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Edited Transcript of CGX.TO earnings conference call or presentation 14-Nov-19 3:00pm GMT

Q3 2019 Cineplex Inc Earnings Call

TORONTO Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Cineplex Inc earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ellis Jacob

Cineplex Inc. - President, CEO & Director

* Gord Nelson

Cineplex Inc. - CFO

* Melissa Pressacco

Cineplex Inc. - Senior Manager of Communications & IR

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Conference Call Participants

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* Adam Shine

National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst

* Aravinda Suranimala Galappatthige

Canaccord Genuity Corp., Research Division - MD

* Derek J. Lessard

TD Securities Equity Research - Research Analyst

* Drew McReynolds

RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst

* Jeffrey Fan

Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst

* Robert Goff

Echelon Wealth Partners Inc., Research Division - MD & Head of Research

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Presentation

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Operator [1]

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Good day, and welcome to the Cineplex Inc. Third Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melissa Pressacco, Senior Manager, Investor Relations and Communications. Please go ahead.

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Melissa Pressacco, Cineplex Inc. - Senior Manager of Communications & IR [2]

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Thank you. Good morning, everyone. Before beginning the call, we would 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 will now turn the call over to our President and CEO, Ellis Jacob.

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [3]

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Thank you, Melissa. Good morning, and welcome to Cineplex Inc.'s 2019 Third Quarter Conference Call. We are pleased you could join us this morning. I will begin by providing a top line overview of our third quarter results and a summary of our key accomplishments during the period. Then we will look at some of the upcoming films for the rest of the year and into 2020. At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide an overview of our financials, and then we will follow with the question-and-answer period.

With growth across all of our businesses, Cineplex delivered an impressive third quarter, including record total revenue of $418.4 million, up 8.3% and a 21.2% increase in adjusted EBITDAaL, as we leverage the strong film product and further executed on our diversification strategy. In addition to the increases in attendance and box office revenue, which were largely the result of the quarter's strong film slate, we also achieved third quarter records for food service and amusement revenue and achieved an all-time quarterly record for digital place-based media revenue. These positive results are a great example of how our diversified businesses continue to build scale and make more meaningful contributions to our bottom line. New third quarter records were also achieved for BPP of $10.16 and CPP of $6.68 as we grew transaction size through expanded offerings in our theaters. Top-performing films for the quarter included The Lion King, Spider-Man: Far from Home, Fast & Furious Presents: Hobbs & Shaw, It: Chapter Two and Once Upon a Time in Hollywood, all of which helped drive the 1.8% increase in attendance this quarter.

Now let's take a look at some of our key accomplishments during the third quarter. Exemplifying our commitment to providing Canadians with an unparalleled moviegoing experience, we opened Canada's second 4DX auditorium at Scotiabank Theatre Chinook in Calgary, Alberta. And just this past Tuesday, subsequent to quarter end, we opened our third 4DX auditorium at Cineplex Cinemas, Winston Churchill in Oakville, Ontario.

For those of you who haven't tried it yet, 4DX is a fully immersive experience with motion seats and environmental effects like wind, mist and scent that work in concert with the action on the big screen. We will continue to expand our footprint of both 4DX and ScreenX experiences in the coming months.

Also during the quarter, we were pleased to announce plans for a new Cineplex VIP Cinemas at Royalmount in Montréal, Québec, which is expected to open in 2022.

Within theater food service, we continue to expand our alcohol service to an additional 12 theaters today totaling 83 locations within 3 provinces, that's over half of our circuit. And in addition to our Uber Eats offering at 101 theaters, we also began a pilot program with Skip the Dishes ensuring guests can enjoy our signature popcorn and other popular concession items anytime they want right to their door. Key contributors to the record CPP I mentioned earlier included growth in alcohol and merchandise sales and also within Cineplex VIP Cinemas as we continue to expand food and beverage offerings (inaudible) increasingly popular premium experience.

Looking at alternative programming, we continue to bring new non-Hollywood content to audiences across Canada, both in our traditional auditoriums and our 24 dedicated event screen auditoriums. During the quarter, we featured live events from André Rieu, Fleabag by Phoebe Waller-Bridge and Margaret Atwood’s book launch of The Testaments. Anime features along with documentaries from BTS, the Korean pop sensation, and the feature, Game Changers, were all part of the quarter's lineup.

Our international film programming also featured several strong performers in Hindi, Punjabi and Filipino with the film Hello, Love, Goodbye becoming the highest-grossing Filipino title in Cineplex history.

