Cineplex Inc.

Hello, everyone, and thank you for joining the Cineplex Inc. Q2 2022 earnings conference call. My name is Darius, and I'll be moderating the call today. Before handing over to your host, Mahsa Rajari, I would like to remind you that if you would like to ask a question during the Q&A session, please press star, follow for one on your telephone keypad. I now have the pleasure of handing over to your host, Mahsa Rajari, 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 Gordon Ellison, 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 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 remarks, we will close the call with our customer question and answer period. I will now turn the call over to Ellis Jacobs.

Thank you, Masha. Good morning and welcome to our Q2 2022 conference call. We are glad you could join us today. As I address our quarterly results, I am pleased to announce that our business generated a positive net income and highest adjusted EBITDA since the pandemic began. This milestone was driven by a strong phone slate and record results from across our diversified businesses. These results benefited from our strong operational management and strategic marketing campaigns. Leading the box office was Dr. Strange in the Multiverse of Madness, which delivered 75% more domestic box offices than the original release in 2016. Then there was Jurassic World Dominion and the highly successful Top Gun Maverick, which has grossed over $1.3 billion at the global box office. It has become Paramount Pictures and Tom Cruise's most successful film of all time. Even today, 11 weeks after its release, it continues to perform well. We were also pleased to see great success with mid-year titles including Elvis and Everything Everywhere All at Once, which became A24's highest all-time grossing motion picture. The success of these films and other blockbusters this year is a validation of the industry's recovery. The North American industry box office exceeded $2.3 billion during the quarter, which is nearly a three-fold increase from the same quarter last year. It is no longer a question of whether customers will come back to theaters. They are coming back from every cohort and from all genres of film. You saw this with Top Gun and Elvis, films that brought back adult guests to our theaters, and Sonic the Hedgehog 2 and Minions Rival crew, which brought families and the highly sought-after teen demographic back and forth. Also, originally scripted films such as The Blackthorn and No perform well for the horror and suspense genre. And last weekend, Bradford's highly anticipated Bullet Train was released with a domestic box office of $30 million. As you can see, like our industry peers globally, we are highly encouraged by the box office momentum reflected in our second quarter results. When comparing pre-pandemic periods in 2019 to 2022, April's box office reached 56%, May reached 72%, and the growth continued into June at an impressive 89%. July results were almost as strong, coming in at 85% of 2019. It is worth noting that April 2019 is a tough comparative period as Avengers Endgame was released that month and became the highest grossing term of all time. These results fueled a second quarter year-over-year revenue growth of 439% and adjusted EBITDA of $35.8 million. We drove stronger patron spend with a second quarter record BPP of $12.29 and an all-time quarterly record CPP of $8.84. In fact, all of our reported segments generated positive adjusted EBITDA. We were particularly pleased with the results of our amusement and leisure segments, which included an all-time quarterly record adjusted EBITDA on B1AG, and a record second quarter adjusted EBITDA in the LBE business. It is also important to remember that we are driving these strong results even as consumers contend with concerns over inflation and speculation of a looming recession. The theatrical business has historically been resistant to recessionary pressures. Going to the movies is an affordable form of out-of-home entertainment, certainly more so than options such as sporting and live music events. Case in point, the domestic box office has actually grown in the last seven out of nine recessionary periods. Overall, we are very pleased with our second quarter results and look forward to continued business growth. I will now provide an update on the strategic priorities that were outlined during our previous earnings calls. As a reminder, these include reuniting theatrical exhibitions, growing our diversified businesses, leveraging our ecosystem, and continuing to apply financial discipline and operational excellence. First, we are reigniting theatrical exhibition and driving attendance through numerous strategic initiatives. If you can believe it, one year ago today we introduced CineClub to Canadians, and we are pleased with the strong demand and interest in the program, already attracting approximately 75,000 members to date ahead of our projections. What is even more impressive is that despite the closures and restrictions we saw in the first three quarters of its launch, CineClub's membership has shown strong growth each month since reopening. It is also delivering a very low churn rate, demonstrating the program's value to all members. During the quarter, our CinePlus program expanded as we welcomed Empire Company Limited as co-owners along with Scotiabank. The addition of Empire's over 1,500 stores to ScenePlus will provide even more ways for customers to earn and redeem points on nearly all of their daily purchases. For us, the expanded partnership increases program engagement