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Executives

Pat Marshall - VP, IR

Ellis Jacob - President & CEO

Gord Nelson - CFO

Analysts

Paul Steep - Scotia Capital

Adam Shine - National Bank Financial

Aravinda Galappatthige - Canaccord Genuity

Rob Goff - Euro Pacific Canada

Tim Casey - BMO Capital Markets

Colin Moore - Credit Suisse

Haran Posner - RBC Capital Markets

Cineplex Inc. (OTC:CPXGF) Q4 2013 Earnings Conference Call February 11, 2014 10:00 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Cineplex, Inc. Fourth Quarter Year-End 2013 Conference Call. During today's presentation, all participants are in listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded Tuesday, February 11, 2014, and I would now like to turn the conference over to Pat Marshall, Vice President Investor Relations. Please go ahead.

Pat Marshall

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 Ellis Jacob.

Ellis Jacob

Thank you, Pat. Good morning and welcome to our fourth quarter and year-end conference call for 2013. We really appreciate you joining us today. I will begin the call this morning by providing a top line overview of our full year results followed by a summary of our key accomplishments during the fourth quarter and a look at the film slate this year. I will then turn the call over to our Chief Financial Officer, Gord Nelson, who will provide more specific details on our financials. Once Gord has concluded his remarks, we will hold a question-and-answer period.

Now let's take a look at our full year results. We are pleased to report that 2013 was another strong year for Cineplex as we exceeded prior year results in many key reporting metrics. Total revenues of CAD$1.2 billion were up 7.2% and we achieved a highest ever annual adjusted EBIDTA of CAD$202.4 million.

The results for the year were positively impacted by the acquisition of the 24 Empire theaters and EK3. With our acquisition and integration of Empire we see continued benefits with our national presence and application of best practices to drive increased box office concession and media revenue.

Box office revenues of CAD$665.3 million were up 4.2% over 2012 and outperformed the Canadian industry box office which was lower by 2.8% as a result of a weaker performing film slate and weather challenges during the latter part of the year. However, the Cineplex increase was driven by the inclusion of the full year of the AMC theaters we acquired in 2012 and the Empire theaters we acquired in October, 2013. Box office success in 2013 included Iron Man 3, Despicable Me 2, The Hunger Games: Catching Fire, The Hobbit: The Desolation of Smaug, and Gravity, which were the top five films of the year. The latter three being the top five films of the fourth quarter. Four of the top five films were highly anticipated sequels and with the exception of the Hunger Games were all available in 3D.

The success of these films and our continued expansion of our premium offerings contributed to our premium price experiences delivering a record 38.7% of box office revenue in 2013 compared to 30.9% in 2012. Attendance reached new milestone for Cineplex as we welcomed 72.7 million guests in 2013, which includes the full year of the AMC acquired theaters and two months of the Empire acquisition.

Concession revenues, our second largest revenue source, set a new annual record increasing 6.4% to CAD$350 million versus CAD$329 million in 2012. These results are primarily due to a continued focus on promotional programs with drive purchase incidence and transaction value. The expansion of our menu offerings increased theater service, increased attendance and our continued focus on our retail branded outlets. We reached a record CPP of CAD$4.82 for 2013.

Other revenue generated the greatest growth on a percentage basis in 2013 increasing 24.6%. The largest growth area came from media, which increased 30% over 2012 as a result of a continued growth in our traditional media business as well as across our digital platform within Cineplex Digital Networks and Cineplex Digital Solutions. Our recent acquisition of the digital signage company EK3 Technologies now renamed Cineplex Digital Networks also fueled our strong media gain this year by contributing CAD$10.9 million to media revenues in 2013. Cineplex Digital Networks designs installed managers and consults on some of the largest digital merchandising networks in North America with more than 1.8 billion annual impressions.

Now let's take a look at some of the accomplishment that occurred during the fourth quarter. In Exhibition, with the completion of the Empire acquisition in Atlantic Canada Cineplex is the only Canadian exhibitor ever to have a truly coast-to-coast presence. By year-end, the Cineplex circuit included 161 theaters with 1,630 screens across Canada.

Our premium entertainment offerings have one key aspect that sets us apart from other exhibitors and provides our guests with a variety of entertainment choices. As mentioned earlier, given the acquisitions and the tremendous success in this area we continue to expand our premium offerings by adding five UltraAVX, two IMAX and 90 3D digital screens to our circuit in the quarter.

