Cineplex Inc

Good morning, everyone, and welcome to the Cineplex Incorporated Q3 2022 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. At the end of the presentation, you will have the opportunity to ask a question by pressing start, followed by the number one on your telephone keypads. I'll now turn the call over to our host, Marcel Rogili, Executive Director, Corporate Development and Investor Relations. Please go ahead.

Good morning and welcome. With me today is Ellis Jacob, our President and Chief Executive Officer, and Gord Nelson, our Chief Financial Officer. Before I turn the call over to Ellis, let me remind you that certain statements being made are forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results could differ materially from those expressed in the forward-looking statements. Factors that could cause results to vary include, among other things, the negative impact of the COVID-19 pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national and world events, discovery of undisclosed material liabilities, and general economic conditions. Following today's remark, we will close the call with our customer request question and answer period. I will now turn the call over to Ellis Jacobs.

Thank you, Massa. Good morning and welcome to our Q3 2022 conference call. We are glad you could join us today. I am pleased to share that the third quarter marked another significant step in the resurgence of Cineplex and the theatrical exhibition industry. The North American box office reached $1.9 billion during the quarter, which was 44% higher than Q3 2021. These results were achieved despite a widely expected and thankfully temporary limited supply of Hollywood content in the second half of the quarter. Leading the box office was Minion's Rise of Gru, which brought families and the highly sought-after teen demographics back, generating over 360 million in North American box office. Then there was Marvel's Thor Love and Thunder, which has earned over 340 million domestically to date, and the continued success of Top Gun Maverick, Top Gun which has become one of only six films to ever exceed $700 million in North America. It is now the fifth largest domestic film of all time. The sustained success of this title 23 weeks after its initial release is truly remarkable. These results, along with many other examples from the past year, demonstrate that consumer enthusiasm for theatrical moviegoing is as strong as ever. Even more promising is that we continue to see significant growth in attendance for our premium offerings, which accounted for nearly 37% of our third quarter box office. We now offer eight different types of experiences for movie lovers, and these investments are showing strong results as our theaters with premium amenities have been the fastest to recover. The bottom line is, when there's compelling content, guests are coming back to our theaters. Leading up to the quarter, Cineplex and the industry as a whole anticipated limited Hollywood content in August and September as a result of pandemic-related production delays. In response, we undertook a series of targeted marketing initiatives to drive attendance and diversify our film slate by increasing focus on international products. We consistently take an industry-leading position in international cinema and we're very pleased with this quarter's results. In fact, we earned an impressive 80% of the North American box office for the Punjabi film Chalamud Ki Nahi Aaye. For Disney's Bollywood title, Bamastra Part 1 Shiva, Cineplex took a notable 28% market share. These are strong numbers, especially for Cineplex, which generally accounts for 7-8% of the North American box office on Hollywood releases. Years' worth of rich data about Canadian movie-going habits has enabled us to match certain content to the right demographics in specific locations. As a result of our efforts, we achieved box office revenue of 70% compared to the same quarter in 2019. From a recovery perspective, our June box office came in at 89% compared to the same month in 2019, followed by 85% in July. Due to the previously mentioned product supply issues, box office results declined in August and September, but Cineplex performed better than the industry as a result of the initiatives I noted earlier. In August, we reached 64% of 2019 levels, exceeding the domestic industry by a notable 500 basis points. Similarly, in September, we reached 52% of 2019 levels, outpacing the North American box office recovery by 300 basis points. And in October, we continued to be impacted by content supply challenges for the first half of the month, but saw our box office recovery reach 62% of 2019 levels. While Gord will speak to our financial highlights in more detail shortly, I did want to emphasize our commitment to growing our diversified businesses. We are particularly pleased with the results of our amusement and leisure segment, which included an all-time quarterly record adjusted EBITDA in both the P1AG and LBE business. The momentum at the box office, combined with growth in our diversified businesses, fueled third quarter year-over-year revenue increase of 36% and adjusted EBITDA of $20.4 million, which is a 90% growth when compared to the same quarter last year. And there's more to be optimistic about. The fanfare and successful opening of Black Adam last month has kick-started the exhibition industry from a film slate perspective. This holiday season will be a busy one with two of the most highly anticipated releases in years, Black Panther Wakanda Forever and Avatar The Way of Water. Black Panther opens tonight for advance showing across Canada and ticket sales thus far indicate that we are on track for a very strong weekend. Avatar The Way of Water, which opens December 16th, is the highly anticipated sequel to the highest grossing film of all time. As you may know, the Canadian Academy Award winner James Cameron directed the film and was also one of the writers. Our team remains focused on reinventing theatrical exhibition and driving attendance. One key pillar of this marketing is marketing and loyalty. During the third quarter, through targeted ScenePlus offers, promotional campaigns, and one-to-one engagement offers, we outpaced the industry as noted above. We also participated in the inaugural National Cinema Day campaign on September the 3rd, where theaters across Canada, the United States, and Europe celebrated moviegoing by opening their doors with $3 admissions. Welcoming over a half a million guests in one day, National Cinema Day was our busiest day thus far in 2022, and third busiest day in the last five years. During the quarter, in partnership with Scotiabank, we also officially welcomed Empire Company Limited to the ScenePlus loyalty program as a co-owner as it initiated its phased retail rollout across Canada. This has resulted in substantial membership growth in recent months, which will continue as the program has rolled out across Canada. Following the launches in Atlantic and Western Canada, the rollout for Ontario occurred last week, and Quebec's rollout is scheduled for early next year. To further underscore the positive momentum for ScenePlus, Home Hardware Stores Limited would also be joining ScenePlus as loyalty partners sometime next summer. ScenePlus growth provides Cineplex with the opportunity to engage and reach a wider range of consumers, including