Good day, and welcome to the Cineplex Incorporated First Quarter Analyst Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Pat Marshall, Vice President of Communications and Investor Relations. Please go ahead, Ms.
Marshall.
Good morning. Before beginning 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'll now turn the call over to Ellis Jacob,
our President and CEO. Thank you, Pat. Good morning and welcome to Cineplex's, Inc. First quarter twenty eighteen 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. Throughout the quarter, we continue to execute our diversification strategy to reduce our reliance on the cyclicality of the quarterly box office.
Total revenue for the 2018 decreased slightly by 0.9% to $390,900,000 compared to the prior year period as the revenue strength from our new businesses was offset by the decline in the exhibition business due to a 9.3% attendance decrease as a result of the softer film slate. However, this was partially offset by record first quarter box office per patron of $10.21 and record first quarter concession per patrons of $6.09 which increased $0.24 and $0.38 respectively from prior year period. Amusement revenue increased 20.5% or 8,500,000.0 largely due to increased revenue associated with the Dandy Amusements acquisition in 2017 and contributions from The Rec Room. The Rec Room performed well and we continued with proactive cost control measures. However, the attendance decline resulted in a 10% decrease in adjusted EBITDA to $53,500,000 Now I would like to highlight our key accomplishments during the quarter.
Beginning with Film Entertainment and Content. The top five performing films for the quarter included Black Panther, Welcome to the Jungle, The Last Jedi, Peter Rabbit and 50 Shades Free. The strong performance of Black Panther, which is now the third highest domestic grossing movie of all time, was a very positive contributor. Although one film does not make the quarter and unfortunately, the remainder of the period's film product did not perform as well as expected compared to the prior year. Black Panther represented 22% of box office revenue during the quarter and Jumanji, Welcome to the Jungle represented 10%.
However, the remainder of the top five films for the fourth quarter represented significantly less than the prior year. In alternative programming, the 2018 included international feature films, five live performances of the Met Opera and performances from the Bolshoi Ballet and National Theatre Live. Our international film programming reported an all time record quarter with the Hindi film Padma Vad, which became the highest grossing international title in Cineplex history. Within theater food service, in addition to the record CPP discussed earlier, as a result of changes to provincial liquor laws in Ontario and Alberta, we can now offer alcoholic beverages to our guests outside of VIP cinema auditoriums and licensed lounges. We began rolling out beer and wine sales in theatres in Ontario late last year and during the first quarter added five more theatres bringing our total to 15.
The plan is to continue to add this service to select theaters within Ontario and Alberta in 2018. In addition, we continue to work with other provinces to revise legislation so that we can provide this offering across the country. We see upside for continued CPP growth as we expand the number of locations with alcohol sales and continue to enhance our VIP cinema offerings. Subsequent to quarter end, we were pleased to open our newest theatre Cineplex Cinemas East Hills in Calgary on April 20. Located at the Southwest end of the East Hills Shopping Center, this seven screen theatre features luxury live recliner seating and offers a variety of entertainment options for guests of all ages.
These include an ultra AVX auditorium with D Box motion seats, an X Scape entertainment center and a variety of food service options beyond traditional concessions. The theater will also feature an auditorium designed specifically for families with young children. Looking at our online initiatives, registered a 52% increase in device activations and a 54% 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. Moving on to Media.
Overall, the 4.1% decrease in total Media revenue was due to a 1.2% decrease in advertising from cinema media and a 9.2 decrease in revenue from our digital place based media. However, we do expect a strong second quarter ahead for both of these areas of the business. As reported earlier this year, Cineplex Digital Media was selected by Arcos Dorados, the largest independent McDonald's franchisee in the world to deploy, maintain, operate and support a network of digital menu boards at locations in Argentina, Brazil and Uruguay. The rollout has begun and will continue through the balance of the year and into 2019. In amusement and leisure, we were very pleased with the performance of The Rec Room in the 2018 with our four locations generating total revenue of $16,100,000 and a store level margin of 20.5%.
During the quarter, we announced plans to open two new locations of The Rec Room, the first on the East Coast at Avalon Mall in St. John's, Newfoundland and the second in Winnipeg at Seasons of Tuxedo. Both are scheduled to open in 2019. On Monday, we opened our newest location of The Rec Room at Masonville Place in London, Ontario. Response from the community has been very positive as we continue to enhance the offerings with each new opening.
