Q1 2021 Cineplex Inc Earnings Call
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Good day and welcome to the Cineplex, Inc. First quarter 2021 Analyst Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Melissa per socket Senior manager Communications and Investor Relations. Please go ahead.
Thank you Todd Good morning, and welcome with me today is Alex Jacobs, our President and Chief Executive Officer, and Golf Gordon out then our Chief Financial Officer.
Before I turn the call over to Ellis, but remember 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.
Factors that could cause results to vary include among other things the negative impact of COVID-19. 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 right now I will turn things over to Alex Jacob.
Thank you Melissa good morning, and welcome to our Q1 2021 conference call. We are so glad you could join US today I Hope you on your families are well and staying healthy.
As we make our way through the third wave of defensive.
Given the reinstated restrictions and mandated temporary closures across Canada. The continued into the first quarter. It won't come as a surprise that we experienced the significant decline in our Q1 results.
Therefore, I would like to focus today's discussion on the measures within our control on the groundwork we have laid for a recovery of success over the long term.
I'm going to discuss three key areas of focus first how are we further solidified our financial position.
The second how we continue to control costs and manage cash flow and lastly, how we are well prepared to capitalize on the pent up demand for social experiences has the restrictions lift.
Yes.
Yes.
Recognizing that the pandemic has lasted much longer than originally estimated we created the financial stability needed to see ups from the pandemic recovery period.
During the first quarter, we received $57 million on gross proceeds from the sale leaseback of all of head office in Toronto.
In February we completed a private placement offering of $250 million in the form of second lien secured notes offering that was significantly oversubscribed by out of interested investors. It is a true testament to the market's faith in our business and the strength of a recovery once we are permitted to reopen.
In addition to actual refunds of 63 million are starting to come in and we obtained further relief from certain financial covenants under our credit facility, which will extend into the fourth quarter of 2021.
Well the board will provide a more fulsome financial update shortly we also remain prudent in managing cost during Q1 and reported an average monthly net cash burn of $26 9 million of net capex of $5 1 million for the quarter.
This was the result of continued cost controls in the wage subsidies, primarily on the Qs as well as rent abatements and government occupancy subsidies.
With the expanding impact of the third wave of COVID-19, we continue to work with our landlords to obtain further relief.
This includes negotiating the lease related abatements, rather than rent deferrals during the closure periods and pursuing other opportunities to extract value under our existing lease agreements.
In addition, as I've mentioned on previous calls, we minimized all capital expenditures by deferring or canceling projects spending during the crisis.
We are only moving forward with projects that are already significantly underway have binding legal commitments of where the need is critical to our business operations.
We have a number of new builds that were near completion last year, including a palladium in Dartmouth, Nova Scotia, which opened earlier this year and performed extremely well prior to the recent shutdown.
Other anticipated openings include locations of the Rec room, and barrier, Ontario, Alberta, B B C as well as two VIP cinema in Montreal at Burnaby.
We expect these remaining locations will open shortly which means we should see a reduction in the construction costs in the second half of the year.
Looking ahead, we will continue to actively monitor all aspects of our business and operations in order to minimize the impact of COVID-19 wherever possible.
And we will assess our future capital spending as we make our way out of the recovery period.
Let me take a moment here to pause and restate what all of these actions mean for us the.
The team has done an outstanding job focusing on what we can control the bullet proof of our company. During this unprecedented time the.
Key liquidity actions I mentioned combined with our ongoing focus on minimizing cash burn provide the runway we need to see us food to the other side of this on.
The other side of close we can all see the light at the end of the tunnel.
We will stay the course and remain focused over the next few weeks and months as the vaccine rollout continues across the country and restrictions lift.
We know that the exhibition of amusement and leisure industries will recover in fact, we've already seen positive results from our peers in geographies that have reopened.
We are thrilled to see strong desire from audiences in other countries to get back to the theater and the numbers have exceeded the industry's expectation.
The recent success of films like Detective Chinatown, three in China, the minutes lay out of Japan and box office results in Australia, All point to where we are heading in the coming months, we've already seen proof within North America with the release of Godzilla versus calling a few weeks ago. The films the opening weekend.
All the industry projections and is now over the $90 million Mark in North America.
Last week demons land mortal Kombat exceeded over $40 million in box office in North America, signifying the audiences are excited to see movies in the theater on the big screen with Pixar.
These positive indicators extend to our L. B E business as well day.
Moving Busters, just announced that it has 98% of its locations open and has seen a strong uptick in results, which is encouraging for all locations of the rec room and palladium.
The out of the border of view on AG business is seeing positive results as well.
