jiande Chen.
Thanks, Rich Gelfond. Our box office performance last year was very impressive. We saw a healthy mix of Hollywood and local language films, which drove a 16% increase in total box office compared to 2017. Our opening weekend indexing across the top 10 Hollywood films was over 10% of our total Chinese box office. And remember, that is on just 1% of the total screens in China. Driving our outperformance on Hollywood films were two key titles in the second half, "Aquaman" and "Venom." "Aquaman" opened to RMB 70 million, setting a new IMAX record for the best opening weekend in the fourth quarter. The previous record holder was "Venom," which had just opened the previous month. It is nice to report that "Alita: Battle Angel" has kept up our Hollywood momentum in China, setting numerous February records.
Then on the local language side, Chinese film accounted for 30% of our total PRC box office, increasing from 24% in 2017. This increase was due in part to our programming more Chinese films, as well as the outperformance of several titles such as "Operation Red Sea." Looking at the year ahead, our technology and the brand initiatives are timely, given the robust film slate in 2019.
In addition to the strong start to Chinese New Year, we anticipate a blockbuster film slate for the remainder of the year. There are too many exciting titles to name. However, some key films in our slate includes the final "Avengers," which was shot entirely with the IMAX cameras, "Captain Marvel," "The Lion King," and "The Eight Hundred," to name a few here. It is also worth mentioning "Captain Marvel," which is tracking really well, its opening day and the date in China.
Overall, we anticipate the combination of the robust film slate, our working more closely with the ticketing platform, and the continued growth of the IMAX footprint to serve as the key drivers to our business in 2019 and beyond. With that, I will turn the call over to Jim Athanasopoulos.
Thanks, Jiande Chen, and good morning, everybody. We believe our accomplishments over the last 18 months have positioned us well heading into the new year. We increased the differentiation of the IMAX experience, refined our marketing efforts, and continued to optimize our programming strategy. These efforts, coupled with our continued cost discipline, drove 140-basis point increase in adjusted profit margin compared to 2017. We also delivered a record $56.4 million of operating cash flow, up 59% from 2017. Most importantly, we've hit the ground running in 2019, and our recent performance is a positive indication that these accomplishments will continue to propel us forward into the new year. I'd like to begin today's call by providing some insights into our programming strategy and network growth before turning to our financial highlights and guidance for 2019.
On the programming front, we exhibited 45 titles in mainland China last year, which included 19 Chinese titles and nine of the top 10 grossing films. Our new film team and multi-programming local film approach has worked exceptionally well over the last 12 months, and we continue to secure the best titles available. While our performance indexing and market share on Hollywood titles remains consistently strong relative to other screens and offerings, our performance on Chinese films continues to be a focus of growth for us going forward. The Wandering Earth's $ 45 million IMAX box office proved how well we can perform on a local film, particularly one whose visuals and presentation align with the IMAX experience. As more of these types of films are made in China, we believe we can increase our market share significantly.
Local language box office represents nearly RMB 5.7 billion in box office and is an incredible growth opportunity for IMAX. Turning to installations. In 2018, we installed a total of 101 systems, including 56 revenue share, 14 hybrid revenue share, 27 sales, and four IMAX with Laser upgrades. Our Greater China network at year-end stood at 639 theaters, up 18% compared to 2017.
On the signings front, we continue to see sound activity for both Xenon and our new IMAX with Laser system. We signed agreements for 60 new theaters last year, evenly split between sale, 30, and revenue sharing, 30. Our signed agreements were headlined by 20 IMAX with Laser deals since its introduction to the market. We'r e partnered with virtually all of the top exhibitors in China, and we look forward to forging new and expanding existing relationships with our strategic partners.
As a result of the signings activity, our contracted backlog for new systems stood at 272 theaters at year-end. Looking ahead, we remain quite positive on future installation activity due to our healthy backlog, which gives us solid transparency for years to come. Furthermore, we believe the introduction of our new IMAX with Laser system will fuel additional activity in the future.
Turning to our financial results. We generated total revenues of $118 million last year. Network business revenue was $48 million, and theater business revenue was $70 million. Please note in 2018, due to the adoption of IFRS 15, we reclassified $4.6 million of network business Hollywood production costs out of cost of goods sold. These costs are now treated as a reduction to revenue in our network business, with the effect of reducing revenue, reducing costs, and increasing film margin percentage.
