Cineplex Inc

TSX:CGX

Earnings Call Transcript 2018-Q1

[Operator]

Good day and welcome to the Cineplex Incorporated first quarter analyst call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Pat Marshall, Vice President of Communications and Investor Relations. Please go ahead, Ms. Marshall.

[Pat Marshall]

Good morning. 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'll now turn the call over to Ellis Jacob, our President and CEO.

[Ellis Jacob, President, CEO & Director]

Thank you, Pat. Good morning and welcome to Cineplex Inc's First Quarter of 2018 Conference Call. We are glad you could join us today.I will begin by providing a brief overview of our topline results as well as a summary of our key accomplishments during the first quarter. I will also highlight some of the most anticipated films for the summer. After conclusion of my remarks, our Chief Financial Officer, Gord Nelson will provide a more in-depth overview of our financials. As always, once Gord has concluded his remarks, we will hold a question-and-answer period.Throughout the quarter, we continued to execute our diversification strategy to reduce our reliance on the cyclicality of the quarterly box office. Total revenue for the first quarter of 2018 decreased slightly by 0.9% to $390.9 million compared to the prior year period as the revenue strength from our new businesses was offset by the decline in the exhibition business due to a 9.3% attendance decrease as a result of the softer film slate.However, this was partially offset by record first quarter box office per patron of $10.21 and record first quarter concession per patron of $6.09, which increased $0.24 and $0.38 respectively from the prior year period.Amusement revenue increased 20.5% or $8.5 million, largely due to increased revenue associated with the Dandy Amusements acquisition in 2017 and contributions from the Rec Room. The Rec Room performed well and we continued with proactive cost control measures, however the attendance decline resulted in a 10% decrease in adjusted EBITDA to $53.5 million. Now I would like to highlight our key accomplishments during the quarter; beginning with film entertainment and content, the top 5 performing films for the quarter included Black Panther, Jumanji: Welcome to the Jungle, Star Wars: The Last Jedi, Peter Rabbit and Fifty Shades Freed. The strong performance of Black Panther, which is now the 3rd-highest domestic grossing movie of all-time, was a very positive contributor. Although, one film does not make a quarter and unfortunately the remainder of the periods film product did not perform as well as expected compared to the prior year. Black Panther represented 22% of box office revenue during the quarter and Jumanji: Welcome to the Jungle, represented 10%.However, the remainder of the top 5 films for the first quarter represented significantly less than the prior year. In alternative programing, the first quarter of 2018 included international feature films, 5 live performances of the Met Opera and performances from the Bolshoi Ballet and National Theatre Live.Our international film programing reported an all-time record quarter with the Hindi film Padmaavat, which became the highest-grossing international title in Cineplex history.Within theater food service in addition to the record the CPP discussed earlier, as a result of changes to provincial liquor laws in Ontario and Alberta, we can now offer alcoholic beverages to our guests outside of VIP Cinema auditoriums and licensed lounges. We began rolling out beer and wine sales in theaters in Ontario late last year and during the first quarter added 5 more theaters bringing our total to 15.The plan is to continue to add this service to select theaters within Ontario and Alberta in 2018. In addition, we continue to work with other provinces to revise legislation, so that we could provide this offering across the country.We see upsides for continued CPP growth as we expand the number of locations with alcohol sales and continue to enhance our VIP Cinema offerings.Subsequent to quarter end, we were pleased to open our newest theater, Cineplex Cinemas East Hills and Calgary on April 20. Located at the Southwest end of the East Hills shopping center, this 7-screen theater features luxurious [ leather ] recliner seating and offers a variety of entertainment options for guests of all ages.These include an UltraAVX auditorium with D-BOX motion seat and XSCAPE entertainment center and a variety of food service options beyond traditional concessions. The theater will also feature an auditorium designed specifically for families with young children.Looking at our online initiatives, the Cineplex still registered a 52% increase in device activations and a 54% increase in monthly active users compared to the prior year period. This business continues to grow as consumers continue to expand their adoption of transactional digital movie consumption.Moving on to media, overall the 4.1% decrease in total media revenue was due to a 1.2% decrease in advertising from cinema media and 9.2% decrease in revenue from our digital place-based media. However, we do expect a strong second quarter ahead for both of these areas of the business. As reported earlier this year, Cineplex Digital Media was selected by Arcos Dorados, the largest independent McDonald's franchise in the world to