Good day, welcome to the Cineplex Inc. Twenty fifteen Second Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Pat Marshall, Vice President of Communications and Investor Relations.
Please go ahead, 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 Ellis Jacob.
Thank you, Pat. Welcome to Cineplex Inc. Second quarter twenty fifteen conference call. Thank you for joining us today. I will begin by providing a brief overview of our record second 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 2015. At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide an in-depth overview of our financials. As always, once Gord has concluded his remarks, we will hold a question and answer period. Cineplex delivered record results for the 2015. All revenue sources increased during the quarter resulting in all time quarterly records for total revenue, which increased 6.8% to 3 and $45,500,000 and adjusted EBITDA, which increased 9.9% to $65,300,000 due to increased box office, food service and media revenues.
Box office revenue was up 2.6% and attendance was up 2% versus the prior year period. The top three films during this quarter, Age of Ultron, Jurassic World and Furious seven represent the top films of 2015 and collectively have grossed more than $1,400,000,000 in domestic box office to date. These films represented 43.5% of our total box office revenue as compared to 29.2% last year for the top three films and rank in the top 10 grossing films of all time. The increase in film costs for this quarter was an anomaly and largely driven by the quality of the movies and the concentration of these top performing films. Now let's take a look at our key accomplishments during the period.
During the quarter, we opened our 13 screen Cineplex Cinemas, Markham and VIP just Northeast of Toronto. This brings our VIP cinemas to 14 locations and 53 screens by June 30. We also acquired a single screen IMAX theater at Galeries de la Capitale in Quebec City. The expansion of our premium experiences remains a strategic priority for Cineplex. Premium box office represented 46.3% of our total box office in Q2 twenty fifteen, and this is our highest quarterly premium percentage ever.
During the quarter, we added seven Ultra AVX auditoriums, bringing us to a total of 77. We installed D BOX systems into five theaters now bringing us to a total of 33 locations. In addition to the Quebec City IMAX acquisition, we added IMAX to our new Marcon Theater and on July 1, added an IMAX auditorium to Cineplex Cinemas Winston Churchill. These installations bring our total IMAX auditoriums to 23. As an example of the success of these offerings, Cineplex Ultra AVX auditoriums accounted for 13 of the top 20 premium large format screens in North America for the opening weekend of Mission Impossible Rogue Nation and accounted for 12 of the top 20 PLFs for Jurassic World.
In July, we announced an agreement with Paramount Pictures whereby Cineplex Entertainment in Canada and AMC Theatres in The U. S. Will test a new distribution model for two movies in the horror genre. The studio will share a percentage of the revenue received from transactional digital sales in The U. S.
And Canada in exchange for a shorter window. Cineplex will benefit in two ways with revenue earned from online sales, including Super Ticket and from the new revenue source generated from the share of the digital sales earned on other platforms. Each of the partners is pleased to be working together to test new business models and window options. It is important to note that this is not a test for traditional or blockbuster film that will play in theaters for several weeks. We have chosen a very specific film genre to gather as much learning as possible.
We believe it is an important first step to finding a model that works for exhibition and distribution while not impacting the success of the traditional theatrical window. Switching to foodservice, we set new records for foodservice revenue and CPP in the 2015 with CPP increasing 8.3% to $5.5 versus $5.8 in the prior year, a new all time quarterly record. This growth was driven by higher transaction values, increased purchase incidents, expanded offerings and growth in our VIP cinemas program. We want to extend a warm welcome and special thanks to our new Toronto Blue Jays pitcher, David Price, who famously tweeted that the Toronto Blue Jays have the best popcorn in the world. Thank you, David, as Cineplex wholeheartedly agrees and is proud to supply them with that world's best popcorn.
We continue to focus on the expansion of our proprietary food service offerings during the quarter, opening new locations for Outtakes, YoYo's Yogurt Cafe and Poptopia in our theaters. Throughout 2015, we will continue to grow both our core concessions and proprietary offerings by refining our menu, offering targeted marketing and promotional programs and leveraging the flexibility of our digital menu boards. Earlier this year, we announced plans to launch a new social entertainment destination called The Rec Room. The Rec Room features three main offerings: a large attractions area featuring state of the art simulation games, redemption games and recreational games A performance venue offering live entertainment such as musical acts, bands and comedians along with the theater size screen and an upscale casual dining restaurant. With this strategic and concept development work largely behind us, we are entering the next phase of this project focusing on execution and building our first location at South Edmonton Common.
