Good everyone. Welcome to Cineplex Inc.'s third quarter 2016 conference call. Today's conference is being recorded. At this time, I'll now 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 Inc.'s third quarter 2016 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, Gordon Nelson, will provide an overview of our financials, and 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 CAD 376 million, and adjusted EBITDA, which increased 13.8% to CAD 67.3 million.
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 Starburst Inc., following our acquisition of the remaining 50% interest last October. ATP increased CAD 0.48 to CAD 9.37, and CPP increased CAD 0.26 to CAD 5.69, both were third-quarter records. Top-performing films during the period included "Suicide Squad," "The Secret Life of Pets," "Star Trek: Beyond," "Jason Bourne," and "Finding Dory." Four of the top five films were available in 3D, which resulted in premium formats accounting for 46.5% of box office revenue this period, up from 34.5% in the prior-year period. Gordon 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 theaters in Ontario, Cineplex Cinemas North Barrie, which is north of Toronto, features eight screens, including the city's first UltraAVX 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 UltraAVX 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 Yonge Dundas 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 that generated from our test locations, plans are currently underway to retrofit theaters 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 Hip, 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, the Cineplex mobile app has been downloaded over 15 million times as of September 30, 2016, recording over 843 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, continue to experience record growth during the quarter. Cineplex Media reported record third-quarter revenue of CAD 29.1 million, up 16.2% versus the same period last year, primarily due to increases in showtime and pre-show advertising, as well as growth in new media offerings. Cineplex Digital Media revenue grew by 69.8% to a record CAD 15.7 million 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 Ivanhoé 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're extremely pleased with the early results, and we'll 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 first half of 2017. In esports, WorldGaming hosted its third championship tournament that featured the first multiplayer team-based game, "Uncharted 4: A Thief's End." 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 Tricorp Amusements, a leading provider of interactive video, redemption, and amusement gaming services in the U.S. Tricorp will enable us to further build our CSI presence in the U.S. The transaction closed subsequent to quarter end on October 1st. Our SCENE loyalty program continued to grow its membership during the quarter, reaching 7.9 million members as at September 30th. Before moving on to the new 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 Ivanhoé Cambridge.
Our amusement, gaming, and leisure businesses continue to expand through key acquisitions in the U.S., the launch of our first location of The Rec Room, and the continued growth in our esports startup, WorldGaming. 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. 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 3D, UltraAVX, VIP Cinemas, IMAX, Barco Escape, D-BOX, 4DX, as well as our new recliner seating program.
Let's take a look at some of the films we have coming up for the balance of the year. We open the fourth quarter with films such as "The Girl on the Train," "The Accountant," "Jack Reacher: Never Go Back," and "Inferno." Marvel's "Doctor Strange" starring Benedict 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 16th, we have "Rogue One: A Star Wars Story." Mark your calendars for December 21st, as that's the day we bring you three highly anticipated movies, including the adventure-sci-fi film "Passengers" starring Jennifer Lawrence and Chris Pratt, "Assassin's Creed" with Michael Fassbender and Marion Cotillard, 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. 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. 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 consul 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 Harlequin, who joined our board of directors today. With that, I'll turn the call over to Gord.
Thanks, Ellis. I am pleased to present the third 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. For the third quarter, total revenues increased by 14.5% to CAD 376 million. Adjusted EBITDA increased by 13.8% to CAD 67.3 million. 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 Starburst Inc., which was equity accounted for in the prior year. Cineplex opened the first location of The Rec Room in mid-September in Edmonton, Alberta. We are very pleased with the results to date.
Cineplex presents its income statement line items by nature. 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&A. Cineplex's third quarter box office revenue increased 4.4% to CAD 180.1 million, compared to CAD 172.6 million in the prior year, as a result of a VPP increase of 5.4% to CAD 9.37 from CAD 8.89 in 2015. This was partially offset by an attendance decrease of 1%. The increase of VPP 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% in 2015.
