Cineplex Inc

TSX:CGX

Earnings Call Transcript 2018-Q4

[Operator]

Good day, everyone, and welcome to the Cineplex Inc. Q4 Year-end 2018 Analyst Call. Just as a reminder, today's call is being recorded. At this time, I would like to turn the call over to your host for today, Melissa Pressacco. Please go ahead, ma'am.

[Melissa Pressacco, Manager of Communications]

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. Fourth Quarter and Year-end 2018 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 the summary of our key accomplishments during the fourth quarter. I will also highlight what is in store for the balance of 2019. At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide an overview of our financials. As always once Gord has concluded his remarks, we will hold a question-and-answer period.I'm pleased to report that 2018 was a record year for Cineplex. Total revenue increased 3.8% to $1.6 billion and adjusted EBITDA increased 8.7% to $256.4 million, our highest EBITDA since going public, as we continue to focus on managing our costs in addition to seeing our diversification initiatives, build scale and show more meaningful returns. This was accomplished in the year with one of the largest increases in minimum wage, which required us to mitigate roughly $13 million in additional costs.As supported by the strong box office in 2018, the movie industry continues to be vibrant. Last year, we had 2 of the highest grossing films ever in North America, with Avengers: Infinity War and Black Panther. Other standout performers included Incredibles 2, Jurassic World: Fallen Kingdom and Deadpool 2. Simply put, guests will come to the movies when quality content is available, and they still want to experience it in a social setting in the theater on a big screen with great sound and great amenities. The offering has only improved over the years compared to the limited offerings when we went public in 2003. You can now enjoy a movie in a number of different formats, including 2D, 3D, 4DX, ScreenX, UltraAVX, IMAX, D-BOX, the Clubhouse and VIP Cinemas. These are key differentiators in the out-of-home movie experience.Looking at the fourth quarter, many key revenue segments delivered strong results, including total revenue, which increased 0.4% to a fourth quarter record of $428.2 million and adjusted EBITDA up 2.5% year-over-year to $81.6 million. Box office revenue decreased slightly due to the strong comparator in 2017 with Star Wars: The Last Jedi. However, theater food service revenue increased 0.6% to $111 million with a CPP of $6.53, representing a fourth quarter record. Gord will go into greater detail about the fourth quarter results in a few moments. Now I would like to highlight some of our key accomplishments during the quarter.Beginning with film entertainment and content. Despite the marginal decrease, the box office performed better than expected in the fourth quarter with films like The Grinch, A Star is Born, Venom, Bohemian Rhapsody and Fantastic Beasts: The Crimes Of Grindelwald representing the top 5. During the quarter, we announced plans to open a second standalone adult-only VIP cinema theater in Calgary University District. Scheduled to open in 2021, the theater will be dedicated exclusively to adult moviegoers with 5 specifically designed auditoriums and a fully licensed lounge.As we continue to provide the newest and most innovative moviegoing experiences to our guests, we opened Canada's first ScreenX auditorium at Cineplex Cinemas Queensway and VIP during the quarter. ScreenX provides a panoramic movie watching experience that surrounds audiences with imagery beyond the frame of the traditional movie screens and provides them with a sense of being inside the movie. Initial results have far exceeded our expectations, and we will expand both ScreenX and 4DX to additional locations throughout the year.Alternative programming reported growth in revenue and attendance for the fourth quarter with strong performances from documentaries, Burn the Stage and They Shall Not Grow Old, the Opera Aida and stage performances, King Lear and The King and I, which both drew large audiences. Looking at our digital products. Cineplex.com registered a 9.4% increase in business in the fourth quarter, and online and mobile ticketing represented 29.8% of total admissions. During the quarter, we continue to update the new Cineplex mobile app, including the addition of Apple Wallet support. Launched in the third quarter, the new app offers a most simplified ticket purchase process, digital tickets for paperless entry and mobile food and beverage ordering in VIP auditoriums for our guests. We continue to see strong growth quarter-over-quarter in all of our digital commerce initiatives. On the Cineplex Store, active monthly users grew by 30% in 2018, reaching over 980,000 users.Moving to media. Faced with a tough year-over-year comparison as a result of the record fourth quarter in 2017, total media revenue decreased 5.4% as expected, primarily due to lower cinema advertising and digital media projects installation revenue. The 6.8% decrease in cinema media