We're going to move on to our next guest from Cineplex. Joining us are CEO Ellis Jacob and CFO Gord Nelson. I'll sit here. You guys sit here.
Sit here?
Sure.
Good to see you.
Six. Okay. Well, welcome to the both of you.
Thank you.
Thank you.
I'm joined with two veterans in the industry and inside Cineplex. Combined, you have 59 years of experience.
You're aging us.
I'm not trying to age you. No, that's not my point. Our audience is going to be impressed by the amount of years of experience that our speakers have today. 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 the box office, as well as on the concession side. We're seeing pretty good penetration now on the premium, around 50%. We're seeing good growth on the concession side as well. 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 10 years ago, we were at 3% on a premium basis, and now we are at 50%. I still feel, and we feel, that there are opportunities going forward from the perspective of we've got 1 4DX 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. 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. You see good opportunities still ahead in those.
Yeah, I think it's going to be harder to go from 50% to 60% and 70%, there is potential to continue to grow the premium offerings for us.
Okay.
Again, we stand out in North America because our closest competitors are in the mid-20 range. We did focus on this as a growth opportunity with the UltraAVX, so when a movie opens on a weekend, we will have 20 of the top 25 grossers in North America with our theaters.
Right. 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, I'll give you guys the opportunity to talk a little bit about that.
Yeah, I think there's a lot of strong product through the balance of the year. 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 CAD 500 million for North America, which is a big number. The advantage we have this quarter is we've got "Bon Cop, Bad Cop 2," which is a Canadian movie, it's also doing relatively well, and that helps us sometimes with the content versus what the U.S. is playing. There's also an Eastern Canadian movie called "Maudie" that's doing very well for us out there. The runway is great. There's a number of kids movies coming out later in the quarter, "Cars" and also "Despicable Me 3." You've got "Transformers," "Spider-Man," there's a lot to look forward to.
How should investors be thinking about the attendance and box office over the longer term? Are we going to go through these slight peaks and valleys from year to year, or do you think it's flat, or do you think it's kind of a downward shift? How do you think about the trends beyond just this year?
I think it's a lot to do with content. You're going to have those ups and little ticks here and there, but we have seen significant consistency from an attendance perspective. We are getting the benefit with the premiums on the revenue side. 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. You've got alternative programming, which includes the opera. When we started off, we had 20 locations, and we did CAD 1 million worth of business for the whole season. Now we have over 120 locations, and we do CAD 1 million worth of business in one day because of selling the tickets online. Those changes are going to transform where the revenue's coming from.
Furthermore, we have a lot more diversity in the product offering, including Bollywood product, Punjabi, Hindi, Filipino, and Chinese films that we are playing. There are some locations, for example, in Markham, where there is a Mandarin movie will out-gross a Hollywood movie. In Vancouver at Surrey, the Bollywood movie out-grosses the Hollywood movies. As long as we know the markets and we cater to that audience, it's really important. A good example, when we purchased a theater from AMC that was negative cash flow in Courtney Park, and we just introduced the Bollywood films, and after about a year and a half, it's now become one of the top Bollywood locations in North America, especially for IMAX. Those are the kinds of things. If you know your territory, you can basically program it to those kinds of movies.
Right. One issue that's been on and off over the years has been the premiere VOD, the windowing.
Correct.
I know without getting into too much about speculation, I just want to maybe for us to talk about what some of the issues are. Specifically, you've talked about not trading dimes for 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 with the DVD and the hard goods business. They're looking at ways that they can substitute and replace those dollars. They're trying to come up with a formula that would work both for exhibitors and for the studios. Back to my comment, they're not going to walk away from a CAD 38 billion business around the world and a CAD 11.5 billion business in North America.
which is what the box office does. One thing we have to appreciate is we are still the launching pad for the movies, because without that marketing, the movies don't tend to work in the ancillary businesses around. When I look at Netflix and 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's just thrown online without having that marketing push behind it. We're still the engine that drives the train from that perspective.
Do the studios alone, 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, some of them have tried or threatened to do that, but they've never actually done it.
They've basically backed down because a lot of times it goes back to the director or the producer of the movie. Christopher Nolan doesn't want his movie played on a television screen. He wants it on a 60-foot screen. That's where the studio may want something, but it's also what the producers want for their films. Some movies are not made to be viewed on your phone or your television set.
That's a good point.
Will things change? I'm sure there will be changes, but again, at Cineplex, we've basically created the Cineplex Store. 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 to.
Right. Good point. Let's shift gears to some of your growth initiatives. One thing that has impressed me in looking at you guys is that you don't stand alone. You don't stand still. You're always moving forward, and you're always looking ahead. Let's talk about The Rec Room. Saw the 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?