Also subsequent to quarter end, we announced plans to open a new Palladium location in Brampton, Ontario, converting and reimagining our current Cineplex, Odeon, Orion Gate Cinemas. The new entertainment space will be specifically designed for teens, their friends and family who are looking for an affordable entertainment choice for everyday play, casual dining or to celebrate special occasions. We expect this location to open its doors in mid-twenty nineteen. This will be the first conversion of an existing theater and we will continue to evaluate other opportunities on a market by market basis. In March, Cineplex and World Gaming hosted the Canadian Call of Duty World War II Championship Series finals at Scotiabank Theatre Toronto, where teams from across Canada competed for $60,000 in cash and prizes as well as the championship title.
A variety of gamers from underdogs and the unknown to the world's highest ranking talent competed in this action packed live national finals event, which was also live streamed globally with approximately 500,000 views. During the quarter as part of a partnership with the Ed Schneider Foundation, World Gaming hosted the first ever North American competitive hockey video gaming tournament played on an eSports NHL 18. The finals were held in Philadelphia and proceeds from the tournament benefited the Ed Snyder Youth Hockey Foundation, which was created by the late Philadelphia Flyers owner. This past weekend, our collegiate Star League held a CSL finals in Huntington Beach, California, with the top ranked college teams across North America competing for prizes and scholarships in this exciting event. Moving on to SCENE.
During the quarter, we reached another milestone surpassing the 9,000,000 member mark and adding 200,000 members during the period. As of March 31, our Steam loyalty program reached 9,100,000 members. Finally, subsequent to quarter end, we implemented a program to extract cost savings and synergies across our organization. This included headcount reductions as well
as the ongoing integration and optimization of the cost structures of our business.
As a result, on April 9, a restructuring occurred within the company. Overall, we expect an annualized cost savings of approximately $25,000,000 to be realized by year end. Now let's take a look at some of the films for the summer. The past weekend, Infinity War delivered the highest opening weekend ever with a total of $257,000,000 in North American box office revenue. It was also Cineplex's largest opening weekend ever.
This illustrates the power and flow of quality film product. Audiences will come to the cinema when we have films that they want to see. We spent last week at CinemaCon where over 3,000 movie exhibitors from around the world gathered with distributors, suppliers, celebrities and journalists. After viewing upcoming content from a record 11 studios, we were all very encouraged by the film slate for the year and especially so for the next seven weeks, which includes Deadpool two, A Star Wars Story, Ocean's Age, The Incredibles two and Fallen Kingdom. The conference also reaffirmed the very strong relationships between distributors and exhibitors.
Moving to the third quarter, we look forward to Marvel's Ant Man and the Wasp opening on July 6 and the ever popular Cartoon Monster Family returns with Hotel Transylvania three: Summer Vacation, which opens on July 13. Also opening on July 13 is the action adventure film Skyscraper starring Dwayne Johnson. Then the original Mamma Mia cast returns for Mamma Mia, Here We Go Again. On July 27, Tom Cruise returns to the big screen as Ethan Hunt in another action packed Fallout. As you can see, the summer film slate looks very strong and offers something for everyone.
As we have been saying for some time, we feel the recent box office performance has been cyclical in nature and the result of weaker film product. We are confident that the second quarter film slate signals a positive turnaround in box office performance. We also remain committed to our business diversification strategy, which positions Cineplex uniquely in its ability to deliver results from many different revenue sources. Before I turn the call over to Gord, I'm pleased to announce that the Cineplex Board has approved a 3.6% dividend increase to $1.74 per share on an annual basis, up from the current $1.68 per share. This increase will be effective with the May 2018 dividend, which will be paid in June 2018.
Now I will 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. We continue to execute our diversification strategy. And for the first quarter, total revenue was relatively flat, decreasing 0.9% to $390,900,000 as the revenue strength from the new businesses was offset by the decline in exhibition revenue as a result of the 9.3% attendance decline.
