Cineplex Inc. Reports Second Quarter Results

TORONTO, Aug. 14, 2020 /CNW/ - (TSX: CGX) - Cineplex Inc. ("Cineplex" or the "Company") today released its financial results for the three and six months ended June 30, 2020. The Company's second quarter financial results were impacted by the COVID-19 pandemic, as the Company temporarily closed all of its theatres and location-based entertainment ("LBE") venues effective March 16, 2020. Unless otherwise specified, all amounts are in Canadian dollars.

"To immediately mitigate the impact of the closure of our theatres and entertainment venues, we focused on reducing all expenses to the greatest extent possible. We also shifted our attention to plan for the safe return of our employees and guests and to strengthen Cineplex's financial position over the short and long term," said Ellis Jacob, President and CEO, Cineplex. "The past four months have given Canadians a new appreciation for the importance of friends and family and the power of shared experiences with those we love and we believe that this will only strengthen our business moving forward."

"During the quarter, we significantly reduced operating costs and capital expenditures and worked with our landlords to abate and defer rents. We also focused on growing and supporting our diversified and on-line businesses and in anticipation of reopening, developed an industry-leading program with end-to-end health and safety protocols to ensure that our employees and guests return to a safe environment.  We also benefited from the government wage subsidy programs which allowed us to retain our employees and reduce costs during this quarter.

"In addition, Cineplex has undertaken actions to provide further financial stability throughout the recovery period and to ensure that our long-term liquidity needs are met. These include obtaining relief from certain financial covenants under our Credit Facilities and securing additional financing in the form of Convertible Unsecured Subordinated Debentures issued subsequent to quarter end.

"While it is impossible to predict how long this crisis will last and how significant the impact will be on our business, Cineplex will continue to take the necessary steps to strengthen the financial position of our company and ensure a healthy future.

"Entertaining is what we do best, and we simply can't wait to safely welcome guests back to our theatres, The Rec Room and Playdium for some much-deserved fun and escape," Mr. Jacob concluded.

Impact of the COVID-19 Pandemic

In early 2020, the outbreak of COVID-19 was confirmed in multiple countries throughout the world and on March 11, 2020, it was declared a global pandemic by the World Health Organization. In response, Cineplex immediately introduced enhanced cleaning protocols and reduced theatre capacities to promote social distancing. By mid-March, each of Canada's provinces and territories had declared a state of emergency resulting in, among other things, the mandated closure of non-essential businesses, restrictions on public gatherings and quarantining of people who may have been exposed to the virus.

On March 16, 2020, Cineplex announced the temporary closure of all of its theatres and LBE venues across Canada, as well as substantially all route locations operated by P1AG. On April 1, 2020, in response to applicable government directives and guidance from Canadian public health authorities, Cineplex announced that the closure of its theatres and LBE venues across Canada would remain in effect and that the reopening of such locations would be reassessed as further guidance is provided by Canadian public health authorities and applicable government authorities.

To mitigate the negative impact of COVID-19 and support its long-term stability, Cineplex immediately undertook a variety of measures including:

• temporary layoffs of all part-time and full-time hourly employees as well as a number of full-time employees who chose a temporary layoff rather than a salary reduction;
• reducing full-time employee salaries by agreement with such employees;
• suspending or deferring current capital spending and reviewing all capital projects to consider either deferral or cancellation;
• reducing non-essential discretionary operational expenditures (such as spending on marketing, travel and entertainment);
• implementing a more stringent review and approval process for all outgoing procurement and payment requests;
• proactively negotiating with landlords for rent relief, including abatements and converting fixed rent to variable rent depending on attendance, until attendance returns to previous levels;
• working with major suppliers and other business partners to modify the timing and quantum of certain contractual payments;
• reviewing and applying for government subsidy programs where available, including the Canada Emergency Wage Subsidy ("CEWS"). This program, which was launched by the Government of Canada, provides a subsidy of 75% of employee wages, up to a maximum benefit of $847.00, per week, for up to 24 weeks, retroactive from March 15, 2020 to August 29, 2020. In mid-July, the federal government announced an extension to the program to December 19th, backdated to July 5th with threshold amounts and benefits amended, allowing for additional subsidies for those businesses who are on a slower recovery track. It is expected that most of Cineplex's businesses will be able to benefit from the higher 85% subsidy maximum threshold available to those businesses who have sustained a revenue decline greater than 50% during a specified claim period;
• continuing the suspension of dividends; and
• focusing on revenue driving opportunities including the expansion of Cineplex Store offerings and expansion of food home delivery from theatres and LBE venues.

