Good day, and welcome to the Cineplex Inc. First Quarter twenty nineteen Analyst Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melissa Prasacco. Please go ahead.
Good morning. Before we begin the call, we would like to remind you that certain statements being made are forward looking and subject to various risks and uncertainties. Such forward looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results could differ materially from those expressed in the forward looking statements. Factors that could cause results to vary include, among other things, adverse factors generally encountered in the film exhibition industry, risks associated with national and world events, discovery of undisclosed material liabilities and general economic conditions.
I will now turn the call over to our President and CEO, Ellis Jacob.
Thank you, Melissa. Good morning, and welcome to Cineplex Inc. First quarter twenty nineteen conference call. We are glad you could join us today. I will begin by providing a brief overview of our top line results as well as a summary of our key accomplishments during the first quarter.
I will also highlight some of the most anticipated films for the summer. At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide a more in-depth overview of our financials. As always, once Gord has concluded his remarks, we will poll the question and answer period. Although first quarter results were impacted by the anticipated soft box office, we continued executing against our diversification strategy during the quarter and are encouraged by the results from our new businesses, including first quarter records for media, amusement and other revenue. This highlights why we are focusing on diversifying our company to mitigate quarterly fluctuations of the Hollywood film product.
The quarter's expected weaker film product in January and February combined with a lack of strong carryover films from the prior year all contributed to a soft box office quarter. In addition, the tough comparator with last year's record success of the film Black Panther resulted in a 15.6% decline in attendance, which drove the decrease in box office and foodservice revenue. But as we look ahead to the second quarter and beyond, we are very encouraged by the results so far and the films slate for the balance of the year. Especially with films like Endgame, which broke numerous records as it achieved the largest global opening weekend ever and became the first film in history to surpass the $1,000,000,000 mark in its opening weekend. As of today, Endgame has grossed over $650,000,000 in North America in just two weeks and continues to deliver significant numbers for us.
For Cineplex, it was our highest advanced sales and our biggest opening weekend ever. This just illustrates the power and draw of quality film product. Audiences will come out to the theater when we have films that they want to see instead of waiting for the movie to be released onto streaming platforms. Moviegoing is a social event that provides a totally immersive experience that can't be replicated at home. And we provide multiple experience options at a great value.
Where else can you watch a $300,000,000 production for less than it costs you to park your car in most major Canadian cities? As I've said before, one quarter is not reflective of the entire year. In fact, the first quarter box office results are in line with the 2015, which ended up being our year with one of our highest box office revenues. As we continue to grow our diversified businesses, partially offsetting the first quarter decline was the all time quarterly record amusement revenue and first quarter record media revenue. First quarter records were also achieved for BPP of 10.44 and CPP of 6 .35, which also helped partially offset the theater attendance decline.
In addition, first quarter results were impacted by the adoption of International Financial Reporting Standards or IFRS sixteen's leases. In order to avoid any confusion and to assist with the comparability of prior periods, we have introduced a new non GAAP measure, adjusted EBITDA after leases or EBITDAI. To address these issues, primarily as a result of the soft Box Office results, first quarter adjusted EBITDA decreased 30.6% to $34,300,000 Looking ahead, we believe the strong second quarter film slate signals a positive turnaround in box office performance. It was our biggest April ever. And as of last night, the Canadian industry is up over 10% for the second quarter.
Now I'd like to highlight our key accomplishments during the first quarter. Beginning with film entertainment and content, following the successful launch of Canada's first ScreenX auditorium at Cineplex Cinemas Queensway and VIP in Toronto, we expanded our agreement with CJ ODPLEX to add up to 20 ScreenX locations in select Canadian markets over the coming years. The new agreement reflects the growing demand for immersive movie going experiences in Canada. Alternative programming reported growth in revenue and attendance for the first quarter with strong performances, including the anime film Super Broly, our biggest event of the quarter. Carmen from the Metropolitan Opera and the concert event BTS World Tour Love Yourself in Seoul.
