Cineplex Inc. (CGX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. It gives me great pleasure to welcome you to the Annual and Special Meeting of Cineplex Inc. My name is Phyllis Yaffe, and I am Chair of the Board of Directors of Cineplex. I'm pleased to be here today to preside over the meeting and to work so closely with the exceptional Cineplex management team. I am, however, sorry that we're not able to host our shareholders in person today as originally planned. As you know, in order to help curtail the spread of COVID-19, the Ontario government issued a directive this past Friday mandating that we closed theaters in Toronto, Ottawa and the Peel region for a 28-day period. Before proceeding with the formal business of the meeting, I'd like to introduce the Cineplex executives who are present with us today, all properly wearing masks and being socially distanced from each other. Seated in our auditorium are Ellis Jacob, President and Chief Executive Officer; Gord Nelson, Chief Financial Officer; Anne Fitzgerald, Chief Legal Officer and Corporate Secretary; Dan McGrath, Chief Operating Officer; Cindy Bush, Chief Human Resources Officer; Susan Campbell, Senior Vice President, Finance; and Melissa Pressacco, Senior Manager, Communications and Investor Relations. Other members of management and the rest of our Board of Directors are joining us virtually today. I thank each of you for your attendance at the meeting today, whether with a limited group in person or virtually. I also thank all of Cineplex staff and our exceptional board for your ongoing commitment to Cineplex through the work that you do on a daily basis. Most of our current Board members are standing for reelection today along with myself and Ellis Jacob, the current Director, standing for reelection for the coming year are: Jordan Banks, Robert Bruce, Joan Dea, Janice Fukakusa, Donna Hayes, Sabi Marwah and Nadir Mohamed. Ian Greenburg, past Chair of the corporation, opted not to stand for reelection this year. We would like to thank him for his years of exceptional guidance and commitment to Cineplex. He will be very missed as we move forward. After concluding the formal business of the meeting, Ellis Jacob, President and CEO; and Gord Nelson, Chief Financial Officer, will each say a few words. Following their comments, there will be a virtual Q&A session. Registered shareholders and proxy holders who are attending the meeting virtually will be able to submit questions for the Q&A session during the meeting and during the Q&A session itself. [Operator Instructions] Though we may not be able to answer every question during the Q&A session, we will do our best to respond to as many as possible. [Operator Instructions] Please also note that this meeting is being recorded. In the meantime, I want to move to the formal portion of this Annual and Special Meeting, and I now call the meeting to order. With the consent of the meeting, I will act as Chair and I will ask Anne Fitzgerald, Chief Legal Officer and Corporate Secretary of Cineplex, to act as secretary of the meeting. Jennifer Andersen and Kay Harrison of AST Trust Company Canada, Cineplex's transfer agent, are acting as scrutineer. Today, they are serving in that capacity on a virtual basis. I have been provided with a preliminary scrutineers report indicating that a quorum is present and that due notice of the meeting has been given. As such, I declare that the meeting has been duly convened and constituted. When the formal report of the scrutineer is available, it will be kept with the minutes of the meeting. Each share represented at the meeting is entitled to 1 vote. Shareholders who have previously sent in proxies or voted online or via telephone do not need to take any further action today. For those registered shareholders or proxy holders who have not yet voted, voting will be conducted by online ballot by following the instructions in the management information circular of the corporation dated August 28, 2020. The online voting polls are now open for all matters to be voted on. This will allow you to choose to vote on each item of business immediately or to wait until each motion has been made prior to casting your vote. Please note that those of you voting online have the ability to change your votes at any time before the polls close after all motions have been made. We'll now proceed to the first item business. Prior to the meeting, every registered shareholder was presented with the December 31, 2019, Annual Financial Statements of Cineplex Inc., together with reports of management and the auditors of the corporation. Those materials were either mailed or provided electronically to registered shareholders. These materials are also available online under the corporation's profile on SEDAR. Shareholders do not have to take any action regarding the financial statements. But if any shareholder has questions relating to the statements, I would ask that they be raised during the Q&A portion of the meeting. It's now time to proceed with the next item of business, the election of directors. I would invite a motion in this regard.

