Cineplex Inc.

Hello and welcome to the Cineplex Inc Q1 2023 earnings conference call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. I'll now hand over to your host, Mesa Rajali, VP of Corporate Development and Investor Relations. Please go ahead.

Good morning and welcome. With me today is Ellis Jacob, our President and Chief Executive Officer, and Gordon Ellison, our Chief Financial Officer. Before I turn the call over to Ellis, let me 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, the negative impact of the COVID-19 pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national world events, discovery of undisclosed material liabilities, and general economic conditions. Following today's remarks, we'll close the call with our customary question and answer period. I will now turn over the call to Ellis Jacob.

Thank you, Masha. Good morning and welcome to our Q1 2023 conference call. We are glad you could join us. I am very excited to be addressing you today as our business moves forward to a promising era in the exhibition industry. First, guests are continuing to show up. They love coming to our theaters and are choosing the shared and immersive theatrical experiences that we offer. Second, content supply is ramping up with Hollywood, international suppliers, and streamers releasing many anticipated titles. Third, the commitment of traditional and non-traditional studios to an exclusive theatrical window is stronger than ever. And lastly, I want to discuss Cineplex's advantageous position and the strategies we deploy in capitalizing on the positive momentum in the return of moviegoings. Consumer enthusiasm for the theatrical experience is strong across a range of genres and for all demographics. Here are just a few examples. Top Gun Maverick, Spider-Man No Way Home, Doctor Strange and the Multiverse of Madness, Creed III, and John Wick Chapter Four were all the highest grossing domestic films of their respective franchise. Three of the top 10 highest grossing domestic films of all time have been released since 2020, including Spider- No Way Home, Top Gun Maverick, and Avatar The Way of Water, which has now crossed the $2 billion mark and become the third highest grossing movie globally. Horror films Megan and Smile substantially exceeded industry expectations, delivering domestic box office revenue of over 95 million and 105 million respectively. Smile was originally slated for direct streaming, but was given an exclusive theatrical release instead, which was highly beneficial to the bottom line, so much so that a sequel is now being produced. And more recently, family favorite, the Super Mario Brothers movie, released in April of this year, has surpassed $1 billion at the global box office and is now in the top five family movies of all time. These and other record-breaking results demonstrate a point you hear me say on each and every one of these calls. When there's compelling content, consumer enthusiasm for theatrical moviegoing is as strong as ever. Coming out of this year's movie convention, CinemaCon, we are thrilled by the increase in supply of great films for the remainder of 2023 and into 2024. In April, we benefited from a variety of titles that truly appealed to a wide range of audiences, including the Super Mario Brothers movie, John Wick Chapter Four, and Amazon Air courting a legend starring Ben Affleck and Matt Damon. The remarkable performance of these films, along with the success of our diversified businesses, resulted in Cineplex generating impressive April results, with adjusted EBITDA being higher than April 2019, and the month alone generating higher EBITDA than the entire first quarter. Then in May, we started with a strong performance of Guardians of the Galaxy Volume 3, which generated $118 million at the domestic box office this past weekend. Also, we are excited about Fast X's opening next weekend and The Little Mermaid, which is a live-action adaption of the Disney animated classic 34 years after its initial release. In June, the blockbusters continue with Spider-Man Across the Spider-Verse, Transformers Rise of the Beast, and the next feature in the beloved Indiana Jones franchise, Indiana Jones and the Dial of Destiny. There's also The Flash, which we had an opportunity to screen at CinemaCon, and it is incredible. I can say it's probably one of the best DC movies to date. The momentum continues in July with the release of Mission Impossible Dead Reckoning Part 1. We saw 20 minutes of this film at CinemaCon and Tom Cruise doesn't disappoint. We end July with Barbie and Christopher Nolan's much-anticipated World War II epic Hoppenheimer. It is important to note that I have not yet mentioned upcoming movies from non-traditional studios. Apple is releasing two long-awaited films. In October, we will see Martin Scorsese's Killers of the Flower Moon starring Leonardo DiCaprio and slated for November is Ridley Scott's Napoleon. In addition, we are highly encouraged by Amazon's express intention to