Good day, ladies and gentlemen, welcome to the Cineplex Inc. First Quarter 2017 analyst call. Today's conference is being recorded, at this time, I'd like to turn the floor over to Pat Marshall, Vice President of Communications and Investor Relations. Please go ahead.
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, general economic conditions. I'd now like to turn the call over to President and CEO, Ellis Jacob.
Thank you, Pat. Good morning, welcome to Cineplex Inc.'s First Quarter 2017 conference call. We're 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 of the summer film slate. At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide a more in-depth overview of our financials. Always, once Gord has concluded his remarks, we will hold a question and answer period. Cineplex reported a record first quarter with total revenue of CAD 394.2 million and adjusted EBITDA of CAD 59.4 million, both up 4% versus the same period last year.
Although the current period benefited from the strong performance of "Beauty and the Beast", the prior period was a tough comparator with strong results from "Deadpool", which had the all-time highest grossing February opening weekend, combined with the record-breaking success of "Star Wars: The Force Awakens", which continued to perform well into the first quarter of 2016. A result, we saw our attendance for the first quarter of 2017 decrease by 4.8%. Attendance was also impacted by the underperformance of three films in Canada compared to the U.S., which included "Hidden Figures", "Get Out" and "Power Rangers", as well as the timing of certain foreign language product. Guests continued to seek out our premium entertainment experiences, which represented 44.9% of our box office revenue and resulted in a first-quarter record PPP of CAD 9.97.
Media revenue continued to grow, achieving a new first-quarter record of CAD 33.9 million, and amusement revenue increased 58.9%, largely due to the acquisition of Tricorp Amusements Inc. and SAW, LLC completed in the fourth quarter of 2016. Gord will share the balance of our first-quarter results with you in a few moments. Now, I would like to highlight our key accomplishments during the quarter. Beginning with theater exhibition. Top-performing films during the period included "Beauty and the Beast", "Logan", "The Lego Batman Movie", "Rogue One: A Star Wars Story", and "Sing", of which four out of five were available in premium moviegoing experiences. We continue to roll out luxury recliners in select theaters across the country with great success. We anticipate having a total of 15 theaters completed by the end of the year.
Alternative programming for the quarter included performances from the Bolshoi Ballet from Moscow, the National Theatre from London, and encore performances of the Metropolitan Opera live in HD. Theater productions were especially popular this quarter with strong results from Disney's Newsies and National Theatre Live's No Man's Land. Moving on to media, we continue to grow our cinema media business, which reported record first-quarter results. This can largely be attributable to the sponsorships and other media associated with our esports business. Digital place-based media experienced a 3% increase in revenue for the quarter as a result of an expanded client base, which contributed to higher recurring revenue. As reported earlier this year, Cineplex Digital Media was selected by Morguard Investments Limited to install, maintain, and operate 175 digital displays across 21 retail properties throughout Canada.
Situated in concourses and high-traffic areas, these displays will deliver impactful interactive experiences for shoppers, including digital wayfinding and advertising that will support new store openings, retail promotions, and upcoming events. The rollout is expected to be completed by the fall of 2017. With the addition of Morguard, along with our partnerships with Ivanhoé Cambridge, Oxford Properties, and other mall developers, Cineplex now impacts approximately 50% of all mall traffic in Canada. In amusement and leisure, during the quarter, Player One Amusement Group announced its acquisition of Dandy Amusements International, a leading amusement game machine operator in the Western U.S. Strategic acquisitions like this one, which closed subsequent to quarter end, are an integral part of our diversification strategy. The addition of Dandy to Player One gives us coast-to-coast coverage and presence throughout the U.S., providing us a much broader and expanded market across the U.S. and Canada.
