Cineplex Inc

TSX:CGX

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Cineplex Inc. Second Quarter 2018 Analyst Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Melissa Pressacco, Manager, Communications. Please go ahead.

[Melissa Pressacco]

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 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 2018 Second Quarter Conference Call. We are pleased you could join us this morning. I will begin by providing a top line overview of our second quarter results and a summary of our key accomplishments during the period. Then we will look at some of the most anticipated movies to complete the year's film slate, followed by a brief outlook of our businesses for the balance of the year. 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 a question-and-answer period.Cineplex reported a record second quarter with increases in revenue across all reportable segments, benefiting from the period's strong film product, media results and additional locations of The Rec Room.Total revenue of $409.1 million increased 12.4%, and adjusted EBITDA of $67.8 million increased 78.3% versus the same period last year. On a last 12-month basis, adjusted EBITDA is $259.7 million, reflecting the revenue growth as well as our continued focus on diversification.Top-performing films for the quarter included: Avengers: Infinity War, which had the highest grossing opening weekend ever in North America; Deadpool 2, Incredibles 2, which set the North American box office record for biggest opening weekend for an animated film; Jurassic World: Fallen Kingdom; and Solo: A Star Wars Story.The second quarter was strong for Cineplex with box office revenue up 9.7% and attendance up 5% versus the prior period. In addition to this, our ongoing focus on per patron metrics resulted in all-time quarterly records for BPP of $10.82 and CPP of $6.59.As I have said before, when there is quality content available, guests will come out to see it. The movie business is healthy and thriving, and the second quarter was a great example of this with the blockbuster records I just mentioned.Now I would like to highlight some of our key accomplishments during the second quarter. Beginning with Film Entertainment and Content, during the quarter, we were pleased to open Cineplex Cinemas East Hills in Calgary, which features 7 auditoriums, including an UltraAVX auditorium with D-BOX and the Clubhouse, a unique auditorium specifically designed for families with young children. Then in July, subsequent to quarter-end, we opened 2 new theaters: Cineplex Cinemas Pickering and VIP and the first page -- phase of Cineplex Cinemas Seton and VIP in Calgary. The second phase of Seton, which includes our VIP cinema's experience, will open to the public next week.We also announced plans to add 4 VIP auditoriums and a licensed lounge to our existing Cineplex Odeon North Edmonton Cinemas this fall and plan to open a new theater at The Center Mall in Saskatoon in 2019.Alternative programming included record results from international film programming due to strong performing Punjabi and Hindi films in select markets across the country.Additional performances included 2 live shows and multiple encores from the Metropolitan Opera as well as the classic ballet, Giselle, broadcast live from the Bolshoi Ballet.Within theater food service, in addition to the record CPP mentioned earlier, we launched an expanded partnership with Uber Eats. Now you can order our famous popcorn and other popular concession items, bundled with digital movie rentals right to your door. This service is available through 66 Cineplex theaters in British Columbia, Alberta, Ontario and Québec with plans to expand the offering to 25 additional locations in the coming months.The Cineplex store remains a strategic area of focus for us. During the second quarter, registered users of the store increased by 40% and we recorded an 88% increase in device activations compared to the prior year period. We continue to see this area of the business evolve and grow, and it has become one of many initiatives that differentiates Cineplex from other film exhibitors worldwide. Adoption of our online offerings, including ticket purchases, continues to grow. During the quarter, 32.3% of total admissions were purchased online or via mobile devices.Moving to Media. Our Media business reported a record second quarter. Cinema media revenues increased 12.3% primarily due to an increase in showtime advertising. And digital place-based media revenue increased 9.9% due to an expanded client base, which contributed to increased project installation revenue and advertising revenue.The increased project installation revenue was in part due to our partnership with AT&T and 7-Eleven to design, develop and implement various digital menu board solutions supporting 7-Eleven's U.S. Convenience Store hot food program. To date, CDM has have deployed their solutions in 240 stores across the U.S. We continue to pursue opportunities around the globe to expand our digital media footprint with some of the world's top brands.Moving on to Amusement Gaming and Leisure. During the quarter, we opened our fifth location of The Rec Room in London, Ontario, and have been pleased with its performance to date. The 5 locations reported second quarter revenue of $15.7 million and a store level margin of 13%. There is an element of seasonality in this business and weather can have an impact on results.During the second quarter, Alberta had an unseasonably warm May, which negatively impacted the results in this market, in particular, Edmonton, where we have 2 locations. If we exclude the Edmonton locations, the store level margin of the remaining locations could have been 22%.We also announced plans to open a new Playdium location in Brampton, Ontario, by