Madam Chair, I nominate Jordan Banks, Robert Bruce, Joan Dea, Janice Fukakusa, Donna Hayes, Ellis Jacob, Sabi Marwah, Nadir Mohamed, and Phyllis Yaffe as Directors of Cineplex Inc. to hold office until the next Annual General Meeting of shareholders or until their successors are elected or appointed.

I second the nomination.

As the corporation's bylaws require that any additional nominations for directors be submitted at least 30 days prior to the annual meeting and no such nominations were received, I declare the nominations closed. Would someone please move and someone please second a resolution for the election of these persons as directors?

I move a resolution as follows: be it resolved that Jordan Banks, Robert Bruce, Joan Dea, Janice Fukakusa, Donna Hayes, Ellis Jacob, Sabi Marwah, Nadir Mohamed, and Phyllis Yaffe are hereby elected as directors of Cineplex Inc. to hold office until the next annual meeting of shareholders or until their successors are elected or appointed.

I second the motion.

As discussed, voting on this matter will be done via the online voting polls for shareholders attending the meeting virtually. Shareholders who have previously sent in proxies or voted online or via telephone do not need to take any further action at this time. For those who previously registered and have not yet voted, the online portal is open now for you to cast your votes. [Voting]

Thank you. We will now move on to the next matter to be voted on. The next item of business is the appointment of our auditors and the authority of the directors to fix their remuneration. Will someone please move and someone please second a resolution in that regard?

Madam Chair, I move the following resolution. Be it resolved that PricewaterhouseCoopers LLP is hereby appointed as auditor of Cineplex Inc. to hold office until the next annual meeting of shareholders at such remuneration as may be fixed by the directors.

Madam Chair, I second the motion.

As discussed, voting on this matter will be done via the online voting polls for shareholders attending the meeting virtually. I will pause for a moment for any shareholders or proxy holders to vote online. [Voting]

Thank you. We will now move on to the next matter to be voted on. The next item of business is a nonbinding advisory vote on the approach to executive compensation disclosed in the management information circular. This shareholder advisory vote forms an important part of the ongoing process of engagement between shareholders and the Board of Directors on executive compensation. Will someone please move and someone please second a resolution in that regard?

Madam Chair, I move the following resolution. Be it resolved that on an advisory basis and not to diminish the role and responsibilities of the Board of Directors, the shareholders accept the approach to executive compensation disclosed in the management information circular of Cineplex dated August 28, 2020.

Madam Chair, I second the motion.

For those of you who have not yet voted, you may now vote via the online voting polls. [Voting]

Thank you. We will now move on to the next matter to be voted on. The next item of business is a vote on the Shareholder Rights Plan in the management information circular. A summary of the material terms of the plan is set out in the management information circular and the full text of the plan is available on SEDAR. The form of resolution, which I don't plan to read, is also set out in the management information circular. Will someone please move and someone please second a resolution in that regard?

Madam Chair, I move that the resolution regarding the Shareholder Rights Plan in the form set out in the management information circular be approved.

Madam Chair, I second the motion.

I will pause for a few minutes for the online voting to occur. [Voting]

Thank you. We will now move on to the final matter to be voted on. Final item of business is a vote on the ratification and approval of the Omnibus Equity Incentive Plan which forms part of management compensation. A summary of the material terms of the plan is set out in the management information circular and the full text of the plan is attached to Schedule C to the circular. The form of resolution, which I don't plan to read, is also set out in the management information circular. Will someone please move and someone please second the resolution in that regard?

Madam Chair, I move that the resolution regarding the Omnibus Equity Incentive Plan in the form set out in the management information circular be approved.

Madam Chair, I second the motion.

Again, I will pause for a moment for shareholders to complete the online voting polls. [Voting]

Thank you. Ladies and gentlemen, the online voting polls will remain open for a brief moment. Any shareholder who hasn't yet voted or wishes to change their vote, may take the opportunity to do so now through the voting buttons on the web portal. [Voting]

