Cineplex Inc. (CGX) reported a modest increase in its first quarter 2024 box office revenues, achieving $125 million, up 1.4% despite a 5.2% decline in the North American box office. The company also highlighted a record Q1 Box Office per Patron (BPP) of $12.74 and concession per patron of $8.95.
A comprehensive refinancing plan was successfully completed, raising $575 million and selling P1AG for $155 million, enhancing financial flexibility. With a strong pipeline of upcoming films and growth initiatives, Cineplex is optimistic about future prospects, expecting to return to pre-pandemic performance levels and generate significant free cash flow.
Key Takeaways
- Cineplex's box office revenue increased by 1.4% to $125 million in Q1 2024.
- Achieved record Q1 BPP of $12.74 and concession per patron of $8.95.
- Completed refinancing, raising $575 million and sold P1AG for $155 million.
- Optimistic about a strong film lineup, including "Kingdom of the Planet of the Apes" and "Despicable Me 4."
- Expects to reach pre-pandemic attendance and EBITDA levels with incremental EBITDA contribution per guest between $12 and $13.
- Plans to expand LBE business with 14 additional locations and double its EBITDA contribution.
- Digital media revenue grew by 38% year-over-year in the fourth quarter.
- Litigation expenses are high but expected to decline in future quarters.
- Online mobile ordering service shows early success with potential to increase concession sales.
Company Outlook
- Cineplex is focused on long-term shareholder returns with a strong film lineup for 2024 and 2025.
- Target leverage set between 2.5x to 3x before increasing shareholder returns.
- Confidence in achieving pre-pandemic adjusted EBITDA levels and generating over $100 million of free cash flow.
Bearish Highlights
- North American box office experienced a 5.2% decline.
- Adjusted EBITDA decreased to $4.6 million due to strikes and legal costs.
- Litigation expenses related to a competition bureau lawsuit impacted earnings.
Bullish Highlights
- Strong box office performance in India and France, nearing pre-pandemic levels.
- Positive sentiment from studios about the future of cinema.
- Commitment from streaming platforms to produce content that enhances the cinema experience.
Misses
- Despite an increase in total revenue, there was a decrease in adjusted EBITDA.
Q&A Highlights
- The company will review demographics to decide between building a Rec Room or a Playdium.
- Digital media revenue expected to continue growing with additional networks.
- International film content expected to grow from historical 2-3% contribution.
- Litigation expenses are high but anticipated to decrease in subsequent quarters.
- Online mobile ordering has shown positive early results, with potential for growth in concession sales.
Cineplex Inc. remains committed to enhancing the cinema experience and capitalizing on strategic growth opportunities. With a strong lineup of films and initiatives to expand its LBE business and digital media presence, the company is poised to navigate industry challenges and deliver value to shareholders.
Full transcript - None (CPXGF) Q1 2024:
Operator: Good morning. Thank you for attending today’s Cineplex Inc. First Quarter 2024 Earnings Call. My name is Jennifer and I will be your moderator today. [Operator Instructions] I would now like to pass the conference over to our host, Mahsa Rejali, VP of Corporate Development and Investor Relations. Mahsa, please proceed.
Mahsa Rejali: Good morning, everyone. I would like to welcome you to Cineplex’s first quarter 2024 earnings release conference call hosted by Ellis Jacob, President and Chief Executive Officer and Gord Nelson, Chief Financial Officer. Before we begin, 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 information currently available. Actual results may differ materially from those expressed in the forward-looking statements. Information regarding factors that could cause results to vary, can be found in the company’s most recently filed Annual Information Form and Management’s Discussion and Analysis. Following today’s remarks, we will close the call with our customary question-and-answer period. I will now turn the call over to Ellis Jacob.