release 10 to 12 films per year. We are excited by the amazing lineup of films for 2023 and believe we have overcome pandemic-related content supply challenges. A key message we heard from every studio at CinemaCon was the importance of the cinematic experience and theatrical windows in maximizing the performance of each film. The industry took note when multiple studios confirmed that the theatrical window was critical to the success of streaming. This belief is now prevalent in our industry as it has been backed by financial results. Overall, the feedback from CinemaCon was overwhelmingly positive, and the biggest star of the show was optimism. Before I move on, I want to address the Writers Guild of America strike, which started over a week ago. While we are monitoring the situation, we don't expect the strike to have a material impact on our business. Typically, these strikes have a greater impact on short-term content delivery cycles, including content for network TV and streamers. Given the long lead times in making theatrical films, such strikes have historically not had an impact on our industry. In fact, if we look at the previous two strikes, the 100-day strike spanning 2007 and 2008, and the 154-day strike in 1988, you will note that in both cases, industry box office revenues were higher in each of the three years after the strike than the three years prior. I am now going to discuss our content broadening strategy, which we continue to advance by expanding our distribution business, Cineplex Pictures. Last quarter, we announced the Canadian Theatrical Distribution Agreement with Lionsgate for its 2023 film slate bringing 11 titles to the big screen. To date, we have already distributed four titles to Canadian audiences, and we are happy to say that they have been very successful, with John Wick Chapter 4 being Cineplex Pictures' biggest title thus far. We look forward to distributing the remaining Lionsgate titles in 2023, including the prequel to the Hunger Games franchise, The Hunger Games, The Ballad of Songbirds and Snakes, which is slated for November of this year. Regarding international cinema programming, Cineplex consistently over-indexes the North American market share, particularly with Bollywood product. During the quarter, Cineplex took the number one position in North America for Bollywood titles Pathan and Kali Jota, with 31 and 83% share of the domestic box office, respectively. We also realized great success with the film The Wandering Earth 2, which is now Cineplex's highest-grossing Mandarin language film, earning a 32% share of North American box office. These efforts were instrumental during the quarter as we outpaced the North American box office industry recovery by an impressive 10% when comparing Q1 2023 to Q1 2019. This was all made possible by our rich consumer data that we leveraged to drive attendance through our strategic film programming and marketing initiatives. Cineplex has a proven successful history of using data, predictive and analytics, and targeted communication strategies to drive revenue growth. We will continue to leverage our data for personalized content engagement and targeted offers including through the Scene Plus loyalty program, which continues to grow and now has over 13 million members. At Cineplex, we continue to develop and introduce enhanced cinematic and entertainment experiences. We are extremely pleased with the success of our first Cineplex Junction location, which opened in December 22 in Winnipeg, Manitoba. This new concept features multiple entertainment options, including movies, gaming, live events, and expanded food and beverage offerings, all under one roof. We are excited to announce the opening of our second junction location in Mississauga, Ontario, just in time for next week's opening of FastX. The junction concept is a great example of how we look to maximize revenue per square foot in our venues by driving incremental attendance and spend from expanded offerings. Turning your attention to our first quarter results, we welcomed 9.8 million guests in Q1, which was up 47% year over year. We generated total revenue growth of 49% and a sizable increase in adjusted EBITDA to 20.2 million. While Gord will speak to our financial highlights in more detail shortly, I want to emphasize our commitment to growing our diversified businesses, which we continue to scale and meaningfully contribute to the bottom line. We are particularly pleased with our amusement and leisure segment and its performance, which helped mitigate the short-term film content supply challenges during the first quarter. Our LBE business saw an all-time quarterly record adjusted EBITDA of 12.1 million and margin of 34.6%. This business is a strategic growth initiative for our company and it's gratifying to see the results from our 13 locations. LBE continues to be an area of growth for us as we look for strategic expansion opportunities. Our P1 AG business also performed extremely well, generating