We also opened our newest theater in British Columbia and a 11-screen Cineplex cinemas in Abbottsford with three VIP auditoriums and a licensed lounge. This brings our total VIP cinemas to eight as of December 31st. Subsequent to year end we opened VIP cinemas at our flagship Cineplex cinemas Queensway location in mid-January. This location features our new VIP cinema concept with extra large premium seating, a spacious licensed lounge and a broad menu including wine and cocktails. Performance since opening has been very encouraging.

We plan to open more VIP cinemas in the next few years and especially within the GTA. Our plans include renovating Cineplex cinema the undone outs to add five VIP auditoriums which will open in May. The Shops at Don Mills and the downtown Markham development are both scheduled to open in the second half of 2014 and SilverCity Yonge-Eglinton Cinemas will also add VIP cinemas scheduled to open in 2015.

In Merchandising, during the quarter we opened our first stand-alone food service business YoYo's Yogurt Café at the Pergola Commons complex in Guelph, Ontario. YoYo's Yogurt Café is a London Ontario based self-serve frozen Yogurt chain of locations throughout the province. Subsequent to the quarter end, we announced our acquisition of a 50% stake in the YoYo Yogurt corporate entity. We will continue to develop opportunity both within and outside the theater with the YoYo's Yogurt brand.

In Media, as previously mentioned, media experience tremendous growth for the full year, but especially during the fourth quarter where our traditional media business generated strong double digit growth. Our focus on securing new clients, getting previous clients to return and generating incremental buys from existing clients proved successful. Our top three advertising categories during the quarter were auto, wireless and electronics.

The addition of Cineplex Digital Networks also had a major impact on the quarter and we will continue to do some moving forward. Subsequent to the quarter end, Cineplex Digital Networks announced the launch of Tims Television, which is one of the largest digital programming networks in the Canadian restaurant and retail sectors. The in restaurant television channel will showcase Tim Hortons' content in a creative, informative and entertaining way in more than 2,200 existing restaurants in Canada. Cineplex Media will sell advertising for the network which provides with our media sales force with yet another national out of home advertising option for clients.

In Alternative Programming, the fourth quarter was filled with a variety of entertainment content ranging from our popular classic song series and family favorites to concerts and the MET Opera which premiered a new season Opera Eugene Onegin. However, the highlights of the quarter was a presentation Dr. Who's 50th anniversary special The Day of the Doctor in 3D. We also played our first Bollywood IMAX movie Dhoom 3 to great results in the quarter.

Moving to Loyalty, membership in the SCENE loyalty program continued to grow in the fourth quarter of 2013. For the full year it added 1 million members and surpassed 5.3 million members. Having launched the program in Atlantic Canada at the time of our Empire theater acquisition and given the program's overall success we expect to see continued growth.

In our Interactive business, we made strong advancement this quarter introducing CAD$2.50 Digital Tuesdays to help us grow our online store traffic and drive incremental visits and higher sales volumes. Also during the quarter, we relaunched cineplex.com and the Cineplex store website with brand new responsive design formats providing customers with a much more user-friendly experience and expanded functionality.

Our Cineplex mobile app continues to remain one of the most popular mobile apps in Canada. At December 31, the Cineplex app had been downloaded more than 8.3 million times and recorded 255 million app sessions.

Now let's leave 2013 and take a look ahead at the film run up for 2014. The Canadian box office has been off to a softer start in the first quarter. However, The Lego Movie which opened this past weekend performed extremely well generating CAD$69 million in North American box office. New openings for the balance of the quarter include Robocop, 300: Rise of an Empire, Mr. Peabody and Sherman, Need for Speed and Divergent.

And looking at the balance of the first half of the year the studios are releasing a strong slate of franchise films with many available in 3D including Captain America, The Winter Soldier, Rio 2, The Amazing Spiderman 2, X-Men: Days of Future Past, A Million Ways to Die in the West, which is a new Seth MacFarlane's film, and Transformers: Age of Extinction.

In the second half of the year there's Dawn of the Planet of the Apes in 3D, Hercules and the new Marvel film Guardians of the Galaxy. We also have the Return of the Teenage Mutant Ninja Turtles and The Expendables 3 all in the third quarter. The fourth quarter brings another installment of the hugely successful series The Hunger Games with Mockingjay Part 1, then The Hobbit There and Back Again, and Ben Stiller's Night at the Museum 3 right in time for the holidays.