deploy, maintain, operate and support a network of digital menu boards at locations in Argentina, Brazil, and Uruguay. The rollout had begun and will continue through the balance of the year and into 2019.In amusement and leisure, we were very pleased with the performance of The Rec Room in the first quarter of 2018 with our 4 locations generating total revenue of $16.1 million and a store level margin of 20.5%. During the quarter, we announced plans to open 2 new locations of The Rec Room, the first on the East Coast at Avalon Mall in St. John's Newfoundland and the second in Winnipeg at Seasons of Tuxedo. Both are scheduled to open in 2019. On Monday, we opened our newest location of The Rec Room at Masonville place in London, Ontario. Response from the community has been very positive as we continue to enhance the offerings with each new opening.Also subsequent to quarter end, we announced plans to open a new Playdium location in Brampton, Ontario converting and reimagining our current Cineplex Odeon Orion Gate Cinemas.The new entertainment space will be specifically designed for teams, their friends and family who are looking for an affordable entertainment choice for everyday play, casual dining or to celebrate special occasions. We expect this location to open its stores in mid 2019. This will be the first conversion of an existing theatre and we will continue to evaluate other opportunities on a market-by-market basis.In March, Cineplex and WorldGaming hosted the Canadian Call of Duty World War II Championship Series finals at Scotiabank theatre, Toronto, where teams from across Canada competed for $60,000 in cash and prizes as well as the championship title. A variety of gamers from underdogs and the unknown to the world's highest ranking talent competed in this action packed live national finals event, which was also live-streamed globally with approximately 500,000 views.During the quarter as part of a partnership with the Ed Snider Foundation, WorldGaming hosted the first ever North American competitive hockey video gaming tournament played on an eSports NHL 18. The finals were held in Philadelphia and proceeds from the tournament benefited the Ed Snider Youth Hockey Foundation, which was created by the league Philadelphia Flyers owner.This past weekend, our Collegiate Startleague held a CSL finals in Huntington Beach, California, with the top ranked college teams across North America competing for prices and scholarships in this exciting event.Moving on to SCENE, during the quarter, we reached another milestone surpassing the 9 million member mark and adding 200,000 members during the period. As of March 31, our SCENE loyalty program reached 9.1 million members.Finally, subsequent to quarter end, we implemented a program to extract cost savings and synergies across our organization. This included headcount reductions as well as the ongoing integration and optimization of the cost structures of our business. As a result on April 9, a restructuring occurred within the company. Overall, we expect an annualized cost savings of approximately $25 million to be realized by year-end.Now let's take a look at some of the films for the summer. The past weekend, Avengers Infinity War delivered the highest opening weekend ever with a total of $257 million in North American box office revenue. It was also Cineplex's largest opening weekend ever. This illustrates the power and [ overall ] quality film product. Audiences will come to the cinema when we have films that they want to see. We spent last week at CinemaCon where over 3,000 movie exhibitors from around the world gathered with distributors, suppliers, celebrities and journalists. After viewing upcoming content from a record of 11 studios, we were all very encouraged by the film slate for the year and especially, so for the next 7 weeks, which includes Deadpool 2, Solo: A Star Wars Story, Ocean's 8, The Incredibles 2 and Jurassic World: Fallen Kingdom. The conference also reaffirmed the very strong relationships between distributors and exhibitors.Moving to the third quarter, we look forward to Marvel's Ant-Man and the Wasp opening on July 6 and the ever popular cartoon monster family returns with Hotel Transylvania 3: Summer Vacation, which opens on July 13. Also opening on July 13 is the action adventure from Skyscraper starring Dwayne Johnson, then the original Mamma Mia cast returns from Mamma Mia! Here We Go Again.On July 27, Tom Cruise returns to the big screen as Ethan Hunt in another action packed Mission Impossible - Fallout. As you can see the summer film slate looks very strong and offer something for everyone. As we have been saying for some time, we feel the recent box office performance has been cyclical in nature and the result of weaker film product. We are confident that the second quarter film slate signals a positive turnaround in box office performance.We also remain committed to our business diversification strategy, which positions Cineplex uniquely in its ability to deliver results from many different revenue sources.Before I turn the call over to Gord, I'm pleased to announce that the Cineplex Board has approved a 3.6% dividend increase to $1.74 per share on an annual basis, up from the current $1.68 per share. This increase will be effective with the May 2018 dividend, which will be paid in June 2018.Now I will turn the call over to Gord.