It's also worth highlighting that our average revenue per installation in 2018 was $1.4 million, up from the $1.3 million in 2017, demonstrating price consistency in the face of an expanding market. Network business margin increased to 65%, up 920 basis points. Theater business margin of 63.5% was healthy in 2018. However, it came in slightly below the previous year due to the higher cost associated with IMAX with Laser. Total gross profit for the year came in at $75 million, resulting in a gross margin of 64%, up 280 basis points compared to 2017. Overall, we were pleased with the operating leverage we demonstrated last year. Moving to operating expenses. SG&A, excluding stock-based comp, increased $2 million- $14.3 million. This was primarily the result of the launch of our new brand campaign and unrealized foreign exchange.
Stock-based compensation came in around $1.8 million, 19% less than the prior year because of no further charges related to pre-IPO equity awards. Overall, we remain incredibly diligent in controlling our cost structure going forward and focused on strategic spending that will drive our core business. Adjusted net income in 2018 was $44.3 million, down just 4% from 2017. This decline was the result of our installing 14 additional sale-type theaters in 2017 compared to last year. The delta in installations was driven from a high base of sale installs in 2017, in addition to certain installation deferrals. Nonetheless, our adjusted net income margin came in 140 basis points higher in 2017, illustrating the inherent operating leverage that exists in our business.
A strong balance sheet and consistent operating cash flow has provided us with the flexibility to pursue strategic initiatives such as Maoyan, invest in our brand and core business, while at the same time returning capital to shareholders. In late 2018, we believe that our stock was negatively impacted by some of the macro China headwinds that existed in the market, and because our business was being categorized as a traditional asset-heavy exhibitor.
We took the opportunity to step in and buy $6 million of our own shares through a buyback, and we have the continued ability to buy back more in the event we feel our stock remains undervalued. In addition to the above, we also announced today that IMAX China received board recommendation for the payment of a final dividend in the amount of roughly $7 million or $0.02 per share, maintaining our existing payout ratio.
In total, buybacks plus interim dividend of $0.02 per share and a final dividend of also $0.02 per share related to 2018 amount to $27 million and demonstrate our commitment to returning value to our shareholders. Turning to guidance for 2019, we expect to install roughly 90- 95 new theaters this year, as we expect the mix and pace of these installations to be roughly similar to last year. SG&A, including stock-based comp, is expected to be roughly flat with last year. Stock-based comp is expected to be roughly $2.1 million. To close, we continue to believe our efforts last year will create value for our stakeholders in 2019 and beyond.
We'll continue to roll out IMAX with Laser, which will further differentiate the IMAX experience, while our refined marketing campaign and strategic partnerships with the key ticketing platforms will better educate consumers on the benefits of experiencing their favorite blockbusters in IMAX. This, coupled with the exciting slate of films ahead, should bode well for IMAX. With that, I turn it over to the operator for Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, you may do so by pressing the star key, followed by the digit one on your touch-tone telephone. Star one for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. We'll pause a moment to assemble our queue. We'll take our first question from Ellie Xie with Macquarie. Please go ahead.
Thank you, management, for taking my question. I actually have two questions. The first is about the installation guidance for 2019. Could you give us some color on the breakdowns of the installations by type? My second question is about the regulation impact. The government has been encouraging lower tier cities, especially to build more PLFs and also high techs. What' s the financial impact from that and what's the financial impact from is there any regulation subsidies given from that aspect? Thank you.
On the second question, we're not aware of any subsidies that are associated with that. The pace of our signings last year was good and the climate this year is very good. We have quite a lot going on. I don't think that the regulations have had any impact one way or the other on our signings activity there. Jim Athanasopoulos will talk about the installation.
Yeah. We have guided to 90- 95 installations. Roughly a similar pace to last year in terms of when they'll be installed and in terms of the mix, roughly similar to what we were going to do last year. We haven't given out specific guidance, but we are looking at something similar in a way to how we did it last year.
Okay. Thank you.