On the human capital front, in November, Cineplex was named one of 10 national recipient of Canada's Passion Capitalist Award, an award that recognizes organizations that have achieved long term success by creating passion capital. Given our accomplishments over the last few years our team at Cineplex is deserving of this award. I would like to thank each and every one of employees for their hard work and dedication as we have been recognized as one of Canada's Passion Capitalists, Canada's 10 Most Admired Corporate Cultures and 50 Most Engaged Workplaces.

Together with our strategic business model which has already proven to be successful, a strong balance sheet and the dedication and passion of the team we are very well positioned to continue to deliver strong results in 2014 and beyond.

Now I will turn the call over to Gord. But before I do that I would like to congratulate Gord as the recipient 2014 Best IR by a CFO Award from IR Magazine in the mid-cap category. Thank you for your confidence in Cineplex and our CFO. Gord will now go into the financials in greater detail.

Gord Nelson

Thanks, Ellis. I am pleased to represent the fourth quarter financial results for Cineplex, Inc. For your further reference our financial statements and MD&A have been filed on CEDAR this morning and are also available on our Investor Relations website at cineplex.com.

For the fourth quarter total revenues increased 8.2% to a fourth quarter record CAD$323.2 million and adjusted EBITDA decreased 5.8% to CAD$54.1 million. The results for the quarter were positively impacted by the acquisitions of the 24 Empire theaters and EK3. And although we had success in a number of controllable items such as media revenue and CPP, we were negatively impacted by the weaker film product playing during the quarter and the record share price which impacted share related compensation expense.

Attendance for the fourth quarter was 18.9 million, an increase of 1.6% or 0.3 million over the fourth quarter of 2012. New theaters including the acquired Empire theaters added 1.5 million guests but this was partially offset by attendance decline of 1 million guests at same-store locations due to the weaker film product and CAD$8.2 million decline as a result of closed theaters.

Cineplex's fourth quarter box office revenue increased 4.2% to CAD$177.7 million from CAD$170.5 million in the prior year. New and acquired theaters added CAD$14.6 million to box office revenues offsetting a same-store decrease of CAD$5.7 million. The Hunger Games Catching Fire was our top film generating 14.2% of our box office revenue followed by The Hobbit: The Desolation of Smaug, Gravity, Frozen, and Thor and the Dark World. This compared to the fourth quarter of 2012 where Skyfall was our top film with 15.2% of our box office.

Our average ticket price for the quarter increased to CAD$9.42, an increase of 2.6% over the CAD$9.18 reported in the fourth quarter of 2012. Premium product including 3D, UltraAVX, VIP and IMAX products represented 14.3% of our box office revenue during the fourth quarter of 2013 as compared to 29.2% in the fourth quarter of 2012.

The impact of premium priced product on the average ticket price was CAD$0.90 for this quarter as compared to CAD$0.61 from the prior year. Excluding premium product, our average ticket price decreased 0.6% to CAD$8.52 from CAD$8.57 primarily due to the higher tie of senior attendance mix during the quarter as a result of the strong performance of Frozen.

Concession revenue increased 8% to CAD$93.3 million dollars as a result of 1.6% attendance increase and the 6.2% increase in the concession revenue per patron to CAD$4.94, a quarterly record. RBO optimization, expanded offerings and increased visitation at concession outlet led to the continued strong CPP result.

Other revenues for Cineplex were CAD$52.2 million versus the prior year actual CAD$41.8 million, an increase of CAD$10.4 million or approximately 25%. Media revenue represented 75.1% of Q4 2013 total, and increased CAD$8.4 million or 27.3% to CAD$39.2 million. Media revenue includes CAD$8.3 million relating to the results of Cineplex Digital Networks following the completion of its acquisition on August 30.

Turning briefly for our expenses line items, film cost for the quarter came in at 51.7% of box office revenue, which was slightly above the 51.3% reported in the prior year. Concession costs for Q4 2013 were 21.3% of concession revenue as compared to 20.9% in the prior year. Our retention from concession sales or concession margin per patron increased 5.7% during the quarter to CAD$3.89 from CAD$3.68.

Other costs of CAD$158 million increased CAD$21.7 million or 15.9%. As detailed in our MD&A and press release, the CAD$158 million in other costs is comprised of CAD$48.7 million of theater occupancy expenses, CAD$91.4 million of other operating expenses, and CAD$17.9 million of general and administrative expenses.

I will discuss each of these categories separately. Theater occupancy expenses were CAD$48.7 million for the quarter versus a prior year actual of CAD$45.5 million, an increase of CAD$3.2 million due to new and acquired theaters.