[Gord Nelson, Chief Financial Officer]

Thanks, Ellis. I am pleased to present the First 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.We continue to execute our diversification strategy and for the first quarter, total revenue was relatively flat decreasing 0.9% to $390.9 million as the revenue strengths from the new businesses was offset by the decline in the exhibition revenue as a result of the 9.3% attendance decline.Adjusted EBITDA decreased by 10% to $53.5 million primarily, a result of the attendance decline as a result of the weaker film slate and a $1 million restructuring charge related to the cost savings and synergy program.Cineplex's First quarter box office revenue decreased 7.2% to $181.4 million compared to $195.4 million in the prior year. This was a result of the impact of the 9.3% decrease in attendance, more than offsetting a BPP increase of 2.4%, which established a first quarter record of $10.21, up from $9.97 in 2017. The increase in BPP is primarily due to price increases in selective markets as compared to 2017.Food service revenue increased 2.6% to $116.9 million included in food service revenue of $8.7 million from The Rec Room, excluding revenue from The Rec Room theatre food service revenue decreased by 3.2% from the prior year due to the attendance decline, partially offset by the 6.7% increase in concession revenue per patron to a first quarter record of $6.09.The CPP growth is primarily result of increased basket size and expanded food offerings, including those available at Cineplex's VIP cinemas and Outtakes locations and CPP was also positively impacted by the continued rollout of additional licensed locations in Ontario.Total media revenue decreased $1.4 million or 4.1% to $32.5 million for the quarter. Cinema media revenue, which is primarily a theatre-based, decreased 1.2% due to lower cinema advertising as we saw some shift in spending to Q2 with the stronger film slate.Digital place-based media revenue decreased 9.2% primarily due to lower project installation revenues compared to the prior year period. During the quarter, we increased our location account by 11% or 227 new locations to a total of 13,153 locations.Amusement revenue increased $8.5 million or 20.5% due to the acquisition on April 1, 2017 of Dandy Amusements International Inc. and strong revenue growth from The Rec Room, which contributed $6.9 million of amusement gaming and other revenue.With respect to The Rec Room, we were pleased with the results for the quarter reporting total revenues $16.1 million and store level cash flow of $3.3 million representing the store level margin of 20.5% with only one of the 4 locations reaching its first full year of operations.Turning briefly to our key expense line items, film costs for the quarter came in at 52.5% of box office revenue as compared to 52.9% reported in the prior-year.Cost of food service for Q1 2018 excluding the $2.3 million incurred at the Rec Room was 20.7% as compared to 22.3% in the prior year. Cost of food service at the Rec Room was 26.8%, in line with expectations.Other costs of $217.5 million, increased $11.4 million or 5.5%. Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses.Theater occupancy expenses were $51.9 million for the quarter versus a prior year actual of $52 million. Other operating expenses were at $147.4 million for the quarter versus a prior year actual of $132 million, an increase of $15.4 million. Major reasons for the increase include an increase of $4.7 million in amusement solutions expenses primarily due to the acquisition completed during the first quarter of 2017.An increase of $7.6 million at unit level operating costs related to additional Rec Room locations and an increase of $2.2 million in costs related to same store theater payroll as a result of the minimum wage increases in Ontario, Quebec and Alberta, which more than offset labor efficiencies achieved during the quarter.G&A expenses were $18.1 million for the quarter, which was $4 million lower than the prior year due to reduced costs arising from share-based compensation, mainly due to Cineplex's lower share price. Throughout 2018, we have implemented a program to extract synergies across our organization, including the ongoing integration and optimization of the cost structures of our businesses and technology opportunities.Certain one-time costs in the amount of $1 million related to this program were incurred during the first quarter and included in G&A expenses. We expect an additional $4 million to be incurred during the remainder of the year. Once fully implemented, we expect the annualized savings from these initiatives to be approximately $25 million.With respect to the timing of the realization of these savings, we expect to ramp up to the full annualized run rate over the next 3 quarters in equal increments. Net CapEx for the first quarter was $23.6 million as compared to $25.1 million in the prior year. We continue to estimate that our net CapEx for 2018 will be approximately $125 million and $150 million for 2019, reflecting [ on par ] the CapEx for our first anticipated Topgolf location in 2019.As Ellis mentioned earlier, we have steadfastly focused on creating a diversified entertainment and media company for the future. Our short-term results may be impacted by non-recurring startup or integration costs, but the benefits of these investments will be borne in future periods as these emerging businesses grow, similar to the way we are seeing the Rec Room margins improve as we gain operating history.We are prepared to diligently take these short-term expenses in anticipation of creating future value. We are also prudently prepared to use both our operating cash flow and our credit facilities to invest in these new businesses.While theater exhibition results for the quarter were weaker than the prior year due to the relative film slate, we are encouraged by the early Q2 box office successes and the outlook for the remainder of the quarter in addition to the positive results from the other areas of the business and our ongoing focus on cost management.We continue to remain comfortable with where Cineplex Inc. is positioned today. We are pleased to announce the dividend increased to $1.74 on an annualized basis. We are in the yearly 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 now like to turn the call over to the conference operator for questions.

[Operator]

[Operator Instructions] We'll take our first question from Jeff Fan with Scotiabank.