a first quarter record adjusted EBITDA of 8.9 million and margin of 17.9%. These exceptional results were driven by robust demand in the high margin family entertainment segment and continued theater revenue growth within the root business. In the previous 12 months, this business surpassed the 200 million revenue mark and generated a $31 million contribution before intercompany elimination. On the media side, both the Cineplex Media and Cineplex Digital Media businesses saw significant growth in overall revenues for the quarter, collectively increasing 43% to $22.3 million from the prior year. The Cineplex media team is focused on data initiatives and anticipates this will provide a competitive advantage as advertisers continue to return to spend in the cinema space. With further content supply and mall traffic recovery underway, we expect further momentum in these divisions. Overall, we are pleased with the performance of all our businesses and our diversification as a whole. which is an important pillar for the continued growth of the company. Our diversification strategy is just one of several compelling attributes that differentiate Cineplex from our North American peers. Other attractive and notable differentiating factors include our leading market position for entertainment destinations in Canada, which provides us with meaningful scale in the market. Second, being the most innovative exhibitor when it comes to guest experiences. From premium formats to enhanced gaming in our venues to new entertainment destinations like Junction, Cineplex is the first mover innovator in the exhibition industry. We have the widest array of premium offerings in North America with nine formats including 3D, Ultra AVX, IMAX, VIP, D-Box, 4DX, ScreenX, Clubhouse, and Recliners. The Cineplex VIP offering in particular has been extremely successful in driving incremental attendance and spend. These efforts have led to industry-leading revenue per patron results. For example, in its opening weekend, Cineplex delivered approximately 80% of its box office for Avatar, The Way of Water, from premium experiences which significantly exceeded our peers in North America by approximately 20%. These results were also seen in our first quarter, where we earned over 47% of our box office revenues from premium experiences. Not only is this a first quarter record for us, but it is also the highest percentage of any exhibitor in North America. The third differentiating factor is our leading market position in international cinema and alternative content. Through our relationships with international content suppliers and rich customer data, we have attracted audiences such that the share of our total box office from international product has increased from 4.3% in 2019 to 9.8% in Q1 2023, with the rest of the industry in North America only at 2.7% in the first quarter, well below Cineplex's levels. The fourth differentiating factor is our full ownership and control of the cinema media business. With over 33 years of experience in this business, we have built a portfolio of media offerings that drive industry-leading revenue per patron, almost double that of our U.S. peers. Not only do our expanded media offerings drive increased revenue per patron results, but our in-house team allows us to retain a significantly higher portion of this revenue stream. And the last, but certainly not least differentiating factor is the volume and value of the consumer data collected that is used to drive additional revenue and make our operations more efficient. The ScenePlus program has over 13 million members representing almost one-third of the Canadian population and 15 years of history which provides us with access to expanded member data including non-moviegoers. In addition, we have an extensive customer data platform which has thousands of variables for each guest and provides enhanced capabilities to execute personalization initiatives. Overall, Cineplex is well positioned to achieve great success and has a history of driving industry leading revenue per patron results. Looking ahead, we are incredibly confident in the future of our business. We are excited about the strong start to the second quarter and are encouraged by the positive momentum our industry and company have realized year to date. With strong consumer demand for movie going, content volume returning to pre-pandemic levels, commitment to exhibition from our studio partners, and the record results from our diversified businesses, we have much to be excited about. When you look at Cineplex's attributes, you can see that there are huge opportunities for investors in our business. Innovative and successful growth initiatives, along with our disciplined capital and cost management, will serve us well for years to come. I'm extremely proud of the Cineplex team and want to thank them for their agility, resourcefulness, and determination as we work together to grow our business. With that, I will turn things over to Gord.