Switching gears to our online offerings, our guests are becoming more comfortable with and more reliant on mobile technology inside and outside of our theaters, which is why the Cineplex mobile app is such an important asset for us. During the quarter, online and mobile ticketing represented 31% of total theater admissions, up from 24% in the third quarter of 2018. Total registered users for the Cineplex Store increased by 43% in the third quarter. We also saw a 181% increase in device activations as compared to the prior year period. Growth in the Store is largely driven by increases in consumer use of the Cineplex apps embedded on smart TVs and leveraging the Cineplex ecosystem by providing Store offers to guests who visit our theaters and purchase concession combos.

Moving to Media. I am very pleased to report that our media business reported a 30.6% increase in revenue as a result of growth in both Cinema Media, which was up 13%, and digital place-based media, which was up 57.2%. Growth in showtime and preshow advertising sales resulted in the increased Cinema Media revenue for the third quarter, with automotive continuing to lead as a top category. And as I mentioned earlier, digital place-based media reported an all-time quarterly record as a result of increased project installation revenue for new and existing clients.

Speaking of new clients in the third quarter, we also announced that Cineplex digital media was selected to manage and enhance AMC Theatre's digital network at approximately 630 locations across the United States. This includes box office signage, theater menu boards and other ancillary signage.

Moving on to amusement, gaming and leisure. It has been a particularly exciting time for our location-based entertainment team. And this quarter, we opened our very first reinvented Playdium concept in Brampton, Ontario. Retrofitted from what was once our Orion Gate theater, the new Playdium is designed specifically for teens, their friends and family. We are pleased with the response from the community so far as the new Playdium becomes Brampton's ultimate place to play, featuring the latest video games, a rope course, bowling and virtual reality as well as a range of fresh food and beverage offerings that are fun to eat.

And just this weekend, subsequent to quarter end, we celebrated the grand opening of our second new Playdium location in Whitby, Ontario. Our plan remains to open 10 to 15 Playdium locations in midsized markets over the next 3 to 5 years.

Earlier on the call, I spoke about the newly announced Cineplex VIP cinemas opening at Royalmount in Montreal. As a direct result of regulatory amendments made by the Québec government in partnership with Cineplex, we also announced plans for the province's first location of The Rec Room at Royalmount in Montreal. Designed to become the city's new hotspot, the entertainment complex is expected to open in 2022 and will feature incredible dining options, exciting live entertainment, over 100 amusement games and attractions including virtual reality.

Shifting our focus to Topgolf. Last quarter, I shared that we had secured a site for our first location within the GTA. While I wish I could share specifics, we are still conducting our due diligence on this site and hope to have an announcement shortly.

Turning to eSports, WorldGaming Network held its second annual Rocket League North American Championship tournament with this grand finals event taking place at the hugely Popular FAN EXPO Canada in August. We entered into this industry early in its evolution in North America. And today, it's fast becoming one of the largest eSports businesses with many opportunities.

As such, during the quarter, Cineplex initiated a review process and engaged a financial adviser to identify a strategic equity partner to further develop the WorldGaming Network business. While we are still early in the process, at its conclusion, we may retain a minority interest in the operations of the business. Gord will go into more detail as it relates to our reporting shortly.

Moving on to the SCENE loyalty program. This quarter, we celebrated our 10 million member milestone, reaching 10.1 million members as of September 30. As the tool for growth, the value of SCENE is significant. It drives increased customer frequency and provides more channels for us to communicate directly and regularly with our guests. SCENE also increased its overall awareness and spend, not just at our network of 165 theaters across Canada, but also across the entire Cineplex ecosystem of businesses. But perhaps the most valuable benefit of SCENE is the tremendous insights into customer behavior through the rich data we have collected. Using this information has and continues to help us better understand our guest needs, enabling us to analyze and influence behaviors across the business.

Now let's take a look at some of the films for the balance of the year and into 2020. The fourth quarter got off to a good start, largely because of the huge success of Joker, which had the highest ever opening weekend in the month of October and has become the highest-grossing film to open in the month, reaching $316 million in domestic box office to date.

Looking ahead, the remainder of the year has a great lineup of films, including Ford v Ferrari, A Beautiful Day in the Neighborhood, Frozen 2, Jumanji: The Next Level and Star Wars: The Rise of Skywalker, which are already generating some strong buzz. So much so that the first week of Cineplex presales for Frozen 2 has already set a record for advanced ticket sales for an animated film at the same point in time.

There are 2 other films I would like to mention, both opening on December 25, Merci pour tout, which is expected to be a big holiday release in Québec, and Little Women directed by Greta Gerwig and starring Emma Watson in the reimagined classic.