[Jeffrey Fan]

A couple of quick ones. The premium percentage this quarter was about 41%, it's down from last year. And wonder if you could just comment about what happened in the quarter and if you have any outlook for the rest of the year as to how that percentage may trend? And then the second one is just housekeeping. With respect to the working capital on the free cash flow number, what's the outlook with respect to your working capital for the rest of the year, just so that we can get the free cash flow number rate?

[Gord Nelson, Chief Financial Officer]

Sure, on the first question, I mean, the contributions of 3D product really impact kind of the overall premium percentage, so in the first quarter, the 3D product is a little bit weaker in terms of the overall mix compared to the prior year. Now the outlook for the remainder of the year is quite positive. If you look at, particularly in Q2 and the type of product that's being [ rolled ] into, so I think Jeff, what you're just seeing is kind of quarter-over-quarter 3D impact. Definitely nothing to do, we see the continued strength in UltraAVX and VIP as concepts. On the second part of your question, the working capital, as we have mentioned kind of historically, the pattern of working capital inflows and outflows in the exhibition space is fairly relatively consistent year in and year out. In that during Q4, there tends to be a significant inflow working capital, primarily as we're selling gift cards and corporate coupons in the holiday period, [ that then ] are utilized in the first quarter. Now this year was a little bit of an anomaly and that the first quarter period over period working capital changes, there is a significant improvement and it really just related to kind of the timing and some of the receipts and payments from an AR side and an AP side. I usually say that over the course of the year, one should expect that there will be a significant kind of quarterly swings in Q1 and Q4 relatively flat in Q2 and Q3 and on a full year basis, there should be a small source of working capital, any typical annualized basis.

[Ellis Jacob, President, CEO & Director]

Jeff, going back to your question on the 3D, if you look at 2018, there were only 3 of the top 5 movies that were in 3D compared to 4 in the prior year, which resulted in the 41%.

[Jeffrey Fan]

And just, if I can just squeeze in one quick one for Ellis, we talked about seeing in the past and wondering if you can talk a little bit about the opportunities around using that data to help monetize for potentially incremental revenue opportunities and where we stand in some of those discussions?

[Ellis Jacob, President, CEO & Director]

We continue to use SCENE in a beneficial way as far as our internal opportunities go and we are also looking at external opportunities with Scotiabank as to how we can better utilize the data and we feel after 11 years, we've got considerable history and great data where 1 out of 4 Canadians are part of the program and 45% of the households have a SCENE card. So, it's a work-in progress and we continue to evaluate it, but for us, one of the main pushes is to use it to basically increase our movie visitation and also to help us as it relates to staffing and some other areas of our internal business.

[Operator]

Our next question will go to Derek Lessard with TD Securities.

[Derek J. Lessard, Research Analyst]

Congratulations, Pat, on the retirement, no doubt, well deserved. I was wondering Ellis or Gord on your synergies program, if maybe you could help or elaborate further in break down the $25 million into buckets for us whether by segment or whether it was for headcount or technology and you already answered my question on when you expect to get there?

[Gord Nelson, Chief Financial Officer]

Let me just give you a little bit color around the numbers. So roughly 2/3 of the amount will come from, at the business unit level and OpEx and 1/3 will come from G&A. So that's kind of bucketing in terms of kind of geography on the financial statements. Bucketing in terms of nature or whether it's headcount versus kind of OpEx, operating cost savings, that same relationship holds relatively true, sort of roughly 2/3 of that amount is coming from payroll and payroll-related initiatives including technology and automation, and 1/3 is coming from direct cost reductions.

[Derek J. Lessard, Research Analyst]

And maybe just 2 quick questions on digital media. In Q4, you had a nice revenue bump from the 1,000 or so from Citizens Bank project. Just wondering if you can explain why there wasn't a similar bump in this quarter and secondly, just wondering if you able to tell us a bit more on the articles throttles rollout, how many anticipated installs and when you expect the -- maybe a timeline on the project?

[Gord Nelson, Chief Financial Officer]

So with respect to the first part of your question, we did the Citizens Bank install substantially all in Q4 of last year, so you had a 1,000 locations being deployed which contributed that spike that you saw in Q4. As we will continue to Q1, and again, as I said, Citizens Bank was substantially fully deployed in Q4. We announced Arcos Dorados, we're not, we haven't really started the deployment, as Ellis mentioned on his commentary we expect that to occur through 2018 and into 2019. And on Ellis's comment further was, that we expect to see some decent growth in this business in the back 3 quarters of the year as a result of kind of a backlog of that and some other opportunities that we feel that we are optimistic on some outcomes out of some other opportunities we're pursuing.