Other operating expenses were CAD$91.4 million for the quarter versus a prior year actual of CAD$75.5 million, an increase of CAD$15.9 million. Major reasons for the increase include CAD$4.9 million increase related to the new and acquired theaters, CAD$7 million increase from the newly acquired Cineplex Digital Networks, CAD$1.5 million increase in marketing costs, CAD$0.7 million increase related to 3D royalties, CAD$0.6 million increase in card costs due to record gift card sales during the fourth quarter, CAD$0.5 million charge related to the conversion to energy efficient lighting systems, which will provide future benefits, and CAD$1.7 million increase in cost related to our e-commerce initiative as we continue to enhance and transition the website and backend infrastructure. Theater level payroll costs represented approximately 35.7% of other operating expenses for the quarter, as compared to 40.9% in the prior year.

G&A expenses were CAD$17.9 million for the quarter, which was CAD$2.6 million higher than the prior year in part due to a CAD$2.1 million increase in long-term and short-term incentive program expenses as a result of the recent operating and stock performance.

Cineplex's share price increased CAD$5.85 or 15.3% during the quarter.

Adjusted EBITDA for the quarter was CAD$54.1 million versus a prior year amount of CAD$57.5 million, a decrease of CAD$3.4 million. The primary contributors to the EBITDA decrease were the weaker film product playing during the quarter and higher stock-based compensation cost related to the record share price.

Interest expense of CAD$4.8 million was CAD$2.7 million higher than the prior year amount of CAD$2.1 million. Contributing to the increase was CAD$1.3 million or 59.7% increase in cash interest as a result of the higher debt balances due to the acquisitions of Cineplex Digital Networks and the Empire theaters, plus the issuance of CAD$107.5 million of convertible debentures in the fourth quarter of 2013.

Non-cash interest increased CAD$1.4 million mainly due to the accretion of the deferred consideration arising on the acquisition of EK3.

The company recorded tax expense of CAD$9.3 million during the fourth quarter of 2013, of which CAD$1.1 million was current tax expense and CAD$8.2 million was deferred. Our blended federal and provincial statutory tax rate was 26.3% in 2013 as compared to 26.2% in the prior year. With the CAD$147 million of non-capital tax losses acquired on the AMC acquisition, we significantly reduced our current tax expense in 2013, and we estimate that there are approximately CAD$43.2 million of these non-capital losses remaining to reduce taxable income in 2014.

Net CapEx is defined as total capital expenditures net of tenant inducements. Net CapEx for the fourth quarter was CAD$15.3 million, as compared to CAD$20.8 million in the prior year. Excluding the acquisitions, our full year net CapEx was CAD$57 million. Of this total approximately CAD$27.8 million came from maintenance CapEx, and CAD$29.2 million from growth initiatives, including new construction CapEx related to additional premium experience rollouts, CapEx at the AMC and Empire location, and CapEx related to new initiatives, including our interactive and digital signage initiatives.

With respect to the two acquisitions, we closed the EK3 transaction at the end of August and the Empire transaction in October. During the fourth quarter we entered into an amended and restated credit agreement increasing our borrowing ability to CAD$400 million, of which CAD$250 million is a revolving facility. Funds under this facility were used to finance the acquisition of the Empire theaters. In addition, during the quarter, we issued CAD$107.5 million of convertible unsecured subordinated debentures. Proceeds from this issuance were used to pay down a portion of the debt borrowed to acquire Empire theaters.

Our covenant leverage ratio at the end of the fourth quarter was 1.13 versus a covenant of 3.5 times. We remain very comfortable with where Cineplex is positioned today. We have a strong balance sheet with a low leverage ratio and a low payout ratio. We are pleased with the closing of the acquisitions of EK3 and the Empire theaters and the new financing structure we have put in place. These transactions are cash flow and EPS accretive and are consistent with the strategic goals that we have communicated over the past several years.

That concludes our remarks for this morning. And we would now like to turn the call over to the conference operator for questions.

Question-and-Answer Session

Operator

Thank you, sir. Our first question comes from the line of Paul Steep of Scotia Capital. Please go ahead.

Paul Steep - Scotia Capital

On Empire, I guess Gord or Ellis, maybe if you could talk just a little bit about the integration progress that's been done so far and where you would see your pacing so far in the progress?