Ellis Jacob: Good morning. Thank you, Mahsa and welcome to our Q1 2024 conference call. Today, Gord and I look forward to highlighting some of our key accomplishments this quarter. While the first quarter North American box office saw a decline of 5.2% versus 2023, Cineplex’s box office increased 1.4% to $125 million over the same period. Once again, we exceeded the domestic box office relative to Q1 2023 by a sizable 6.4% and outperformed our peers. We achieved record Q1 BPP of $12.74 and concession per patron of $8.95 surprising records we set in Q1 2023. While an anticipated shortage of films impacted the start of the year, given the prolonged disruption from the Hollywood strike last year, 2024 began on a more positive note than expected. This quarter, we not only exceeded our box office projections, but also surpass market expectations. Cineplex’s top three films during the quarter were Dune: Part Two, which generated over $280 million in domestic box office revenue to date, Kung Fu Panda 4 and migration. Cineplex delivered strong performance across all three titles over indexing the domestic box office in each instance. Furthermore, Cineplex continued to benefit from the strategic management of international content with three titles ranking in the top 20 films. Fighter, Warning 2 and Shaitaan contributed meaningfully to our box office with Cineplex capturing significant market share ranging from 30% to 80%. In addition to achieving industry-leading results, our focus remains on executing important corporate actions designed to reduce leverage, improve financial flexibility and position Cineplex for accelerated long-term growth. In February, we successfully closed the strategic sale of P1AG for $155 million in gross cash proceeds and recognized a gain of $67 million, a testament to the success of our diversification strategy. The net proceeds were used to repay bank debt serving as a pivotal catalyst to commence a comprehensive refinancing plan which we also successfully completed in the first quarter. This refinancing plan was meticulously crafted to deliver three key benefits for our company and shareholders, extending debt maturities, easing restrictions and minimizing potential dilution from existing convertible debentures. Our new 3-year note offering of $575 million had robust demand surpassing $2 billion across North America, a clear testament to the remarkable confidence the market has in our business plan and team. Now with our strengthened balance sheet, we are focused on executing our growth initiatives and shifting our capital allocation priorities to support enhanced shareholder return. I’d like to highlight some of these key initiatives that continue to differentiate us from our peers. The first is our ongoing investment in LBE, which is a profitable and successful business with attractive store level margin in excess of our 25% target. The Rec Room and Playdium brands feature a variety of food and entertainment offerings appealing to an attractive demographic. We entered the business in 2016 that we saw an opportunity in Canada with no other national competitor in the market operating at scale. This first mover advantage served us well and positions us as a leading Canadian player. Our expertise in multiunit retail locations and our customer database who seen helped us extract significant synergies within our business and create an overall entertainment destination for Canadians. Currently, we operate 13 LB venues strategically positioned in key markets with an additional three locations opening in the fourth quarter of this year. Among these, the new Playdium venue will be added to the Greater Toronto area adjacent to the Cineplex Cinemas Fairview Mall. We will also open two new venues of the Rec Room, a Marquee location in downtown Vancouver and other in the exciting Royalmount development in Montreal. Given the success of our LBE business, we believe there’s an opportunity to grow to 30 locations across Canada. This expansion has the potential to double the store level EBITDA contribution from the LBE business to approximately $75 million. By fortifying our leadership position in the market, we have good runway to further grow in the highly accretive, high-margin business and strengthened our position as a leading entertainment destination for Canadians. Our media business is also expanding as Cineplex Digital Media signed two important deals in the quarter. with Cadillac Fairview and Cominar, growing our digital out-of-home shopping network to 94 premium shopping centers, which includes 9 of the country’s top 10 busiest malls. We now operate and have media representation agreements for more than 1,000 screens and malls across Canada. Cineplex Digital Media is also working closely with retailers looking to innovate their in-store experience with digital displays as a way to inspire and engage shoppers throughout their experience. This speaks to the future of retail. Walmart (NYSE:WMT) Canada announced the grand reopening of its Flagship Location At Square One in Mississauga, a first of its kind concept for Walmart globally that will test new technologies and concepts as it modernizes its retail operations. Cineplex Digital Media supported Walmart by building digital signage solutions and integrating them throughout the new store design. These solutions include new digital wayfinding technologies with the goal of being part of an immersive retail experience to enhance in-store shopping. As Cineplex’s Digital Media’s network grows, this positions Cineplex Media as one-stop shop for advertisers looking to reach Canadians through digital out-of-home advertising and in shopping malls and cinema. A key differentiator amongst our peers is that we fully own our cinema media business and retain all the revenue generated from the advertising on our screens. By offering a portfolio of media products, we attract advertising customers of all sizes and drive our revenue per patron to industry-leading levels, almost doubling our peers in the U.S. Not only do our expanded media offerings drive increased results, but our in-house team allows us to retain significantly more of this revenue. Our Cinema Media business operates at an EBITDA margin of approximately 80%, while our U.S. peers retain only a fraction of the revenue stream through an access