Now that everyone has had the opportunity to vote, I declare the polls for the 2020 Cineplex Annual and Special Meeting of shareholders closed. We've been informed by the scrutineer that the preliminary vote report shows that each of the proposals presented for approval today have been duly passed. I declare that the nominees listed in the management information circular have been duly elected as directors of the corporation until the close of the next annual meeting of shareholders or until they resign or their successes are elected or appointed. PricewaterhouseCoopers LLP has been appointed as the corporation's auditors for the ensuing year. The advisory resolution on the corporation's approach to executive compensation has been passed. The Shareholder Rights Plan adopted by the Board of Directors on June 19, 2020 has been ratified and approved. And the Omnibus Equity Incentive Plan adopted by the Board of Directors on August 9, 2020 has been ratified and approved. We will be reporting the final voting results in a press release and SEDAR filing following the meeting. We have now completed the formal part of the meeting. As there is no further business to be conducted, the formal meeting is hereby terminated. On behalf of management and the Board of Directors, I would like to thank you for attending the meeting. It is now my pleasure to turn the meeting over to Ellis Jacob, the President and Chief Executive Officer of Cineplex, Inc.

Thank you, Phyllis. Good morning, everyone, and thank you for joining Cineplex's Annual and Special Meeting. As Phyllis mentioned, we had hoped to see you in person for today's meeting at the theater. However, given the recent Ontario government directors around social gatherings, we had to temporarily close 22 of our 68 theaters and 3 entertainment venues in the affected regions, including Toronto, Ottawa and Peel on Saturday. We are definitely disappointed with the government's decision to close our theaters, particularly because we know how hard our local theater teams have worked since our reopening to keep movie lovers safe across the province and the country. We feel that these forced closures, given our proven track record, are excessive and do not consider our team's efforts, of which we are very proud. Looking specifically at our Ontario theaters that have been opened since July 3 and those 98 days of welcoming back movie lovers, we have had 0 cases of COVID-19 traced back to our operations. I can't stress enough that our top priority remains the health and safety of our employees and guests, and we take pride in ensuring that we always deliver an environment that is above all safe, comfortable and welcoming. Turning our focus back to today's meeting. We are glad you could join us virtually, and we hope that you and your families are doing well and that everyone is staying safe and healthy. For today, I will take a brief look back on 2019 and the first half of 2020 as well as discuss the impact that COVID-19 has had on the business. I'll spend some time discussing where we are now, the actions we have taken to manage through this crisis as well as how we plan to continue operations throughout the pandemic. Then I'll provide an outlook on the upcoming film slate for the rest of 2020 and into 2021. Following this, Gord Nelson, our Chief Financial Officer, will provide a financial update, and we'll close the meeting with questions from shareholders participating online. Before I proceed, however, I would like to draw your attention to this slide and ask that we all be aware of its content. Looking back, 2019 was a strong year for Cineplex. Our diversified businesses continues to build scale and show more meaningful returns, and we achieved all-time annual records for media, amusement and food service revenue. In response to our strong results in 2019, our business was getting noticed globally, so much so that in December of last year, we entered into an arrangement agreement to be acquired by Cineworld Group. The agreement was later repudiated by Cineworld in June of this year, which I'll address in a moment. As we moved into 2020, we had a strong start to the first quarter, with total revenue for January and February up approximately 6%. But as we all know, the world dramatically changed. On March 16 in response to growing global concerns around the spread of COVID-19 and various Canadian government directors, we closed our network of theaters and location-based entertainment venues. The social and economic effect of COVID-19 has been widespread and hard hitting. Like so many other businesses in Canada as a direct result of the global pandemic, our locations remain closed for almost the entire second quarter, only beginning to reopen in select markets during the last 2 weeks of June, where it was deemed safe to do so. With the mandated closures, capacity restrictions and shift in the film release schedule, our 2020 financial results have been significantly impacted. Having said that, although our physical doors were shut between March and June, the team worked harder than ever to mitigate the negative impact and support the long-term stability of the company. I couldn't be prouder of the one Cineplex team for their commitment and resiliency during this tough time. Beginning in mid-March, we remained laser-focused on significantly reducing our 2 primary operating costs, lease costs and payroll, which Gord will discuss shortly. Then in July, we had to make some difficult but necessary decisions, including reducing the size of our workforce across all lines of the business. We reworked our teams, consolidated our organizational structures and had to say goodbye to a number of colleagues across the Cineplex ecosystem. Above all this, in an effort to further reduce our operating costs, we also eliminated all discretionary spending and worked with our suppliers to renegotiate and revise contracts. While we were able to dramatically reduce our cash burn, we also focused on the other revenue-generating areas of our business, which were not as heavily impacted by COVID-19. These included Cineplex Digital Media, our expanded food delivery services through Skip the Dishes and Uber Eats and our online Cineplex store, which experienced significant growth as people consume more content from home. The Cineplex store remains a strategic area of focus for us and is a key differentiator from our peers. The business continues to grow as consumers expand their adoption of transactional digital movie consumption and enjoy the Cineplex movie experience at home. So far this year, our customer base has grown by 32% to 1.8 million registered users, and we have completed more than 2 million transactions. Switching gears on June 12, Cineworld repudiated our arrangement agreement. I know all too well the frustration and disappointment felt by our shareholders from this outcome, and that sentiment is shared by me, my fellow board members and the entire Cineplex team. As you have heard me say, we believe that Cineworld had no