Cineplex Inc

TSX:CGX

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the Cineplex Inc. First quarter 2019 Analyst Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melissa Pressacco. Please go ahead.

[Melissa Pressacco]

Good morning. Before we begin the call, we'd like to remind you that certain statements being made are forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results could differ materially from those expressed in the forward-looking statements. Factors that could cause results to vary include among other things, adverse factors generally encountered in 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.

[Ellis Jacob, President, CEO & Director]

Thank you, Melissa. Good morning, and welcome to Cineplex Inc.'s first quarter 2019 conference call. We are glad you could join us today. I will begin by providing a brief overview of our top line 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. At the 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.Although first quarter results were impacted by the anticipated soft box office, we continued executing against our diversification strategy during the quarter and are encouraged by the results from our new businesses, including first quarter records for media, amusement and other revenue. This highlights why we are focusing on diversifying our Company to mitigate the quarterly fluctuations of the Hollywood film core product.The quarter's expected weaker film product in January and February combined with the lack of strong carryover films from the prior year, all contributed to a soft box office quarter. In addition, the tough comparator with last year's record success of the film Black Panther resulted in a 15.6% decline in attendance, which drove the decrease in box office and food service revenue.But as we look ahead to the second quarter and beyond, we are very encouraged by the results so far and the film slate for the balance of the year, especially with films like Avengers: End Game, which brought numerous records as it's achieved the largest global opening weekend ever and became the first film in history to surpass the CAD1 billion mark in its opening weekend. As of today, End Game has grossed over CAD650 million in North America in just 2 weeks and continues to deliver significant numbers for us. For Cineplex, it was our highest advanced sales and our biggest opening weekend ever.This just illustrates the [ power and drove ] quality film product. Audiences will come out of the theater when we have films that they want to see instead of waiting for the movie to be released on to streaming platforms. Movie-going is a social event that provides a totally immersive experience that can't be located at home. And we provide multiple experience options at a great value. Where else can you watch a CAD300 million production for less than it costs you to park your car in most major Canadian cities.As I've said before, 1 quarter is not reflective of the entire year. In fact, the first quarter box office results are in line with the first quarter of 2015, which ended up being our year with one of our highest box office revenues. As we continue to grow our diversified businesses, partially offsetting the first quarter decline was the all-time quarterly record amusement revenue and first quarter record media revenue. First quarter records were also achieved for BPP of CAD10.44 and CPP of CAD6.35, which also helped partially offset the theater attendance decline.In addition, first quarter results were impacted by the adoption of International Financial Reporting Standards or IFRS 16 leases. In order to avoid any confusion and to assist with the comparability of prior periods, we have introduced a new non-GAAP measure, adjusted EBITDA after leases or EBITDAaL to address these issues. Primarily as a result of the soft box office results, first quarter adjusted EBITDAaL decreased 30.6% to CAD34.3 million. Looking ahead, we believe the strong second quarter film slate signals a positive turnaround in box office performance. It was our biggest April ever. And as of last night, the Canadian industry's up over 10% for the second quarter.Now I'd like to highlight our key accomplishments during the first quarter beginning with film entertainment and content. Following the successful launch of Canada's first ScreenX auditorium at Cineplex Cinemas Queensway and VIP in Toronto, we expanded our agreement with CJ 4DPLEX to add up to 20 ScreenX locations in select Canadian markets over the coming years. The new agreement reflects the growing demand for immersive movie-going experiences in Canada.Alternative programing reported growth in revenue and attendance for the first quarter with strong performances, including the animated film Dragon Ball Super: Broly, our biggest event of the quarter, Carmen from The Metropolitan Opera, and the concert event BTS World Tour: Love Yourself in Seoul. In addition, Cineplex international film included strong first quarter performances from The Wandering Earth andGully Boy.Within theatre food service, In addition to the record CPP discussed earlier, we continued the roll out of alcohol beverage service outside of VIP cinema auditoriums and licensed lounges to an additional 19 theaters. As of today, we currently [ have 60 ]theaters, not including VIP, offering this service within 3 provinces, including Ontario, Alberta and now Manitoba. We will continue adding the service to select theatres this year and work with other provinces to update legislations, so that we can provide this offering across the country. Subsequent to quarter end, we were pleased to open our newest theatre Cineplex Cinemas Park Royal and VIP on April 3rd. Located at the south side of the Park Royal Shopping Centre in West Vancouver, the 11 auditorium theatre features luxury recliner seats and UltraAVX auditoriums, reclining D-BOX Motion Seats, a variety of food service offerings, and of course our highly successful VIP Cinemas.Looking at our