In addition, Cineplex International Film included strong first quarter performances from The Wandering Earth and Gully Boy. Within Theater Foodservice, in addition to the record CPP discussed earlier, we continued the rollout of alcohol beverage service outside of VIP cinema auditoriums and licensed lounges to an additional 19 theatres. As of today, we currently have 60 theatres, not including VIP, offering this service within three provinces, including Ontario, Alberta and now Manitoba. We will continue adding this service to select theaters this year and work with other provinces to update legislation so that we can provide this offering across the country. Subsequent to quarter end, we were pleased to open our newest theatre Cineplex Cinemas Park Royal and VIP on April 3.
Located at the South side of the Park Royal Shopping Centre in West Vancouver, the 11 auditorium theatre features luxury recliner seats and ultra AVX auditorium, reclining D BOX motion seats, a variety of food service offerings and of course, our highly successful VIP cinemas. Looking at our digital products, increase in device activation and a 57% increase in monthly active users compared to the prior year period. This business continues to grow as consumers continue to expand their adoption of transactional digital movie consumption. Online and mobile ticketing represented 30% of total admissions during the first quarter, up from 26% in the prior year period. Looking at Media.
Total Media revenue was the first quarter record for us increasing 7.7 to $35,000,000 Cinema Media revenues increased normally despite the decline in theater attendance. This only emphasizes the strength of our advertising business and its portfolio of expanded offerings for customers even when there's a decline in attendance of softer film products. We anticipate a strong second quarter in Media given the upcoming film slate and our results to date. Looking at Cineplex Digital Media, record first quarter results were achieved with a 21.9% increase in revenue as a result of higher project installations. Subsequent to quarter end, CDM announced its partnership with Mountain Equipment Co op to deliver a unique digital sign in solution that will optimize the retail experience for customers at 20 MEX stores across the country.
Since its inception, CDM has been an important part of our diversification strategy and continues to be an area of strong growth. In Amusement and Leisure, Player One Amusement Group reported all time quarterly record revenue and increased margins to 14.1%, primarily due to an increase in distribution sales and increased route revenues in The U. S, including the Cinemark agreement signed in the 2018. These increases were also a result of our continued optimization efforts and the cost reduction initiatives undertaken in 2018. Revenue for The Rec Room increased 1.8% to $16,400,000 And while we are very pleased with The Rec Room performance to date, first quarter results were impacted by a number of factors, including exceptionally poor winter weather conditions and the timing of Easter, which fell in April year as compared to March 2018.
However, we were thrilled to open our sixth location of The Rec Room at Square 1 in Mississauga near the end of the quarter and subsequent to quarter end opened our seventh location in St. John's, Newfoundland at Avalon Mall in April. During the quarter, we also announced plans to open Atlantic Canada's first Palladium location in Dartmouth, Nova Scotia scheduled to open in 2020. Moving to esports. World Gaming hosted the official Winnipeg Jets NHL nineteen tournament during the first quarter, With the grand finals held at the Bell MTS place in Downtown Winnipeg in February, the top players from each of the Xbox One and PlayStation four platforms competed to be crowned the official Winnipeg Jets NHL nineteen champion.
Also during the quarter, World Gaming teamed up with NFL Canada to launch Season two of the Madden NFL nineteen Canadian Challenge and also held the online qualifiers for the twenty nineteen Call of Duty Black Ops four Canadian Championship Series. Finally, subsequent to quarter end, Collegiate Star League held its twenty nineteen North American Collegiate Grand Finals at the April in Atlantic City, New Jersey. The event featured hundreds of the very best collegiate esports teams and players from The United States and Canada competing for more than $100,000 in scholarships. Looking at SCENE, membership in our loyalty program continued to grow reaching 9,700,000 members as of March 3139. Now let's take a look at some of the films for the summer.
As I mentioned earlier, the second quarter is off to a great start with the record breaking success of Endgame and its continued traction over the past two weeks. Next up is the action adventure of Pokemon Detective Pikachu, starring the voice of Ryan Reynolds as Pikachu opening this weekend. And then on May 24, we have the live action adaptation of the Disney classic Aladdin starring Will Smith. We close out the month with the Elton John film Rocketman and King of the Monsters, the next in the series both coming to theaters on May 31. And June doesn't appear to slow down with films like Doc Phoenix, the Marvel X Men film with Jennifer Lawrence, Sophie Turner and Jessica Chastain, the animated sequel Secret Life of Pets two, Men in Black International with Chris Hemsworth and Pixar's Toy Story four when a new toy joins Woody and the gang.