was a result of lower on-screen revenue as compared to the prior record fourth quarter, which was due to the highly anticipated Star Wars: The Last Jedi.Looking at Cineplex Digital Media. The 1.9% decline in revenue was primarily due to the strong comparator from last year's initial rollout of the Citizens Bank contract, which occurred in the fourth quarter of 2017. We also have a number of significant installations still in the pipeline from our most recently announced contracts, including Arcos Dorados and Subway Europe. Shifting to amusement, gaming and leisure. Amusement revenue continues to become a more important part of our business with total revenue of $205.8 million in 2018 as a result of contributions from Player One amusement gaming in our theaters and The Rec Room. The Rec Room reported strong growth during the fourth quarter as a result of the contributions from the additional locations and operational refinements and achieved a store level margin EBITDA of 22%. During the quarter, we announced plans to open a new location at Park Place in Barrie with construction scheduled to begin early next year and a targeted opening of summer 2020. Player One amusement group had strong fourth quarter revenue due to increased route revenue in the U.S., which was in part a result of the Cinemark agreement signed in the second quarter of 2018.WorldGaming in partnership with Alisports held the World Electronics Sports Games Canadian and U.S. regional championships in Toronto and Los Angeles in the fourth quarter. Winners from the 8 separate competitions in the world's only Olympic-style esports tournament will represent their countries at the global grand finals in China next month. Also during the quarter, Collegiate Starleague launched its 10th annual season of collegiate esports leagues, the longest standing and largest footprint for competitive gaming programming between schools in the U.S. and Canada.Moving to SCENE. Membership in Canada's top entertainment loyalty program continued to grow as we added 200,000 members during the quarter, bringing our total to 9.6 million members as of December 31, 2018.As mentioned in the last quarter's call, SCENE announced the pilot of a new premium SCENE Gold loyalty card that offers guests exclusive perks and more points. Only available in Edmonton, the pilot is still in early days, but we are encouraged by the initial results. Cineplex has gained tremendous insight into customer behavior with over 10 years of data collected. We will continue to focus on leveraging the information through marketing automation, artificial intelligence and machine learning to drive customer behavior and expand our insight.Now let's take a look at the film slate. Even though the first quarter is off to a softer start, we anticipate another strong year at the box office driven by severally highly anticipated films. We like to see a combination of action, adventure, comedy, drama, science fiction and animated children's features throughout the year in addition to strong film sequels. This year has a variety of genres available in traditional and premium formats. Opening today, we have the Robert Rodriguez and James Cameron film, Alita: Battle Angel; then it's How to Train Your Dragon: The Hidden World, the latest in the popular animated series opening February 22; and one of the most anticipated films of 2019, Captain Marvel starring Brie Larson, Gemma Chan and Samuel L. Jackson opens on March 8. With 3 weeks still remaining until its release, presales for Captain Marvel are already tracking ahead of Black Panther.Looking ahead to the second quarter. On April 26, we have the latest Avengers film with Marvel's Avengers: End Game. Then in May, we have the live-action adaptation of the Disney classic, Aladdin, starring Will Smith and the space adventure, Ad Astra, starring Brad Pitt and Tommy Lee Jones, both opening on May 24. We close out the month with the Elton John film, Rocketman, coming to theaters on May 31. And June doesn't appear to slow down with films like Dark Phoenix, The Marvel X-Men film with Jennifer Lawrence and Jessica Chastain, the animated sequel Secret Life of Pets 2 and a new toy will join Woody and the gang in Pixar, Toy Story 4, all opening in the month. Looking to the second half of 2019, I'm equally encouraged by the strong slate of films set to hit theaters, including titles like Spider-Man: Far From Home; The Lion King; Hobbs & Shaw; It: Chapter Two; Joker; Frozen 2; a Jumanji sequel and Star Wars: Episode IX.Also as we enter an eventful year for our location-based entertainment theme, we're looking forward to opening 4 locations of The Rec Room and 2 Playdium locations in 2019. We also hope to announce our first Topgolf location very soon.With what appears to be a strong film slate for the year combined with our continued focus on growing our diversified businesses, I am very confident that we're positioning the company for success. In the months and years ahead, we will remain diligent in continuing to control costs and invest wisely to build the business for the future. With that, I'll turn the call over to Gord.