[Operator]

We go next to Kenric Tyghe with Raymond James.

[Kenric Saen Tyghe, Senior Vice President]

Ellis, just, if I could touch on the magnitude of the relative box office underperformance, little surprising, clearly Black Panther didn't resonate as well north of the border as it did south. Could you help us better understand why, and perhaps more importantly, look into the second quarter, why it's not a risk given a sort of a superhero heavy slate? And then just a follow-up there as well, could you also speak to Canadian box office performance quarter to date relative to U.S. quarter to date?

[Ellis Jacob, President, CEO & Director]

On the Canadian side, I think for quarter-to-date, there are couple of movies in the month of April that didn't perform as well for us. There was some faith-based movies and other movies that didn't work. But with Avengers, we are seeing a roaring back position for Canada. And when I looked at the numbers this morning, in North America, we are already at $306 million for the movie as of last night. And in Canada, by the end of this week, I think over 2.5 million people will walk through our theater doors. So this is a really strong movie and it looks like it continues to have legs and you've got great opportunities and these movies did well in Canada in the first versions with Deadpool 2, which was extremely strong when it was released originally, you've got the Star Wars story, you've got Oceans, you've got Incredibles 2 and Jurassic, all movies that performed extremely well in their original releases. So, we're pretty comfortable with the bigger movies and where they are positioned for the second quarter and our overall performance.

[Kenric Saen Tyghe, Senior Vice President]

Just one for Gord. Gord you called out or rather provided the breakdown on the other operating expense increase including that $7.6 million in Rec Room. How much of the Rec Room related expense was pre-opening and apologies if I missed that? And then a follow-up for you as well, just on your theater payroll, was that just the minimum wage impact? Or were you perhaps a little people heavy in theaters given that Black Panther doesn't play quite as well in Canada in the quarter?

[Gord Nelson, Chief Financial Officer]

Yes. So on the second question, we -- look at the minimum wage. I would say there is a theater -- hours reduction that was more than offset by the minimum wage increase, and the hours reduction was significant as we've mentioned that we're looking to technology to certain extent to kind of make the whole process more efficient and better from a customer journey perspective. And that's taking labor out of the system. And as I mentioned, kind of a ramp up period as we were ramping up that throughout the year, but the minimum wage more than offset that increase. And sorry, Kenric, just remind me of the other -- your first question in.

[Kenric Saen Tyghe, Senior Vice President]

Just on the Rec Room, you called out the $7.6 million, how much of that was perhaps preopening versus run rate on existing?

[Gord Nelson, Chief Financial Officer]

Yes, so there were no new openings in the quarter. We have opened there, location in [ London ] this week. So there is a little bit of pre-opening, but not kind of significant as compared to other quarters -- prior quarters when we've actually had locations opening in the quarter.

[Operator]

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

[Aravinda Suranimala Galappatthige, Managing Director]

I just want to start with the recliner, the rollout there. I was wondering Ellis or Gord, who can maybe give us an update as to where you stand and if there is a little bit more that you want to sort of roll out there in terms of recliners? And the extent to which it still affecting the delta between the industry box office number and Cineplex's and whether we should see that gap kind of closes, we get to it at second half of the year?

[Ellis Jacob, President, CEO & Director]

Yes, Aravinda, we've done as of now 149 screens, 15 locations, about 10% of our circuit. The problem with the recliners is [ saucy ] in the process of doing them, you basically have to take down those auditoriums and it affects the overall box office. So that was one of the reasons that we under index. Second reason is, a couple of new theaters were opened by independents in Canada and in 2017, we did not open any new theaters. Now we did open in East Hills, which is in Calgary. We will be opening Seton and following that Pickering and those will all be recliner theaters. So that will be something that we will continue to monitor, but we should be seeing better positioning as far as our percentage is going forward. Again Quebec does hurt us, as there are movies that perform higher in Quebec because our share there is lower than the rest of the country.

[Aravinda Suranimala Galappatthige, Managing Director]

It's very helpful and just my second question, with respect to the Player One, the amusement gaming business, just wanted to touch on the margins. I know that earlier last year there was some integration spend and there was the absolute expectation that there would be some margin expansion. Obviously in Q1, the margins sort of contracted a little bit. I was wondering Gord, if you can kind of give us some color on that and whether some of the restructuring would be occurring in that area as well?

[Gord Nelson, Chief Financial Officer]

Yes, absolutely. I think we kind of, we've mentioned previously that we expected some ongoing costs and additional costs in that business occurring for 12 months post acquisition of Dandy which will take us into the kind of the first quarter here, so definitely some additional costs related to that. Look at the margin was compressed a little bit in the first quarter. I think also when we look at the timing of some of the expenses that plays a role in it, but we're still comfortable with that 15% margin that we've discussed with you -- with the investment community previously is, is the mark that we're comfortable that we're going to get to fairly quickly.