As you can see, we have what appears to be a promising film slate for the remainder of the year and are encouraged by the 2020 film slate that's been announced to date, films such as Birds of Prey; The King's Man; A Quiet Place: Part II; Mulan; the James Bond movie, No Time to Die; Trolls World Tour; Black Widow; Fast & Furious; Wonder Woman 1984; Top Gun: Maverick; Minions: The Rise of Gru; Tenet; and an untitled Spider-Man film.

Before I turn things over to Gord, let me take a moment to discuss a few questions and concerns I have received about some of the new streaming platforms that are available. Our industry and specifically, Cineplex has experienced many disruptions over the years from various economic cycles and technological advances, including VHS, cable, DVD, the Internet and now streaming. But time and time again, over the past 30-plus years, movie-going has long excelled amidst changes in the industry. The reason is when there's great content available, our guests want to see the film in the way it was meant to be seen: on a big screen with great sound and amenities, and seek out that social movie theater experience. And that's why we remain ever focused on keeping movie-going top of mind by putting the guests first.

Today, we offer our guests 9 different ways to watch a movie, including 2D, 3D, 4DX, ScreenX, UltraAVX, IMAX, D-BOX, VIP Cinema and the Clubhouse, always bringing the very latest in innovation and technology for a totally immersive experience that cannot be replicated at home.

In summary, Cineplex experienced a very strong third quarter by capitalizing on the robust film lineup and continuing to execute our diversification strategy. Looking ahead, I'm encouraged by the outlook of film product for the remainder of the year and the ongoing growth of our diversified businesses. Adding to this, with our strategic focus on spending for growth, we remain confident that we are positioning Cineplex well for the future.

Finally, I'd like to congratulate the entire Cineplex team for being recognized as 1 of the top 40 most valuable Canadian brands for 2019. The study conducted by BrandZ was based on in-depth consumer research, and I'm extremely proud to see that Cineplex was highlighted numerous times for our customer experience, emotional connection, excellent reputation, clear purpose and good citizenship. In addition to this tremendous recognition, our team was also honored with the best brand experience award with call-outs to our Uber Eats partnership, SCENE loyalty program, VIP Cinema's experience, brand meaningfulness and brand innovation.

With that, I'll turn it -- the call over to Gord.

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Gord Nelson, Cineplex Inc. - CFO [4]

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Thanks, Ellis. I am pleased to present the third quarter financial results for Cineplex Inc. For your further reference, our financial statements and MD&A have been filed on SEDAR this morning and are also available on our Investor Relations website at cineplex.com.

Before I review the results, I would like to note that Q3 2019 is Cineplex's third quarter reporting under the new accounting standard for leases, IFRS 16. I would like to remind you of the new non-GAAP measure we are providing, adjusted EBITDA after leases or adjusted EBITDAaL to assist with the comparability to prior year periods.

With respect to the transition to IFRS 16 leases, we have noted that there continues to be confusion in the market with respect to the consistent reporting of key financial metrics provided by financial data provider services including Bloomberg, Capital IQ and FactSet. This confusion in the marketplace is not unique to Cineplex and applies to many organizations with large lease portfolios. The inconsistency relates to the use of an operating earnings metric before or after a lease cost and a debt measure, which either includes or excludes a lease obligation liability.

I caution investors to use additional diligence when reviewing metrics provided by data provider services. We continue, and we'll be working with these providers to help rectify the situation and give investors more accurate information.

As Ellis mentioned, during the third quarter, Cineplex initiated a review process of World GamingNetwork's online eSports business, including Collegiate StarLeague engaging a third-party adviser to identify a strategic equity partner. As a result of this process, the operations of WorldGaming Network are reported separately in the financial statements, categorized as discontinued operations. All the results I will discuss today exclude any impact of WorldGaming Network in the current and comparative periods as prior year amounts have been restated to reflect this treatment.

Growth in results from all lines of business resulted in total revenue increasing 8.3% to a third quarter record of $418.4 million and adjusted EBITDAaL increasing by 21.2% to $62.3 million.

Turning to specific items. Cineplex's third quarter box office revenue increased 2.6% to $177.9 million, compared to $173.3 million in the prior year. The increase was due to the third quarter BPP record of $10.16, an increase of $0.09 or 0.9% and from $10.07 reported in 2018 as well as the 1.8% increase in attendance. The third quarter benefited from a wider appeal of the film slate than in 2018.

Food service revenue increased 8.6% to $125.6 million. Included in food service revenue is $8.5 million from The Rec Room. Excluding revenue from LBE, theater food service increased by 8.9% from the prior year to a third quarter record of $117.1 million due to the 6.9% increase in concession revenue per patron to a third quarter record of $6.68 and the 1.8% increase in attendance.