fee. As attendance continues to grow, we expect further growth in our Cinema Media business. What makes cinema advertising so compelling is its attention power. The first-ever Canadian Cinema Advertising Attention study was conducted in partnership with Lumen, a global attention technology company. Marketers and advertisers are becoming increasingly conscious of the challenge in capturing an audience’s attention due to online information overlap. This study shows ad plane and cinemas are virtually unmissable, 100% of cinema audience is not only viewed the ad but also paid an average of 80% active attention to the advertising content on the big set regardless of the ads length. It also demonstrates an average brand recall of 75% with audiences being 35% more likely to choose those brands as a result of exposure in cinema. As the advertising sector continues to recover, we know Cinema advertising provides a compelling ROI to clients and on our team is well positioned to capitalize on. As I mentioned earlier, we consistently surpassed the industry box office results and outperform our peers. In March alone, we exceeded the North American box office relative to 2023 by nearly 30%. This consistent outperformance is a direct result of our relentless efforts to elevate the guest experience and drive increased attendance and frequency through our alternative content and premiumization initiatives. We are at the forefront of bringing diverse content to movie lovers and the box office has been responding. This past quarter, 13% of Cineplex’s box office revenues came from international cinema, and this continues to be an important content play for us to expand our offerings. When guests visit a Cineplex theater, not only do they have a variety of content to choose from, they can also choose to upgrade and optimize their movie going experience. In this quarter, 41% of box office revenue came from premium experiences like IMAX (NYSE:IMAX), UltraAVX, 3D and VIP. Cineplex’s VIP in particular, has been extremely successful and not many of our peers have been able to duplicate this offering. Continuing our commitment to premium experiences, we are adding IMAX, ScreenX and UltraAVX screens an upgrading to laser projections this year, further enhancing our portfolio and solidifying our position as leaders in the industry. We pride ourselves on giving guests a conceptional experience when visiting our theaters. And now we are also making their movie going experience a more seamless one with the introduction of online and mobile concession ordering. When purchasing tickets on the Cineplex app or online, guests can add their favorite concessions to their cart and easily pick them up on their way to their seats. We’re also creating operational efficiencies through data, automation and technology. We’ve shared in the past how we use data to attract and retain guests. We are also leveraging advanced data analytics, automation and technology to create operational efficiencies across our business. Using these two helps us create more accurate attendance forecast models that help us anticipate business volumes and more precisely planned staffing levels. I also want to provide a brief update on the Competition Bureau’s allegations regarding our online booking fee. We presented our case before the competition tribunal in February. We note that the Competition Bureau is not contesting our rights to charge the online booking fee. It is only contesting the manner in which we presented the fee to consumers. We strongly believe we have complied with both the letter and spirit of the law and that the Competition Bureau allegations are unfounded. We await the Competition tribunal’s decision in the coming months. Before I pass it on to Gord, I want to touch on last month’s CinemaCon, our industry’s annual trade show and meetings, the Executive Committee of the Global Cinema Federation had with studios and the directors and producers deals. The feedback was extremely encouraging as every studio and the [indiscernible] about the return of product and the importance of theatrical to the overall success of content. As studios unveil their film lineup for the next 1.5 years, the emphasis at CinemaCon and in our discussions was on the immense value of theatrical releases. One resounding message from our studio partners with their commitment to both volume of film release and quality of content on the horizon. With the Hollywood strikes resolved and major players like Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), meaningfully leaning into theatrical, our optimism for the box office in the latter half of the year and beyond is growth. In fact, over 30 new firms have been added to this 2024 pipeline since December 2023. We are starting to see a buildup of content with exciting titles such as Kingdom of the Planet of the Apes, [indiscernible] Garfield, Furiosa, A Mad Max Saga, Inside Out2, A Quiet Place Day One, Despicable Me 4, Twisters and Deadpool and Wolverine. In the back half of the year, the slate further strengthens with titles like Beetlejuice, Moana 2, Joker: Folie a Deux, Wicked, Gladiator 2, The Lord of the Rings: The War of the Rohirrim, Sonic the Hedgehog 3 and Mufasa: The Lion King. Looking ahead to 2025, we already see a robust full slate on the horizon, including another Jurassic World, Superman Legacy, the next installment of Mission Impossible, Ballerina from the John Wick Universe, Captain America: Brave New World, Minecraft: How to Train Your Dragon Live-Action, Fantastic Four, The Bad Guys 2, [indiscernible] Blade, Snow White, Avatar 3 and many more. With this exciting lineup, we are returning to a consistent flow of new and diverse phones landing on screens each week, and we are energized by the potential box office ahead. Our recent refinancing has well positioned our company to drive growth and effectively navigate prerelease [indiscernible] of reduced some volume. We remain confident in our disciplined and balanced approach and in the successful strategic initiatives we’ve achieved so far. We have meaningful potential upside as we expand our LBE business and grow as an industry-leading, diversified entertainment and media company. We are optimistic about the future and our ability to drive long-term shareholder return. With that, I will turn things over to Gord.