The Rec Room continued to perform well in the first quarter of 2017. With construction well underway, we look forward to opening three additional locations this year, including in Toronto at the historical Roundhouse, a second location in Edmonton at the West Edmonton Mall, and in Calgary at Deerfoot City. In March, Cineplex and WorldGaming hosted the Canadian Call of Duty: Infinite Warfare Championships at Scotiabank Theatre, Toronto, where teams from across Canada competed for over CAD 65,000 in cash and prizes, as well as the championship title. Subsequent to the quarter end, Cineplex acquired the remaining 20% of WorldGaming that it did not already own for CAD 4.4 million. Moving on to Scene+. Membership in the loyalty program increased by 0.2 million members in the period, reaching 8.3 million members as of March 31st.
Also during the quarter, Scene launched a new mobile app that allows members to instantly browse the many ways to earn and redeem points, access their digital card, and plan their night out. Overall, even with the decline in attendance, we achieved record results in the quarter as we continue our diversification strategy. This positions Cineplex uniquely in its ability to deliver results from many different revenue sources. Let's take a look at some of the films for the summer. The second quarter is off to a good start as box office in Canada for the quarter to date is up 16% year-over-year compared to North America, which is up 4.4% as reported by Rentrak. Looking ahead to what's in store for the quarter, on Thursday, the sequel to the very successful "Guardians of the Galaxy" opens on May 4th.
On May 12th, we have the Guy Ritchie film, "King Arthur: Legend of the Sword", the comedy "Snatched" starring Goldie Hawn and Amy Schumer, and the sequel "Bon Cop, Bad Cop 2". The original is still the highest grossing Quebec-made film ever. Johnny Depp reprises his role as Captain Jack Sparrow when "Pirates of the Caribbean: Dead Men Tell No Tales" comes to theaters on May 26th. Looking at June, Wonder Woman makes her solo big screen debut on June 2nd. Lightning McQueen returns on June 16th with "Cars 3", and the Autobots roll out again on June 23rd in "Transformers: The Last Knight". The summer revs up when "Baby Driver" speeds into theaters and everyone's favorite villain, Gru, returns with "Despicable Me 3", both on June 30th.
Moving to the third quarter, we look forward to the return of one of our favorite superheroes in "Spider-Man: Homecoming" on July the 7th. We have "War for the Planet of the Apes" on July 14th. Legendary film director Luc Besson brings us his space adventure, "Valerian" on July 21st, and both "Atomic Blonde", which stars Charlize Theron, and the animated film, "The Emoji Movie" opens on July 28th. That with many more big titles to follow for the balance of the quarter. As you can see, the summer film slate looks strong and offers something for everyone. Before I turn the call over to Gord, we are pleased to announce a 3.7% dividend increase to CAD 1.68 per share on an annual basis from the current CAD 1.62 per share. This increase will be effective with the May 2017 dividend, which will be paid in June 2017.
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&A have been filed on SEDAR this morning and are also available on our investor relations website at cineplex.com. Before I begin, I would like to highlight a number of changes in the presentation of revenue in our financial statements. As a result of the recent acquisitions in our Amusement Solutions business, and as we continue to develop and grow our amusement and leisure business, we have created a new revenue line for amusement revenue. We have reclassified the amounts that were previously included in other revenue into this new revenue line. In addition to enhanced comparability with exhibition peers, certain revenue from Cineplex's enhanced guest service initiatives, which were previously included in other revenue, are now included with box office revenues.
Prior period financial statement figures have been reclassified to conform to the current period presentation, with details available in Note 11 of the financial statements and in Section nine of the management discussion and analysis. For the first quarter, total revenue increased by 4% to CAD 394.2 million and adjusted EBITDA also increased by 4% to CAD 59.4 million, both first quarter records. The results for the quarter were positively impacted by higher amusement revenue, which increased 58.9% to a first quarter record of CAD 41.4 million. Cineplex's first quarter box office revenue decreased 1.7% to CAD 195.4 million compared to CAD 198.6 million in the prior year as a result of an attendance decrease of 4.8%, which was partially offset by a BPP increase of 3.3% to a first quarter record CAD 9.97, up from CAD 9.65 in 2016.
