Cineplex's (CPXGF) CEO Ellis Jacob on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Cineplex, Inc. (CPXGF)

Cineplex Inc. (OTC:CPXGF) Q2 2014 Earnings Conference Call August 6, 2014 10:00 AM ET

Executives

Pat Marshall – Vice President-Communications and Investor Relations

Ellis Jacob – President and Chief Executive Officer

Gord Nelson – Chief Financial Officer

Analysts

Adam Shine – National Bank Financial

Aravinda Galappatthige – Canaccord Genuity Corp.

Kenric S. Tyghe – Raymond James Ltd.

Bob Z. Bek – CIBC World Markets, Inc.

Paul Steep – Scotia Capital Markets

Benjamin Mogil – Stifel Nicolaus & Co.

Rob A. Goff – Euro Pacific Canada, Inc.

Haran Posner – RBC Capital Markets

Colin Moore – Credit Suisse

Operator

Good day, and welcome to the Cineplex Second Quarter Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Pat Marshall, Vice President of Communications and 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’ll now turn the call over to Ellis Jacob.

Ellis Jacob

Thank you, Pat. Good morning and welcome to Cineplex, Inc. second quarter 2014 conference call. We appreciate you joining us today. I will begin this morning by discussing the performance of the Canadian box office during the quarter and how Cineplex compared to the industry. I’ll also discuss some of our key accomplishments during the quarter and then we will take a look at the film slate for the remainder of the year. Following this, our Chief Financial Officer, Gord Nelson, will provide more specific details on our financials. Once Gord has concluded his remarks, we will hold a question-and-answer period.

The second quarter last year was a record quarter, which made the second quarter of 2015 a tougher comparator. Although we experienced increases in many of our revenue streams and adjusted EBITDA this was due to contributions made by our 2013 acquisitions, which included 24 Atlantic theatres and digital signage company, Cineplex Digital Networks, formerly EK3. As we have seen over the years, box office fluctuates from quarter-to-quarter and year-to-year, but the fundamentals of the business continue to be related to the number, quality, and types of movies release.

During this quarter, the previously scheduled big release of Fast and Furious 7 was moved to 2015. Fast and Furious 6 did CAD$12 million of box office at Cineplex in 2013. So, the deferral of this release hurt the quarter. The second quarter 2014 box office could have been larger than 2013 had the slate remained as originally outlined. In addition, compared to 2013, there were a very limited number of family releases. We firmly believe this is a cyclical decline, and it reinforces our view point that investor should look at this business on a quarter-to-quarter basis.

Cineplex outperformed the Canadian and North American industry results, with box office revenues increasing 4% for the same period. However, on a same-store basis, our box office decreased 4.2% compared to the prior year quarter. This outperformed the Canadian industry, which decreased 6.4%, and North America which was down 6.5%. While box office revenues vary as a result of the film schedule each quarter, we continue to focus on innovation and diversification within our exhibition business. As of June 30, 2014 we now have 66 UltraAVX locations and 10 VIP cinemas.

We also have a highest performance on 3D movies in the Americas. We continue to expand our other businesses including media, digital commerce, gaming, food service, alternative programming and loyalty. We saw examples of this during the quarter with the insulation of four new XSCAPE entertainment centers, which significantly expanded existing gaming areas within the theatres. We also opened four new Poptopia and three YoYo's Yogurt Cafes with two of these located in malls with the ability to service shoppers and theatregoers.

We will continue to build our proprietary brand inside our theatres initially, with the plan to take them outside of boxes in future. We achieved a number of successes this quarter and I like to take a moment to highlight a few of them. We continued to open new theatres organically at a rate of about 2 to 3 per year on average. In April, we opened Cineplex Cinemas Manning Town Centre in Edmonton, Alberta. In May, we added Cineplex's popular VIP cinemas concept to Cineplex Cinemas Yonge Dundas and VIP, with the retrofit of six existing auditoriums into five VIP cinema auditoriums and a licensed lounge.

Next week, we'll open Canada's first standalone VIP cinema at Shops at Don Mills in the north end of Toronto. The theatre will feature five VIP cinema auditoriums and more than 500 seats. Another first for this adult-only location will be the luxury reclining seats that we are installing in two of the five auditoriums. Later this year, we'll celebrate theatre openings at Cineplex Cinemas downtown Markham and VIP, and we'll be adding three VIP cinemas to our theatres in Saskatoon, renaming it Scotia Bank Theatre Saskatoon and VIP. In 2015, we'll open Cineplex Cinemas Lansdowne in Ottawa, and we'll add VIP cinemas to our popular SilverCity Yonge Eglinton cinemas.

Moving on to Cineplex Digital Media, as previously announced, Cineplex and Oxford Properties Group partnered to create North America's first place-based digital ecosystem. These installations will integrate architectural digital media, mobile technology, social media, and other experiential technologies together to create a new way to interact with and inspire shoppers while influencing their purchase decisions.