CPP growth was attributed in part to expanded food offerings, including those available at Cineplex's VIP Cinemas, Outtakes, pricing changes and additional licensed locations.

Total media revenue increased $10.1 million or 30.6% to $43.3 million for the quarter. Cinema revenue, which is primarily theater-based, increased 13%. Digital place-based media revenue increased 57.2% compared to the prior year, primarily due to higher project installation revenues. For the quarter, project revenue was up 273.4% due to the increased installations, including AMC, A&W and McDonald's.

At the end of the third quarter, our location count of 14,559 locations represent an increase of 8.5% over the prior year and an increase of 7.8% during the first 9 months of 2019.

Amusement revenue increased $4.3 million or 8% due to continued revenue growth from P1AG as well as the additional locations of Rec Room and our new Playdium. P1AG revenues increased by $2 million due to an increase in route revenue in Canada and the U.S. Margins on the P1AG business increased 450 basis points as compared to the prior year to 14.3% for the third quarter and are 13.3% on a year-to-date basis. P1AG EBITDAaL for the third quarter increased 52.1% to $6.4 million.

With respect to location-based entertainment, which includes results from The Rec Room and the new Playdium, total revenue grew $2.8 million over the prior year, primarily due to the additional locations. We opened our first reimagined Playdium in Brampton on September 16, 2019. Store-level EBITDAaL from location-based entertainment increased $0.6 million or 17% to $4.1 million and the store-level EBITDAaL margin increased to 20.7% from 20.6% in the prior year.

Turning briefly to our key expense line items. Film costs for the quarter came in at 52.7% of box office revenue as compared to 52.1% reported in the prior year, reflecting the relative mix of films in the quarter. Cost of food service for Q3 2019, excluding $2.2 million incurred at LBE was 21.5% as compared to 20.5% in the prior year. Cost of food service at LBE was 26.1%, down against 28.2% reported in the prior year due to improved cost management. The increase in theater concession costs was primarily due to the mix of food and beverage items sold, including the impact of increased number of locations with alcohol sales.

Other costs of $191 million decreased $ 26 million or 12%, primarily due to the impact of the adoption of IFRS 16, partially offset by increased costs due to an increase in business volumes in the nonexhibition businesses, new theater locations, increased operating hours in the exhibition business and minimum wage increases. Other costs include theater occupancy expenses, other operating expenses and general administrative expenses. Theater occupancy expenses were $18.2 million for the quarter versus a prior year actual of $53.2 million, a reduction of $34.9 million. This was primarily due to the impact of IFRS 16, which reduced rent expense by $38.8 million. Additional details on the movement arising from the transition to IFRS 16 can be found in our MD&A.

Other operating expenses were $156.7 million for the quarter versus a prior year actual of $145.8 million, an increase of $10.9 million. Other costs are net of $4.5 million of cash rent related to the lease obligations arising on the adoption of IFRS 16. Increases included an increase in media expenses of $8.7 million due to increased media business volumes and revenue mix shifts, a $2.2 million increase in LBE expenses due to increased number of locations and a $1.2 million increase due to new and acquired theaters net of a reduction of $0.4 million due to disposed theaters. Same theater payroll increased by $2.3 million mainly due to increased operating hours, additional attendance, expanded concepts and minimum wage increases.

G&A expenses were $16 million for the quarter, which was $2.2 million lower -- sorry, $2 million lower than the prior year due to a $0.8 million decrease in restructuring costs, and in addition to other cost reductions, a $0.4 million decrease in share-based compensation costs.

Interest expense increased $11.4 million during the quarter to $18.3 million, primarily due to the inclusion of $11.6 million in lease-related interest arising on the transition to IFRS 16.

Net CapEx for the third quarter was $27.1 million, flat against the prior year. We are continuing to confirm our net CapEx guidance of $155 million for 2019 and $170 million for 2020.

Net income for the quarter from continuing operations was up $2.8 million or 31.1% to $15.1 million and basic EPS was up $0.05 or 26.3% per share to $0.24 per share, primarily on the strength of the results for the quarter, offset by the impacts of the adoption of IFRS 16, which negatively impacted our net income by approximately $3.8 million in the current period and approximately $6.4 million or $0.10 per share as compared to the third quarter of 2018.

As Ellis mentioned earlier, we have steadfastly focused on creating a diversified entertainment and media company for the future. We are prepared to prudently use both our operating cash flow and our credit facilities to invest in these new businesses. We continue to remain comfortable with where Cineplex Inc. is positioned today. We are still in the early execution phase of a number of our diversification initiatives and our balance sheet allows us to continue to invest in these growth initiatives to deliver future value for our shareholders.