First of all of gaming operations within the family Entertainment centers have reopened and in many cases are comparing very well against 2019 business results, even with several locations. So close on many with occupancy of restrictions.
I've been saying this for over a year a year of matters, even more true now everyone is missing the social connections that have been restricted for such a long time.
We miss welcoming our guests into our theaters and L. B locations and based on the data hub guests are eager to return to.
Surveys conducted by our team this quarter showed that the team members are excited to visit those venues highlighting optimism optimism amongst Canadians and returning to the big screen and our L. B.
We have remained extremely flexible on a job with RV openings on subsequent mandated closures responding quickly to reinstated or lifted restrictions as they come from local and provincial health authorities.
We have diligently prepared for the safe reopening of all of our theaters on LTE venues carefully redesigning our buildings and implementing in the industry, leading health and safety program. The key of power employees and guests comfortable as safe.
When we consider the safety of moving Boeing we know that it doesn't pose the same risk as the other in the services and the gatherings and we continue to actively work with government regulators and public health experts to highlight the safety protocols within the hour venues.
We are proud of the continued track record of the zero reported cases of N simple and cinemark over transmission globally.
What's more of a recent study published by the technical University of Berlin. The included the risk of spreading the virus through aerosol particles and infecting someone else is much lower on cultural venues such of cinema theaters on museum than it is in classrooms or offices.
Especially when you consider the unique conditions of moviegoing, which have largely silent masked guests who are spaced out facing one direction and of typically high ceiling the environment with little interaction amongst one of another.
We know our venues of safe and we are confident in our preparation for our guests returning.
Okay.
One thing is for sure of the team is eager to get back to the business of entertaining and providing our guests with the safe escape from the every day.
People are craving the experiences that we have to offer and we are ready to capitalize on the pent up demand as we continue to reopen our circuit, we will hit the ground running and deliver safe first class experiences as we welcome back all of our guests.
As inoculation numbers of rise across the country, we will see more people reenter the social environments, especially with the great lineup of films coming out from the next few months.
That is exactly what we are starting to see in parts of the U S.
What's more of the strength of the U S. Vaccine program has given the confidence to the studios, which means the upcoming slate is very likely to hold firm with few changes.
Now we are looking forward to films like the quiet place part to beat of rebate to the runaway.
Yes, nine black widow, the suicide squad free Guy Tsang Chi on the legend of the 10 range.
The box babies families of business no time to die.
The sponsors after life.
The <unk> gun Maverick on Spider Man No way on just to name a few for the balance of 2021.
You can ask studios rethink some of the theatrical release strategies, we know that streaming doesn't compare to the theatrical experience. The studio of recognizes this and moving towards feel the same way.
What we are seeing is that the pandemic has reinvigorated of love for the cinematic experience and escape that you just can't get from your couch.
And after experimenting with the release strategies for the past year. The studios have recognized that the an exclusive theatrical release window is critical to of films success as evidenced by the recent announcements.
While the windows are changing they are not disappearing and nor will move equally.
Movie exhibition has been growing globally and pre pandemic was over $40 billion worldwide.
As I have said many times, we are the engine that drives of the train and we are focused on driving our business for the full steam ahead.
Theres a difference between watching a movie going to a movie theater, playing games online and playing them together ordering in and dining of and that's exactly what we're going to focus on as we come out of this pandemic.
Providing our guests with an exceptional experience that they can only get in one of our theaters on LTE venues, we can't wait to get back to doing what we do best entertaining Canadians and giving them the safest escape everyone. That's gravy.
With that I will pass the call over to core.
Thanks, Alex I am pleased to present, the condensed summary of the first quarter results for Cineplex, Inc, and to provide additional detail on the ongoing financial impacts of the COVID-19 on our operations.
For your further reference our financial statements and the MD&A have been filed on SEDAR and are also available on our Investor Relations website at the Cineplex Dot 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 items, including commentary on cost control liquidity initiatives and the outlook.
The COVID-19 pandemic continued to have a material negative impact on all aspects of cineplex was core businesses, resulting in material decreases in revenue results of operations and cash flows for Q1 2021.
As a result, we continue to focus on cost control and liquidity.
With respect of cost control I want to provide some additional details on our largest fixed and semi fixed costs or at least cost on our payroll expenses and then discuss our overall cash burn rates.
<unk> costs of our largest fixed costs throughout 2020 and into 2020 'twenty. One we maintained strong communication channels with our landlord partners and identify opportunities from relief during these unprecedented times.
Our focus has been working on with.
With them to identify opportunities for abatements during the closure period and to jointly look for other opportunities under our existing lease agreements.
On an LTM Q1 2021 basis.