converting our existing Cineplex Odeon Orion Gate Cinemas. The redesigned space will include approximately 2/3 games and attractions and 1/3 fresh food and beverage options targeting teens, young adults and families. Both this location and our previously announced Playdium Whitby location are scheduled to open in 2019. We anticipate having a total of 9 locations of The Rec Room and 2 Playdiums in operation by the end of 2019.Subsequent to the quarter-end, we announced an expansion agreement with The VOID that will provide Cineplex with the exclusive rights to operate the VR experience in Canada. With our first location already successfully operating at The Rec Room in Toronto, the plan is to open additional VOID experience centers over the coming years, both inside and outside of Cineplex-operated properties. The next location is set to open at The Rec Room, West Edmonton Mall next week.We believe we are well-positioned to grow in this area and have identified a number of ways to leverage VR within our ecosystem, including our theaters, location-based entertainment concept and as a product set for Player One Amusement Group.And speaking of P1AG, in June, we announced an exclusive agreement with Cinemark to install, operate and service amusement gaming equipment in over 270 Cinemark locations across the U.S. As part of the agreement, P1AG will also pilot 3 premium gaming locations featuring the latest interactive amusement and redemption games with a variety of great prices. The expanded partnership leverages P1AG's national infrastructure and industry experience as one of North America's leading providers of amusement solutions.In eSports, WorldGaming announced its Rocket League Canadian championship tournament. The top 8 teams from the regional finals will compete in Toronto at our Scotiabank Theatre later this month. Additionally, WorldGaming was named the official tournament operator for the U.S. and Canadian qualifiers of the 2018 World Electronics Sports Games in partnership with Alisports. These Olympics-style games will last over 7 months and involve more than 65,000 players from over 190 countries competing for a $5.5 million prize pool. WorldGaming will host the national events via online qualifiers and live finals for both the U.S. and Canada.Following this, winners from each country will meet in China to attend the grand finals.Our SCENE program continues to grow as we reached 9.2 million members by the end of the quarter. We have gained tremendous insights into our customers and their behaviors with over 10 years of data. We continue to focus on leveraging this data through marketing automation to drive customer behavior as well as accelerating our adoption on artificial intelligence and machine learning for more robust consumer insights.Aside from our revenue initiatives, we continue to be diligent and focused on our costs. We are well on our way to achieving the $25 million in annualized cost reductions that we had previously communicated by the end of this year.Now let's take a look at some of the films in store for the balance of the year. The third quarter got off to a strong start with movies like Ant-Man and The Wasp, Hotel Transylvania 3 and Mission: Impossible - Fallout. Then opening next weekend, we have the highly anticipated film Crazy Rich Asians, a movie based on the bestselling book. The Nun, an offshoot of The Conjuring series opens on September 7. And on September 28, the animated comedy, Smallfoot, starring the voice of Zendaya and Channing Tatum hits theaters.We have a number of films opening on October 5 including: Venom starring Tom Hardy as the Marvel super villain, and A Star Is Born with Bradley Cooper and Lady Gaga, which has already generated strong Oscar buzz. Next up is Jamie Lee Curtis' return to the big screen in the 11th installment of the Halloween franchise, which opens on October 19.Moving into November, we have Bohemian Rhapsody, the Freddie Mercury, Queen story opening November 2; and the animated Dr. Seuss, The Grinch, starring Benedict Cumberbatch opens on November 9. Also, on November 9, we have The Girl In The Spider's Web, the sequel to the popular crime thriller, The Girl with the Dragon Tattoo. On November 16, The Wizarding World franchise returns to theaters with Fantastic Beasts: The Crimes of Grindelwald. Disney's Ralph Breaks the Internet opens on November 23. And on December 14, we have both Spider-Man: Into the Spider-Verse, an animated Spider-Man movie; and Mortal Engines, the post-apocalyptic adventure film based on the novel.Right in time for the holidays, the highly anticipated Mary Poppins Returns opens on December 19 with a star-studded cast including Emily Blunt, Meryl Streep and Dick Van Dyke. Then we close out the year with 4 great films all opening on December 21, including the next film in the DC Comic universe, Aquaman; the new Transformers film, Bumblebee; the James Cameron's film, Alita: Battle Angel; and Holmes and Watson which stars Will Ferrell and John C. Reilly.As you can see, the film slate looks strong for the remainder of the year, with the line up of films that includes something for everyone. We are also very encouraged by what's to come in 2019.Overall, Cineplex experienced a strong second quarter and accomplished a great deal. We continue to pursue our diversification strategy, leveraging synergies within the Cineplex ecosystem and identifying new opportunities for revenue growth.As we move into 2018 and look ahead to 2019, we remain confident in our approach. With a strong film slate, our new theater openings, added VIP cinema locations and continued growth of The Rec Room, Cineplex Digital Media and Player One Amusement Group, we believe we are well-positioned for long-term success by investing in the future.With that, I'll turn the call over to Gord.