The impact of premium priced product on the average ticket price was CAD 1.17 for this quarter as compared to CAD 0.79 in the prior year, primarily due to the success of 3D product. The top three films in 2016 were released in 3D as compared to only two of the top three films in the prior year. Food service revenue increased 39% to CAD 109.6 million as a result of a 4.8% increase in concession revenue per patron to CAD 5.69, a third quarter record. Included in food service revenue is CAD 0.3 million from The Rec Room. The CPP 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 and VIP Cinemas. Total media revenue increased CAD 10.5 million, or 30.7%, to CAD 44.8 million for the quarter.
Cineplex Media revenue, which is primarily theater-based, increased 16.2%. Cineplex Digital Media revenue increased 69.8% due to increased project revenue for new clients, including A&W and American Dairy Queen, and growth in existing and new business opportunities, including advertising revenue from the [PIMS] TV network deployment and the Oxford Properties Group digital installations. With the acquisition of the remaining 50% of the equity of CSI on October 1st, 2015, we began consolidating the results during the fourth quarter of 2015. Other revenue includes CAD 24 million in gaming revenue arising as a result of the consolidation of CSI's results. In addition, other revenue includes CAD 0.2 million of amusement and gaming revenue earned by The Rec Room since its mid-September opening. Turning briefly to our key expense line items, film cost 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 2016, excluding CAD 0.1 million 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 CAD 189.1 million decreased CAD 32.4 million, or 20.7%. Other costs include theater occupancy expenses, other operating expenses, and general and administrative expenses. Theater occupancy expenses were CAD 51.7 million for the quarter versus a prior year actual of CAD 51.2 million. Other operating expenses were CAD 120.4 million for the quarter versus a prior year actual of CAD 89.8 million, an increase of CAD 30.6 million.
Major reasons for the increase include an increase of CAD 20.4 million due to the consolidation of CSI, an increase of CAD 1 million due to the impact of new acquired theaters, net of disposed theaters, higher media and digital media expenses of CAD 5.1 million due to higher business volumes, CAD 0.4 million in unit-level operating costs related to The Rec Room, and costs related to the growth and development of new businesses, including the WorldGaming Network and The Rec Room. G&A expenses were CAD 17 million for the quarter, which were CAD 1.3 million higher than the prior year, due in part to higher head office payroll expenses.
Interest expense of CAD 4.6 million was CAD 1.3 million lower than the prior year amount of CAD 5.9 million, contributing to the decrease of a CAD 1.2 million decrease in non-cash interest, mainly as a result of the full accretion of EK3 burnout amount in 2015, and by lower cash interest of CAD 0.1 million due to lower average interest rates. The company recorded tax expense of CAD 10.2 million during the third quarter of 2016, comprised substantially of current. Our blended federal and provincial statutory tax rate currently is 26.8%. Net CapEx for the third quarter was CAD 27.5 million as compared to CAD 25.6 million in the prior year. We continue to estimate that net CapEx will be approximately CAD 100 million 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 to additional sites.
We expect to deploy approximately CAD 25 million in lounger retrofits in 2017, and our projected net CapEx for 2017 is now approximately CAD 125 million. 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.
Thank you, sir. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one if you'd like to ask a question. We'll go first to Drew McReynolds with RBC Capital Markets.
Yeah, thanks very much. Good morning. I guess, just Gord, on the digital media side, obviously in a nice kind of ramp-up mode here with some of those contracts coming on board. Just from a modeling standpoint, can you help us say, relative to Q3, kind of going forward, how far along you are on the kind of Dairy Queen and A&W deployments, what kind of impact the Ivanhoé Cambridge contract could have?
Yeah, sure. With respect to Dairy Queen and A&W, 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 to date, 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. We've had about a 14% increase in locations deployed throughout this period, as we'll look to kind of extend that projection over the next number of quarters. With respect to your question on Ivanhoé 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&W model, where it's the brand capital and we're providing technology, network management, and creative services. There's more of an advertising, pure advertising-based model, where we are in essence doing advertising and sharing the revenue stream with the landlord of the facility. There's a hybrid model, which we've been introducing across Canada, which includes elements of both. As we noted in our press release, we're looking to create a better customer experience within the mall, interactivity, gamification, as well as selling some advertising models. 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 CAD 10 million a year in digital installations under these hybrid model and advertising-based model scenarios.