This exciting new initiative will be added to 10 high-profile shopping centers across Canada beginning in the fall of this year. Earlier this year, together with Tim Horton's, we announced plans to launch Tim's TV in 2,200 locations, naturally the largest digital programming network in the Canadian restaurant and retail sectors. Work is in progress and is expected to be substantially completed in the third quarter of 2014. At June 30, 2014, Cineplex Digital Media operated digital signage systems in almost 9,000 Cineplex and third-party customer locations.

Our digital signage business continues to be a key area of strategic focus for Cineplex this year and beyond. This quarter, we also launched a new digital commerce platform for our e-commerce site, cineplexstore.com. The platform makes it easier for our guests to access the more than 6,000 digital movies that can be rented or purchased from the store and viewed on a variety of different devices. We also significantly expanded our device ecosystem and functionality as a result of the new platform.

We are pleased with the progress we have made with the store and believe this will provide greater traction for Canadians who want to make the move to consume content through digital platforms. It also brings us closer to achieving our Cineplex anywhere concept, because when Canadians think of movies, whether it’s in theatre, in home, or on the go, we want them to think of Cineplex.

The cineplex mobile app has now been downloaded onto 9.6 million devices and is one of the most used apps in Canada. Our website, cineplex.com registered a 7% increase in page views and a 2% increase in visits, compared to the same period last year. Our entertainment loyalty program, SCENE, added another 200,000 members during the quarter, reaching a total of 5.8 million members.

Now let’s take a look at the film slate for the remainder of the year. After a tough July, the back half of the year looks a little stronger, with titles such as Guardians of the galaxy, which opened on the weekend to CAD$94 million. Teenage Mutant Ninja Turtles opening on Friday, as well as The Expendables 3, Sin City, a Dame to Kill For, The Maze Runner and The Equalizer rounding out the summer season.

Moving into the fourth quarter, we have Gone Girl, adapted from the best-selling novel by Jillian Flynn, The Judge, starring Robert Downey, Jr. and Robert Duvall, opens the Toronto Film Festival this year and hits theatres right in time for Canadian Thanksgiving. We also have two action-adventures that will be sure to thrill audiences this fall, with the King’s Men-The Secret Service, starring Samuel Jackson and Colin Firth. And from director Christopher Nolan, we have the much-anticipated Interstellar, and Big Hero 6 from Marvel.

The holiday season is headlined by two very popular franchises, The Hunger Games-Mockingjay, part one of the final installment in the trilogy, and The Hobbit-The Battle of The Five Armies. Christian Bale is back on the big screen with Ridley Scott’s Exodus, and we’ve got another installment of Night at the Museum-Secret of the Tomb.

Following this, there are five movies opening on Christmas day, including Unbroken, Paddington, Big Eyes, Into the Woods, and Hot Tub Time Machine 2. There’s truly a movie for everyone.

Although you remain optimistic for the second half of this year, we are particularly encouraged by the film slate schedule for 2015. Films like sci-fi thriller Jupiter Ascending, 50 Shades of Grey, Disney’s Cinderella, The Avengers-Age of Ultron, Tomorrowland with George Clooney, Jurassic World and Inside Out, the new Pixar film, are all on the slate for the first half of 2015, followed by Terminator-Genesis starting Arnold Schwarzenegger.

The Minions are back in a self-titled prequel to the Despicable Me films. We also

Ant Man from Marvel Studios, the final installment of The Hunger Games franchise, and the yet to be titled James Bond and Star Wars films, which round out next year.

Before I conclude my remarks, I would like to personally thank our more than 11,000 cast members, theatre management teams, and home and regional office employees for their uncompromised passion for the business and consistent efforts to deliver an exceptional guest experience this quarter and throughout the entire year.

Now, I’ll turn the call over to Gord, who will go into the financials in greater detail.

Gord Nelson

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

For the second quarter, total revenues increased 7.2% to CAD$323.5 million, and adjusted EBITDA increased 1.2% to CAD$59.4 million. The results for the quarter were positively impacted by the acquisitions in 2013 of the 24 Empire theatres and EK3 renamed Cineplex Digital Networks. And as Ellis mentioned, the box office was impacted by the underperformance of a number of big summer titles and the shifting of certain release dates from 2014 to 2015.

Attendance for the second quarter was CAD$19.3 million, an increase of 3.6% or CAD$0.7 million over the second quarter of 2013. New theatres including the acquired Empire theatres added 1.8 million guests, but this was partially offset by the attendance decline of 0.9 million guests at same-store locations due to the weaker film product and a CAD$0.2 million decline as a result of closed theatres.

Cineplex's second quarter box office revenue increased 4% to CAD$181.4 million from CAD$174.4 million in the prior year. New and acquired added CAD$16.4 million to box office revenue offsetting the same-store decrease of CAD$8.5 million. In looking at the CAD$8.5 million same-store decrease, it is important to also remember that the deferred release of Fast and Furious 7, which was expected to be an important contributor to our Q2, 2014 box office.