digital products, The Cineplex Store registered a 107% increase in device activation, and a 57% increase in monthly active users compared to the prior year period. This business continues to grow as consumers continue to expand adoption of transactional digital movie consumption. Online and mobile ticketing represented 30% of total admissions during the first quarter, up from 26% in the prior year period.Looking at media. Total media revenue was a first quarter record for us, increasing 7.7% to CAD35 million. Cinema media revenues increase normally, despite the decline in theater attendance. This will only emphasize the strength of our advertising business and its portfolio of expanded offerings for customers, even when there is a decline in attendance of softer film product. We anticipate a strong second quarter in media, given the upcoming film slate and our results to date.Looking at Cineplex Digital Media, record first quarter results were achieved with the 21.9% increase in revenue as a result of higher project installations. Subsequent to quarter-end, CDM announced its partnership with Mountain Equipment Co-op to deliver a unique digital signage solution that will optimize the retail experience for customers at 20 mega stores across the country. Since its inception, CDM has been an important part of our diversification strategy and continues to be an area of strong growth.In amusement and leisure, Player 1 Amusement Group reported all-time quarterly record revenue and increased margins to 14.1%, primarily due to an increase in distribution sales and increased route revenues in the US, including the Cinemark agreement signed in the second quarter of 2018. These increases are also a result of our continued optimization efforts and the cost reduction initiatives undertaken in 2018.Revenue for the Rec Room increased 1.8% to CAD16.4 million. And while we are very pleased with the record performance to date, first quarter results were impacted by a number of factors, including exceptionally poor winter weather conditions and the timing of Easter, which fell on April this year as compared to March in 2018. However, we were thrilled to open our sixth location of The Rec Room at Square 1 in Mississauga near the end of the quarter, and subsequent to quarter-end, opened our 7th location in St. John's Newfoundland at Avalon Mall in April. During the quarter, we also announced plans to open Atlantic Canada's first Playdium location in Dartmouth, Nova Scotia, scheduled to open in 2020.Moving to esports, WorldGaming hosted the official Winnipeg Jets NHL 19 Tournament during the first quarter. With the grand finals held at the Bell MTS Place in downtown Winnipeg in February, the top players from each of the Xbox 1 and PlayStation 4 platforms competed to be crowned the official Winnipeg Jets NHL 19 champion.Also during the quarter, WorldGaming teamed up with NFL Canada to launch Season 2 of the Madden NFL 19 Canadian Challenge and also held the online qualifiers for the 2019 Call of Duty: Black Ops 4 Canadian Championship Series. Finally, subsequent to quarter-end, Collegiate StarLeague held its 2019 North American Collegiate Grand Finals at the end of April in Atlantic City, New Jersey. The event featured hundreds of the very best Collegiate esports teams and players from the United States and Canada competing for more than CAD100,000 in scholarships. Looking at SCENE, membership in our loyalty program continued to grow, reaching 9.7 million members as of March 31st, 2019.Now let's take a look at some of the films for the summer. As I mentioned earlier, the second quarter is off to a great start with the record-breaking success of Avengers: Endgame and its continued traction over the past 2 weeks. Next up is the action adventure Pokemon Detective Pikachu, starting the voice of Ryan Reynolds as Pikachu opening this weekend. And then on May 24th, we have the live-action adaptation of the Disney classic, Aladdin, starring Will Smith. We close out the month with the Elton John film, Rocketman and Godzilla: King of the Monsters, the next in the series. Both coming to theaters on May 31st.And June doesn't appear to slow down with films like Dark Phoenix, the The Marvel X-Men film with Jennifer Lawrence, Sophie Turner and Jessica Chastain, the animated sequel Secret Life of Pets 2, Men in Black: International with Chris Hemsworth and Pixar's Toy Story 4 when a new toy joins Woody and the gang.Moving to the third quarter, we look forward to Marvel's live-action Spider-Man: Far From Home opening on July 2nd. Then from the team behind The Jungle Book, we have the remake of The Lion King on July 19. We think this will be one of the biggest movies of 2019 with amazing graphics and high anticipation across a wide demographic range for this time of the story.On August 2nd, guests can enjoy The Fast and the Furious spin-off Hobbs & Shaw, starring Dwayne Johnson and Jason Statham. And on August 9, the Disney film Artemis Fowl, which is based on the popular book series will open in theaters. Just before the kids go back to school, we have the animated sequel The Angry Birds Movie 2 opening on August 16th. Then on September 16th, we have the anticipated It: Chapter 2. Part 1 of this film became one of the highest-grossing films for the month of September when it opened 2 years ago.As you can see, the upcoming film slate looks very strong and offers something to everyone. As I mentioned, we are encouraged by the outlook of the 2019 film slate and are confident in our strategic direction as we continue to build scale in our other businesses, prudently manage our costs and execute on Cineplex's diversification strategy for future growth. As such, we are pleased to announce that the Cineplex Board has approved 3.4% dividend increase to CAD1.80 per share on an annual basis, up from the current CAD1.74 per share. This increase will be effective with the May 2019 dividend, which will be paid in June 2019.With that, I'll turn the call over to Gord.

