Cineplex Inc. Reports Third Quarter Results

Company Obtains Extended Covenant Relief Under Credit Facilities

TORONTO, Nov. 13, 2020 /CNW/ - (TSX: CGX) - Cineplex Inc. ("Cineplex" or the "Company") today released its financial results for the three and nine months ended September 30, 2020. The Company's third 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, only beginning to reopen in select markets during the last few weeks of June. Unless otherwise specified, all amounts are in Canadian dollars.

"Cineplex is a resilient organization and we remain confident in our financial position and business recovery plans, despite the tough industry and economic conditions," said Ellis Jacob, President and CEO, Cineplex. 

"Building on our response to the pandemic, we continued to focus on adapting our operations, significantly reducing expenses, and strengthening Cineplex's financial position. In addition to this focus, since Q2, we have raised $303 million (net of fees) in additional financing, obtained extended relief under our credit facilities, reduced net cash outflows with respect to leases by approximately $58 million, received approximately $22.5 million in wage subsidies, and are generating a substantial tax asset which we will realize upon in 2021."

"In the third quarter, we reopened all of our theatres and with the first major film in five months, Tenet, we welcomed over 1.6 million guests to our theatres. This signals to us, as well as our studio partners, that Canadians have missed the magic of the big screen and are confident in the rigorous health and safety protocols we have put in place in our venues. Keeping our guests and staff safe is our top priority and we are proud that no major outbreaks or transmission of COVID-19 can be attributed to movie theatres."

"We are always reviewing and refining our operating plans across the entire business and will take the necessary steps that ensure Cineplex remains on solid financial ground and is well positioned for a strong and healthy future," Mr. Jacob concluded.

Impact of the COVID-19 Pandemic

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 the continued closure of its theatres and LBE venues across Canada.

Cineplex was able to reopen a limited number of venues in late June, and as government restrictions across the country were eased, additional locations were opened. On August 21, 2020, Cineplex became one of the first of all the major film exhibitors in the world to reopen its entire circuit of theatres with all 164 Cineplex theatres and 1,687 screens across Canada reopened, including 22 VIP Cinemas locations, as well as 10 location based entertainment venues.

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 million to $20 million per month as a result of having to close its theatres and LBE venues (for Q3 2020 net cash burn was $49.7 million for the three months or approximately $16.6 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 or have limitations on capacity, current government wage subsidies continue in place, with respect to the Canada Emergency Wage Subsidy ('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 focused on reducing its largest fixed and semi-fixed expenses, including those attributed to theatre payroll and theatre occupancy. Cineplex was able to materially reduce theatre payroll expenses from $40.9 million reported in the third quarter of 2019 to approximately $3.9 million in the third quarter of 2020 as a result of assistance received under CEWS. With respect to theatre occupancy expenses, Cineplex worked with its landlord partners to identify relief measures, which resulted in significantly reduced cash rent being paid in the third quarter of 2020. The focus was 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.

Reopening Plans

Although restrictions on social gatherings are being lifted in many of the markets in which Cineplex operates, there has been a reinstatement of restrictions in certain markets and there is the possibility that further restrictions may be reinstituted in the future if there are additional outbreaks of COVID-19 in Canada. 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.

Subsequent to September 30, 2020, social gathering restrictions were reinstituted in several key markets that Cineplex operates including select regions in Ontario, Quebec and Manitoba. The restrictions resulted in the mandated temporary closure of certain theatres and LBE locations. In addition, with the global delay of exhibitors reopening, specifically those in California and New York, distributors have shifted the release dates of major movie titles out of 2020 into 2021 and beyond, in an effort to maximize box office revenues on their eventual release. This included No Time To Die, and Dune.  In addition, some previously expected theatrical releases have instead been redirected to streaming services. The impact of the reduction of new releases in the fourth quarter as a result of these postponements in combination with the ongoing and potentially expanded restrictions on the reopening of Cineplex's businesses, has also negatively impacted the timing of Cineplex's return to profitability.

Cineplex has also undertaken the sale of assets and lease rights unlocking value where available. During the third quarter, Cineplex sold certain restrictive lease rights to landlords resulting in the receipt of $21 million during the quarter.  Cineplex also announced during the quarter that it was pursuing the sale of its head office location, with the potential for a leaseback transaction, expected to close in early 2021.

Credit Facility Waiver

On November 12, 2020, Cineplex and Cineplex Entertainment Limited Partnership entered into the Second Credit Agreement Amendment with its lenders. The amendment provides Cineplex with immediate financial covenant suspension in light of the COVID-19 pandemic and its effects on Cineplex's businesses, which will be extended to the second quarter of 2021. As at September 30, 2020, an aggregate of $460 million was outstanding under 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"). 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.

On September 2, 2020, Cineworld filed its Statement of Defence and Counterclaim in which it denied Cineplex's claims and advanced a counterclaim seeking reimbursement of an unspecified amount for costs incurred with respect to the transaction and an unspecified amount for punitive damages.  Cineplex responded to Cineworld's defence and counterclaim on September 15, 2020, denying all claims levied by Cineworld.

