Cineplex Inc. (TSX:CGX) Q1 2021 earnings call dated May. 06, 2021.
Corporate Participants:
Melissa Pressacco — Senior Manager, Communications and Investor Relations
Ellis Jacob — President and Chief Executive Officer
Gord Nelson — Chief Financial Officer
Analysts:
Derek Lessard — TD Securities — Analyst
Jeff Fan — Scotia Capital — Analyst
Drew McReynolds — RBC Capital Markets — Analyst
Presentation:
Operator
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 Pressacco, Senior Manager, Communications and Investor Relations. Please go ahead.
Melissa Pressacco — Senior Manager, Communications and Investor Relations
Thank you Todd. 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 remarks, we will close the call with our customary question-and-answer period.
Right now, I will turn things over to Ellis Jacob.
Ellis Jacob — President and Chief Executive Officer
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 and your families are well and staying healthy, as we make our way through the third wave of the pandemic.
Given the reinstated restrictions and mandated temporary closures across Canada that continued into the first quarter, it won’t come as a surprise that we experienced a significant decline in our Q1 results. Therefore, I would like to focus today’s discussion on the measures within our control and the groundwork we have laid for our recovery and success over the long term.
I’m going to discuss three key areas of focus. First, how we further solidified our financial position; second, how we continued to control costs and manage cash flow; and lastly, how we are well prepared to capitalize on the pent-up demand for social experience as restrictions left.
Recognizing that the pandemic has lasted much longer than originally estimated, we created the financial stability needed to see us through the pandemic recovery period. During the first quarter, we received $57 million in gross proceeds from the sale-leaseback of our head office in Toronto. In February, we completed a private placement offering of $250 million in the form of second lien secured notes, an offering that was significantly oversubscribed via interested investors.
It is a true testament to the market faith in our business and the strength of our recovery once we have committed to reopen. In addition, tax refunds of $63 million are starting to come in and we obtained further relief from certain financial covenants under our credit facilities, which will extend to the fourth quarter of 2021.
While Gord will provide a more fulsome financial update shortly, we also remain prudent in managing costs during Q1 and reported an average monthly net cash burn of $26.9 million and net capex of $5.1 million for the quarter. This was a result of continued cost controls and wage subsidies, primarily on the CEWS 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 lease-related abatements rather than rent deferrals during the closure period 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 project spending during the crisis.
We are only moving forward with projects that are already significantly underway, have binding legal commitments or where the need is critical to our business operations. We have a number of new builds that were near completion last year, including our Playdium 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 in Barrie, Ontario and Burnaby, BC as well as two VIP cinemas in Montreal and Burnaby. We expect these remaining locations will open shortly, which means we should see a reduction in 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’ll 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 team has done an outstanding job focusing on what we can control to bulletproof 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 through to the other side of this. And the other side is close, we can all see the light at the end of the tunnel now.
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, 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 industry’s expectations. The recent success of films like Detective Chinatown 3 in China; Demon Slayer in 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 vs. Kong a few weeks ago. The film’s opening weekend broke all industry projections and is now over the $90 million mark in North America. Last week, Demon Slayer and Mortal Kombat exceeded over $40 million in box office in North America, signifying that audiences are excited to see movies in the theater on the big screen with big sound.
These positive indicators extend to our LBE business as well. Dave & Buster’s just announced it has 98% of its locations open and is seeing a strong uptick in results, which is encouraging for our locations of The Rec Room and Playdium.
South of the border, our P1AG business is seeing positive results as well. Most of our gaming operations within family entertainment centers have reopened, and in many cases, are comparing very well against 2019 business results even with several locations still closed and many with occupancy restrictions.
I’ve been saying this for over a year and it’s 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 LBE locations. And based on the data, our guests are eager to return too. Surveys conducted by our team this quarter showed that SCENE members are excited to visit our venues, highlighting optimism amongst Canadians in returning to the big screen and our LBEs.
We have remained extremely flexible and agile with our re-openings and 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 our theaters and LBE venues, carefully re-examining our buildings and implementing an industry-leading health and safety program to keep our employees and guests comfortable and safe.
When we consider the safety of movie going, we know that it doesn’t pose the same risk as other indoor services and gathering, and we continue to actively work with government regulators and public health experts to highlight the safety protocols within our venues.
We are proud of the continued track record of zero reported cases of in-cinema COVID transmission globally. What’s more, a recent study published by the Technical University of Berlin concluded the risk of spreading the virus through aerosol particles and infecting someone else is much lower in cultural venues such cinemas, theaters or museum than it is in classrooms or offices, especially when you consider the unique conditions of movie going, which have largely silent masked guests who are spaced out, facing one direction in a typically high ceilinged environment with little interaction amongst one another.