[Gord Nelson, Chief Financial Officer]

Thanks Ellis. I'm 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 the 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 Q1 2019 is Cineplex's first quarter reporting under the new accounting standard for leases IFRS 16. I refer you to the presentation we made last week, which is posted on our Investor Relations website that gives an overview of the impact of IFRS 16 on our results.I will highlight specific impacts of the adoption of the new standard throughout the call. But specifically, I would like to highlight the new non-GAAP measure we are providing, adjusted EBITDA after leases or adjusted EBITDAaL to assist with the comparability to prior periods. Our disclosures in the MD&A for our first reporting period under for IFRS 16 are enhanced in order to assist readers in comparing our results year-over-year.Despite strong results from all other business lines, an expected weak film slate in the first quarter negatively impacted the exhibition business, resulting in total revenue decreasing 6.6% to CAD364.9 million and adjusted EBITDAaL decreasing by 30.6% to CAD34.3 million from CAD49.5 million in the prior year.Cineplex's first quarter box office revenue decreased 13.7% to CAD156.5 million compared to CAD181.4 million in the prior year due to the week film slate. The impact of the 15.6% attendance decline partially offset by a BPP increase of 2.3%, which established a first quarter record of CAD10.44, up from CAD10.21 in 2018. The first quarter was up against a strong comparator in the prior year, which included Black Panther as well as strong carryover films from the fourth quarter of 2017, including Star Wars: The Last Jedi and Jumanji: Welcome To The Jungle.Food service revenue decreased 11.9% to CAD103.1 million. Included in food service revenue was CAD7.9 million from The Rec Room. Excluding revenue from The Rec Room, theater food service revenue decreased by 12.1% from the prior year due to the previously-mentioned decrease in attendance, partially offset by the 4.3% increase in concession revenue per patron to a first quarter record of CAD6.35. The CPP growth was attributed in part to expanded food offerings, including those available at Cineplex's VIP Cinemas and Outtakes, an additional licensed locations.Total media revenue increased CAD2.5 million or 7.7% to CAD35 million for the quarter. Cinema media revenue, which is primarily theater-based, increased nominally, despite the theater attendance decline. Digital place-based media revenue increased 21.9% compared to the prior-year period, primarily due to higher project installation revenues. For the quarter, project revenue was up 105.8% due to the increased installations, including A&W and 7-Eleven. During the quarter, we added 345 new locations, up 5% over the prior year to a total of 13,847 locations.Amusement revenue increased CAD8.6 million or 17.2%, due to strong revenue growth from P1AG in addition to The Rec Room, which contributed CAD8 million of amusement gaming and other revenue. P1AG revenues increased by CAD7.4 million due to increased distribution sales as well as an increase in route revenue in the United States as a result of the Cinemark agreement. Margins on the P1AG business increased 2.9% to 14.1% for the quarter.With respect to The Rec Room, total revenue grew CAD0.3 million over the prior year. Impacting total revenue was the poor winter weather conditions experienced across Canada, the honeymoon impact which was expected after the first 12 to 24 months of operations as locations settle into their expected long-term run rate, and the timing of the Easter holiday weekend which fell in Q2, 2019.Turning briefly to our key expense line items. Film costs for the quarter came in at 50.3% of box office revenue as compared to 52.5% reported in the prior year, which reflects the impact of the strong titles in the first quarter of 2018. Cost of food service for Q1, 2019 excluding CAD2.2 million incurred at The Rec Room was 22.4% as compared to 20.7% in the prior-year period. Cost of food service at The Rec Room was 27.5%, up 0.7% from 26.8% reported in the prior year. Both changes were primarily due to the mix of food and beverage items sold.Other costs of CAD185.4 million decreased CAD32 million or 14.7%, primarily due to the impact of the adoption of IFRS 16. Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses. Theater occupancy expenses were CAD18.4 million for the quarter versus a prior year actual of CAD51.9 million, a reduction of CAD33.5 million. This was primarily due to the impact of IFRS 16, which reduced rent expense by CAD39.7 million. Additional details on the movement arising from the transition to IFRS 16 can be found in our MD&A.Other operating expenses were CAD148.2 million for the quarter versus a prior year actual of CAD147.4 million, an increase of CAD0.8 million. Other costs are net of CAD4.3 million of cash rents related to the lease obligations arising upon the adoption of IFRS 16. Increases included a CAD5.2 million increase for P1AG due to its growth in business volumes and a CAD2.1 million increase due to new and acquired theaters, net of a reduction of CAD0.4 million due to disposed theaters. These increases were offset by CAD2.7 million decrease in same-store theater payroll and a CAD1.4 million decrease in same-store theater operating expenses due to lower business volumes in addition to a CAD1.6 million decrease in marketing costs due to the timing of expenditures.Pre-opening costs for The Rec Room of CAD0.7 million as compared to CAD0.3 million in the prior year were higher due to the timing of openings. G&A expenses were CAD18.9 million for the quarter, which was CAD0.7 million higher than the prior year due to a CAD1.8 million increase in share-based compensation expenses, mainly due to Cineplex's relatively flat share price during the quarter and ongoing regular vesting as compared to the prior year during which the share price decreased.In addition there was a CAD0.8 million increase in professional fees during the current quarter, due in part to an increase in consulting work including the software upgrade undertaken for IFRS 16. These increases offset savings realized from our CAD25 million cost reduction program.Interest expense increased CAD11.2 million during the quarter to CAD17.6 million, primarily due to the inclusion of CAD11.5 million in lease related interest arising on the transition to IFRS 16. Net CapEx for the first quarter was CAD31.7 million as compared to CAD23.6 million in the prior year. With timing changes related to certain new locations, we are reducing our net CapEx guidance to CAD155 million from CAD175 million for 2019, with the CAD20 million timing difference now flowing into 2020 and increasing our 2020 guidance to CAD170 million from CAD150 million.Net income for the quarter was down CAD22.6 million to a loss of CAD7.4 million and basic EPS was down CAD0.36 per share to a loss of CAD0.12 per share, primarily due to the softer results from the exhibition business and the impacts of the adoption of IFRS 16, which negatively impacted our net income by approximately CAD3.3 million in the current period and approximately CAD6.4 million or CAD0.10 per share as compared to Q1, 2018.As I was 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 facility to invest in these new businesses. We continue to remain comfortable with where Cineplex Inc. is positioned today. We are 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.And that concludes our remarks for this morning. And we now like to turn the call over to the conference operator for any questions.

[Operator]

[Operator Instructions] And at this time, we will hear first from our vendor Aravinda Galappatthige of Canaccord Genuity.

[Aravinda Suranimala Galappatthige, Managing Director]

I'll start with Player One AG, given the strength in the margins there. Obviously, there is a distribution piece for the Cinemark -- under the Cinemark arrangement, which I suspect will continue for maybe another quarter or so. And then, there's the recurring piece that will continue. So how should we think about sort of the sustainable growth of that segment didn't -- perhaps for Gord, I mean do you see sort of -- I know you talked about 15% mark is where you want to get to. Do you see the movement now sort of heading in that direction to be something that can be sustained, given sort of the fact that you've done a lot of the restructuring there? So that's number 1. And my second question is on cinema media. Obviously, creditable to having stable, given the box office quarter that you've had, but I know that following the soft second half, there was some internal restructuring that was done. Is -- do you feel comfortable now that given the slate that there is more sustainable growth on the cinema media side as well?