Yeah, we were quite excited. I think you were there.
Yeah
we opened it. It's continued to perform extremely well. That 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. We think there's a lot of growth opportunities in The Rec Room, and we've announced a number of deals across the country. What gives us a huge advantage is things like our loyalty program. For example, we've got 8.3 million 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 return of The Rec Room. How should investors think about those metrics?
I think we've been very consistent to say that we expect 25% returns on the boxes, the large box Rec Room deployments that we expect to do about 15 of those across the country.
We've also mentioned that we're working on a smaller market-type prototype, Ellis likes to say more of a Galaxy-type model. We would expect that once we've got that nailed down, that you could probably do about 15 of those, too, across the country. 25% EBITDA margins, 25% returns is our expectation. When we look against our peers running similar type businesses in the U.S., they're generating 30% returns and 30% margins and given our food costs in Canada and our labor costs being a little bit higher is that's why we've tempered ours down a bit. As you mentioned, we're very excited about the run rates that we're seeing out of the Edmonton location. We're very encouraged that this is an opportunity for us.
Do you feel like you have a head start or a competitive edge for perhaps other providers that might be coming into that market to try to compete in that space?
I think we have a national footprint. Ellis mentioned some of our competitive advantages, which we have a Scene loyalty program with 8.3 million members. We have our theater foot traffic. We know that these boxes work well close to other entertainment destinations. Look at we're the only one that's really looking to create a national footprint in this space right now.
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 revenue growth coming from that, but obviously, we don't see the visibility into what's coming from recurring installation, et cetera. Can you talk about the opportunity and how big that market could be and your growth within that market?
Yeah. There's three distinct models we operate under in this space. One is more of a service-based model. The service-based model, we're really focused in QSRs, financial institutions, and retailers. 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. That's where we work with clients like Tim Hortons.
Scotiabank
McDonald's, Scotiabank, The Beer Store, as others. We often refer to that as the point of purchase. 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 had a number of shopping mall announcements over the past year or so. We will have about 50% of Canada's mall traffic under our contract once we're fully deployed on our new shopping mall installations.
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. That benefits the mall owner.
In that case, 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. As we see that model evolving, as I said, we're now up to 50% of mall traffic in Canada. The digitization of that service-based model, and still really being in the infancy in the overall digitization in both Canada and the U.S., we see kind of continued opportunity in the space. We grew 40% last year. We expect strong growth again this year in the space.
The opportunity in the U.S., obviously, it looks like you got a very good start in Canada, becoming a very dominant position, albeit in a new area. What about the U.S.? Do you see that? Would you need to grow further into the U.S.?
I mean, we've had some great progress to date. We announced American Dairy Queen as a customer, and that was through our initiative in the U.S. 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. Things are looking good in our entrance into the U.S. The one skill set we don't have in the U.S. is we don't have an advertising sales representation.
That's something we could build or potentially buy. In that way, we could kind of mimic the full model on both sides of the border.
Right. I guess 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. Give you the opportunity to share with us what's the value creation opportunity in that space?
I mean, it's really exciting. 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. When you think about some of the concepts that we've been working on in our theaters, so our XSCAPE family entertainment centers, Rec Room as an example, I mean, these are all retail concepts that use amusement gaming equipment for significant revenue streams. When you hear about Dave & Buster's and Main Event and other concepts building in the U.S.
Probably more importantly, when you hear about the future of the retail mall and that ultimately sort of a shift from, say, 25% food and beverage and entertainment options to as high as 50% entertainment and food and beverage options, there's going to be a big transition in kind of that retail mall footprint in which entertainment and amusement will play a big part of that. It's been a very stable business. We've consolidated a number of companies to create a national footprint in the U.S. at attractive valuations, extract the synergies. Those are all the good types of things that you expect, there's also this growth element that we see in the future.
What
That business is greater than CAD 100 million business for us today.
Right. How far are you along the way in terms of consolidating the U.S. segment?
Well, we just closed the last transaction on April 1st, so look, it'll probably take a year to kind of integrate everything in together.
Okay. I'm going to turn the mic over to the audience for a little bit to 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 Rec 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?
Well, one I just spoke about is a mid-market type, rec room type concept. That's something that's kind of out there that we expect to develop, that would be use of capital. 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, you'd never say that there wouldn't be opportunities for something else.
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. You are looking at something, you just don't want to talk about it. That's fine. Let's talk about return to shareholders then on the dividend. How do you think about that with respect to your dividend payout?
Look, 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. 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. We've got a few, what I'd say more capital-heavy initiatives with, particularly The Rec Room going forward.
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, Ellis, for being here.