Good day, ladies and gentlemen, and welcome to the Cineplex Inc. First Quarter twenty seventeen Analyst Call. Today's conference is being recorded. And 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 and general economic conditions.
I'd now like to turn the call over to President and CEO, Ellis Jacob.
Thank you, Pat. Good morning, and welcome to Cineplex Inc. First quarter twenty seventeen 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 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. As 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 $394,200,000 and adjusted EBITDA of $59,400,000 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 year 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 twenty sixteen.
As a result, we saw attendance for the 2017 decreased 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. However, 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 $9.97 Media revenue continued to grow achieving a new first quarter record of $33,900,000 and amusement revenue increased 58.9% largely due to the acquisition of Tricorp Amusement Inc. And Saw LLC completed in the 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, A Star Wars Story and Sing, of which four out of five were available in premium movie going 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 Theater 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 Theater Alive's No Man's Land. Moving on to Media, we continue to grow 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 Morgart 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 way finding and advertising that will support new store openings, retail promotions and upcoming events. The rollout is expected to be completed by the 2017. With the addition of Moguard along with our partnerships with Ivanhoe, 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 United States.
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 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 World Gaming hosted the Canadian Call of Duty Infinite Warfare Championships at Scotiabank Theatre Toronto, where teams from across Canada competed for over $65,000 in cash and prizes as well as the championship title. Subsequent to the quarter end, Cineplex acquired the remaining 20% of World Gaming that it did not already own for $4,000,000 Moving on to SCENE, membership in the loyalty program increased by 200,000 members in the period, reaching 8,300,000 members as of March 31. 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. Now 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 4.
Then on May 12, we have the Guy Ritchie film, King Arthur Legend of the Sword, the comedy Snatch starring Goldie Hawn and Amy Schumer, and the sequel, Pulp of Babcock two, the original is still the highest grossing Quebec based film ever. Johnny Depp reprises his role as Captain Jack Sparrow and Pirates of the Caribbean Dead Men Tell No Tales comes to theaters on May 26. Looking at June, Wonder Woman makes her solo big screen debut on June 2. Lightning McQueen returns on June 16 with Cars three and The Autobots roll out again on June 23 in The Last Knight. The summer wraps up when baby drivers feeds into theaters and everyone's favorite villain grew returns with Despicable Me three both on June 30.
Moving to the third quarter, we look forward to the return of one of our favorite superheroes in Homecoming on July 7. Then we have War for the Planets of the Apes on July 14. Legendary film director, Luc Pesson brings us a space adventure, Valerian on July 21 and both Atomic Blonde, which stars Charlize Theron and the animated film, The Emoji Movie opens on July 28. That's with many more big titles to follow for the balance of the quarter. As you can see, the sum of Grum's fit 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 $1.68 per share on an annual basis from the current $1.62 per share. This increase will be effective with the May 2017 dividend, which will be paid in June 2017. 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. 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 $394,200,000 and adjusted EBITDA also increased by 4% to $9,400,000 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 $41,400,000 Cineplex's first quarter box office revenue decreased 1.7% to 195,400,000 compared to $198,600,000 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 $9.97 up from $9.65 in 2016. The increase in BPP is due to an increase in the premium product percentage in the first quarter, increasing the 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 $1.42 for this quarter as compared to $1.33 in the prior year. This was primarily due to the success of three d products with four of the top five films in 2017 being released in three d as compared to three films in the prior year. Foodservice revenue increased 1.7% to $118,900,000 Included in Foodservice revenue was $2,100,000 from The Rec Room. Excluding revenue from The Rec Room theatre, Foodservice 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 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 outtake locations. Total media revenue increased $800,000 or 2.6% to $33,900,000 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 beer store deployment. Amusement revenue increased CAD 15,400,000.0 or 58.9% due primarily to two acquisitions in The United States made during the 2016. In addition, amusement revenue includes $2,000,000 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 U.
