Good day, everyone. Welcome to the Cineplex Inc. Third Quarter twenty sixteen Conference Call. Today's conference is being recorded. At this time, I'd 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'd 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 President and CEO, Ellis Jacob.
Thank you, Pat. Good morning, and welcome to Cineplex King's third quarter twenty sixteen conference call. We are pleased you could join us this morning. I will begin by providing a brief overview of our third quarter results as well as a summary of our key accomplishments during the period. I will also highlight a few of the most anticipated films for the balance of the year.
At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide an overview of our financials and then we will follow with a question and answer period. I'm very pleased to report that Cineplex experienced a strong quarter setting third quarter records for total revenue, which increased 14.5% to $376,000,000 and adjusted EBITDA, which increased 13.8% to 67,300,000.0 Third quarter records were also established for all revenue sources, including box office, food service, media and other revenue, the latter benefiting from the consolidation of Cineplex Starbursting following our acquisition of the remaining 50% interest last October. EPP increased $0.48 to $9.37 and CPP increased $0.26 to $5.69 both with third quarter records. Top performing films during the period included Suicide Squad, The Secret Life of Dead, Star Trek Young, Jason Bourne and Finding Dory. Four of the top five films were available in three d, which resulted in premium formats accounting for 46.5 of Box Office revenue this period, up from 34.5% in the prior year period.
Gordo will share the balance of the quarter's results with you in a few moments. Now I'd like to highlight some of our key accomplishments during the third quarter. We opened two new theatres in Ontario. Cineplex Cinemas North Harry, which is North of Toronto, features eight screens, including the city's first Ultra AVX auditorium. We also opened Cineplex Cinemas Kitchener and VIP, where guests can enjoy our newest state of the art offerings, including four VIP auditoriums as well as an Ultra auditorium.
During the quarter, we announced plans to further expand our D BOX footprint with D BOX Motion seats being added to 10 theater auditoriums across Canada by year end. To date, we have already completed three of the 10 installations with the remaining seven to be installed in December. This past Friday, we opened Canada's first 4Dx auditorium at our YongeBundas location with the movie Doctor Strange to sold out performances. As part of our ongoing strategy to improve the guest experience, we are moving forward with the recliner seat program for all new theaters and select existing theaters across Canada. Based on the great results generated from our test locations, plans are currently underway to retrofit theatres in Victoria, Surrey and Nanaimo, British Columbia as well as in Kingston and at Cineplex Cinemas Ottawa in Ontario.
Alternative programming for the quarter included strong performances from international film programming and concert presentations. We also partnered with the CBC to offer complimentary screenings of the tragically hit a national celebration live from Kingston, Ontario. Our digital commerce offerings maintained their momentum this quarter. Traffic to cineplex.com increased 5% year over year, excuse me, and the Cineplex mobile app has been downloaded over 15,000,000 times as of September 3036, recording over eight forty three million app sessions and making it one of Canada's most popular mobile brands. We also launched a fully transactional Cineplex store app for Android users, allowing guests to rent, buy and watch movies directly from their tablet or mobile phone.
Moving to Media. This area of the business comprised of Cineplex Media and Cineplex Digital Media continued to experience record growth during the quarter. Cineplex Media reported record third quarter revenue of $29,100,000 up 16.2% versus the same period last year, primarily due to increases in showtime and preshow advertising as well as growth in new media offerings. Cineplex digital media revenue grew by 69.8% to a record $15,700,000 compared to the prior year. This was largely due to an expanded client base, which contributed to increased project installation revenue and advertising revenue growth in the period.
We continue to make strides in growing our digital media business across numerous verticals and see this as a significant growth driver for the future. Yesterday, we announced a partnership between Cineplex Digital Media and Ivanhoe Cambridge to install, maintain and operate digital display networks at 21 shopping centers across Canada. After an extensive audit and request for proposal process, CDM was selected because of its experience in the strategic management of large complex digital networks as well as its ability to offer premium media sourcing, content creation and advertising sales through Cineplex Media. Moving on to the amusement, gaming and leisure area. We were proud to open our very first location of The Rec Room in South Edmonton, Alberta.