[Operator]

We will go next to Drew McReynolds with RBC.

[Drew McReynolds, Analyst]

Gord, on the $25 million in cost savings, appreciate the detail in terms of how that all fits through. Is that in addition to what you've been doing over the past few years in terms of putting through or getting ready with some cost efficiencies to offset the minimum wage? Is that incremental to that or is everything just kind of all included in that $25 million?

[Gord Nelson, Chief Financial Officer]

Yes, no, it's incremental. So, I mean, there's been some initiatives. But I think you'll see that in this quarter -- sorry throughout 2018. We will be fully rolling out some of the initiatives related to technology automation, but I mean these are real hard cost reductions across all our businesses across North America.

[Drew McReynolds, Analyst]

And on the $4 million in remaining onetime costs, will those like this quarter just be thrown in to wherever in the cost structure or will you strip those out for [Technical Difficulty].

[Ellis Jacob, President, CEO & Director]

Similar to what we did in -- with $1 million in Q1 here. We'll quit it and disclose it similar way to the way we did that. And as I mentioned, we expect an additional $4 million.

[Drew McReynolds, Analyst]

Yes, now great and shifting gears here...

[Gord Nelson, Chief Financial Officer]

By the way, the majority of that in Q2, sorry.

[Drew McReynolds, Analyst]

Shifting gears on The Rec Room, remind us, I know, only 4 locations, now 5, but just remind us on seasonality with respect to Q1 kind of percentage wise relative to the rest of the year?

[Gord Nelson, Chief Financial Officer]

Yes. So seasonality is an interesting thing, because with the limited number of locations out there, they each have their uniqueness. I would say, typically, you would expect sort of in the more winter months and particularly, the holiday period in Q4 having a stronger quarterly allocation. But if you think about location with the Roundhouse, where tourism and the Blue Jays are playing, getting heavy foot traffic from those related activities, that sort of distorts the overall trend. But I mean to you just if I was to give you something I would say that between Q1, Q2 and Q3, a slightly more strength in Q1 and we're talking about ranges between probably 22% and 25% of the overall business volume; with Q4, somewhere between say 25% and 30%. Not a lot of seasonality, but some.

[Drew McReynolds, Analyst]

2 others from me, a bigger picture on Topgolf , you reiterated 2019 expect to obviously invest and open a location, maybe just talk to kind of confidence on securing location when we could hear an announcement along those lines. And secondly maybe for you Ellis, just big picture on virtual reality just update us on where you see Cineplex's role with virtual reality? I know we all know you have that installed in a theater. Yes, that installed in The Rec Room, if you can just update us on how you see the year unfolding as we go forward?

[Ellis Jacob, President, CEO & Director]

The response to your first question on Topgolf, we do have a few locations that we are pursuing at this stage and we should be making an announcement in the short while ahead for a location, which we will commence construction. So that process is ongoing and we should be there and get the best location for the long-term and open it in 2019. On your question on virtual reality, as you know, we were one of the first to put in the VOID, which only had 4 locations in the world when we installed ours at the Roundhouse in Toronto. We continue to look at opportunities and options as we move forward, because there are so many different technologies out there and we continue to study the marketplace. As you know, we've got the IMAX virtual reality in our Scotiabank theatre and we've also got our D-Box in location in Ottawa. So we are looking at all of the choices and we definitely feel it's a really important part of the ongoing entertainment experience for Canadians.

[Gord Nelson, Chief Financial Officer]

Yes, and Drew, so as Ellis mentioned, we think it's a product that will work in The Rec Room. There may be a different product that would work in a theatre and in addition, it's a product that there are P1AG business could distribute its supply to other third-party customers.

[Ellis Jacob, President, CEO & Director]

And we are looking Drew, also. It's Ellis again, that we would install additional VOIDs as we move forward with hopefully one in Q2 and then looking to the balance of the year. Because I'm sure you've tried the one at the Roundhouse and the lineups and the engagement is just fantastic.

[Operator]

We'll take our next question from Tim Casey with BMO.

[Tim Casey, Equity Research Analyst]

Few from me. Can we just go back to the restructuring initiative, a $25 million saving -- annual saving on a $5 million outlay is a pretty impressive ratio. It's outstanding actually. Can you help us understand how that is, I mean, I guess the implication is, there's less severance charges related to the headcount reductions, I'm assuming that's because there are part-time employees. Can you offer us some more help on understanding that? And is that $25 million savings, is that based on a particular box office assumption or I guess, what degree of variability or confidence do you have -- you hit the $25 million by the end of the year?

