Cineplex Inc. (CPXGF) Q1 2023 Earnings Call Transcript

Cineplex Inc. (OTCPK:CPXGF) Q1 2023 Earnings Conference Call May 12, 2023 10:00 AM ET

Company Participants

Mahsa Rejali - Vice President, Corporate Development & Investor Relations

Ellis Jacob - President & Chief Executive Officer

Gord Nelson - Chief Financial Officer

Conference Call Participants

Adam Shine - National Bank Financial

Derek Lessard - TD Cowen

Aravinda Galappatthige - Canaccord

Maher Yaghi - Scotiabank

Drew McReynolds - RBC

Operator

Hello, and welcome to the Cineplex Inc. Q1 2023 Earnings Conference Call. My name, Alex, I'll be your coordinating the call today. [Operator Instructions]

I would now hand over to your host Mahsa Rejali, VP of Corporate Development and Investor Relations. Please go ahead.

Mahsa Rejali

Good morning, and welcome. With me today is Ellis Jacob, our President and Chief Executive Officer; and Gord Nelson, our Chief Financial Officer.

Before I turn over the call to Ellis, let me remind you that certain statements being made are forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results could differ materially from those expressed in the forward-looking statements. Factors that could results -- cause results to vary include, among other things, the negative impact of the COVID-19 pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national and world events, discovery of undisclosed material liabilities and general economic conditions. 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

Thank you, Mahsa. Good morning and welcome to our Q1 2023 conference call. We are glad you could join us. I'm very excited to be addressing you today as our business moves forward to a promising error in the exhibition industry. First, guests are continuing to show us they love coming to our theaters and are choosing the shared and immersive theatrical experiences that we offer.

Second, content supply is ramping up with Hollywood international suppliers and streamers releasing many anticipated titles. Third, the commitment of traditional and non-traditional studios to an exclusive theatrical window was stronger than ever. And lastly, I want to discuss Cineplex's advantageous position and the strategies we deploy in capitalizing on the positive momentum and the return of movie going.

Consumer enthusiasm for the theatrical experience is strong across a range of genres and for all demographics. Here are just a few examples. Top Gun: Maverick, Spiderman Norway Home, Dr. Strange in the Multiverse of Madness, Creed III and John Wick Chapter 4 were all the highest grossing domestic films of their respective franchise.

Three of the top 10 highest grossing domestic film of all time have been released since 2020, including Spiderman Norway Home Top Gun: Maverick and Avatar the way of water which has now crossed the $2 billion mark and become the third highest grossing movie globally. Horror film M3GAN and Smile substantially exceeded industry expectations, delivering domestic box office revenue of over $95 million and $105 million respectively.

Smile was originally slated for direct streaming, but was given an exclusive theatrical release instead which was highly beneficial to the bottom line so much so that the Sequel is now being produced. And more recently, family favorite the Super Mario Brothers movie released in April of this year has surpassed $1 billion of global box office and is now in the top five family movies of all time.

These and other record-breaking results demonstrate a point you hear me say on each and every one of these calls. When there is compelling content, consumer enthusiasm for theatrical moviegoing is as strong as ever.

Coming out of this year's movie convention, CinemaCon, we are thrilled by the increase in supply of great films for the remainder of 2023 and into 2024. In April, we benefited from a variety of titles that truly appeal to a wide range of audiences, including the Super Mario Brothers movie, John Wick: Chapter 4 and Amazon AIR: Courting a Legend starring Ben Affleck and Matt Damon.

The remarkable performance of these films, along with the success of our diversified businesses resulted in Cineplex generating impressive April results, with adjusted EBITDA being higher than April 2019 and the month alone generating high EBITDA than the entire first quarter.

Then in May, we started with a strong performance of Guardians of the Galaxy Volume 3, which generated $118 million at the domestic box office this past weekend. Also, we are excited about Fast Xs opening next weekend and the Little Mermaid, which is a live-action adoption of the Disney Animated Classic 34 years after its initial release.

In June, the blockbusters continue with Spider-Man: Across the Spider-Verse, Transformers: Rise of the Beasts and the next feature in the beloved Indiana Jones franchise in the Indiana Jones and the Dial of Destiny. There's also The Flash, which we had an opportunity to screen at CinemaCon, and it is incredible. I can say it's probably one of the best DC movies to-date.