Ellis Jacob

Good question, Paul. We did this acquisition in late October and we spent a great deal of time working on the integration of the Empire theaters. We personally went out and visited the theaters all across Eastern Canada and we see a great deal of opportunity moving forward. We have introduced zoning in certain of our locations to improve the concession per patron on the media side with the integration of the national presence that will continue to evolve as we move forward.

So we look at a lot of opportunities for us in the longer-term. And the systems and processes of integration are now complete and now our focus is really about synergies. And I remember back when we integrated Cineplex and Famous we had the same kind of issues the first few months before we were able to really get moving forward on a stronger footing, and we see that happening as we move forward in 2014.

Paul Steep - Scotia Capital

Should we think about the Q1 and Q2 maybe there is a bit of a lingering effect here just as you ramp up and get through this and then we build towards the end of the year and then into next year, you get some of the longer-term wins? Is that a fair way to think about it, Ellis?

Ellis Jacob

I think Q1 you will see bit of continuation from year-end, but as we get to Q2 and beyond we should be reaching our stride.

Paul Steep - Scotia Capital

I guess on EK3 as well may be talk a little bit about aligning it with the core business and how it sort of merged in in the first I guess with our first full quarter here?

Gord Nelson

Sure, and I'll just step back and talk about the two businesses then. So the existing business we refer to as Cineplex Digital Solutions and EK3 has been renamed as Cineplex Digital Networks. When you think of sort of the transitioning of where we're taking these businesses on a go-forward basis, think of Cineplex Digital Solutions more as the path to purchase. So solutions that are going to be placed in what we would refer to as the path to purchase, the more public places. So the shopping malls, food courts, office towers, sport stadiums.

So we're really realigning and refocusing sort of the efforts at Cineplex Digital Solutions in the path to purchase. And think of EK3 or Cineplex Digital Networks really at the point of purchase. So this is working the retailers from the QSR, the financial institution and the retailer. So where we see the power of these networks is combining the path to purchase with the point of purchase and using some of our mobile strength, interactivity and emerging technology related to the digital signage space. So if you think of how we are transitioning the businesses all I think that's how you should think of it, point of purchases versus path to purchase.

Paul Steep - Scotia Capital

And then the last one from me just on CapEx and maybe expectations for 2014 if, Gord, you can us give your expectation and Ellis maybe talk to where the new business or the new money is going beyond sort of a maintenance CapEx this year whether the concessions, YoYo's, bunch of the other initiatives you've got going on?

Gord Nelson

So just on CapEx then, at the end of the third quarter I provided sort of guidance that we would hit around CAD$70 million for 2013. We came in around CAD$57 million. And there's always there's timing shifts on new constructions, but we're about CAD$13 million less in 2013 than my original guidance. Some of that will fall on to 2014. So we expect kind of maintenance to be in the same range as it was in 2013 just over CAD$27 million in 2013. The premium formats, as was stated previously, will continue in around the CAD$10 million range, construction will be in the CAD$40 million (inaudible). And then on an overall basis we'll also have new initiatives in the digital signage space as well as from the acquisition related CapEx for the Empire theaters. So we would expect that our total CapEx will be approximately CAD$100 million in 2014.

Operator

Thank you. Your next question comes from the line of Adam Shine with National Bank Financial. Please go ahead.

Adam Shine - National Bank Financial

Ellis, you obviously in answering Paul touched on synergies to be extracted from the Empire theaters; obviously you'll have them for a full year as you'll have EK3. Can you maybe talk about some of the other building blocks in terms of driving both revenue and EBITDA into 2014?

Ellis Jacob

Well one of the things that I didn't mention when Paul asked the question is we just recently came to agreement with Scotiabank about naming rights for those eastern Canadian theaters in addition to our partnership on the VIP. So that's going to provide us with additional revenues through 2014 which we would not have had in 2013. We have also with EK3 announced and which we said in our narrative is that Tims Television which will also provide us with a new opportunity to continue to increase our business.

On the media side, as I mentioned, we've got the benefit of having the coast to coast presence and also the digital initiatives that we've got in theater. So that will increase our EBITDA returns on the acquired theaters and it will be much more seamless in the fact that we now basically have control of those assets.

Adam Shine - National Bank Financial

I guess either of Gord -- maybe more for Gord than you necessarily, Ellis, what are the things that the market is struggling with a bit today? I'll be presumptuous about that but obviously the EBITDA missed perhaps due to incremental costs related to acquisition that may be myself and others who properly bake in to our models. But when you look at the go forward EBITDA into 2014 is it unreasonable to extrapolate some of these seemingly added cost from Q4 through the period or do we sort of move forward acknowledging that maybe they were some sort of transitioning costs related to Empire in the Q4 and maybe even EK3 and that your margin expansion is something that we should search with the anticipating in the current year?