Thanks, Ellis. I am pleased to present a condensed summary of the first quarter results for Cineplex, Inc. For further reference, our financial statements and MD&A have been filed on CDAR and are also available on our investor relations website at cineplex.com. Our MD&A and earnings press release includes a complete narrative on the operational results, so I will focus on highlighting select items and providing commentary on our liquidity and outlook. As Ellis mentioned, we were pleased with our Q1 operating results. We reported adjusted EBITDA of $20.2 million. There are amusement and leisure businesses reporting its strongest quarterly adjusted EBITDA ever. For the first quarter, total revenues increased 49.1% to $341 million from $228.7 million in the prior year, and adjusted EBITDA increased from negative 5.7 million in the prior year to $20.2 million in 2023. Each of our businesses improved dramatically from the prior year. Adjusted EBITDA in our film exhibition and content businesses increased to $10.7 million from negative $6.3 million in the prior year. Adjusted EBITDA in our media business increased 72%, and adjusted EBITDA in our amusement and leisure businesses increased 70%. Before discussing our liquidity position, I wanted to briefly touch on three items, CapEx, taxes and an update on our Cineworld claim. For the first quarter of 2023, we reported net CapEx of $13.9 million as compared to $9 million in the prior year. Included in CapEx in the first quarter is net growth CapEx of approximately $5 million, which primarily relates to the Aaron Mills Junction location scheduled to open next week. For 2023 and beyond, we will continue to be prudent and opportunistic with our growth initiatives focused on driving incremental revenues. Guidance for net cap backs for 2023 remain but $60 million. Next, I want to remind you of the benefit of the tax asset that was de-recognized during 2020 as a result of uncertainties related to the pandemic. As described in Note 3 of our financial statements, we currently have non-capital losses totaling $436 million to utilize against future periods. And as such, you should expect minimal cash taxes over the next several years. We continue to evaluate the recoverability of these deferred tax assets and will recognize such assets when and if appropriate. And lastly, Cineworld filed its proposed Chapter 11 plan of reorganization on April 11, 2023. This plan contemplates all holders of general unsecured claims, which includes Cineplex's claim of $1.24 billion Canadian. Those claims shall receive a share of a total pool of U.S. dollars of $10 million in cash plus interest in a litigation trust, which are not expected to be material. Well, at this time, we do not know the expected distribution on our claim. We do not anticipate it will be material, and no amounts have been accrued in Cineplex's financial statements. I would like to move on and speak to our balance sheet, in particular, our liquidity position. In March 2023, we entered into a credit facility amendment which suspended testing of the total leverage ratio until Q4 2023, and relaxed the testing of the senior leverage ratio and fixed charge ratio throughout 2023. This amendment was primarily in response to the film product supply challenges, which continued into Q1 2023. For Q1 2023, we reported net borrowings of $29 million under our credit facilities, which left us with $356 million drawn. and approximately $177 million available under our credit facilities as of March 31st, 2023. As of March 31st, we reported a senior leverage ratio of 2.86 times as compared to a covenant of 3.25 times. As at quarter end, our current costs of borrowing are 6.4% on the bank credit facility, 7.5% on the high yield debt, and 5.75% on the convertible debentures. We have $450 million in fixed rate hedges in place on the bank credit facility, with $300 million maturing in November 2023 at rates of 2.8% to 2.9%, and $150 million maturing in November 2025 at 2.9%. The interest rate environment has caused significant shifts in the mark-to-market adjustment on these hedges. with an expense of $2.6 million in the current quarter as compared to $10.4 million in income in the prior year. These adjustments flow through our interest expense and have also impacted our overall net income comparison. Now, with products from an impressive and broad range of studios returning on a regular cadence, I'd like to take a few moments and look forward. First, let's start with April. We achieved 96% of our pre-pandemic 2019 April box office and 102% of our pre-pandemic combined box office and theater food sales on 86% of the pre-pandemic attendance level. In addition, as Ellis mentioned, our EBITDA for the month of April alone is higher than our EBITDA for the entire first quarter of 2023 and is also higher than EBITDA for the month of April 2019. Now let's talk about a world where we return to around 75 to 80% of the pre-pandemic attendance levels. Again, this is below the 86% level we experienced in April 2023. In this world, we have suggested And our analyst models would also concur that in this world, Cineplex could achieve approximately 100% of its pre-pandemic EBITDA level of approximately $230 million. As compared to our peers, we achieved these results because of our diversified business model, including record results in growth in our amusement and leisure businesses, as well as initiatives put in place in the exhibition and media businesses since 2019. With CapEx restrained at $60 million, interest expense of approximately $60 million, and our tax losses sheltering near-term current taxes, this would create approximately $100 million in free cash flow, which would go towards deleveraging our balance sheet. Now let's talk about our balance sheet. At the end of Q1 2023, we had approximately $922 million face value of debt, including $316.3 million in convertible debentures, which have a conversion price of $10.94. All of our equity research analysts have a one-year target price in excess of this conversion price. In this scenario, we believe that the convertible debentures would convert to equity And with the adjusted current debt balance of $606 million, excluding the converts, we would be at the low end of our target leverage ratio range of 2.5 times to 3.0 times, and on the path to consider the reintroduction of a dividend. Now let's talk about initiatives to optimize our capital structure. I want to make it clear that we are primarily talking about the composition and maturity of our debt stock, including items such as rating strategies, mix of bank versus private versus public debt, US, Canadian, not dire measures such as issuing common equity to reduce debt. And finally, speaking of common equity, Our business is typically traded at a premium, given our market share and diversified businesses. However, with the positive results of our business and momentum in the industry, we have not seen the same valuation return that our peers in the US have experienced. We are trading at an approximate 25% discount to our target price. We understand that our Canadian listing means that we are subject to more of a show-me view, but we would expect that over the next several months, our stocks should receive the same or better valuation that our peers have experienced. With a continuing strong movie slate for the balance of 2023 and the incredible results from our diversified businesses, there is a lot to be excited about. And with that, I would like to turn things over to the conference operator for questions.