As a reminder, star one for questions, please. We will take our next question from John Choi with Daiwa. Please go ahead.
Hey, guys. Thanks for taking my question. I' ve a couple questions here. First of all, I think, Jim Athanasopoulos, you gave a guidance for the overall to the revenue and the operating expenses to be more or less flat. Can you kind of walk us through how, especially on the sales side, because if you look at the current box office, as you mentioned, it looks more promising this year versus last year. As a result, we are still being conservative on a flattish sales. That's my first question.
My second question is on the profitability side. I know that typically second half is usually a bit lower than the first half, but I think considering we had a very strong first half 2018, can you kind of give us a bit more detail about what happened in the second half on the gross margins and the margins? Thanks.
Sure. Let's just dealing with the in terms of the sales and the flattish sales. Yes, we're encouraged by box office. We couldn't be more happy and thrilled about it. We are just being conservative in terms of how we look at installations going forward.
We have got a pretty robust backlog, John Choi, of about 270 theaters. There's a lot of activity. We've got a new laser projector coming out. We feel good about it. At the same time, we're trying to be conservative and sort of looking at everything else that's going on in the market overall. To the extent that there could be some upside in that, obviously if we continue at this kind of pace with box office, we'll be in pretty good shape. We could definitely see some interesting happenings in the year.
In terms of profitability, first half and second half, again, it continues to be very back-end loaded. The significant number of our installations are happening in Q4 of the year, and as a result everything skews towards the back- end. But in terms of our margins, as I talked about, we had margin expansion this year.
Across the board, a lot of that stuff has to do specifically, of course, with the operating leverage of our business and the increase in box office dropping to our bottom line, and us managing our costs accordingly. Again, continued demand for our product. We're happy with the sort of price per unit that we've gotten. We're continuing to see some activity. Hopefully, again, going forward into the back half of the year, we can continue to see that operating leverage.
Ladies and gentlemen, as a reminder, star one for questions or comments, please. Star one, and we'll pause a moment to assemble our queue. We'll take our next question from Gary Yu with Morgan Stanley.
Hi. Thank you for the opportunity to ask question. I have two questions from my side. First is on box office. What was the split between Hollywood and Chinese film contribution to our box office last year, and how do we see the split going forward with more and more better quality Chinese films in the pipeline? Second is on laser screen economics. Could you please remind us what the difference in terms of selling price, cost to IMAX China, and also take rate for the revenue sharing screen for laser compared to the traditional Xenon screen? Thank you.
Yeah. Hi, Gary Yu. Our box office last year was 70% Hollywood, 30% local language. The local language was up from 24% the year before. Obviously given sort of where we're at with The Wandering Earth right now, we're continuing to focus on local language. We make 12.5% of the box office on local language, so it's continuing to be a strategic initiative for us to sort of maximize that box office. On the laser screen economics, it obviously varies deal to deal, customer to customer. Nothing has changed in terms of what we've said in the past, Gary Yu. Our cost is slightly higher and our selling price is going to be slightly higher.
Overall, we're targeting from an absolute margin on our laser deals to kind of come out somewhat similar to kind of where we are at on Xenon, but the percentages will likely go down a little bit. That' s sort of where we are modeling things, but things are different for different clients, and it varies from client to client. Our take rate would be higher as well relative to Xenon.
In a JV.
In a JV, yes.
Okay, and a follow-up question on the laser screen. Based on any early data points that you have seen in the market, have you seen higher PSA for laser screen that you newly installed last year?
It's really too early to say. We just started installing them, and you have to look at the same tier and different movie slates. It's way too early. You need a period of time in which to examine that. But we do know that some of the exhibitors have taken surveys as to customer satisfaction. And the customers are very satisfied, as are the exhibitors.
Okay, thank you.
Thank you. We'll take our next question from Yi Wang with China International Capital Corporation. Please go ahead.
Thank you, management, for taking my question. My first question is a follow-up on the new laser system. Can the management please guide how many laser system will be installed in 2019? And my second question is that we' ve seen the success of The Wandering Earth in the recent Chinese New Year. Are there any similar domestic titles in sight that can possibly achieve the height of this movie? Can you please shed more light on the coming domestic titles? That's my question.