[Gord Nelson, Chief Financial Officer]

Thanks, Ellis. I'm pleased to present the fourth 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 fourth quarter, total revenue increased 0.4% to a Q4 record $428.2 million and adjusted EBITDA increased by 2.5% to $81.6 million. If we look at specific items, Cineplex's fourth quarter box office revenue decreased 1.5% to $182.4 million compared to $185 million in the prior year, primarily due to the strength of Star Wars: The Last Jedi in the prior year. Attendance declined 3.2%, but this was partially offset by a BPP increase of 1.8%, which established a fourth quarter record of $10.73, up from $10.54 in 2017. Food service revenue increased 1% to $120.7 million. Included in food service revenue is $9.7 million from The Rec Room. Excluding revenue from the Rec Room, theater food service revenue increased by 0.6% from the prior year due to the 3.8% increase in concession revenue per patron to a fourth quarter record of $6.53, partially offset by the previously mentioned decrease in attendance. The CPP growth was attributed in part to expanded food offerings, including those available in Cineplex's VIP Cinemas, Outtakes and additional licensed locations.Total media revenue decreased $3.3 million or 5.4% to $58.2 million for the quarter. Cinema media revenue, which is primarily theater-based, decreased 6.8% due to lower pre-show advertising as compared to the prior period. The prior year was an all-time quarterly record due to the highly anticipated Star Wars: The Last Jedi. Digital place-based media revenue decreased 1.9% compared to the prior year period, primarily due to the strong comparator in 2017 as a result of the large initial rollout for Citizens Bank. We have started to break out the project revenue versus other revenues in our MD&A disclosure this quarter. For the quarter, project revenue was down 10.6%, primarily as a result of the aforementioned Citizens Bank rollout in the prior year. The other category, includes software, maintenance support, creative and advertising revenue. This category is up 2.4% in the quarter with the software support and creative component up 6.6% and the advertising component down 1.8%. Year-to-date, we have increased our location count by 4.5% or 576 new locations to a total of 13,502 locations.Amusement revenue increased $4.2 million or 8.5% due to strong revenue growth from The Rec Room, which contributed $7.5 million of amusement gaming and other revenue. With respect to The Rec Room, total revenue grew $1 million over the prior year with 5 locations opened for the full quarter. Margins were up 2% to a quarterly record of 22% on the strength of the holiday season and continued improvement in optimization of operations.P1AG revenues increased by $3.4 million due in part to an increase in revenue in The United States as a result of the Cinemark agreement. Turning briefly to our key expense line items. Film costs for the quarter came in at 52 -- 50.2% of box office revenue as compared to 53.4% reported in the prior year, which reflects the impact of the strong titles in the fourth quarter of 2017.Cost of food service for Q4 of 2018, excluding the $2.3 million incurred at The Rec Room, was 21.4% as compared to 22% in the prior year. Cost of food service at The Rec Room was 24%, down 4.4% from 28.4% reported in the prior year as a result of improved cost management and menu optimization. Other costs of $228.6 million increased $7.6 million or 3.5%. Other costs include theater occupancy expenses, other operating expenses and general and administrative expenses.Theater occupancy expenses were $52 million for the quarter versus a prior year actual of $50.1 million, primarily due to the relative impact of onetime items and other non-rent increases. Other operating expenses were $163.8 million for the quarter versus a prior year actual of $155.1 million, an increase of $8.7 million. Increases included a net $0.7 million related to The Rec Room, which is comprised of a $1.4 million increase due to new locations, offset by $0.7 million in cost efficiencies at existing locations; a $3.9 million increase for P1AG due to increased business volumes and timing of certain expenditures; a $2.5 million increase in same-store theater payroll, mainly due to the impact of minimum wage increases of $3.3 million, which were offset by volume and labor efficiencies realized in the quarter; and a $2.8 million increase in SCENE cost due to the timing of expenses.These increases were offset by a decrease in media cost of $2.3 million due to the cost-reduction program and a decrease in business volumes, and business interruption proceeds of $1.7 million resulting from the fire in 2017 at Cineplex Cinemas Seton and VIP, this represents the final amount of insurance proceeds for the fire.Pre-opening costs for The Rec Room of $0.3 million as compared to $0.7 million in the prior year were also reduced due to the timing of openings.G&A expenses were $12.8 million for the quarter, which was $2.9 million lower than the prior year due to a $2.6 million decrease in share-based compensation expenses, mainly due to Cineplex's lower share price, which decreased $9.56 during the current quarter as compared to a nominal increase in the prior year period, partially offset by restructuring costs in the amount of $1 million related to our $25 million cost-reduction program.Business unit level cost reductions will be reflected in the other operating expenses as detailed in our MD&A.Interest expense increased $4.1 million during the quarter to $10.7 million but included a onetime charge of $2.7 million related to the amendment and extension of our credit facility and an increase of $1 million in noncash swap expense related to the interest rates environment. Net CapEx for the fourth quarter was $21.4 million as compared to $46.2 million in the prior year. Due to the impact of timing, net CapEx for the year was $95.3 million. The difference between our original target of $125 million and revised target of $115 million was the result of timing, and as a result, we are increasing our 2019 net CapEx estimates by the same amount of the shortfall to approximately $175 million.Thereafter, we continue to forecast to be at the previously communicated $150 million level.Despite the adjusted EBITDA growth, net income for the quarter was down 5.7% and basic EPS was down 4.4%, primarily due to the amendment of the credit facilities undertaken in the fourth quarter, which resulted in the onetime charge of $2.7 million and the increased noncash swap charges of $1 million. 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 balance sheet and operating cash flow and our credit facilities to invest in these new businesses. We continue to remain comfortable with where Cineplex Inc. is positioned today. We are still in the early execution phase of a number of our diversification initiatives, and our balance sheet allows us to continue to invest in these growth initiatives to deliver future value for our shareholders.That concludes our remarks for this morning. And we now would like to turn the call over to the conference operator for questions.