[Gord Nelson, Chief Financial Officer]

Thanks, Ellis. I am pleased to present the second 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 second quarter, total revenue increased 12.4% to $409.1 million, a second quarter record, with increases across all reportable segments contributing to the growth.Adjusted EBITDA increased by 78.3% to a second quarter record $67.8 million, primarily a result of this growth.Cineplex's second quarter box office revenue increased 9.7% to $187.2 million, compared to $170.7 million in the prior year. This was a result of the impact of the 5% increase in attendance, coupled with a BPP increase of 4.4%, which established an all-time quarterly record of $10.82, up from $10.36 in 2017.Food service revenue increased 20.6% to $122.3 million. Included in food service revenue is $8.3 million from The Rec Room. Excluding revenue from The Rec Room, theater food service revenue increased by 14.6% from the prior year due to the previously mentioned increase in attendance combined with the 9.3% increase in concession revenue per patron to an all-time quarterly record of $6.59.The CPP growth was attributed in part to increased basket size and expanded food offerings, including those available at Cineplex's VIP cinemas, Outtakes and additional licensed locations.Total media revenue increased $4.2 million or 11.5% to $40.8 million for the quarter. Cinema media, which is primarily theater-based, increased 12.3% due to higher cinema advertising with strong results from the automotive sector and a shift in spending this quarter due to the stronger film slate.Digital place-based media revenue increased 9.9% compared to the prior year, primarily due to higher project installation revenue related to 7-Eleven.During the quarter, we increased our location count by 2.3% or 308 new locations to a total of 13,461 locations.Amusement revenue increased $2.9 million or 6.3% due to the strong revenue growth from The Rec Room, which contributed $5.4 million of amusement gaming and other revenue. This was offset by a decrease in amusement gaming revenue from P1AG due in part to a decline in children's attendance mix in the exhibition sector, the impact of foreign exchange rates on U.S. sourced revenue and a nonrecurring item in the prior year.There were significantly fewer family friendly films in Q2 2008 (sic) [ 2018 ] versus Q1 2017. And using Cineplex as a proxy, although our overall attendance was up 5%, our children's attendance category was down 17.9%.With respect to The Rec Room, we opened the fifth location at CF Masonville Place in London, Ontario, during the quarter. While revenue grew $12 million over the prior year with 4 locations open for the full quarter and the fifth for part of the quarter as compared to 1 in the prior year.Margins were down as compared to the first quarter due to unseasonably warm weather during May in Alberta. Ellis provided some more color earlier on this impact.Turning briefly to our key expense line items, film costs for the quarter came in at 54.7% of box office revenue as compared to 53.6% reported in the prior year, reflecting the impact of the strong titles from the second quarter of this year.Cost of food service for Q2 2018, excluding $2.3 million incurred at The Rec Room, was 20% as compared to 22.7% in the prior year period. And cost of food service at The Rec Room was 27.1%, in line with expectations.Other costs of $213.8 million increased $2.3 million or 1.1%. Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses.Theater occupancy expenses were $52.8 million for the quarter versus a prior year actual of $52.6 million. Other operating expenses were $143.2 million for the quarter versus a prior year actual of $138.9 million, an increase of $4.3 million. Increases included $8.6 million related to additional Rec Room locations and $2.3 million in same-store theater payroll due to increased business volumes and minimum wage changes in excess of labor efficiencies. These increases were offset by the initial impact of our business unit level cost-reduction program and business interruption proceeds of $3.7 million as a result of the fire at Cineplex Seton and VIP reported as a credit to other costs.With respect to the $2.3 million theater payroll increase, I would note that our focus on labor hour efficiencies resulted in a $2.1 million efficiency reduction impact, but this was offset by a $3.2 million wage rate increase impact, which includes the 21% increase in minimum wage in Ontario and a $1.2 million volume impact based on the higher attendance levels.G&A expenses were $17.8 million for the quarter, which was $2.1 million lower than the prior year due to a $3.6 million reduction in share-based compensation expenses, mainly due to Cineplex's lower share price, and a $1.3 million reduction in G&A expenses, primarily a result of our cost-reduction program. These savings were partially offset by restructuring costs in the amount of $2.8 million related to this program. As we had said earlier, we expect that the annualized impact of the business unit and G&A cost-reduction program to be approximately $25 million, and this will ramp up over the remainder of the year. Business unit level cost reductions will be reflected in the Other Operating Expenses as detailed in our MD&A.Net CapEx for the second quarter was $23.1 million as compared to $52.2 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 in part the CapEx for our anticipated Topgolf location in 2019.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 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.