For Q2, 2014, Captain America-The Winter Soldier was our top film, generating 11.2% of our box office revenue followed by X-Men-Days of Future Past, The Amazing Spider-Man 2, Godzilla, and Maleficent. Our average ticket price for the quarter increased to CAD$9.40, an increase of 0.4% over CAD$9.36 reported in the second quarter of 2013.

Premium product, including 3D, UltraAVX, VIP, and IMAX, represented 41.8% of our box office revenues during the second quarter of 2014 as compared to 42.2% in the second quarter of 2013.

The impact of premium priced product on the average ticket price was CAD$0.94 for this quarter as compared to CAD$0.99 from the prior year. Excluding premium product, our average ticket price increased 1.1% to CAD$8.46 from CAD$8.37, primarily due to the top two movies in the quarter appealing to a more adult audience.

Food service revenue increased 9.3% to CAD$98 million, as a result of 3.6% attendance increase and the 5.6% increase in the concession revenue per patron to CAD$5.08, a quarterly and all time record. RBO optimization, expanded offerings, and increased visitation at concession outlets led to the continued strong CPP result.

Media revenue increased CAD$4.6 million or 17.6% to CAD$31million. Cineplex Media revenue decreased 10.5% to CAD$21.2 million against a strong comparator of CAD$23.7 million reported in 2013.

Cineplex Digital Media revenue increased CAD$7.1 million due to the CAD$7 million arising from the Cineplex Digital Networks acquisition following its acquisition on August 30 of last year. New business opportunities not fully deployed and not generating significant revenue at the end of the second quarter include Tim’s TV and Oxford Properties Group.

Other revenues for Cineplex were CAD$13.1 million versus the prior year actual of CAD$11.2 million, an increase of CAD$1.9 million or approximately 16.6%. Gaming revenue represented approximately 13.5% of this total, during the second quarter Cineplex committed to acquire the remaining 50% of Cineplex Starburst, Inc. which Cineplex does not already own, for a minimum payment of CAD$17.5 million in cash.

The transaction is expected to close in the third quarter of 2015 at which time Cineplex will own 100% of the company. Cineplex currently equity accounts for CSI. Turning briefly to our expense line items, film costs for the quarter came in at 52.3% of box office revenue as compared to 53.3% reported in the prior year.

Cost of food service for Q2, 2014 was 21.6% of food service revenue as compared to 21.4% in the prior year. Our retention from food service sales, or concession margin per patron, increased 5% during the quarter to CAD$3.98 from CAD$3.79 in 2013.

Other costs of CAD$149 million increased CAD$17.1 million or 13%. As detailed in our MD&A and press release, the CAD$149 million in other costs is comprised of CAD$50.2 million of theatre occupancy expenses, CAD$83.5 million of other operating expenses, and CAD$15.2 million of general and administrative expenses.

I will discuss each of these categories separately. Theatre occupancy expenses were CAD$50.2 million for the quarter versus a prior year actual of CAD$46.8 million, an increase of CAD$3.4 million due primarily to an incremental CAD$3.7 related to new and acquired theatres. Other operating expenses were CAD$83.5 million for the quarter versus prior year actual of CAD$68.4 million, an increase of CAD$15.1 million. Major reasons for the increase include a CAD$5.4 million increase related to new and acquired theatres net of closed theatres a CAD$7 million increase from the newly acquired Cineplex Digital Networks, CAD$0.4 million increase in payroll costs due primarily to minimum wage increases.

Higher costs arising from higher 3D attendance including royalty cost of CAD$0.4 million and higher bulb costs of CAD$0.5 million due to the higher output required for 3D features, which reduces the life of the bulbs.

Higher credit card costs arising from the higher volume of sales with the acquisition of the Empire Theatres of CAD$0.2, higher other costs CAD$0.3 million, including maintenance and CAD$1.1 million increased in cost related to new initiatives including the enhancement and transition of our e-commerce delivery platform and back end infrastructure.

G&A expenses were CAD$15.2 million for the quarter, which is CAD$1.4 million lower than the prior year, in part due to a CAD$2.6 million decrease in long-term and short-term incentive program expenses as a result of the recent operating and stock performance partially offset by CAD$1.2 million of higher professional fees relating to new business opportunities.

Interest expense of CAD$5.6 million was CAD$3.6 higher than the prior year amount of CAD$2 million, contributing to the increase with a CAD$2 million increase in cash interest, as a result of very higher debt balances due to the acquisitions of Cineplex Digital Networks and the Empire Theatres, including the issuance of CAD$107.5 million on convertible debentures in the fourth quarter of 2013. Non-cash interest increased CAD$1.6 million, mainly due to the accretion of the deferred consideration arising on the acquisition of Cineplex Digital Networks. The company recorded tax expense of CAD$9.5 million during the second quarter of 2014, of which CAD$1 million was current tax expense and CAD$8.5 million was deferred. Our blended federal and provincial statutory tax rate currently is 26.3%.