Moving to the third quarter, we look forward to Marvel's live action, Far From Home opening on July 2. Then from the theme behind The Jungle Book, we have the remake of The Lion King on July 19. We think this will be one of the biggest movies of 2019 with amazing graphics and high anticipation across a wide demographic range for timeless story. On August 2, guests can enjoy the Fast and the Furious spin off, Hobbs and Shaw, starring Dwayne Johnson and Jason Statham. And on August 9, the Disney film Artemis Fowl, which is based on the popular book series will open in theaters.
Just before the kids go back to school, we have the animated sequel, The Angry Birds Movie two opening on August 16. Then on September 16, we have the anticipated Chapter two. Part one of this film became one of the highest grossing films for the month of September when it opened two years ago. As you can see, the upcoming film slate looks very strong and offers something for everyone. As I mentioned, we are encouraged by the outlook of the 2019 film slate and are confident in our strategic direction as we continue to build scale in our other businesses, prudently manage our costs and execute on Cineplex's diversification strategy for future growth.
As such, we are pleased to announce that the Cineplex Board has approved a 3.4% dividend increase to $1.8 per share on an annual basis, up from the current $1.74 per share. This increase will be effective with the May 2019 dividend, which will be paid in June 2019. With that, I'll turn the call over to Gord.
Thanks, Ellis. I am pleased to present the first quarter financial results for Cineplex Inc. For your further reference, our financial statements and MD and A have been filed on SEDAR this morning and are also available on our Investor Relations website at cineplex.com. Before I review the results, I would like to note that Q1 twenty nineteen is Cineplex's first quarter reporting under the new accounting standard for leases IFRS 16. I refer you to the presentation we made last week, which is posted on our Investor Relations website that gives an overview of the impact of IFRS 16 on our results.
I will highlight specific impacts of the adoption of the new standard throughout the call, but specifically, I would like to highlight a new non GAAP measure we are providing, adjusted EBITDA after leases or adjusted EBITDAaL, to assist with the comparability to prior periods. Our disclosures in the MD and A for our first reporting period under IFRS 16 are enhanced in order to assist readers in comparing our results year over year. Despite strong results from all other business lines and the expected weak film slate in the first quarter negatively impacted the exhibition business, resulting in total revenue decreasing 6.6% to three and sixty four point nine million dollars and adjusted EBITDAaL decreasing by 30.6% to $34,300,000 from $49,500,000 in the prior year. Cineplex's first quarter box office revenue decreased 13.7% to $156,500,000 compared to $181,400,000 in the prior year due to the weak film slate. The impact of the 15.6% attendance decline was partially offset by a BPP increase of 2.3%, which established a first quarter record of $10.44 up from $10.21 in 2018.
The first quarter was up against a strong comparator in the prior year, which included Black Panther as well as strong carryover films from the 2017, including The Last Jedi and Welcome to the Jungle. Foodservice revenue decreased 11.9% to CAD103.1 million. Included in food service revenue is CAD7.9 million from The Rec Room. Excluding revenue from The Rec Room, theater food service revenue decreased by 12.1% from the prior year due to the previously mentioned decrease in attendance, partially offset by the 4.3% increase in concession revenue per patron to a first quarter record of CAD6.35. The CPP growth was attributed in part to expanded food offerings, including those available at Cineplex's VIP cinemas outtakes and additional licensed locations.
Total media revenue increased CAD2.5 million or 7.7% to CAD35 million for the quarter. Cinema media revenue, which is primarily theatre based, increased nominally despite the theatre attendance decline. Digital place based media revenue increased 21.9% compared to the prior year period, primarily due to higher project installation revenues. For the quarter, project revenue was up 105.8% due to the increased installations, including A and W and seven Eleven. During the quarter, we added three forty five new locations, up 5% over the prior year to a total of 13,847 locations.