[Operator]

[Operator Instructions] We'll go first to Kenric Tyghe of Raymond James.

[Kenric Saen Tyghe, Senior Vice President]

I wonder if we could just touch on the box office performance in quarter. Specifically, yet another quarter where Canadian industry and your own box office performance tracked below that of the U.S. I know we've spoken before the -- the hollowing out in the middle that sort of midrange titles, et cetera. But is there some other dynamic here that we should be aware of or mindful of as you look to 2019 with respect to the relative box office performance?

[Ellis Jacob, President, CEO & Director]

Kenric, great question. And as you've seen during the year, as we go quarter-by-quarter, the gap between the U.S. and Canada continues to close. And it really has a lot to do with the types of films that are released during the quarter that affect Canada versus the U.S. And we ended up with just being slightly down against the prior, whereas the U.S. was just slightly up over 2017. So I wouldn't see that as the trend, but there are certain movies where we basically aren't able to deliver the same kinds of box offices as the U.S. because of the demographics between the 2 countries.

[Kenric Saen Tyghe, Senior Vice President]

Great. Ellis, I appreciate the color. And Gord, maybe just a quick one for you. I noticed a little bit of a better term step change in the SCENE loyalty or loyalty cost in quarter. Is that a function of sort of a new approach with respect to how you're using or need to be using SCENE? Or how should we think about that increase in costs in quarter and is that sort of indicative of run rate going forward?