The momentum continues in July with the release of Mission: Impossible - Dead Reckoning Part One. We saw 20 minutes of this film at CinemaCon and Tom Cruise doesn't disappoint. We end July with Barbie and Christopher Nolan's much anticipated World War II epic Oppenheimer.

It is important to note that I have not yet mentioned upcoming movies from nontraditional studios. Apple is releasing two long-awaited films. In October, we will see Martin Scorsese Killers of the Flower Moon starring Leonardo DiCaprio and slated for November is originally Scott's Napoli.

In addition, we are highly encouraged by Amazon's expressed intention to release 10 to 12 foams per year. We are excited by the amazing lineup of films for 2023 and believe we have overcome pandemic-related content supply challenges. A key message we heard from every studio at CinemaCon was the importance of the cinematic experience and theatrical windows and maximizing the performance of each film.

The industry took note when multiple studios confirm that the theatrical window is critical to the success of streaming. This belief is now prevalent in our industry as it has been backed by financial results. Overall, the feedback from CinemaCon was overwhelmingly positive, and the biggest star of the show was optimism.

Before I move on, I want to address the writers Gildo America strike, which started over a week ago. While we are monitoring the situation, we don't expect the strike to have a material impact on our business. Typically, these strikes have a greater impact on short-term content delivery cycles, including content for network TV and streamers.

Given the long lead times in making theatrical films, such strikes have historically not had an impact on our industry. In fact, if we look at the previous two strikes, a 100-day strike spanning 2007 and 2008 and the 154-day strike in 1988 you will note that in both cases, industry box office revenues were higher in each of the three years after the strike in the three years prior.

I am now going to discuss our content broadening strategy, which we continue to advance by expanding our distribution business, Cineplex Pictures. Last quarter, we announced the Canadian theatrical distribution agreement with Lionsgate for 2023 film slate, bringing 11 titles to the big screen.

To date, we have already distributed four titles to Canadian audiences, and we are happy to say that they have been very successful with John Wick: Chapter 4 being Cineplex Pictures biggest title thus far. We look forward to distributing the remaining Lionsgate titles in 2023, including the prequel to the Hunger Games franchise, The Hunger Games: The Ballad of Songbirds and Snakes, which is slated for November of this year.

Regarding international cinema programming, Cineplex consistently over-indexed the North American market share, particularly with Bollywood product. During the quarter, Cineplex took the number one position in North America for Bollywood titles Pathaan and Kali Jotta with 31% and 83% share of the domestic box office, respectively.

We also realized great success with the film, The Wandering Earth II, which is now Cineplex's highest grossing Mandarin language film, earning a 32% share of North American box office. These efforts were instrumental during the quarter as we outpaced the North American box office industry recovery by an impressive 10% when comparing Q1 2023 to Q1 2019.

This was all made possible by our rich consumer data that we leverage to drive attendance through our strategic film programming and marketing initiatives. Cineplex has a proven successful history of using data, predictive analytics and targeted communication strategies to drive revenue growth.

We will continue to leverage our data for personalized content engagement and targeted offers, including through the Scene+ loyalty program, which continues to grow and now has over 13 million members. At Cineplex, we continue to develop and introduce enhanced cinematic and entertainment experiences.

We are extremely pleased with the success of our first Cineplex Junxion location, which opened in December 2022 in Winnipeg, Manitoba. This new concept features multiple entertainment options, including movies, gaming, live events and expanded food and beverage offerings all under one roof. We are excited to announce the opening of our second Junxion location in Mississauga, Ontario just in time for next week's opening of Fast X. The Junxion concept is a great example of how we look to maximize revenue per square foot in our venues by driving incremental attendance and spend from expanded offerings.

Turning your attention to our first quarter results. We welcome 9.8 million guests in Q1, which was up 47% year-over-year. We generated total revenue growth of 49% and a sizable increase in adjusted EBITDA to $20.2 million.