I would suggest that Ivanhoé Cambridge will be roughly half of that total amount, so we're looking at co-investing about CAD 5 million in that. As we've also always said, we tend to look for approximate 30% returns on some digital installations at about 30% EBITDA margins. You can kind of back into some of the numbers there that may help you with your modeling.
That's great, Gord. Thanks for all of that. Just two other quick ones for me. Just on The Rec Room, I know it's been not a long time since Edmonton has been open, but obviously you're pleased. Just wondering if you can kind of just let us know to what extent it's certainly validated the concept. Does this convince you to move more aggressively versus kind of previous plans in terms of expansion? My last question may be for you, Ellis. Just in terms of the box 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?
On The Rec Room, it's Ellis. We are extremely pleased with the performance. We are six weeks into it, and the numbers have been ahead of what we had anticipated. As mentioned, we will be opening two additional locations in the first half of 2017. The Roundhouse, which you know is the historical site in Toronto right across from the Rogers and the Aquarium, and also at Deerfoot Trail in Calgary. Those would be two. 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 in 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. It's getting to be very much driven by blockbusters. That's not to say there are not other films that people are interested in seeing, and we have a lot of those coming out as a result of the Oscar nominations, 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 a "Doctor Strange" and some of the other big movies we anticipate over the next number of months.
Yes, you do see that there are the bigger movies over-performing and the smaller movies not to the same degree. Overall, I don't think it's impacting the business from the perspective of attendance and 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 Drew's question. Something I was interested 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 think we saw the box office per patron grow at a faster clip based on the overall premium penetration. With respect to 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. We're still running, as we mentioned, about 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 CPP growth. Adam, I would just say it's a little bit more muted in the third quarter based on expanded operating hours and the mix of film, and I wouldn't 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?
Yeah. Again, Adam, you will see a little bit of seasonality to the business. When you think of the higher margin for those two elements of the business, where there's the distribution side, which is the sale of equipment, and then there's the route operation side. Again, the route operation side will perform a little bit stronger in the summer months when there's more kids 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.
Yeah, we put some modest price increases, Adam. We've been staying back on pricing because we didn't want to press that trigger. 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 moved forward with them. The premium offerings continue to be well taken up by our guests, as we've seen with our UltraAVX and with the 4DX we just installed on Friday. 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. Morning. Could you talk a little bit about the pipeline you're seeing on the media side, guys? You previously 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. Then one quick follow-up would just be on the timing of the rollout of the recliner seat program. Thanks, guys.
Paul, I think all your questions relate to [audio distortion] for the digital media side. As we mentioned, we opened an office in the U.S. about a year and a half ago. We've established a great relationship with a number of our customers in Canada. We've been able to expand into new customers like The Beer Store, A&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. A number of times, we're involved in a number of processes of larger organizations that are looking to convert primarily in the U.S., but also North American operations. We're very optimistic about the outcomes in those processes. 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 10 times the size of Canada, we have been announcing these wins in Canada, like A&W and Beer Store.
On the recliners, your question as far as the rollout, initially, we are looking to do approximately 10 locations, then look at the results and continue to focus on that. Some of our peers in the U.S. have seen significant opportunities with the recliner program, we will be looking at it selectively across the country.
Our next question comes from Derek Lessard with TD Securities.
Good morning, guys. Just a quick question to follow up on Adam. Are you able to maybe quantify some of those price increases that you've put through?
Derek, what I would say that the impact, some of them have been implemented throughout 2016. I would suggest that the incremental impact going into 2017 could be roughly CAD 0.15 a person.
Okay. All right. There was a 1% drop in attendance at the box office. 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, that there are variations between Canada and the U.S. In the third quarter, the major contributors to that were in the prior year, "Minions" way outperformed the performance of "Pets" because "Minions" did a better percentage in Canada compared to the U.S. in 2015. 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. 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%. It all depends on the types of product that's out there and the content that's available.