[Gord Nelson, Chief Financial Officer]

Yes, Kenric, in my remarks, I mentioned that it's primarily timing of expenses. So if you remember, there is a JV where typically we share 50% of the cost of the program. So in certain quarters, particularly in Q4 and this year versus the prior year, there's a little bit of an elevated expense level. So you may see that on a short-term basis as new programs are being introduced and then revert back.

[Kenric Saen Tyghe, Senior Vice President]

Sure. And sorry, I should have perhaps clarified on the question. I was just really trying with some of the tweaks we've seen in the year, there's not sort of a change with respect to the value proposition or something like that would dilute the economics on a go forward, this is just timing and there's nothing else we should be worrying about there?

[Gord Nelson, Chief Financial Officer]

Yes. So sorry, when we call out the number that appears in other operating expenses, which is what we are chatting about, those are really the costs of running the SCENE infrastructure as opposed to potentially the benefits and what we're recording in Cineplex's box when points are being redeemed at our theater or being issued for programs that are specific to our theater.

[Operator]

We'll go next to Aravinda Galappatthige of Canaccord Genuity.

[Aravinda Suranimala Galappatthige, Managing Director]

A couple from me. First of all, Ellis, just talk a little bit about how you're looking at Cinema Media in 2019, obviously a softer second half in '18. Perhaps touch on some of your -- not just your expectations but also some of the initiatives that you put in place or hope to put in place to sort of get that side of business back again sort of in growth territory? And secondly, for Gord, with respect to the Player One AG, I know that the longer-term target is to get to 15% margins. It looks like there was some variance again, there was some extra cost. I know you talked about timing. How do you feel about sort of bridging that variance from '18 to '19 getting to that sort of targeted margin levels? What needs to be done from here on given that a lot of the restructuring was completed last year?

[Ellis Jacob, President, CEO & Director]

So Aravinda, on your question on Cinema Media, we really feel strongly about 2019. And we're not really seeing any changes to what our clients cater as move forward with and there is great interest from automotive and a number of other sectors. And I think when you look at the fourth quarter, fourth quarter of 2017 was a record because of Star Wars and Jumanji and other products. In 2018, we didn't have that Star Wars lead, and we ended up not in bad shape when you compare with a record in 2017, we were down middle-single digits. And to me, I think, 2019, we will be well on our way and back on track.

[Gord Nelson, Chief Financial Officer]

And then on the P1AG question. Yes, we're still firm on the target margins of 13% and to elevate those up to ultimately 15% over time. Throughout 2018, when we ran through our cost-reduction program, I would say, our largest opportunities were in some of the businesses where we've done M&A and where we were able to consolidate operations. And as you know, P1AG was the one where we had the most number of acquisitions, and therefore, there's the most opportunity to kind of consolidate and with that comes additional costs as you go away and look at all the operations. So I'd say throughout 2018, with good focus on managing and looking for cost-savings opportunities, but with that came some onetime elements that we don't foresee occurring in the future.

[Aravinda Suranimala Galappatthige, Managing Director]

And just a quick follow-up on the CapEx number. You indicated $175 million for 2019. Does that include a full sort of amount of $25 million or something close to that for the Topgolf location? Or is that only partly factored into '19?

[Gord Nelson, Chief Financial Officer]

Yes. And look, that's fully factored in. So I do have -- in my number of $175 million, I do have full $25 million in for Topgolf. Now that could -- depending on the timing of the opening, that could potentially shift, but in terms of kind of being conservative for this year, I'm including the full amount in my guidance for the $175 million.

[Operator]

From Scotiabank, we'll go to Jeff Fan.

[Jeffrey Fan]

Question around The Rec Room. So when we look at 2019, it's going to be a big year, very busy year in terms of the number of locations that you plan to open. Can you just walk us through now that you've got, I guess, 5 openings now, the capital programs specifically allocated towards The Rec Room and Playdium, how much you're going to spend there? Maybe a little bit on just the timing of when these locations come online, and on the operating side maybe a bit on the startup costs as well?