Gord Nelson: Thanks Ellis. I’m pleased to hear that the condensed summary of the first quarter 2024 results for Cineplex Inc. for further reference, our financial statements and MD&A have been filed on SEDAR Plus and are also available on our Investor Relations website cineplex.com. Our MD&A and earnings press release include a complete narrative on the operational results. So, I will focus on highlighting select items, including providing commentary on the gain on sale [indiscernible] debt and our outlook. For my comments on operations, all amounts – sorry, amount following will be from continuing operations unless otherwise stated. As Ellis mentioned, and you are all aware, our first quarter results were impacted by the actors and writer strikes, which delayed the release dates of a number of key titles. Notwithstanding, our total revenue increased 1.2% to $295 million. However, our adjusted EBITDA increased to $4.6 million in 2024 as compared to $11.4 million in 2023, primarily due to minimum wage increases and legal costs in the quarter related to the competition bureau lawsuit against Cineplex. Let’s take a closure look at our segments. In the Film Exhibition and Content segment, attendance was flat at approximately $9.8 million. Total revenue increased 1.7% and segment adjusted EBITDA decreased $1.5 million, primarily as a result of minimum wage increases. We are using data, automation and other initiatives to mitigate the impact of these increases going forward. In the Media segment, as we mentioned previously, the Cineplex Media business model post pandemic has shifted to a CPM-based model. The Media segment revenue was flat at $22.1 million and segment adjusted EBITDA was down slightly by $0.8 million to $8.3 million. Cinema Media revenue was impacted by shifting release schedules and some pandemic-related commitments, which were utilized in the prior year quarter. Our digital place-based media business had strong results with total revenues up 24% to $9.9 million, primarily as a result of the addition of Cadillac Fairview to our shopping mall network beginning in 2024. And lastly in our LBE segment, revenues were down nominally to $34.5 million from $35.1 million in part due to the inclement weather experienced across parts of North America during the first quarter, which resulted in some location closures due to extreme conditions. Store level adjusted EBITDA margins for Q1 2024 was 28.1% continued to exceed our target of 25%. With the closing of the P1AG transaction in Q1 2024, we recorded a $67.3 million gain during the quarter, which is detailed in Note 2 to the financial statements. I’d like to point to two things related to the gain. First, the gain is included in net income from discontinued operations. And secondly, as a reminder, we will use a portion of our non-capital losses to shelter any cash taxes payable resulting from the game. Also, during the quarter, we executed and included our comprehensive refinancing plan. This plan has three key initiatives: Objective one was to meaningfully extend debt maturities. Results, we now have senior secured notes with the maturity of 5 years and an amended convert offering with a term of 6 years. Objective two was to reduce restrictions in post debt covenants. The results, the repayment in full of the existing bank credit facility and the replacement with a $100 million revolver with a covenant-lending structure. And finally, objective three was to reduce the potential equity dilution from the existing convertible debentures. The results, the amendment and principal repayment resulted in a reduction in potential equity dilution of just under 8 million shares or just under 28% of the potential equity dilution of the existing converts. Our well-executed plan was a bold move to strengthen the balance sheet for the future. P&L shows a loss of approximately $54 million of the refinancing, which is primarily related to the treatment of the convertible debenture amendment as an extinguishment of debt. At year-end, the carrying value of the convertible debentures was $272 million versus a face value of $316 million as a component was included in equity on original issuance – of the $54 million loss on extinguishment of debt, approximately $43 million was related to non-cash items, including this convert item. And finally, back on the P&L, net income has increased to $5.2 million from a loss of $30.2 million in 2023, primarily due to the aforementioned items. I would now like to move on and speak to our balance sheet and, in particular, our liquidity position. At quarter end, we had $92 million in cash and nothing drawn under the covenant-like credit facilities, which have had capacity of $100 million. As I mentioned earlier, was the comprehensive refinancing plan, one of the objectives is to remove