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 CAD 25 million. We didn't play those movies in Canada. In the third quarter, 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. "The Purge: Election Year" didn't do as well. "Lights Out" didn't do as well. "Don't Breathe" also a horror movie, did better, but not as well as what one would expect for usual movie percentages in Canada.
Comparing Canada as a percentage and Cineplex, sometimes what happens is in the summertime, there are a number of drive-ins that are open. This year, as we all know, we had some spectacular weather that drove the performance. We just have one remaining drive-in in our circuit. In certain of those locations, we see where we end up slightly lower.
Thanks for that color, Ellis. Maybe just one final one on Cineplex Media. In the MD&A, you talked about some new media initiatives driving the business. Can you maybe just touch on what those are?
Sure. I think, we look at, and we're talking about the traditional media side of things here. We're extremely pleased to have 16% growth in the traditional media business in what is, for most of our peers in the space, a challenging media environment. We had growth really in three core elements. The most traditional, the showtime and then the pre-show, of the overall CAD 4 million growth, about CAD 2 million came from increased capacity utilization in that space. With about 35% of that two million coming from new customers. We had about CAD 1 million of the increase in some of our interactive initiatives. Our interactive media zones and in particular our TimePlay installation drove CAD 1 million of that increase.
Last, as we think about trying to engage customers into more long-term commitments with us, those commitments also contributed to a CAD 1 million increase, and part of that was related to the WorldGaming business. CAD 2 million from the traditional pre-sale and showtime, CAD 1 million from the interactive and TimePlay initiatives, CAD 1 million from some of these corporate commitments, including some of our gaming sponsorships.
Thanks very much, guys.
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. Could you discuss any factors influencing that, be it over-indexing, under-indexing? The second question would be if you could give any additional color on your CSL partnership with Riot Games.
Yeah. On the first one, on the film cost, as we've mentioned in previous quarters, it's largely dependent on how the revenue is spread out between the films. When you have a more even distribution, you tend to have a more moderate film cost percentage. This year was pretty close to what happened in 2015. The percentage was very close, within one tenth of 1% of each other. 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.
With respect to the question on League of Legends and CSL. CSL is our Collegiate StarLeague, which is on about 700 campuses across North America. We were extremely excited to partner with Riot Games to become the official campus competition for League of Legends. As you may or 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 filled Air Canada Centre for two days. That is the premier title. We're extremely pleased to partner with them 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 how the 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. With respect to the events in Canada to date and the conversations, as you 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, Call of Duty, which was single player versus single player, as opposed to the more traditional team versus team. We followed that up with Street Fighter V, which again was one versus one. We just introduced our first team-based title, Uncharted, which was our third quarter event. As we look forward, we're going to expand off of console, more teams, and additionally introduce PC-type games. We've also been introducing more one-off type events in the theaters too.
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. We've also focused in the U.S. in building out the College League and some of the offshoots of that wave were included the announcement with Riot Games and League of Legends. As we're looking to build out and perfect the operating structure, I would just say we're having conversations with peers globally. As we build that model and move it forward, we are excited what the opportunity is to build across the borders.
Thank you.
We'll next go to Robert Peters 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 from me up front. Gord, just wondering if you could clarify if the food revenue from Rec Room is included in CPP or not?
Hopefully we've tried to footnote that, but yeah, no, it is not. It's absolutely not.
Perfect. Thank you. Maybe a bigger question on the recliner seating. I know you're obviously happy with the trials you've run and now bringing it out in the broader footprint. How should we think about pricing for a theater with recliner seating versus maybe more of your traditional offerings? When you look at the North American peers, they've certainly seen some strong price increases as they've rolled those out in their networks.
Yeah, we will be looking at it overall and seeing how our experiences are and what we do from a pricing perspective. In the couple that we've tested, we felt that the pricing, we were able to raise it without much guest concerns because of the offering. That's what most of our peers are starting to do in the U.S. also.