Adjusted EBITDA decreased by 10% to $53,500,000 primarily a result of the attendance decline as a result of the weaker film slate and a CAD1 million restructuring charge related to the cost savings and synergy program. Cineplex's first quarter box office revenue decreased 7.2% to CAD181.4 million compared to CAD195.4 million in the prior year. This was a result of the impact of the 9.3% decrease in attendance, more than offsetting the PPP increase of 2.4%, which established a first quarter record of CAD10.21, up from CAD9.97 in 2017. The increase in BPP is primarily due to price increases in selective markets as compared to 2017. Foodservice revenue increased 2.6% to $116,900,000 Included in Foodservice revenue is $8,700,000 from The Excluding revenue from The Rec Room, Theatre foodservice revenue decreased by 3.2 from the prior year due to the attendance decline, partially offset by the 6.7% increase in concession revenue per patron to a first quarter record of CAD6.09.
The CPP growth was primarily the result of increased basket size and expanded food offerings, including those available at Cineplex's VIP cinemas and outtakes locations. And CPP was also positively impacted by the continued rollout of additional licensed locations in Ontario. Total media revenue decreased $1,400,000 or 4.1% to $32,500,000 for the quarter. Cinema media revenue, which is primarily theater rate, decreased 1.2% due to lower cinema advertising as we saw some shift in spending to Q2 with the stronger film slate. Digital place based media revenue decreased 9.2% primarily due to lower project installation revenues compared to the prior year period.
During the quarter, we increased our location account by 11% or two twenty seven new locations to a total of 13,153 locations. Amusement revenue increased CAD8.5 million or 20.5% due to the acquisition on 04/01/2017 of Dandy Amusements International Inc. And strong revenue growth from The Rec Room, which contributed CAD6.9 million of amusement, gaming and other revenue. With respect to The Rec Room, we were pleased with the results for the quarter, reporting total revenue of CAD16.1 million and store level cash flow of 3,300,000 representing a store level margin of 20.5% with only one of the four locations reaching its first full year of operations. Turning briefly to our key expense line items.
Film cost for the quarter came in at 52.5% of box office revenue as compared to 52.9% reported in the prior year. Cost of food service for Q1 twenty eighteen, excluding the $2,300,000 incurred at The Rec Room was 20.7% as compared to 22.3% in the prior year. Cost of food service at The Rec Room was 26.8%, in line with expectations. Other costs of $217,500,000 increased $11,400,000 or 5.5%. Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses.
Theater occupancy expenses were CAD51.9 million for the quarter versus a prior year actual of CAD52 million. Other operating expenses were CAD147.4 million for the quarter versus a prior year actual of CAD132 million, an increase of $15,400,000 Major reasons for the increase include an increase of $4,700,000 in amusement solutions expenses, primarily due to the acquisition completed during the 2017. An increase of CAD 7,600,000.0 in unit level operating costs related to additional Rec Room locations and an increase of CAD 2,200,000.0 in costs related to same store theatre payroll as a result of the minimum wage increases in Ontario, Quebec and Alberta, which more than offset labor efficiencies achieved during the quarter. G and A expenses were CAD18.1 million for the quarter, which was CAD4 million lower than the prior year due to reduced costs arising from share based compensation, mainly due to Cineplex's lower share price. Throughout 2018, we have implemented a program to extract synergies across our organization, including the ongoing integration and optimization of the cost structures of our businesses and technology opportunities.
Certain onetime costs in the amount of CAD1 million related to this program were incurred during the first quarter and included in G and A expenses. We expect an additional CAD4 million to be incurred during the remainder of the year. Once fully implemented, we expect the annualized savings from these initiatives to be approximately CAD25 million. With respect to the timing of the realization of these savings, we expect to ramp up to the full annualized run rate over the next three quarters in equal increments. Net CapEx for the first quarter was 23,600,000 as compared to $25,100,000 in the prior year.
We continue to estimate that our net CapEx for 2018 will be approximately $125,000,000 and CAD150 million for 2019, reflecting in part the CapEx for our first anticipated Topgolf location in 2019. As Ellis mentioned earlier, we have steadfastly focused on creating a diversified entertainment and media company for the future. Our short term results may be impacted by non recurring startup or integration costs, but the benefits of these investments will be borne in future periods as these emerging businesses grow, similarly to the way we are seeing the rec room margins improve as we gain operating history. We are prepared to diligently take these short term expenses in anticipation of creating future value. We are also prudently prepared to use both our operating cash flow and our credit facility to invest in these new businesses.
While theatre exhibition results for the quarter were weaker than the prior year due to the relative film slate, we are encouraged by the early Q2 box office successes and the outlook for the remainder of the quarter in addition to the positive results from the other areas of the business and our ongoing focus on cost management. We continue to remain comfortable with where Cineplex Inc. Is positioned today. We are pleased to announce the dividend increase to $1.74 on an annualized basis. 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, and we'd now like to turn the call over to the conference operator for questions.