With the CAD$147 million of non-capital tax losses acquired on the AMC acquisition, we will significantly reduce our current tax expense in 2014, as we estimate that there are approximately CAD$44.4 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 second quarter was CAD$19.2 million, as compared to CAD$16.9 million in the prior year.

Of this total approximately CAD$4.9 million came from maintenance CapEx, and CAD$14.3 million from the 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.

Our covenant leverage ratio at the end of the second quarter was 1.44x versus a covenant of 3.5x, while the results of the second quarter were not as strong as we hoped. we continue to remain comfortable with where Cineplex Inc. is positioned today.

Despite factors, which negatively impacted the second quarter results, including the weaker film slate, our strong balance sheet and low leverage ratio allows us to continue to invest in future growth for the company and benefit from future strong film product.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Adam Shine of National Bank Financial. Please go ahead.

Adam Shine – National Bank Financial

Thanks. Good morning. Gord, maybe I’ll just start with you, just the usual housekeeping. If you could give us EBITDA contributions in the Q2 for Empire and EK3, and maybe, just as you’re looking for that, I’ll hit Ellis with a question. I know this comes up regularly, Ellis, in terms of strategy regarding pricing, and we know the historical perspective as to how the company approaches pricing. But if I look at BPP rates, notwithstanding a flat Q3 2013, the growth trend in recent quarters has been steadily declining. Obviously, that’s a function of the success you’ve had over the last few years, particularly the rollout of the premium priced screens. But we’re at 0.4% in this quarter. Are we getting a little bit closer to an exploration as to a potential modest bump to pricing in the next few quarters?

Gord Nelson

We do – Adam, just on pricing, we do take a look on a regular basis as to the optimum pricing from an overall perspective. But we do have a significant number of programs like Tuesdays at special pricing and the SCENE programs, which allow people to come on a regular basis. And you are correct, number from CAD$936 million to CAD$940 million, but also during the quarter, you saw decrease on the premium offerings from 42%, down to 41%, which had an impact on the overall price. but going back to your original question is we do look on a regular basis, and at this point, we don’t have any significant plans to increase pricing.

our focus is always to drive more people into and more guests into our theatres. And over the last number of years, if you looked at our pricing compared to the U.S., we used to be significantly higher, and today, the pricing is much more in line with the U.S. but our attendance over the last eight to 10 years as continued to increase while theirs have decreased as a result of the pricing.

Adam Shine – National Bank Financial

Okay. Thanks for that. And obviously, I agree with the strength of 2015 film slate. It looks exceptional. Gord?

Gord Nelson

Yes, sure. So, your question – the response to your questions were the Empire contribution, EBITDA contribution in the second quarter was approximately CAD$5.6 million. And the EK3 business was marginally positive. and I think the important thing that you need to remember is they’re in the midst of a rollout of Tim’s TV to about 2,200 locations. And as we mentioned before, the digital signage business ramps up the costs in advance of the revenue being generated, so to date has been next to no revenue generated from the Tim’s TV network, and we expect to see that sort of in the back half of 2014.

Adam Shine – National Bank Financial

Thanks for that. And then just one last one really for you, Gord, with respect to working capital, obviously we’ve seen greater usage in the first half of the year. It’s usually a seasonal usage period. But obviously, we’re all trying to adjust to the dynamic, post the acquisitions from last year. We know that Q3 tends to be usage, and then obviously there’s a big reversal in Q4. Is there any other additional color, or magnitude or anything else that you can give us for 2014 working capital?

Gord Nelson

No, I think it’s still – we get the trends within the quarter, but at the end of the day, there’s a slight positive source of working capital typically in our structure and I would not expect that on an annual basis, and I would not expect that to be any different.

Adam Shine – National Bank Financial

Great. Thank you very much.

Gord Nelson

Thank you.

Operator

And the next question comes from the line of Aravinda Galappatthige of Canaccord Genuity. please go ahead.

Aravinda Galappatthige – Canaccord Genuity Corp.

Good morning. Thanks very much for taking my questions. I just want to start with the arrangement with Oxford Properties. Ellis, maybe you can give a little bit more color on what exactly that arrangement is, particularly with respect to the magnitude of it. I know you talked about Tim’s TV in the past couple of quarters. How does this compare in terms of scale?

Ellis Jacob

Well, this is a different focus, and the area of Tim’s is basically insulation in all of the eating areas, and over the 2,200 sit-in and areas within Tim’s. the one with Oxford is more all-encompassing as it relates to the shopping experience, and the focus of the shopping centers is, how do we keep people coming back and not shopping online. and this allows both Oxford and Cineplex to work together to create that a valued experience overall. and that will happen over a period of time, Oxford, as you know, owns some of the largest shopping centers in Canada, including the Yorkdale Shopping Center, which is under another expansion.

