Good day, welcome to the Cineplex Inc. first quarter 2019 analyst call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melissa Persaud. 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, welcome to Cineplex Inc.'s first quarter 2019 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 hold a 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 the quarterly fluctuations of the Hollywood film product. The quarter's expected weaker film product in January and February, combined with a lack of strong carry-over 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 food service revenue. As we look ahead to the second quarter and beyond, we are very encouraged by the results so far and the film slate for the balance of the year, especially with films like "Avengers: Endgame," which broke numerous records as it achieved the largest global opening weekend ever and became the first film in history to surpass the CAD 1 billion mark in its opening weekend.
As of today, "Endgame" has grossed over CAD 650 million 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 CAD 300 million 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 first quarter of 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 declines was the all-time quarterly record amusement revenue and first quarter record media revenue. First quarter records were also achieved for BPP of CAD 10.44 and CPP of CAD 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 16 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 EBITDA-L, to address these issues.
Primarily as a result of the soft box office results, first quarter adjusted EBITDA-L decreased 30.6% to CAD 34.3 million. 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's up over 10% for the second quarter. 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 4DPLEX to add up to 20 ScreenX locations in select Canadian markets over the coming years. The new agreement reflects a growing demand for immersive moviegoing experiences in Canada.
Alternative programming reported growth in revenue and attendance for the first quarter, with strong performances including the anime film "Dragon Ball 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 food service, 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 theaters. As of today, we currently have 60 theaters, 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 theater, Cineplex Cinemas Park Royal and VIP, on April 3rd. Located at the south side of the Park Royal Shopping Center in West Vancouver, the 11-auditorium theater features luxury recliner seats, an UltraAVX 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, the Cineplex Store registered a 107% 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 a first-quarter record for us, increasing 7.7% to CAD 35 million.
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 is a decline in attendance of softer film product. 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 signage solution that will optimize the retail experience for customers at 20 MEC 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 second quarter of 2018. These increases are 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 CAD 16.4 million. 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 this year as compared to March in 2018.
However, we were thrilled to open our sixth location of The Rec Room at Square One 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 Playdium location in Dartmouth, Nova Scotia, scheduled to open in 2020. Moving to esports, WorldGaming hosted the official Winnipeg Jets NHL 19 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 4 platforms competed to be crowned the official Winnipeg Jets NHL 19 champion.
Also during the quarter, WorldGaming teamed up with NFL Canada to launch season 2 of the Madden NFL 19 Canadian Challenge and also held the online qualifiers for the 2019 Call of Duty: Black Ops 4 Canadian Championship Series. Finally, subsequent to quarter end, Collegiate StarLeague held its 2019 North American Collegiate Grand Finals at the end of April in Atlantic City, N.J. The event featured hundreds of the very best collegiate esports teams and players from the United States and Canada competing for more than CAD 100,000 in scholarships. Looking at Scene, membership in our loyalty program continued to grow, reaching 9.7 million members as of March 31st, 2019. 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 "Avengers: Endgame" and its continued traction over the past 2 weeks. Next up is the action-adventure, "Pokémon Detective Pikachu" starring the voice of Ryan Reynolds as Pikachu, opening this weekend, and on May 24th, 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 "Godzilla: King of the Monsters," the next in the series, both coming to theaters on May 31st. June doesn't appear to slow down with films like "Dark Phoenix," the Marvel X-Men film with Jennifer Lawrence, Sophie Turner, and Jessica Chastain, the animated sequel, "The Secret Life of Pets 2," "Men in Black: International" with Chris Hemsworth, and Pixar's "Toy Story 4," when a new toy joins Woody and the gang.
Moving to the third quarter, we look forward to Marvel's live-action "Spider-Man: Far From Home," opening on July 2nd. From the team behind "The Jungle Book," we have the remake of "The Lion King" on July 19th. We think this will be one of the biggest movies of 2019, with amazing graphics and high anticipation across a wide demographic range for this timeless story. On August 2nd, guests can enjoy the "Fast & Furious" spin-off, "Hobbs & Shaw," starring Dwayne Johnson and Jason Statham. On August 9th, 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 2," opening on August 16th.
On September 16th, we have the anticipated "It Chapter Two." Part one of this film became one of the highest grossing films for the month of September when it opened 2 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 CAD 1.80 per share on an annual basis, up from the current CAD 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&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 2019 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 the new non-GAAP measure we are providing, adjusted EBITDA after leases or adjusted EBITDA-L, to assist with the comparability to prior periods.