That concludes our remarks for this morning, and we'd now like to turn the call over to the conference operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Derek Lessard from TD Securities.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [2]

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Congrats on the quarter and the awards, which I think are well deserved. I think my first question is maybe for Gord. What was going on with your EBITDA margin in the Media business? It looks like there was a significant compression in the quarter. And maybe, if you could just, a follow-up to that is should we expect it to go back to normalized levels?

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Gord Nelson, Cineplex Inc. - CFO [3]

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Yes, I mean what I highlighted in my comments was that the cost increase in Media was related to a mix shift. So when you look at the components of revenue in the third quarter. I highlighted in my comments, and we put in our MD&A, the growth in the installation revenue and the project-based revenue. So that's a lower-margin business than the services business and then the Cinema Media business. So it's really related to the amount of the installation revenue that occurred during the third quarter.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [4]

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Okay. And I guess once you complete these rollouts with your new customers, do you expect sort of a shift back?

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Gord Nelson, Cineplex Inc. - CFO [5]

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Yes, absolutely.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [6]

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Okay. All right. And just sort of -- and maybe if you can remind us again when you expect to reach peak spend and assuming, I guess, there's no -- assuming no delays with Topgolf?

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [7]

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We've talked about that. As I said, we are still anxious and awaiting final due diligence and we will confirm that in a short period of time with our first location. And Gord, on the spend?

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Gord Nelson, Cineplex Inc. - CFO [8]

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Yes. So I mean, and that's why we have the higher amount that we've kind of retained in the 2020 guidance of the $170 million. So the peak spend would probably be in 2020 as we're getting that site ready for opening in 2021.

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Operator [9]

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We will now take our next question from Adam Shine from National Bank Financial.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [10]

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Maybe one question for Ellis and a couple for Gord. Ellis, just in terms of some of the headlines we saw in recent weeks on The Irishman. Obviously, it's going to debut on the streamer after about a 26-day window. I think there was some talk in the market that Netflix was maybe prepared to go to 45 days, but that theater operators didn't want to go less than 60 days. Maybe you can talk around that. I don't know if those metrics are true or not. Obviously, they were part of private negotiations, but can you speak to the concern around maybe setting the precedent for that type of movie? Or could that -- could there be some degree of accommodation for obviously a special movie like that? Maybe I'll leave it there and move on after with Gord.

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [11]

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Yes, it's a great question. And as we've said repeatedly, we like to give great movies, great experiences in our theaters, but we have a number of partners that we work with closely. And we feel that it's important that the theatrical window is observed by all of the players coming to our theaters and no different for Netflix and no different for any of the other suppliers. And yes, we would welcome them into our theaters. And I think as part of their whole building of their business, which they continue to evolve, is to get that theatrical release creates a lot of positive buzz for their product. And I always say, we are still the engine that drives the train. So it's a decision, and we'll continue to keep speaking with them and we'll see over the next couple of quarters where things end up.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [12]

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Okay. Maybe for Gord, on one of the U.S. peer calls, they talked about the fact that the recruitment on DCIP would perhaps peak out next year and then sort of run its course, ultimately, in 2021. Can you give us just a quick little update perhaps where things stand with respect to CDCP up here?

And then with respect to the gap in your box office revenue performance and industry, there were some adjustments to industry numbers, some restatements to last year. But I think your industry data point that you provided, I presume reflects that adjustment?

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Gord Nelson, Cineplex Inc. - CFO [13]

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Yes. So I'll take the first question on CDCP. And for everyone who's not familiar with CDCP, it's the Canadian Digital Cinema Partnership, where we set up a -- really, there's a third-party entity that have set up for the funding and financing of digital projection rollouts in Canada. DCIP, which Adam referred to is the similar type of partnership set up in the U.S. We do show on our statement of changes of the cash flow, a net cash received from CDCP line. It was roughly $12.5 million on a year-to-date basis in the third quarter of this year. And very similar to the comments that were made in the U.S. is we expect that to continue until early to the midpoint of 2021. So that will continue along to that point of time. The -- and with respect to the industry question, I'll just turn that over to Ellis.

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [14]

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Yes. So Adam, as you mentioned, our under compared to the box office for the industry, number of factors come into play in the quarter. We have taken 2 of -- large theaters where we are converting them to loungers. So when we take a screen out, that affects our box office. We've also got the issue of the drive-ins this summer, the drive-ins did extremely well. That's 40 drive-ins across Canada. We, unfortunately or fortunately, only have one of them, which is in the province of Québec. So -- and they overperformed compared to the prior year.

And there's also a number of theaters that are IMAX locations that never used to report in the past and they are now included in those totals. And there was also an IMAX film called Super Dogs (sic) [Superpower Dogs], which played very well in those IMAX locations from an educational perspective and also box office.