Thank
And we'll take our first question from Jeff Fan with Deutsche Bank.
Thanks and good morning everyone. A couple of quick ones. The premium percentage this quarter was about 41%. It's down from last year. Wondering if you could just comment about what happened in the quarter and if you have any outlook for the rest of the year as to how that percentage may trend?
And then the second one is just more housekeeping with respect to the working capital on the free cash flow number. What's the outlook with respect to your working capital for the rest of the year just so that we can get the free cash flow number right? Thanks.
Sure. On the first question, I mean, the contributions of three d product really impact kind of the overall premium percentage. So in the first quarter, the three d product was a little bit weaker in terms of the overall mix compared to the prior year. Now the outlook for the remainder of the year is quite positive. If you look at the particularly in Q2 and the type of product that's being
So I think, Jeff, what you're just seeing is kind of a quarter over quarter three d impact. Definitely nothing to do and we've seen a continued strength in Ultra AVX and VIP as a consequence. On the second part of your question, the working capital, as we've mentioned kind of historically, the pattern of working capital inflows and outflows in the exhibition space is fairly relatively consistent year in and year out. And that during Q4,
there
tends to be a significant inflow of working capital, primarily as we're selling gift cards and corporate coupons in the holiday period that then are utilized in the first quarter. Now this year was a little bit of an anomaly and that the first quarter period over period working capital changes, there is a significant improvement. And it really just related to kind of the timing of some of the receipts and payments from an AR side and an AP side. I usually say that on over the course of the year, one should expect that there'll be a significant kind of quarterly swings in Q1 and Q4, relatively flat in Q2 and Q3. And on a full year basis, there should be a small source of working capital in a typical annualized basis.
Jeff, going back to your question on the three d, if you looked at 2018, there were only three of the top five movies that were in three d compared to four in the prior year, which resulted in the 41%.
Okay. And just if I can just squeeze in one quick one for Ellis. We talked about SCENE in the past. I'm wondering if you can talk a little bit about the opportunities around using that data to help monetize for potentially incremental revenue opportunities and where we stand in some of those discussions? Thanks.
We continue to use SCENE in a beneficial way as far as our internal opportunities go. And we're also looking at external opportunities with Scotiabank as to how we can better utilize the data. And we feel after eleven years, we've got considerable history and great data where one out of four Canadians are part of the program and 45% of the households have a SIM card. So it's a work in progress and we continue to evaluate it. But for us, one of the main pushes is to use it to basically increase our movie visitation and also to help us as it relates to staffing and some other areas of our internal business.
Okay. Thank you.
For our next question, we'll go to Derek Lessard with TD Securities.
Yes. Good morning, everybody, and congratulations, Pat, on the retirement. No doubt well deserved. I was wondering, Alice or Gord, on your synergies program, if maybe you could help or elaborate further and break down the 25,000,000 into buckets for us, whether by segment or whether it was for headcount or technology? And you already answered my question on when you expect to get there.
Yes. So I mean, let me just give you a little bit more color around the numbers. So roughly two thirds of the amount will come from at the business unit level in OpEx and one third will come from G and A. And so that's kind of bucketing in terms of kind of geography on the financial statements. Bucketing in terms of nature of whether it's headcount versus kind of OpEx operating cost savings, that same relationship holds relatively true.
Roughly two thirds of that amount is coming from payroll and and payroll related initiatives, including technology and automation, and one third is coming from direct cost reductions.
Okay. Thanks for that. And maybe just two quick questions on Digital Media. In Q4, you had a nice revenue bump from the 1,000 or so from Citizens Bank project. Just wondering if you can explain why there wasn't a similar bump in this quarter.
And secondly, I'm just wondering if you're able to tell us a bit more on the Arcos Dorados rollout, how many anticipated installs and when you expect the and maybe a timeline on project?
Yes. So with respect to
the first part of your question, yes, we did the Citizens Bank install substantially all in Q4 last year. So you had 1,000 locations being deployed, contributed to that spike that you saw in Q4. As we look into Q1, as I and again, as I said, Citizens Bank was substantially fully deployed in Q4. We announced our Costa Rattles. We're not we haven't really started the deployment.