[Gord Nelson, Chief Financial Officer]

Thanks, Aravinda. This is Gord. I'll handle the P1AG question. So, first and foremost, we are very pleased with the results from P1AG here in the quarter. As we had mentioned, historically, our focus on -- strategic focus on One AG was really to create a national footprint in the US. We believe that would give us 2 advantages. One, we will become a [ national AG firm like it service ] clients across the country. And as such, we expected that we'll be in a bit of share shift opportunity within that space that exists today. And I think Cinemark is an example of a share shift as well as having a national footprint. It will allow us to grow, as retail looks to create food and beverage and entertainment destinations anchors in the future and as new entertainment concept such as VR and another concepts are introduced into the marketplace. So, share shifts plus growth was very attractive for us to create a national opportunity. As you guys know, last year, we've gone through a number of acquisitions and we look to sort of right-size the organization and we went through a lot of integration and there's a lot of bump in last year's numbers as we integrated the various entities within P1AG. And as we had stated, we expect it to get to sort of our target 13% to 15% EBITDA margins in that business. And so, we're pleased that we're at the 14% during the first quarter and we will continue to see sort of the growth in that -- the lapping of the new Cinemark agreement for another couple of quarters. And when you looked -- and Aravinda, just to clarify one thing in your comments, so the Cinemark contract is what we would characterize as a route business client. So, that's where were and that's placing equipment in the third-party venue and sharing in the revenue stream, as opposed to a distribution type customer, which is typically we're selling equipment to the third-party and that's a lower margin business. So, hopefully, those have answered your questions on P1AG.

[Ellis Jacob, President, CEO & Director]

And our window on the media question, we feel very confident for the balance of the year, given the film slate and both in the Cineplex Media business and CDM. On the CDM side, we've seen some reduction in costs, as we move forward. So looking at the next few quarters, we feel quite comfortable as to our continued growth in those 2 business areas.

[Aravinda Suranimala Galappatthige, Managing Director]

And just a quick third question and I'll pass the line. With respect to the industry delta that I know we've been talking about for a while, obviously, we see that getting smaller, and Q1 obviously is a difficult quarter to use as an indicator. But at this point, as we've sort of sit in the middle of Q2, do you feel confident that going forward you more or less sort of track industry growth, notwithstanding some of these provincial sort of those titles that spike the provincial box office numbers that you generally back on track there, given that most of this and the refurbishments and so on and as some of the new installs that were done by competitors that's sort of starting to sort of taper out? I'd just -- from the modeling perspective, I'd just wanted to get your thoughts on that.

[Ellis Jacob, President, CEO & Director]

Yes. It's a good question , Aravinda. One of the things we have, which we see right across North America when movies like Avengers open, we have so many choices for our guests to see the movie and we basically very much overperform because of our UltraAVXs, because of IMAXs and VIP and all of those different offerings. So again, it's product-driven, but it's also a lot to do with what you said earlier is the leveling out of what's going on around us. And I think in the second quarter, we should be -- it's early now, it's just half the quarter, but we should be well in line or over the industry.

[Operator]

And we'll go to our next question from Rob Goff of Echelon.

[Robert Goff, MD & Head of Research]

It was interesting that you mentioned The Wandering Earth. Ellis, could you discuss where you see opportunities to work with some of the SVODs where your theater platform as a showcase leading into the SVOD service? Or do you see opportunities there?

[Ellis Jacob, President, CEO & Director]

Well, The Wandering Earth did extremely well in certain pockets of Canada. And one of the things we continue to look at is using our data, which we continue to improve as a means of getting 2 locations where we see movies like these performing above average. And in Toronto, for example, in areas like Markham and Yonge and Dundas, we did extremely well with Wandering Earth. Again in areas around Vancouver, it was very, very strong. And similarly with the Bollywood product like I mentioned Gully Boy, we were able to deliver some good numbers right across the country. But what we're now starting to do is using the data to even have limited runs of these movies in certain markets where they may not be able to sustain a 2 or 3-week time frame, but we can get them in for a week or 2. And that's going to be our continued focus in building, given our diversification in Canada and the diversity in the country. Does that answer your question?

[Robert Goff, MD & Head of Research]

Yes. Very good. The next question would be on The Rec Room. Are you pleased with the balance of roughly 50-50 between food sales and amusement? And when we look at The Rec Room, should we look at traffic they're having any correlation with the box office?