In addition to cost savings associated with the temporary layoffs of its employees, reductions in salaries and other mitigation efforts, Cineplex has suspended or deferred certain capital spending and is reviewing all capital projects to consider further deferrals or cancellations and has plans to reduce purchases of property, plant and equipment (net of tenant inducements) to approximately $50.0 million over the next 12 months.

The COVID-19 pandemic has had a material negative effect on all aspects of Cineplex's businesses resulting in material decreases in revenues, results of operations and cash flows. Since March 15, 2020, Cineplex has experienced a net cash burn of approximately $15 to $20 million per month as a result of having to close its theatres and LBE venues (for Q2 2020 net cash burn was $53.9 million for the three months or approximately $18.0 million monthly) (see Non-GAAP measures section of this news release). When used in this news release, net cash burn is calculated as adjusted EBITDAaL less cash interest (excluding amounts with respect to lease obligations), provision for income taxes and net capital expenditures. Net cash burn assumes that all of Cineplex's theatres and LBE venues remain closed, current government wage subsidies continue in place, (originally in place only until August 29, 2020 subsequently extended to December 19, 2020) with respect to the CEWS and certain lease-related abatements and other lease-related savings currently being negotiated are implemented as expected by management.

As some of Cineplex's largest expenses, such as film cost and cost of food services, are fully variable, during the closure of its theatres and LBE venues Cineplex has focused on reducing its largest fixed and semi-fixed expenses, including those attributed to theatre payroll and theatre occupancy. As a result of the measures described below, including receipt of assistance under the CEWS, Cineplex has been able to materially reduce theatre payroll expenses from $41.1 million reported in the second quarter of 2019 to approximately $0.2 million in the second quarter of 2020. With respect to theatre occupancy expenses, Cineplex is continuing to work with its landlord partners to identify relief measures, which resulted in no material cash rent being paid in the second quarter of 2020. The focus has been on identifying opportunities for lease-related abatements during the closure period, converting fixed components of rent to variable rent during the reopening period and looking for other opportunities to extract value under its existing lease agreements. While Cineplex is still in the process of finalizing these measures, and the accounting for any amendments will be more complex under IFRS 16, Cineplex was able to materially reduce cash payments during the second quarter of 2020.

Reopening Plans

Since the closure of its theatres and LBE venues in March 2020, Cineplex diligently prepared for their safe reopening, with the health and wellbeing of its employees and guests being its top priority. Cineplex has carefully re-examined all of its buildings and processes, so that when its theatres and LBE venues reopened, it has implemented an industry-leading program with end-to-end health and safety protocols. At Cineplex's theatres specifically, it has also be launched reserved seating in all auditoriums across the country to ensure proper physical distancing between its guests.

Cineplex has been able to maintain connections with its guests during the period of theatre and LBE venue closures through its online Cineplex Store and home delivery of food offerings via Uber Eats and Skip the Dishes, as well as through the SCENE loyalty program and social media channels. Cineplex will use these communication channels to ensure that its guests are made aware of when its theatres and LBE venues will reopen, and the various measures put in place to ensure their safety while enjoying a long-deserved outing.