legal basis to terminate the agreement. In fact, we believe that Cineworld was in breach of the agreement themselves and was attempting to avoid its obligations in light of COVID-19. Cineplex filed a statement of claim in the Ontario courts on July 3. And since then, the court has assigned a judge to our case and set a time line to get to trial in September 2021. And rest assured, we are diligently working to advance the legal process and seek to recover all damages as outlined in the claim. We will share updates during our quarterly earnings calls as we progress through the litigation. Moving on to our measured and phased reopenings. As I said earlier, our top priority has always been the health and safety of our employees and our guests. During the Canada-wide shutdown between March and June, we used the time to carefully reexamine our processes and procedures. We worked work with the country's top infectious disease experts to develop and implement an industry-leading program of health and safety protocols. We made sure that our guests could feel confident and relax returning to our venues. As restrictions lifted across individual provinces, we resumed operations in late June and throughout July in a phased and approached base on region and theater size. By August 21, we fully reopened our entire circuit coast to coast. This was a truly momentous day, not only because our circuit was fully open, but also because it was the first time that we welcomed our guests back with new first-run content after 5 long months. This included the exclusive Canadian release of The SpongeBob Movie: Sponge on the Run. We were also thrilled to screen Christopher Nolan's film Tenet in Canada, of part of its international release, which was a full week before the U.S. This was the first time a major theatrical film was released in Canada before the U.S. and is a testament to the strength of our reopening plans and the studio's belief in our business and the theatrical model. Let me be clear, our guests are delighted to be back, almost as delighted as our teams were to reopen our doors and get back to doing what we do best, providing some much-deserved entertainment, fun and escape. When we look at movie going in general, it simply does not pose the same risk as other indoor services and gatherings. Movie theaters are fundamentally different from any other retail or restaurant environment. The spacious footprint and headroom are features that naturally lend themselves to physical distancing, staggering our show times and implementing reserve seating layouts with physically distanced spacing creates a predictable and manageable flow and spacing of guests that most other businesses cannot replicate. And as I said earlier, the magic of the movies provides guests and their families with a safe and temporary escape from the mounting pressures and anxiety created by the COVID-19 pandemic. We continue to take our cues from the government as they monitor second wave COVID cases across the country and adjust provincial regulations and safety guidelines as required. As we know, there's a risk that we may be required to shut down theaters at certain times as the recent closure enacted in Ontario, Québec and New Brunswick on a limited basis. Future adjustments will depend on infection rates in particular areas and on how the COVID cases evolve over time. But we continue to work closely with government regulators to promote the safe environment of the theaters. We know there's a lot of speculation based on how other circuits around the world are reacting. But frankly, the industry's uncertainty it creates doesn't have the same impact to our business on a macro scale. You may have also noticed that some of our exhibition peers in the U.S. quickly responded with statements that they intend to remain open. As I mentioned earlier, in Canada, we are benefiting from government subsidies that many of our global peers are not able to access. We also recently completed a round of financing with the issuance of convertible debentures that puts us on a solid ground to manage the continuing uncertainty due to the pandemic. What I want to emphasize is that we will remain agile and nimble in our operations in the coming months. While we are always reviewing and refining our operating plans, we are staying the course and will proudly continue to offer a safe, comfortable and welcoming moviegoing environment for Canadians, which brings me to the film slate. As I mentioned, things are changing quickly, and the film release schedule continues to shift and settle. Certain studios have also used the shutdown period to test new release models and windows, which has caused some speculation in the media and with analysts. What remains clear in speaking with many of our studio partners is that they are committed to the theatrical release of their films and recognize that it's critical to the long-term financial success of a film, which is evidenced by the great lineup of upcoming films. Looking ahead, we still have strong titles targeting for release in the fourth quarter, Death on the Nile, Croods 2, and Wonder Woman 1984, among others, hitting the big screen. And while there could still be some movement in the coming months, 2021 is looking to be an exceptionally strong year at the box office. As you know, several key titles have shifted from 2020, including most recently, James Bond No Time to Die, and Dune as well as Top Gun: Maverick, Fast and Furious 9, A Quiet Place II, Black Widow, The Eternals, Candyman, West Side Story and Minions: The Rise of Gru. This, of course, in addition to titles previously announced for 2021, such as Mission Impossible 7, Sing 2 and Cruella. What I know for sure is that our guests miss the magic of the big screen and are looking forward to shared experiences with friends and family that can't be replicated at home. As we look to the future, we remain extremely strategic and agile in our approach to operating during this pandemic. While our business strategy remains the same in the short and medium term, we are focusing on a smaller number of projects and priorities, supported by a sustainable financial model. We also continue to work with our financial partners to ensure that our long-term liquidity needs are mapped. As we monitor revenues and plan for our future, we will continue to make the necessary changes required as we navigate through the next 6 to 12 months. Before I turn the meeting over to Gord, what I'd like to highlight is that throughout our history, Cineplex has demonstrated its agility and resiliency time and time again, and this time is no different. We have a highly strategic and seasonal senior management team who remains committed to our employees, our shareholders, our partners and our guests. We have initiated actions to solidify our financial position to weather the storm and we'll pivot quickly, if and when we need to, ensuring the long-term strength of the company. With that, I will turn things over to Gord Nelson for a financial update.