While Gord will speak to our financial highlights in more detail shortly, I want to emphasize our commitment to growing our diversified businesses, which we continue to scale and meaningfully contribute to the bottom line. We are particularly pleased with our Amusement and Leisure segment and its performance, which helped mitigate the short-term film content supply challenges during the first quarter. Our LBE business on all-time quarterly record adjusted EBITDA of $12.1 million and margin of 34.6%. This business is a strategic growth initiative for our company, and it's gratifying to see the results from our 13 locations.

LBE continues to be an area of growth for us, as we look for strategic expansion opportunities. Our P1AG business also performed extremely well, generating a first quarter record adjusted EBITDA of $8.9 million and margin of 17.9%. These exceptional results were driven by robust demand in the high-margin family entertainment segment and continued theater revenue growth within the route business. In the previous 12 months, this business surpassed the $200 million revenue mark and generated a $31 million contribution before intercompany eliminations.

On the media side, both the Cineplex Media and Cineplex Digital Media businesses saw a significant overall revenues for the quarter collectively increasing 43% to $22.3 million from the prior year. The Cineplex media team is focused on data initiatives and anticipate this will provide a competitive advantage as advertisers continue to return to spend in the cinema space.

With further content supply and mall traffic recovery underway, we expect further momentum in these divisions. Overall, we are pleased with the performance of all our businesses and our diversification as a whole, which is an important pillar for the continued growth of the company. Our diversification strategy is just one of several compelling attributes that differentiate Cineplex from our North American peers.

Other attractive and notable differentiating factors include our leading market position for entertainment destinations in Canada, which provides us with meaningful scale in the market. Second, being the most innovative exhibitor when it comes to guest experiences for premium formats to enhance gaming in our venues to new entertainment destinations like Junction, Cineplex is a first mover innovator in the exhibition industry. We have the widest array of premium offerings in North America with nine formats, including 3D UltraAVX, IMAX, VIP, DBox 4DX, ScreenX, Club House and recliners.

The Cineplex VIP offering in particular, has been extremely successful in driving incremental attendance in PET. These efforts have led to industry-leading revenue per patron results. For example, in its opening weekend, Cineplex delivered approximately 80% of its box office for Avatar: The Way of Water from premium experiences, which significantly exceeded up years in North America by approximately 20%. These results were also seen in our first quarter, where we earned over 47% of our box office revenues from premium experiences. Not only is this a first quarter record for us, but it is also the highest percentage of any exhibitor in North America.

The third differentiating factor is our leading market position in international cinema and alternative content. Through our relationships with international content suppliers and rich customer data we have attracted audiences such the share of our total box office from international product has increased from 4.3% in 2019 to 9.8% in Q1 2023 with the rest of the industry in North America only at 2.7% in the first quarter well below Cineplex's levels.

The fourth differentiating factor is our full ownership and control of the cinema media business. With over 33 years of experience in this business we have built a portfolio of media offerings that drive industry-leading revenue per patron almost double that of our US peers.

Not only do our expanded media offerings drive increased revenue per patron results, but our in-house team allows us to retain a significantly higher portion of this revenue stream.

And the last, but certainly not least differentiating factors, the volume and value of the consumer data collected that is used to drive additional revenue and make our operations more efficient.

The Scene+ program has over 13 million members representing almost one-third of the Canadian population and 15 years of history which provides us with access to expanded member data including non-movie goers.

In addition we have an extensive customer data platform which has thousands of variables for each guest and provides enhanced capabilities to execute personalization initiatives. Overall, Cineplex is well-positioned to achieve great success and has a history of driving industry-leading revenue per patron results.

Looking ahead we are incredibly confident in the future of our business. We are excited about the strong start to the second quarter and are encouraged by the positive momentum our industry and company have realized year-to-date.

With strong consumer demand for movie going content volume returning to pre pandemic levels commitment to exhibition from our studio partners and the record results from our diversified businesses we have much to be excited about.

When you look at Cineplex' attributes you can see that there are huge opportunities for investors in our business. Innovative and successful growth initiatives along with our disciplined capital and cost management will serve us well for years to come. I'm extremely proud of the Cineplex team and want to thank them for their agility, resourcefulness, and determination as we work together to grow our business.

With that, I will turn things over to Gord.