S. In the Western U. S. Transaction was completed on 04/01/2017. 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 twenty seventeen, excluding $700,000 in credit The Rec Room, was 22.3% as compared to 22.6% in the prior year period. Other costs of $206,100,000 increased $16,700,000 or 8.8%. Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses. Theater occupancy expenses were $52,000,000 for the quarter versus a prior year actual of $52,700,000 Other operating expenses were $132,000,000 for the quarter versus a prior year actual of $117,600,000 an increase of $14,400,000 Major reasons for the increase include an increase of 10,900,000 in amusement solutions expenses, primarily related to the two acquisitions completed during the 2016, an increase of $1,000,000 due to the impact of new and acquired theatres net of disposed theatres, dollars 2,900,000.0 in unit level operating costs related to The Rec Room and costs related to new business initiatives, including the World Gaming Network and The Rec Room.
These increases were offset by decreases in other costs, including a decrease in same store theater payroll of $2,600,000 due to decreased attendance levels and reduced marketing costs of CAD1.8 million due to the timing of expenditures. G and A expenses were CAD22.1 million for the quarter, which was CAD3 million higher than the prior year due to the higher head office costs, including $1,600,000 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 World Gaming that we did not already own for 4,400,000 and recorded a $1,000,000 gain on change in fair value of financial instruments during the quarter. Net CapEx for the first quarter was $25,100,000 as compared to $28,700,000 in the prior year. We continue to estimate that our net CapEx will be approximately $125,000,000 for 2017 and this includes approximately $25,000,000 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 our 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 3.7% increase in the annualized dividend to $1.68 effective with the May dividend to be paid in June 2017.
That concludes our remarks for this morning and we'd now like to turn the call over to the conference operator for
you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And our first question will be from Drew McReynolds with RBC.
Yes, 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 kind of the industry stands to date on that? And then Cord, just on the CapEx side, the $125,000,000 for this year obviously includes that $25,000,000 recliner retrofit. Just bigger picture, looking at longer term, do we assume that $25,000,000 is onetime and you go down to more or less $100,000,000 kind of recurring just given all the ramp up and the diversification?
Not looking for specific guidance, just more general kind of directional comments. Thank you.
Thanks. On the Pvot, as you know, we continue to have discussions with our studio partners. But again, between the studio partners and the exhibitors, we have to do the right thing for the industry and neither us or them are looking to trade dimes for nickels. So this is something that we continue to discuss, but there's nothing new to report at this present time. And 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.
And sorry, Drew, on the CapEx question then, yes, the guidance has been that there's an additional incremental $25,000,000 of spend in 2017 relates 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. But as we look to future years, as we've mentioned, as we would expect that the CapEx related to exhibition, with the exception of my comment about the recliner program, could tail off. And then as we look to expand The Rec Room and build up The Rec Room as it would replace that amount, and we would remain at that roughly that $100,000,000 level in the near term. Now we are working on, as we mentioned, developing a model which could go into kind of a mid market size town and so that could change that amount as we look forward.
Okay. That's helpful, Gord. And maybe if I can just squeeze in one last one. Obviously, again, nice numbers, early stages, but nice numbers on The Rec Room. Ellis or Gore, just can you provide an update on kind of 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. And we've got three more opening in 2017 and 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.
And our next question is from Rob Goff with Echelon Wealth Partners.
Good morning and 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? And that we've had Regal in The States talk to where they have recliners, attendance was up by 9.5% versus 4.5%. So if you could just talk to that, that would be appreciated. Thank you.
Yes. Thanks, Rob. And 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. So 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. But so far, it's been extremely positive.
And our next question is from Kenric Ty with Raymond James.
You. Good morning. Gord, Good 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 mean I have a think I have a pretty good handle on it, but I don't want to make any assumptions on that. And just further to that, could you also give us some indication sort of over a longer period of time how those have trended as a percent of actual box office just for modeling purposes?
Yes. Sure, Kenric. And on the kind of the second part of the question, if you we've disclosed the amounts by quarter to help you out in the modeling side of things. So if you went to leave it to Section nine of the MD and A, you'll find that detail out for the last eight quarters. So with regards to the category, there's certain kind of convenience related fees that were in addition to the box office price.
And so 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. And nothing more beyond that, so 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. And as you can see, look, as we expanded amusement solutions business, that was also included in other revenues. So we've really kind of left the other revenue line with items such as breakage and theater rentals and screening fees. So we've really kind of evaluated what we want to leave in that line item.
Great. Thanks. I appreciate that. And then just a follow-up with respect to the amusement business. Could you sort of 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. Obviously, in quarter, there were some expenses rolled up there that we won't see recurring, but perhaps how we should expect to see that scale through the year?