Jim Athanasopoulos, go first.
Thank you.
Sure. We haven't given specific guidance on the laser installs right now. Last year, we installed four. We obviously, which includes four upgrades, I'm sorry, plus we installed, I think up to 11 total up until this point in time. So obviously there's a range there that we're looking at given the pipeline, but we haven't given specific guidance on laser versus everything else at this point in time. Do you want to
Jiande Chen, do you want to give color?
Go, whatever.
Yeah, sure. On the local language title side, we have been in close discussions with those major leading directors. Let me give you a few examples of what we found out in the market in the forthcoming months. First, it is a Stephen Chow's movie called "The Mermaid," the sequel. "The Mermaid two," which the first one was a huge success a few years ago. The second movie is called "The Captain." It is a bonus movie, produced by a very well-known director from Hong Kong, Mr. Liu Wei Chiang. The movie production cost is very high. They spent $18 million just to build the Evelyn model to film that movie. More importantly, we have a couple more sci-fi movies coming up also in the summer.
Besides the "The Wandering Earth " you have already seen, the director, Teng Huatao, his movie called "Shanghai Fortress" and "Shanghai Body," which is to be released probably in late July or early August in this coming summer. We have been discussing with more directors about the possibilities of working together with IMAX. Those titles, we feel very positive and very excited about it.
We'll take our next question from Tallan Zhou with Deutsche Bank.
Hi, management. Thank you for taking my question. My question was about the sales model installment. I think the guidance at the beginning of 2018, the sales model installation guidance was around 37. It turns out 2018, we got 27 installations versus last year, which is 41. I just have a question there. Does that mean 10 installations will be installed in 2019, or it is delayed in 2020? Thank you.
Yeah. I mean, Tallan Zhou, some will be installed in 2019. Definitely, there' s a shifting of when the installations happen. They are big real estate developments when they go in. It's not just one theater. It's not just a retrofit. There's a lot going on in terms of our installations. But yeah, some of them will actually shift over into 2019 overall.
Okay. Thank you.
Okay.
We'll take our next question from Timothy Lee with CLSA Limited.
Hi. Thanks, management, for taking my question. I just noticed there were actually two theaters being canceled, actually being closed in 2018. I mean, what's the reason for the closure? Does management have a call on how many screens are going to be closed in 2019 as well? Thank you.
I mean, we opened up 97 theaters. We have 640 in backlog. These two theaters that closed were institutional theaters that are somewhat old. There were some circumstances around it. But they were institutional. They're not commercial, so they wouldn't be impacting our box office.
The institutional theaters were before we introduced our commercial efforts in China, and they were science centers and things like that. That's a very different business than we're in the business of right now. So I wouldn't draw any conclusions out of that. They're generally publicly supported, not run for profit, and don't really have a material impact. In fact, don't really have much of an impact at all on our network.
All right. Thank you.
We will go next to John Choi with Daiwa. Please go ahead.
Hey. I have a follow-up question on the PSA. I think obviously, the PSA has been continuing more on a downward trend. But as you go into 2019, what is your view on this? I know this is a result of the box office and then the number of theaters installed. But in general, as you pointed out, given the mix on the tier one, two, three, four cities and how you guys are trying to do more on the lower tier cities going forward, is this going to continue to see a downward pressure? Or do you think with the recent success, as you could see in the year to date, it's been very successful, are we going to see more stabilized PSA going forward? Thank you.
Well, again, going forward is hard to predict, but over the last six months, our PSAs have definitely stabilized as have same store sales to answer your question.
Ladies and gentlemen, this does conclude today's Q&A session of the call. I'd like to turn the call over to Rich Gelfond for closing remarks.
Well, thank you everybody for tuning in to our call. We think 2018, particularly the second half, was a very strong period for IMAX. This year, as we said, the box office is up over 60% for the first several months. Over last year, there were a lot of issues in China that we addressed, including the programming issue, which we addressed with the multi-picture strategy, the marketing efforts, the introduction of laser, and continued differentiation. As we look into 2019, we feel better about our business than we have in a while. Thank you for listening in.
Ladies and gentlemen, this does conclude today's discussion. We appreciate your participation.