We know our venues are safe, and we are confident in our preparations for our guests returning. One thing is for sure, the team is eager to get back to the business of entertaining and providing our guests with a safe escape from the every day. People are craving the experiences that we have to offer, and we are ready to capitalize on this 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 our guests.
As inoculation numbers rise across the country, we will see more people re-enter social environments, especially with the great line-up of films coming out in the next few months. That is exactly what we are starting to see in parts of the U.S. What’s more the strength of the U.S. vaccine program has given confidence to the studios, which means the upcoming slate is very likely to hold firm with few changes.
Right now, we are looking forward to films like A Quiet Place Part 2, Peter Rabbit 2: The Runaway, F9, Black Widow, The Suicide Squad, Free Guy, Shang-Chi and the Legend of the Ten Rings, The Boss Baby: Family Business, No Time to Die, Ghostbusters: Afterlife, Top Gun: Maverick and Spiderman: No Way Home, just to name a few for the balance of 2021.
Even as studios rethink some of the theatrical release strategies, we know that streaming doesn’t compare to the theatrical experience. The studio recognizes this and moviegoers feel the same way. What we are seeing is that the pandemic has reinvigorated a love for the cinematic experience and escape that you just can’t get from your couch.
And after experimenting with release strategies for the past year, the studios have recognized that an exclusive theatrical release window is critical to a film’s success, as evidenced by recent announcements. While windows are changing, they are not disappearing a novel movie going. 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 the train and we are focused on driving our business forward full steam ahead. There’s a difference between watching a movie and going to a movie theater, playing games online and playing them together, ordering in and dining out, 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 or LBE venues.
We can’t wait to get back to doing what we do best, entertaining Canadians and giving them the safe escape everyone is craving.
With that, I will pass the call over to Gord.
Gord Nelson — Chief Financial Officer
Thanks, Ellis. I am pleased to present a condensed summary of the first quarter results for Cineplex Inc. and to provide additional detail on the ongoing financial impacts of 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 cineplex.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 outlook.
The COVID-19 pandemic continued to have a material negative impact on all aspects of Cineplex’s 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 to cost control, I want to provide some additional details on our largest fixed and semi-fixed costs, our lease costs and our payroll expenses, and then discuss our overall cash burn rate.
Lease costs are our largest fixed costs. Throughout 2020 and into 2021, we maintained strong communication channels with our landlord in identifying opportunities for relief during these unprecedented times. Our focus has been working on 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 in lease savings, $21 million as a result of the sale of restrictive rates to landlords, and approximately $21.3 million as a result of other subsidies and rebates. Of this total, approximately $26 million was reflected in Q1. We continue to work with our landlord partners to provide additional relief throughout 2021.
Payroll was our largest semi-fixed costs. With the mandated closures, we immediately initiated temporary layoffs and reduced full-time employee salaries across the board by agreement with the employees. We reviewed and applied for government subsidy programs where 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 that the CEWS program has been extended through to September 2021.
With respect to other supplier partners and expense control, we put in place immediate expense and capex curtailment programs during the closure period. We worked with our supplier partners to provide elements of relief, including eliminating or reducing amounts due for contractual monthly services, in addition to payment deferrals and abatements.
You can see the further benefits of these initiatives and the substantial cost reductions in a number of our controllable cost categories. In addition, we continue to monitor other subsidy and relief programs which could benefit Cineplex.
For the first quarter of 2021, 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 in 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 2021, we will only be completing contractually committed projects. And as such, we expect that 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’ll seek out opportunities within the disruptive 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, the average monthly net cash burn rate was approximately $26.9 million. The increase over prior quarters was primarily a result of achieving our maximum threshold on our income tax recoveries in the fourth quarter of 2020.
I would now like to focus on some of our liquidity initiatives. In February 2021, we completed a $250 million offering of five-year 7.5% senior unsecured second lien notes, which was well received and significantly oversubscribed. Of the proceeds received, $100 million constituted a permanent repayment of our credit facilities.
In January 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% of the net proceeds received were applied as a permanent repayment of our credit facilities.
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, but provided for monthly liquidity tests until the financial covenants are reintroduced.
We completed our 2020 tax returns for select entities in January 2021 and have filed for approximately $66.2 million in refunds. Of this amount, 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 $3 million will be recoverable against future taxes payable.