We were able to materially reduce net cash lease and occupancy related outflows by approximately $106 $1 million.
Which includes approximately $63 $8 million of lease savings $21 million as a result of the sale of strict of rates to landlords and approximately $21 $3 million as a result of other subsidies tend to rebase of.
Of this total of approximately $26 million was reflected in Q1.
We continue to work with our landlord partners to provide additional relief throughout 'twenty one.
Payroll is the largest semi fixed costs with the mandated closures, we immediately initiated temporary layoffs and reduce the full time employee salaries across the board by agreement with the employees.
We reviewed and applied for government subsidy programs with the available, including the Canada emergency wage subsidy.
On an LTM basis, we have benefited from approximately 71 $8 million in subsidies primarily under this program.
Of which $14 8 million was related to Q1 2021.
We were able to materially reduce our theater payroll to approximately $3.6 million in Q1, 2021 from approximately $31 $4 million in the prior year quarter.
We are encouraged of the acute program has been extended through to September 2021.
With respect to other supplier partners on expense control, we put in place the immediate expensing of Capex curtailment programs. During the closure of period, we worked with our supplier partners to provide elements of relief, including eliminating or reducing the amounts due from contractual monthly services. In addition, the payment deferrals and abatements.
You can see the further benefits of these initiatives and the substantial cost reductions in a number of our controllable cash cost categories.
In addition, we continue to monitor other subsidy in the relief programs, which could benefit cineplex.
For the first quarter of 2021, where we reported net capex of $5 1 million and $28 $5 million on an LTM basis during the COVID-19 impacted period.
We reported $49 $1 million of net Capex for the full year of 2020, which included significant growth initiatives in Q1 2020 prior to COVID-19.
As we look forward for the remainder of 'twenty, one 2020. One we will only be completed contractually committed projects and as such we expect that the net capex for 2021 will be in the range of $40 million to $50 million.
Beyond 2021, we will continue to be prudent with our growth initiatives and we will seek out opportunities within the disrupted retail landscape.
With all the actions previously described we were able to achieve an LTM average monthly net cash burn rate of approximately $21 $5 million per month.
For Q1 2021 net the average monthly net cash burn rate was approximately $26 $9 million the increase over prior quarters was primarily a result of achieving a maximum threshold on our income tax recoveries in the fourth quarter of 2020.
I would now like the focus on some of our liquidity initiatives.
In February of 2021, we completed a $250 million offering of five year seven 5% senior unsecured the second lien notes, which was well received and significantly oversubscribed of.
Of the proceeds received $100 million constituted the permanent repayment of our credit facilities.
In January of 2021, we completed the sale leaseback transaction on our head office buildings for gross cash proceeds of $57 million and recorded a gain on the sale of approximately $30 million.
50 per cent of the net proceeds received were applied as a permanent repayment of our credit facility.
Also during Q1, we entered into the third credit agreement Amendment. This amendment extended the suspension of financial Covenant testing until the fourth quarter of 2021.
What's provided for monthly liquidity cash until the financial covenants of our reintroduced.
We completed our 2020 tax returns for select entities in January of 2021, and have filed for approximately $66 $2 million in refunds.
Of this amount of approximately $5 million was received during Q1 and related to certain provincial amounts.
$58 million is expected to be received in the near term and.
And $3 million will be recoverable against future taxes payable.
The $58 million is included as a current asset Inc.
Income taxes receivable on the March 31, 2021 balance sheet.
As a result of the focus on cash control and the proceeds on the sale of the head office building, our total debt balance increased only $14 million during the quarter.
We will continue to focus on cash burn and liquidity as.
As at March 31, 2021, we had approximately $259 million and availability under our credit facility.
Adjusting for the pending tax refund on our pro forma availability would be approximately $317 million.
And assuming the Q1 cash burn of approximately $27 million continued in a prolonged closure scenario, we have positioned the company well to handle any further uncertainties through the next 12 months.
As we look ahead, we see positive news on vaccine Rollouts, we see pent up consumer demand and we see a backlog of film titles supply the supply of the market on reopening.
We continue to focus on the safe reopening of our businesses and continuing to explore further opportunities for cost reduction and value creation.
And that includes concludes our remarks from this morning, and we'd like to turn the call over to the conference operator for questions.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned on to allow your signal to reach of our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Derek Lessard with TD Securities.
Yes, good morning, everybody in the nice to speak to you again.
You mentioned that you've done a lot.
And clearly you've done a lot of in terms of the cash preservation and shoring up the balance sheet.
And you mentioned some of the tax benefits that you're expecting just wondering what I guess your confidence.
All of your confidence level that we've been waiting out the balance of of the crises.