[Ellis Jacob, President, CEO & Director]

Yes. In the first quarter, like the beverage number was a little bit softer than we were projecting, but we got more out of the beverage. It would be a better mix overall. And the locations that are close to zeros do get a bit of a bump, when there is a big movie like Avengers because they are in close proximity, but not all of the locations are located within the proximity of theaters.

[Operator]

And moving on, we do have a question from Derek Lessard of TD Securities.

[Derek J. Lessard, Research Analyst]

Maybe just another follow-up on The Rec Room. You did point to weather being a factor in Q1. Is there anything of note in Q2, given that it has been pretty chilly at least in the Northeast and maybe any impact from any Canadian NHL teams not making the playoffs or exiting early?

[Ellis Jacob, President, CEO & Director]

Yes. April has been also impacted a little bit. And also the fact that when the NHL team doesn't make the playoffs, it helps us on the theater side, but it hurts us on The Rec Room. So you've got a combination of both because I was looking at the numbers on Tuesday when the Raptors were playing and they were quite a big bump because of people wanting to watch the event in social gathering together.

[Derek J. Lessard, Research Analyst]

Okay. And maybe just as a follow-up, I was wondering if there is any plans on expanding your original guidance from 10 to 15 builds beyond that range?

[Ellis Jacob, President, CEO & Director]

Yes. And just to let you know on the 2 Rec Rooms we opened since the last week of the quarter and then into the second quarter. Those ones have been performing extremely well. The one in the Square 1 in Mississauga and also the Avalon Mall in St. John's Newfoundland. And regarding the -- as far as number of units itself, we don't expect to have a change in the number of units. We talked about earlier between 10 and 15 in Canada.

[Gord Nelson, Chief Financial Officer]

Yes. So, we chatted historically about 10 to 15 large blocks typically called the Rec Room and the 10 to 15 of the small box, which could have and typically called Playdium. I think what a better way to describe it now is we're probably going to do up to 30 locations and they'll be branded accordingly based on the size of the market. So you're going to get the smaller versions that are going to be the sub 40,000 square feet and then the larger ones which are 40,000 plus. But in total, that will be up to 30 locations.

[Derek J. Lessard, Research Analyst]

Okay. That clears it up. And I was wondering if you guys have cleared any of the regulatory hurdles for The Rec Room in Quebec?

[Ellis Jacob, President, CEO & Director]

Yes, we are working on it and we are very close to getting to the finish line. And that will result in our expanded focus on Quebec from The Rec Room and Playdium perspective.

[Derek J. Lessard, Research Analyst]

Okay. And then one final one from me. And then, I'm just wondering if you guys still think that there is -- if you still have a lot of room to maybe leverage your digital or your applications to lower maybe some of the expenses at the theater level?

[Gord Nelson, Chief Financial Officer]

Yes, we are always looking at -- I mean as we've mentioned, we've -- our initial focus was sort of on the box office and the ticket purchase. And we are now -- we're looking at developing the mobile app for concession purchases, which we're piloting in VIP right now, which could ultimately extend and that [ takes labor out because it's ] typically been an order taker in the auditorium. So looking --- we're always looking to use digital products as a way to improve the customer experience, customer journey. And so sometimes and occasionally the end result of that is it does actually take some cost out of this.

[Ellis Jacob, President, CEO & Director]

And in summary, I mean, when you look at our SCENE loyalty program, as I mentioned, we are up to 9.7 million guests that have a SCENE loyalty card. And it's quite a significant benefit as far as improving as Gord said the different offerings that we have and being able to communicate with our guests. As we have specific products from different parts of the globe. So I think there's a lot of opportunity in using our theatre going forward.

[Operator]

[Operator Instructions] We'll hear next from Matthew Hoffman of Scotiabank.

[Jeffrey Fan]

It's Jeff Fan from Scotia. I've got a few here. First start off on the capital spending budget for this year. Can you elaborate a little bit on what pushed the spend to 2020? What are the changes that's in your timing of the expansion whether it's a Rec Room or other spending areas?

[Ellis Jacob, President, CEO & Director]

Yes, I mean primarily, the largest change is going to be the shift of our Topgolf, which we initially had planned to open at the end of 2019 into early 2020. And that's going to shift more into 2020 now. So that's the primary shift.

