Good day. Welcome to the Cineplex Inc. 2015 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, 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 Ellis Jacob.
Thank you, Pat. Welcome to Cineplex Inc.'s second quarter 2015 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 second quarter of 2015. All revenue sources increased during the quarter, resulting in all-time quarterly records for total revenue, which increased 6.8% to CAD 345.5 million, and adjusted EBITDA, which increased 9.9% to CAD 65.3 million due to increased box office, food service, and media revenues.
Box office revenue was up 2.6%. Attendance was up 2% versus the prior year period. The top three films during this quarter, "Avengers: Age of Ultron", "Jurassic World", and "Furious 7", represent the top films of 2015 and collectively have grossed more than $1.4 billion 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 30th. We also acquired the single-screen IMAX theater at Galerie 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 2015, and this is our highest quarterly premium percentage ever. During the quarter, we added seven UltraAVX 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 Markham theater and on July 1st 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 UltraAVX 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 SuperTicket, 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 a 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 food service, we set new records for food service revenue and CPP in the second quarter of 2015, with CPP increasing 8.3% to CAD 5.50 versus CAD 5.08 in the prior year, a new all-time quarterly record. Excuse me. 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 a theater-size screen, and an upscale casual dining restaurant. With the 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 TimePlay, 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. We have installed an additional 12 interactive media zones in theater lobbies this quarter, bringing our total at June 30th to 37 across Canada. We believe these interactive and 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 TimsTV 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 12.2 million times as of June 30th, 2015, recording nearly 667 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 SuperTicket offerings. The Scene loyalty program continued to exceed our expectations, adding more than 266,000 members to finish the quarter at 6.8 million members. In addition, Scene announced that later this year, members will be able to earn and redeem points at more than 800 Cara restaurant locations across Canada. Currently, members can earn Scene points at all Milestones and East Side Mario's restaurants, with other Cara brands to launch later this year. Strategic marketing partnerships such as those with Cara and Sport Chek help us grow our member base and make the program even more valuable to existing members. 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 premiere event, including Q&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. 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 and all of us, there's The Peanuts Movie in 3D. The final film in The Hunger Games series, Mockingjay Part 2. Pixar's latest animated feature, The Good Dinosaur, completes the month. In December, mark your calendars for the 18th. We are looking forward to one of the most anticipated films, Star Wars: The Force Awakens. Over the Christmas holiday, there are a number of films opening, including Alvin and the Chipmunks: The Road Chip for the kids. "Joy", starring Jennifer Lawrence, Bradley Cooper, and Robert De Niro. "Daddy's Home" starring Will Ferrell and Mark Wahlberg. "Concussion" with Will Smith and Alec Baldwin. It's easy to see why the fourth quarter of 2015 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 product, particularly through our digital media and amusement gaming businesses, as well as the upcoming launch of The Rec Room. 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 on MD&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 second quarter of 2015. Cineplex's second quarter box office revenue was CAD 186.2 million, compared to CAD 181.4 million 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 CAD 9.45, a quarterly record from the CAD 9.40 reported in the second quarter of 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 CAD 1.10 for this quarter as compared to CAD 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 CAD 8.35, primarily due to mix shifts within our alternative programming event. Food service revenue increased 10.6% to CAD 108.4 million as a result of the 8.3% increase in concession revenue per patron to CAD 5.50, 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 CAD 4 million or 13% to CAD 35 million 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 TimsTV 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 2015 was 22.1% as compared to 21.6% in the prior year. Other costs of CAD 155.3 million increased CAD 6.3 million or 4.3%. Other costs include theater occupancy expense, other operating expenses, and general and administrative expenses. Theater occupancy expenses were CAD 50.5 million for the quarter versus our prior year actual of CAD 50.2 million. Other operating expenses were CAD 89.2 million for the quarter versus a prior year actual of CAD 83.5 million, an increase of CAD 5.7 million. Major reasons for the increase include an increase of CAD 1.9 million due to the impact of new and acquired theaters, net of disposed theaters.
Higher same-store payroll of CAD 1 million due to higher business volumes as well as minimum wage increases in certain provinces.
Higher marketing costs of CAD 1.3 million due to the timing of campaigns. Higher Scene costs of CAD 0.9 million in the current year due to growing membership and support for the Sport Chek partnership. G&A expenses were CAD 15.6 million for the quarter, which was CAD 0.4 million higher than the prior year, primarily due to a CAD 0.4 million increase in long-term and short-term incentive program expenses. Interest expense of CAD 5.5 million was CAD 0.1 million lower than the prior year amount of CAD 5.6 million. Contributing to the decrease was a CAD 0.3 million decrease in cash interest as a result of lower average rates on the revolving facility. The company recorded tax expense of CAD 11.1 million during the second quarter of 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 CAD 20.4 million as compared to CAD 19.2 million in the prior year. We continue to estimate that net CapEx will be approximately CAD 100 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, should we be thinking about higher film costs in the beginning of next year, given Star Wars is likely to dominate? 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 first quarter of 2016. Again, it's opening at the end of December 2015, part of that will be in 2015 and the balance in 2016. It'll 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 first quarter of 2016, I think there is a film that I think will be quite big is the "Batman versus Superman" movie.
Of course.