[Operator]

[Operator Instructions] And we'll go first to Tim Casey with BMO.

[Tim Casey, Equity Research Analyst]

Three for me. Gord, could you talk about the concession margins? What drove that up so nicely in quarter-to-quarter there from almost 300 basis points there. Is -- and is that sustainable in the back half of the year? Just a clarification on the fire insurance of $3.7 million, that's a -- I am assuming that's a one-off, there is no more carry-through in subsequent quarters? And then thirdly, on Cineplex media, a nice gain there. Just, could you talk a little bit about how dynamic advertiser demand is? I guess, where I'm going is, if the movie slate is unexpectedly better or worse, do you see a quick demand change by advertisers or is the inventory pre-bought and so you kind of have a feel for it going into the quarter? If you could just flesh out that little bit that would be helpful.

[Gord Nelson, Chief Financial Officer]

Sure. So thanks, Tim. And so on your first 2 questions, on the concession margin, and if you've noticed the last 3 quarters, we've had lifts anywhere between 6% and 9% on CPP. A component of that relates to some pricing changes that we were -- have been reflected in both 2017 and into 2018 as well as some of the adjustments to the SCENE program where cash discounts were replaced with point rewards. In addition, we see continued bucket size increases lifting the CPP, but those first 2 elements what I mentioned, with them, you don't get necessarily the corresponding increase in the cost of food items. So that is, in essence, what is helping our margins, the other thing is costs are relatively contained, and we've got these increases from the CPP side. On the business interruption question, the Seton location has now opened in July, so the business interruption claim that we made would have been from the anticipated date of opening and from the fire date until the actual opening date. And as I mentioned, it is in July. So there could be a small additional amount in the third quarter, but I would say substantially all of the estimated interruption claim amounts have been reflected in the second quarter results.

[Ellis Jacob, President, CEO & Director]

And Tim, just to follow up on that, we also have with our restructuring costs, a onetime charge in our numbers. So yes, there are costs from extraordinary items, which kind of offset each other[Audio Gap]

[Gord Nelson, Chief Financial Officer]

So for -- on the media question, Tim, just in terms of anticipation, there's a -- as we digitize, obviously, there can be speed of execution based on estimated performance of films. But usually people are -- there is a production period where the campaigns are being developed in advance to associate themselves with certain films. So I would say you probably don't see as much as you would expect in terms of people being -- a lot of reaction because of the preplanning process of the campaigns. Now we do have the ability to move some of it, particularly, in the digital preshow, some campaigns and if there is highly anticipated product. But I would say there is a lot of preplanning on these campaigns, and so not as much kind of movement at last minute. And I'm not sure whether your next question is on how if films don't perform, what that -- how that impacts us and, as we mentioned before, we typically don't sell our cinema advertising on a CPM model basis. So as you said, you may see in the NCM results, such as made good type items aren't as prevalent in our business model.

[Tim Casey, Equity Research Analyst]

Just a follow-up, Gord, is -- do you think 80% margin on concessions is sustainable or is it going to be somewhere between 77% and 80% on a go-forward basis?

[Gord Nelson, Chief Financial Officer]

Yes. No, I would say, looking in the near term, I would say that 80% margin is our sustainable level.

[Operator]

We'll go next to Derek Lessard with TD Securities.