And finally, there are theaters that are being built in Canada, as we talked about, in Fort McMurray there was a new theater put in. In Loretteville in Québec, there was a new theater put in. And the difference is every time you add those, it increases the size of the market. And because our share is as high as it is, the percentage looks like it's impacted more than one would see on a regular basis.

And the other thing is we continue to look at the square footage and what we are using the theater for. So in the case of Orion Gate, that was a theater that was delivering us with box office, we've converted it to a Playdium. So that doesn't come into the totals, and then we look at other opportunities as we move forward through the whole process. And we've still got a number of things on the goal that we continue to focus on. And to me, it's all about how do we use the available square footage and increase the value that we are getting out of that square footage within all of our complexes.

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Operator [15]

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We will now take our next question from Jeff Fan from Scotiabank.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [16]

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A few questions. First, maybe touch on The Rec Room, saw some good growth this quarter, but you also added a few locations that you didn't have before. So it looks like from a revenue per location perspective or same-store sales, wondering if you can talk a little bit about the performance there.

And also the mix between food and gaming, looks like the mix for food was down. Wondering if there's anything specific, whether it's macro-related or spending -- consumer spending related that's impacting that in the quarter?

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Gord Nelson, Cineplex Inc. - CFO [17]

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Sure. Thanks, Jeff, it's Gord. So as we look at sort of the same-store results and as we kind of get past the first 12, 18 months in a number of locations, we do see the honeymoon period come into play, such that the same-store revenue numbers decline after that first 12 to 18 months of operation. What we have seen is -- and again, we have a limited number of locations out there today. So -- and each one of them has performed differently over the various quarters. I think we highlighted in the first quarter that the same stores, our expectation was the honeymoon impact was around 12% or so. I would say, in the second quarter, it was significantly less than that. It was almost neutral. And then the third quarter, it was a bit higher than the average. So I would say we're still seeing trends that the numbers are plus or minus around the 12% range. And so in the third quarter, we saw something that was just a little bit higher than what we've seen in the first 2 quarters. So still, again, limited number of locations, limited number of experience since each one of them is unique and has their own set of criteria.

With respect to the second part of your question, which was on food and beverage versus amusement. What we are seeing also is that for a number of these locations, and you may be familiar with some of the announcements related to The VOID and some of their new experiences, is that we've been actually expanding some of the amusement options that are out there. In particular, we've kind of called out The VOID experience, which wasn't at the West Edmonton Mall on opening. So we do have some expanded amusement options, which is driving the growth. But with that said, we are seeing what the market is seeing in terms of some of that late night food and beverage spend has been a bit softer in recent quarters than it has been historically.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [18]

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And then my next question is on to the Digital Media. Again, you're seeing some good implementation and installation of locations, seeing some good momentum there. Wondering if you can talk about the -- that pipeline of installations for the near and medium term as well as the recurring revenue stream that, I guess, that you should be generating from that business beyond kind of the lumpy installation business?

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Gord Nelson, Cineplex Inc. - CFO [19]

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Sure. So we expect to kind of continue to see in the short term for the rest of '19 is some of that continued revenue growth that we've seen in the first 3 quarters of this year. So we're continuing to roll out with some of the clients that we've mentioned earlier, we have a lot of prospects that we've announced. I think we've continued to call out A&W as a customer. And if you do recall, it was about 3 years ago, we announced the contract with A&W. And as we've mentioned time and time again is that when we're in the QSR space and we have the franchisee relationship, there's often a long deployment period. So we have a number of contracts in place, our agreements in place with QSR operators. So those take time, but we are very encouraged by the results that we're seeing in the short term in terms of the significant growth. With respect -- and so that creates the lumpiness.

With respect to the recurring is that lumpy installation revenue is typically the precursor for that recurring revenue stream. I would make a comment that a component of the recurring revenue stream is based on advertising sales in our digital mall networks, and so that could go up and down as well as the level of creative services that individual customers request during a time period.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [20]

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If I can just be a little bit more specific, what was the recurring revenue stream? Did that grow this quarter compared to the same period a year ago or early this year?

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Gord Nelson, Cineplex Inc. - CFO [21]

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No, again, so it's relatively flat. And again, what we saw is 2 elements, the 2 elements I actually called out. So the level of creative work and the amount of advertising revenue stream created that sort of neutral impact.

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Jeffrey Fan, Scotiabank Global Banking and Markets, Research Division - Director of Telecommunication Services & Canadian & U.S. Telecom and Cable Equity Research Analyst [22]

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Okay. And just a couple of more strategic questions One, on eSports, I know that you made the announcement about looking at opportunities. Maybe just stepping back, the strategic view of how you see this industry kind of moving forward? And why take a minority position of perhaps a new entity or sort of redefined entity?