As Ellis mentioned in his commentary, we expect it to occur throughout 2018 and into 2019. And then Ellis' comment further was that we expect to see some decent growth in this business in the back three quarters of the year as a result of kind of the backlog of that and some other opportunities that we feel that we're optimistic on some outcomes out of some other opportunities we're pursuing.
Thanks for that guys.
We'll go next to Ken O'Toole with Raymond James.
Thank you and good morning.
Ellis, just if we could
touch on the magnitude of the relative box office underperformance, a little surprising. Clearly, Black Panther didn't resonate as well north of the border as it did south. Could you help us better understand why, and perhaps more importantly, looking to the second quarter, why it's not a risk given a sort of a superhero heavy slate? And then just a follow-up there as well. Could you also speak to Canadian box office performance quarter to date relative to U.
S. Quarter to date?
Yes. On the Canadian side, I think for quarter to date, there are a couple of movies in the month of April that didn't perform as well for us. There were some faith based movies and other movies that didn't work. But with Avengers, we are seeing a roaring back position for Canada. And when I looked at the numbers this morning in North America, we are already at $3.00 $6,000,000 for the movie as of last night.
And in Canada, by the end of this week, I think over 2,500,000 people will walk through our theater doors. So this is a really strong movie and it looks like it continues to have legs and you've got great opportunities and these movies did well in Canada in the first versions with Deadpool two, which was extremely strong when it was released originally. You've got the Star Wars story. You've got Oceans. You've got Incredibles two and Jurassic, all movies that performed extremely well in their original releases.
So we're pretty comfortable with the bigger movies and where they are positioned for the second quarter and our overall performance. Great. Thank you, Ellis. Just one for Gord.
Gord, you called out or rather provided the breakdown on the other operating expense increase, including that $7,600,000 in rec room. How much of the rec room related expense And apologies if I missed that. And then a follow-up for you as well, just on your theater payroll. Was that just the minimum wage impact?
Or were you perhaps a little sort of people heavy in theaters given that Black Panther didn't play quite as well in Canada in the quarter?
Yes. So on the second question, the look at the minimum wage. I would say there's a a theater pay hours reduction that was more than offset that by the minimum wage increase. And the and the hours reduction was was significant as was mentioned that we're looking to technology to a certain extent to kinda make the whole process more efficient and and better from a customer journey perspective. And that's taking labor out of the system.
And as I mentioned, kind of a ramp up period as we we're ramping up that throughout the year, but the minimum wage more than offset that increase. And sorry, Kenric, just remind me the other your first question then.
Sorry, Gord. Just on The Rec Room, you called out the 7.6 How million much of that was perhaps preopening versus run rate on existing?
Yes. So there were no new openings in the quarter. We have opened our location in one in this week. So there is a little bit of preopening, but not kind of significant as compared to other quarters, prior quarters when we've actually had locations opening in the quarter.
Want to start with the recliner, the rollout there. I was wondering, Ellis or Gord, if can maybe give us an update as to where you stand and if there's a little bit more that you want to sort of roll out there in terms of the recliners. And the extent to which it's still affecting the delta between the industry box office number and Cineplexes? And whether we should see that gap kind of close as we get to it in the second half of the year?
Yes, Arinda, we've done as of now 149 screens, 15 locations, about 10% of our circuit. The problem with the recliners is, as process of doing them, you basically have to take down those auditoriums and it affects the overall box office. So that was one of the reasons that we under indexed. Second reason is a couple of new theaters were opened by independents in Canada. And in 2017, we did not open any new theaters.
Now we did open East Hills, which is in Calgary. We will be opening Seaton and following that Pickering and those will all be recliner theaters. So that will be something that we will continue to monitor, but we should be seeing better positioning as far as our percentages going forward. Again, Quebec does hurt us if there are movies that perform higher in Quebec because our share there is lower than the rest of the country.
Great. Thank you. That's very helpful. And just my second question, with respect to the Player One, the amusement gaming business, I just wanted
to touch on the margins.
I know that earlier last year there was some integration spend and there was the absolute expectation that there would be some margin expansion. Obviously, in Q1, the margins contracted a little bit. I was wondering, Gord, if you can kind of give us some color on that and whether some of the restructuring would be occurring in that area as well?