Gord Nelson

Thanks Ellis. I am pleased to present a condensed summary of the first quarter results for Cineplex Inc. For further reference our financial statements and MD&A have been filed on SEDAR and are also available on our Investor Relations website at cineplex.com.

Our MD&A and earnings press release includes a complete narrative on the operational results. So, I will focus on highlighting select items and providing commentary on our liquidity and outlook.

As Ellis mentioned, we were pleased with our Q1 operating results. We reported adjusted EBITDA of $20.2 million. The amusement and leisure businesses reporting its strongest quarterly adjusted EBITDA ever.

For the first quarter, total revenues increased 49.21% to $341 million from $228.7 million in the prior year and adjusted EBITDA increased from negative $5.7 million in the prior year to $20.2 million in 2023. Each of our businesses improved dramatically from the prior year.

Adjusted EBITDA in our film exhibition and content businesses increased to $10.7 million from negative $6.3 million in the prior year. Adjusted EBITDA in our media business increased 72% and adjusted EBITDA in our amusement and leisure businesses increased 70%.

Before discussing our liquidity position I wanted to briefly touch on three items; CapEx, taxes and an update on our Cineworld claim. For the first quarter of 2023 we reported net CapEx of $13.9 million as compared to $9 million in the prior year. Included in CapEx in the first quarter is net growth CapEx of approximately $5 million, which primarily relates to the airmiles junction location scheduled to open next week.

For 2023 and beyond we will continue to be prudent and opportunistic with our growth initiatives focused on driving incremental revenues. Guidance for net CapEx for 2023 remains at $60 million.

Next I want to remind you of the benefit of the tax asset that was derecognized during 2020 as a result of uncertainties related to the pandemic. As described in Note 3 of our financial statements we currently have non-capital losses totaling $436 million to utilize against future periods. And as such you should expect minimal cash taxes over the next several years. We continue to evaluate the recoverability of these deferred tax assets and will recognize such assets when and if appropriate.

And lastly Cineworld filed its proposed Chapter 11 plan of reorganization on April 11 2023. This plan contemplates all holders of general unsecured claims, which includes Cineplex's claim of CAD 1.24 billion. Those claims receive a share of a total pool of USD 10 million in cash plus interest in a litigation trusts which are not expected to be material.

Well at this time we do not know the expected distribution on our claim we do not anticipate it will be material and no amount has been accrued in Cineplex's financial statements. I would like to move on and speak to our balance sheet and in particular our liquidity position.

In March 2023, we entered into a credit facility amendment which suspended testing of the total leverage ratio until Q4 2023 and relax the testing of the senior leverage ratio and fixed charge ratio throughout 2023. This amendment was primarily in response to the film product supply challenges, which continued into Q1 2023.

For Q1 2023 we reported net borrowings of $29 million under our credit facilities which left us with $356 million drawn and the approximately $177 million available under our credit facilities as of March 31, 2023. As of March 31 we reported a senior leverage ratio of 2.86 times as compared to a covenant of 3.25 times.

As at quarter end our current cost of borrowing are 6.4% on the bank credit facility, 7.5% on the high-yield debt and 5.75% on the convertible debentures. We have $450 million in fixed rate hedges in place on the bank credit facility with $300 million maturing in November 2023 at rates of 2.8% to 2.9% and $150 million maturing in November 2025 at 2.9%. The interest rate environment has caused significant shifts in the mark-to-market adjustment on these hedges with an expense of $2.6 million in the current quarter as compared to $10.4 million in income in the prior year.

These adjustments flow through our interest expense and have also impacted our overall net income comparison. Now with products from an impressive and broad range of studios returning on a regular cadence, I'd like to take a few moments and look forward.

First, let's start with April. We achieved 96% of our pre-pandemic 2019 April box office and 102% of our pre-pandemic combined box office and theater food sales on 86% of the pre-pandemic attendance level.

In addition, as Ellis mentioned, our EBITDA for the month of April alone is higher than our EBITDA for the entire first quarter of 2023 and is also higher than EBITDA for the month of April 2019.

Now let's talk about a world where we return to around 75% to 80% of the pre-pandemic attendance levels. Again, this is below the 86% level we experienced in April 2023. In this world, we have suggested and our analyst models would also concur that in this world, Cineplex could achieve approximately 100% of its pre-pandemic EBITDA level of approximately $230 million.