Thank you. As a reminder, if you'd like to ask a question, you can press Star 1 on your telephone keypad. If you'd like to withdraw your question, you may press Star 2. Please ensure you're unmuted locally when asking your question. Please also limit yourselves to two questions each. Thank you. Our first question for today comes from Derek Lessard from TD Cohen. Well, Derek, my apologies. Our first question for today comes from Adam Shine of National Bank Financial. Adam, your line is now open. Please go ahead.

Okay, thanks for that. Sorry, Derek. I'll start maybe just talking about margins a little bit. You know, Gord, obviously... UNL has highlighted some record results out of LBE and P1AG. We are seeing margins certainly lift up on P1AG by a few points and obviously taking advantage of some improving operating leverage there. Can you speak not just to where those margins could ultimately be going in terms of any particular target or ranges and then As it relates to the core box office concession business, can you speak to any inflationary dynamics and the context of margins that we don't explicitly get to see, but how you position those in this environment compared to, let's say, pre-COVID? Thanks.

Thanks, Adam. And so, you know, let's talk – I'll take the first question on – or let's deal with the amusement and leisure businesses first. I have to give credit to the operating team that done an incredible job on optimizing the operations. I've always said the one good thing about COVID is it allows you to take a very serious look about the cost structures that you're operating in. On a couple of calls before, I think I had mentioned that a couple of years back, our target margins on on P1AG were to get them up from 13% to 15%, and the team has done a great job of getting there. Our new range is now between 15% and 17%, and as you can see, we're well on our way of achieving those levels. A quick comment on the LBE business then, and we're very pleased with the margins in the LBE business too, and what we're seeing there is There's a little bit of a mix shift. We're finding that our customers are more apt to spend additional money in the amusement side of the business, which is a higher margin business. Our target was typically 25% and we're extremely pleased, again, with what the operations team has done in building up that margin. Moving over to the box or the exhibition side of the business. perhaps speak, I think you got two questions. One is related to kind of the film margin gross margin, and maybe I'll hit the concession one then is, is, you know, obviously, when and then the last couple, couple calls, I've detailed our overall cost structure, you know, to indicate that, you know, the majority of our cost structure, we're less prone to, you know, inflationary pressures, the one area where we are is typically in the food service area. And you'll see a little bit of that coming into our overall percentages. We have a little bit of a mix shift in our concession and our food service mix into sort of higher cost items. And you'll also note that, as was said before, is with the food cost pressures that not only us but others are experiencing, we have historically looked to turn the price to offset some of those things. You know, so I would say, you know, what do we see going forward? I would say Q1 was a little bit of an elevated level when you're looking at a pure cost percentage level. And then we would be ramping up and sort of looking forward to be more in that 22 and a half to 23 times.

And Adam, from a product perspective, as we've seen a very, very strong start to the second quarter. and that continues. We have book club and Blackberry opening this week, and that's followed by Fast 10, and then we get into Spider-Man. We've got Transformers, we've got The Flash, which I spoke about, and Indiana Jones. So the second quarter product, and looking forward even into the third quarter and beyond, we feel that there's a real return to the strong movies that we are back to where we were pre-pandemic from an overall perspective. And our guests are really enjoying the different choices that we offer them when they come to our theaters. And part of the discussion on the concession side is also the mix of what our guests are enjoying when they partake and come to the movies at our venues. So anything else, Adam?

No, just maybe one last one. I'd thank you, Ellis and Gord, for those answers. The headcount, perhaps, you know, just, you know, we look to perhaps some efficiencies that were gained over the last maybe two, three years. It looks to us that there might be fewer bodies, you know, in the theaters. Maybe I'm wrong. Maybe it's just isolated to where I am. But can you just speak to that at all in terms of, you know, additional efficiencies potentially driving savings going forward as revenues kick in?