Yes. And absolutely, I think we've kind of we've mentioned previously that we expected some ongoing costs and additional costs in that business occurring for twelve months post the acquisition of Danny, which will take us into the kind of the first quarter here. So definitely some additional costs related to that. Look, the margin was compressed a little bit in the first quarter. I think also when we look at the timing of some of the expenses, that plays a role in it, but we're still comfortable that, that 15% margin that we've discussed with you with the investment community previously is the mark that we're comfortable that we're going to get to fairly quickly.
Great. Thank you. I'll pass the line.
We'll go next to Drew McReynolds with RBC.
Thanks very much. Gord, on the $25,000,000 in cost savings, appreciate the detail in terms of how that all feeds through. Is that in addition to what you've been doing over the past few years in terms of putting through or getting ready with some cost efficiencies to offset the minimum wage? Is that incremental to that? Or is everything just kind of all included in that 25,000,000
Yes. No. It's incremental. So I mean, there's been some initiatives, but
I think you'll see that in this quarter sorry, throughout 2018, we'll be fully rolling out some of the initiatives related to technology automation. But I mean, are real hard cost reductions across all our businesses across North America.
Okay.
And on the $4,000,000 in remaining onetime costs, will those like this quarter just be thrown in to wherever in the cost structure? Or will you strip those out for adjusted Okay.
To what we did and with the $1,000,000 in Q1 here, we'll include it and disclose it similarly to the way we did that. And as I mentioned, we expect an additional $4,000,000 Yes.
Great. And shifting gears
in Q2, sorry.
Okay. Shifting gears on The Rec Room. Remind us, I know only four locations, now five, but just remind us on seasonality with respect to Q1 kind of percentage wise relative to the rest of the year?
Yes. So you know what, seasonality is an interesting thing because with the limited number of locations out there, they each have their uniqueness. I would say, typically, you would expect sort of in the more winter months and particularly the holiday period in q four having a stronger quarterly allocation. But, you know, if you think of a location like the Roundhouse where tourism and, you know, the Blue Jays are playing, getting heavy foot traffic from those related activities, you know, that sort of distorts the overall trend. But, I mean, Drew, just to if I was to give you something, I would say that, between Q1, Q2 and Q3, slightly more strength in Q1.
And we're talking about ranges between probably 2225% of the overall business volume, with Q4 somewhere between, say, 2530%.
That's perfect. Yes, that's perfect. Not a
lot of seasonality,
that's not. Two others from me, a bigger picture. On Topgolf, you reiterated 2019, expect to obviously invest and open a location. Maybe just talk to kind of confidence on securing a location when we could hear an announcement along those lines. And secondly, maybe for you Ellis, just big picture on virtual reality.
Just update us on where you see Cineplex's role with virtual reality. I know or we all know you have that installed in a theater. You have that installed in the rec room. If you
can just
update us on how you see VR unfolding as we go forward? Thank you.
So in response to your first question on Topgolf, we do have a few locations that we are pursuing at this stage and we should be making an announcement in the short while ahead for a location which we will commence construction. So that process is ongoing and we should be there and get the best location for the long term and open it in 2019. On your question on virtual reality, as you know, we were one of the first to put in the void, which only had four locations in the world when we installed ours at the Roundhouse in Toronto. We continue to look at opportunities options as we move forward because there are so many different technologies out there and we continue to study the marketplace. As you know, we've got the IMAX virtual reality in our Scotiabank theater and we've also got our D BOX in location in Ottawa.
So we are looking at all of the choices and we definitely feel it's a really important part of the ongoing entertainment experience for Canadians.
Yes. And Drew, so as Ellis mentioned, we think it's a product set that will work in The Rec Room. There may be a different product that would work in a theater. And in addition, it's a product set that our P1AG business could distribute its supply to other third party customers.
And we are looking through also, TELUS, again, that we would install additional voids as we move forward with hopefully one in Q2 and then look into the balance of the year. Because I'm sure you've tried the one at the roundhouse and the lineups and the engagement is just fantastic.
That's great. That's very helpful. Thank you.
We'll take our next question from Tim Casey with BMO.
Yes. Good morning. Thanks. A few for me. Can we just go back to the restructuring initiative?
A $25,000,000 saving annual saving on a $5,000,000 outlay is a pretty impressive ratio. It's outstanding, actually. Can you help us understand how that is? I mean, I guess the implication is there's less severance charges related to the headcount reductions. I'm assuming that's because they're part time employees.