Cineplex will take a gradual approach to reopening its consumer-facing segments in phases. The phases will be driven by government regulations around public gathering sizes and safety guidelines, availability of first run film product, social norms around social distancing and attendance levels at theatres and other venues once reopened. Cineplex is also implementing a number of pricing and marketing strategies to entice its guests to return to theatres and LBE venues as the impact of the COVID-19 pandemic in the markets which it operates subsides. As a result of loosened provincial government restrictions on social gatherings in certain markets in which it operates, Cineplex resumed measured operations at The Rec Room in Winnipeg, Calgary and Edmonton during the week of June 15, 2020. Cineplex also reopened six theatres in Alberta on June 26, 2020. Cineplex will continue to assess how long it should extend the closure of its other theatres and LBE venues across Canada as additional government directives and guidance from Canadian public health authorities are issued. In all markets where Cineplex is permitted by government and health authorities, and it is economically feasible under those limitations, it plans to reopen as many of its locations as it can throughout July and August.

Some of the new measures implemented on reopening include:

• launching reserved seating in all auditoriums across Canada; seating options will be automatically blocked off to ensure proper distance in every direction between guests;
• reducing capacity in all auditoriums to allow for physical distancing;
• enhancing cleaning practices throughout our facilities, with particular focus on high-contact surfaces, restrooms and seats;
• accepting debit and credit payments only, with the exception of gift card purchases;
• limiting food offerings in theatres to Cineplex's famous popcorn and other core concessions;
• ensuring employees have the personal protective equipment they need and as required by provincial regulations;
• making hand sanitizer readily available for guests and employees throughout the buildings; and
• keeping VIP Cinemas closed until first run product is available.

Although restrictions on social gatherings are being lifted in many of the markets in which Cineplex operates, there is the possibility that restrictions may be reinstituted in the future if there are additional outbreaks of COVID-19 in Canada, a vaccine has not been developed and other effective treatment options are not available. Any reinstitution of restrictions on social gatherings that would result in the closure of Cineplex's theatres and LBE venues would have a significant negative impact on the ability and timing of Cineplex's return to profitability.

Convertible Debentures

On July 7, 2020, Cineplex filed a preliminary short form prospectus in connection with a marketed public offering (the "Offering") of convertible unsecured subordinated debentures (the "Debentures"). On July 15, 2020, Cineplex completed an Offering of $275.0 million aggregate principal amount of Debentures.  On July 17, 2020, the underwriters purchased an additional $41.25 million aggregate principal amount of Debentures pursuant to the exercise of their over-allotment option.

Completion of the Offering satisfies the condition under the Credit Agreement Amendment that Cineplex entered into with its lenders on June 29, 2020 which required Cineplex to raise $250.0 million of new financing by August 31, 2020, of which $100.0 million would be used to make a permanent repayment of the Credit Facilities.

Other Matters

Repudiation of the Arrangement Agreement with Cineworld: On June 12, 2020, Cineworld delivered a notice to Cineplex purporting to terminate the Arrangement Agreement dated December 15, 2019 between Cineplex and Cineworld (the "Arrangement Agreement").   Cineplex believes that Cineworld had no legal basis to terminate the Arrangement Agreement and that instead, Cineworld breached the Arrangement Agreement and its other contractual obligations including when Cineworld repudiated the Arrangement Agreement on June 12, 2020. On July 3, 2020, Cineplex announced that it had commenced an action in the Ontario Superior Court of Justice against Cineworld and 1232743 B.C. Ltd. seeking damages arising from what Cineplex claims was a wrongful repudiation of the Arrangement Agreement.  The claim seeks damages, including the approximately $2.18 billion that Cineworld would have paid upon the closing of the Cineworld Transaction for Cineplex's securities, reduced by the value of the Cineplex securities retained by its security holders, as well as compensation for other losses including the failure of Cineworld to repay or refinance Cineplex's approximately $664 million in debt and transaction expenses. Cineplex has also advanced alternative claims for damages for the loss of benefits to its security holders, and to require Cineworld to disgorge the benefits it improperly received by wrongfully repudiating the Cineworld Transaction.

Second Quarter Financial Results

Year to Date Financial Results

KEY DEVELOPMENTS IN THE SECOND QUARTER OF 2020

The following describes certain key business initiatives undertaken and results achieved during the second quarter of 2020 in each of Cineplex's core business areas:

FILM ENTERTAINMENT AND CONTENT

Theatre Exhibition

• During the second quarter, all of Cineplex's circuit of theatres were closed. During June 2020, six theatres in Alberta re-opened with significant capacity restrictions.