[Derek J. Lessard, Research Analyst]

You've talked about your initiatives over the next 5 years accounting for about 2/3 of your profits, I was just wondering if there is any change to that timeline and whether or not you think you can accelerate it? And maybe in that time line, specifically, are you only talking about the initiatives you've announced or should we assume that there is other opportunities not discussed?

[Ellis Jacob, President, CEO & Director]

Yes, it's a great question. And for us, it's all about focusing on making smart decisions as we move forward and picking the right locations as we go both The Rec Room, Topgolf and some of the other initiatives that we're focused on. So as we see strong results and opportunities, we are going to, basically, look at those opportunities within the CapEx that we've talked about, and then making sure that we're always diligent as to our leverage ratio and where Cineplex stands from a balance sheet perspective. So really, in response to your question is if we see opportunities for growth, we're basically going to look at moving forward with them. And it's basically things like VR, which we announced with The VOID, and we look at opportunities in that area also, as it is something that we think is important for the future growth of the business.

[Derek J. Lessard, Research Analyst]

Okay. And maybe on the -- just switching gears to the digital media. Is the 7-Eleven a new contract that you announced -- that you just announced. And just wondering how big of a rollout this would be?

[Gord Nelson, Chief Financial Officer]

Yes, Derek, look, as we've kind of provided commentary over the past number of calls is -- we actively kind of pilot at customers, which can ultimately lead to contracts amongst a full deployment scenario. I would characterize kind of 7-Eleven, one, as a customer that we've been piloting with over the past 1 to 2 years and that we're happy to kind of name them today as one that we're continuing to grow with them, and I think as we mentioned in our results today that we showed some significant growth in the first quarter due to that relationship. But I wouldn't characterize it necessarily as a contracted relationship at this point.

[Derek J. Lessard, Research Analyst]

Okay. And maybe just one final one for me before I requeue. Just wondering, Gord, maybe, if you could quantify the higher operating costs for the London Rec Room and maybe just lay out the overhead costs for the Amusement and Leisure segment and how should we be looking at those costs?

[Gord Nelson, Chief Financial Officer]

Sorry, the London -- what was the second part of that question?

[Derek J. Lessard, Research Analyst]

Yes. The overhead costs for amusement and for the -- Amusement and Leisure segment?

[Gord Nelson, Chief Financial Officer]

Yes. So in the MD&A, which I think, is maybe where you're referring to is we break out the store level margins for The Rec Room locations, and we bring it -- and we break out the P1AG operation -- operating results. There is a component of overhead, obviously, for the Amusement and Leisure sector, which includes our LBE initiatives, includes our amusement solution initiatives and includes our WorldGaming initiatives. So there is a component of overhead in that amount. In the second quarter itself, with the opening of the London location, you'll kind of see pre-opening costs of approximately $1 million, which in -- also in kind of in those overhead and preopening numbers.

[Operator]

We'll go next to Kenric Tyghe with Raymond James.

[Kenric Saen Tyghe, Senior Vice President]

I wonder if we could just sort of speak to or revisit the Canadian industry performance versus the U.S. and what appears to be a fairly persistent tracking error. I know in the past we've spoken to sort of relative appeal of the mix, have fewer titles or release north of the border versus south or similar, I mean, it's strong performance-wise, in quarter that gap was pretty noticeable. Could you perhaps just sort of walk us through some of that dynamic and how we should think about its evolution?

[Ellis Jacob, President, CEO & Director]

Yes, certainly, Kenric. And this quarter, it looked like in Canada we were up close to 10%, and in the U.S., we were up over 24%. And looking at the different components, last year in Canada, we had in Québec a movie called Bon Cop, Bad Cop, which did a significant amount of business. And this year, in the Québec feature, we have La Bolduc, which did less than half of the business that, that particular film did. We also had movies that opened in the U.S. that did not penetrate Canada movie like Overboard, which did close to $50 million in the U.S. and didn't have much of an impact in Canada. The other thing is, with the U.S., we've seen the movies out, and we feel from looking at the numbers in the U.S. that, that's had an impact. And the range of seeing publicly from -- anywhere from 4% to 8% as far as the impact on the difference between us and them, and that will change over time as the different proposals are out there. We also saw the U.S. premium large formats. We did a lot more before they had started, and now we're catching up, and that's resulted in them doing a higher box office spin-offs because they followed our focus in that particular area. So those are all the different components, I would say, add up to where we are today. And there are certain movies, when I look at it for the quarter-to-date, in the third quarter, we are basically slightly ahead of the U.S., but things change depending on 1 or 2 movies that either under- or overperform in Canada versus the U.S.