[Jeffrey Fan]

Okay. Can you elaborate on a little bit more like you have locations that and this is just comes down to timing of getting everything out or are we -- are there other factors at play?

[Ellis Jacob, President, CEO & Director]

Jeff, we are quite excited because we feel that we are very close and it's imminent that we will be announcing our location. And not like the last few quarters when we were hoping. This time I think we are just about there from an overall perspective of getting started.

[Jeffrey Fan]

Okay, great. And just circling back on the cinema media business. Maybe asking it slightly differently, attendance was down but this line item seems to have gone up. How do you attribute that? Was it sales execution that you think has drove this? Is there some changes in how advertisers are buying in your cinema business? Can you elaborate on all a little bit?

[Ellis Jacob, President, CEO & Director]

And as we've always said, it really has to do with when advertisers want to have their messages on the screen. It's our sales execution and our ability to have a whole portfolio of assets to offer and that makes a big difference compared to just focusing on the individual cinema business. And some of the timings of the large contracts also have an impact on when they're booked and when they basic play in the theaters.

[Jeffrey Fan]

Okay, but you feel pretty confident ...

[Ellis Jacob, President, CEO & Director]

As I have mentioned, here we feel very comfortable moving forward for the next quarters.

[Jeffrey Fan]

Okay. Switching over to The Rec Room. Last quarter, I think you guys gave up some numbers on same-store or same location trend on revenue. Wondering if you have any stat to share on that front. And just on the Rec Room, with the changes in I guess the format between the Rec Room and Playdium, as we sit back, is there anything in the numbers that you've seen to date with the performance that makes you less excited about The Rec Room opportunity? I'm just want trying to get your assessment of how it's done and the overall market opportunity.

[Gord Nelson, Chief Financial Officer]

So Jeff, I'll take the -- your first question, which was when we alluded to in our remarks that the expected honeymoon period which will begin after a period of 12 to 24 months. So, we believe that we are seeing the honeymoon impact of approximately 10%. And we're seeing that kind of starting to kick in right now. And -- but we believe that we're down at a run rate, which is still above where our initial expectations where when we went into looking at The Rec Room concept.

[Jeffrey Fan]

Okay.

[Ellis Jacob, President, CEO & Director]

And when you look at the round -- the The Rec Room versus Playdium, it's got to do with mainly the demographics and the age groups that the entertainment provides. And we have basically being very strategic about where we opened these locations. And the first one we should be doing is going to be in Brampton where we had a theater called Orion Gate, which is being redone to a Playdium.

[Jeffrey Fan]

Okay. And finally just on the digital media, looks like a lot of the growth was in the project related. I'm just trying to assess like -- it looks like installation maybe the driver this quarter. Do you have kind of an outlook for the next few quarters on how installations would come therefore revenue outlook for digital media? And then the second part of the digital media is just the recurring revenue piece is that -- should we look at the other revenue line as kind of the recurring revenue piece based on installations that have been -- that have taken place in the past?

[Gord Nelson, Chief Financial Officer]

Yes. So, Jeff, on the first part of the question, as we evolve and recently segregated the line item as the installation revenue -- the project revenues typically fairly lumpy and [ dependent on sort of clients planned ], roll-out schedules, particularly in the QSR space. That is often dependent on the individual franchisee. So, I would say that we are obviously really pleased with the installation revenue is the lead indicator of the recurring revenue stream to show the growth that we showed in Q1, I feel little hesitant to kind of give guidance because individual franchisees and clients can shift there programing around for the rest of the year, but we are happy we have a number -- we have a fairly collectible backlog with the clients that we have historically [ announced ]. On your second question, in that bucket of non-installation revenue, it includes a number of elements, which also includes our media revenue. So the advertising revenue in the shopping malls as well as creative and then it would include what I would call the more duty type items like the software license fees and the network management fees. So there is discretion period over period in both the amount of creative services that's asked for and we'll get periods of ups and downs in the advertising revenue and in sort of our public space networks. So those are the key drivers. So, there are some discretionary elements from the return. So, look at it over a longer period of time, that was 1 quarter in isolation.

[Operator]

[Operator Instructions] We will hear next from Drew McReynolds of RBC.