The increase in BPP is due to an increase in the premium product percentage in the first quarter, increasing to 44.9% of box office revenue in 2017 from 42.2% in 2016. The impact of premium priced product on the average ticket price was CAD 1.42 for this quarter as compared to CAD 1.33 in the prior year. This was primarily due to the success of 3D products, with four of the top five films of 2017 being released in 3D, as compared to three films in the prior year. Food service revenue increased 1.7% to CAD 115.9 million. Included in food service revenue was CAD 2.1 million from The Rec Room. Excluding revenue from The Rec Room theater, food service revenue decreased by 0.2% from the prior year due to the decrease in attendance, partially offset by the 5% increase in concession revenue per patron to a first quarter record of CAD 5.71.
The CPP growth was primarily a result of increased visitation, basket size, and expanded food offerings, including those available at Cineplex's VIP Cinemas and Outtakes locations. Total media revenue increased CAD 0.8 million, or 2.6%, to CAD 33.9 million for the quarter. Cinema media revenue, which is primarily theater-based, increased 2.3%. Digital place-based media revenue increased 3% due to increased recurring revenue, offset by lower project installation revenue compared to the prior year period, which included installation revenue for the Beers on the Roof deployment. Amusement revenue increased to CAD 15.4 million, or 58.9%, primarily due to two acquisitions in the United States made during the fourth quarter of 2016. In addition, amusement revenue includes CAD 2 million of amusement gaming and other revenue earned at The Rec Room. During the quarter, Cineplex announced the acquisition of Dandy Amusements International Inc., a leading amusement game machine operator in the Western U.S.
This transaction was completed on April 1st, 2017. Turning briefly to our key expense line items, film costs for the quarter came in at 52.9% of box office revenue, as compared to 54.1% reported in the prior year. The decrease in film cost percentage is a result of the reduced concentration of box office revenue from a select number of titles during the quarter as compared to the prior year period. Cost of food service for Q1 2017, excluding CAD 0.7 million included The Rec Room, was 22.3% as compared to 22.6% in the prior year period. Other costs of CAD 206.1 million increased CAD 16.7 million, or 8.8%. Other costs include theater occupancy expenses, other operating expenses in general, and administrative expenses. Theater occupancy expenses were CAD 52 million for the quarter versus a prior year actual of CAD 52.7 million.
Other operating expenses were CAD 132 million for the quarter versus a prior year actual of CAD 117.6 million, an increase of CAD 14.4 million. Major reasons for the increase include an increase of CAD 10.9 million in amusement solutions expenses, primarily related to the two acquisitions completed during the fourth quarter of 2016. An increase of CAD 1 million due to the impact of new acquired theaters net of disposed theaters, CAD 2.9 million in unit-level operating costs related to The Rec Room, and costs related to new business initiatives, including WorldGaming Network and The Rec Room. These increases were offset by decreases in other costs, including a decrease in same-store theater payroll of CAD 2.6 million due to decreased attendance levels and reduced marketing costs of CAD 1.8 million due to the timing of expenditures.
G&A expenses were CAD 22.1 million for the quarter, which was CAD 3 million higher than the prior year due to the higher head office costs, including CAD 1.6 million associated with a non-recurring past service charge adjustment related to a supplemental executive retirement plan and higher professional fees, partially offset by lower costs associated with long-term and short-term incentive program expenses. Subsequent to the quarter end, we acquired the remaining 20% of WorldGaming that we did not already own for CAD 4.4 million and recorded a CAD 1 million gain on change in fair value of financial instruments during the quarter. Net CapEx for the first quarter was CAD 25.1 million as compared to CAD 28.7 million in the prior year. We continue to estimate that our net CapEx will be approximately CAD 125 million for 2017, and this includes approximately CAD 25 million related to our recliner program.
While box office results for the first quarter were down slightly from the prior year, we are pleased with the results from the amusement business, and we are optimistic about the remainder of the 2017 film slate. We continue to remain comfortable with where Cineplex Inc. is positioned today. Our strong balance sheet and low leverage ratio allows us to continue to invest for future growth opportunities for the company and benefit from future strong film product. As Ellis mentioned, we are pleased to announce the 3.7% increase in the annualized dividend to CAD 1.68, effective with the May dividend to be paid in June 2017. That concludes our remarks for this morning, we'd now like to turn the call over to the conference operator for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure 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. Our first question will be from Drew McReynolds with RBC.