Amusement revenue increased CAD8.6 million or 17.2% due to strong revenue growth from P1AG in addition to The Rec Room, which contributed CAD8 million of amusement, gaming and other revenue. P1AG revenues increased by CAD7.4 million due to increased distribution sales as well as an increase in route revenue in The United States as a result of the Cinemark agreement. Margins on the P1AG business increased 2.9% to 14.1% for the quarter. With respect to The Rec Room, total revenue grew CAD0.3 million over the prior year. Impacting total revenue was the poor winter weather conditions experienced across Canada, the honeymoon impact, which was expected after the first twelve to twenty four months of operations as locations settle into their expected long term run rate and the timing of the Easter holiday weekend, which fell in Q2 twenty nineteen.
Turning briefly to our key expense line items. Film costs for the quarter came in at 50.3% of box office revenue as compared to 52.5% reported in the prior year, which reflects the impact of the strong titles in the 2018. Cost of food service for Q1 twenty nineteen, excluding CAD2.2 million incurred at The Rec Room was 22.4% as compared to 20.7% in the prior year period. Cost of food service at The Rec Room was 27.5%, up 0.7% from 26.8% reported in the prior year. Both changes were primarily due to the mix of food and beverage items sold.
Other costs of $185,400,000 decreased $32,000,000 or 14.7%, primarily due to the impact of the adoption of IFRS 16. Other costs include theatre occupancy expenses, other operating expenses and general and administrative expenses. Theatre occupancy expenses were $18,400,000 for the quarter versus the prior year actual CAD51.9 million, a reduction of CAD33.5 million. This was primarily due to the impact of IFRS 16, which reduced rent expense by CAD39.7 million. Additional details on the movement arising from the transition to IFRS 16 can be found in our MD and A.
Other operating expenses were CAD148.2 million for the quarter versus a prior year actual of and $47,400,000 an increase of $800,000 Other costs are net of $4,300,000 of cash rent related to the lease obligations arising upon the adoption of IFRS 16. Increases included a CAD5.2 million increase for P1AG due to its growth in business volumes and a CAD2.1 million increase due to new and acquired theatres, net of a reduction of CAD0.4 million due to disposed theatres. These increases were offset by CAD2.7 million decrease in same store theatre payroll and a CAD1.4 million decrease in same store theatre operating expenses due to lower business volumes, in addition to a $1,600,000 decrease in marketing costs due to the timing of expenditures. Pre opening costs for The Rec Room of 700,000 as compared to $300,000 in the prior year were higher due to the timing of openings. G and A expenses were CAD18.9 million for the quarter, which was CAD0.7 million higher than the prior year due to a CAD1.8 million increase in share based compensation expenses, mainly due to Cineplex's relatively flat share price during the quarter and ongoing regular vesting as compared to the prior year during which the share price decreased.
In addition, there was a CAD0.8 million increase in professional fees during the current quarter due in part to an increase in consulting work, including the software upgrade undertaken for IFRS 16. These increases offset savings realized from our $25,000,000 cost reduction program. Interest expense increased $11,200,000 during the quarter to $17,600,000 primarily due to the inclusion of 11,500,000 in lease related interest arising on the transition to IFRS 16. Net CapEx for the first quarter was $31,700,000 as compared to $23,600,000 in the prior year. With timing changes related to certain new locations, we are reducing our net CapEx guidance to $155,000,000 from $175,000,000 for 2019 with the $20,000,000 timing difference now flowing into 2020 and increasing our 2020 guidance to $170,000,000 from 150,000,000 Net income for the quarter was down CAD22.6 million to a loss of CAD7.4 million and basic EPS was down CAD0.36 per share to a loss of CAD0.12 per share, primarily due to the soft results from the exhibition business and the impacts of the adoption of IFRS 16, which negatively impacted our net income by approximately $3,300,000 in the current period and approximately CAD6.4 million or CAD0.10 per share as compared to Q1 twenty eighteen.
As Ellis mentioned earlier, we have steadfastly focused on creating a diversified entertainment and media company for the future. We are prepared to prudently use both our operating cash flow and our credit facilities to invest in these new businesses. We continue to remain comfortable with where Cinephar, Inc. Is positioned today. We are in the early execution phase of a number of our diversification initiatives, and our balance sheet allows us to continue to invest in these growth initiatives to deliver future value for our shareholders.