and will grow the membership base, allowing our team to target and engage with a wider range of consumers, including non-movie goers. This quarter, we continued our efforts in offering alternative content to attract new audiences. Programming from Cineplex Events in the second quarter included the anime feature Jujutsu Kaisen Zero and the Metropolitan Opera titles such as Dead on Doors and Hamilton. We continue to see momentum through our focus on international cinema. In fact, in every month during the quarter, international films consistently accounted for 5 or 6 of the top 20 films on our film slate, and we continue to take a dominant share of the North American market in international cinema. For instance, the Bollywood film, Bold Woolly Up 2, saw cineplex achieve a North American market share of 32%. Also, we accounted for an impressive 66% of the domestic market for Suntan Sunni, another Bollywood feature. This is an incredible feat, and it didn't happen by accident. It was fueled by customer data that enables us to match specific content to the right demographics in specific locations. We also continue active discussions with non-traditional suppliers about showcasing their content on the big screen. Without question, non-traditional studios are forming a new and heightened appreciation for the role of a theatrical release in increasing awareness and value for content prior to launching on streaming platforms. A key focus area in reigniting theatrical exhibition is to increase per patron spent. During the quarter, our box office per patron was up 10.4% compared to Q2 2019. mainly resulting from the favorable mixtures to premium offerings as well as strategic pricing actions. Our concession for patron reached an all-time high when it was up 25.6% compared to the same quarter in 2019. A combination of a higher incidence rate, higher average basket size of concessions and alcohol, and strategic pricing actions were key drivers to these exceptional results. In mid-June, we also followed in the footsteps of our industry peers and introduced an online booking fee. These auxiliary revenues will fund the expansion and enhancement of our digital infrastructure and digital offerings to ultimately enhance guest experience. Speaking of guest experience, this quarter we continue to benefit from investments we've made and continue to make in premium amenities in our theaters across Canada. We now offer eight different types of experiences for movie lovers, and during the quarter added another ScreenX location, bringing our total to 11 auditoriums. These investments are showing strong results as we have seen theaters with premium amenities experience the fastest recovery coming out of the pandemic. In fact, 42.4% of our total box office was driven by premium formats. Turning to our next strategic priority, we are pleased to see strong rebound and recovery in our diversified businesses. Our diversification strategy is an important pillar for the continued growth of the company. This quarter, we reported an all-time quarterly record in amusement revenues. Our LBE business generated all-time quarterly record results and saw a strong same-show growth in both top and bottom lines as compared to pre-pandemic results. In fact, the adjusted EBITDA for comparable locations reached 87% of pre-pandemic levels during the quarter, and in Alberta, all of our locations exceeded 100% of 2019 levels. Our P1AG business also performed exceptionally well, generating a record adjusted EBITDA and an adjusted EBITDA margin of 18%. This is reflective of strong top-line demand and our team's ability to effectively manage inflationary pressures and control costs. On the media side, Cineplex Media and Cineplex Digital Media continue to demonstrate encouraging signs of recovery, and we saw significant improvement in our overall media revenues for the quarter. Going forward, we expect to see further momentum in both media businesses as audiences and mall traffic return and advertisers increase their media spending. In fact, digital media is gaining traction by winning new clients. Earlier this week, we announced the addition of Primera Street and their circuit of shopping centers to our digital out-of-home mall networks. Our third strategic priority is to leverage the CinePlus ecosystem to unlock value by leveraging richer data available to us in the expanded CinePlus program and by applying digital tools to better mine opportunities within our existing movie-going audience. Our fourth and final strategic priority is focusing on optimizing our operations and assets. During the quarter, we exited one location in Windsor, Ontario, sold another location in Antigonish, Nova Scotia, and received proceeds of $5.4 million on a restricted lease rights transaction. We continue to apply financial discipline to manage capital allocation across our businesses and work towards achieving our target leverage ratio of 2.5 to 3 times. The second quarter marked the first credit facility test of our covenants, and we were pleased to report an annualized leverage of 3.24 times, which is well below the required total leverage ratio of 3.75 times. Before I pass things to Court, here is a brief update on the ongoing litigation with Cinnabon. As we announced in December 2021, the Ontario Superior Court of Justice issued the judgment for $1.24 billion in favor of Cineplex. While Cineplex is a large company, we believe that we will take all steps to respond and advance Cineplex's processes. We remain focused on the Ontario Court of Appeal hearing, which is scheduled for October 12th and 13th of this year. Having