Cineplex Inc

TSX:CGX

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Cineplex Q4 Year-End 2019 Analyst Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Melissa Pressacco, Senior Manager, Investor Relations and Communications. Please go ahead, miss.

[Melissa Pressacco]

Good morning. Before beginning the call, we would like to 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, adverse factors generally encountered in the film exhibition industry, risks associated with national and world events, discovery of undisclosed material liabilities and general economic conditions.I will now turn the call over to our President and CEO, Ellis Jacob.

[Ellis Jacob, President, CEO & Director]

Thank you, Melissa. Good morning, and welcome to Cineplex Inc.'s Fourth Quarter and Year-End 2019 Conference Call. We are all glad you could join us.On today's call, I will provide a brief overview of our top line annual results and accomplishments as well as a status update on the pending acquisition of Cineplex by Cineworld Group. At the conclusion of my remarks, our Chief Financial Officer, Gord Nelson, will provide a brief overview of our financials, specifically focusing on the transaction-related expenses, which have impacted the results. Following that, we will hold a question-and-answer period.I am pleased to report that 2019 was another strong year for Cineplex. Our diversified businesses continued to build scale and show more meaningful results, resulting in total revenue of $1.7 billion, up 3.3% year-over-year, as we achieved all-time annual records from media, amusement and food service revenue. Despite the strong results, adjusted EBITDAaL and net income were negatively impacted by transaction costs related to the proposed Cineworld acquisition as well as the adoption of IFRS 16, which Gord will go over in more detail shortly.Shifting our focus to some of our key accomplishments throughout the year, there was much to celebrate in 2019. We opened 2 new theaters: one in Vancouver and one in Saskatoon, as well as a new VIP cinema experience by retrofitting our Winston Churchill location in Oakville. Through our existing partnership with CJ 4DPLEX and reaffirming our commitment to bringing the latest in cinema technology to Canadians, this year, we added 5 new 4DX auditoriums and 5 new ScreenX auditoriums to our circuit. We also introduced Junxion, our new theater of the future concept that combines cinema with location-based entertainment to create the perfect entertainment destination for any occasion.During the year, we expanded our alcohol beverage service to an additional 52 theaters, now available at 88 theaters, which is over 50% of our circuit. Adding 9 locations this year, our Uber Eats delivery service is available at 104 theaters, and we also launched our partnership with Skip the Dishes, providing home delivery from 130 theaters across the country. Both our cinema media and digital place-based media businesses reported record annual results. Cineplex media saw growth in showtime and preshow advertising and, in partnership with Tangerine Bank, announced Tangerine Tuesdays, a continuation of our popular Tuesday ticket program where guests enjoy discounted movie admissions and free popcorn upgrades for Tangerine customers.Cineplex Digital Media saw continued growth with existing clients and completed the deployment of AMC Theatres' digital network at approximately 630 locations across the United States.Turning our attention to location-based entertainment. In 2019, we opened new locations of The Rec Room in Mississauga, Ontario and St. John's, Newfoundland as well as the first 2 locations of our reinvented Playdium concept in Brampton and Whitby, Ontario. In 2020, we plan to open 3 new locations of The Rec Room and 2 new Playdium locations. The first will be later this month when we open the doors to Manitoba's very first location of The Rec Room in Winnipeg. SCENE also celebrated a big milestone last year as we reached the 10 million member mark in September. Now with over 10.3 million members, SCENE is Canada's top loyalty program for movie lovers.I'm proud to report that for the third time, Cineplex was named one of Canada's most admired corporate cultures by Waterstone Human Capital. Selected from hundreds of companies, the award recognizes best-in-class Canadian organizations that demonstrate a strong work culture. Also, during the year, we were recognized as one of the top 40 most valuable Canadian brands for 2019. This study by BrandZ was based on in-depth consumer research, and Cineplex was highlighted numerous times throughout the report for our customer experience, emotional connection, excellent reputation, clear purpose and good citizenship.And of course, this past December, we announced that we had entered into an agreement to be acquired by Cineworld Group. As the entertainment industry continues to transform, the pending transaction ensures that Cineplex is part of the next era of global entertainment. It means that our business, particularly our network of 165 movie theaters across Canada, has access to global opportunities in an evolving entertainment landscape.Overall, shareholder sentiment has been very positive. In fact, last night, we announced that Cineplex shareholders voted 99.92% in favor of the deal following the special shareholder meeting. Separately, Cineworld announced yesterday that its shareholders also voted to approve the transaction at its general meeting of shareholders.Cineworld will continue to work towards obtaining the remaining regulatory approvals required to close the transaction under the Investment Canada Act. As you know, transactions like this take time, but the process continues, and we expect the transaction to close between March 23 and June 30.Before I turn the call over to Gord, I want to say thank you to our shareholders for your continued support as well as Cineplex's senior management team and our 13,000 employees across Canada and the U.S. for their hard work and commitment throughout the year.Since going public in 2003, we have worked hard to deliver value to our shareholders, and we are confident that the pending transaction with Cineworld does just that.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 fourth quarter and annual financial results for Cineplex Inc. For your further reference, our financial statements and MD&A have been filed on SEDAR this morning 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 just focus on highlighting and quantifying some of the more unusual items related to the pending transaction and the impact of the adoption of IFRS 16. For the fourth quarter, total revenue increased 3.6% to an all-time quarterly record of $443.2 million as a result of growth in results from food service revenue and media revenues. On an annual basis, total revenues of $1.7 billion increased 3.3% or $52.7 million as compared to the prior year on all-time annual records reported for food service, media and amusement revenues. The bottom line was impacted significantly as a result of the pending transaction and the adoption of IFRS 16. Key items impacting the results and the comparability to the prior year include the following: G&A expenses included Cineworld transaction-related costs of $11.7 million, which included professional fees and the acceleration of certain stock-based compensation items; interest expense was impacted by the inclusion of $12.1 million in noncash interest expense related to the loss of hedge accounting on their proposed change of control and expected repayment of debt on closing; the adoption of IFRS 16 negatively impacted net income by approximately $14.3 million dollars for the full year in 2019 and $25.5 million as compared to the prior year. In total, these items, after adjusting for taxes, negatively impacted net income by $43.1 million or $0.68 per share as compared to 2018. As Ellis mentioned, we have worked hard to deliver value to our shareholders, and we are confident that the pending transaction with Cineworld does just that.That concludes our remarks for this morning, and we'd now like to turn the call over to the conference operator for questions.