And Adam, that's a good point. And part of the COVID was about looking at different ways to deliver a better overall success. And we've used technology to help us as we go forward. And we've also, as you saw with the online ticket sales, it reduces the number of significantly headcount additions or the number of people that are required at the theater level. And we are trying to use technology as much as we can through all of our different offerings to help us with the overall success. And our guests are really much more accommodating in those situations as they're used to it.

Okay, that's great. I'll leave it there. Appreciate it.

Thank you, Adam.

Thank you. Our next question comes from Derek Lassard of TD Cohen. Derek, your line is now open. Please go ahead.

Yeah, good morning, everybody. Hope you're well. Alice, I think I wanted to touch on, there appears to be a bit of a narrative, and maybe it's more in the U.S., more U.S.-centric, given the effects of the pandemic well over before Canada, but there's this idea out there that the film supply is actually okay if you look at the number of titles and it's close back to pre-pandemic levels. So maybe the climb or the slower climb back to 2019 box office revenue is tied to lower demand. So I'd like to hear your thoughts on what you're seeing specific to the Canadian market and sort of the average Canadian moviegoer and your theaters.

I think the Canadian moviegoers are just as driven to want to come back to our theaters as our U.S. counterparts. You have to remember we were in Canada faced with a lot of different challenges. We went through a period where we were closed multiple times. We weren't allowed to serve food in theaters. That hurt the overall bottom line. What we see now is our guests are really keen on returning back to our theaters. And what is great is it's the expansion of the choices of both the demographics that are coming back and the type of movies that are being released in the theaters. And to me, it's a much broader array of product that will help us as we move forward. So I'm pretty strong on where we are and where we are going and very optimistic based on the content that's available as we move forward into the future. So I don't think there's a difference when it comes to Canadian moviegoers compared to the US, and I think we will, with the international product, continue to see an uptick as we move forward into the future.

Yeah, Derek, I was just gonna add too, so I think, okay, from the demand perspective, you know, I think, you know, some scripts gave, you know, a number of examples where, you know, the sequels to films are performing stronger than the previous versions. And that we're achieving kind of record results. So when the product is there is, is people want to go see it, I do really believe it, it's the supply. And that's why we've been focusing on saying the number of films. And that's, again, We're finally in sort of mid-March or so getting into a period where we have a new film, major film being released every week. And we haven't been in that situation since the pandemic started. And that's why we were kind of stressing that April is one of our first months where we have a new film opening every week. And we're back into that regular cadence. And we're back up to 86% of our attendance, 96% of our box office revenue, 102%. you know, of our box, plus, you know, concession sales, and achieving, you know, exceeding the EBITDA from, you know, April 2019. So, so yeah, I think, you know, from our perspective, it's not a demand issue, it's a supply issue.

Okay, that's helpful. And Gord, maybe just to, I mean, you did talk about a world of 75 to 80% attendance. And I just want to be clear, that's not what you guys are expecting. And I guess, The follow-up to that is do you have a sense of what level of attendance you guys need to get to in order to really see that operating leverage start to kick in?

Well, the part I'm trying to give you, you know, what we disclosed today with respect to April results is, you know, being at 86% of 2019's level and having, you know, more EBIDEL in the month of April alone than our entire first quarter, I think that's given you some sense of, you know, the operating leverage of having that additional, you know, attendance. And what I've said typically, historically, is that each incremental guest in our theaters is worth in excess of $10 of EBIDEL to us. So that's also an indicator of, you know, the strong operating leverage that we see.

Yeah, and as Gord said in his script, basically at an 80% attendance level, we will exceed our EBITDA that we had prior to the pandemic. And we feel that will continue to get stronger. And with our diversification, our bottom line will also improve.

Awesome. And maybe just one final one for me. I guess if I was being nitpicky and pointing to a weakness, it seems like the digital media business still seems having a little bit of a struggle. I'm just curious about some of the key issues there that you're working through and how we should be thinking about the recovery of that business this year and into next.