Thanks very much. Good morning. I guess, Ellis, just out of the gate here, can you provide just an update on the premium VOD window, and where the industry stands to date on that? Gord, just on the CapEx side, the CAD 125 million for this year obviously includes that CAD 25 million recliner retrofit. Just bigger picture, looking at longer term, do we assume that CAD 25 million is one time and you go down to more or less CAD 100 million recurring, just given all the ramp-up in the diversification? I'm not looking for specific guidance, just more general directional comments. Thank you.
Thanks. On the PVOD, as you know, we continue to have discussions with our studio partners. Between the studio partners and the exhibitors, we have to do the right thing for the industry, and neither us nor them are looking to trade dimes for nickels. This is something that we continue to discuss, but there's nothing new to report at this present time. Cineplex as a company is well-positioned with our store, where today we have over 7,000 movies, and we continue to see double-digit growth in that whole area.
The guidance had been that there's an additional incremental CAD 25 million that we'll spend in 2017 related to the recliner program. As we look at the potential success of that program, that amount could change, and there could be additional spending in that. As we look to future years, as was mentioned, as we would expect that the CapEx related to exhibition, with the exception of my comment about the recliner program, could tail off. As we look to expand The Rec Room and build out The Rec Room, is it would replace that amount, and we would remain at roughly that CAD 100 million level in the near term.
We are working on, as we mentioned, developing a model which could go into a mid-market size town. That could change that amount as we look forward.
That's helpful, Gord. Thank you for that. Maybe if I can just squeeze in one last one. Obviously, again, some nice numbers, early stages, nice numbers on The Rec Room. Ellis or Gord, just can you provide an update on your observation to date in Edmonton?
We are very pleased with the performance of Edmonton. The results to date are much stronger than we had projected. We've got three more opening in 2017. We feel we are well-positioned with The Rec Room and the benefits we see as far as the synergies and the interplay between our human capital and our infrastructure with The Rec Room.
Okay, thank you.
Thanks.
Our next question is from Rob Goff with Echelon Wealth Partners.
Good morning. Thank you very much for taking my question. I realize it's still early days, but could you talk to what initial observations you've had with respect to the recliners? We've had Regal in the U.S. talk to where they have recliners, attendance was up by 9.5% versus 4.5%. If you could just talk to that, it'd be appreciated. Thank you.
Yeah, thanks, Rob. So far we've seen some strong results from recliners. We are getting the benefit of higher food sales in locations with recliners, and we've been able to take some price increases. Overall, it's been successful. We just have to be careful in certain locations because of capacity utilization as to whether we move forward or not. So far, it's been extremely positive.
Very good. Thank you.
Our next question is from Kenric Tai with Raymond James.
Thank you. Good morning.
Good morning.
Gord, on the revenue reclassification, just with respect to the enhanced guest services, could you just remind us what specifically would be sort of reclassified into that bucket or what those services are? I think I have a pretty good handle on it, but I don't want to make any assumptions on that. Just further to that, could you also give us some indication over a longer period of time how those have trended as a % of actual box office just for modeling purposes?
Yeah, sure, Kenric. On the second part of the question, we've disclosed the amounts by quarter to help you out in the modeling side of things. If you went to, I believe it's section 9 of the MD&A, you'll find that detail out for the last 8 quarters. With regards to the category, there's certain kind of convenience-related fees that were in addition to the box office price. We've really just looked to include everything related to the admission and the entry into the theater and the convenience-related fees into one line item.
Okay, nothing more beyond that. There's nothing else beyond that in terms of some of the other differentiators you have in your model that is being included into that other line item?
No. As you can see, as we expanded the amusement solutions business, that was also included in other revenues. We've really left the other revenue line with items such as breakage and theater rentals and screening fees, that we've really evaluated what we want to leave in that line item.