While a trial date has been set for September 2021, due to uncertainties inherent in litigation, it is not possible for Cineplex to predict the timing or final outcome of the legal proceedings against Cineworld or to determine the amount of damages, if any, that may be awarded.

Third Quarter Financial Results

Year to Date Financial Results

KEY DEVELOPMENTS IN THE THIRD QUARTER OF 2020

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

FILM ENTERTAINMENT AND CONTENT

Theatre Exhibition

• Reported third quarter box office revenues of $14.5 million, a decrease of $163.3 million (91.8%) from $177.9 million reported in the prior year period due to the 91.1% decrease in theatre attendance from 17.5 million in 2019 to 1.6 million in the third quarter of 2020 due to the slow rollout of the opening of theatres in the third quarter after the closures in the second quarter, strict capacity restrictions and limited number of first-run movies.
• BPP was $9.30, a decrease of $0.86 (8.5%) versus the prior year period BPP of $10.16.

Theatre Food Service

• Reported third quarter theatre food service revenues of $13.9 million, a decrease of $103.1 million (88.1%) from the prior year period as a result of the decrease in theatre attendance and restricted food offerings.
• CPP was $7.37, an increase of $0.69 (10.3%) versus the prior period CPP of $6.68.

Alternative Programming

• Alternative Programming (Cineplex Events) featured the release of the Break the Silence: The Movie starring BTS, Bill & Ted Face The Music, André Rieu's Magical Maastricht: Together In Music and A Night At The Louvre: Leonardo Da Vinci.    

Digital Commerce

• Total registered users for Cineplex Store increased by 41% in the third quarter of 2020 as compared to the prior year period.    

MEDIA

• Reported third quarter media revenues of $12.8 million, a decrease of $30.5 million or 70.4% compared to the prior year period.

Cinema Media

• Reported third quarter revenues of $3.3 million, compared to $22.6 million in the prior year period, a decrease of 85.2%, primarily due to the decreases in show-time and pre-show advertising as a result of the limited screens and new releases available.

Digital Place-Based Media

• Reported third quarter revenues of $9.5 million, compared to $20.7 million in the prior year period, a decrease of 54.2%, primarily due to the lower project installation revenues as a result of COVID-19 and reductions in customers' businesses.

AMUSEMENT AND LEISURE

Amusement Solutions

• Reported third quarter revenues of $13.2 million, a decrease of $36.7 million (77.2%) versus the prior year period as a result of the temporary closures of P1AG route locations and capacity restrictions due to COVID-19.

Location-based Entertainment

• As of August 4, 2020, all of Cineplex's LBE venues were reopened with province specific restrictions on capacity in both the gaming and restaurant areas.
• Reported third quarter revenues of $5.1 million, a decrease of $14.3 million (73.8%) as compared to the prior year period due to locations beings partially closed for the third quarter and capacity restrictions at the reopened locations.

LOYALTY

• Membership in the SCENE loyalty program remained flat at 10.5 million members as at September 30, 2020.

CORPORATE

• On July 15, 2020, Cineplex completed the offering of $275.0 million aggregate principal amount of convertible unsecured subordinated debentures. On July 17, 2020, the underwriters purchased an over-allotment option for an additional $41.3 million aggregate principal amount of the Debentures.
• During the quarter, Cineplex initiated a sales process for its head office building located at 1303 Yonge Street, Toronto, Ontario.
• Cineplex announced the appointment and return of Phyllis Yaffe to the Board of Directors. Ms. Yaffe returned to the role of Board Chair, replacing Ian Greenberg who did not stand for re-election at the Annual Special Meeting of shareholders in October 2020.
• In July, Cineplex announced a cost restructuring program incurring $5.4 million in associated costs during the quarter.

OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

Total revenues

Total revenues for the three months ended September 30, 2020 decreased $357.4 million (85.4%) to $61.0 million as compared to the prior year period. Total revenues for the nine months ended September 30, 2020 decreased $856.1 million (70.1%) to $365.8 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):

Third Quarter and Year to Date

As of August 21, 2020, Cineplex had reopened its entire circuit of theatres with limited show times and reduced seating capacity to ensure physical distancing, enhanced cleaning protocols and staff equipped with personal protective equipment. As a result of these restrictions, the gradual reopening of the theatres throughout the summer, and limited film product, box office revenues decreased $163.3 million, or 91.8%, to $14.5 million during the period, compared to $177.9 million reported in the third quarter of 2019.

Cineplex's BPP for the period decreased $0.86, or 8.5%, from $10.23 in the prior year to $9.30 in the current period.  The decrease was due to lower ticket pricing on previously released content, SCENE promotions and reduced premium offerings. The quarter included the release of the much anticipated Christopher Nolan's film "Tenet" on