Sure. So I mean, it somewhat goes hand in hand with, you know, post pandemic results. So as again, we mentioned, you know, our customer verticals are sort of SRS and retailers, shopping malls, you know, all all areas have been impacted by the pandemic. And so when they're looking at deploy capital moving forward, they're a little bit slower, just as I described how, you know, we're being somewhat cautious with our capital spends for the rest of this year, you know, our customers are likewise, you are and then on top of that, you've got, you know, a little bit about the return to mall traffic. And we have, you know, just as our cinema business has the return of theatre attendance is, you know, advertisers looking to see that prior to, you know, making the kind of the larger commitments to the digital signage space.

Okay, thanks for that.

Thank you.

Thank you. Our next question comes from Aravinda Gallapatige from Canaccord. Aravinda, your line is now open. Please go ahead.

Good morning. Congrats on the quarter. Thanks for taking my questions. I wanted to go back to sort of the LBE performance, which, you know, I think as was cited during this call thus far is certainly impressive. Alice, what are your thoughts on the sustainability of that strength? I mean, when I look at that 12.1 million EBITDA number, I mean, it almost compares to your full year, 16.6 million in 2019 for the full year, right? And it's dramatically ahead of sort of the initial expectations you had. Is there something, you know, structural here, you think, with I don't know whether it's sort of the macros causing people to shift their spend from perhaps more expensive options to the rec room and such. Any kind of color on what you're seeing so far and has this sort of, you know, outperformed your own expectations as well?

So when you look at the LBE, one thing we are seeing is that it really is a confirmation of the consumer behavior. and they are wanting to come out of their homes and basically we are seeing a much higher percentage on the gaming side than on the food side and I think that will continue to improve as our clients start to do more corporate events in these facilities and that will drive the business even harder. So overall I think we will continue to grow and get stronger and we should have a great year in 2023 and beyond. And I think it's a business that has served us well, especially, you know, now that the pandemic is over and guests can get together and have a great social experience. And I'll get Gord to talk about the margin percentages.

Well, sorry, and Arvind, so the one kind of structural, if you want to call that difference is that we have more locations out there in that business. So, so at the end of 2019, we had nine locations, and today we have 13. So and this is going back to your number. So if you take the 16 million that you described and divide it by the nine locations, it's just under, you know, $2 million on average per location. You know, you take the 13 that we had an open for the first quarter, And it's just under a million dollars for the quarter alone that we did per location. And, you know, if you recall, historically we said that on average these things are about, you know, $10 million to build, and we expect about $2.5 million per location. So we're significantly exceeding, you know, the returns that we're expecting in this space.

Okay. Thank you. That's helpful. And then my second and last question. I know that an area there is obviously some incremental upside and perhaps some catch-up upside is cinema media. What sort of conversations are you having with advertisers during these times? Obviously, we're arguably in an ad recession with virtually every platform posting high single-digit or double-digit declines year over year. But maybe just talk to the prospect of recovery towards the year end and what – what sort of back and forth you're having with your key advertisers?

Arvind, a great question. And, you know, what we usually see is about a one quarter lag between when the business starts to, you know, come back and advertisers and given the quantity and quality of the product, especially the quality, we have been now getting a lot of inbounds from advertisers who want to get back on the screen. and also the ability of our data to provide them with feedback. And overall, there's a great opportunity moving forward, and we feel that the balance of the year, especially the second half, will be very strong from a cinema advertising perspective.

Thank you very much. I'll pass the line. Thank you. Thank you. Our next question comes from Mayor Yagi from Scotiabank. Your line is now open. Please go ahead.

Yes, thank you for taking my question. And I wanted to have, well, I have two short-term questions and one longer-term. So I just wanted to ask you on the theatre, the film cost, we saw an increase in the quarter on film cost, you probably have a better view, better read on what to expect in the second quarter, third quarter. Can you help us understand the dynamics playing over there? And in terms of tier rent cost, you're paying more because of lower subsidies. Have we cleared up all the subsidies yet or there's still more subsidies that is helping offset any of the rental costs that we could see increase later this year. And the longer-term question is related to your dividend. You mentioned that there is a path that you see right now for the dividend to be reinstated. I just wanted to maybe, if you can, tell us what level of operational performance you would like to see other than your leverage ratio, I guess, you know, in terms of operational performance for you to have the conviction to reinstate that dividend. Thank you.

