We're gonna move on to our next guest from Cineplex. Joining us are CEO, Ellis Jacob, and CFO, Gord Nelson. I'll sit here. Do you guys sit here? I do?
Sure. To see you.
Good see you. Ten
six. Okay. Well, welcome to the both of you. Thank you. I mean, I'm joined with two veterans in the in the industry and inside Cineplex.
Combined, you have fifty nine years of experience. I'm not I'm I'm not trying to age you. No. Don't that's not my point. I mean, I said earlier in the beginning at the conference, was impressed by the the our audience is gonna be impressed by the by the by the amount of years of experience that our speakers have today.
But let's start with the exhibition business because I think that's still the bread and butter. You guys have done a really good job over the last number of years of moving up the value chain on both the premium side on on the box office as well as on the concession side. And we're seeing pretty good penetration now on the premium around 50%. We're seeing good growth on the concession side as well. So can you talk about the runway for growth on both of those areas as you look ahead on both the box office and the concession?
Certainly, I think when we look back about ten years ago, we were at 3% on a premium basis, and now we are at 50. And I still feel and we feel that there are opportunities going forward from the perspective of we've got 140X in Canada. There's opportunities to install other locations. We've got D BOX, which we've installed, and we will continue to expand. The VIPs have been very successful and they will go into other locations across Canada.
And more so, you've also got new technologies coming in like VR and AR, and I think not tomorrow, but over the next number of years, you're going to see that as part of the experience within the theater box or within our rec room. Okay. So you see good opportunities still ahead? Think it's gonna be harder to go from 50 to sixty and seventy, but there is potential to continue to grow the premium offering And for again, we stand out in North America because our closest competitors are in the mid-twenty range, but we did focus on this as a growth opportunity with the Ultra AVXs. So when a movie opens on a weekend, we will have 20 of the top 25 grosses in North America with our theaters.
Right.
And it looks like the box office in 2017 doing better than expected even in the first quarter. It looks like the outlook for the rest of the year seems bright, but I'll give you guys the opportunity to talk a little bit about that.
Yes. I think there's a lot of strong product through the balance of the year. And again, we end the year with Star Wars, which should be one of the largest movies again. We just finished with Beauty and the Beast, which is just under $500,000,000 for North America, which is a big number. And the advantage we have this quarter is we've got BoCopp, BadCopp two, which is a Canadian movie and it's also doing relatively well, and that helps us sometimes with the content versus what The US is playing.
And there's also an Eastern Canadian movie called Marty that's doing very well for us out there. So the runway is great. There's a number of kids' movies coming out later in the quarter, Cars and also Despicable Me three. You've got Transformers, Spider Man, so there's a lot to look forward to.
So how does how should investors be thinking about the attendance and box office over the longer term? Are we gonna go through these slight peaks and valleys, over the from year to year, or do you think it's, you know, flat, or do you think it's kind of a secular downward shift? How do you think about the trends beyond just this year?
I think it's a lot to do with content, and you're going to have those ups and little ticks here and there. But we have seen significant consistency from an attendance perspective, and we are getting the benefit with the premiums on the revenue side. And the other thing one has to look at is in the old days, we just played movies. Today, we play way more than movies in the theater box. So, you know, you've got alternative programming, which includes the opera.
When we started off, we had 20 locations, and we did a million dollars worth of business for the whole season. Now we have over a 120 locations, and we do a million dollars worth of business in one day because of selling the tickets online. So those changes are going to transform where the revenue is coming from. And furthermore, we have a lot more diversity in the product offering, including Bollywood product, Punjabi, Hindi, Filipino, and and Chinese, you know, films that we are playing. So there are some locations, for example, in Markham where there is a Mandarin movie will outgrow the Hollywood movie.
In Vancouver at Surrey, the Bollywood movie outgrosses the Hollywood movies. So as long as we know the markets and we cater to that audience, it's really important. And a good example, when we purchased a theater from AMC that was negative cash flow in Courtenay Park, and we just introduced the Bollywood films. And after about a year, year and a half, it's now become one of the top Bollywood locations in North America, especially for IMAX. So those are the kinds of things.
If you know your your territory, you can basically program it to those kinds of movies. Right.
So one issue that's been on and off over the years has been the premier VOD, the windowing. Correct. I know without getting into too much about speculation, I just wanna maybe for us to talk about what some of the issues are. Specifically, you know, you've talked about not trading dimes or nickels, and there's obviously some issues that's at play here, but can you help us think through what those specific issues are without us speculating?