And so we see significant value, going forward on an overall basis. It’s working with directive and digital signage, including specific digital features. In the old days, you used to have a fountain in the middle of the shopping mall, and as Gord always says; now that’s been taken over by a large feature panels, which people then congregate and interactive panels that we will see there. As far as the magnitude, it’s really early to tell at this stage, as we continue the rollout. So the investments are being made now for payouts in the future.

Aravinda Galappatthige – Canaccord Genuity Corp.

Great. Thanks, Ellis. And just staying on the media side, I just want to get an update as to where you sit in terms of sort of the rollout of your media initiatives to the new Atlantic theatres, particularly where we are in terms of the ramp-up. I know that you’ve obviously rolled out your pre-show and digital lobby initiatives. Where do you stand with respect to the ramp-up of the media revenues there?

Ellis Jacob

I think in the second half of year, you will see the total ramp-up, because the first couple of quarters, we were engaged in the installation of putting the pre-show in place. and the lobby networks consults themselves are still now in progress, and they should be completed in the next quarter. So probably, by the fourth quarter of 2014, we will be at the – at the run rate of what we would have anticipated.

Aravinda Galappatthige – Canaccord Genuity Corp.

Great. And just lastly from me on the food service front, I mean, your CPP numbers continue to tick up nicely. As we look ahead, I mean, is it fair to say that it’s really sort of the – I guess the exporting of the zoning initiatives that you had in your legacy theatres and sort of the rollout of VIP that would really drive that, going forward? I mean, is it fair to say that those two are the primary drivers as we look ahead?

Ellis Jacob

Those were strong drivers and they’ll continue to be drivers, but also building of the brands within the theatres themselves and also taking them outside the theatres, are going to continue to grow our concessions per person. And we had said, we would get to that CAD$5 number, and we did get to that number, and now we are looking at further increases, as a result of the menu offerings, the VIPs, the outside theatre locations to continue to grow that concession per person.

Aravinda Galappatthige – Canaccord Genuity Corp.

Great. Thanks, Ellis. I’ll pass the line.

Operator

Your next question comes from Kenric Tyghe of Raymond James. Please go ahead.

Kenric S. Tyghe – Raymond James Ltd.

Thank you. Good morning. Ellis, if I could just pick up on the CPP discussion very briefly, and understanding the successes you’ve had to date and the like, what I’m trying to get my head around is where is the sensitivity to your mind with consumers? I mean, there are some great initiatives in place to continue to increase that number, and you’ve pushed it through the targeted CAD$5 level. But essentially, what’s your thinking around at certain points, to the extent, there is one, or to ask the question another way, I mean, how much room do you really think you have before you start putting at risk the growth on your CPP?

Ellis Jacob

Well. First of all, I mean when you compare our CPPs to the peers in the U.S. they are significantly higher, and a lot of that has to do with our menu offerings. And in addition to that, we have been very, very conservative on pricing. We have not had a price increase on the CPP for quite some time. And when you look at the overall offering, we have basically significantly more opportunities for our guests to stay at the theatre and consume the offerings that we have. We have our own brands, and we’ve also got brands like Tim Horton’s and Pizza Pizza, which we have in a number of our locations across Canada. So we think that there is still continued growth and with the additions of VIPs, as I mentioned before, you will see the lift in the CPP, moving forward.

Kenric S. Tyghe – Raymond James Ltd.

Fair enough. I’ll leave that one there. If I could just switch gears to loyalty very briefly, good new member adds. I’m wondering how, with the size of the program now and its sort of relative importance with respect to your marketing decisions and the like, how are you thinking about the economics of the program, or, perhaps more importantly, about the evolution of the economics of the program? I mean, how are those tracking against your expectations? How would you look to sort of revisit those if you were inclined to revisit the economics on the program at all?

Ellis Jacob

Well, firstly, the program has grown to one of Canada’s top loyalty programs. this program is seven years old, and we keep adding members. last year, we added over 1 million members is its sixth year of the program. As far as the value of the program, we see significant economic value from the perspective of people engaging in the program, wanting to come and see repeated movies, getting their discounts at the concession stand. and furthermore, it’s a great database for us as we grow our others businesses, including our digital commerce business, because it gives us the ability to communicate with our movie fans on an ongoing basis. That’s not to say we don’t continue to do programs with third parties as we benefit our guests with more and more value for the program itself.

Kenric S. Tyghe – Raymond James Ltd.

Thank you. I’ll leave it there.

Ellis Jacob

Thank you.

Operator

And your next question comes from the line of Bob Bek with CIBC. Please go ahead.

Bob Z. Bek – CIBC World Markets, Inc.