Thanks, Ellis, and good morning, everyone. I'm pleased to be here today to provide an update on our financial results for 2019 and the first half of 2020. I'll also speak about our immediate response to COVID-19 and our ongoing focus on liquidity and the financial health of the company. As Ellis mentioned, 2019 was a strong year for Cineplex, with record-breaking results across many of our businesses. And while top line revenue was up 3.3% over the prior year, EBITDA was negatively impacted by charges related to the Cineworld transaction. While we're off to a good start with our total revenues up approximately 6% for the first 2 months of 2020, the impact of COVID-19 with the related capacity restrictions and location closures materially impacted our results from March. Our immediate focus upon the mandated closures was on cost minimization and managing liquidity while maintaining the terms of the arrangement agreement with Cineworld, prior to the receipt of the termination notice on June 12, 2020, which Ellis discussed. Once we optimized our position with respect to these items, our focus turned to our reopening plans. Let's talk about some of our key areas of focus. With respect to cost control, I want to provide some additional details on our largest operating costs, our lease costs and our payroll expenses. Lease costs are our largest fixed costs. During the mandated closure period, we maintained strong communication channels with our landlord partners and identifying opportunities for relief during these unprecedented times. Our focus has been on working with them to identify opportunities for abatements during the closure period to reduce rent during the reopening period and to jointly look for other opportunities under our existing lease agreements. Payroll is our largest semi-variable cost. With that mandated closure, we immediately initiated temporary layoffs and reduced full-time salaries across the board. These were voluntary permanent reductions and not deferrals. We reviewed and applied for government subsidy programs where available, including the Canada Emergency Wage subsidy, which has now been extended through to June 2021. During Q2, we benefited from approximately $20.2 million in subsidies primarily under this program, and laid off our part-time staff. As a result, we were able to materially reduce our theater payroll to approximately $234,000 in Q2 2020 from approximately $41.1 million in the prior year quarter. Then, as Ellis mentioned, in July 2020, the company initiated a restructuring process. This difficult but necessary action resulted in the elimination of approximately 130 roles for an annualized savings of approximately $12 million. With respect to our other supplier partners and expense control, we put in place immediate expense and CapEx curtailment programs during the closure period and worked with our supplier partners to provide elements of relief, including cessation or reduced amounts of contractual services and payment deferrals. Our near-term CapEx guidance has been reduced significantly by approximately $100 million from our pre-COVID guidance to the current $50 million for the next 12 months. In addition, we focused on managing our working capital to ensure that we are optimizing our cash position. As a result of these and other key initiatives, the effective cash burn rate was minimized to approximately $18 million per month. Looking ahead, we continue to focus on diligently controlling costs and exploring opportunities for further cost reduction and value creation. As we consider liquidity, we had eliminated the monthly dividend as part of the arrangement agreement and do not expect to start repaying the dividend again in the near future. We entered into a credit facility amendment that provided for the immediate suspension of covenant testing. The agreement also included a provision for an extension through Q2 and Q3 upon a mandatory permanent repayment of $100 million of our credit facility from the proceeds of a minimum $250 million financing by August 31. We over-delivered on this commitment, and on July 15, announced an equity raise of over $300 million in convertible unsecured subordinated debentures. In addition, we have listed our head office for sale, which we expect to close at or around year-end. As at June 30, our borrowing under the credit facility was approximately $664 million. As a result of the convertible debenture offering, our pro forma credit facility debt was approximately $359 million or approximately 51% drawn on the total capacity of $700 million. As a reference point, our net cash burn rate for Q2 2020 was approximately $20 million per month. In summary, we have taken a number of significant steps during the first half of the year to manage our costs and improve our liquidity position and balance sheet. Despite the current environment, we are pleased with our achievements and where we have positioned the company today. As we look ahead, we continue to focus on operating our businesses safely and as efficiently as we can. We continue to explore further opportunities for cost reduction and revenue creation while working on behalf of our shareholders to deliver value in the future. With that, we would like to open the meeting to shareholder questions. [Operator Instructions] Melissa, do we have any questions?