Thanks to a number of you who joined us for the opening. The Rec Room brings together incredible dining experiences with exciting live entertainment and amusement gaming all under one roof. This is an important milestone for Cineplex as we begin our expansion of this new line of business. We are extremely pleased with the early results and will start to see more meaningful revenue contributions beginning in the fourth quarter. Construction is moving ahead at our Toronto location at the historic John Street Roundhouse and our Calgary location at Deerfoot Crossing, both of which are expected to open in the 2017.
In eSports, World Gaming hosted its third championship tournament and featured the first multiplayer team based game, Uncharted four, Team 10. The tournament included online qualifying rounds followed by regional tournaments culminating in a national championship event at our Scotiabank Theatre Toronto. During the quarter, we also announced the acquisition of Tricop Amusements, a leading provider of interactive video redemption and amusement gaming services in The United States. Tricop will enable us to further build our CSI presence in The U. S.
The transaction closed subsequent to quarter end on October 1. Our SCENE loyalty program continued to grow its membership during the quarter, reaching 7,900,000 members as of September 30. Before moving on to the film slate, I would like to reiterate our continued focus on executing our diversification strategy. Investing in and identifying new businesses are key initiatives designed to build new avenues of growth for Cineplex now and into the future. Businesses such as Cineplex Digital Media continue to evolve and we seek new opportunities and partnerships such as the announcement made yesterday with Live and Hope Cambridge.
Furthermore, our amusement gaming and leisure businesses continue to expand through key acquisitions in The United States, the launch of our first location of The Rec Room and the continued growth in our esports startup, World Gaming. In addition to the locations already announced, there are several other locations of The Rec Room in various stages of development, and we anticipate announcing these in the weeks and months ahead. We believe that investing in these businesses now will bear tremendous fruit in the years ahead. And even though we are the recognized market leader in the exhibition business, we will continue to innovate and focus on providing our guests with the best entertainment experience available. We do this through a number of initiatives, including our premium offerings such as three d, Ultra AVX, VIP Cinemas, IMAX, Barco Escape, D BOX, 4DX as well as our new recliner seating program.
Now let's take a look at some of the films we have coming up for the balance of the year. We opened the fourth quarter with films such as Girl on the Train, The Accountant, Jack Reacher, Never Go Back and Inferno. Marvel's Doctor. Strength starring Jenedict Cumberbatch and the animated comedy Trolls both opened to strong results this past weekend. Looking ahead to the holiday season, a number of highly anticipated films are opening, including on November 18, Harry Potter fans will delight in the release of Fantastic Beasts and Where to Find Them, the prequel to the popular franchise.
Later in the month, we have Moana, the Disney animated fairy tale featuring a headstrong young heroine and is based on an ancient Polynesian legend. On December 16, we have A Star Wars Story. And mark your calendars for December 21 as that's the day we bring you three highly anticipated movies, including the adventurous sci fi film Passengers starring Jennifer Lawrence and Chris Pratt, then Assassin's Creed with Michael Fassbender and Marion Fotiard, along with the animated family film Sing Just in Time for the Holidays. As you can see, the film slate looks promising for the remainder of 2016, and we are very encouraged by the film slate for 2017. We are well positioned to amplify on the strength of the slate through our premium experiences.
Overall, it was a successful quarter and I'm excited about the strategic opportunities ahead that will help us to continue to grow the business and create shareholder value. Before I turn the call over to Gord, we would like to extend our thanks and best wishes to Phyllis Yaffe, who stepped down from the Cineplex Board as she has taken on her new role as Counseling General in New York. We're also pleased to advise that Ian Greenberg, former President, CEO and Co Founder of Astral Media, is the new Chairman of the Cineplex Board of Directors. We also welcome Donna Hayes, the retired publisher and CEO of Aliquin, who joined our Board of Directors today. With that, I'll turn the call over to Gord.