restrictions related to covenant testing, and no testing was required under the credit facilities that quarter. As we have mentioned previously, our capital allocation priorities include maintenance capital expenditures, continuing to strengthen the balance sheet to achieve our target leverage ratios, investing in growth opportunities and providing shareholder returns in the form of dividends and/or share buybacks. With respect to CapEx for the quarter, we had a net CapEx of $13.2 million versus $12.2 million in the prior year. Three LBE locations and one theater location under construction and to be opened in 2024, we are currently estimating net CapEx for 2024 of approximately $80 million. As we look forward in years where we would be bringing on three additional LBE locations and other growth initiatives, we would expect net CapEx to be approximately $80 million including approximately $30 million in maintenance CapEx. Our LBEs continue to deliver results in-line with our targets [Technical Difficulty] and such growth CapEx will continue to be allocated towards the LBE business. Now I’d like to take a few moments to consider the future. I want to revisit the world we’ve described during our past analyst calls this is a world where we achieve or exceed pre-pandemic adjusted EBITDA levels on 75% to 80% of pre-pandemic attendance levels. With no near-term cash taxes due to the NOLs, we would generate in excess of $100 million of free cash flow due to our business model and use this free cash flow to invest, de-lever and provide shareholder returns. With the confidence coming out of CinemaCon as Ellis has described, the long-term view for exhibition is solid, and we believe the world that I’m describing is real and coming soon commencing in the back half of this year. We see a continued path to hitting our leverage target of 2.5 to 3x and reintroducing shareholder returns, including share buybacks and/or dividends. In summary, we believe there’s a lot to be excited about. And with that, I would like to turn the call over to the conference operator for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Maher Yaghi with Scotiabank. Maher, your line is now open.
Maher Yaghi: Great. Thank you for taking my question. I wanted to – maybe if we can have a discussion on your expectation for movie releases in Q2, Q3, Q4. Since we started the quarter, as you mentioned this morning, slightly on the weaker side, how should we think about conversion of attendance to revenues to EBITDA as the year progresses? And as a follow-up, you indicated your expectation for additional expansion of some of your opportunities on the entertainment side. Any indications on what that will implicate in terms of CapEx? Thank you.
Ellis Jacob: Okay. I’ll answer the first part of the question, and Gord, I’ll turn it to or to you on the CapEx for the LBE side. The product, to me, looks extremely strong, especially in the back half of 2024. We have strong movies coming out with Planet of the Apes, on Friday, and we’ve got IF from Paramount, Garfield, [indiscernible] all that in the month of May. And then in June, we’ve got Inside Out 2, which I think will be one of the larger movies for 2024. We’ve got a Quiet Place also for Paramount. So, there’s a lot of product to look forward to. And the back end is even much stronger and what we see is a lot of movies being put into the slate as we move forward. And it’s the reverse to COVID when things were being pushed out. Now they are being pushed in, which is overall strong for us. In July, we’ve got Despicable Me 4. We’ve got Twisters. We’ve got Deadpool 3, then going through to the balance. We’ve got Beetlejuice, Transformers, The Wild Robot, and then November, you’ve got a big slate with Gladiator, Wicked and Moana. And then we end the year with some strong firms like Lord of the Rings, Karate Kid, Mufasa: The Lion King, Sonic: The Hedgehog and Nosferatu. So, I’m pretty confident that the product is coming back and it’s going to be strong. And one of the things when we did our global cinema presentations and met with the studios and the [indiscernible], some countries like, for example, India and France, in 2023, India did 99% of its 2019 box office and France did over 90%. So once the content is there, our guests want to come back and have that experience. I hope that helps.
Gord Nelson: And then on your second question, I just want to remind us that I think, Maher, you’re talking about attendance and the contribution to EBITDA. I just want to kind of remind people that you use sort of the 2023 metrics that each incremental guess contributes between $12 and $13 in EBITDA. So huge operational leverage there. And that’s why we see the path to get it back to pre-pandemic level – on 75% of premium [Technical Difficulty] on your question really.