Great. Thanks, we appreciate that. Then just a follow-up with respect to the amusement business. Could you also speak to the expense leverage in the Player One Amusement Group, how that performance was in the quarter relative to expectations, and perhaps how we should expect to see that evolve through the course of the year? In quarter there were some expenses rolled up there that we won't see recurring, perhaps how we should expect to see that scale through the year.
Look, in terms of the overarching strategy in the space, it is really been to execute and create a national footprint to extract some of the operating synergies and revenue synergies in the U.S. that we have also experienced in Canada. We did two acquisitions in the fourth quarter, with the announced one that would close on April 1. As we look to integrate these businesses and grow them, it will take a number of quarters before you see, one, the extraction of some of those revenue synergies and the operating synergies. Then also, just to extract and remove some of the more one-time costs related to executing the transaction and professional fees related to those transactions.
Great.
As we have always said, that amusement sort of typical solutions business, when you blend the distribution side and the rent side of the business, it is a mid-teen type margin business.
Perfect. Thanks very much, Gord. I will leave it there.
We will take our next question from Aravinda Galappatthy with Canaccord Genuity.
Good morning. Thanks for taking my questions. I just wanted to start with the digital place-based media. Obviously, saw a very good growth in 2016 and a good stream of new contracts, Morguard being the most recent one. I know that quarterly numbers are sort of hard to call because of the project installation revenues. You can perhaps talk to sort of the full year expectations. Do you still see strong double-digit growth in that line item? Just so that we appreciate the quarterly movement, how meaningful are those installation revenues at this point in that line item?
Look, during the call, I usually provide a little bit more color on the installation base. At the end of last year, we had about 11,100 locations under deployment. Q1 2016, that number was about 9,900 locations. We're at about 11,900 locations deployed, at the end of Q1 2017. About a 20% increase year-over-year. 6% in the quarter. As we've always said, we had a fairly significant installation with The Beer Store last year. The installations were a bit lighter in the first quarter than they were last year, but we're still looking at that overall level that's going to be in the range of where we were last year in terms of the overall revenues.
During the first quarter, and the last part of your question was, how significant is our hardware sales in terms of the overall revenue amounts? For the first quarter, they were in the low double digits, so between 10% and 15% of overall revenue.
Okay, thanks. Gord, I just wanted to clarify what you said just before that about the full year number. Is your expectation to see similar type of growth in dollar terms in 2017 as you did in 2016, or I wasn't clear on that?
Sorry, that was an overall %.
Oh, % growth. Okay. Great. Thank you. Thank you for that. Just moving on to the exhibition side of things. You continue to see that underlying BPP growth, excluding the premium formats that continue to kind of tick up. I think it was about 1.8% last quarter. It's 2.8%. Can you just sort of remind us of what's happening on the underlying pricing front, just so that we appreciate that inflation there?
Yeah, Aravinda, during 2016, in October, we took some selected price increases, and you're seeing the benefit of that flowing through. As you talked about, it's the premium formats that are driving the balance of the increase that's taking us to the CAD 9.97. If you look at things like our D-BOX installs last year, first quarter, we were at 44. At the end of this first quarter, we were at 78. We have 4DX, we have a lot of the premium formats, and also our UltraAVX continues to outperform our peers and provide us with great opportunities with BPP growth. Finally, the recliners are another addition where you'll see continued benefits from a BPP perspective.
Awesome. Great. Thank you very much. I'll leave it there.
Thanks.
Once again, if you would like to ask a question, please press star one. We'll take our next question from Derek Lessard with TD Securities.
Yeah, thanks. Good morning, everybody. You touched a bit on it in your prepared remarks, but I was just wondering if you can talk about the recent acquisitions of Tricorp and Dandy Amusements International, maybe just what your overall strategy here is, some of the potential growth you see, as well as other consolidation opportunities.