non-moviegoers. From a subscription perspective, we are introducing two important innovations to our CineClub program leading up to the holidays, just in time for the upcoming busy box office and the holiday gifting season. First, in September, we launched the ability for members to purchase annual memberships, and earlier this week, we also launched gifting. This means that this holiday season, Canadians will be able to give the gift of a year of movies to their loved ones. CineClub has been a great success since its launch, and we will continue to innovate and expand CineClub features as we focus on program growth. In October, we hosted the exclusive Black Adam Rocks Canada fan event at the Rec Room Roundhouse, welcoming world-famous Dwayne Johnson into our venue. Over 900 fans and the media enjoyed exclusive photo opportunities, the chance to win various prizes including annual Cine Club memberships and a special advanced screening of Bass Adams at neighboring Scotiabank Theatre Toronto. The success of events like these certainly demonstrates our ability to leverage assets across our ecosystem, whether in a theatre or an entertainment venue, to engage with customers while driving business across Cineplex's operations. I would like to thank Warner Brothers Pictures Canada for partnering with us and we look forward to hosting similar events in the future. In the quarter, we continue to diversify film content and increase our international offerings through our distribution business, Cineplex Pictures. The business continues to grow as we release the anime hit Dragon Ball Super Super Heroes. along with three international films this quarter, including titles from China, South Korea, and Egypt. In fact, this past weekend, two of the top ten films in Canada were distributed by Cineplex Pictures, One Piece Film Red and Pray for the Devil. In addition, we continue to make progress with non-traditional suppliers as they are choosing to showcase their content on the big screen. Now, October, we reached an agreement with Netflix for the theatrical release of Glass Onion, a Knives Out Mystery, later this month. It is becoming increasingly clear that the approach by streamers to collapse theatrical windows and squarely focus on growing a subscriber base does not deliver a sustainable or competitive return. Traditional and non-traditional studios are now forming a new and heightened appreciation for the role of theatrical release in increasing awareness and value for content prior to its launch on streaming platforms. That said, we believe this realization will lead to further content opportunities with exhibitors. As you've heard me say before, exhibition is the engine that drives the train for downstream revenues for any and all content producers. Turning to our next strategic priority, our diversified businesses continue their strong rebound and recovery. As mentioned earlier, our amusement and leisure segment continues to consistently deliver strong results, and this quarter it generated all-time quarterly record revenues and adjusted EBITDA. In fact, revenues for comparable LBE locations reached 95% of 2019 levels, with many locations exceeding 2019 results. Our P1 AG business also performed exceptionally well generating a record adjusted EBITDA and adjusted EBITDA margin of 19.8%. This is reflective of strong top line demand where we saw third quarter revenues exceed Q3 2019 and our team's ability to effectively manage inflationary pressures and control costs. On the media side, we remain encouraged by continued signs of recovery for Cineplex Media and Cineplex Digital Media, both seeing significant improvements in overall revenues for the quarter. With the promising film slate and holiday mall traffic to look forward to, we expect to see further momentum in these divisions moving forward. Overall, we are pleased with the performance of all our businesses and the diversification strategy as a whole, which has been an important pillar for the continued growth of the company. Looking ahead, we are particularly excited about opening the first location of our new entertainment concept, Junction, later this year in Winnipeg. Aptly named as it leverages our capabilities in exhibition and location-based entertainment Junction will provide our guests the ultimate destination for a complete night out. It features multiple entertainment options, including movies, amusement gaming, live events, and expanded food and beverage offerings, all in one great venue. Though Junction is the first of its kind in Canada, the location itself is not new to our circuit. Located in Winnipeg, the new junction location will replace an existing older theater of famous players, Gildon, in place. Our second junction is scheduled to open at Aaron Mills Town Center in Mississauga, Ontario in mid-2023. Before I pass things to board, here is a brief update on the ongoing litigation with Cineworld. As we announced on September 7th, Cineworld filed for Chapter 11 bankruptcy in the United States which resulted in an automatic worldwide stay of all enforcement proceedings against it. We attempted to lift the stay with respect to the ongoing appeal in Ontario, but our request was denied and the litigation is on hold for now. On October 31st, CINAHL received final court approval with respect to its debtor in possession facility, which required agreement from its lenders and landlord. It is important to note that this is not a plan of reorganization. That said, Cineworld remains under Chapter 11 bankruptcy, and we continue to work closely with our advisors to monetize and maximize the judgment claim. Looking ahead, it is clear that all of our businesses are gaining momentum. The global exhibition industry is rebounding as guests return to theaters in search of great movie moments, premium experiences, and a magical escape. Our studio partners and non-traditional studios recognize the underlying importance of an exclusive theatrical window as evidenced by the desire to release their content on the big screen. We're excited by the robust film slate of blockbuster titles for the remainder of the year and into 2023. We feel this lineup, combined with strong consumer enthusiasm for moviegoing, confirms that our business is back in a meaningful way. When assessing the 2023 film slate, it is important to remember that the volume of films isn't the only indicator of success at the box office. Oftentimes, fewer titles means that they can have an extended life in the theaters. At the end of the day, quality is the key driver to success of the box office. As evidence of the success of Top Gun, we look forward to much anticipated titles in 2023, including Ant-Man and the Wasp, John Wick Chapter 4, Super Mario Brothers, Guardians of the Galaxy Vol. 3, Fast X, The Little Mermaid, Spider-Man Across the Spider-Verse, Indiana Jones 5, Mission Impossible 7, Barbie, Christopher Nones, Oppenheimer, The Marvels, and Dune Part 2. In closing, we remain focused on maximizing value across all our businesses and driving shareholder returns. Our balance sheet is solid, and we remain confident in our ability to manage financial uncertainties. Cineplex is well positioned to fully capitalize on surging demand as we head into an exciting holiday season and beyond. I'd like to thank our incredible team for all that they do to enhance our position as an industry leader. With that, I will turn things over to Gaur.