The $58 million is included as a current asset income taxes receivable on the March 31st, 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 of March 31st, 2021, we had approximately $259 million in availability under our credit facility.
Adjusting for the pending tax refunds, 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 — to supply 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 concludes our remarks for this morning. And we’d like to turn the call over to the conference operator for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] We’ll take our first question from Derek Lessard with TD Securities.
Derek Lessard — TD Securities — Analyst
Yeah, good morning everybody and nice to speak to you again. You’ve mentioned that you’ve done a lot and you’ve — and clearly, you’ve done a lot in terms of 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 is or your confidence level is in waiting out the balance of the crisis? And if you think that you’ve got a few more options up your sleeve, aside from the tax relief.
Gord Nelson — Chief Financial Officer
Yes, Derek. So, as I said, we’re always focused on opportunities for value creation as well as cost control. So, with respect to how we look forward, we’re always — if there is an opportunity out there that we thought was a 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 with the building, with respect to what we did with our interest in SCENE. So we will continue to explore and monitor if we think there are opportunities — additional opportunities aside from cost reductions to be value-accretive to the company.
Derek Lessard — TD Securities — Analyst
Okay, thanks for that Gord. And Ellis, maybe just one last one for you. In terms of the — I guess there was initially a shift towards or the view towards streaming. I was wondering as you’ve seen the inoculations in the U.S. ramp up, if you’ve seen any of that rhetoric kind of pull back there?
Ellis Jacob — President and Chief Executive Officer
Well, what we are seeing now is the studios themselves are coming out and basically continuing to 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 theaters. They will continue to be the engine, like I said, that drives the train. And there may be some modification, but I don’t think streaming is going to be replacing the experience one gets in a movie theater. And that’s really from all the big studios that I’ve spoken within the last couple of days.
Derek Lessard — TD Securities — Analyst
Okay. Thanks for that. That’s it from me.
Ellis Jacob — President and Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions] We’ll take our next question from Jeff Fan with Deutsche Bank [Phonetic].
Jeff Fan — Scotia Capital — Analyst
Well, hi. Good morning, it’s Jeff Fan from Scotia. Couple of just more modeling and detailed questions for Gord, and then maybe a bigger picture question for Ellis. Regarding these cost savings for Q1, it looks like $40 million if we add up all the wage subsidies and rent subsidies, etc. abatement, how does that $40 million look 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, realty taxes and utilities, etc.
And then, with respect to the cash burn, it was a little bit higher this year — or this quarter. Can you just revisit the reason for it being a little bit higher? And what your outlook, Gord, 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, when we hopefully will have some more dramatic reopenings getting ready for patrons to come back.
And then finally for Ellis, 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 respect to the Cineplex Store that perhaps position it against some of the other streaming platforms in Canada, domestic ones especially. Just wondering how you can position that for what things may look like post the recovery? Thanks.
Gord Nelson — Chief Financial Officer
Thanks Jeff. So, first question related to sort of subsidies and the impact on EBITDA and our cash burn. So you are correct, when you add it up everything, it’s roughly $40.5 million for 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, it was 37.1%. And what we’re seeing is the amounts are staying relatively constant in and around that $40 million number.
And what we’re seeing is — what we saw in the first quarter is that the wage subsidy actually increased. And then anything with respect to rent abatements, where there is a slight decline in — and rent abatements was offset by additional subsidies that were available to us.
So as we kind of look forward into Q2 is, as we reopen and so Q2 will be a reopening phase, is the landlord abatements will start to tail off. So we’re going to be in and around probably the $35 million to $40 million number, I would expect, in Q2 in terms of the sum of all your abatements and subsidies.
Your second question related to cash burn, and the question was, 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 reason 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 near-term cash benefit from the losses that was created in Q1.
So it’s all related to taxes as that kind of delta and cash burn. And so the magnitude that we were at in Q1 is, given my sort of comment on the various other subsidies being in a similar level to where we were in Q1, is that you would likely expect the cash burn to be around some of that same number where — that we reflected in Q1.
And also in my comment, when I mentioned liquidity and — that we had enough liquidity to cover the next 12 months, that was based — again, my comment was based on a cash burn level as the same as Q1.
Your third question was related to working capital and just commenting on what we’re going to see or what we would expect to see in a reopening phase and over the next two quarters. So what I would like to comment on that is, given — the main sort of uses of working capital in our business starting in a reopening phase, would be sort of the replenishment of the food inventories into all of our locations. But I would also let you know that, that inventory, given that’s food, moves fairly quickly.