As compared to our peers, we achieved these results because of our diversified business model, including record results and growth in our amusement and leisure businesses as well as initiatives put in place in the exhibition and Media businesses since 2019. With CapEx restrained at $60 million, interest expense of approximately $60 million and our tax losses sheltering near-term current taxes, this would create approximately $100 million in free cash flow, which would go towards deleveraging our balance sheet.

Now let's talk about our balance sheet. At the end of Q1 2023, we had approximately $922 million face value of debt, including $316.3 million in convertible debentures which have a conversion price of $10.94. All of our equity research analysts have a one-year target price in excess of this conversion price.

In this scenario, we believe that the convertible debentures would convert to equity and with the adjusted current debt balance of $606 million, excluding the converts, we would be at the low end of our target leverage ratio range of 2.5 times to 3.0 times and on the path to consider the reintroduction of a dividend.

Now let's talk about initiatives to optimize our capital structure. I want to make it clear that we are primarily talking about the composition and maturity of our debt stock, including items such as rating strategies, mix of bank versus private versus public debt US, Canadian, not dire measures such as issuing common equity to reduce debt.

And then finally speaking of common equity, our business is typically traded at a premium given our market share in diversified businesses. However, with the positive results of our business and momentum in the industry, we have not seen the same valuation return that our peers in the US have experienced. We are trading at an approximate 25% discount to our target price. We understand that our Canadian listing means that we are subject to more of a show-me view, but we would expect that over the next several months, our stock should receive the same or better valuation that our peers have experienced with a continuing strong movie slate for the balance of 2023 and the incredible results from our diversified businesses, there is a lot to be excited about.

And with that, I would like to turn things over to the conference operator for questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question for today comes from Derek Lessard from TD Cowen. Derek, my apologies. Our first question for today comes from Adam Shine of National Bank Financial. Adam, your line is now open. Please go ahead.

Adam Shine

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

A – Gord Nelson

Thanks, Adam. And so let's talk -- I'll take the first question on or let's deal with the amusement and leisure businesses first and I have to give credit to the operating team have done an incredible job on optimizing the operations. And the one I've always said the one good thing about COVID it allows you to take a very serious look about the cost structures that you're operating in.

On a couple of calls before, I think I had mentioned that a couple of years back, our target margins on P1AG, were to get them up from 13% to 15%, and the team has done a great job of getting there. Our new range is now between 15% and 17%. And as you can see, we're well on our way of achieving those levels.

A quick comment on the LBE business then is -- and we're very pleased with the margins in the LBE business too. And what we're seeing there is -- there's a little bit of a mix shift. We're finding that our customers are more apt to spend additional money in the amusement side of the business, which is a higher-margin business. So our target was typically 25%, and we're extremely pleased, again, with what the operations team has done in building up that margin.

Moving over to, yes, the box or the exhibition side of the business, I'll let Ellis perhaps speak -- I think you've got two questions. One is related to kind of the film margin, gross margin. And maybe I'll hit the concession one then is -- we obviously -- and in the last couple of calls, I've detailed our overall cost structure to indicate that the majority of our cost structure were less prone to inflationary pressures.

The one area where we are is typically in the foodservice area. And you'll see a little bit of that coming into our overall percentages. We have a little bit of a mix shift in our concession and our foodservice mix and to higher cost items. And you'll also note that as we've said before is with the food cost pressures that not only us but others are experiencing, we have historically looked to truth price to offset some of those business.

So I would say what do we see going forward? I would say Q1 was a little bit of an elevated level when you're looking at a pure cost percentage level and that we would be ramping up and looking forward would be more in that 22.5 to 23 times.

Ellis Jacob

And Adam from a product perspective as we've seen a very, very strong start to the second quarter and that continues. We have Book Club and Blackberry opening this week and that's followed by Fast X. And then we get into Spider-Man. We've got Transformers. We've got The Flash, which I spoke about and Indiana Jones.

So the second quarter product and looking forward even into the third quarter and beyond, we feel that there's a real return to the strong movies that we are back to where we were pre-pandemic from an overall perspective. And our guests are really enjoying the different choices that we offer them when they come to our theaters. And part of the discussion on the concession side is also the mix of what our guests are enjoying when they partake and come to the movies at our venues.