And that concludes our remarks for this morning. And we'd now like to turn the call over to the conference operator for any questions.
Thank And at this time, we will hear first from Arvinda Galappatthige of Canaccord Genuity.
Thanks. Good morning. Thanks for taking my question. I'll start with Player one AG given the strength and the margins there. Obviously,
there's
a distribution piece for the Cinemark under the Cinemark arrangement, which I suspect will continue for maybe another quarter or so and then there's the recurring piece that will continue. So how should we think about sort of the sustainable growth of that segment? And perhaps for Gord, I mean, do you see sort of I know you talked about 15% mark is where you want to get to. Do you see the movement now sort of heading in that direction to be, something that can be sustained given sort of the fact that you've done a lot of the restructuring there? So that's number one.
And, my second question is on Cinema Media. Obviously, creditable to have it stable given the box office quarter that you've had. But I know that following the soft second half, there was some internal restructuring that was done. Do you feel comfortable now that given the slate that there's more sustainable growth on the Cinema Media side as well? Thanks.
Thanks, Erwin. This is Gord. I'll handle the P1AG question. So first and foremost, we are very pleased with the results from P1AG during the quarter. As we had mentioned historically, our focus on our strategic focus on P1AG was really to create a national footprint in The U.
S. We believe that would give us two advantages. One, we will become a national a firm that could service clients across the country. And as such, we expected that to give a bit of share shift opportunity within the spaces that exist today, and I think Cinemark is an example of a share shift. As well as having that national footprint, it allows us to grow as retail looks to create food and beverage and entertainment destinations as anchors of the future and as new entertainment concepts such as VR and other concepts are introduced into the marketplace.
So share shift plus growth was very attractive for us to create a national opportunity. As you guys know, last year, we've gone through a number of acquisitions and we've looked to sort of right size the organization and we went through a lot of integration and there's a lot of bump in last year's numbers as we integrated the various entities within P1AG. And as we had stated, we expected to get to sort of our target 13% to 15% EBITDA margins in that business. And so we're pleased that we're at the 14% beginning of the first quarter. And we will continue to see sort of the growth in that the lapping of the new Cinemark agreement for another couple of quarters.
When you look at and Aravinda, just to clarify one thing in your comments. So the Cinemark contract is what we would characterize as a root business client. So that's where we're and that's placing equipment in the third party venue and sharing in the revenue stream as opposed to a distribution type customer, which is typically we're selling equipment to the third party and that's a lower margin business. So hopefully those have answered your questions on
question, we feel very confident for the balance of the year given the film slate and both in the Cineplex Media business and CDM. On the CDM side, we've seen some reduction in cost as we move forward. So looking at the next few quarters, we feel quite comfortable as to our continued growth in those two business areas.
Thanks, Alison. Just a quick third question and I'll pass the line. With respect to the industry delta that I know we've been talking about for a while, obviously, we see that getting smaller and Q1 obviously is a difficult quarter to use as an indicator. But at this point as we've sort of sit in the middle of Q2, do you feel confident that going forward you more or less sort of track industry growth notwithstanding some of these provincial titles that spike the provincial box office numbers that you generally back on track there given that most of the refurbishments and so on and some of the new installs that were done by competitors starting to sort of taper out. Just from a modeling perspective, just want to get your thoughts on that.
Thanks.
Yes. And it's a good question, Aravinda. And one of the things we have, which we see right across North America, when movies like Avengers open, we have so many choices for our guests to see the movie and we basically very much overperform because of our Ultra EV Xs, because of our IMAX and VIP and all of those different offerings. So again, it's product driven, but it's also a lot to do with what you said earlier is the leveling out of what's going on around us. And I think in the second quarter, we should be it's early now, it's just half the quarter, but we should be well in line or over the industry.
Thank you. I'll pass the line.
And we'll go to our next question from Rob Goss of Echelon.
Thank you and good morning. It was interesting that you mentioned The Wandering Earth. Alice, could you discuss where you see opportunities to work with some of the SVODs where your theater platform is a showcase leading into the SVOD service? Or do you see opportunities there?