Thanks, Gord. We have 2 questions. What is the plan if Wonder Woman is delayed past Christmas Day? Is there a cost-benefit analysis being done to see if it is feasible to have the theaters remain open? The cash burn rate of approximately $18 million -- sorry, $18 million a month, are we materially reducing this currently with theaters open and Wonder -- if Wonder Woman is delayed, how do we plan to react?

Thank you for the question. And as of late last evening, Wonder Woman is still dated for Christmas. But again, it will largely depend on the level of the pandemic as to whether Warner Brothers decides to move the movie into 2021. As it relates to the cash burn and the theaters remaining open, while the theaters are open and we've been operating, we are in a positive position from the theaters being open, and that's largely a result of being very focused on costs, being also taking advantage of the government availabilities and working with our suppliers. So it is still on a slightly positive side, while we've been open.

Thank you, Ellis. Next question, are there additional precautions being put into place, perhaps to increase theater attendance from 20% capacity to potentially 50% to 75%? If so, what are they?

Thank you again. A lot of the capacity has been mandated by the provincial regulators, and they vary by province. As we saw prior to the shutdown of certain theaters in the province of Québec, we were allowed significantly higher capacities in Québec, where we could go as high as 200 guests in an auditorium, depending on the size of it. Whereas Ontario, when we first started, I remember looking at it, and they were saying you can only have 50 people in the whole building, and that was eventually changed to 50 people per auditorium which is still a low number, but still allows for us to basically have guests come through the facility. And we have the highest level of precautions that we've put in place all the way from dealing with the highest groups of individuals who provide us with assistance as it relates to making sure that the environment is safe for our guests, our employees and everybody that's in the building.

Thank you, Ellis. There are no further questions, so I'll turn the meeting back over to you for closing remarks.

Thanks, Melissa. Before we close the meeting, I would like to thank my fellow Cineplex colleagues and employees for their hard work and dedication. Thank you to the Board of Directors for their continued thoughtful advice and good governance. And finally, thank you to our shareholders, guests and partners for your ongoing support and belief in Cineplex. While it is impossible to predict how long this crisis will last, the pandemic will end, and when it does, Cineplex will be well positioned to welcome guests back to our venues and grow our revenues and cash flow across all of our lines of business. Cineplex has been entertaining Canadians for over 100 years. It's what we do best. And we know that millions across the country now have a new appreciation for the importance of friends and family and the power of shared experiences such as movie going. We are taking the necessary steps to navigate through this pandemic and remain steadfast on driving our business forward, safely operating our network of theaters and entertainment venues across Canada, driving growth in our diversified businesses and building a strong, well-positioned company for the future. We will update you again in November with the release of our third quarter results. Until then, thank you for joining us today, and be well.