And then just on SCENE, I think, Ellis, you and I spoke before about a partnership that you had engaged in with one of the studios on marketing new films using your SCENE data. I wonder if you can just give us a bit of an update as to how that one is moving along.

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Gord Nelson, Cineplex Inc. - CFO [23]

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Sure. I'll start with the eSports question, and we entered eSports space a number of years ago. We are a very Canadian-based company. We have businesses in the U.S. Our locations are primarily -- so our location-based entertainment and theaters are primarily based in Canada -- virtually entirely based in Canada. What we recognize is there's a number of elements of the eSports ecosystem. We -- and I give the team great credit for building the WorldGaming Network and the Collegiate StarLeague to where it is today. We have great connections with amateur eSports athletes all across North America as well as viewers of eSports content. But one thing we've recognized is eSports is a global business. And the impressions that we're seeing on our live events, it's a small share of that viewership that it's Canadian and the majority of the viewer is -- viewership is international. And as we look into how do we grow this business going forward, our view is we've got great connections with eSports athletes in Canada and the U.S. We're primarily in the amateur space. The ecosystem is much larger than the space that we're in today. It includes pro teams, it includes content creation -- creators, it includes distribution partners. But mainly, the business is global. And how do we grow, and we believe the better opportunity is to position ourselves with other members of the ecosystem and global players in this space. So that is primarily our focus on why we're going through this review process today.

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [24]

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And Jeff, on your second question regarding the partnership with the studio. As you know, the studio is Lionsgate, and we are working on their first film, which is Knives Out which will be released shortly. And part of it is basically having the media and marketing budget and taking a portion of that and having Cineplex's assets like SCENE and other assets being used to promote those films. And that will be the first film that we will be doing together, and it's a partnership with Mongrel Media and also with marketing, Victor Loewy. So you can see the results, and we'll see the percentages when the film gets released, I guess, 8 days from now or 2 weeks from now.

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Operator [25]

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We will now take our next question from Aravinda Galappatthige from Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Corp., Research Division - MD [26]

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Two for me. The first one with respect to Cinema Media, obviously, very nice growth in Q3, as was the case in the first half of the year. Obviously, a much stronger year this year than last year. I was wondering if in addition to the revenue growth, Gord or Ellis, you can talk a little bit about the structural changes that have occurred. I'm referring to perhaps the change in the sector mix in terms of the advertisers and perhaps even the size -- individual sizes of the contracts. Is there anything that's -- when you look at the individual components where there's sort of a difference that you can call out that will help us sort of think through the sustainability of the improvement in Cinema Media.

And then the second question, with respect to VIP, obviously, continues to contribute to the nice CPP growth that you have. I realize that over the last year, there's only been a few additions to the VIP count. Wondering if, Ellis, you're kind of reaching sort of that maturity stage for VIP? Or is there still a little bit more running room there?

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [27]

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Okay. So on your questions, the first one regarding Cinema Media, we focused and we actually broadened the base of our clients, and that's really been a big focus because, in the past, we relied heavily on a number of clients to deliver the numbers at the end of each quarter. And by broadening the base, it also takes away the volatility that we have suffered in the past. So that's been positive. And we're also using technology to help us in inventory management and the ability to market quickly. So those have all been positive for us as we look forward for that Cinema Media business.

On VIP, they continue to do extremely well. As you noticed, we just announced another one for the province of Québec. We have one opening in Brentwood, and we are also working on a couple of theaters where we will retrofit them to basically put VIPs into those cinemas that have numerous screens that we can better benefit the bottom line with the VIP experience. And what helps with the VIP is also the experience for the guests and also the ability to make it a one-stop shop when it comes to having a great evening out.

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Operator [28]

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We will now take our next question from Rob Goff from Echelon Wealth Partners.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [29]

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Perhaps if we could go back to the focus on increased over-the-top provisions. Could you talk to perspectives you might have where there are opportunities to do showcasing or specific events working alongside and taking advantage of the increased competition or the numerous over-the-top providers.

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [30]

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Well, we have a great asset in our Cineplex Store, and our store has close to 8,600 different movie titles. And one of the things that I've talked with a number of friends and one of their challenges are with so many different streaming services, they don't know where to find what they're looking for. And we give them the capacity to go in, and for a small rental fee, they can watch what they want when they want it. And to me, that's also very, very positive. And in the past, we've also basically done, in the theaters, events that are part of those streaming companies like we did Game of Thrones with Bell. So there are lots of opportunities, I think, going forward, both from an event perspective in the cinema and also in our Store as we go forward.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [31]

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And if I could turn it to a different subject. Could you talk to the experience you've had with introducing alcohol across more theaters? You've been pleased with the both the revenue generation and you're okay with the incremental costs associated with that?