Perfect. Thank you very much.
Thank you.
Once again, if you would like to ask a question, please do so by pressing star one. We'll next go to Aravinda Galappatthige with Canaccord Genuity.
Good morning. Thanks for taking my question. For Gord or 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 more and more into the U.S., expanding presence. Maybe just touch on the magnitude of the opportunity, given the recent acquisition.
Sure, Aravinda. Look, I think you may recall our experience in Canada, where we took two companies that were in Canada. We combined them. We 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 a presence In within the U.S. Again, somewhat of a similar game plan. We now have a distribution business in the U.S.
We have a more expanded business that gives us revenue synergies and some operating synergies that allow us to service our customers better in that space.
Thanks, Gord. On the CapEx side, obviously CapEx 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 CAD 100 million 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?
I think, as we've said, we jumped up to CAD 100 million when we inherited some additional builds from Empire and we're rolling out our premium initiatives. As I mentioned, the expectation was as that kind of new construction or new build from the exhibition side of things may tail down a little bit from where it had been historically given that expanded build base. That would've been replaced by increases in Rec Room sites. We've now said today that we look to go up to CAD 125 million as it relates to the recliner program. Again, that's more of a premium-type rollout, which would have more of a limited life in terms of overall spend.
As we have mentioned, we're looking to roll out 10 to 15 Rec Rooms 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. Another additional 10 to 15 of a smaller box version of the Rec Room. With that said, we would expect that we'd be operating at that CAD 100 million to plus, slightly over CAD 100 million CapEx range over the next number of years. Our focus is really to kind of remain free cash flow neutral as we go forward and obviously run at a relatively low leverage ratio and have a significant amount of debt capacity. That leverage should remain low as our operating earnings increase.
Great. Thanks for the color, Gord.
Next we'll go to Ben Mogil with Stifel.
Good morning. Thanks for taking my question. Two questions. On the renovation or the retrofits and the reseating, U.S. guys have generally targeted sort of between 20%-25% based on the operator. In the test that you've done, I'm sorry, that's the IRR. In the test that you've done, have you sort of 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. 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 will see the benefits of the program.
Obviously, the U.S. guys have a probably competitive market. In the Canadian market, do you see any of the smaller operators doing anything similar in that market, in your markets?
Look, the operators do what they're doing depending on their position in the marketplace, so we can't really talk about them.
Okay. Fair enough. Then one for Gord. Gord, when we're looking for the cash flow from ops, very large sort of outflow on non-operating side sort of year to date. When you sort of look through to the quarter and reversal of timing around those things, should we sort of expect cash flow from ops to be sort of similar to, say, what it was in 2015, sort of just adjusted for sort of a net income difference, if you will, or even back to 2014 levels?
Yeah. You're thinking about the working capital changes that have been-
Yeah. Yes.
Look, historically, what happens is when we sell corporate tickets and gift cards in the fourth quarter, there's a huge buildup or source of working capital. The first quarter, typically there's a big drawdown as those certificates and coupons are being redeemed. 2016 was a little bit of a unique year in the fact that through 2015, we were making tax installments based on our 2014 filed returns, which had the benefits of those AMC tax losses. We're in essence making our recurring tax payment based, our installment payments based on sort of that lower tax payable level. Then when we filed our returns in the first half of 2016 is we needed to make that big catch-up payment.
When you look at the notes to our financial statement, you'll see that the cause of that big kind of drain in the first and second quarters is due to those tax payments. A little bit of an anomaly year in 2016. There will be a little bit more of a drain of working capital than there typically would be, don't read anything into that into the future.
Okay. That's great. Very helpful. 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. Wanted to double check. Thanks again.
Thank you, Ben.
Okay, one last opportunity. It is star one if you'd like to ask a question. It looks like there are no further questions at this time, so I'd like to turn it back over to Mr. 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 theaters over the holidays. Thank you.
That concludes today's conference. We thank you all for your participation. You may now disconnect.