We have a number of additional locations under negotiation and expect to announce these as they come to fruition in the weeks ahead. As mentioned previously, Cineplex will acquire the remaining 50% equity that it doesn't already own in Cineplex Starburst, Inc. This transaction will close during the third quarter of this year and we will provide more specific details at that time. Our media business experienced strong growth in the second quarter compared to the prior year period. Cineplex media revenues increased as a result of robust Showtime advertising sales, particularly among automotive and telco clients.
As part of our strategy to grow this business, we have created offerings that leverage new technology to offer interactive customer experiences. These include Cineplex Time Play, digital poster cases and our interactive media zones. The interactive media zone provides clients with interactive brand experiences featuring large touch screens that offer gesture, motion, image and video capture technologies as well as social media connectivity and participant data capture. Capture. We have installed an additional 12 interactive media zones in theater lobbies this quarter, bringing our total at June 30 to 37 across Canada.
We believe these interactive experiential media properties will provide future media revenue growth. Cineplex digital media revenues also grew in the second quarter, thanks to higher advertising revenue from Tim's TV and Oxford Properties Networks. We see an opportunity to further grow our Digital Media business throughout North America by leveraging our proprietary technology as well as network installation, management, creative services and advertising sales capabilities. Overall, our media businesses continue to be strong both in theater and in the digital out of home space. Our digital commerce offerings continued to gain traction in the second quarter of this year with cineplex.com registering a 20% increase in unique visitors and a 22% increase in visits versus the prior year period.
The Cineplex mobile app has been downloaded more than 12,200,000 times as of June 3035 recording nearly six sixty seven million app sessions and making it one of Canada's most popular mobile brands. At the Cineplex store, we continue to enhance the technology platform releasing support for Chromecast in both iOS and Android apps, as well as supporting super ticket offerings. The SCENE loyalty program continued to exceed our expectations adding more than 266,000 members to finish the quarter at 6,800,000 members. In addition, SCENE announced that later this year, members will be able to earn and redeem points at more than 800 Carra restaurant locations across Canada. Currently, members can earn SCENE points at all Milestones restaurants with other Cara brands to launch later this year.
Strategic marketing partnerships such as those with Cara and SportChek help us grow our member base and make the program even more valuable to existing members. Now let's take a look at some of the films we have coming for late summer and for the balance of this year. The third quarter got off to a strong start with Minions, Ant Man, Trainwreck and Mission Impossible Rogue Nation. Tom Cruise and Director Christopher McQuarrie were in Toronto to help us launch the movie with a special premier event including Q and A for guests and a meet and greet for some of our scene members. For the first five weeks of the third quarter, Canadian box office is up 14.1% compared to The U.
S, which is up 9.2%. These percentages vary from quarter to quarter depending on the type of movies and formats that they play in. Now let's take a look ahead to see what films we have for the balance of the year. These include the Ridley Scott directed film, The Martian starring Matt Damon and Jessica Chastain. The film adaptation of the classic story based in Peter Pan's Neverland entitled Pan starring Hugh Jackman.
The latest installment in the James Bond series Spectre. For the kids in All of Us, there is the Peanuts movie in three d. And the final film in the Hunger Games series Mockingjay Part two. Pixar's latest animated feature, The Good Dinosaur completes the month. And in December, mark your calendars for the eighteenth, we are looking forward to one of the most anticipated films, Star Wars The Force Awakens.
Over the Christmas holiday, are a number of films opening including Alvin and the Chipmunks, The Road Chip for the Kids, Joy starring Jennifer Lawrence, Batley Cooper and Robert De Niro, Daddy's Home starring Will Ferro and Mark Wahlberg, Concussion with Will Smith and Alec Baldwin. It's easy to see why the fourth quarter of twenty fifteen is expected to be one of the biggest quarters in our history. We believe we are well positioned to amplify the strength of the year's film slate with our premium experiences and also through our food service and media offerings. Outside our theaters, we will continue to diversify Cineplex, reducing our reliance on the cyclical nature of Hollywood film products, particularly through our digital media and amusement gaming businesses as well as the upcoming launch of The Rec Room. Now I will turn it
over to Gord. Thanks, Ellis. I'm pleased to present the second 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. As Ellis mentioned, Cineplex reported all time quarterly records for total revenues, attendance, BPP, CPP and adjusted EBITDA in the 2015.
Cineplex's second quarter box office revenue was $186,200,000 compared to $181,400,000 in the prior year as a result of an attendance increase of 2% and an increase in average ticket price of 0.5%. Our average ticket price for the quarter increased to CAD9.45, a quarterly record from the CAD9.40 reported in the 2014. Our premium product percentage increased to 46.3% of box office revenue in 2015 from 41.8% in 2014. The impact of premium priced product on the average ticket price was $1.1 for this quarter as compared to $0.94 in the prior year. Excluding premium product, our average ticket price decreased by 1.3% as compared to the prior year quarter to $8.35 primarily due to mix shifts within our alternative programming event.