[Kenric Saen Tyghe, Senior Vice President]

That's great color, Ellis. And could we just switch quickly to The Rec Room. I know you called out some of the weather-related challenges in Edmonton, where previously you'd also highlighted the dynamic of a mall-based location. Could you sort of speak to us outside of weather how the Edmonton business is evolving with The Rec Room?

[Ellis Jacob, President, CEO & Director]

Yes. We continue to do well, and it's a little tougher market than the other ones because we've got 2 locations in the market compared to our other markets within the rest of the country. And as we opened these locations, there's great learning and we've been able to get synergies from what we've done on an overall basis. And we still have some softness in the West Edmonton Mall location. And we are opening our VOID there next week, and we will continue to work on improving those locations moving forward. But we are very pleased with the performances of the other locations, and also Masonville, without the university kids, are still doing quite well from a start-up perspective.

[Kenric Saen Tyghe, Senior Vice President]

Great. Just a final one for me. Gord, with respect to your 2019 CapEx commentary, if Topgolf were to be bigger than expected surprise or win, is it some flex in that CapEx number or is it simply a constraint from a real estate point of view that regardless of how well it does or doesn't do, 2019 would just be a single Topgolf planned location or launch?

[Gord Nelson, Chief Financial Officer]

Yes. I would say, at this time, we're going to try and just get what the -- first one out of the box, and then we'll kind of move on from there. But I would say, it does not -- it would be extremely unlikely to have a second Topgolf location in the 2019 CapEx number.

[Ellis Jacob, President, CEO & Director]

But we will continue to pursue other locations. But again, I think in '19, like Gord says, we can probably have 1 open.

[Operator]

We'll go next to Jeff Fan with Scotiabank.

[Jeffrey Fan]

Got a few here. Maybe to start off on digital media, it looks like the installation ramped up a bit in the second quarter. Do you expect that to continue into the second half, and therefore, the revenue trajectory to continue that acceleration? And then on P1AG, it looks like the revenue there is a -- was a little bit softer, I think, in the second quarter, in general, and down mid-single digit. Wondering if you can talk about the -- that business in general and the context of that softness? And the Cinemark deal, perhaps talk about when that can kick in and how that would impact that trend? And then just on The Rec Room, understanding that there is this seasonality or weather impact, as you were, I guess, projecting the return of this business, I'm wondering how that factored into your 25% margin and cash return on that business? How much did this seasonality factor in? Can we still expect that on a full year basis even with the seasonality that you get on those types of return?

[Gord Nelson, Chief Financial Officer]

Yes. So on the first question on CDM and their revenue trajectories. So I mean, we're obviously increase of 10% growth in the second quarter, and we kind of highlighted that we're rolling out with 7-Eleven and see continued opportunity there. So we're comfortable with that. Yes, we're going to continue to see those growth levels over the foreseeable future. On P1AG, let me provide a little bit of color -- additional color on the results. I tried to kind of highlight in my prepared comments that kind of disconnect between the attendance growth, yet the decline in children's attendance. Obviously, we have the data for our own circuit in Canada, but when you look at top 15 films, as an example, in 2018, there's really only one film which I recall kind of family-friendly versus that 7 in the prior year. So our children's attendance in our circuit was down almost 18%. And obviously, they're some of the kind of key gamers from an amusement solutions perspective. So that definitely had an impact on our results, and you see that Cineplex results from amusement gaming were down about 5% too. In the U.S., about a quarter of our revenue comes from the exhibition sector. So I would say that you would assume similar level of declines in children's attendance slowly impacting that sector. We had a foreign exchange impact, which was about 2% -- just slightly over 2% of the variance versus the prior year. And we had a onetime adjustment as related to some of the acquisitions or revenue-related items in the prior year results that also impacted kind of the year-over-year change by about 2%. So decline in children's attendance in the exhibition side of the business, foreign exchange and a nonrecurring item in the prior year results. With respect to Cinemark, we're pleased to announce that relationship during the second quarter. I want to kind of make one kind of comment. When we built that strategy of creating the national footprint in the U.S., part of the reason for that was we believe that there is an ability to kind of take share away from competitors in a more kind of regionalized business model that existed in the U.S. So I think this is a good example of that, and customers looking to our expertise, obviously, are delivering results in the exhibition space. So just early days on the Cinemark rollout. So we'll continue to see some of that, and we're excited about that and potentially other opportunities in the future.