Thanks, Ellis. I am pleased to present a condensed summary of the third quarter results for Cineplex Inc. For further reference, our financial statements and MD&A have been filed on CDAR. and are also available on our investor relations website at cineplex.com. Our MD&A and earnings press release include a fulsome narrative on the operational results, so I will focus on highlighting and quantifying some of the key operating results and provide commentary on our liquidity and outlook. As Ellis mentioned, we were pleased with our Q3 operating results. We reported adjusted EBITDA of $20.4 million dollars, And although the film exhibition segment faced some film release schedule challenges, our diversified business model continues to deliver with our amusement and leisure businesses reporting its strongest quarterly adjusted EBITDA ever. Total revenues increased 36% to $339.8 million from $250.4 million in the prior year. Net income was positive $30.9 million as compared to a net loss of $33.6 million in the prior year. And adjusted EBITDA increased 90% to $20.4 million from $10.8 million in 2021. In our film exhibition and content segment, attendance increased 34% to 11.1 million people in the current quarter as compared to 8.3 million in the prior year. We reported second quarter BPP of $11.25 and CPP of $8.35. Both of these metrics were impacted by the industry-wide National Cinema Day with its discounted product offering. As Ellis referenced earlier, National Cinema Day was a huge success, driving approximately 5% of our total quarter attendance. But it impacted BPP by approximately $0.43 and CPP by approximately $0.15. In mid-June, we introduced an online booking fee, which is included in other revenues. And for the third quarter, this item contributed $5.2 million in revenues. For the quarter, our box office revenues were approximately 70% of the pre-pandemic period, being Q3 2019. and our total segment revenues were approximately 77% of this pre-pandemic period. Segment-adjusted EBITDA of $10.7 million increased 21% from $8.8 million in the prior year. On the media side of the business, we are seeing our clients return and report a third-quarter media segment revenue of $25 million as compared to $13.9 million in the prior year. The increase was primarily due to cinema media revenue, which increased $15.1 million in Q3 2022 from $6.6 million in the prior year. Our overall media segment adjusted EBITDA increased to $12 million from $6 million in the prior year. In comparison to the pre-pandemic period, our media segment revenue was approximately 58% of our Q3 2019 levels, but this was impacted by strong hardware sales in our digital place-based media business in Q3 2019. If we excluded hardware sales, our overall media segment revenue is at approximately 66% of the Q3 2019 levels, with cinema media at 67% of Q3 2019's level, and digital place-based media revenue at 63%. The results in our cinema media business are encouraging as we generated 67% of Q3 2019's level with 63% of the attendance level. As we continue to see growing traffic patterns in our cinemas and in malls, we expect to see further recovery in our media businesses. Our amusement and Ouija segment had another incredible record-breaking quarter. This business segment continues to outperform the pre-pandemic period on a top line and bottom line basis. Both P1AG and our LBE businesses had record quarters, as each had strong top line results, margins, and third quarter record adjusted EBITDA. Segment revenue increased to $76.6 million as compared to $57.2 million in the prior year. and segment EBITDA increased to $18 million from $15 million in the prior year. Our amusement and leisure segment total revenues exceeded the pre-pandemic levels, coming in at 119% of the Q3 2019 levels. G&A expenses increased 11.2% to $16.9 million from $15.2 million in the prior year, primarily due to increased payroll costs as a result of a decrease in wage subsidies and increased costs related to certain digital and technology initiatives, partially offset by reduced litigation and advisory costs. These items are described in more detail in our MD&A. For the third quarter of 2022, we reported net CapEx of $11 million as compared to $3.6 million in the prior year. For 2022 and beyond, we will continue to be prudent with our growth initiatives. Our guidance for net capex for 2022 remains at $65 to $70 million, and our guidance for 2023 is approximately $100 million. Before discussing our liquidity position, I wanted to briefly touch on the following five items, scene, center world, taxes, impairments, and finally, Canadian Digital Cinema Partnership. First, I want to talk about SENE. During the third quarter, we recognized a gain related to the 2020 sale of one-third of our 50% interest in SENE LP, as specified non-financial milestones were met. As such, we are reflecting a gain of $50.1 million in the Q3 financial statements. Second, with respect to the Cineworld litigation and to Bill and Ellis' earlier comments, as in past quarters, no amount has been accrued as a receivable in our financial