Thanks, Elf. I am pleased
to present the third 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. For the third quarter, total revenues increased by 14.5 to $376,000,000 and adjusted EBITDA increased by 13.8% to $67,300,000 The results were positively impacted by third quarter record results reported for all revenue categories and adjusted EBITDA. Also included in our top line results is the consolidation of Cineplex Fibers Inc, which was equity accounted for in the prior year. Cineplex opened the first location of The Rock Room in mid September in Edmonton, Alberta, and we are very pleased with the results to date.
Cineplex presents its income statement line items by nature, and as such, revenues and operating expenses for The Rec Room are included in existing income statement line items of a similar nature. We provide additional detail with respect to the breakout of The Rec Room's results in our MD and A. Cineplex's third quarter box office revenue increased 4.4 to $180,100,000 compared to $172,600,000 in the prior year as a result of a VPP increase of 5.4% to $9.37 from $8.89 in 2015. This was partially offset by an attendance decrease of 1%. The increase in PPP is due to an increase in the premium product percentage in the third quarter, increasing to 46.5% of box office revenue in 2016 from 34.5 percent in 2015.
The impact of premium priced product on the average ticket price was $1.17 for this quarter compared to $0.79 in the prior year, primarily due to the success of three d product. The top three films in 2016 were released in three d as compared to only two of the top three films in the prior year. Foodservice revenue increased 3.9% to $109,600,000 as a result of a 4.8% increase in concession revenue per pay ton to $5.69 a third quarter record. Included in foodservice revenue is $300,000 from The Rec Room. The PPP growth was primarily a result of higher average transaction values as a result of expanded offerings, targeted premium core concession offerings, merchandise programs and increased penetration and visitation to outtakes in VIP cinemas.
Total media revenue increased $10,500,000 or 30.7% to $44,800,000 for the quarter. Cineplex Media revenue, which is primarily theater based, decreased 16.2%. Cineplex Digital Media revenue increased 69.8% due to increased project revenue for new clients, including A and W and American Dairy Queen and growth in existing and new business opportunities, including advertising revenue from the Tim's Teaching Network deployment and the Oxford Properties Group digital installations. With the acquisition of the remaining 50% of the equity of CSI on 10/01/2015, we began consolidating the results during the 2015. Other revenue includes $24,000,000 of gaming revenue arising as a result of the consolidation of CSI's results.
In addition, other revenue includes $200,000 of amusements and gaming revenue earned by The Rec Room since its mid September opening. Turning briefly to our key expense line items. Film costs for the quarter came in at 53% of box office revenue as compared to 53.1 reported in the prior year. Cost of food service for Q3 twenty sixteen, excluding $100,000 incurred at The Rec Room, was 22.2% as compared to 21.2% in the prior year as a result of the mix of food offerings, including VIP offerings. Other costs of $189,100,000 increased $32,400,000 or 20.7%.
Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses. Theater occupancy expenses were $51,700,000 for the quarter versus a prior year actual of $51,200,000 Other operating expenses were $120,400,000 for the quarter versus the prior year actual of $89,800,000 an increase of $30,600,000 Major reasons for the increase include an increase of $20,400,000 due to the consolidation of CSI, an increase of $1,000,000 due to the impact of new and acquired theaters, net of disposed theaters, higher media and digital media expenses of $5,100,000 due to higher business volumes, dollars 400,000.0 in unit level operating costs related to The Rec Room and costs related to the growth and development of new businesses, including the World Gaming Network and The Rec Room. G and A expenses were $17,000,000 for the quarter, which were $1,300,000 higher than the prior year due in part to higher head office payroll expenses. Interest expense of $4,600,000 was $1,300,000 lower than the prior year amount of 5,900,000 contributing to the decrease of a $1,200,000 decrease in noncash interest, mainly as a result of the full accretion of the K3 earnout amount in 2015 and by lower cash interest of $100,000 due to lower average interest rates.