Thanks, good morning. I just wanted to follow up, Ellis, perhaps on the internal brand expansion. I know you’ve talked about, you’ve got the standalone sort of out – there is a testing; you’re talking about outside the box in the future. Can you update us on some of your thoughts as what kind of drives that decision as far as the expansion outside of the box? Is this a many-year, multi-year kind of thing or what is it you’re kind of looking at to see to kind of guide your strategy on that brand development?

Ellis Jacob

I think what’s really important initially is to fill the brand within our box, and we continue to work towards that on an ongoing basis. And a great example is in Toronto, at out theatre, which we have purchased from AMC at Yonge Dundas, there was additional space, which is in the pathway before you even go up to the theatres and we’ve used that to introduce YoYo’s and Poptopia concept. So what we’ve done there is basically utilize space within our facilities, but it’s not in the theatre itself.

Now in some cases, you’re going to have situations like that with Tim Horton’s in Montreal, for example, or you’re going to have standalone facilities, either in shopping malls, or close proximity of a theatre, where we can complement what we do and develop the brand, going forward.

Bob Z. Bek – CIBC World Markets, Inc.

Okay. That’s helpful.

Ellis Jacob

But the whole target is to really create these brands that eventually, with our close to 78 million to 80 million guests, is get them to the point where they recognize that brand as the Cineplex brand, when it comes to Poptopia, and also to YoYo’s and the other brands that we continue to develop, like Outtakes. And the other great traction opportunity for us is the SCENE loyalty program, which we can also maximize value for the individuals who come to these locations.

Bob Z. Bek – CIBC World Markets, Inc.

That’s helpful, thank you. Just switching gears slightly, Ellis, your thoughts on studio consolidation? I think that the Time Warner-Fox bid is off, but still lots of chatter in that industry for consolidation. Any thoughts on how it might play out for you?

Ellis Jacob

Look, it’s too early to tell. and as we found out last night, Fox has called off the transaction with Warner’s. We continue to look at the opportunity with the different titles coming out from the bigger studios, the smaller studios. and to us, it’s all about content and the quality of content.

Bob Z. Bek – CIBC World Markets, Inc.

All right. And just lastly for Gord, a modeling question. You talked about the tax – the cash tax shield there. Can you – I didn’t quite catch all the numbers there, if you can just repeat that for me again. As we place through our DCF, your thoughts on the cash tax protection for the next couple years?

Gord Nelson

Yeah, sorry. So, we mentioned that there was about CAD$44 million of NOLs available to be used in 2014.

Bob Z. Bek – CIBC World Markets, Inc.

Okay.

Gord Nelson

And so I would suggest that kind of in your model, that if you look at income before taxes, the first CAD$44 million will be sheltered. And then we’ll pay it and I gave you the kind of the rate of…

Bob Z. Bek – CIBC World Markets, Inc.

Yes.

Gord Nelson

Approximately 26%.

Bob Z. Bek – CIBC World Markets, Inc.

And looking past 2014?

Gord Nelson

I would say the shelter that we have, which is our UCC pools really approximate the accounting depreciation. So if you used about 26% of income before taxes, that would be a good number.

Bob Z. Bek – CIBC World Markets, Inc.

Perfect. thank you very much.

Gord Nelson

Thank you.

Operator

Your next question is from Paul Steep of Scotia Capital. please go ahead.

Paul Steep – Scotia Capital Markets

Great, thanks. Just quickly, Ellis, maybe you could go over, on CVN, what the number of screens or locations would be, depending on how you want to count it, once you get Oxford and Tim’s TV fully rolled out. And then, maybe talk a little bit about the composition or the split of the network.

Ellis Jacob

Well, the actual number, when we look at a location, we just count it as one location. We don’t count it as multiple screens within a location. But we, with the rollout of all of those, will probably be in the neighborhood of 11,000 locations. But it will be impressions in the billions, based on those locations.

Paul Steep – Scotia Capital Markets

Okay. And then, how would we think about what that network – just once that’s fully out there, because I’m trying to sort of figure out what the blend would be, like retail, office, I know you said some other in there as well, what that network actually looks like fully deployed?

Ellis Jacob

Well, you’re going to have a blend of retail, you’re going to have the blend of retail, where it’s specific retail like a McDonald’s or a Tim Horton’s or a Walmart. And then, you’re going to have the shopping center retail, which will be part of that Oxford development, and then you’ve also got the path networks that we also continue to service. So it will vary by type of blend. We probably will be about 50% retail, 25% will be the financials, like the Scotia Banks and 25% will be other networks.

Paul Steep – Scotia Capital Markets

Okay. And coverage nationally is pretty uniform at this point, isn’t it, or is there an area of the country that’s sort of got a little bit of a gap to it?

Ellis Jacob

No, it’s pretty national like our chain. I mean, the Atlantic provinces, we just took over in the last six months, but we will continue to develop in those areas also.