Maher Yaghi: Maybe, Gord, just maybe before we talk about the CapEx question. I think the investors I’m speaking with trying to figure out what is the run rate of the business that can be sustained now that with past call that we passed COVID, we’ve passed the Hollywood studio strike, etcetera. What is your view on what the company’s operational performance could look like on a steady-state basis on the top line and the EBITDA line?
Gord Nelson: Yes. So, look, I think the question is, and if you look what the last year’s numbers as an example, which we had total EBITDA of $157 million in a constrained sort of media market. So, there’s lots of upside in the market – and from the media side. But if you looked at the incremental – the number I gave with respect to incremental contribution of each somewhere between $12 and $13. And potentially, if you’re up to 80% of the pre-pandemic a level, that will be 53 million people versus 48 – roughly 48 million last year. So, 5 million additional guests at $12 to $13 is $60 million to $70 million of incremental EBITDA, so you take that on top of the $157 million and you’re in a $220 million-$230 million range, which is in excess of where we were pre-pandemic. So, we kind of see that path coming. And as I mentioned in my remarks, I see that world commencing in the back half of this year and into – so that’s around where we believe kind of this era run rate as it will be. And then it’s incumbent enough to find other reasons why people want to come together that we can potentially increase the attendance above that 75% to 80% level.
Maher Yaghi: Great.
Gord Nelson: Then second question on CapEx is at the end of this year, we’ll be up to about 16 LBE out there. We’ve communicated that they have plans to – where we think there’s opportunity for about 30. So that’s 14 additional locations. We’ve kind of communicated on a potentially in average cost of $10 million, so that’s $140 million to ramp up to that full capacity, which will double the EBITDA contribution from that business. In my comments, I mentioned about would we do about three a year. That’s probably around where we would be and not kind of world, but we’d be at levels of around $80 million CapEx, I will suggest that next year, we don’t have three that we’re committed to and we’ll be opening. So, it will be a little bit less than that in 2025, but could ramp up to that number as we kind of that roll out – 4 to 5 years.
Maher Yaghi: Great. Thank you.
Ellis Jacob: Thank you.
Operator: Thank you. Our next question comes from the line of Cheryl Zhang with TD Cowen. Cheryl, your line is now open.
Cheryl Zhang: Hi, Ellis. Thanks, Ellis Jacob, Gord. This is Cheryl standing in for Derek, who’s on another call. So, thanks for taking my question. Our first question is around the LBE business. So, in addition to the weather impact, you were locking a pretty tough comp on both the top line and margins last year. Could you just remind us why it was so strong last year? And I think in the M&A, you alluded to the strength that you saw at the end of this quarter. Is that carrying into Q2? And maybe just how you see it developing over the rest of the year?
Gord Nelson: Yes. So, first of all, the top line is relatively in line despite the inclement weather this year. Last year, in the first quarter, we did make – we have provided some commentary that the EBITDA margin benefited from certain one-time items last year and was roughly 35%. And as we have described, our expectation is to be at 25%. We were above that for the full year last year, and we have been above that for the first quarter. So, it was really that there were some sort of one-time benefits that were reflected in last year’s, which included some items related to kind of labor being kind of over sort of underutilized or over constrained, I guess during the quarter that really made the first quarter last year more of an anomaly.
Cheryl Zhang: Okay. Thanks. And curious how you see it evolving for the rest of the year, like in terms of the top line and the margin?
Gord Nelson: Yes. So, I mean we – one thing about the LBE business, as we mentioned last year too, is as anything in Canada, it’s a beautiful day in Toronto here. But as weather – as we suffered from bad weather, because we can’t open when weather is strong and good in the spring time, people don’t want to be inside. So, depending on that, we have great weather at weekend, that can hurt the overall results, and we called that out last year during the second quarter, which has impacted that. But we continue to work on over the course of the year, we see the average unit volumes of $10 million and that we have an EBITDA margin in excess of 25%. So – now you will see the three locations coming on likely in the fourth quarter and typically serve out of the box. As we have training and other things is they may not hit their margins right down with the box of few ones. But the only one – sort of the existing ones, we expect to continue on the trajectory that that doesn’t exceed our targets for the course of the year.