The company recorded tax expense of $10,200,000 during the 2016, comprised substantially of current tax expense. Our blended federal and provincial statutory tax rate currently is 26.8%. Net CapEx for the third quarter was 27,500,000 as compared to $25,600,000 in the prior year. We continue to estimate that net CapEx will be approximately $100,000,000 for 2016. As Ellis mentioned earlier, we have been testing a recliner program, which has been successful to date and are looking to roll out two additional sites.
We expect to deploy approximately $25,000,000 in lounger retrofits in 2017, and our projected net CapEx for 2017 is now approximately $125,000,000 Record third quarter revenue contributed to our strong Q3 results. We continue to remain comfortable with where Cineplex Inc. Is positioned today. Our strong balance sheet and low leverage ratios allows us to continue to invest in future growth opportunities for the company and benefit from future strong film product. That concludes our remarks for this morning.
I would now like to turn the call over to the conference operator for questions.
We'll go first to Drew McReynolds with RBC Capital Markets. Yeah. Thanks very much.
Good morning. I guess, Discord, on the digital media side, obviously, a nice kinda ramp up mode here with some of those contracts coming on board. Just from a modeling standpoint, can you help us say relative to q three kinda going forward, how far along you are on the kind of Dairy Queen and a and w deployments? And then what kind of impact Ivanhoe Cambridge contract could have.
Yes, sure. So with respect to Dairy Queen and AW, both of those entities are looking to roll out over a number of quarters. Let me give you some of the stats that we have today. And as I mentioned to you guys earlier, at the end of last year, we were just under 10,000 locations deployed. In fact, we were at 9,700 locations.
At the end of the third quarter, we're just over 11,000. So we've had about a 14% increase in locations deployed throughout this period, and so we'll look to kind of extend that projection over the next number of quarters. With respect to your question on Ivanhoe Cambridge, as we described to you historically, we operate under really three business models. There's sort of that service based model, which is the Dairy Queen and the A and W model, where it's the brand capital and we're providing technology, network management and creative services. Then there's a more of an advertising, pure advertising based model, where we are, in essence, advertising and sharing the revenue stream with the landlord of the facility.
And then there's a hybrid model, which we've been introducing across Canada, which includes elements of both. And as we noted in our press release, we're looking to create a better customer experience within the mall, interactivity, gamification as well as sell ins and advertising. So this one falls into that kind of hybrid model. I would say that as we have disclosed, when we look at our CapEx spending, we've been spending about $10,000,000 a year in digital installations under these hybrid model and advertising based model scenarios. I would suggest Kavanaugh Cambridge will be roughly half of that total amount.
So we'd look to co invest about $5,000,000 in that. And as we've also always said, we tend to look for approximate 30% returns on some digital installations at about 30% EBITDA margin. So you can kind of back into some of the numbers there that may help you in your modeling.
Sure. George, thanks for all
of that. Just two other quick ones for me. Just on rep room, I know it's been not a long time since Edmonton has has been open, but obviously, you're pleased. Just wondering if you can kinda just, know, let us know to what extent it's it's certainly validated the concept. Does this convince you to move more aggressively versus kind of previous plans in terms of expansion?
And then my last question, maybe for you, Ellis. Just in terms of the, office attendance, just overall North American trends, I'm just wondering from your observation, just relative to the slate of movies that come in and out quarter in, quarter out, are
you seeing any kind of
real changes to behavior, to demographics relative to the slate that are kind of surprising you? Or is it just business as usual?
K. So on The Rec Room at Celis, we are extremely pleased with the performance, and we are six weeks into it, and the numbers have been ahead of what we had anticipated. And as mentioned, we will be opening two additional locations in the 2017. The Roundhouse, which is the historical site in Toronto right across from the Rogers And The Aquarium and also at Deerfoot Trail in Calgary. So those would be two.
And then we are in the process of getting closer on a number of other deals across the country, which we will be announcing over the next couple of months. On the box office change and behavior, I think one of the things we are seeing is the fact that the highs are getting higher and the lows are getting lower as far as the types of films that are performing. And it's getting to be very much driven by blockbusters. But that's not to say there are not other films that people are interested in seeing, and we have a lot of those coming result of the Oscar nominations like movies like La La Land, Lion, Manchester by the Sea. These are smaller movies, but they are still movies that we expect will perform well, not to the same degree as the Doctor Strange and some of the other big movies we anticipate over the next number of months.