statements due to the uncertainties in timing and ability to recover. Third, I want to remind you of the benefit of the tax asset that was de-recognized during 2020 as a result of uncertainties related to the pandemic. As described in Note 8 of our year-end financial statements, we currently have non-capital losses totaling $314.6 million to utilize against future periods, and as such, you should expect minimal cash taxes over the next two years. We continue evaluating the recoverability of these deferred tax assets and will recognize such assets when and if appropriate. Fourth, in addition to the deferred tax assets, As our business continues to recover and returns to profitability, the reversal of a portion of previously recognized impairments may be appropriate. Finally, in our subsequent events note, we discussed the planned end of the Limited Life Financing Entity Canadian Digital Cinema Partnership, or CDCP. CDCP expects to distribute its remaining assets to its partners in 2022, and Cineplex expects to record a gain of approximately $4.2 million on dissolution and receive a nominal cash amount. Historically, we have excluded the impacts of CDCP in our calculation of adjusted EBITDA as it was a limited life financing entity. I'd be happy to answer further questions about these five items in the Q&A, however, I would like to now move on for the time being and speak to our balance sheet, in particular, our strong liquidity position. Q3 2022, we reported net borrowings of $38 million under our credit facilities, which left us with $332 million drawn and approximately $200 million available under our credit facilities as at September 30th, 2022. As Ellis spoke to earlier, the industry saw a void in the release schedule beginning in mid-August, which would impact our Q3 results. Anticipating this, we proactively approached our lending syndicate to ask for a suspension of covenant testing in Q3. With their ongoing support, they quickly agreed to the suspension of testing in Q3, with commencement again in Q4. I would now like to address some macroeconomic concerns in today's environment, including recessionary concerns, inflation, and interest rates. With respect to any recessionary concerns in the economic outlook, it is important to note that the exhibition industry has fared extremely well during past recessionary cycles. As consumers trade down their out-of-home experiences, moviegoing becomes the affordable option. In fact, during seven of the last nine recessionary periods, box office revenues have increased. As we see rates of inflation that we haven't seen in decades, it is important to understand the overall cost structure of an organization in understanding potential impacts. At Cineplex, our top four cost categories make up approximately 75% of our overall cost. Film cost is approximately 25% of our overall costs and is a 100% variable cost based on the related box office revenues. Rent and occupancy related costs represent approximately 20% of total costs and are typically contractual and fixed in nature. Payroll related costs are approximately 20% of total costs and are subject to wage markets and minimum wage impacts And lastly, food costs represent approximately 10% of our overall costs. And this is a cost category that is impacted by inflationary pressures. As you can see here, cost structure is one where we are not as significantly impacted by inflationary cost pressures. But to the extent that we do see cost pressures that we cannot offset through other means, we believe Cineplex can turn to pricing as others have done. The last macroeconomic factor I want to discuss is the interest rate environment. We believe we are well positioned in this regard. Cineplex is currently in an over-hedged position on our bank credit facility. We have hedges totaling $450 million as compared to $332 million in borrowings as at September 30th, 2022. These hedges are at fixed rates of between 2.83% and 2.945% maturing between November 2023 and November 2025. In addition, our $250 million high yield offering is fixed at 7.5% and our convertible debenture is fixed at 5.75%. As we look at our balance sheet, our capital allocation strategy is to remain focused on de-levering and strengthening the balance sheet as we navigate towards our target leverage range of 2.5 to 3 times. Over the past six months, since fully opening without restrictions in April 2022, we have generated positive free cash flow and adjusted free cash flow. We expect this trend to continue as business volumes increase. And during the next year or so, we will continue to define and move towards our optimal capital structure. As Ellis mentioned, there's a lot for the exhibition industry to be excited about. We have a resilient business, great product coming, and we have a renewed focus from studios on the importance of theatrical exhibition. We remain focused on the recovery of our businesses while exploring opportunities for value creation. And that concludes our remarks for this morning, and we'd now like to turn the call over to the conference operator for questions.