Cheryl Zhang: Okay. Thanks. That’s very helpful. And maybe just one more before I go on [ph] queue. Could you remind us again around your plan for increasing shareholder returns and more specifically, maybe on the timing and the prerequisites to do so? And also, is there a preference when it comes to dividend versus share buybacks or – and also considering the LBE investment. Just curious how you prioritize or secure on that balancing yet? Thank you.
Gord Nelson: Yes. Thanks Cheryl for that question. And so, we have been pretty clear in our communication and just reinforce it again, is our focus is to get into our target leverage of 2.5x to 3x. And I described sort of the world that we see that we are going to get into in the back half of the year and into next year. The question for all of us is really how many sustaining quarters do people want to see what we are in that zone, probably a minimum of two, I would suggest and which probably puts us into the beginning of next year. So, we will continue to monitor and evaluate and with respect to a decision of do we do dividends versus share buybacks, I think that would be based on sort of where the share price sits at that point in time. Right now, we would evaluate what either of those options. And then the last part of your question, I just want to make sure that in the world that I communicated, we would have $100 million of free cash flow. That already includes investing in three LBEs. So, I want to make that clear that the LBE investment does not – we do not believe that will constrain us in the short-term from considering a returning capital as we [Technical Difficulty]
Cheryl Zhang: That’s very helpful. Thank you, Gord.
Operator: Thank you. Our next question comes from the line of Drew McReynolds with RBC Capital Markets. Drew, your line is now open.
Drew McReynolds: Yes. Thanks very much and good morning. Just sticking with the LBE expansion in the 14 locations, Gord, you alluded to. I am just wondering, as you build those out, the nature of those locations, are they kind of materially different than what the first kind of 16 would be? And are you able to – with some additional scale squeeze out some additional profitability? And then the second question, just on the outlook for CDM. How do we – I guess, having for specific quarterly guidance, how do we model this? I know you have two disclosed revenue streams, the project revenues and other revenues. Just how much of the overall kind of growth here will be so-called recurring versus one-time? Just any help on time on that would be great. Thank you.
Ellis Jacob: So, Drew, on the amusement and leisure side of the business, as you know, every time we have opened one of these locations, we learn a great deal as to how do we better our overall square footage, what our returns are going to be and depending on the marketplace. And as Gord said earlier, we basically have to make sure that it’s in a location. It is financially strong for us as we move forward. So, yes, we would like to get to 30%, but that’s not going to happen overnight. It’s going to take a bit of time because as we have seen the locations that we have really make a difference as to the guests coming and enjoying the experience. So, we will continue to review that and look at the square footage depending on the demographics in the area we are building and choose between whether we build the Rec Room or a Playdium in the communities that we are going into. I will turn it over to Gord to talk about CDM.
Gord Nelson: Yes. Thanks Ellis. And just to add on, like I think we have clearly learned. I think the size of the Rec Room doesn’t need to be as large as those initial ones that were deployed. So, we are constantly learning and refining the box as we go forward. And there are significant synergies between the learnings that we are seeing in the Rec Room and then the theaters, too. So, food service as an example, is one that kind of extends is the connection we are seeing that we can drive entertainment customers into box. So, significant synergies between kind of the [Technical Difficulty] business and the theater business. And then, of course, the obvious one is the junction concept, which is we are basically taking and LBE and the theater and putting in to one box, so great opportunities there. On the question on digital media then, so this is what I am kind of excited about because we took over Cadillac Fairview and Cominar in the first quarter. If you look at the split between project revenue and other revenue, which is – which includes the media advertising revenue, during the fourth quarter, you will note that, that increased 38% year-over-year, so the other revenue. And then the other thing that you need to remember is that we only started selling those additional networks beginning January 1. And there is always a little bit of a lag and a slowdown when you take over a new network because you need to communicate that you are at the agent of record for that network. So, you are not ramped up to a full potential in those early periods. So, as you look forward, the project revenue can be a little bit lumpy, depending on who is deploying and who is not deploying. But that 38% growth in other, I would suggest is that has a ramp-up to where we are going to be, and it’s going to be 50% or more as we go forward, given the additional networks that are out there.
Drew McReynolds: Okay. That’s helpful, Gord. Thank you for that. Maybe one last one here, maybe back to you, Ellis, you have done such a great job on the international film side of the equation and obviously, 13% in Q1, it contributed. Historically, and I guess let’s talk pre-COVID, what kind of contribution apples-to-apples, would you say this kind of category of a film product would have been contributing?