Ellis Jacob

Look, whenever we do an acquisition there are additional costs and I'll let Gord talk to the cost side, but I think one thing we have to also focus on is the film slate in the fourth quarter was a lot weaker than in 2012 especially in Canada because last year we had the James Bond movie Skyfall which did extremely strong in Canada and this year we were impacted by certain movies that basically did a lot of money in the U.S. but did not perform the same way in Canada including movies Best Man Holiday which did over CAD$75 million in North America and we did a very small percentage of that. You had a Tyler Perry movie which didn't perform well in Canada and Saving Mr. Banks was also very weak.

And when you look at Oscar movies for 2012 we had things like Argo, Life of Pi, Silver Linings Playbook, the equivalent[ph] movies of American Hustle, 12 Years a Slave did not deliver the same percentages in Canada or the same numbers.

And our full focus moving forward is to become less dependent on Hollywood product which is why we look at diversify away into to the digital signage business, the alternative programming. The Bollywood movie for example in Dhoom 3 which we opened, it didn't do a ton of money in North America but Cineplex in Canada represented closed to 20%. So those are the kinds of wins we are looking for to offset the weaker slate.

And when you look at all the metrics we control we did extremely well when you look at our media business was up, our CPP was up nicely and our BPP was also up even though the base theater of BPP was lower because of the large percentage of kids with the movie Frozen. So I don't think there is a structural issue as it relates to our business. I think whenever you do an acquisition there are additional costs you're going to incur and because you got to start to look at the systems, you got to integrate those systems and move forward. There are also the financing transactions, the time in dollars and I think we are well-positioned to move forward.

Gord, any comments on the cost?

Gord Nelson

No, I mean, Adam, I think the focus on sort of other operating expenses that Ellis described in detail about sort of the initiatives related integrating the Empire circuit. When you look at the increase in operating expenses they went up CAD$15.9 million. CAD$4.9 million of that was related to new and acquired theaters primarily Empire. CAD$7 million was related to Cineplex Digital Networks, and Cineplex Digital Networks had CAD$8.3 million of revenues, contributed during the quarter CAD$1.3 million which was above the pre-acquisition run rate of CAD$4 million. So that was positive.

We identified a number of other initiatives. So CAD$0.7 million in 3D royalties, it was a strong when the 3D product played strong during the quarter then those royalties will go up. There's roughly CAD$3.2 million in marketing and e-commerce initiatives related to the website redesign and backend infrastructure. So those costs get expensed, those are necessarily recurring type positive, you're going to see on a go forward basis.

We invested CAD$0.5 million lighting retrofits which will provide lower utility cost on a go forward basis. So those are few between the integration, the two acquisitions and a number of other initiatives which I would not characterize as sort of ongoing, there's a number of items that created a little bit of your concern in the fourth quarter.

Adam Shine - National Bank Financial

Okay, no, I appreciate that color, and maybe very lastly for Gord. You just highlighted the EK3 contribution 8 minus this or whatever, 8.3 minus 71.39 of EBITDA. What was the Empire EBITDA?

Gord Nelson

Just it was over CAD$4 million, between CAD$4 million and CAD$4.5 million.

Operator

Thank you. Our next question comes from the line of Aravinda Galappatthige with Canaccord Genuity. Please go ahead.

Aravinda Galappatthige - Canaccord Genuity

I have a couple of questions on the Cineplex Digital store. With respect to the streaming and downloading initiative, I wanted to get your thoughts on how the business has tracked your expectations thus far, and what you think you need to do to sort of lift it to the next level? Is it sort of getting the app and more TV models going forward, more promotions, et cetera? I just wanted to get your thoughts on that.

And then secondly, I guess related to that, there's been a fair bit of discussion in the press around various over-the-top platforms, mainly domestic emerging in the near term. I was wondering whether you can talk to your own ambitions along those lines, given the infrastructure that you already have, particularly on the -- in terms of S1 offerings, may be in terms of partnering or on your own. Just what are your thoughts on that?