Thank you. If you'd like to ask a question, please do so now by pressing start followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press start followed by two. We ask that when you're preparing to ask your question that you ensure your device and your microphone are unmuted locally. Our first question today comes from the line of Adam Shine with National Bank. Please go ahead, Adam, your line is open.

Thanks a lot. Good morning. Ellis, you touched on the center world litigation. I just want to go back to maybe some of the speculative headlines that we've seen over the last few weeks around the bankruptcy and possible discussions that you guys might have had with lenders. I'm going to presume that you can't say much, but obviously there was a lot of speculative headlines around what could get resolved around Regal and your particular outreach, not just to Cinerworld, but in particular to the lenders. So anything that would be helpful, and then a couple for Gord, please.

Adam, it's a good question, and we with our advisors are looking at all options and opportunities to maximize the value of our claim. and looking at what potential situations are moving forward. But there's not much I can disclose that we have discussed that would be of any meaningful to our team of panelists and groups.

Can I ask you just as a follow-up, Alice, just in terms of, you know, the obvious next steps, do we need to get to a plan of arrangement ultimately being approved, you know, force in a world as, you know, I guess next steps that you're either a part of potentially and or obviously moving towards, you know, a return of the appeals process sometime next year?

We really are in a position now where we have to wait and see when Cineworld comes out of the position they are in and what the Texas judge says as it relates to the initial dip which we just saw got processed through. So we are in the sidelines and waiting to see with our advisors any opportunities that are available.

Okay, I'll take it there. Gord, a couple for you. Obviously, a great rundown in terms of the additional color that you've provided. If we think about the scene dynamic and the context of the gain of the third sale, we know that there's been some accounting adjustments that you've elaborated on in prior quarters. regarding the reorg at scene. Is there anything you can help us with in regards to, you know, either profitability or evolving losses at scene and whether, you know, those, I presume losses, uh, improve, uh, as we move forward, any, any color around that would be great as a starting point.

Yeah. So a number, a number of things there, Adam. So, you know, obviously the, you know, I referred to the gain amount, which, um, you know, goes back to the, uh, the proceeds that we received back in 2020. And as I mentioned during the call, certain sort of non-financial covenants were met that are allowed us to record the gain. During this quarter, we've talked about, you know, with our sort of with our With the new arrangement under SIEM and SIEM Plus and having three partners and now, as Ellis mentioned, expanding to include home hardware in the future, we affected that sort of change in accounting. We were taking the SIEM discount and charging as a marketing expense, and we've been breaking that out for you in the MT&A each quarter, so that's a change that we see and we disclose for you each quarter. And then the last piece, which you referred to, is sort of the overall economics of the scene program. And, you know, you'll see in our other operating expenses, we do disclose, you know, the two items related to the scene. One is related to the issuance of points, and then the other one is, in effect, sort of a net position related to scene. You know, it's relatively in line with where it has been in other quarters. And, you know, I would expect it, as we're going through this stage where we're introducing, you know, large new participants in the program that it will stay at that level at some point in time and then when we sort of normalize and are more run rate so is you know as else alluded to is bringing home hardware into 2023 is as i would expect it would kind of neutralize itself down to potentially a more break-even level after that okay that's very helpful and just lastly i mean you touched on