Paul Steep – Scotia Capital Markets

Great. Then the last one from me, just on the digital store, I know there were some media buys I think put into some markets during the last quarter. What’s sort of the thoughts in terms of more aggressively promoting the digital store and pushing consumers towards that option? Thanks.

Ellis Jacob

Well, with the new platform, we’ve seen great traction, but we also have a program for the fourth quarter of 2014 to promote it heavily as we move forward. So we see that as a huge opportunity. The other big change we are seeing is on the traction, as it relates to super ticket. More and more studios are coming on board for the movie opening on Friday, the turtle movie. We have a reduced price offering for the first time, both for the HD and non-HD versions, as part of the Super Ticket.

Paul Steep – Scotia Capital Markets

Great. Thanks, guys.

Ellis Jacob

Thanks.

Operator

And your next question will come from the line of Ben Mogil of Stifel. Please go ahead.

Benjamin Mogil – Stifel Nicolaus & Co.

Hi, guys, good morning and thanks for taking my question. Morning, guys. So, I'm not sure if I'm right, but when I was reading the MD&A, it looked like the legacy Cineplex properties performed pretty well against the box office benchmark. The Empire ones were sort of materially weaker. Was there anything going on geographically in the slate? Was there any sort of disruption to Empire that was worth talking about?

Ellis Jacob

I know where you're getting the material weakness in the Empire locations from.

Benjamin Mogil – Stifel Nicolaus & Co.

Sorry, I thought the legacy – it looks like the legacy Cineplex ones performed a little bit better than the legacy Empire ones. Is that correct?

Ellis Jacob

On a year-to-date basis, that’s correct, then the first quarter Empire locations were impacted by the weather, but there weren’t historic numbers, so it would be difficult for you to see that, though.

Benjamin Mogil – Stifel Nicolaus & Co.

Okay. And in the second quarter, they performed pretty much in line?

Ellis Jacob

Yes.

Benjamin Mogil – Stifel Nicolaus & Co.

Okay. Sorry about that. And then, on the ad front, anything that you wanted to talk about on the ad front? Obviously, you faced a tough comp. As you kind of look into the back half of the year, particularly around the back-to-school, are you sort of seeing activity sort of re-accelerate again?

Ellis Jacob

We are comfortable, Ben with the back half of 2014. And looking forward, we feel that we should be in line with at least at a minimum last year, plus all the additional benefits we’re going to get from the CVN networks that we have that are out there.

Benjamin Mogil – Stifel Nicolaus & Co.

Good, that's great. Thanks for me. Thanks, guys.

Ellis Jacob

Thanks, Ben.

Operator

(Operator Instructions) And your next question will come from the line of Rob Goff of Euro Pac. Please go ahead.

Rob A. Goff – Euro Pacific Canada, Inc.

Good morning, and thank you for taking my question. I too would like to go back to the Oxford announcement. If you could give us a bit more perspective in terms of how your relationship there with Oxford reaches out to the retailers, is that a push or pull relationship with the retailers within the Oxford Properties? And also, would you have theatres within those Oxford Properties?

Gord Nelson

Rob, to address the first part of your question, you’ve heard of us talk about owning the path to purchase primarily through our Cineplex Digital Solutions business, and then owning the point of purchase through the Cineplex Digital Networks business. And the focus of Cineplex Digital Networks, or the three verticals that they're focused on today, is quick service, retailers, and financial institutions. So, the emphasis today on that kind of the path to purchase, or the Oxford or the shopping mall properties, is really to create a more compelling environment for the customers of the shopping mall. To the extent that we're going to be able to help merchants within that shopping mall, that's going to benefit the landlord, and it will also benefit the landlord, and it will also benefit the individual tenants, including these retailers, in that mall. So, absolutely, our focus is owning path to purchase and pointing those customers into the ultimate point of purchase. So, ultimately, we expect to see some level of integration sorts of strategies, interactivity, amongst other types of techniques. With respect to the question on landlords, is yes, we are tenants of Oxford.

Rob A. Goff – Euro Pacific Canada, Inc.

Very good, and thank you.

Operator

And your next question will come from the line of Haran Posner of RBC Capital Markets. Please go ahead.

Haran Posner – RBC Capital Markets

Yes, thanks very much, good morning. Maybe just following up on Rob's question there with respect to Oxford, Gord, just can you maybe clarify, on the path to purchase, are we talking about sort of a subscriber fee with Oxford, or is this an advertising model for you?

Gord Nelson

Yes, so you look at – we probably have a number of models that work out there today. So, typically we've told you about an advertising-based model where we tend to invest the capital, and we share the revenue – the advertising revenue stream with the landlord in that facility. And that's the typical model that would work in a – the office concourses and the path networks. Then, there's the service-based model, which has traditionally been the EK3 model, where you're working with a brand and you're deploying – they're investing the capital and we're servicing the network within their facility for a monthly fee.