So anything else Adam?

Adam Shine

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

Ellis Jacob

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

Adam Shine

Okay. That’s great. I’ll leave it there. Appreciate.

Ellis Jacob

Thank you, Adam.

Operator

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

Derek Lessard

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

Ellis Jacob

I think the Canadian moviegoers are just as driven to want to come back to our theaters as our US counterparts. You have to remember; we were in Canada faced with a lot of different challenges. We went through a period where we were closed multiple times. We weren't allowed to serve food in theaters and that hurt the overall bottom line. And what we see now is our guests are really keen on returning back to our theaters. And what is great is it's the expansion of the choices of both the demographics that are coming back and the type of movies that are being released in the theaters.

And to me, it's a much broader array of product that will help us as we move forward. So I'm pretty strong on where we are and where we are going and very optimistic based on the content that's available as we move forward into the future. So I don't think there's a difference when it comes to Canadian moviegoers compared to the US. And I think we will with the international product continue to see an uptick as we move forward into the future.

Gord Nelson

And Derek I just going to add too. So I think look from the demand perspective, I think Ellis script gave a number of examples where the sequels to films are performing stronger than the previous versions and that we're achieving kind of record results. So when the product is there, is people want to go see it. I do really believe it's the supply. And that's why we've been focusing on saying the number of films. And that's -- again we're finally in sort of mid-March or so getting into a period where we have a new film major film being released every week.

And that's -- we haven't been in that situation since the pandemic started. And that's why we were kind of stressing, as April is one of our first months where we have a new film opening every week and we're back into that regular cadence and we're back up to 86% of our tenants, 96% of our box office revenue, 102% of our box plus concession sales and achieve exceeding the EBITDA from April 2019. So yes, I think from our perspective, it's not a demand issue as a supply issue.

Derek Lessard

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

Gord Nelson

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

Ellis Jacob

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

Derek Lessard

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

Gord Nelson

Sure. So, I mean, it somewhat goes hand-in-hand with post-pandemic results. So as again we mentioned our customer verticals or sort of SRs and retailers, shopping malls all areas that have been impacted by the pandemic. And so when they're looking to deploy capital moving forward they're a little bit slower.

And just as I described how we're being somewhat cautious with our capital spend for the rest of this year our customers are likewise. And then on top of that you've got a little bit about the return to mall traffic and we have -- this is our cinema business as the return of theater attendance is advertisers looking to see that prior to making the kind of the larger commitments to the digital signage space.

Derek Lessard

Okay. Thanks for that.

Ellis Jacob

Thank you.

Operator

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

Aravinda Galappatthige

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

Ellis Jacob

So when you look at the LBE, one thing we are seeing is that it really is a confirmation of the consumer behavior, and they are wanting to come out of their homes. And basically, we are seeing a much higher percentage on the gaming side than on the food side. And I think that will continue to improve as our clients start to do more corporate events in the facilities and that will drive the business even harder.

So, overall, I think we will continue to grow and get stronger, and we should have a great year in 2023 and beyond. And I think it's a business that has served us well especially now that the pandemic is over and guests can get together and have a great social experience. And I'll get Gord to talk about the margin percentages.

Gord Nelson

Well, Sorry. And Aravinda, so the one kind of structural, if you want to call that difference is that we have more locations out there in that business. So at the end of 2019 we have nine locations and today we have 13. And then just going back to your numbers, so if you take the $16 million that you described and divide it by the nine locations it's just under $2 million on average per location.

You take the 13 that we had an open for the first quarter and it's just under $1 million for the quarter alone that we did for a location. And if you recall that historically, we've said that on average these things are about $10 million to build and we expect about $2.5 million per location. So we're significantly exceeding the returns that we're expecting in this space.

Aravinda Galappatthige

Okay. Thank you. That's helpful. And then, my second and last question, I know that an area there is obviously some incremental upside and perhaps some catch-up subsidies cinema media. What sort of conversations are you having with advertisers during these times?