Our disclosures in the MD&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, an expected weak film slate in the first quarter negatively impacted the exhibition business, resulting in total revenue decreasing 6.6% to CAD 364.9 million, and adjusted EBITDA-L decreasing by 30.6% to CAD 34.3 million from CAD 49.5 million in the prior year. Cineplex's first quarter box office revenue decreased 13.7% to CAD 156.5 million, compared to CAD 181.4 million in the prior year due to the weak film slate. The impact of the 15.6% attendance decline was partially offset by a VPP increase of 2.3%, which established a first-quarter record of CAD 10.44, up from CAD 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 fourth quarter of 2017, including "Star Wars: The Last Jedi" and "Jumanji: Welcome to the Jungle." Food service revenue decreased 11.9% to CAD 103.1 million. Included in food service revenue is CAD 7.9 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 CAD 6.35. The CPP growth was attributed in part to expanded food offerings, including those available at Cineplex's VIP cinemas and additional licensed locations. Total media revenue increased CAD 2.5 million or 7.7% to CAD 35 million for the quarter.
Cinema media revenue, which is primarily theater-based, increased nominally despite the theater 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&W and 7-Eleven. During the quarter, we added 345 new locations, up 5% over the prior year to a total of 13,847 locations. Amusement revenue increased to CAD 8.6 million or 17.2%, due to strong revenue growth from P1AG, in addition to The Rec Room, which contributed CAD 8 million of amusement gaming and other revenue. P1AG revenues increased by CAD 7.4 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 CAD 0.3 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 12 to 24 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 2019. Turning briefly to our key expense line items. Film cost 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 first quarter of 2018. Cost of food service for Q1 2019, excluding CAD 2.2 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 CAD 185.4 million decreased CAD 32 million or 14.7%, primarily due to the impact of the adoption of IFRS 16. Other costs include theater occupancy expenses, other operating expenses, and general and administrative expenses. Theater occupancy expenses were CAD 18.4 million for the quarter versus a prior year actual of CAD 51.9 million, a reduction of CAD 33.5 million. This was primarily due to the impact of IFRS 16, which reduced rent expense by CAD 39.7 million. Additional details on the movement arising from the transition to IFRS 16 can be found in our MD&A. Other operating expenses were CAD 148.2 million for the quarter versus a prior year actual of CAD 147.4 million, an increase of CAD 0.8 million.
Other costs are net of CAD 4.3 million of cash rents related to the lease obligations arising upon the adoption of IFRS 16. Increases included a CAD 5.2 million increase for P1AG due to its growth in business volumes and a CAD 2.1 million increase due to new and acquired theaters, net of a reduction of CAD 0.4 million due to disposed theaters. These increases were offset by a CAD 2.7 million decrease in same-store theater payroll and a CAD 1.4 million decrease in same-store theater operating expenses due to lower business volumes. In addition to a CAD 1.6 million decrease in marketing costs due to the timing of expenditures. Pre-opening costs for The Rec Room of CAD 0.7 million as compared to CAD 0.3 million in the prior year were higher due to the timing of openings.
G&A expenses were CAD 18.9 million for the quarter, which was CAD 0.7 million higher than the prior year due to a CAD 1.8 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 CAD 0.8 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 CAD 25 million cost reduction program. Interest expense increased to CAD 11.2 million during the quarter to CAD 17.6 million, primarily due to the inclusion of CAD 11.5 million in lease-related interest arising on the transition to IFRS 16. Net CapEx for the first quarter was CAD 31.7 million as compared to CAD 23.6 million in the prior year.
With timing changes related to certain new locations, we are reducing our net CapEx guidance to CAD 155 million from CAD 175 million for 2019, with the CAD 20 million timing difference now flowing into 2020 and increasing our 2020 guidance to CAD 170 million from CAD 150 million. Net income for the quarter was down CAD 22.6 million to a loss of CAD 7.4 million, and basic EPS was down CAD 0.36 per share to a loss of CAD 0.12 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 CAD 3.3 million in the current period and approximately CAD 6.4 million or CAD 0.10 per share as compared to Q1 2018. 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 Cineplex 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. That concludes our remarks for this morning. We'd now like to turn the call over to the conference operator for any questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. At this time, we will hear first from Aravinda 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 under the Cinemark arrangement, which I suspect will continue for maybe another quarter or so, then there's the recurring piece that will continue. How should we think about the sustainable growth of that segment? And perhaps for Gord, I know you talked about 15% mark is where you want to get to. Do you see the movement now heading in that direction to be something that can be sustained given the fact that you've done a lot of the restructuring there? That's number one. My second question is on Cineplex Media. Obviously creditable to have it stable given the box office quarter that you've had.