[Gord Nelson, Chief Financial Officer]

Yes, I'd say a little percentage of that amount would be dependent on a box office impact. So we are -- as I kind of alluded to previously, we're taking a significant amount of cost that is [ exempted ] that when you look at kind of that waiver allocation, there is a smaller component, which is related to taking hours out of the system, but the majority -- and we're operating kind of throughout North America, so the severance amount is in the position that -- comprising that amount, some of it is related to -- some resignations and positions that just have not been filled. There's no severance related. So we're trying to be prudent in the way we're kind of managing a hire process. But as I said, there is a fine balance between some longer-term employees that were unfortunately -- difficult decisions for us to make and some more current employees.

[Ellis Jacob, President, CEO & Director]

And Tim, this is more focused on the overhead side of the business, not the people who are part-timers working at the theater level, which we've also looked at from an hour's perspective and using technology, because you have to remember, we just in Ontario got hit with a 21% minimum wage increase. So, it's a fine balance that we've got to work through as far as how we deal with that and I think in the first quarter, you saw indications of how we work towards that and what court is talking about with the $25 million is more on the overhead side and the different businesses that we operate under.

[Gord Nelson, Chief Financial Officer]

Yes, so with that said, we have a high confidence of achieving that number.

[Tim Casey, Equity Research Analyst]

A couple more. Could you provide some idea of relative scale of the Latin American McDonald roller program versus maybe McDonald's Canada or Dairy Queen, is it about the same size as those or much bigger, much smaller?

[Gord Nelson, Chief Financial Officer]

Yes, so I mean they operate about just over 2,000 locations in South America, which puts them in kind of a relative size to McDonald's in Canada.

[Tim Casey, Equity Research Analyst]

Do you think you -- I don't know if you mentioned it, but what timeframe do you think you will complete that appointment in?

[Ellis Jacob, President, CEO & Director]

So into 2019. So, through 2018 and to 2019.

[Tim Casey, Equity Research Analyst]

How should we assess the rollout of the extra or the more flexibility you have with respect to alcohol in Alberta, Ontario and concessions. Do you expect a meaningful impact in concession revenue growth there?

[Ellis Jacob, President, CEO & Director]

I think, we said with respective that is, and when you look at the overall growth in CPP and the history that we have achieved in the last 2 quarters, 9% in the fourth quarter and over 6% in the first quarter is that we feel very comfortable that it will contribute, but only of the few contributing factors that we're going to exceed kind of our historic growth rates in CPP in 2018. And historically, we've been up 4% or 5% and so we should be above the 5% in 2016 -- sorry 2018.

[Tim Casey, Equity Research Analyst]

And is that any margin implications, we should think about?

[Ellis Jacob, President, CEO & Director]

Look at -- I would say in terms of the overall scheme of all the initiatives that are in play, and you've seen some margin -- overall margin growth in the last 2 quarters. So I would say that the alcohol won't have a significant impact on the overall portfolio of our offerings, but it will help in terms of overall margin BPP growth, but as I always say to everyone that further we move away from popcorn, our margins are not going to be at those same level.

[Tim Casey, Equity Research Analyst]

And last one, a lot of noise around movie subscription services mostly South of the Border, Ellis, any thoughts on incorporating that into SCENE or some variation there of?

[Ellis Jacob, President, CEO & Director]

And you're referring to movie MoviePass, which has been in the U.S., I guess, for about 4 to 5 months now, and as you probably read, their offering keeps changing. So as a consumer, I don't know how it will continue to deliver, because they started off with one program, then they changed to another program and now their latest program won't allow you to see a movie more than once and multiple other opportunities that have been taken away from the customer. So for us, we will evaluate the subscription model that works for both Cineplex and the studios. Their whole focus was on [ data ]. We started data 11 years ago and we've got some great information that they will never be able to replicate. So we are always working with our studio partners on how to use the data best and also with third parties. So for us, it's basically something that we will continue to evaluate, but we're not rushing into doing something that will not provide meaningful benefits both sides.

[Operator]

[Operator Instructions] We will go next to Rob Goff with Echelon.

[Robert Goff]

My first question would be on the outlook for the box office, and Ellis, there you've been very helpful with respect to Q2, might I ask with respect to Q3 and in particular, looking at the number of titles perhaps coming out, could you recall that August was terrible with something like 9 new titles versus 11 year-over-year?