A couple of elements in regards to the scene reorg dynamic obviously has created a bit of a bump in the context of obviously revenue at the top, but also in terms of other OPEX. Q4 seems to be setting up as a more normalized, if we can use that word, quarter for the first time in nearly three years through COVID, which sort of sets us up with a line of sight towards other OPEX that, you know, if we go back to Q4 18, let alone a number of the quarters in 2019, you know, start to work its way up, you know, obviously into the 150 million plus zone. Specifically, I'm talking other OPEX. So as we think about Q4 and puts and takes, should we think about a level, you know, moving back up above $150 million, but not necessarily above $160 million for Q4 this year?

Look, I think there's a lot of things that we're looking to see going forward. We've talked a lot about some of the improving margins in the amusement and leisure business and some of the initiatives that we've seen with respect to the exhibition business. Look, it's all going to depend on the volume of the business during the fourth quarter.

Okay. Well, I'll leave it at that. Thanks.

Thank you.

Our next question comes from Mayor Yagi with Scotiabank. Please go ahead.

Yes, thank you for taking my questions. Alice, you mentioned in your prepared remarks about the discussion among streamers to backtrack a little bit from the drive to send everything online. we did hear something like that coming from one of brothers as well on their call so hopefully we see this trend reverse soon but just specifically on the topic you know your deal with netflix on knives out can you discuss what you are hoping to achieve on this project and if success could lead to additional rollout of theatrical releases with netflix also if you can also discuss the The short window for that movie, what's your view on it and can we see longer windows coming from Netflix going forward? I have a follow-up question after that. Thank you.

Good question. And really what's important is that, as I've said publicly numerous times and in my script was about We, theatrically, are still the engine that drives the train for future value, and even with Nights Out, Netflix has recognized that, look, we need to basically get this out there and get our subscribers aware of what we have in content. So it's a great marketing tool for them, and it's also a great opportunity for our guests to come to the theaters and see the movie on a big screen, which the original one was released on the big screen. There's a lot of opportunity with a number of these different groups, including the streamers like Apple and Amazon. What you're going to see is a move towards a window. It may not be as long as some of the other windows, but again, it's basically a cost versus reward perspective that one has to look at. But it's very encouraging, and I'm quite confident that we are going to see more content on the big screen.

Great. And in terms of margins for these, let's say, shorter release, shorter window movies, Are we looking at similar margins in general as the longer release cycles?

Well, we can't discuss publicly what we've negotiated with each one of the streaming companies, but overall it's a strong situation for both companies, and we feel that this is a great model for others to participate in.

not specifically to glass onion but to other ways of releasing these movies when it comes to windows and the ability to get them out on the big screen okay and my second question is more bigger question bigger bigger you know bigger question in terms of view and as we look into 2023 uh with an improving slate of movies Can you provide some general view on how this improved slate would mean to your attendance and box office revenue levels? Are you hoping to get back to 2019 levels, for example, in next year? Is that the plan? Is that the goal?

Yeah, we would like to see a strengthening, and as I've said in my remarks, there are a lot of big movies that are being released in 2023. And one of the things I look at at Cineplex is our average screen count is lower than our peers in the other North American cinema chains, and that in a way helps because you don't want an extremely large amount of product because what happens is one product goes right into the other. So if you've got a reasonable amount of strong titles, we should do very well and perform well. And the benefit we also have is we've grown our international product business significantly. And then with Cineplex Pictures, we are also releasing films. So taking that all into account, I'm optimistic that 2023 will be a great year for us going forward. And this is all based on the fact that we don't end up with any COVID issues as we move into 2023. But what's really promising is we've seen a strong resurgence in upscale clientele coming back. With the number of the movies that we have out there like Tar, Ticket to Paradise, The Banshees, they've all done extremely well and that's a much more upscale audience.

Okay, great. And maybe my last question, are you seeing still any push out in terms of releases of movies because of the pandemic? You know, seeing the delays, are we seeing an improvement in those delays or it's still the same as let's say last quarter?

There has been an improvement because a lot of the studios have opened up to continuing with the productions. That's not to say there could be some slippage, but it may not be COVID related. It may be an actor or actress that gets impacted on the filming and has to delay the final productions. But we feel pretty confident with the release schedules that we're looking at into 2023, that there are going to be some strong, meaningful releases all through the year.