[Drew McReynolds, Analyst]

I was coming on late a little bit. So, apologies if you've covered this one of. Maybe for you Gord on the concession side. The percentage was a little bit higher than I would have thought in the quarter. Just wondering if there's any dynamic in there. And then just secondly, with respect to the dividend increase today, obviously a signal that you've got confidence in the business. Looking forward, maybe just remind us kind of your capital return priorities, how you look at the dividend within the context of clearly an elevated CapEx profile. And then can you just address the balance sheet and if there's any kind of impact with ratings agencies as a result of IFRS 16? I'd assume no, but if you can address those would be great.

[Gord Nelson, Chief Financial Officer]

Okay, Drew. So, first and foremost, concessions -- so the concession costs was a little bit higher in the quarter. As I alluded to, there is -- there was a mix of -- bit of a mix shift in terms of the offerings that were sold during the quarter. We continue to roll out alcohol into the theaters. Uber Eats was quite successful during the quarter at a bit higher costs than other items. And then as we expand VIP and Outtake sales, they are no lower margin product for us. But I would say, I think this is a bit of a high point in this quarter, as we look at what we expect the mix over the course of the year that we would expect that the cost will be a bit higher than last year but not as high as in Q1. And then, your second question in terms of capital allocation and dividend policy. And so just as a reminder, our model the way we look at capital allocation is we are entering into diversification phase with growth initiatives. When we look at our sustaining cash flow, operating cash flow, our results from operations, net of maintenance CapEx, we are prepared to dividend 60% to 85% out of that to our shareholders. We are currently at the lower end of that range, so we are using the difference, so 35% to 40% of our operating cash flow to invest in new growth initiatives and use our balance sheet to fund the remainder of the cost requirements to fund those initiatives. While we're doing that, we're maintaining prudent balance sheet where we're not looking to take our leverage much more than that 2.5 x range. Those we look forward, we expect based on our capital program to continue to be free cash flow negative marginally for the next 2 years, and then we'll revert to positive. While balancing that leverage criteria, providing our shareholders with a return through the form of a dividend. And that's the model that we historically [indiscernible] that we continue to operate in. When we look at where we are allocating capital, we're allocating capital through LBE initiatives where we expect to generate 20% to 25% returns on those capital.

[Ellis Jacob, President, CEO & Director]

Drew, looking back to when we actually did our transaction with Famous Players and put the 2 companies together, we increased our leverage. Our dividend at that point was close to 10%. And the challenge today compared to back then is we were able to deliver the synergies and build up our EBITDA and pay down our debt. Now, we are doing this one block at a time, so it takes a little longer to get to the final runway, but we are very confident in our diversification and what we're doing. And this quarter proved out that it's important to continue to focus on.

[Derek J. Lessard, Research Analyst]

Yes. I appreciate. That recap very helpful. A final one, just back to Cineplex Media. I know you don't want to kind of give specific quarter by quarter guidance, but qualitatively, it's been kind of well-known Avengers was coming down the pipeline along with a stronger slate. Just so, expectations are set for Q2 on the surface, if it was more of a attendance-driven kind of advertising model with an expectation of a strong slate, clearly, we'd expect a pretty good quarter on the Cineplex media side, but, as we saw in Q1, it isn't kind of that direct correlation necessarily. So just want to level set expectations going into Q2 around Cineplex Media and kind of give a sense of kind of where advertisers are at with respect to the slate in this period within the year.

[Ellis Jacob, President, CEO & Director]

As I said on the call, Drew, in my script that we do expect a good runway in the second quarter as a result of the film product and also all of the attributes in the quarter. But we know that the box office was up 10% for the quarter, so we can't give you a number, but we feel comfortable that it's going to be a strong quarter from a media perspective.

[Operator]

And with no further questions in the queue, I would now like to turn the call back over to Ellis Jacob for closing remarks.

[Ellis Jacob, President, CEO & Director]

Thank you very much for joining us this morning. Our next scheduled event is the AGM on May 29th at our Cineplex Cinemas Yonge-Eglinton and VIP theatre. This will be a much condensed event with a very brief meeting. There is no management presentation or film reel, but we will have a short Q&A. And then in August, we look forward to speaking with you again for our Q2 conference call. Thanks very much.

[Operator]

And that does conclude the call. We would like to thank everyone for your participation. You may now disconnect.