[Operator]

[Operator Instructions] Our first question is coming from Derek Lessard from TD Securities.

[Derek J. Lessard, Research Analyst]

Ellis, Gord, Melissa and, I guess, Pat is not there. Just before I start, I just want to let you all know that it was a pleasure working with you guys over the years. You're all consummate pros and looking out for the best interest of the shareholders. Would have loved to see how all these initiatives played out for you guys. So one question for me is, you ran a pretty extensive go-shop process. And just wondering if you could add some color to that process and perhaps some of the feedback you got coming out of it.

[Ellis Jacob, President, CEO & Director]

Derek, thank you for your comments, much appreciated. We did run a robust process, as you mentioned, onto the go-shop, and we had parties that were interested in the go-shop. But at the end of the day, the $34 price was very fair, and the premium that we were offered at that position of 42% was something that the other parties weren't able to go beyond.

[Operator]

[Operator Instructions] Our next question is coming from Adam Shine from National Bank Financial.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

Ellis, Of course, congratulations on the transaction. Just one quick question. I mean, you highlighted March 23 or end of June. That's really been the mantra since back in December. Just curious, have we seen any movement in regards to Heritage Canada and/or ISED making any progress on the file, odds of a potential closing to close out Q1 versus slippage into Q2. Just your thoughts.

[Ellis Jacob, President, CEO & Director]

We have a process that's underway, Adam, and we continue to work together with Cineworld and the authorities to make sure that we continue to move this forward. And we continue to communicate with all of the parties. And again, this is a Cineworld proposal to invest in Canada.

[Operator]

It appears there are no further question at this time. Mr. Jacob, I would like to turn the conference back to you for any additional or closing remarks.

[Ellis Jacob, President, CEO & Director]

Again, thank you for joining us this morning. We look forward to providing additional updates as we move towards closing the transaction with Cineworld. And thank you very much again for all your support as shareholders, as analysts and great group to work with and also our team at Cineplex and all of our employees. Thanks very much again. Have a great day.

[Operator]

Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation. You may now disconnect.