Thank you. So, I will talk about the film cost and then turn it over to Gord to address the other issues. So on the film rental, as you saw in the first quarter, the significant amount of the box office was driven by Avatar. And Avatar was the third largest grossing movie ever. And that drove the higher percentage because Avatar represented a quarter of our box office for this quarter. Looking forward, it'll all depend. Sometimes I say I don't mind paying higher firm rental because usually it results in extremely high box office. So, it's a matter of, you know, how the movies perform going forward and which studio the movie is released from.

And I'll turn it over to Gord. Okay. So, Merrill, with respect to your question on occupancy then, so, yes, the rent subsidies were primarily tied into operating restrictions and closures. So, those are now behind us in a good way. And so, you know, you shouldn't expect additional subsidies going forward. The other point that I want to stress is that during the pandemic is we did get abatements from our landlords. And so we don't have deferred rent. So there's not additional rent expenditures that need to be made going forward, like some of our peers have. So that's also an important differentiating point. With respect to your other question on the path to the dividend being reinstated, so obviously the leverage is kind of a key gating item for us, is somewhere between two and a half to three times, which primarily means you're at an EBITDA level, which is roughly at the pre-pandemic level. And then I guess the last gating item would be is you'd want some confidence that we're you know, that there are no additional hiccups and that the business has returned. So a couple quarters on that return to normal under our belt and likely four quarters before we contemplate, you know, reinstating the dividend.

Thank you for this. One last question I have for you is related to employee cost. We saw an increase in the quarter. I mean, your volumes, your attendance is going up, so it's normal to see that increase, but was there any specific items that boosted the cost related to employees in the quarter, or this is a run rate we could use going forward? Thank you.

Yeah, so the run rate was relatively consistent with the Q4 run rate when we had, you know, similar attendance levels. When we look as compared to the prior year, there was about $20 million of wage subsidies in the prior year numbers. So year over year, although it may look like the wage costs went up, it's primarily related to twofold when you do the prior year comparison. It's related to lack of subsidies in the current period and then increased business volume relative to the prior first quarter.

Okay, thank you. Thank you very much.

Thank you.

Thank you. As a reminder, if you'd like to ask a question, you can press star 1 on your telephone keypad. Our next question comes from Drew McReynolds of RBC. Drew, your line is now open. Please go ahead.

Yeah, thanks very much, and good morning, too, for me. obviously a lot of momentum in the diversification business is amazing to see because you guys have certainly prioritized that for a number of years. So, you know, fantastic to see these things scale and be profitable. Wondering if that degree of success may be for you, Gord, you know, as you kind of look forward when your balance sheet is normalized and You know, you're kind of fully back to normal. How is the success of these businesses influencing your capital allocation decisions kind of through that median term? And then secondly, just, Gordon, can you remind us from the SEEM program? I know accounting has evolved significantly. you know, over the last few years, in terms of that program increasingly becoming a profit center, how does that kind of flow through to the overall Citiflex profitability?

Thank you. So thanks, Drew. So first of all, on your first question is on capital allocation. And, you know, I think as we've said over the past number of years is that, you know, when we look at sort of our typical roughly around $100 million sort of run rate in a normal business type scenario is that we would look to allocate more of our capital towards the LBE business. We have 13 that are open right now. We've said we believe that there's opportunity to build about 30 of those across the country. So, you know, as we look forward is, yeah, it's capital allocation. We're prioritizing LBE and, you know, and spending where appropriate and required in the exhibition business. And as you can see, the returns are really paying off in those decisions. So on your second question, so with respect to scene then, is with the new structure of scene, scene plus is we now equity account for our interest in scene. So it's an equity pickup rather than a proportional consolidation. We, obviously, from the Cineplex side of things, when we, and I'll, sorry if I'm getting too accounting, but I know you're accounting, Drew. And you'll see in our other operating expenses is that we have seen loyalty points. And so that's the marketing loyalty points, and that's our cost of issuing those points. You know, so those will always be there. And then there's an additional item for related to C, which as we said historically, is that's really more of a transitionary type of expense. And that's, you know, we would expect that to go away probably in another year, within another year. But the ongoing operations are going through equity income.

Okay. No, that's very helpful. Thank you. Thank you.

Thank you. At this time, we have no further questions, so I'll hand back to Alice Jacob for any further remarks.

Thank you all again for joining the call this morning. We look forward to connecting with you again on Wednesday, May 24th for our annual and special meeting. Have a great day and see you at the movies.

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