Obviously, we're arguably in an ad recession with virtually every platform, posting high single-digit or double-digit declines year-over-year. But maybe just talk to the prospect of recovery towards the year-end and what sort of back and forth you're having with your key advertisers?

Ellis Jacob

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

Aravinda Galappatthige

Thank you very much. I'll pass the line.

Ellis Jacob

Thank you.

Operator

Thank you. Our next question comes from Maher Yaghi from Scotiabank. Your line is now open. Please go ahead.

Maher Yaghi

Yes. Thank you for taking my question. And I wanted to have -- well, I have two short-term questions and one longer term. So I just wanted to ask you on the theater -- the film cost we saw an increase in the quarter on film costs. You probably have a better view a better read on what to expect in the second quarter third quarter.

Can you help us understand the dynamics playing over there? And in terms of tier rent cost you're paying more because of lower subsidies. Have we cleared up all the subsidies yet, or there's still more subsidies that is helping offset any of your rental costs that we could see increase later this year.

And the longer-term question is, related to your dividend. You mentioned that, there is a path that you see right now for the dividend to be reinstated. I just wanted to maybe if you can, tell us what level of operational performance you would like to see other than your leverage ratio, I just in terms of operational performance for you to have the indiction to reinstate that dividend? Thank you.

Ellis Jacob

Thank you. So I will talk about the film costs and then turn it over to Gord to address the other issues. So, on the film rental, as you saw in the first quarter the significant amount of the box office was driven by Avatar, and Avatar was the third largest grossing movie ever and that drove the higher percentage because Avatar represented a quarter of our box office for the first quarter.

Looking forward, it will all depend. Sometimes I say I don't mind paying higher for mental, because usually it results in extremely high box office. So, it's a matter of how the Moody's perform going forward and which studio the movie is released from. And I'll turn it over to Gord. Okay.

Gord Nelson

So Maher, with respect to your question on occupancy then. So yes, the rent subsidies were primarily tied into operating restrictions and closures. So those are now behind us in a good way. And so you shouldn't expect additional subsidies going forward.

The other point that I want to stress is that during the pandemic is, we did get abatements from our landlords and so we don't have deferred rents. So there is not additional rent expenditures that need to be made going forward like some of our peers have. So that's also an important difference at any point.

With respect to your other question on the path of the dividend being reinstated, so obviously the leverage is kind of a key gating item for us is somewhere between 2.5 to three times, which primarily means you're at an EBITDA level which is roughly at the pre-pandemic level. And then I guess the last gating item would be if you want some confidence that we're -- that there are no additional hiccups. The business has returned. So a couple of quarters on that return to normal under our belt and likely four quarters before we contemplate reinstating the dividend.

Maher Yaghi

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

Ellis Jacob

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

Maher Yaghi

Okay. Thank you. Thank you very much.

Ellis Jacob

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Drew McReynolds of RBC. Drew, your line is now open. Please go ahead.

Drew McReynolds

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

Gord Nelson

So, thanks, Drew. So, first of all, on your first question is on capital allocation. And I think as we've said over the past number of years is that, when we look at sort of our typical roughly around $100 million sort of run rate in a normal business type scenario is that we would look to allocate more of our capital towards the LBE business. We have 13 that are open right now. We've said, we believe, that there is opportunity to build about 30 of those across the country. So, as we look forward, it's capital allocation. We're prioritizing LBE and spending where appropriate and required in the exhibition business. And you can see the returns are really paying off in those decisions.

So on your second question, so with respect to semen is with the new structure of Scene, Scene+ is we now equity account for our interest in Scene. So it's an equity pickup, rather than a proportional consolidation. We -- obviously from the Cineplex side of things, when we -- and sorry if I get into accounting, but I know you're counting, Drew. And you'll see in our other operating expenses is that we have seen loyalty points. And so that's the marketing loyalty points and that's our cost of issuing those points. So those will always be there. And then there's an additional item related to Scene, which as we said historically is that's really more of a transitionary type of expense and that we would expect that to go away probably in another year within another year. But the ongoing operating are going through equity income.

Drew McReynolds

Okay. That’s very helpful. Thank you.

Gord Nelson

Thank you.

Operator

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

Ellis Jacob

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

Operator

Thank you for joining today's call. You may now disconnect your lines.