Yeah. I think what's happened in the industry is the studios are basically losing a lot of their dollars in the back end because of what's happening, you know, with the DVD and the hard goods business, and they are looking at ways that they can substitute and replace those dollars. And they're trying to come up with a formula that would work both for exhibitors and for the studios. And, you know, back to my comment, they're not gonna walk away from a $38,000,000,000 business around the world and an 11 and a half billion dollar business in North America Mhmm. Which is what the box office does.
And one thing we have to appreciate is we are still, you know, the launching pad for the movies because without that marketing, the movies don't tend to work in the ancillary, you know, businesses around. And, you know, when I look at Netflix, they've started to make a number of movies. We don't hear a lot about the success of those movies because it's hard when a movie is just thrown online without having that marketing push behind it, and we're still the engine that drives the train from that perspective.
Does, I mean, do the studios alone, I get it as a group, I guess, have enough clout to push a model like
that forward without the exhibition industry playing ball and being aligned? I think being partners with the studios for such an extended period of time, you know, that's some of them have tried or threatened to do that, but they've never actually done it. And they've basically backed down because a lot of times it goes back to the director or the producer of the movie. Like, you know, Christopher Nolan doesn't want his movie played on a television screen. He wants it on a 60 foot screen.
So that's where you get you know, the studio may want something, but it's also what producers want for their films. And some movies are not made to be, you know, viewed on your phone or your television set. So That's a good point. Will things change? I'm sure there will be changes.
But again, at Cineplex, we basically created the Cineplex store. So if the windows do adjust, we are right there to be able to deliver, and we're the only exhibitor in North America that has that capacity
point. Let's shift gears to some of your growth initiatives, because one thing that has impressed me in looking at you guys is that you don't stand alone. You don't you don't stand still. You're you're always moving forward, you're always looking ahead. So let's talk about The Rec Room.
Saw the local location expansion. Edmonton seems like it's been a good start. Has your confidence in that concept increased based on what you've seen out of Edmonton?
We were quite excited. I think you were there when we opened it and it's continued to perform extremely well. That kind of was our test lab because we went bigger than we normally would and we put in things like axe throwing and bowling and virtual reality. Some of them we're going to repeat at the roundhouse down here in Downtown Toronto. But we think there's a lot of growth opportunities in The Rec Room, and we've announced a number of deals across the country.
And what gives us a huge advantage is things like our loyalty program. For example, we've got 8,300,000 members. We can communicate about the rec room with them. There can be cross promotions. It gives us a leg up on somebody else who wants to try and replicate that experience.
Maybe I'll bring Gord into the conversation about the profitability and and return of The Rec Room. How do how should investors think about those metrics?
I mean, I think we've been very consistent to say that, you know, we expect 25% returns on the boxes, the large box rec room deployments that we expect to do about 15 of those cross country. We've also mentioned that we're working on a smaller market type prototype, so it's I also like to say more of a galaxy type model. And and, you know, we would expect that once we've got that nailed down, that you could probably do about 15 of those too across the country. So
25%
EBITDA margins, 25% returns is our expectation. And you know what? We look against kind of our peers running similar type businesses in The US, and, you know, they're generating 30% returns and 30% margins. And, you know, given our food costs in Canada and our labor costs being a little bit higher, that's why we've kinda tempered ours down a bit. But as you mentioned, you know, we're very excited about the kind of the run rates that we're seeing out of the Edmonton locations.
So so we're very encouraged, but this is an opportunity for us.
Do you feel like you have, a head start or or competitive edge for perhaps other providers that might be coming into that market to try to compete in that space?
You know, I think we we have a national footprint. Ellis mentioned some of our competitive advantages, which, you know, we have a SCENE loyalty program with 8,300,000 members. You know, we have our our theater foot traffic. We know that these boxes work well close to other entertainment destinations. So look at we're the only one that's really looking to create a national footprint in this space right now.
So k.
Another area where another initiative that you guys are expanding into is the digital place based media digital signage business. Can you talk about the opportunities there? We saw some good growth, revenue growth coming from that, but obviously, we don't see the visibility into what's coming from recurring installation, etcetera. But can you talk about the opportunity and when how big that market could be and and your growth within that market?
Yeah. So we got there's three distinct models we we operate under in this space. So one is more of a service based model, And the service based model, we're really focused in QSRs, financial institutions, and retailers. And so that's where we're working with a brand within their own box and providing value to them by creating a better customer experience or lifting sales within the box. You know, that's where we work with clients like, you know, Tim Scotia Bank, you know, Beer Store as others.