And what's happening today is we are creating this hybrid models, which involve both a service and an advertising component, and that I would characterize the Oxford model as more of that hybrid. So, there will be an element of advertising sales with some rev share component, and there will be an element of kind of a recurring revenue stream and a service-type model.

Haran Posner – RBC Capital Markets

Okay. Now, that's very helpful, Gord. And then, maybe just to follow up on that, then, presumably in your CapEx guidance, maybe you can update us on that front, and then just I guess the Oxford rollout will be included in those numbers?

Gord Nelson

Yes. No, absolutely it will be. So, the two elements that will be in there will be both the Oxford rollout and the Tim's TV rollout. So for 2014, I’d say our total CapEx will be somewhere in the neighborhood of CAD$95 million to CAD$100 million, approximately CAD$45 million of that will come from new construction, about CAD$25 million from maintenance CapEx, about CAD$10 million from premium initiatives, and approximately CAD$15 million to potentially CAD$20 million from these digital initiatives, which would include Tim's and the Oxford properties deployment. And as we go into 2015, the construction amount will scale back significantly. We should be around the CAD$60 million to CAD$70 million number in 2015 and just slightly ahead of that based on the new construction timelines in 2016.

Haran Posner – RBC Capital Markets

Okay. Now, that's all very good and very helpful. Maybe just one question for Ellis, been some talk in the media. You guys are, I guess, testing a pilot program to surcharge for premium seatings in some of your theatres. Can you maybe – can you give us a sense for what that's about and what potentially you see there?

Ellis Jacob

We had mentioned that in the Annual Meeting, and it was one specific theatre that we were looking to test this out in. And this has not been implemented as yet, and we are still looking at that as an opportunity, as some other countries have done it quite successfully in Europe.

Haran Posner – RBC Capital Markets

Okay, thanks very much.

Ellis Jacob

Thank you.

Operator

And your next question comes from the line of Colin Moore of Credit Suisse. Please go ahead.

Colin Moore – Credit Suisse

Yes, hi, good morning. I guess my only question’s a bit of a follow-up on the CapEx. I think over the past few years, you’ve been setting CAD$8 million, CAD$9 million on the refurbishment, rebranding, and sort of premium theatre deployment. On that specific line item, would you expect that to moderate in the mid-term as well? And I guess maybe it’s more of a holistic question, as you look at your network now, with over 50% premium-type theatre, do you see that moderating, or is there other possible initiatives that could drive that line item, going forward?

Ellis Jacob

Yes, Colin. I would suggest that with moderate. As we build new theatres, we typically build in either VIP, or UltraAVX, or both. so as we construct new theatres, the premium mix will increase. I said that we spend about CAD$10 million in 2014, primarily UltraAVX, but also VIP. I suggested that’s probably about the level for 2015. It will probably cut in half in 2016 and then we will probably be fully deployed where we think premium opportunities would be in the – kind of the existing base circuit.

Colin Moore – Credit Suisse

That’s great. Thank you.

Operator

And your next question comes from the line of Adam Shine of National Bank Financial. Go ahead.

Adam Shine – National Bank Financial

Thanks a lot. Just a quick question on margins. Notwithstanding some of the organic top line pressures, we’ve seen sort of the year-over-year margin gap steadily compress over the past couple quarters. And I guess, just on the back of the data you gave us earlier, Gord, with respect to the Empire EBITDA, it looks like the margin for Empire was about 25%, nice lift from the 18% plus in Q1. Is there anything worth highlighting there, and also acknowledging, at least based on our estimates and maybe others on the Street that heading into the back half of the year, that we start to see year-over-year growth in margins.

Ellis Jacob

Yes. I think I mean with respect to Empire acquisition, at that 20%, roughly 25% EBITDA margin, I think the one thing you have to remember when you’re comparing that to our base circuit is that there is really very little incremental G&A involved in generating that the additional Atlantic revenues and expenses.

And with respect to margins, going forward, our digital media business, we have a number of large initiatives out there. as I mentioned earlier, the costs related to these initiatives tend to be incurred upfront. And then once the rollout is complete, that’s when we generate the margin. while we said that the digital media business should operate and give about somewhere around a 30% EBITDA margin level and as the numbers I gave you today, it’s marginally positive. In terms of EBITDA dollars today as we ramp up that business.

So, yes, you’re absolutely – you are going to get the leverage from the expected film product in 2015. So you’re going to get the operating leverage from the side and you’re going to get some ramp-up of some of these digital signage initiatives rolling to 2015 and 2016. So we should see margin expansion.

Adam Shine – National Bank Financial

Okay, super. Thank you.

Operator

And there are no further questions at this time. I will now hand the conference back over to Mr. Ellis Jacob for closing remarks.

Ellis Jacob

Thanks, everyone for joining us this morning. We look forward to speaking with you again during our third quarter results, which will be in November. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.

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