So yes, you do see that there are the bigger movies are overperforming and the smaller movies not to the same degree. But overall, I don't think it's impacting the business from the perspective of attendance and, you know, box office revenue.
That's great. Thank you very much.
Our next question comes from Adam Shine with National Bank Financial.
Thanks a lot. Good morning. Maybe just building a little bit on Bruce's question. Something that was interesting in the quarter was that concession revenue growth lagged box office revenue growth, something that we don't usually see. Any particular items worth highlighting there?
I mean, I think we saw the box office for Patron grow at faster pace on the overall premium penetration. With respect to kind of concession revenue, year over year, you typically see that Q3 is typically the lowest amount during the four quarters just given the expanded operating hours of the theaters. But we're still running, as we mentioned, about $0.26 growth year over year with basket size being the primary driver and then the VIP being the second highest impact and then visitation being the third highest contributor to that PPG growth. So Adam, I would just say it's a little
bit more muted kind of in
the third quarter based on expanded operating hours and the mix of phone, and there's nothing I wouldn't think read anything else into that.
Okay. If I just turn over to CSI. The margin moved up quite nicely versus the prior three or so quarters that we've seen. Anything related there in terms of seasonality or just better traction and perhaps some efficiencies?
Yes. And again, Adam, you will see
a little bit of seasonality to the business. When you think of sort of the higher margin so there's two elements of the business where there's the distribution side, which is the sale of equipment and then there's the route operations side. So again, the rooted operations side will perform a little bit stronger in the summer months when there's more kids kind of off for holiday. Okay. Maybe I'll try to get one in for Ellis.
Ellis, can you give
us maybe a little bit
of an update in terms of some of the pricing moves that we've seen? We saw some increases announced, I guess, early in October and then obviously some of these interesting developments on the 4DX price proposition.
Yes. We took some modest price increases, Adam. We've been staying back on pricing because we didn't want to get that trigger. But given some of the increases in the minimum wages across the country and the cost of operating, we felt that these small increases would not have a major impact on our attendance, and that's the reason we move forward with them. And the premium offerings continue to be well taken up by our guests as we've seen with our Ultra ADX and with the 4DX we just installed on Friday, and we will continue to innovate as we move forward with those premium offerings.
Okay. Great. Thanks a
lot. Thanks.
We'll next go to Paul Steep with Scotia Capital.
Great. Thanks. Good morning. Could you talk a
little bit about the pipeline you're seeing on
the media side, guys? You've obviously talked about the
win yesterday, but the types of opportunities you're seeing in terms of demand, Canada versus U. S. And maybe also just how much of the shopping center business you've now secured in the Canadian market? And then one quick follow-up would just be on the timing of the rollout of the recliner seat program. Thanks, guys.
So,
Paul, I think I your questions right because I look for the digital media side. And as we mentioned, we opened an office in The U. S. About one years point ago. We've established a great relationship with a number of our customers in Canada.
We've been able to extend into new customers as it appears to worry in W in Canada, some additional shopping mall clients, as you mentioned. As a result of our entrance into The U. S, we were able to secure American Dairy Queen, as we've mentioned. And a number of times, we're involved in a number of processes of large organizations that are looking to convert primarily in The U. S, but also North American operations.
And we're very optimistic about the outcomes in those processes. So it's kind of more of the same. I guess the focus is a little bit more in The U. S. The U.
S. Market is roughly 10x the size of Canada, but we have been announcing these wins in Canada, like AMW and Purestair.
And on the recliners, your question as far as the rollout, we will initially, we are looking to do approximately 10 locations and then look at the results and continue to focus on that. But some of our peers in The U. S. Have seen significant opportunities with direct line of programs, so we will be looking at it selectively across the country. Our next question comes from Zach Lassard with TD Securities.
Yeah. Good morning, guys. Just a quick question to follow-up on on Adam's. Are you able to maybe quantify some of those price increases that that you've put through?