And then there's more of a and and we often refer to that as the point of purchase, and then there's what we call the path to purchase, which are more public spaces. We operate an advertising model where it's more of a kind of a rev share type environment. That's the traditional model. We've been evolving what we would call a hybrid model, and we've just we've and now had had a number of shopping mall announcements over the past year or so, so much so that, you know, we we will have about 50% of Canada's mall traffic under our contract once we're fully deployed on our our our new shopping mall installations. And these are both there's an advertising element to it, but there's also an experiential element to it where we're trying to create a better customer experience within the mall using gamification gesture technology, connect with customers and their mobile devices, to work with the mall owners to increase the dwell time within the space and make a connection and push those mall customers into their retailers, and that benefits benefits the the mall mall owner. Owner.
So in that case, you know, it's not pure advertising because we're creating entertainment content, we're creating interactive installations, and so there's a service and an advertising element to that. So, you know, as we see that model evolving, so as I said, we got we're now up to 50% of mall traffic in Canada, and the digitization of that service based model and still, you know, really being in the infancy in in the overall digitization in both Canada and The US. We see kinda continued opportunity in the space. We grew 40% last year.
You know, we expect strong growth again this year in the space.
And the the opportunity in The US, obviously, it looks like you've got a very good start in Canada, good dom becoming a very dominant position, albeit in a in a in a new area. But what about The US? Do you see that would you need to grow further into The US?
And Yeah. Look at it. I mean, we've had some great progress to date. We announced our American Dairy Queen as a customer, and that was through our initiative in The US. You know, we're involved in a number of processes down there right now, and I would say that we're very optimistic about our outcomes there.
So, you know, things are looking good in our in our entrance into The US. The one skill set we don't have in The US is we don't have an advertising sales representation. Mhmm. So that's something we could build or potentially buy. In that way, we could kinda mimic the the full model on both sides of the border.
Right.
And then I I guess the the the the other growth initiative is on the gaming side of player one. You guys have been very active in that market consolidating the space. Most of us probably don't spend too much time looking too deep into that market segment and the opportunity. So give you the opportunity to share with us what's the value creation opportunity in that space. Yeah.
So it's I
mean, it's really exciting. You know, we built a position up in Canada a number of years ago where we took the two major players and consolidated and put them together. And when you think about some of the concepts that we've been working on in our theaters, so our Escape Family Entertainment Centers, Rec Room as an example, I mean, are all retail concepts that use amusement gaming equipment for significant revenue streams. When you hear about, you know, Dave and Buster's and Main Event and other concepts building in The US, but probably more importantly, you hear about the future of the retail mall and that, you know, ultimately sort of a shift from, you know, say 2025% food and beverage and entertainment options to, you know, as high as 50, you know, entertainment and food and beverage options. There's gonna be a, you know, a big transition in in kind of that retail mall footprint in which entertainment and amusement will play a big part of that.
And so it's been a very stable business. We've, you know, consolidated a number of companies to create a national footprint in The US at attractive valuations, you know, extract the synergies. So those are all the good types of things that you expect, but there's also this growth element that we see in the future. And And that business just is greater
than
a $100,000,000 business for us today. So
Right. And what's the how far are you along the way in terms of consolidating the The US segment? Well, we just closed the
last transaction on April 1, so, look, it'll probably take a year to kind of integrate everything in together. So Okay.
I'm gonna turn the, the mic over the audience for a little bit, see if there are any questions before I finish off. Okay. Last round of questions regarding capital allocation. You guys allocated some growth capital towards the theater on the recliners. You obviously have the direct room to build out.
Are there any other growth opportunities that you think that we should be aware of looking ahead the next few years?
Look at one I just spoke about is a mid market type, you know, rec room type concept. So that's something that's kind of out there that we expect to develop, like, that would be use of capital. And, you know, I think we're very focused on growing what we have today, but to the extent that there's something else that's out there that makes sense to fit into what we're building today, then, I mean, you never say that there wouldn't be opportunities for something else.
And, Jeff, it's all about using our human capital and our infrastructure to maximize the value. Right.
The reason I ask is I know you guys are always looking a few years ahead, so there's you are looking at something. You just don't wanna talk about it. That's fine. Let's talk about return to shareholders and on the dividend. How do you think about how do you think about that with respect to to your dividend dividend payout?
Look. And I think
what we've always shown is that we like to grow the business and pass that growth on to our shareholders in the form of dividend increases. And, you know, we've done that every year since converting to a corp. We're one of the few income funds that didn't adjust their dividend when tax was introduced. And, you know, we've got a few, what I say, more capital heavy initiatives with, you know, particularly The Rec Room going forward. Mhmm.
So I think, yeah, I would expect more of the same going forward over the next number of years. Right.
Great. I think we'll leave it there. That's a good spot. Thank you, Gord. Thank you, Alice, for being