Ellis Jacob

Looking at the first part of your question on the VOD business we probably had our largest increase in our best quarter in the fourth quarter of 2013. And that, as we mentioned in our script, was largely driven by the CAD$2.50 rental Tuesdays. So we are getting a lot of acquisitions of guests that are now engaging in our website and our apps. So that will continue to grow and we are quite comfortable as to the growth pattern. Again it started small, so the percentage numbers are very high, but we continue to see growth in all of these areas.

As it relates to the S1 comment, it's a little premature because we haven't made any public announcements and at this stage we would like to leave it there. And in Q1 of 2014, we are going to introduce a new digital platform, which will have additional devices and it will continue to engage the guest.

Furthermore, as you noted we did a number of movies where we had super ticket. The Hobbit was the most recent one and was the best performing super ticker where you receive the first Hobbit into your locker and then you receive the movie itself and the then the movie into your locker subsequent to actually seeing it when it's available in the SD. So all of those are businesses in their infancy, which we see continuing to grow. And there's going to be R&D costs like Gord talked about to grow these businesses to where they become major contributors.

Aravinda Galappatthige - Canaccord Genuity

Okay. Thanks for that, Ellis. And just a quick question for Gord, with respect to the minimum-wage increase in Ontario, do you expect that to kind of tick up the numbers for your other operating expenses going forward as well?

Gord Nelson

I mean, with respect to the minimum wage increase, as you know between 2008 and 2010, it was in effect that almost 25% minimum wage increase across the country. When we look at how we combat minimum wage increases, as we looked at technology, we look at operation efficiency, so yes there will be a cost of the minimum wage increase, but we will also look to offset that through efficiencies and use of technology.

Operator

Thank you. Our next question comes from the line of Rob Goff with Euro Pacific Canada. Please go ahead.

Rob Goff - Euro Pacific Canada

I would have two questions. The first would be on the EK3, Gord, where we have seen the growth, the revenues on the quarter. Could you talk to how the pipeline and the trajectory of the growth is lining up there? And as a second question, the film costs were higher on the quarter, as you noted, and you've also noted that does vary depending on the movies. Was that simply a function of the top five movies being a significantly higher proportion of overall traffic?

Ellis Jacob

From reverse order, I guess the answer to your second question is, on the film cost it's largely dependent if you have a number of big monster movies that results in higher film rental whereas in 2012 you had a much more balanced situation as it related to the movies, so that's on the film cost side. And on EK3 I'll turn it to Gord.

Gord Nelson

Okay. With respect to EK3, as you know EK3 works with a number of large multi unit retailers and financial institutions. So some of these rollouts take a number of years to execute and complete. We've recently announced Tim's TV, which is 2,200 in-dining locations. So that pipeline looks very encouraging. And we started to disclose in the MD&A the number of locations that are being served us under the various networks. So in the future you will see the growth in this business from a location perspective.

But as we said, when we acquired EK3, the business has doubled in the last two years and the plan was to double it in the next two years and we still believe that's where this business will end up.

Operator

Your next question comes from the line of Tim Casey with the BMO Capital Markets. Please go ahead.

Tim Casey - BMO Capital Markets

Gord, can you -- or I guess Ellis, can you talk about the priorities you're looking forward to this year? I mean would you say you're more inwardly focused now that you've done those two acquisitions? Or do you think the plan for those acquisitions as largely in place and you are spending more time on both thinking of revenue initiatives and other things like that. Thanks.

Gord Nelson

I think the first thing is integrating the Empire assets, which we got running start on when we acquired the theaters and to get the synergies and benefits as a result of that acquisition because it gives us a really strong presence across the country and it's very complementary to our regular business. So I think that's an important priority and as we mentioned previously with the naming rights and all those kinds of things that we have done which is basically going t be new revenue for us in 2014 as they come on track.

In addition to that the acquisition of the digital signage business it completed a business we were in already and it allows us to be one of the larger players in this business in Canada with some significant clients like Tim Hortons, McDonald's, Wal-Mart and some of the major banks. So it positions us well to continue to grow. So I would hope for 2014 to be a year of growth from the complementary and acquisition of the Empire theaters, looking at media on a total basis including the acquisition of EK3, and our continued focus on the merchandising business. As an overall focus as we continue to work on the ecommerce business again that's not going to be huge returns but it will continue to go as we move forward.

Tim Casey - BMO Capital Market

Thanks for that. As a follow up, Gord, the step up in CapEx this year from let's call it 60 odd to a 100, should we look at that as one time or we're moving towards a new capital intensity run rate for the business?