Can you offer us some more help on understanding that? And is that $25,000,000 savings, is that based on a particular box office assumption? Or guess what degree of variability or confidence do you have you'll hit the $25,000,000 by the end of the year?
Yes. I would say a low percentage of that amount would be dependent on a box office impact. So as I kind of alluded to previously, we're taking a significant amount of cost out of the system. And that when you look at kind of that labor allocation, there is a smaller component, which is related to taking hours out of the system. But, you know, the majority of and we operate we're operating kind of throughout North America.
So the severance amounts and the positions that are comprising that amount, Some of it is related to, know, if there's been resignations and positions that just have not been filled, there's no severance related. So we're trying to be, you know, prudent in the way we're kind of managing the entire process. But I'd there's a fine balance between some longer term employees, which were unfortunately difficult decisions for us to make and some more current employees.
And Tim, this is more focused on the overhead side of the business, not the people who are part timers working at the theater level, which we've also looked at from an hours perspective and using technology because you have to remember, we just in Ontario got hit with a 21% minimum wage increase. So it's a fine balance that we've got to work through as far as how we deal with that. And I think in the first quarter, you saw indications of how we've worked towards that. And what Gord is talking about with the 25,000,000 is more on the overhead side and the different businesses that we operate under.
Yes. So with that said, we have a high confidence of achieving that number.
Okay, great. Thanks for that color. A couple more. Could you provide some idea of relative scale of the Latin American McDonald rollout program versus to maybe McDonald's Canada or Dairy Queen? Is it about the same size as those?
Is it much bigger, much smaller?
Yes. So I mean they operate about just over 2,000 locations in South America, which puts them kind of in relative size to McDonald's in Canada.
And do you think you I don't know if you mentioned it, but what what time frame do you think you'll complete that deployment in?
So into 2019. Throughout 2018 is 2019.
Okay. How should we assess the rollout of the extra or the more flexibility you have with respect to alcohol in Alberta, Ontario in concessions? Do you expect a meaningful impact in concession revenue growth there?
I think what was said with respect to that is and we when you look at the overall growth in CPP and the history that we've achieved in the last two quarters, 9% in the fourth quarter and over 6% in the first quarter, is that we feel very comfortable that it will contribute, but it will be one of the few contributing factors that we're going to exceed kind of our historic growth rates in CPP in 2018. And historically, we've been up 4% to 5%, and so we should be above the 5% in 2016 sorry, 2018.
And is
that any margin implications we should think about?
Look. I would say in terms of the overall scheme of all the initiatives that are in play, and, you know, you've seen some some margin overall margin growth in the last two quarters. So, you know, I would say that the alcohol, won't have a significant impact on the overall, on the overall, portfolio of our offerings, but, it will help in terms of overall margin, CPP growth. But as I always say to everyone, the further we move away from POP and POPCORN, our margins are not going be at both same levels.
Yes, understood. And last one, a lot of noise around movie subscription services, mostly south of the border. Ellis, any thoughts on incorporating that into SCENE or some variation thereof? Thanks.
No. And you're referring to MoviePass, which has been in The U. S. For, I guess, for about four to five months now. And as you probably read, their offering keeps changing.
So as a consumer, I don't know how they will continue to, you know, deliver because they started off with one program, then they changed to another program. And now their latest program won't allow you to see a movie more than once and multiple other opportunities that have been taken away from the customer. So for us, we will evaluate subscription model that works for both Cineplex and the studios. Their whole focus was on data. We started data eleven years ago, and we've got some great information that they will never be able to replicate.
So we are always working with our studio partners on how to use the data best and also with third parties. So for us, it's basically something that we will continue to evaluate, but we are not rushing into doing something that will not provide meaningful benefits both sides.
Thank you.
We'll go next to Rob Goff with
Good morning and thank you for taking my question. My first question would be on the outlook for the box office. And Alistair, you've been very helpful with respect to Q2. Might I ask with respect to Q3, in particular looking at the number of titles perhaps coming out, because I do recall that August was terrible with something like nine new titles versus 11 year over year?
Yes. And to me, it's not the number of titles, the quality of the title and the amount of box office it's going to deliver. So when you look at Q3, you're basically looking at the start of Q3 with Ant Man and the Wasp, which is a Marvel sequel. You've got Hotel Transylvania. You've got Skysraper, which I talked about, Mamma Mia!