Well, with Wandering Earth, it did extremely well in certain pockets of Canada. And one of the things we continue to look at is using our data, which we continue to improve as a means of getting to locations where we see movies like these performing above average. And there in Toronto, for example, in areas like Markham and Yonge and Dundas, we did extremely well with Wandering Earth. Again, in areas around Vancouver, it was very, very strong. And similarly with the Bollywood product, like I mentioned, Gully Boy, we were able to deliver some good numbers right across the country.
But what we are now starting to do is using the data to even have limited runs of these movies in certain markets where they may not be able to sustain a two or three week timeframe, but we can get them in for a week or two. And that's going to be a continued focus in building given our diversification in Canada and the diversity in the country. Does that answer Yes. Your
Very good. Thank you. The next question will be on The Rec Room. Are you pleased with the balance of roughly fifty-fifty between food sales and amusement? And when we look at The Rec Room, should we look at traffic there having any correlation with the box office?
Yes. In the first quarter, like the beverage number was a little bit softer than we were projecting. But if we got more out of the beverage, it would be a better mix overall. And the locations that are close to the theaters do get a bit of a bump when there's a big movie like Avengers because they are in close proximity, but not all of the locations are located within proximity of theaters.
Okay. Thank you.
Moving on, we do have a question from Derek Lessard of TD Securities.
Hi, good morning, everybody. Maybe just another follow-up on The Rec Room. You did point to weather being a factor in Q1. Is there anything of note in Q2 given that it has been pretty chilly at least in the Northeast and maybe any impact from any Canadian NHL teams not making the playoffs or exiting early?
Yes. April has been also impacted a little bit and also the fact that when the NHL team doesn't make the playoffs, it helps us on the theater side, but it hurts us on the rec room side. So you've got a combination of both because I was looking at the numbers on Tuesday when the Raptors were playing and they were quite a big bump because of people wanting to watch the event in social gathering together.
Okay. And maybe just as a follow-up, I was wondering if there's any plans on expanding your original guidance from 10 to 15 builds and beyond that range?
Yes. And just to let you know, the two rec rooms we opened since the last week of the quarter and then into the second quarter, those ones have been performing extremely well. The one in the Square 1 in Mississauga and also the Avalon Mall John's, Newfoundland. Regarding the
far as the number of
units itself, we don't expect to have a change in the number of units we talked about earlier between ten and fifteen in Canada.
Derek, just to so chatted historically about 10 to 15 large blocks, typically called The Rec Room and then 10 to 15 of the small boxes, which could have been typically called Palladium. I think what a better way to describe it now is we're probably going to do up to 30 locations, and they'll be branded accordingly based on the size of the market. So you're going to get the smaller versions that are going be the sub-forty thousand square feet and then the larger ones, which are 40,000 plus. But in total, there'll be up to 30 inflations.
Okay. That clears it up. And I was wondering if you guys have cleared any of the regulatory hurdles for The Rec Room in Quebec?
Yes. We are working on it and we are very close to getting to the finish line and that will result in our expanded focus on Quebec from The Rec Room and Playdium perspective.
Okay. And then one final one for me. And I was wondering if you guys still think that there's if you still have a lot of room to maybe leverage your digital or your applications to lower maybe some of the expenses at the theater level?
Yes, we're always looking at I mean, as we've mentioned, we've our initial focus was sort of on the box office and the ticket purchase. And we're now we're looking at developing the mobile app for concession purchases, which we're piloting in VIP right now, which could ultimately extend and that takes labor out because there's typically been an order taker in the auditorium. So look, we're always looking to use additional products as a way to improve the customer experience and customer journey. And sometimes and occasionally, the end result of that is that it does actually take some costs out of the system.
And in summary, I mean, when you look at our loyalty program, as I mentioned, we are up to 9,700,000 guests that have a SCENE loyalty card. And it's quite a significant benefit as far as improving, as Gord said, the different offerings that we have and being able to communicate with our guests as we have specific products from different parts of the globe. So I think there's a lot of opportunity in using our data going forward.
Okay. Thanks for your time, gentlemen.
We'll hear next from Matthew Hoffman of Scotiabank.