[Ellis Jacob, President, CEO & Director]

And Jeff, on your question on the Rec Room, as far as the Edmonton weather impact, I think what we should have focused on sooner was the better cost control as we saw the changing dynamic there. I don't think it's something that will continue to impact us on an annual basis.

[Operator]

We'll go next to Adam Shine with National Bank Financial.

[Adam Shine]

Ellis, you highlighted for 10 years into SCENE program, the only data we really tend to get is the number of members and 100k added basically ever quarter. Is there any additional color you can share today or maybe in future just in regards to how indeed incidents are being driven, degree of frequency of a SCENE member versus maybe non-SCENE members and anything else that might shed a bit more color in terms of the productivity you're getting out of the program?

[Ellis Jacob, President, CEO & Director]

Adam, we have a significant amount of information and stratifications of the data. We are now looking at artificial intelligence to better use the data to control costs and generate higher revenue. We've got the benefit of now having it introduced into The Rec Room, and it will eventually be part of our other opportunities in Amusement and Leisure. So our focus is really about owning your entertainment time and entertainment dollar as we move forward. It's not just about movies, it's about all your experiences, including your experiences online. So I mean, we could spend another hour talking about the data, but just to let you know, we feel that this is one act that provides us with huge advantage in being able to communicate with our guests and give them the best experience quite possible under all of those circumstances. So we know...

[Adam Shine]

If you think, I'm sorry. Sorry, go ahead.

[Ellis Jacob, President, CEO & Director]

So we know a significant amount of information. Now we have to be careful because we don't want to also overuse the information to turn the guests away. But it can provide us with great opportunities to continue to grow in different areas of the business.

[Adam Shine]

Yes. I was just kind of interject in terms of, do you think there is ever a time where you're prepared to give, let's say, miles issuance and redemption or that's really something that remains proprietary and you don't want to give it out competitively?

[Ellis Jacob, President, CEO & Director]

I think it's something like, the program was designed to increase the incidence of movie uptake and also now broadened it to all of the entertainment venues that we offer. And I think the redemption versus earned, it could be used in so many different areas, including our concession stands, including our box office and also with the CARA food network that you can earn and redeem points.

[Adam Shine]

Okay. Maybe one for Gord, just on a follow-up to Jeff's question regarding Cinemark. So I think your comment to him was, basically, you'll stay tuned for a bit of a ramp there. So not necessarily something significant in terms of a material bump to necessary revenues, little on profitability heading into the back half of the year or maybe it does indeed ramp up into Q4 plus?

[Gord Nelson, Chief Financial Officer]

Yes, look, I mean it's fully deployed now. We're just in the -- so you can see the impact, but, again, as I mentioned, the exhibition sector as a percentage of our total U.S. business is about 25%. So it will have an impact. Obviously, we have an impact on the exhibition sector, but it's still only a quarter of the overall business.

[Operator]

We'll go next to Rob Goff with Echelon.

[Robert Goff, MD & Head of Research]

Two questions, if I might. The first one would be just to perhaps give us some insights into the experience you've had in the incremental contributions related to recliners and your thoughts on pushing them further out across your platform. And then the second perhaps broader question would be that of eSports, your thoughts there on monetization and your partnership with Alisports?

[Ellis Jacob, President, CEO & Director]

Yes, on the recliner side of things, we've got approximately 10% of our circuit now with recliners. We've seen some good returns, both at the box office and also increased CPP in these locations. All of our new locations that we are opening will have recliners. We've got, as we mentioned, Seton, Pickering and Seton that have opened, and each -- sorry, Pickering and Seton that have opened in the last couple of months, and they are all theaters with recliners. We're looking at other opportunities where we see a benefit in introducing them, but we have to be careful because it's also a capacity utilization issue that we need to focus on in certain of the locations before we convert them.