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [32]

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Well, it definitely has helped our concession per person. And most of them are relatively new rollouts. And it continues to be an overall positive experience for our guests. And we've rolled it out close to 83 locations, as I mentioned, and the CPP impact is $0.17 -- oh, $0.07, sorry.

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Robert Goff, Echelon Wealth Partners Inc., Research Division - MD & Head of Research [33]

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And just to clarify, that $0.07 would be in your aggregate, not within those specific locations?

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [34]

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Correct. That's the aggregate.

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Operator [35]

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We will now take our next question from Drew McReynolds from RBC Capital Markets.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [36]

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Three questions for me. First, maybe, Gord, can you comment on the SCENE issue in the quarter in terms of that security dynamic. Was there any impact in terms of the results that we see?

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [37]

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Yes. Just quickly, that SCENE issue was not a breach, but they were individuals, fraudsters, fishing for information and looking to garner points. And we basically canceled the specific cards and reissued them and the situation is totally under control, and there's no material financial impact.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [38]

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Okay. Second, back to The Rec Room, certainly a little bit below our forecast. Can you remind us the seasonality that you're seeing now across The Rec Room? And is there anything that you think needs to be, I guess, fundamentally evolved in terms of the concept when you look at how everything is performing to date?

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Gord Nelson, Cineplex Inc. - CFO [39]

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Yes. So in terms of the seasonality, I mean, Q2 and Q3 are typically the weakest 2 quarters with Q4, obviously, being the strongest and Q1 being the second strongest. Now they're fairly -- I mean, there's not a wide variance in terms of how the percentage is allocated amongst the 4 quarters. But definitely, Q1 and Q4 and Q4, by far, the strongest.

So on the second question, look, we're continually looking to refine the concept. We've really only introduced our first -- new-generation Playdium during the quarter. As we've mentioned, we've begun to reduce the square footage from something that used to be in the 40,000- to 60,000-square foot range to closer to the 40,000-foot range. So we're always fine-tuning the menus. We're fine-tuning the allocation of floor space. And I think what -- also in the labor models. But also we moved into other geographies, too. So we're in Eastern Canada, we're in smaller towns now and fine-tuning it to determine what works within that local community, too. So -- and that does take a bit of time to tune-up. So it's always going to be a consistent evolution. I think we've tuned in terms of the overall size, the overall allocations. But each market will have its own fine-tuning, too.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [40]

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Okay, okay. One last one then, maybe back to you, Ellis, on SVOD product out there through the theater. I think the interesting dynamic with a lot of the consolidation we've seen in the U.S. and then subsequently the launch of these new platforms is there's -- the movie studio and the direct-to-consumer SVOD platform embedded in the same company. I know it's a complex web that needs to be navigated. But do you ultimately expect some kind of alignment among all the major players when these major players and partners clearly are running now to kind of different models underneath the hood, if you will?

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [41]

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Yes, and I kind of equate it back to the days where you have these same partners running specific television channels and having movies of the week, and to me, this is going to be more of that content that's going to be available. But as I've said before, an Ernst & Young study that was done by the industry basically came up with the fact that people that stream more actually come to the movie theater more frequently. So it increases the awareness, and they want to get into that social experience and leave their homes. So I don't think there's going to be any kind of disconnect. I think it will actually work to our overall advantage. And the benefit is that there will be more content that will be available, which will be positive.

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Operator [42]

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And we will now take our next question from Derek Lessard from TD Securities.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [43]

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Yes. And maybe just a follow-up to Drew's question on The Rec Room. Is your target for store-level EBITDA margins still 25%?

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Gord Nelson, Cineplex Inc. - CFO [44]

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So in aggregate across the pool of locations. So this is the 30 locations in total, yes, we're still around that margin now. What we have -- what we're saying is The Rec Room with the 50-50 roughly allocation between food and beverage and amusement sales will be less than that target rate. And the Playdium, so the smaller box with more of a square footage allocation to amusement and leisure, should be above that target rate and we expect to pull in around that number.

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Operator [45]

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This concludes today's question-and-answer session. I would like to turn the conference back to Ellis Jacob for any closing remarks.

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Ellis Jacob, Cineplex Inc. - President, CEO & Director [46]

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Thank you all for joining us this morning. We wish you a very happy and healthy holiday season, filled with lots of movie theater visits and entertainment experiences. Thank you.

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Operator [47]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.