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 Cineplex Media side as well? Thanks.
Thanks, Aravinda. This is Gord. I'll handle the P1AG question. First and foremost, we're very pleased with the results from P1AG during the quarter. As we had mentioned historically, 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 firm that could service clients across the country. As such, we expected that we would see a bit of share shift opportunity within the space as it exists today. I think Cinemark is an example of a share shift. As well as having that national footprint, it allows to grow as retail looks to create food and beverage and entertainment destinations as anchors in the future, and as new entertainment concepts such as VR and other concepts are introduced into the marketplace.
Share shift plus growth was very attractive for us to create a national opportunity. You guys know, last year, we had gone through a number of acquisitions, we looked to right-size the organization, we went through a lot of integration, and there was a lot of bump in last year's numbers as we integrated the various entities within P1AG. As we had stated, we expected to get to our target 13%-15% EBITDA margins in that business. We're pleased that we're at the 14% beginning of the first quarter. We will continue to see the growth in the lapping of the new Cinemark agreement for another couple of quarters. Aravinda, just to clarify one thing in your comment. The Cinemark contract is what we would characterize as a route business client.
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. Hopefully those have answered your questions on P1AG.
Aravinda, on the media 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. Looking at the next few quarters, we feel quite comfortable as to our continued growth in those two business areas.
Thanks, Ellis. 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. At this point, as we sit in the middle of Q2, do you feel confident that going forward you more or less track industry growth, notwithstanding some of these provincial titles that spike the provincial box office numbers, that you're generally back on track there given that most of some of the refurbishments and so on and some of the new installs that were done by competitors are starting to taper out? Just from a modeling perspective, I just want to get your thoughts on that. Thanks.
It's a good question, Aravinda. 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 over-perform because of our UltraAVXs, because of our IMAXs and VIP and all of those different offerings. 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. I think in the second quarter, 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.
We'll go to our next question from Rob Goff of Echelon.
Thank you, good morning. It was interesting that you mentioned "The Wandering Earth." Ellis, 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?
With "The Wandering Earth," it did extremely well in certain pockets of Canada. 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. There in Toronto, for example, in areas like Markham and Yonge and Dundas, we did extremely well with "The Wandering Earth." In areas around Vancouver, it was very strong. Similarly, with the Bollywood product, like I mentioned, "Gully Boy," we were able to deliver some good numbers right across the country. 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 time frame, but we can get them in for a week or two.
That's going to be a continued focus in building given our diversification in Canada and the diversity in the country. Does that answer your question?
Yes. Very good. Thank you. Next question will be on The Rec Room. Are you pleased with the balance of roughly 50/50 between food sales and amusement? When we look at The Rec Room, should we look at traffic there having any correlation with the box office?
Yeah. In the first quarter, 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. The locations that are close to 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.
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?
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. 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. Maybe just as a follow-up, I was wondering if there's any plans on expanding your original guidance from 10-15 builds and beyond that range?
Yeah. Just to let you know, on 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 One in Mississauga and also the Avalon Mall in St. John's, Newfoundland. regarding the
Okay. Got you.
As 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 10 and 15 in Canada.
Okay.
Derek, we chatted historically about 10 to 15 large box, typically called The Rec Room, and the 10 to 15 of the small boxes, which could have been typically called Playdium. 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. You're going to get the smaller versions that are going to be the sub-40,000 sq ft, and then the larger ones, which are 40,000 plus. In total, there'll be up to 30 locations.
Okay. That clears it up. 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. We are very close to getting to the finish line. That will result in our expanded focus on Quebec from The Rec Room and Playdium perspective.
Okay. One final one for me. I was just wondering if you guys still think that 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?
As we've mentioned, our initial focus was sort of on the box office and the ticket purchase. We're now 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 old order taker in the auditorium. Look, we're always looking to use digital products as a way to improve the customer experience and customer journey. Sometimes and occasionally the end result of that is that it does actually take some cost out of the system.
In summary, when you look at our Scene loyalty program, as I mentioned, we are up to 9.7 million 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. I think there's a lot of opportunity in using our data going forward.
Okay. Thanks for your time, gentlemen.
As a reminder, it is star 1 if you do have a question at this time. We'll hear next from Matthew Hoffman of Scotiabank.
Hi, good morning. It's Jeff Fan from Scotia. I've got a few here. Start off on the capital spending budget for this year. Gord, 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?