[Gord Nelson, Chief Financial Officer]

And then on the eSports question, so, Rob, I know you're very well-versed in this space. The primary revenue sourcing in the eSports space is, obviously, advertising and sponsorship. The relationship now with Alisports to host the World Electronic Sports Games gives us 2 kind of premier events, and now, global events. Our focus has primarily been Canadian-based events. So those online events culminating in live events, which will take place in California and Toronto, are exciting opportunities for us. We still see kind of nonendemic ramps kind of on the tipping point where they're looking to associate with the eSport audience and should be kind of coming online fairly soon in the broader eSports spectrum. So having this event -- this premier event is just another kind of element in the -- enhancing the overall experience for the gamers on our WorldGaming platform. So we're excited about that opportunity.

[Operator]

We'll go next to Drew McReynolds with RBC.

[Drew McReynolds, Analyst]

A couple for me. Just first, maybe on Topgolf. I think last quarter, Ellis, you just talked about potential announcement with respect to the first location. Just wondering how confident you are that you're still on track for a 2019 launch.

[Ellis Jacob, President, CEO & Director]

Yes. We're very close to an announcement in the greater GT area, and we should be hearing about that shortly. And we are focusing to open our first location by the end of 2019.

[Drew McReynolds, Analyst]

Okay. Great. Gord, I may have missed this earlier, with respect to that $25 million in targeted cost savings, what have you achieved, I guess, in the quarter, kind of exiting the quarter?

[Gord Nelson, Chief Financial Officer]

Yes. So look, I think we're pleased with the results to date. I typically said we would ramp up to the $25 million on an annualized basis at the end of the year. If you look specifically at our results, and then particularly in the MD&A where we identified the G&A and the other operating expense line items, I think you know and you would see that G&A was down about $1.2 million year-over-year and some of the other operating expenses that we've identified were down about $2.8 million. So between those 2, you're at about $4 million in the quarter, which is the annualized -- $16 million on an annualized basis. So like I initially said, when we announce the program, we would kind of ramp up 1/3 to achieve the $25 million. So I think we're a little bit ahead of the game right now, and we're still confident on reaching that number at the end of the year.

[Drew McReynolds, Analyst]

Okay. And that's very helpful. Two others. First, just on the BPP growth, little stronger certainly than what I was looking for, and I'm looking at your premium mix. So it's clearly driven by core price increases. Wondering if you could just shed some light on kind of that strategy kind of going forward just with kind of pricing power you think still exists in your ability to raise core prices? And then secondly, on the virtual reality initiatives, obviously, early days. But wondering, I guess, over the medium-term, what kind of CapEx intensity those venues or those offerings, what kind of CapEx requirements would they require?

[Gord Nelson, Chief Financial Officer]

Drew, I'll take the -- your first question on BPP and the first part of the question. The one thing to also notice is that I provided a lot of commentary about kids attendance, how it kind of impacted the amusement solutions business, that's 18% decline in children's attendance. The converse of that helps from a BPP perspective because fewer kids which come in is a lower ticket price. So you've got the premium initiatives, a shift and mix away from child for the higher-priced tickets, that also have contributed to the overall BPP increase, which sounds like as we're higher than you're expecting. And then on pricing, I'll let Ellis make a comment on kind of future opportunities.

[Ellis Jacob, President, CEO & Director]

Yes. And on pricing, we have been really very focused on using efficiency and effectiveness to drive attendance. But when I look at pricing around the world, even specifically in the U.S. compared to what we are charging, I think there is opportunity. But, again, we view that as the last lever to drive our bottom line because it's important to get more people into the box and have those opportunities. But we continue to look at pricing from an overall perspective. And on VR...

[Gord Nelson, Chief Financial Officer]

I'll touch on VR. So typically, when we bucketed the categories of CapEx going forward, we talked about a premium CapEx of about $10 million -- premium market CapEx of about $10 million a year, which could include VR concepts in that amount. When we talk about The Rec Room and on the cost of The Rec Room, typically whatever the VR installation is, it would be included in kind of that new build cost of The Rec Room. So it would be bucketed within that kind of $10 million of premium and other initiatives.

[Operator]

[Operator Instructions] And it appears there are no further questions in queue. I'd like to turn the conference back over to Mr. Ellis Jacob to any -- for any additional or closing remarks.

[Ellis Jacob, President, CEO & Director]

Thank you, everyone, for joining us this morning. We hope you enjoy the rest of your summer and look forward to speaking with you again during our third quarter conference call in November. Have a great weekend.

[Operator]

And that concludes today's conference. Thank you for your participation. You may now disconnect.