The <unk> got a few more options up your sleep I'm, sorry from the tax relief.
Yes.
No.
As I said, we're always focused on opportunities for value creation as well as you know.
Cost control.
So.
With respect to how we look forward. We're always if there is an opportunity of there that we thought was of the value accretive opportunity for the organization, we would explore that as we did.
With the sale of certain lease rights with respect to some of our properties.
With respect to what we did on the building with respect to what we did.
With our interest in seeing so.
We will continue to explore and monitor if we think theres opportunities additional opportunities aside from cost reductions.
Two to.
The value accretive to the company.
Okay. Thanks for that Gordon and Alex maybe just one last one for you.
In terms of the I guess the wood.
Initially the shift.
Towards the.
Or the view towards streaming I was wondering is as you've seen.
On the inoculations and the U S ramp up.
Seen any of that for torque kind of pull back there.
Well, what we are seeing now as the studios themselves the coming out then basically.
The continuing to.
The focus and solidify the.
Exhibitor experience and yes windows as I said will change, but I don't think the actual releasing of.
Films will not happen in the theaters. They will continue to be the engine like I said that drives of the train.
And there may be some modification, but I don't think streaming is going to be replacing.
On the experience one gets in the movie theater and Thats really from all of the Big Studios that I've spoken with in the last couple of days.
Okay. Thanks for that that's it from me.
Thank you.
Thank you as a reminder to ask the question. Please press star one.
Take our next question from Jeff fan with Deutsche Bank.
Oh, Hi, good morning, it's Jeff fan from Scotia.
Couple of budgets more modeling and detailed questions from cord and then maybe a bigger picture question for.
Regarding the cost savings.
For Q1, it looks like $40 million, if we add up all of the wage subsidies.
And rent subsidies et cetera on them.
And then.
How does the 40 million book.
When it comes to the upcoming quarters.
I guess the wage subsidies are continuing but wondering if you can give us a little bit more clarity on the rent side, and maybe tax the realty taxes and utilities et cetera.
And then with respect to the cash burn.
It was a little bit higher this year or this quarter can you just the visit the reason for it being a little bit higher than what your outlook is for cash burn for the next couple of quarters.
And then finally, just working capital how do you think that's going to look through the rest of the year, especially going towards third and fourth one we hopefully will have some more dramatic re openings.
Getting ready for the.
The patrons to come back and then finally for outlets.
With respect to the shift in the Windows.
How is there anything that.
You guys are planning to do or things that you can do with respective of the cineplex store the.
Perhaps the position that.
Again, some of the other streaming platforms in Canada.
The domestic ones, especially just wondering how you can position that for what what.
The things they look like post of the company.
Thanks, Jeff So.
First question related to <unk>.
The subsidies and the impact on.
On EBITDA on our cash burn so you're correct on the added up everything it's roughly $45 million for the first quarter.
I would like to just kind of add that on so for the last 12 months. The average has been $39 $2 million.
In Q4 was 37, one and what we're seeing is.
The amounts are staying relatively constant at around that $40 million number.
And what we're seeing is is that what we saw on the first quarter as of the wage subsidy actually increased.
And then anything with respect to rent abatements, where there is a slight decline in rent abatements of was offset by additional subsidies that are available to us. So as we kind of as we kind of look forward and.
Into Q2 is as we reopen.
And so Q2 will be of reopening phase is the landlord of maintenance will start to tail off so we're going to be in and around probably the $35 million to $40 million number I would say I would expect in Q2 in terms of the <unk>.
Some of volume abatements on subsidies.
Your second question related to cash burn.
And the question was what what was the driver really behind the increase.
In Q1, and the driver sort of as I noted was really because as you've noted the subsidies were relatively consistent or slightly higher in Q1 the.
The reason for for the increase is primarily related to tax recoveries. So we maximized or we hit the ceiling on our tax recovery position in the fourth quarter of 2020.
And therefore, we had no benefit in Q1 in terms of being able to kind of get a a near term cash benefit from the losses that were created in Q1. So so it's all related to taxes is that kind of delta in cash burn and so the magnitude that we were out of Q1 is given.
My sort of comment on.
On the on the various other subsidies being in a similar level to where we were in Q1 is of you'd likely expect the cash burn to be around the from the same number of where that we reflected in Q1 and also on my comment when.
When I mentioned liquidity.
And that we had enough liquidity to cover the next 12 months of that was based on again my comment was based on a cash burn level is the same as Q1.
The your third question was related to working capital and just commented beyond on what we're going to see or what we would expect to see in the reopening phase in the over the next two quarters, So what I would like to.
Comment on that is.
Given the the.
The main sort of use sort of uses of working capital on our business.