Our next question comes from Derek Lessard with TD Securities. Please go ahead, Derek.

Good morning. This is Cheryl calling for Derek. Congrats on the solid results. So my first question is that looks like you've drawn about $38 million in your credit facility this quarter, and we're just curious what's driving that and if you expect this to continue.

Yeah, hi, it's Corey here. So we were adjusted free cash flow positive. Really the draws, if you looked at our statement of changes, is it's really timing of payments. So it's primarily the change in working capital is driving that increased borrowing amount.

Okay. And so you're not expecting that to continue into Q4 or going forward?

No, it was, and so just to provide, so it was about $26 million was the change in operating assets. And so no, that's typically a timing issue. Usually over the course of a year, it would be relatively neutral.

Okay. Okay, thanks for that. And my second question is, do you expect growth in your BPP and CPP going forward following the National Cinema Day? and if you anticipate this to be an annual promotional campaign.

Yes, we do expect our BPP and CPP to continue to grow as we move forward. And on the National Cinema Day, yes, we are in discussions with all of our peers around the world and looking to make it even bigger in 2023.

Okay, that's great to share. Last one for me on Sunday. So looks like your theater payroll is up as a percentage of box office revenue and above the pre pandemic level. And I'm curious what's driving that and are you seeing increases in labor costs? Thank you.

Yeah, so as compared to the pre-pandemic level, which is 2019, there's been, you know, obviously some minimum wage increases over that period. So that's really driving it. And so there's two parts to it. One is that, and then two is with respect to kind of just where the business volumes are, you know, what creates, I'm not going to call it inefficiencies, but the certain minimum levels of staffing that you need to have. So that's impacting the overall ratio.

Our next question comes from Aravinda Galapatige with Canaccord. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to touch a little bit on cinema media. As you mentioned, Alice, you know, you kind of got back up close to that 90% of pre-pandemic levels at the box office in that June, July level, I think 85% and 89%. And as we kind of look at Q4, strongest slate, I suspect you're kind of reengaging your advertisers perhaps more vigorously. I wanted to get a sense of what those conversations were like. Obviously, on one hand, there is the macro headwind, but on the other, your attendance is ramping and there are obviously, as we've been discussing for years, there are benefits to incident advertising. I wanted to get your thoughts on that to begin with.

There's a strong desire from our advertisers to get back on the big screen. With the fourth quarter, we see some strong continuation of where we will see growth, both on the overall side of the business and the mall side of the business, because there's strong momentum for advertisers in both those areas. And one of the benefits of, you know, our advertising in a lot of ways, it's very focused and, you know, goes directly to the consumers that our advertisers want to approach. Okay. Thank you. Fixed labor. Sorry. Go ahead.

I finished your thought, Ellis. I just had a second question unrelated.

No, no, no. All I wanted to say is our labor costs on the media side is pretty well fixed, so any additional money, there's a higher return to the bottom line.

Okay, great. Thank you. And then my second and last question, perhaps record on the online booking fees. It seems to be coming in nicely. How should we think about this line item going forward? It looks like it's close to $6 million a quarter. Could that kind of ramp Are you seeing any kind of pushback on that and maybe a little bit of color on how that can kind of seep into the to the bottom line as well? Thanks.

Yeah, I mean, I guess, you know, from your perspective, in terms of, you know, how you blame on a model going forward is is, you know, if you looked at that on a per patron basis, you know, that may give you a good indication of how you want to how you want to model going forward. You know, obviously, We have three different categories of booking fee. If you're a subscription member, there's no fee. If you're a SIEM member, it's a dollar. And if you're neither of those, it's $1.50. We do about somewhere between 50% and 60% of our purchases are online. So from a modeling perspective, I think you can use some of those reference points that I provided going forward. With respect to the reaction, I guess, is look at I think the world has converged to transacting digitally, particularly during the pandemic. I think what we're all seeing is introductions of various types of fees on top of any transaction that we're doing, whether we're ordering food or whether we're ordering a taxi. And so it's kind of commonplace. We saw a little bit of reaction in social media when it was first introduced, but since then, we haven't really seen much reaction.

Our next question comes from Drew McReynolds with RBC Capital Markets. Please go ahead, Drew.

Yes, thanks very much. Good morning. For you, Cord, on the $100 million in CapEx for 2023, In the past, you've done a good job of unpacking some of the moving parts. That's a little higher, I think, than certainly we were expecting or forecasting. So wondering kind of how that breaks down, but also looking beyond through the medium term, how you kind of see the puts and takes on CapEx.