announced hearing on AGM in May, we have engaged Molus & Company as a financial advisor and Goodman's LRP have leaped to maximize the judgment against Cineworld. Judgment and future steps are a key focus for Cineplex and its advisors. Looking ahead, it is clear the global film industry is rebounding as guests flock back to theaters in search of great movie moments, premium experiences, and a guaranteed escape. The sustained quality and diversity of future releases will keep guests coming back to our theatres as consumer sentiment regarding the pandemic improves. While we are optimistic about the upcoming film space for 2022 and beyond, we anticipate a short-term content supply chain disruption in late August and September, primarily due to pandemic-related production delays. We are well equipped, however, to pass this period and are now quite adept at navigating temporary dips. We have the full support and confidence of our lending group and have proactively amended our credit facility for the suspension of financial covenants in the third quarter of 2022. We look forward to a strong close of the year with a host of much-anticipated titles set for release, including Don't Worry Darling, Thrones, Halloween Nance, Black Adam, romantic comedy ticket to paradise starring Josh Clooney and Julia Roberts. Pray for the Devil, the highly anticipated Black Panther, Wakanda Forever, whose trailer yielded 172 million views in its first 24 hours. Puss in the Boots, The Last Wish. Shazam, Fury of the Gorge. The Whitney Houston biopic, Wanna Dance with Somebody. And the most anticipated film of the year, Avatar, The Way of Water. We also remain highly encouraged as we look to 2023 with industry experts projecting another year with a strong film slate. Just to name a few tenfold titles, we're excited to see Ant-Man and the Wasp, Quantumania, Aquaman and the Lost Kingdom, John Wick Chapter 4, Super Mario Bros., Guardians of the Galaxy Volume 3, Spider-Man Across the Spider-Verse, Indiana Jones 5, Mission Impossible 7, Bargain, Oppenheimer, The Marvels, and Dune Plot 2. In closing, we are confident in our business and our efforts to manage financial uncertainties as we have done during past economic downturns. The second quarter results and recent film performance clearly demonstrates that with strong film products, cats want to come back to our theaters. We are poised to capitalize on the impressive film slate and we will continue to reap benefits from the promising momentum we are seeing in our other businesses. Our balance sheet is solid. We are well positioned for a sustained recovery. Finally, we will continue to advance growth initiatives and drive long-term value for our shareholders to maintain our position as an industry leader. With that, I will turn things over to Borg. Thanks, Phillips. I am pleased to present a condensed summary of the second quarter results for Cineflex TV. For further reference, our financial statements and MD&A have been filed on CDAR and are also available on our investor relations website at cineflex.com. Our MD&A and earnings press release includes 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 extremely pleased with our Q2 operating results. We reported positive net income for the first time since the pandemic. We reported our strongest adjusted FIDEL of $35.8 million since the pandemic. And we reported records in some of our key metrics, including BPP and CPP. In addition, our amusement and leisure business reported its strongest adjusted EBITDA ever. All of this despite certain operating restrictions being in place in early April. Total revenues increased 439% to $349.9 million from $64.9 million in the prior year. Net income was positive $1.3 million. as compared to a net loss of $103.7 million in the prior year, and adjusted EBITDA improved to $35.8 million from an EBITDA loss of $52.2 million in 2021. In our film exhibition and content segment, attendance increased to 11.1 million in the current quarter as compared to 1.1 million in the prior year. We reported a record second quarter PPP of $12.29 and an all-time record quarterly PPP of $8.84. Our box office revenues were approximately 72% of the pre-pandemic period, being Q2 2019, and our total segment revenues were approximately 78% of this pre-pandemic period. Segment adjusted EBITDA of $21.3 million increased significantly from our segment EBITDA loss of $37.4 million in the prior year. We have seen our media clients come back once we reopened and reported second quarter media revenue of $26.2 million as compared to $9.4 million in the prior year. The increase was primarily due to cinema media revenue, which increased $16.3 million in Q2 2022. Our overall media segments adjusted to Adele increased to $14.2 million from $1.4 million in the prior year. In comparison to the pre-pandemic period, our media segment revenue was approximately 54% of our Q2 2019 levels. Media businesses were impacted by the operating restrictions in the early parts of April, but also by the uncertainty that restrictions throughout the year created in our clients' strategies. They look to commit to cinema and our digital place-based networks. As we continue to see strong traffic patterns in our cinemas and malls, we expect to see further recovery in our media businesses. Our amusement and leisure segments had an incredible record-breaking quarter. Both P1AG and our LBE businesses had record quarters as each had strong top-line results, margins, and second-quarter record-adjusted EBITDA. Segment revenue increased to $45.1 million as compared to $2.1 million in the prior year, and segment-adjusted EBITDA