Starting on of reopening phase would be.
Sort of the replenishment of the food inventories until all of our locations.
But I would also.
I would also let you know that that inventory given that the food moves fairly quickly.
So from a working capital perspective, it will not be of significant use of working capital.
And as we look into the fourth quarter of what we're hoping to see this year as opposed to last year is that.
On.
Assuming the reopening for the entire fourth quarter is that we will get those per.
Purchases of gift cards.
And corporate coupons.
Through the fourth quarter, which has traditionally been a very significant source of working capital. So so low use of working capital in Q3, as we ramp up and build the inventory.
And hopefully a big source of working capital.
In Q4, as we're selling Corp.
Corporate certificates of gift cards, and therefore, you would expect that over the back half of the year as we would have a net source of working capital and then I'll turn it over to Elyse for the other questions. Thanks Gordon Jeff. Your question was about the Cineplex store and.
That continues to grow and evolve and we've taken advantage of our people on releases, which is driving a significant amount of the dollars that the store when we look at Universal Warner Brothers of lot of those titles have come to the store and we've basically maximize the and also in.
Increase the number of participants within the store and we look forward to other opportunities to expand our digital offerings in the hole and the beauty for US is the weekend really relate both from the before from bricks to clicks and back again and half of that relationship the inferred.
<unk> about that.
Clients of ours, our guests and where they are on what theyre doing and get that hold some benefits as we move forward and maximize the value from the programs.
So I hope that covers what you were looking for Jeff.
Yes, Thank you Paul.
Thank you very much.
Thank you we'll take our next question from drew Mcreynolds with.
RBC capital markets.
Yes, thanks, very much good morning Allison.
Org.
I guess two from me.
First the it doesn't look like really there is any update on.
The situation with Cineworld, but if you could.
Confirm that or provide an update and then secondly.
Maybe for you Gordon when the when I look at the diversification of businesses.
And the bucket them into media amusement and the location based entertainment.
In your prepared remarks, you talked a little bit about each but.
How do these businesses.
Reopen.
Go forward.
For example on the media side.
Once people return to the theaters the end.
Theater advertising is there any specific dynamic we should be aware of on that ramp up and similar for the other buckets. The diversification benefits of thank you.
So once in the world.
The litigation continues and we are moving forward, there's really no change with.
The anticipated September date and we.
We feel quite comfortable with our position and continue to move forward with the tools.
Okay.
And then on the on your questions related to the diversification businesses. So Alex made some kind of so I'll do <unk> made some comments about the successes of Dave <unk> Buster's as seen on the return.
Their clientele. So we expect that that will ramp up fairly soon as consumer behavior of consumer demand comes back similar to what we've seen the his experiences in other geographies. The only business that I would characterize that there may be a little bit of of lag on would be the media business.
So on particularly with the cinema media business, where.
It could be up to a quarter.
Lag.
Where the advertisers.
The high demand medium they want to be in the space, but the scene of lot of sort of openings and closures.
Throughout the COVID-19 period, so available.
Available on a be a little bit more comfortable.
The things are fully opened.
And they know that the titles are going to be they're not shifting before they commit now the good thing about that is we are where.
Where we're seeing that Canada the expectations on vaccination.
Through of Canada are happening sooner than anticipated.
The anticipated that even a couple of weeks ago.
And Q4 is our big advertising periods. So if we can get open and keep things back to normal.
Throughout the Q3 period.
And then that would be great for us to have that demand during that high the Q4 period and then with respect to on the digital media business is again you've got.
The number of customer come from customers.
Customers are impacted spaces like the <unk> shop.
Shopping malls and others so.
Some of the capital of their their capital deployment and the investment in the media advertising.
Elements of that business have also suffered during the closure period. So you will see that ramp up on a little bit of of delayed cycle.
But hopefully that provides a little bit of color on how we see the ramp up across the various businesses.
Yeah, that's great. Thank you both.
Thank you.
Thank you we have no further questions in queue I'd like to turn it back to endless Jacobs for closing remarks.
Thank you again for joining the call. This morning, before we say goodbye I want to reiterate that cineplex will make it through this tough time, we remain confident in our position and we will continue to take all necessary actions to ensure cineplex has a strong recovery coming on the back end of this pandemic.
Encouraged by the global box office results on the strong film release schedule, we are ready and eager to welcome our cash back.
We look forward to connecting with you again on Wednesday May 19 for our annual General meeting, which will now be an entirety of virtual webcast details have been circulated and you can also access them in the management information circular which is available on.
On our Investor Relations website, thank you and be well and have a great weekend.
This.
Today's call. Thank you for your participation you may now disconnect.
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