Gord Nelson

No, it's going to be short term. It's probably 2014, potentially 2015, and then you are going to ramp itself back down. We do have -- as I mentioned earlier, we have some bills that originally scheduled for 2000 where the CapEx would take place in 2013 shifting to 2014 and it was not on the Empire acquisition, we have some other commitments on bills that will take over in the short term of the (inaudible) back down to that level once we approach 2016.

Operator

Thank you. Our next question comes from the line of Colin Moore with Credit Suisse. Please go ahead.

Colin Moore - Credit Suisse

Thanks. Good morning. Maybe I could circle back the margins, but take a more holistic approach, you guys have done a great job of growing absolute EBITDA dollar margin and EBITDA percentage margin has been pretty stable at that 17%. As you (inaudible) on these premium theaters and so forth do you anticipated over the midterm that that margin percentage can also rise or would you anticipate seeing the initiatives and go forward that you can reinvest in the business and we should think about that margin percentage probably being closer to the table?

Gord Nelson

I think it leads to low growth from that margin, the premium experiences will result in a slight lift in margin, but the thing is they will represent a smaller overall portion of the business today. When you look at the digital signage initiatives as we mentioned before that the margin on in digital signage space will be higher than sort of our overall margin today and to the extent that the ecommerce business if takes off that would be a lower margin business, so that will being he margins down. So you have a number of moving parts in where the margins will ultimately be (inaudible).

Colin Moore - Credit Suisse

All right. Thanks and maybe just a refresh on the pricing it looks like in '13, most of the price in and increase is driven on the premium mix and I think you still have some good comparable there heading into '14. To the extent you needed as far as base price increases, do you feel that still a card you can play and had a potential tailwind either this year or in future years?

Ellis Jacob

Yes, Colin, you always know that pricing is our last line of defense and we haven't used it. And as a matter of fact, if you went to a conventional movie in downtown Toronto today the price is lower than it was eight years ago when we acquired Famous Players. So that card is always there. We just basically focusing on incidence, relationship with the guest and making our money from being more efficient and providing the best experience, but you are correct, there is an opportunity there but we have not pulled the trigger on that.

Operator

Thank you. Our next question comes from the line of Haran Posner with RBC Capital Markets. Please go ahead.

Haran Posner - RBC Capital Markets

Just a couple for me left here, one, with respect to Q4 attendance in Canada versus the U.S. I think Ellis, you pointed to film slates, I am wondering the weather in the quarter which is obviously pretty poor had an impact on that? So maybe starting with that one.

Ellis Jacob

Yes, the weather did have an impact in the later part of 2013, I mean the ice storm didn't help us. When the theater doesn't have power started to get patrons to come and sometimes we have got patrons who didn't have power that have to worry about what they were going to do with getting places to stay during the cold period. So that did have an impact, but I don't know if it was in a lot of ways unique to the Ontario area, but I think the other parts of the U.S. also got hit, but in the case of the product I think the products played a major role into the difference between our performance and the U.S. performance in the quarter.

Haran Posner - RBC Capital Markets

Okay. That's helpful and maybe two small ones for Gord. First, with respect to CPP, I mean, more than 6% throughout in the quarter obviously they are impressive. I am curious I mean you flagged the usual stuff that's driving that. Was there anything unusual in Q4 at all or before we sort of get acquired and start modeling higher growth for that one?

Gord Nelson

No, I think we are seeing kind of continued growth in incidence of purchase and basket size.

Haran Posner - RBC Capital Markets

And then maybe just lastly with respect to the Empire contribution to EBITDA, I think you flagged the CAD$4 million to CAD$4.5 million. So that follows for an EBITDA margin around 25%, which is obviously a bit higher. And just curious if I am missing anything there that kind of the margin for that business that plays in Q4.

Gord Nelson

For FX?

Haran Posner - RBC Capital Markets

Yes.

Gord Nelson

Yes, the CAD$4 million to CAD$4.5 million includes some of the head office cost relating to integrating the circuits. So, yes, the margin would have been in excess to 25% on a standalone basis.

Operator

Thank you. (Operator Instructions) And I am showing no further questions at this time. I would like to turn the call back over to Mr. Jacob for closing remarks. Please go ahead.

Ellis Jacob

Thank you, and thanks everyone for joining us this morning. We look forward to you joining us for our first quarter 2014 call expected to take place on May 8 and see you at our annual general meeting which will be on May 14. Thank you.

Operator

Thank you, ladies and gentlemen, this does concludes our conference for today. Thank you for participating. You may now disconnect.

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