Hi, good morning. It's Geoff Fan from Scotia. I've got a few here. First, to start off on the capital spending budget for this year, Corey, can you elaborate a little bit on what pushed the spend to 2020? What are the changes that's in your timing of the expansion of whether it's a rec room or other spending areas?
Yes. I mean, primarily, it's the largest change is going to be the shift of Topgolf, which we initially had planned to open at the 2019 into early twenty twenty, and that's going to shift more into 2020 now. So that's the primary shift.
Okay. Can you elaborate on that a little bit more? Like, do you have locations set and it's this is just comes down to timing of getting everything up? Or are we are there other factors at play?
Jeff, we are quite excited because we feel that we are very close and it's imminent that we will be announcing our location. And not like the last few quarters when we were hoping, this time, I think we are just about there from an overall perspective of getting started.
Okay. Great. And just circling back on the Cinema Media business, maybe asking it slightly differently. Attendance was down, but this line item seems to have gone up. How do you attribute that?
Was it sales execution that you think has, drove this? Is there some changes in how advertisers are buying in your cinema business? Can you elaborate on that a little bit?
Yes. And as we've always said, it really has to do with when advertisers want to have their messages on the screen. It's our sales execution and our ability to have a whole portfolio of assets to offer. And that makes a big difference compared to just focusing on the individual cinema business. And some of the timings of the large contracts also have an impact on when they are booked and when they basically play in the theaters.
Okay. But you feel pretty We confident in the
very comfortable moving forward for the next quarters.
Switching over to The Rec Room. Last quarter, I think you guys gave us some numbers on same store or same location trend on revenue. Wondering if you have any stat to share on that front. And just on The Rec Room, the changes in, I guess, the format between The Rec Room and Palladium, as we sit back, is there is there anything in the numbers that you've seen to date, with the performance that makes you less excited about The Rec Room opportunity? I'm just trying to get your assessment of how it's done and the overall market opportunity.
So Jeff, I'll take your first question, which was and we alluded to in our remarks about the expected honeymoon period, which was to kick in after a period of twelve to twenty four months. We believe that we're seeing the honeymoon impact of approximately 10%, and we're seeing that kind of starting to kick in right now. And but we believe that we're down at a run rate, which is still above where our initial expectations were when we went into looking at The Rec Room concept.
Okay.
And when you look at the round of The Rec Room versus Palladium, it's got to do with mainly the demographics and the age groups that the entertainment provides. And we are basically being very strategic about where we open these locations. And the first one we should be doing is going to be in Brampton where we had a theater called Orion Gate, which is being redone to a Palladium.
Okay. And finally, just on Digital Media, it looks like a lot of the growth was in the project related. I'm just trying to assess, like, it looks like installation may have been the driver this quarter. Do you have kind of an outlook for the next few quarters on how installations would come, therefore, you know, your revenue outlook for digital media? And then the second part of the digital media is just the recurring revenue piece.
Is should we look at the other revenue line as kind of the recurring revenue piece based on installations that have been that have taken place in the past?
Yes. So Jeff, on the first part of the question, as we've all and the reason we segregated the line item is the installation revenue and the project revenue is typically fairly lumpy and dependent on sort of the client's planned rollout schedules, particularly in the QSR space,
it's independent of individual franchisee. So
look, I would say that we're obviously very pleased in the installation revenue is the lead indicator of the recurring revenue stream to show the growth that we showed in Q1. I'd be a little hesitant to kind of give guidance because individual franchisees and clients can shift their programming around for the rest of the year. But we are happy we have a number we have a fairly sizable backlog with the clients that we've historically announced. On your second question, in that bucket of the noninstallation revenue, it includes a number of elements in which also includes our media revenue. So the advertising revenue of the shopping malls, as well as creative.
And then it would include what I would call the more duty type items, like the software license fees, and the network management fees. So there is discretion period over period in both, the the amount of creative services that is, is asked for, and then we'll get periods of ups and downs in the advertising revenue and serve our public space networks. So those are the key drivers. So there are some discretionary elements in the recurring. So look at it over a longer period of time as opposed to one quarter in isolation.
Okay. Thanks, Gordon.
Thanks,
Jeff.