Derek, you know what, I would say that the impact and and some of them have been implemented throughout 02/2016. So, I I would suggest that the incremental impact going into 2017 could be roughly $0.15 a person.
Okay. All right. And just maybe just talk about there was a 1% drop in attendance at the box office, and it was a little weaker than the Canadian industry growth. I was just wondering what the drivers were for the drop in attendance.
Okay. This is one thing that we see from quarter to quarter variations between Canada and The U. S. And in the third quarter, the major contributors to that were in the prior year, Minions way outperformed the performance of pets sorry, pets because Minions did a better percentage in Canada compared to The U. S.
In 2015. So when you're looking at it year over year, you see that we didn't perform in Canada as well as The U. S. Did. But if you go back, for example, to the first quarter, Cineplex was up 24%, Canada was up 22%, and The U.
S. Was up 12%. In the second quarter, we were down 13%, Canada was down 15%, and North America was down 9%. So it all depends on the types of product that's out there and the content that's available. And there are movies that are played in The U.
S. That we sometimes don't get or don't work in Canada, like movies like The Infiltrator and Hillary's America, they're not big grossing movies, but together, they did over $25,000,000 So we didn't play those movies in Canada. And then in the third quarter, there were 15 of the top 15 films, three of them are horror movies, and those movies don't tend to do as well in Canada as in The U. S. So Purge, election year didn't do as well, Lights Out didn't do as well, Don't Breathe also horror movie, a bit better, but not as well as what one would expect for usual movie percentages in Canada.
And comparing Canada as a percent and Cineplex, sometimes what happens is in the summertime, there are a number of drive ins that are open. And this year, as we all know, we had some spectacular weather that drove the performance. And we just have one remaining drive in in our circuit. So in certain of those locations, we see where we end up slightly lower.
Thanks for that color, Hollis. And maybe just one final one on Cineplex Media. In the MD and A, you talked about some new media initiatives driving the business. Can you maybe just touch on what those are?
Sure. And I think when
we look at and we're talking about
the traditional media side of things here. So we're extremely pleased to have 16% growth in the traditional media business and what is for most of our peers in the space a challenging media environment. We had growth really in kind of three kind of core elements. The my traditional, so the showtime and then the pre show of the overall $4,000,000 growth, about $2,000,000 came from increased capacity utilization in that space, with about 35% of that 2,000,000 coming from new customers. We had about $1,000,000 of the increase in some of our interactive initiatives.
So our interactive media zones and in particular, Time Play installation drove $1,000,000 of that increase. And then last, as we speak about trying to engage customers into more long term commitments with us, those commitments also contributed to $1,000,000 increase, and part of that was related to the world gaming business. So $2,000,000 from the traditional presales and show times, dollars 1,000,000 from the interactive and time play initiatives, 1,000,000 from, some of these corporate commitments, including some of our gaming sponsorships.
Thanks very much, Charlie.
Next, we'll go to Rob Goff with Echelon Wealth Partners.
Thank you very much, and good morning. Two questions, if
I could. The first would be on your film margin.
It was very nice to see it down on a
year over year basis.
Can you discuss any factors influencing that, be it over indexing, indexing? And then the second question would be if you could give any additional color on your CSL partnership with Riot Games.
Yes. So on the first one, on the film cost, as we mentioned in previous quarters, it's largely dependent on how the revenue is spread out between the films. And when you have a more even distribution, you you tend to have a more moderate film cost percentage. So this year was pretty close to what happened in 2015. So the percentage was very close within oneten of 1% of each other.
So that you will see that trend. If you have a lot of movies that are very high grossing that make up a big percentage of a particular quarter, then you would see the higher film rental like we did previously.
And then with respect to the question on League of Legends and CSL, so CSL is our collegiate star league, which is on about 700 campuses across North America. And we were extremely excited to partner with Riot Games to become the official campus competition for League of Legends. And and as you may may not know, League of Legends is really the premier title in eSports. It was the event that for the North American Championship Series, which the publisher tends to control. They still near Canada Center for two days.