Theatre Food Service

• Despite the closure of theatres and LBE venues, Cineplex reported food services revenues of $3.3 million primarily due to home delivery services from theatre and LBE locations with Uber Eats and Skip the Dishes.

Digital Commerce

• Total registered users for Cineplex Store increased by 47% in the second quarter of 2020 as compared to the prior year period.
• Cineplex Store registered a 120% increase in device activation over the prior year period.
• Quarterly active users of the Cineplex Store increased by 103% as compared to the prior year period.

MEDIA

• Media revenues were impacted by the closure of theatres, retail and digital out of home locations in the second quarter leading to a decline in advertising revenue. During the second quarter media revenues were primarily driven by Cineplex Digital Media revenues specifically from creative services, software revenue and support services.

AMUSEMENT AND LEISURE

Amusement Solutions

• P1AG's revenues were primarily earned through equipment sales during the second quarter, in addition to a small contribution from the opening of certain FEC locations in June 2020.

Location-based Entertainment

• During the second quarter, all of Cineplex's LBE venues were closed. During June 2020, four locations in western Canada re-opened and The Roundhouse in Ontario was partially reopened.

LOYALTY

• Membership in the SCENE loyalty program increased by 0.1 million members in the period, reaching 10.5 million at June 30, 2020.

CORPORATE

• On June 12, 2020, Cineworld delivered the Termination Notice to Cineplex purporting to terminate the Arrangement Agreement.
• On June 29, 2020, Cineplex and Cineplex Entertainment Limited Partnership entered into an amendment agreement (the "Credit Agreement Amendment") with The Bank of Nova Scotia, as administrative agent, and the lenders from time to time named therein, to the seventh amended and restated credit agreement with a syndicate of lenders.
• On June 29, 2020, Cineplex sold all of its interest in World Gaming Network for a nominal amount.
• On June 8, 2020, Cineplex offered a collection of "Understanding Black Stories" films that were available free to rent or stream to support the Black Lives Matter movement.
• Beginning April 17 and running through the end of May, 2020, Cineplex donated $1 to Food Banks Canada for every home delivery order fulfilled at its theatre and LBE locations across Canada.

OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

Total revenues

Total revenues for the three months ended June 30, 2020 decreased $416.9 million (95.0%) to $22.0 million as compared to the prior year period. Total revenues for the six months ended June 30, 2020 decreased 498.7 million (62.1%) to $304.8 million as compared to the prior year period. A discussion of the factors affecting the changes in box office, food service, media, amusement and other revenues for the two periods is provided below.

Non-GAAP measures discussed throughout this news release, including adjusted EBITDA, adjusted EBITDAaL, adjusted store level EBITDAaL, adjusted EBITDAaL margin, adjusted store level EBITDAaL margin, adjusted free cash flow, theatre attendance, BPP, premium priced product, same theatre metrics, CPP, film cost percentage, food service cost percentage and concession margin per patron are defined and discussed in Non-GAAP measures section of this news release.

Box office revenues

The following table highlights the movement in box office revenues, theatre attendance and BPP for the quarter and the year to date (in thousands of dollars, except theatre attendance reported in thousands of patrons and per patron amounts, unless otherwise noted):

Second Quarter and Year to Date

Box office revenues were materially impacted by the government mandated closure of theatres during the second quarter. On June 26, 2020, six theatres in Alberta were reopened with reduced seating occupancy to ensure physical distancing, enhanced cleaning protocols and staff equipped with personal protective equipment. BPP during the reopening period was $4.50 due to promotional pricing for all screenings including the older and classic film products with discounted prices.

Food service revenues 

The following table highlights the movement in food service revenues, theatre attendance and CPP for the quarter and the year to date (in thousands of dollars, except theatre attendance and same theatre attendance reported in thousands of patrons and per patron amounts):