[Gord Nelson, Chief Financial Officer]

Yes, sure. So Jeff, in terms of what we take capital, let me take startup. So in capital, and as we've communicated, the boxes can be of various sizes. I've got roughly in that $175 million number, roughly $80 million related to The Rec Room, which is somewhat close to 6 of them at around $13 million each, including some costs for the 20 bills that will all occur in '19. So that's the rough for The Rec Room and the overall capital number. When you look at startup costs or pre-opening and we started to -- in anticipation of the more expanded role of next year, we started breaking out the pre-opening costs in our MD&A. And again, depending on the size of the box, they'll range right around the $1 million number from slightly less to slightly more. So in terms of modeling, I would use $1 million on average in 6 locations. And then, in terms of the timing of the various locations, so we have Square One, which is scheduled to come online in March, Avalon in April. In Q3, we'll have Orion Gate. And then the other 3, so Whitby, Brentwood and Winnipeg will be in Q4.

[Jeffrey Fan]

Okay, great. Stepping back, as you look at the locations that you have opened, how satisfied are you about the performance coming from these locations? Obviously, Toronto seems to be doing really well, but I'm curious about your thoughts on the other locations and how those are doing to give you comfort that you're going to continue to get the return, especially -- and also the revenue take-up from these new areas -- new locations?

[Ellis Jacob, President, CEO & Director]

Jeff, we are quite happy with the numbers from The Rec Room. I mean, as you know, we were having challenges in one of the locations, we continue to work on that. But at the same time, we are focusing on our costs, and as you saw, we ended up with 22% margin. And if we took out the one that's problematic, we would be close to over our numbers moving forward. And we've also felt a little bit -- because 3 out of the 5 locations are in Alberta, we felt a little bit off the economic impact because in the fourth quarter, we had less parties that were booked in Alberta than we would have expected. And overall, we're quite confident as far as our moving forward and the targets that we've set for the overall business.

[Operator]

Up next from Echelon, we'll go to Rob Goff.

[Robert Goff, MD & Head of Research]

I've 2 questions, if I could. First on the Cinema and Media. Ellis, when you make reference to it being back on track, should we look at revenue growth there as being primarily correlated with the box office or to what extent do you have leverage to increased utilization or higher rates? And then changing quick a bit, could you perhaps give us an update on eSports? What has surprised you in 2018, where you see the strategic shifts?

[Ellis Jacob, President, CEO & Director]

So I'll deal with the media and let Gord speak about eSports. But again, our focus is on utilization within the media space. And one of the advantages you have and continue to build on is the great portfolio that we are able to offer our agencies and clients with all of the different businesses, all the way from the digital media and malls to the TimsTV to all of these different facets. And attendance does play a role, but much more important is the bigger films that drive the business. And to me, it's about the big-event movies and not really the overall box office that we see driving the media business moving forward.

[Gord Nelson, Chief Financial Officer]

And so on your eSports question, I guess, what did we see through the past year. I guess, one thing is, you see the publishers taking more control over their titles at the pro level. So leagues being created, pros -- or publishers selling franchises and Overwatch and now Call of Duty. We also see traditional sports players looking to tap into the eSports audience through titles related to their traditional sports games. We see brand, just still in early stages of more traditional brands looking to connect with the impressions that are created in the eSports landscape. And then, you see content providers and distribution platforms, the emergence of new players in that space. We've always been focused in sort of the more the path to the Pro, the 99% of the players that are out there. And so the final question is what do we kind of see going forward? I'd say as the ecosystem evolves, more commercial relationships, strategic partnerships with some of the other players in the system that we look to enhance our value and help them enhance their value in the space.

[Operator]

[Operator Instructions] You'll hear next from Derek Lessard of TD Securities.

[Derek J. Lessard, Research Analyst]

Just 2 quick ones from me and maybe just back to the Cinema Media. You did point out in the MD&A to a challenging advertising environment. I wonder if you can add just some color to that comment.