You've got "Zootopia" and other movies that I think could have a pretty decent box office. The difference is because it's crossing two quarters, you'll feel the impact in both quarters. In the fourth quarter of this year, you have a lot of other big movies.
Yeah.
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 Tyeth with Scotia Capital. Please go ahead.
Morning. On The 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 spring of 2016. We probably will open about two locations in total in 2016 or up to as many as three, 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. We're 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. Of course. Okay. 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 in the digital signage space. 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. 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.
Yeah. When we go out and visit investors, we typically talk about two things, the focus on increasing incidents of purchase and increasing basket size. Historically, we've talked about zoning and increasing the incidents of purchase, we talk about optimization of our product offerings and ways of using our promotional and our digital signage initiatives to increase basket size. First of all, let me comment on the results on where we are on a year-to-date basis and where we're seeing the growth in CPP. It's actually somewhat equally divided between increasing incidents, increasing basket size, and the contributions of our VIP locations. As we go forward, we're looking to continue to expand our VIP presence, we're looking at using our digital signage initiatives to promote the products, use our Scene data to drive some of the promotional messaging.
We continue to believe that we're going to outperform CPI on a go-forward basis based on a number of the initiatives that are in place today.
Okay. Thanks, guys.
Thank you.
Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. As a reminder, if you're using a speakerphone, please make sure your mute function is turned off while you're
Your signal to reach our equipment. Your next question will come from Derek Lessard with TD Securities. Please go ahead.
Yeah. 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.
Gord here. There's really a couple of factors in that core. The non-premium products, there are really two factors at play here. One was there was actually a shift in the adult attendance mix within that category. That shift, it was about a 2% shift out of the adult, which is the highest priced category, into both child and then into the Scene program. 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 play in this quarter, and there was a fairly sizable shift from sort of the premium-priced alternative programming events into the lower-priced events such as the family favorites.
Okay. Another question just 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 beginning of 2016, as we believe that we've been in a position where we would have doubled our revenue base, and yes, we're very encouraged with where we see things today, and we're still consistent with that message.
Okay. Just for modeling, what can we expect for the tax rate going forward?
We gave the tax rate of 26.5%. I would just suggest using that going forward. As I mentioned, the AMC losses were fully utilized in the end of 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 BPP trends, I was just wondering, I know you adjusted the Scene points, I believe, for premium redemptions. I think that's going to go into effect in the fall. I was just wondering how we should think about that and whether or not that was more to see some uplift on BPP, given it seems like that was part of the, I don't know, potentially headwind in the quarter.
We basically looked at the Scene program, as you mentioned, in November, we'll be changing both the earn and the burn categories. This was a result of really when the Scene program was launched compared to today, where we've got all of these premium formats. Yes, it will help the BPP, but I think it'll take a little bit of time until it gets through into the system.
Fantastic. Thank you. 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, a 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 Inside Out had opened, and what you're seeing is the benefit of that once our kids across Canada got out of school. We are seeing better performances for movies that open 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. 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.
Yeah. Rob, just as a reminder, the U.S. theaters tend to have a higher average screen count, on large blockbuster films in the U.S. tends to outperform Canada, whereas Canada plays a little bit more of a catch-up game. We're seeing a little bit of that catch-up, too, on 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.
Yeah, thanks very much. Good morning. Gord, maybe just a couple of questions for you. First on the CapEx picture, I guess CAD 100 million, that's still the target for this year. I guess for the next couple of years, could you maybe help us just break that up a little bit into the different components?
Yeah. Look at it. It's about CAD 30 million in maintenance CapEx, which is where we've typically held that number at. There's about CAD 40 million in growth CapEx. There's been about CAD 10 million in premium spending over the past number of years. When you look at that growth CapEx of the CAD 40 and the CAD 10, 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. 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. The balance is primarily going to come from new initiatives such as digital signage deployments that come on our dime.
Okay. No, that's very helpful. Maybe just on that digital front, Gord, maybe you can just update us on the Cineplex digital side, where do we stand on margins today?
Look, as we've always said, guys, 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 in a 25%-30% range. I'm going to tell you right now, they're not there as we're looking to build the business for 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, 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.
Yeah. Listen, Esports, as you all see, this 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. As we see markets evolve and market mass evolve, there's opportunities for Cineplex to get involved in these emerging spaces. I think you'll see some very interesting initiatives come out of Cineplex in this space going forward.
Thanks. Any idea on how frequent these could become?
I think, as you see what's evolving today, these events, 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.
Thank you. First question. Gord, can you give us the % of admissions or % of concession sales that are coming from Scene members? Maybe that's an offline answer. I'm sure it's not necessarily a stat you keep in the top of your head.
Yeah. Look, what I can tell you is a significant share of our ticket purchases and our concession sales come from Scene participants. Look, with 5.6.
0.8
6.8 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. 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.
Yeah, I'm not sure the technology's perfected yet on the participatory side, but I was just curious at your guys' evaluation of it. Thank you.
Thank you, sir.
Once again, ladies and gentlemen, if you'd like to ask a question, please press the star followed by the one. As a reminder, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to allow everyone an opportunity to signal for questions. There are no further questions at this time. I will now turn the call over to Ellis Jacob 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, 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 line.