increased to $8.1 million from $0.8 million in the prior year. In comparison to the pre-pandemic period, our amusement and leisure segment total revenues were actually higher, coming in at 109% of the key to 2019 levels. G&A expenses increased 7.8% to $15.3 million from $14.2 million in the prior year, primarily due to increased payroll costs as a result of a decrease in wage subsidies, partially offset by reduced litigation and advisory costs, and the reduction in share-based compensation. These items are described in more detail in our MD&A. With the reopening of the businesses, our focus remained on cost control as our business volumes ramped up. It is important to note that as one would expect, our subsidy program receipts had significantly reduced with the reopening of our locations without restrictions. For the second quarter, we reported government subsidies of approximately $1.6 million as compared to $28.5 million. in the second quarter of 2021. Although our landlord abatements also continued to decrease, we did receive proceeds of approximately $5.4 million related to a lease rights transaction. For the second quarter of 2022, we reported net capex of $12.5 million as compared to $3 million in the prior year. For 2022 and beyond, we will continue to be prudent with our growth initiatives, and our guidance for net capex for 2022 has been decreased slightly to $65 to $70 million. Before discussing our liquidity position, I wanted to discuss the following five items. First, I want to talk about Seeing Plus. As mentioned during the first quarter call, Scene points are now treated as marketing expenses with growth ups to the related revenue and no net impact on EBITDA. The impact on the second quarter was the increased box office and concession revenue by approximately $5.1 million, impacting VTT by approximately $0.24 and marketing expenses increased by approximately $5.1 million, for a net nil impact on EBITDA. In addition, with respect to SEEM, we disclose that subsequent to quarter end, Cineplex will recognize a gain of approximately $45 million related to the 2020 sale of one-third of our 50% interest in SEEM LTE, as the economic and contractual obligations of the transfer will now have been met. Second, with respect to the Cineworld litigation, we were awarded damages of $1.24 billion and $5.5 million for transaction costs exclusive to investment interests. Cineworld has filed a notice of appeal and oral hearings are scheduled for October 12th and 13th of this year. Due to uncertainty in the outcome and the ability to recover the full amount, No amount has been accrued as a receivable on our financial statements. We have engaged Mollis and Company and Goodman's LLP as expert advisors with significant experience in these matters to assist in optimizing the value of this claim. Third, 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 8 of our year-end financial statements, we currently have non-capital losses totaling $314.6 million to utilize against future periods. We continue to evaluate 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 return to profitability, the reversal of a portion of previously recognized impairments may be appropriate. Fifth, in our subsequent event notes, we discussed the planned end of the Limited Life Financing Entity Canadian Digital Cinema Partnership, or CECP. CDCP expects to distribute its remaining assets to its partners in 2022, and Cineplex expects to receive approximately $1.9 million of this distribution. Historically, we have excluded the impacts of CDCP in our calculation, as it was a limited way. Now, finally, I'd like to speak to our balance sheet, and in particular, our strong liquidity position. For Q2 2022, we reported net repayments of $9 million under our credit facilities, which left us with $294 million drawn and approximately $238 million available under our credit facilities as of June 30, 2022. Q2 was the first covenant test under the Fourth Amendment of our credit facility. We were pleased to report that we were in compliance with all tests. a total leverage of 3.24 times as compared to a covenant of 3.75 times, senior leverage of 1.79 times as compared to a covenant of 2.75 times, and a fixed charge coverage ratio of 1.44 times as compared to a minimum covenant requirement of 1.25 times. In addition, we maintain the minimum liquidity requirement of $100 million throughout the quarter. As Ellis mentioned, the recent film performance clearly demonstrates that with strong film product, guests want to be back in our theaters. As we look forward into Q3, we realize that a number of recitals originally scheduled for releasing Q3 had COVID-related production issues and had their exclusive theatrical release date delayed to a future period. We are eagerly awaiting of these titles in future periods, we saw a void in the release schedule beginning in mid-August, which would impact our Q3 results. Given the nature and impact of these delays, we proactively approached our lending syndicate to ask for the suspension of covenant testing in Q3 and commencement again in Q4. Their support continues to be strong quickly agreed to the suspension of testing in Q3, and we are pleased to announce the fifth credit amendment agreement today. Further details are included in our filings today. As Ellis mentioned, there is 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 exhibitions. We continue to focus on the return of our businesses while exploring opportunities for value creation. That concludes our remarks for this morning, and we now like to turn the call over to the conference operator for questions.