Yeah, primarily, the largest change is going to be the shift of Topgolf, which we initially had planned to open at the end of 2019 into early 2020, that is going to shift more into 2020 now. That's the primary shift.
Okay. Can you elaborate on that a little bit more? Do you have locations set and this comes down to timing of getting everything up, or 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 a location.
Okay.
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. 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?
As we've always said, it really has to do with when advertisers want to have their messages on the screen. It's 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. 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.
You feel pretty confident?
As I mentioned to you, we feel very comfortable moving forward for the next quarters.
Okay. Switching over to The Rec Room. Last quarter, yeah, I think you guys gave us some numbers on same store or same location trend on revenue. Wondering if do you have any stat to share on that front. Just on The Rec Room, with the changes in, I guess, the format between The Rec Room and Playdium, as we sit back, 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? Just trying to get your assessment of how it's done and the overall market opportunity.
Jeff, I'll take your first question, which was, we alluded it to our remarks about the expected honeymoon period, which would kick in after a period of 12 to 24 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. 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.
When you look at The Rec Room versus Playdium, it's got to do with mainly the demographics and the age groups that the entertainment provides. We are basically being very strategic about where we open these locations. 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 Playdium.
Okay. Finally, just on digital media. It looks like a lot of the growth was in the project related. I'm just trying to assess, it looks like installation may have been the driver this quarter. Do you have an outlook for the next few quarters on how installations would come, therefore, your revenue outlook for digital media? The second part of the digital media is just the recurring revenue piece.
Should we look at the other revenue line as the recurring revenue piece based on installations that have taken place in the past?
Yeah. Jeff, on the first part of the question, the reason we segregated the line item was 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 often dependent on individual franchisees. Look at that. I would say that we're obviously very pleased that 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 give guidance because individual franchisees and clients can shift their programming around for the rest of the year. We are happy we have a fairly sizable backlog with the clients that we've historically announced.
On your second question, in that bucket of the non-installation revenue, it includes a number of elements which also includes our media revenue, the advertising revenue of the shopping malls, as well as creative. Then it would include what I would call the more duty-type items, like the software license fees and the network management fees. There is discretion period over period in both the amount of creative services that is asked for, then we'll get periods of ups and downs in the advertising revenue in sort of our public space networks. Those are the key drivers. There are some discretionary elements in the recurring. Look at it over a longer period of time as opposed to one quarter in isolation.
Okay. Thanks, Gord.
Thanks, Jeff.
As a reminder, it is star one if you do have a question. We will hear next from Drew McReynolds of RBC.
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've thought in the quarter. Just wondering if there's any dynamic in there. 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 your capital return priorities, how you look at the dividend within the context of clearly an elevated CapEx profile. 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 both, that'd be great. Thank you.
Drew. First and foremost, concession. The concession cost was a little bit higher in the quarter. As I alluded to, there was a bit of a mix shift in terms of the offerings that were sold during the quarter. We continued to roll out alcohol into the theaters. Uber Eats was quite successful during the quarter at a bit higher cost than other items. As we expand VIP and outtake sales, they are at a lower margin product for us. 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.
your second question in terms of capital allocation and dividend and dividend policy. 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 flow through our operating cash flow, our results from operations net of maintenance CapEx, we are prepared to dividend 60%-85% out of that to our shareholders. We're currently at the lower end of that range, we are using the difference, 35%-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 2.5 times range.
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. We'll revert to positive while balancing that leverage criteria, providing our shareholders with a return through the form of a dividend. That's the model that we've historically 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%-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%. 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. We are doing this one block at a time, so it takes a little longer to get to the final runway. 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.
Appreciate that recap. Very helpful. A final one, just back to Cineplex Media. I know you don't want to give specific quarter-by-quarter guidance, but qualitatively, it's been 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 a attendance-driven advertising model with an expectation of a strong slate, clearly we'd expect a pretty good quarter on the Cineplex Media side. As we saw in Q1, it isn't that direct correlation necessarily. Just want to level set expectations going into Q2 around Cineplex Media and give a sense of where advertisers are at with respect to the slate and 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. 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, Ellis. Thank you.
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 29th at our Cineplex Cinemas Yonge-Eglinton and VIP Theater . This will be a much condensed event with a very brief meeting. There's no management presentation or film reel, we will have a short Q&A. In August, we look forward to speaking with you again for our Q2 conference call. Thanks very much.
That does conclude the call. We would like to thank everyone for your participation. You may now disconnect.