So from a working capital perspective, it will not be a significant use of working capital. And as we look into the fourth quarter, what we’re hoping to see this year as opposed to last year, is that — assuming that we’re reopening for the entire fourth quarter, is that we will get those purchases of gift cards and corporate coupons throughout the fourth quarter, which has traditionally been a very significant source of working capital.
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 corporate certificates and gift cards. And therefore, you would expect that over the back half of the year is we would have a net source of working capital.
And then, I’ll turn it over to Ellis for the other questions.
Ellis Jacob — President and Chief Executive Officer
Thanks, Gord. And Jeff, your question was about the Cineplex Store. And that continues to grow and evolve, and we’ve taken advantage of our PVOD releases, which is driving a significant amount of the dollars at the store. When we look at Universal, Warner Brothers, a lot of those titles have come to the store and we basically maximize and also increase the number of participants within the store. And we look forward to other opportunities to expand our digital offerings in the home.
And the beauty for us is we can really relate both from, as I’ve said before, from bricks to clicks and back again and have that relationship, the information about that client of ours, our guests and where they are and what they’re doing and get that fulsome benefit as we move forward and maximize the value from the programs.
So hope that covers what you were looking for, Jeff?
Jeff Fan — Scotia Capital — Analyst
Yes. Thank you both.
Ellis Jacob — President and Chief Executive Officer
Thank you very much.
Operator
Thank you. We’ll take our next question from Drew McReynolds with RBC Capital Markets.
Drew McReynolds — RBC Capital Markets — Analyst
Yeah, thanks very much. Good morning Ellis and Gord. I guess two for me. First, it doesn’t look like really there’s any update on the situation with Cineworld, but if you could just confirm that or provide an update?
And then secondly, maybe for you, Gord, when I look at the diversification businesses and just bucket them into media, amusement and location-based entertainment, in your prepared remarks, you talked a little bit about each. But how do these businesses reopen as we go forward?
For example, on the media side, once people return to theaters, the in-theater advertising, is there any specific dynamic we should be aware of on that ramp up? And similar for the other buckets of diversification businesses? Thank you.
Ellis Jacob — President and Chief Executive Officer
So, on Cineworld, the litigation continues, and we are moving forward. There’s really no change with our anticipated September date and we feel quite comfortable with our position and continue to move forward with it, Drew.
Drew McReynolds — RBC Capital Markets — Analyst
Okay.
Gord Nelson — Chief Financial Officer
And then on the — and your questions related to the diversification businesses. So Ellis made some — so I’ll do LBE first, so Ellis make some comments about the successes that Dave & Buster’s have seen on the return of their clientele.
So we expect that that will ramp up fairly soon as consumer behavior, consumer demand comes back, similar to what seeing as experiences in other geographies. The only business that I would characterize that there may be a little bit of a lag on would be the media business. So in particular, the cinema media business where it could be up to a quarter lag where advertisers — it’s a high demand medium, they want to be in the space, but they’ve seen a lot of sort of openings and closures throughout the COVID period.
So they’ll want to be a little bit more comfortable that things are fully opened. And they know that the titles are going to be there and not shifting before they commit. Now the good thing about that is we’re seeing that Canada — the expectations on vaccination throughout Canada are happening sooner than were anticipated even a couple of weeks ago, and Q4 is our big advertising period.
So if we can get open and keep things back to normal throughout that Q3 period, then that would be great for us to have that demand during that high — the Q4 period.
And then with respect to the digital media business, again, you’ve got a number of customers are in impacted spaces like QSRs and shopping malls and others. So some of the capital — their capital deployment and investment and the media advertising elements of that business have also suffered during the closure period. So we’ll see that ramp up on a little bit of a delayed cycle. But hopefully, that provides a little bit of color on how we see the ramp-up across the various businesses.
Drew McReynolds — RBC Capital Markets — Analyst
Yeah, that’s great. Thank you both.
Ellis Jacob — President and Chief Executive Officer
Thank you.
Operator
Thank you. We have no further questions in queue. I’d like to turn it back to Ellis Jacob for closing remarks.
Ellis Jacob — President and Chief Executive Officer
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’ll 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 and the strong film release schedule, we are ready and eager to welcome our guests back.
We look forward to connecting with you again on Wednesday, May 19th, for our Annual General Meeting, which will now be an entirely virtual webcast. Details have been circulated, and you can also access them in our management information circular, which is available on our Investor Relations website.
Thank you, and be well, and have a great weekend.
Operator
[Operator Closing Remarks]