[Ellis Jacob, President, CEO & Director]

And to me it's not the number of titles; it's the quality of the title and the amount of box office it is going to deliver. So when you look at Q3 or basically looking at the start of Q3 with Ant-Man and the Wasp, which is a Marvel sequel, you've got Hotel Transylvania, you've got Skyscraper, which I talked about Mamma Mia!, and Mission: Impossible 6, The Equalizer 2, Disney has got another movie, the Christopher Robin movie, which is Winnie-the-Pooh story. And then there's some other really titles running into September. The only months where year-over-year, I would say, is going to be a little interesting in September, because last year, we had the move It, which did extremely well during the quarter. But July and August looks extremely strong in 2018. And then looking at the balance of the year, you got, Dr. Seuss, which is a title that I think will do extremely well; The Girl in the Spider's Web; Fantastic Beasts; The Harry Potter; The Internet: Wreck-It Ralph 2; and animated Spider-Man feature; Aquaman; Holmes and Watson, and I think the big surprise is going to be Mary Poppins based on what we saw last and heard last week.

[Robert Goff]

And if [indiscernible] bit more a broader question, could you talk to where you're at with respect to the eSports monetization roadmap?

[Gord Nelson, Chief Financial Officer]

Sure, Ellis mentioned a number of events that we had during the first quarter. So the CSL [ play ] just happened this past weekend, Call of Duty, Third Annual Canadian Championship. As we've mentioned, I think there is a little bit of an inflection point going on right now in terms of kind of the endemic versus the nonendemic sponsors. I would characterize the huge interest from the nonendemics to date, but still in a [ warning ] state before they develop their media and their sponsorship strategies. So the endemics have been there for a while and we've had a number of the sponsors for our events, but the real opportunity is when the nonendemics convert and invest in the space and we're doing lots of educating out there and lots of meetings, and I think that's when the opportunity evolve or really kind of ramp up in the entire space across -- particularly across North America. And that will likely take place within the next year, I would say, in a year-and-a-half or so.

[Robert Goff]

And one last one, if I may. Tim did ask about the subscription model at the theater. Could you convey your thoughts with respect to the potential for the subscription model perhaps online?

[Ellis Jacob, President, CEO & Director]

We basically -- as I mentioned before, we will continue to look at all of the opportunities that are out there and with our distribution partners decide what is in the best interest both from Cineplex perspective, the distributors' perspective, and the consumer. So, we will continue to review the situation as SCENE loyalty program provides great enough business for the guest to enjoy. And we have to be careful because some of those programs end up being a very low-margin business. And as we've seen with MoviePass in the U.S., they've been able to signup subscribers, but there are 2 million people in a country of 330 million people and we are here with 9.1 million people in our SCENE program in the population of 36.5 million. So I feel that we have to be really careful as to what we introduced and we have a lot of offerings today for our guests that provide them with significant value.

[Operator]

We will take our next question from Derek Lessard with TD Securities.

[Derek J. Lessard, Research Analyst]

Just one last one for me actually. You have an interesting bullet on the pilot program with UberEats. Just wondering if you can expand on that?

[Ellis Jacob, President, CEO & Director]

So, it is a program that we initiated and we are using it in test locations in Canada and we continue to see interesting uptick on the program. And for example, we've had certain locations with great success and we are looking at other locations that we continue to evolve the program. And we find in university town, what's interesting is a lot of the university students love to order from us and willing to take a chance with the product and with the drinks and everything while they're at home. And it's a pilot that we continue to look at, and it also provides us with incremental dollars as part of our overall offerings.

[Derek J. Lessard, Research Analyst]

What kind of products that you're offering, is it popcorn or where is it coming from?

[Ellis Jacob, President, CEO & Director]

Anything you want from -- pretty much from the concession stand. So it would include popcorn, drinks and many of the wider items that we have on the menu and you can digitally download it and basically have the ability to watch a movie also at the same time from our Cineplex Store.

[Operator]

That concludes today's question-and-answer session. At this time, I'll turn the conference back to Mr. Ellis Jacob for closing remarks.

[Ellis Jacob, President, CEO & Director]

Thank you very much all for joining us this morning. Before we end the call, I'd like to take a moment to advice about Pat Marshall, who will be retiring from Cineplex effective June 1. Pat has been with us for 15 years leading Investor Relations and Corporate Communications. Pat has been a meaningful contributor to our success and we will miss her greatly. As we all know, she's won just about every IR award out there and was an integral part of the team when we went public in 2003 and throughout our many strategic acquisitions. She has steered us well during both good times and those that were more challenging. We wish her great enjoyment and good health as she embarks on this new stage in her life and travels the world.Finally, we look forward to seeing you all at our Annual General Meeting at 10:30 AM on May 25, 2018, at our Cineplex Cinemas Yonge-Dundas and VIP. Please mark that in your calendar and look forward to seeing you. Thank you.

[Operator]

This does conclude today's conference. Thank you for your participation. You may now disconnect.