Sure. So with respect to the CapEx, I would break out the $100 million as follows. I would suggest that there's about $40 million in builds. As I've mentioned to everyone historically, the average cost of a build is about $10 million. Some are less, some are more, depending on the size, but on average, they're about 10. In terms of what we're looking to do, I think you're going to see one theater. We're going to have one junction, so the Aaron Mills Junction is going to come online next year. and two LBEs. So I think that's a good way of looking at our, you know, capital going forward is, you know, more towards diversified business models being the junction and the LBEs as we go forward. So about 40 million in builds, new construction, about 30 in maintenance capex, which has been, you know, sort of our pre-pandemic guidance number. introducing premium experiences, additional premium experiences across the circuit somewhere between 10 and 20. And then in our digital media business, in our amusement solutions business, P1AG, to the extent that we're bringing on new customers and that we need to make additional investments in those, potentially somewhere between 10 and 20. So that would be the breakdown of the $100 million. And as we go forward, we would expect something on that level, you know, probably plus or minus $10 million, depending on whether there's three bills in a year, or five bills a year.

Okay, okay. Now, that's, that's super. Thank you for, for that. And maybe just extending the discussion as we, you know, come out of the pandemic, and you've got a little bit more kind of flexibility here, you know, how do you, how do you size up your footprint on the

lbe side but also on the theatrical exhibition side if you can kind of uh give us give us to the extent you can just some some granularity just to set expectations here so um and and drew i kind of want to add also that you know these projects that i'm talking about that we're have in capital for next year um are really commitments that we had in place in 2019 there was obviously Very little building being done during the pandemic, not only for us but for others for very good reasons, including supply chain issues amongst others. So these are commitments that we had in 2019. We've always disclosed that from the LBE side of the business is we're at 13 locations. We believe there's opportunity to get up to 30. So we will continue to look for opportunities in this potentially disrupted landscape, retail landscape, that are promising. So we'll continue to look for those. We're very excited to introduce the junction concept. And our first will be open in Winnipeg in the next month or so. And then we have the Aaron Mills coming out in 2023. Both of these concepts, are options that potentially could retrofit into either existing theaters or replace existing theaters. So, you know, as we look forward, as I discussed, premiums is the focus on kind of the core theater base. LBE concepts, junction concepts, are potential for new and or retrofits. And then we will always evaluate the circuit capacity and determine whether there's opportunities to either reduce or modify the uses in those theaters. Okay.

Super.

Our next question comes from Tim Casey with BMO. Please go ahead, Tim.

Yeah, thanks. Just a couple for me. Could you talk a little bit about expectations just following up on the working capital question? Quite often historically, I guess, you would see a significant contribution there from gift cards in the fourth quarter. Wondering if you're expecting that to kind of normalize, so if we should see a positive working capital swing, a significant one in the fourth quarter? And then with respect to your comments on the outlook for junction and rec rooms and whatnot, you mentioned that you've wanted to be opportunistic. What are you seeing out there? Are you seeing positive signs that you're willing to commit to, or do you still think you've got to let... you know, potentially a recession hit or more of a washout in the property market or whatnot. Just any color you could provide there. Thanks.

Okay, thanks, Tim. So, again, the first question, yeah, you're absolutely right. It's typically what we would see is we would see an inflow of working capital in the fourth quarter as corporate customers and individuals were buying gift cards and corporate tickets. We're launching digital gift cards this year. So over the past two years, we always are trying to look to make sure that we can make it easier to transact with us. And so, yes, with a robust gift card market, you would expect working capital to be positive in the fourth quarter. That would be the typical state. On the second question is, with respect to being opportunistic is we will always kind of continue to be opportunistic. I believe, you know, as we look at some changes going on right now, potentially, you know, that are attractive sites for us. Mall landlords want entertainment and food destinations to be anchors for their retail tenants. So, you know, the extent that we see attractive opportunities today that may not be there in a couple years from now, if it's a specific site, is we will take advantage of those. So I would say, yeah, we're in the period right now where we don't need to wait for a further recession. I think it's time that we can start working and acting on it.

Thank you.

Those are all the questions we have time for today, so I'll now hand the call back to Ellis Jacobs for closing remarks.

Thank you very much, and thanks again for joining the call this morning. As you heard today, our company is very well positioned. We look forward to speaking with you again in February for our fourth quarter results. Until then, please take care, be well, and enjoy a movie at your local Cineplex theater. And thank you, and have an awesome number of days for the weekend, too.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.