Ellis Jacob: Yes. Historically, we won the 2% to 3% range as far as international content, and that has continued to grow. And we are using all of our data and all of the information we have available and the relationships with the distributors for those films, and they have really helped grow the business nicely in Canada and to foresee that will continue.
Drew McReynolds: Thank you.
Operator: Thank you. Our next question comes from the line of Adam Shine with National Bank Financial. Adam, your line is now open.
Adam Shine: Hi. Thanks a lot. Good morning. A couple of questions, Gord, when I look at the other line in other OpEx, can you just elaborate a little bit, I see what’s there at Cineplex Pictures store and some other stuff, but it did move up quite a bit in the period. Is that more related to do with some of the international activities that you might be bringing in via Cineplex Pictures, or are there other things that might be one-time in nature in the particular period?
Gord Nelson: Yes, Adam, that’s one time in the prior year. So, if you go back 2 years, you see it kind of more along with that number. In the prior year, there was kind of a retro adjustment related to – primarily related to see that impacted the other revenue and the other about the same magnitude. So, it was really – that’s the issue.
Adam Shine: Perfect. Thanks for the reminder. And then maybe, Ellis, just can you talk – I know you have already talked quite a bit about the movie slate. But more specifically, we have seen a number of the studios releasing results recently. Some of them are sort of rethinking their output going forward with obviously try to improve some of the quality that we have seen in the last year or 2 years. Maybe you can address some of the commentary that you have heard things that you might have already heard at CinemaCon in regards to some of the strategies regarding output going forward. And of course, you have mentioned many times that the streamers are waking up to the opportunity to put out more product and we are actually starting to see a bit more of that in recent quarters. Maybe just elaborate on any updates? Thanks.
Ellis Jacob: Yes. I have to tell you, Adam, it was very, very positive. And all the Global Cinema Federation, which Cineplex is part of on the Executive Committee, we met with a number of studios and a couple of the gills [ph], and they were all very positive about product and what the future is going to look like. And they have come to the conclusion which we all knew that the cinema experience is the engine that drives the train. And to me, that is very important. And Disney reiterated that, Universal did. So, I think once the shackles are off and we are behind the COVID and the strikes, you are going to see a lot more content coming through. And I also said previously in countries where the content was there, they were close to 100% of their 2019 numbers. And as Gord mentioned, if we even get back to 80% of the attendance, which is very possible and even better, we will be better than where we were in 2019 from an EBITDA perspective.
Adam Shine: Okay. Thank you very much.
Ellis Jacob: Thank you.
Operator: Thank you. Our next question comes from the line of Derek Lessard with TD Cowen. Derek, your line is now open.
Cheryl Zhang: Hi. Thank you. This is Cheryl, I am calling again. And just a few follow-ups, one is just for modeling. I want to know there are some ongoing cases, but how should we view the litigation expense going forward from a modeling perspective?
Gord Nelson: Look, so we were in the tribunal phase during the first quarter. So, I would suggest that the expenses will be elevated in the first quarter, and they will decline significantly off of that in the future quarters.
Cheryl Zhang: Okay. Thanks Gord. And then the last one for me is just are there any wins or takeaways that you can point to now that you have completed the rollout of the online mobile ordering, any upside that you see from – on the CPP service. Thank you.
Gord Nelson: Yes. So, again, it’s early on, and so the adoption is low, but what we are seeing is that will increase over time. And we are seeing significant lifts on the transactions that are occurring to-date. I don’t want to give you a number right now because it is kind of early days and early adoption. But we are very, very pleased with the results. And as I have mentioned to you previously as we think this is a real opportunity to use data to have personalized messaging to lift sales of concessions and a real opportunity for growth in CPP going forward.
Cheryl Zhang: Great. Thank you.
Operator: Thank you. There are no questions registered at this time. [Operator Instructions] There are no questions registered at this time. So, I would like to pass the call back to Ellis Jacob for any closing remarks.
Ellis Jacob: Thank you very much, and I would like to thank all of you for joining the call this morning, and we look forward to a strong summer and look to speak with you in August for our second quarter 2024 results. Have a great day. Thanks again.
Operator: That concludes today’s call. Thank you for your participation. You may now disconnect your line.
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