Sure, Derek. Look, I think you guys are familiar with the strategy that we executed in Canada, where we acquired the two largest amusement solutions companies, consolidated them, extracted the operating synergies. As we rolled out concepts internally, like Escape, and now as we're rolling out The Rec Room, this amusement solutions business is now a supplier to us. It's a wholly owned supplier into the space as we look to grow that Rec Room business, and the amusement revenue there related. As we look into the U.S., we had, as a result of the PSI acquisition, a small footprint in the southeastern U.S. The acquisitions that we've done to date have really given us a national presence.
We've expanded from the southeastern U.S. to the northeastern U.S. and now western U.S. in both the route-based business, so that's supplying third-party customers on, in essence, rev share models, and as well as a distribution business. Accessing equipment at low cost and selling equipment to interested third parties. As you look and you see location-based entertainment concepts growing, both in Canada as we roll out The Rec Room, and in the U.S. as you see a number of concepts being built out and you hear about sort of the evolution of retail in the mall environment, we expect that the amusement solutions will play a part in this going forward and there will be growth there. What we've really done in the U.S. is now we've created this national footprint.
We can extract some of the operating synergies and take advantage of what we see as growth in this space going forward.
Okay. Thanks for that color. Very helpful. As well, on The Rec Room, there's been talk of one of the competitors said earlier in the year that they were interested in Canada. Just wondering about your thoughts here and what you think your competitive advantage is, and does this change your plans in terms of the rollout in any way?
We feel comfortable with our position given our brand in Canada, our loyalty program, the success of Edmonton and what we have done to make it a unique offering. So far, from all of the feedback we are getting, is people are extremely pleased about what we have done to create this offering in Canada.
Okay. Maybe I'll just squeeze in one final one, Gord. Maybe could you add some color maybe on the decline in the media EBITDA margin year-over-year?
The decline, sorry, in the overall media margin. Really, Derek, it wasn't particularly significant. The media revenue was relatively flat in the segment. As you may be aware, we've allocated certain components of media revenue to the other segments. To some amusement and leisure segments also, which has been growing. With that sort of recategorization or the segment offering, the media EBITDA would not look like it has gone down as it has in the financials. But it really didn't go down significantly. It was about 53.5% last year as the margin percentage, down to 49%, really related to that core timing. The cinema exhibition business was relatively flat year-over-year. The cinema media business was relatively flat year-over-year.
Okay. Thanks for that, guys.
We'll take our next question from Geoff Van with Scotiabank.
Thanks, and good morning. My first question is on the film costs as you look out to the rest of the year. I know it's hard to predict winners and losers, but as you look out in terms of what you would expect on concentration around films and studios, wondering if you can give us some comments on the film cost % as we look out the rest of the year, especially compared to last year, which seemed to be a really tough year on that front. The second question is related to the recliners. It sounds like the experience so far has been very positive. I guess my question is, if that is the case, why are you thinking about not expanding that to more theaters as you look out to 2018 and beyond? Thanks.
On the film costs, as you mentioned, it has a lot to do with the concentration of successful movies. The more movies provide us with doubles and triples instead of just home runs, you end up with lower film costs. On the flip side, we do want those home runs because they increase our box office revenue, which drives attendance and also drives the bottom line. It's very hard to predict from quarter to quarter what the success is going to be from an overall percentage basis. Needless to say, if the box office does go up substantially, you'll see an increase in film rental and vice versa.
On the area of recliners, again, as I mentioned previously, we are looking at it in many locations across the country. We have to also be careful based on the capacity utilization in some of these theaters. You do lose a lot of capacity when you do put in the recliners. We are being very opportunistic and have been quite successful in what we've done so far.
Okay. Thank you.
It appears there are no further questions at this time. I would like to turn the call back to Ellis Jacob for any additional or closing remarks.
Thank you for joining us this morning. We look forward to seeing you at our annual general meeting at 10:30 A.M. on May 17th, 2017 at our Cineplex Cinema, Yonge-Dundas and VIP. Please mark your calendars for that date. Thank you so much and have a great day.
That concludes today's call. Thank you.