Yes. Look, terms of the overarching strategy in the space, it's 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've also experienced in Canada. So we did two acquisitions in the fourth quarter with the announced one that was closed on April 1.
So as we look to integrate these businesses and grow them, it will take a number of quarters before you see, one, the extraction of those some of those revenue synergies and the operating synergies. And then also, just to kind of extract and remove some of the sort of the more onetime costs related to executing the transaction and fees and professional fees related to those transactions. But as we've always said, it's that amusement sort of typical solutions business, when you blend the distribution side and the rent side of the business, it's a mid teen type margin business.
Perfect. Thanks very much, Scott. I'll leave it there.
And we'll take our next question from Arvinda Galappatthi with Canaccord Genuity.
Good morning. Thanks for taking my questions. I just wanted to start with the digital place based media. Obviously, you saw very growth very good growth in 2016 and a good stream of new contracts, more currently the most recent one. I know that quarterly numbers are sort of hard to call because of sort of the project the the installation project installation revenues.
Maybe you can perhaps talk to sort of the full year expectations. Do you still see strong double digit growth in that line item? And just so that we appreciate the quarterly movement, how meaningful are those installation revenues at this point in that line item?
Yes. Look, during the call, I usually provide a little bit color on the a little bit more color on the installation base. At the end of last year, we had about 11,100 locations under deployment. The first quarter of last year, that number was so first quarter twenty sixteen, that number was about 9,900 locations. And we're at about 11,900 locations deployed at the end of the 2017.
About a 20% increase year over year, but 6% in the quarter. So it's as we've always said, we had a fairly significant installation with the beer store last year. But 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. So during the first quarter and the last part of your question was how significant our hardwood sales in terms of the overall revenue amounts. And so for the first quarter, they were kind of in the low double digit, so between 1015% of overall revenue.
That's helpful. Gordon, 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 percentage. Oh,
percentage growth. Okay.
Okay, great. Thank you. Thank you for that. And then just moving on to the exhibition side of things, you continue to see that underlying BPP growth, excluding the premium format, so continue to kind of tick up. 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?
Yes, Arvind, during 2016 in October, took some selected price increases and you're seeing the benefit of that flowing through. And then as you talked about, it's the premium formats that are driving the balance of the increase that's taking us to the $997,000,000 Like you look at things like our D Box installs last year, first quarter, we were at 44,000,000 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 Ultra AVX continues to outperform our peers and provide us with great opportunities with BTP growth. And then 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.
We'll take our next question from Derek Lessard with TD Securities.
Yes. Thanks and good morning, everybody. You touched a bit on it in your prepared remarks, but I was just wondering if you can talk about your the recent acquisitions of Tricorp and Danby and maybe just what your strategy overall strategy here is and 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. And 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. So 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 today have really given us a national presence. So 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 our distribution business, so 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 Amusement Solutions will play a part in the pool going forward and there will be growth there. So 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. And as well on The Rec Room, I mean, there's been talk, 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. And 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. Then 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. I mean, really, Derek, 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, so to some of the amusement and leisure segments also, which has
been
growing. So with that sort of recategorization or the segment offering, the immediate EBITDA would not look like it's gone down as it has in the financials, but it really didn't go down significantly. It was up 53.5% last year as the margin percentage down to 49% really related to kind of 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 Jeff Van with Scotiabank.
Thanks and good morning. My first question is on the film cost 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 the what you would expect on concentration around films and studios, wondering if you can kind of give us some comments on the film cost percentage 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? And then the second question is related to the recliners. It sounds like the experience so far has been very positive.
So I guess my question is, that is the case, why are you thinking about not expanding that to more theaters as you look out to 2018 and beyond? Thanks.
So on the film costs, as you mentioned, it has a lot to do with concentration of successful movies. And the more movies provide us with doubles and triples instead of just home runs, you end up with lower film costs. But 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. So it's very hard to predict from quarter to quarter what the success is going to be from an overall percentage basis. But needless to say, if the box office does go up substantially, you'll see an increase in film rental and vice versa.
And on the area of recliners, again, as I mentioned previously, we are looking at it in many locations across the country, but we have to also be careful based on the capacity utilization in some of these theaters because you do lose a lot of capacity when you do put in the recliners. So 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 10:30AM on May 1737 at our Cineplex Cinema, Young 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