So that is the premier title. We're extremely pleased, to, partner with them to to bring that title to the campus circuit.
Thank you very much.
Thank you. Our next question comes from the line of
Tim Casey with BMO Capital Markets.
Thanks. Just following up on that. Ellis, could you give us a little more color on conversations are going or how the progress is going within Canada on the eSports initiative? And then any color you can provide on conversations you're having with international or non Canadian exhibitors and their interest level in the platform? Thanks.
Sure, Tim. I'll take that question. So with respect to the events in Canada and to date and the conversations, as may or may not have noticed, we've been really building a brand in Canada. We've been focused on bringing titles and perfecting the experience. We introduced our first title of Call of Duty, which was single player versus single player as opposed to kind of the more traditional team versus team.
And then we followed that up with Street Fighter V, which, again, was one versus one. And then
we
we just introduced our first team based title, so Uncharted, which was our third quarter event. And as we look forward, we're going to expand sort of off of console, more teams and more and additionally introduce PC type games. We've also been introducing more sort of one off type events in the theaters, too. So we've done a number of events during the third quarter that are not championship series based, but we're trying to also build a market which will be less intensive from a participation perspective. And then we've also focused sort of in The U.
S. And building out the College Week and some of the to that waiver included the announcement with Riot Games and League of Legends. And as we continue to build out and perfect kind of the operating structure, I would just say we're having conversations with peers globally. And as we kind of build that model and move it forward, you know, we we are excited with the opportunity to to kind of build across the borders. Thank you.
Let's go to Robert Pierce with Credit Suisse.
Thank you
very much for taking my question.
I think most of them
have been answered, but maybe just a quick housekeeping question for me upfront. Gord, just wondering if you could clarify, if the food, the food revenue from, Rec Room is included in CPP or not?
And, hopefully, we've tried to footnote that. But, yeah, no. It is not. So it's absolutely not. So
Perfect. Thank you. And then maybe, your bigger question on the reclinings the recliner seating. I know you're you're obviously, happy with the trials you've run and now bringing out in the broader footprint. How should we think about pricing for a theater with recliner seating versus maybe more of your traditional offerings?
I think when you look at the the American tiers, they've certainly seen some strong price increases, as they've rolled them out in their networks.
Yeah. We will be looking at it overall and seeing, you know, how our experience experiences are and what we do from a pricing perspective. On the couple that we've tested, we felt that the pricing, we were able to raise it without much guess concerns because of the offering. And that's what most of our peers are starting to
do in The US also.
Perfect. Thank you very much.
Thank you.
We'll next go to Aravinda Galappatis with Canaccord Genuity.
Morning. Thanks for taking my question. For Cora Ellis, I was wondering if you can sort of revisit the opportunity on the gaming side following the Tricorp acquisition. I mean, you're moving for and more in The U. S.
Expanding presence. Maybe just touch on the magnitude of the opportunity given the recent acquisition.
Sure. And and, look, I think you're may recall our experience in Canada where we work and we took two companies, that were in Canada. We combined them, extracted the synergies of combining them. We ended up with a national footprint, which has allowed us to extend and service ourselves better as well as new customers in Canada. In The U.
S, CSI had a presence in the Southeastern U. S. With the acquisition of Tricorp. That gives us presence in the Northeastern U. S.
That allows us to service some of our existing customers better as well as to extend into new customers in geographies that we didn't have our presence in within The U. S. So again, somewhat of a similar game plan. We have a distribution business in The U. S.
We have a more expanded business. So that gives us revenue synergies and some operating synergies that allow us to service our customers better in that space.
Cord. And just to the sorry, on the CapEx side, obviously, capital is rising next year, as you mentioned. If you think about free cash flow and CapEx levels on a long term basis, how should we look at this level? I mean, we've been at the
100 level for a
few years. Obviously, we're stepping up. Should we be thinking of this as the new sort of norm, considering the breadth of new initiatives that you have? Or is there a genuine chance of actually that pulling back towards the more normalized level we've been seeing in recent years?