We will hear next from Drew McReynolds of RBC.
Yes, thanks very much. I was coming on late a little bit, so apologies if you've covered this one off. Maybe for you, Gord, on the concession side, the percentage was a little bit higher than I would have thought in the quarter. Just wondering if there's any dynamic in there. And then just secondly, with respect to the dividend increase today, obviously, a signal that you've got confidence in the business looking forward.
Maybe just remind us kind of your capital return priorities, how you look at the dividend within the context of clearly an elevated CapEx profile? And then can you just address the balance sheet? And if there's any kind of impact with ratings agencies as a result of IFRS 16, I'd assume no. But if you can address those, that would great. Okay,
Drew. So first and foremost, concession, so the concession cost.
So the concession cost was a
little bit higher in the quarter. As I alluded to, there's a little there was a mix a bit of a mix shift in terms of the offerings that were sold during the quarter. We've continued to roll out alcohol into the theaters. Uber Eats was quite successful during the quarter at a bit higher costs than other items. And then as we expand VIP and outtake sales, they are at a lower margin product for us.
But I would say, I think this is a bit of a high point in this quarter as we look at what we expect the mix over the course of the year is that we would expect that the cost would be a bit higher than last year, but not as high as in Q1. And then your second question in terms of capital allocation and dividend and dividend policy. And so just as a reminder, our model, the way we look at capital allocation is we are entering into the diversification phase with growth initiatives. When we look at our sustaining cash flows, our operating cash flow, our results from operations net of maintenance CapEx, we are prepared to dividend 60% to 85% of that to our shareholders. We're currently at the lower end of that range.
So we are using the difference, so 35% to 40% of our operating cash flow to invest in new growth initiatives and use our balance sheet to fund the remainder of the cost requirements to fund those initiatives. While we're doing that, we're maintaining a prudent balance sheet where we're not looking to take our leverage much more than that 2.5x range. So as we look forward, we expect based on our capital program to continue to be free cash flow negative marginally for the next two years. And then we'll revert to positive while balancing that leverage criteria, providing our shareholders with a return through the form of a dividend. And that's the model that we've historically that we've continued to operate in.
When we look at where we're allocating capital, we're allocating capital to our LBE initiatives, where we expect to generate 20% to 25% returns on those capital investments.
Drew, on looking back to when we actually did our transaction with Famous Players and put the two companies together, we increased our leverage. Our dividend at that point was close to 10%. And the challenge today compared to back then is we were able to deliver the synergies and build up our EBITDA and pay down our debt. Now we are doing this one block at a time. So it takes a little longer to get to the final runway, but we are very confident in our diversification and what we are doing.
And this quarter proved out that it's important to continue to focus on it.
Yes. I appreciate that recap. Very helpful. A final one, just back to Cineplex Media. I know you don't want to kind of give specific quarter by quarter guidance.
But qualitatively, it's been kind of well known Avengers was coming down the pipeline along with a stronger slate. Just so expectations are set for Q2, on the surface, if it was more of an attendance driven kind of advertising model with an expectation of a strong slate, clearly, we'd expect a pretty good quarter on the Cineplex Media side. But as we saw in Q1, it isn't kind of that direct correlation necessarily. So just want to level set expectations going into Q2 around Cineplex Media and kind of give a sense of kind of where advertisers are respect to the slate in this period within the year?
As I said on the call, Drew, in my script that we do expect a good runway in the second quarter as a result of the film product and also all of the attributes in the quarter. But we know that the box office is up 10% for the quarter. So we can't give you a number, but we feel comfortable that it's going to be a strong quarter from a media perspective.
Okay. That's great, Ul. Thank you.
And with no further questions in the queue, I would now like to turn the call back over to Ellis Jacob for closing remarks.
Thank you very much for joining us this morning. Our next scheduled event is the AGM on May 29 at our Cineplex Cinema, Young Eglinton and VIP Theater. This will be a much condensed event with a very brief meeting. There's no management presentation or film reel, but we will have a short Q and A. And then in August, we look forward to speaking with you again for our Q2 conference call.
Thanks very much.
And that does conclude the call. We would like to thank everyone for your participation. You may now disconnect.