[Ellis Jacob, President, CEO & Director]

I think in the fourth quarter, as you know, in the prior year, we had the benefit of massive films, whereas this year, as we saw the films were basically quite spread out, you had A Star is Born, Bohemian Rhapsody, a lot of different movies that delivered. So it didn't drive the advertisers as much as the year before with Star Wars. And in 2019, you have the repeat of the 2017 with Jumanji and Star Wars both opening in the fourth quarter. So I think we'll be back on that higher trajectory. So overall, the advertising environment I think on an overall basis, you've to look at the different segments where they are challenging, and we feel that we do provide through the theater a unique way of reaching guests and customers.

[Derek J. Lessard, Research Analyst]

Okay, and maybe one for Gord. So wondering if there's any impact from IFRS 16?

[Gord Nelson, Chief Financial Officer]

Yes, so in our disclosures, in our year-end statements, Note 31, we talk about the adoption of that announcement. Look, I think, I would also just kind of reference you guys, as readers to Note 27, which is our lease commitment note, which is our minimum lease commitments. So those are the contractual committed amounts that we need to pay, it's roughly $1.1 billion. When you look at the adoption of IFRS 16, you expand the scope of the leases outside property leases and then you look at -- you try and predict what would happen in the future in terms of which leases you would actually take options on and extend and renew. So we do provide some language in there about typical theater leases about 20 years with often 4-, 5-year options related to that. So I'm going to give you 2 kind of benchmarks as you have the minimum lease commitments notes, and you could have potentially much higher amount based on if you extended all the options that will somewhere fall in between in there. Obviously, it's an impact of both the fixed asset number, the obligation of the financing lease number for the obligation on the balance sheet and then there will be significant impacts to both interest expense and depreciation.

[Operator]

We'll go next to RBC's Drew McReynolds.

[Drew McReynolds, Analyst]

Couple from me. Gord, back to IFRS 16. From a kind of year-over-year basis, I guess, when you report Q1, we'll have IFRS 16 in the numbers. What kind of restatements for prior years? I know it's on a prospective basis, but will you kind of help us square this off? Presumably, there is no free cash flow impact over the life of the leases?

[Gord Nelson, Chief Financial Officer]

No, you're exactly right. I mean, look there can be some nuances. We will provide a bridge in our MD&A to help you get back to kind of how we would have historically reported after taking into account any differences that may not exist under the newly adopted standard. So we will provide a level of bridging. We could potentially provide a full session to help explain through the adoption of IFRS 16 when we do that.

[Drew McReynolds, Analyst]

Okay, that would be helpful. And then finally, on the $25 million in targeted cost savings, wondering if you hit that on a run rate basis by the end of the quarter? And I guess, any thoughts for additional efficiencies through the system kind of going forward?

[Gord Nelson, Chief Financial Officer]

Yes, so as we ramped up over the 3 quarters, we had the program in the second quarter, and we said we would sort of -- we believed that we would kind of evenly ramp up for that $25 million in the run rate at the end of the year. I'd say, yes, we are there at the end of the year. The impact in 2018, based on that ramp up that I just described, little bit about $12 million to $13 million. So we're comfortable that we have executed and delivered on the $25 million. As we look to the future, I mean, I would say that was kind of phase 1. A lot of -- I talked a little bit about P1AG and some of the opportunities in new businesses of extracting synergies and opportunities. I would say that's kind of phase 1. What I look going forward is there's more ecosystem opportunities to take advantage of the skill sets that we have in our businesses and extract the benefits of that knowledge across our other businesses. So opportunity to manage the overall operations to extract value from the strengths that we have in the various businesses.

[Operator]

And with that, I would like to turn things back over to Ellis Jacob for closing remarks today.

[Ellis Jacob, President, CEO & Director]

Thank you all for joining us this morning. Have a wonderful long weekend, and we look forward to speaking with you on May 9 for our Q1 conference call. Thanks, so much.

[Operator]

And again, that does conclude today's conference. We thank you all for joining.