Yeah. Look, I think,
you know, as we've said, we jumped up to a $100,000,000 when we inherited some additional bills from Empire, and we're rolling out our premium initiatives. As I mentioned, the expectation was is that kind of new construction or new build and the exhibition side of things may tail down a little bit from where it had been historically given that expanded build base. But that would have been replaced by increases in the rec room in rec room sites. We've now said today that we look to go up to 125,000,025 million dollars as it relates to the recliner program. And so again, that's more of a premium type rollout, which would have more of a limited life in terms of spend.
As we have mentioned, we're looking to roll out 10 to 15 records in major markets over the next four years, and we've been working on a model that could service in smaller type markets and would look to potentially roll out and increase that count by about twice. So an additional 10 to 15 of a box version of The Rec Room. So with that said, is we would expect that we'd be operating at that $100,000,000 to plus slightly over $100,000,000 CapEx range over the next number of years. But our focus is really to kind of remain free cash flow neutral as we go forward and, you know, obviously run at a relatively low leverage ratio and have a significant amount of debt, capacity, and and that leverage should remain low as our operating earnings increase.
Great. Thanks for the color, Chris.
And next, we'll go to Ben Mogul with Stifel.
Good morning. Thanks for taking
my question. So I have two questions. On the renovation or the retrofits and reseating, U. S. Guys have generally targeted sort of between 2025% based on the operator.
In the test that you've done, have you seen sorry, that's the IRR. In the test that you've done, VCO has seen similar kind of returns?
Yes. Ben, we have seen some great returns both on the, incidents of people coming to the theaters and also on the concession that has also increased. And it's much in line and sometimes better than what's happened, but our tests have been pretty limited. So as we roll it out, we see the benefits of the program. Obviously, The US guys have it's
a probably competitive market. But in the Canadian market,
do you see any of
the smaller operators doing anything similar in
that market in your markets? Look. So the operators do what they're doing depending on their position in the marketplace, so we can't really talk about them. Okay. Okay.
Fair enough. And then
one for Gord. So, Gord, when I'm looking for the cash flow from ops, very, very large sort of outflow on non operating side sort
of year to date.
When you sort of look for through fourth quarter and reversal of timing around those things, should we sort of expect cash flow from ops to be sort of similar to, you know, say, what it was in 'fifteen, sort of just adjusted for sort of the net income difference, if you will, or even back to 'fourteen levels?
Yeah. So you're really you're just thinking about the working capital changes, I'm saying?
Yeah. Yes.
So look at historically, you know, what happens is when we sell corporate tickets and gift cards in the fourth quarter, you know, there's a huge buildup or source of working capital. And in the first quarter, typically, there's a drawdown as those certificates and coupons are being redeemed.
Now 2016 was a little bit
of a unique year in the fact that throughout 2015, we were making tax installments based on our 2014 filed returns, which had the benefits of those AMC tax losses. So we're, in essence, making our recurring tax payments based our installment payments based on sort of that lower tax payable level. And then when we filed our returns in the 2016 as we needed to make that catch up payment. And so when you look at the notes of our financial statements, you'll see that the cost of that same kind of drain in the first and second quarters is due to those tax payments. So a little bit of an anomaly late year in 2016.
There will be a little bit more of a drain of working capital than there typically would be, but don't read anything into that into the future. Okay. That's great and very helpful. And then in your comments earlier about just sort
of staying with the CapEx levels around free cash flow neutral, you were using dividend or distributions
in that equation. Is that correct? Yes. That's what I thought. Yeah.
I thought that was the case. I want to double check. Thanks again.
Thank you. Okay. And one last message, maybe it is star
one if you'd like to ask a question. And looks like there are no further questions at this time. So I'd like to turn it back over to mister Ellis Jacob for additional or closing remarks.
Thank you very much for joining us this morning. We look forward to speaking with you again on our year end conference call in February and hope to see you in our caters over the holidays. Thank you.
So that does conclude today's conference. We do thank you all for your participation. You
may now disconnect.