Mission Impossible six, Equalizer two. Disney's got another movie, the Christopher Robin movie, which is the Winnie the Pooh story. And then there's some other really titles running into September. The only month where year over year, I would say, is going to be a little interesting is September because last year we had the movie It, which did extremely well during the quarter. But July and August look extremely strong in 2018.
And then looking at the balance of the year, you've got Doctor. Seuss, which is a title that I think will do extremely well. The girl in the spider's web, fantastic beasts, the Harry Potter, the Internet wreck at Ralph two, an animated Spider Man feature, Aquaman, Holmes and Watson. And I think the big surprise is going to be Mary Poppins based on what we saw last and heard last week.
Okay. Thank you. And if perhaps a bit more of a broader question, could you talk to where you're at with respect to the esports monetization roadmap?
Sure. Ellis mentioned a number of events that we had during the first quarter. So the CSL finals just happened this past weekend, I'll call you the of the third annual Canadian Championship. As we've mentioned, I think there's a little bit of an inflection point going on right now in terms of kind of the endemic versus the non endemic sponsors. I would characterize the huge interest from the non endemics to date, but still in a learning state before they develop their media and their sponsorship strategies.
So the endemics have been there for a while, and we've had a number of them as sponsors for our events. But but the real opportunity is when the non endemics convert and invest in the space. We're doing lots of educating out there and lots of meetings. And I think that's when the opportunity will really kind of ramp up in the entire space across particularly across North America. And that will actually take place within the next year, I would say, maybe one years point or so.
Thank you. And one last one, if I may. Tim did ask about the subscription model at the theater. Could you convey your thoughts with respect to the potential for the subscription model perhaps online?
Basically, as I mentioned before, we will continue to look at all of the opportunities that are out there and with our distribution partners decide what is in the best interest both from Cineplex perspective, the distributors perspective and the consumer. So we will continue to review the situation. Our SCENE loyalty program provides great enough business for the guests to enjoy. And we have to be careful because some of those programs end up being a very low margin business. And as we've seen with MoviePass in The U.
S, they've been able to sign up subscribers, but they're at 2,000,000 people in a country of three thirty million people. And we are here with 9,100,000 people in our SCENE program in the population of 36,500,000. So I feel that we have to be really careful as to what we introduce. And we have a lot of offerings today for our guests that provide them with significant value.
Great. Thank you very much.
We'll take our next question from Derek Choi with TD Securities.
Is that me? Sorry. Derek? Yes. Sorry.
Okay. Yes, guys. Just one last one for me actually. You had an interesting bullet on the pilot program with Uber Eats. Just wondering if you can expand on that.
So it's a program that we initiated and we are using it in test locations in Canada. And we continue to see interesting uptake on the program. And for example, we've had certain locations with great success and we are looking at other locations that we continue to evolve the program. And we find in university tons, what's interesting is a lot of the university students love to order from us and are willing take a chance with the product and with the drinks and everything while they're at home. And it's a pilot that we continue to look at and it also provides us with incremental dollars as part of our overall offerings.
What kind of products are
you offering? Is it popcorn or where is it
you want from the pretty much from the concession stand. So it would include popcorn, drinks and many of the wider items that we have on the menu and you can digitally download it and basically have the ability to watch a movie also at the same time for us in a black store.
Okay. Thanks for that.
That concludes today's question and answer session. At this time, I'll turn the conference back to Mr. Ellis Jacob for closing remarks.
Thank you very much all for joining us this morning. Before we end the call, I'd like to take a moment to advise about Pat Marshall, who will be retiring from Cineplex effective June 1. Pat's been with us for fifteen years leading Investor Relations and Corporate Communications. Pat has been a meaningful contributor to our success and we will miss her greatly. As we all know, she's won just about every IR award out there and was an integral part of the team when we went public in 2003 and throughout our many strategic acquisitions.
She has steered us well during both good times and those that were more challenging. We wish her great enjoyment and good health as she embarks on this new stage in her life and travels the world. Finally, we look forward to seeing you all at our Annual General Meeting at 10:30AM on May 2538 at our Cineplex Cinemas Young and Dundas and VIP. Please mark that in your calendar and look forward to seeing you. Thank you.
Bye bye.
This does conclude today's conference. Thank you
for
your participation. You may now disconnect.