Foodservice revenue increased 10.6% to CAD108.4 million as a result of the 8.3 percent increase in concession revenue per patron to CAD5.50, an all time quarterly record. The CPP growth was primarily a result of higher average transaction values as a result of expanded offerings, including offerings at Cineplex VIP Cinemas. Total media revenue increased $4,000,000 or 13% to 35,000,000 for the quarter. Cineplex Media revenue, which is primarily theater based increased 15.2%. Cineplex Digital Media revenue increased 7.6% due to continued growth of new business opportunities, including the Tim's TV network deployment and the Oxford Properties Group digital installations, partially offset by lower project revenues due to the timing of project installations.
These new business deployments will provide opportunities for continued advertising revenue growth in the future. Turning briefly to our key expense line items. Film cost for the quarter came in at 54.9% of box office revenue as compared to 52.3% reported in the prior year. The increase in the film cost percentage is a result of the concentration of the box office revenues from the top three films in the current period. These three titles, which rank in the top 10 of all time, accounted for 43.5% of box office revenue as compared to the top three representing 29.2% of box office revenue in 2014.
The period over period film cost percentage increase is also impacted by the prior year being the lowest second quarter film cost percentage reported by Cineplex. Cost of food service for Q2 twenty fifteen was 22.1% as compared to 21.6% in the prior year. Other costs of CAD155.3 million increased CAD6.3 million or 4.3%. Other costs include theater occupancy expense, other operating expenses and general and administrative expenses. Theater occupancy expenses were $50,500,000 for the quarter versus our prior year actual of $50,200,000 Other operating expenses were $89,200,000 for the quarter versus a prior year actual of $83,500,000 an increase of $5,700,000 Major reasons for the increase include an increase of $1,900,000 due to the impact of new and acquired theaters net of disposed theaters, higher same store payroll of $1,000,000 due to higher business volumes as well as minimum wage increases in certain provinces, higher marketing costs of $1,300,000 due to the timing of campaigns and higher seeing costs of $900,000 in the current year due to growing membership and support for the SportChek partnership.
G and A expenses were $15,600,000 for the quarter, which was $400,000 higher than the prior year, primarily due to a $400,000 increase in long term and short term incentive program expenses. Interest expense of $5,500,000 was $100,000 lower than the prior year amount of $5,600,000 Contributing to the decrease was a $300,000 decrease in cash interest as a result of lower average rates on the revolving facility. The company recorded tax expense of CAD11.1 million during the 2015 comprised substantially of current tax expense. Our blended federal and provincial statutory tax rate currently is 26.5%. The losses acquired on the AMC acquisition were fully utilized in 2014.
Net CapEx for the second quarter was CAD20.4 million as compared to CAD19.2 million in the prior year. We continue to estimate that net CapEx will be approximately CAD100 million for 2015. CapEx for 2015 will include the rollout of The Rec Room, the continued rollout of premium offerings, new theater construction and digital signage and media initiatives. Record revenues contributed to our strong Q2 results. We continue to remain comfortable with where Cineplex is positioned today.
Our strong balance sheet and low leverage ratio 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. And we'd now like to turn the call over to the conference operator.
Thank you. We'll now take our first question from Tim Casey with BMO Capital Markets. Please go ahead.
Good
morning. Just wanted to chat about film costs. I totally understand the issue of concentration in the quarter, but should we be thinking about higher film costs in the beginning of next year given Star Wars is likely to dominate? Or is that too early to tell because mix can change through the quarter? I'm just wondering if you can give us any direction on how we should think about the Star Wars effect on some of your margins?
Thanks.
Tim, the key in that situation will be depending on what Star Wars does in total box office and what percentage that box office is of the 2016. Now again, it's opening at the December 2015, so part of that will be in 2015 and the balance in 2016. So it will very much depend on those two factors.
Ellis, do you have expectations of any other films in the first quarter from what you can see now that are likely to balance some of the dominance of Star Wars through the quarter?
Well, towards the end of the 2016, I think there is a film that I think will be quite big is the Batman versus Superman movie. And then you've got Zootopia and other movies that I think could have a pretty decent box office. But the difference is because it's crossing two quarters, you'll feel the impact in both quarters. But in the fourth quarter of this year, you have a lot of other big movies. So you've got the Bond movie, which usually does extremely well in Canada.
You've got Hunger Games and you've got all of the Christmas movies plus Martian, Pan, a whole bunch of movies.
Thank you. Your next question will come from Paul Steep with Scotia Capital. Please go ahead.
Morning. On Rec Room, thanks for the update Ellis. Could you maybe talk just a little bit about how we should think about going into 2016, the number of locations you might enter or exit the year with and the speed with which that deployment would roll out?
Well, I'll start by saying for Edmonton, we are looking at opening it in the 2016. And we probably will open about two locations in total in 2016 or up to as many as three. And then we'll continue to roll them out at a faster pace. The first one always takes a bit longer because you want to get everything buckled down and make sure it's right for the long term future of the business. And we are quite excited about it because of all the other assets that we have that we can use to maximize the value of The Rec Room.
Okay. Just shifting gears to the media initiatives for a second. If we talked about CDM, could you talk about what the opportunity looks like in The U. S. Market and how you're sort of pursuing it?
I know we touched on that last quarter as well. Thanks.
Sure. Thanks Paul. It's Gord. Look, we still believe that there's a strong opportunity in The U. S.
We believe that The U. S. Is under deployed relative to Canada into the digital signage space. So we continue to see lots of opportunity there. As we've described to you guys in the past, we have opened an office up in The U.
S. We're actively involved in a number of discussions with a number of potential customers in The U. S. And we hope to have some news to share with you guys in the future.
Okay. And then just one last quick one for me. If we look at CPP drivers, how should we think about the potential for growth above inflation within CPP in general across the circuit? Thanks.
Yes. And look, when we go out
and visit investors, we typically talk about two things, the focus on increasing incidence of purchase and increasing basket size. And historically, we've talked about zoning and increasing the incidence of purchase and we talk about optimization of our product offerings and ways of using our promotional and our digital signage initiatives to increase basket size. So first of all, let me comment on the results on where we are in a sort of on a year to date basis and where we're seeing the growth in CPP. And it's actually somewhat equally divided between increasing incidents, increasing basket size and the contributions of our VIP locations. And so as we go forward, we're looking to continue to expand our VIP presence and we're looking at using our digital signage initiatives to promote the products and use our scene data to kind of drive some of the promotional messaging.
So we continue to believe that we're going to outperform CPI on a go forward basis based on a number of initiatives that are in place today.
Okay. Thanks, guys.
Thank you.
And your next question will come from Derek Lessard with TD Securities. Please go ahead.
Yes. Good morning, everybody. Just a couple of quick questions. As you mentioned, your premium content penetration reached a record high. Just wondering if you can maybe add some color and help me understand why that didn't lead to maybe a more substantial jump in BPP?
Yes. It's Gord here. So there's really a couple of factors in that kind of core. So the non premium products, there are really two factors at play here. One was there's actually a shift in the adult attendance mix within that category.
And that shift, there was about a 2% shift out of the adult, which is the highest priced category into both child and then some of the and then into the theme program. So that's a portion of the impact. The other portion is in the alternative programming events where we had three operas playing during the last second quarter. We only had one playing this quarter and there is a fairly sizable shift from sort of the premium priced alternative programming events into the lower priced events such as the family favorites.
Okay.
And another question just on the on Cineplex Digital Media. Are you still looking to double revenues over the next two years? It just looks like it's off to a bit of a slow start.
Look, what we've always said is sort of on a run rate basis at the 2016 as we believe that we've been in a position where we would have doubled our revenue base. Yes, we're very encouraged with where we see things today and we're still consistent with that message.
Okay. And just for modeling, what can we expect for the tax rate going forward?
Well, we gave the tax rate of 26.5%. So I would just suggest using that going forward. And as I mentioned, AMC losses were fully utilized in the 2014.
Okay. Thanks guys.
Thank you.
Your next question will come from Rob Peters with Credit Suisse. Please go ahead.
Hi, thanks for taking my question. Just a quick one for me. When we look at the BPP trends, was just wondering, know you adjusted the scene points, believe, for the or for redemption for premium redemptions. I think that's taking going to go into effect in the fall. I was just wondering how we should kind of think about that and whether or not that was more to kind of see some uplift on BPP given it seems like that was part of the kind I don't know, potentially headwind in the quarter?
We basically looked at the SCENE program and as you mentioned in November, we will be changing the both the earn and the burn categories. And this was a result of really when the SCENE program was launched compared to today where we've got all of these premium formats. And yes, it will help the BPP, but I think it will take a little bit of time until it gets through into the system.
Fantastic. Thank you. And maybe just a follow-up. I believe you had flagged that the Canadian box office has outperformed or is outperforming The U. S.
Box office quarter to date and we've seen that kind of trend the opposite the last couple of quarters. Is there anything specifically you would flag as driving that so far?
Well, lot of it had to do with the fact that in the second quarter, The U. S. Kids get off school earlier than we do. And they were Inside Out had opened. And what you're seeing is the benefit of that once our kids across Canada got out of school, plus we are seeing better performances for movies that opened in late June into our month of July.
And our Quebec theaters are also performing better from an overall perspective with local product and the Hollywood films. But again, I also caution you that this can change depending on the movie that's released and what happens as far as the formats that the movies are created in. Yes. And Rob, just
as a reminder, The U. S. Theaters tend to have a higher average screen count. And so on large blockbuster films in The U. S.
Tends to outperform Canada, whereas Canada plays a little bit more of a catch up game. So we're seeing a little bit of that catch up to titles such as Jurassic World and Inside Out, which were released late in the second quarter.
Fantastic. Thank you very much.
Your next question will come from Haran Posner with RBC Capital Markets. Please go ahead.
Yes. Thanks very much. Good morning. Gord, maybe just a couple of questions for you. First on the CapEx picture, guess, 100,000,000, that's still the target for this year.
And I guess for the next couple of years, can you maybe help us just break that up a little bit into the different components?
Yes. Look at it's about $30,000,000 in maintenance CapEx, which is where we've typically held that number at. There's about $40,000,000 in growth CapEx. There's been about $10,000,000 in premium spending over the past number of years. So when you look at that growth CapEx of the 40,000,000 and the 10,000,000 what I think you're going to see evolve and transition over time is that's primarily been exhibition related CapEx and that's going to transition into rec room CapEx.
And the number of builds as we move out into the longer term will likely decrease to the one to two number rather than the two to three number. And then the balance is primarily going to become from new initiatives such as digital signage deployments that come on our dime.
Okay. No, that's very helpful. And then maybe just on that digital front, Gord, maybe you can just update us on, I guess, the Cineplex digital side, where do we stand on margins today?
So look at it, as we've always said, there's a long lead time in the sales process. We've opened up an office in The U. S. We see huge opportunity in The U. S.
The margins are constrained in the short term as we're looking to build this business in the future. On the long term basis, you'd expect that the margins will be sort of in a 25% to 30% range. But I'm going to tell you right now, they're not there as we're looking to build the business of the future.
Thanks very much.
There are no further questions at this time. Please continue. We do have another question that has come through from Rob Goff with Euro Pacific. Please go ahead.
Good morning and thank you for taking my question. My question would be on the Esports Cinema events series. Could you perhaps provide some additional color on how you see this unfolding? Is it more of a periodic event or is it like a major theater event? Additional color would be helpful.
Yes. So listen, esports as you all see is an evolving space. To date, we've seen a number of large live events occurring throughout the world. To date, we've primarily been focused on broadcasting certain of these live events within our theaters. And as we see markets evolve and market mass evolve, there's opportunities for Cineplex to get involved in these emerging spaces.
And so I think you'll see some very interesting initiatives come out of Cineplex in this space going forward.
Thanks. And any idea on how frequent these could become?
I think look at the as you see what's evolving today, these events can the frequency will definitely be more than what you're seeing today.
Okay. Thank you very much.
Your next question will come from Jeff Logsdon with JDL Advisor. Please go ahead.
First question, Gord, can you give us the percentage of admissions or percentage of concession sales that are coming from SCENE members? And maybe that's an offline answer. I'm sure it's not necessarily a stat you keep in the top of your
Yes. Look, what I can tell you is a significant share of our ticket purchases and our concession sales come from SCENE participants. And look at with 5,600,000 or five point six point eight million SCENE members, a significant portion of the Canadian population are holders of SCENE cards.
Okay. Secondly, maybe for Ellis. Can you give us some perspective in the alternative content world? Is there going to be a business in the interactive games, whether it's participatory or spectator based?
I think we've seen both in The U. S. And Canada, the spectator part of it does extremely well. But like when we did opera, Jeff, we will continue to evaluate and look at opportunities beyond the spectator situation and see where we end up. As you know, we try to be as innovative as possible and make those calculated investments based on what we think the future holds for the business.
Yes. I'm not sure the technology is perfected yet on the participatory side, but I was just curious that it's your guys' evaluation of it. Thank you.
Thank you, sir.
There are no further questions at this time. I will now turn the call over to Ellis Jacobs for any closing remarks.
Thank you all for joining us this morning. We look forward to speaking with you again on our third quarter conference call early in November. Enjoy the rest of the summer and we hope to see you in our theaters. Thank you.
Ladies and gentlemen, this does conclude the conference call for today. Thank you for participating. You may now disconnect your lines.