Cineplex Inc. (CGX) Earnings Call Transcript

[Operator Instructions] I would now like to hand the conference over to your speaker today, Mahsa Rejali, Vice President of Corporate Development and Investor Relations.

Good morning, everyone. I would like to welcome you to Cineplex's third quarter 2026 earnings conference call. I'm Mahsa Rejali, Vice President, Corporate Development and Investor Relations at Cineplex. Joining me this morning for his first earnings call at Cineplex is our new CEO, Bill Walker, along with our CFO, Gordon Nelson. I'll 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 may differ materially from those expressed in the forward-looking statements. Information regarding factors that could cause results to vary can be found in the company's most recently filed Annual Information Form and Management's Discussion and Analysis. Following today's remarks, we will close the call with our customary question and answer period. I will now turn the call over to Bill.

Thank you, Mahsa. Good morning, everyone. It's certainly been an exciting time joining Cineplex as CEO as we're coming off a record-breaking quarter and the industry as a whole is strengthening. Before I begin, I'd like to recognize and thank Ellis for his leadership and contribution to both Cineplex and the industry over the past 4 decades. We're grateful to have him step into the role of Special Advisor to the Board during the strategic review process, and I look forward to working alongside him in that capacity. Turning to the task at hand, let's get into our third quarter where Cineplex delivered exceptional results. While Gordon will walk through the details shortly, a few highlights that stand out: not only did we deliver our highest quarterly revenue of all time, but our Adjusted EBITDA more than doubled year over year, generating significant free cash flow. And just as importantly, we reduced our leverage ratio to within our target range, finishing the quarter at 2.9x. Combined, these results demonstrate both the strength of our business model and our ability to translate industry momentum into profitable growth. While it's been an impressive quarter, 3 observations have reinforced my excitement about Cineplex during my first few weeks as CEO: the quality of our people, the sophistication of the organization, and the unique ecosystem we've built around our core business. Cineplex is far more than a movie theater company. We're a data-driven entertainment and media company. The combination of our exhibition business, the location-based entertainment, together with consumer insights through Scene+, create a powerful advantage that is difficult to replicate. My focus and that of our management team remains on executing our strategy, delivering exceptional guest experiences, and creating value for shareholders. This is aligned with our previously announced strategic review process, highlighting that any alternative will be assessed against the value we will create as a standalone company through the continued execution of our strategy. As a reminder, the review remains ongoing and we do not intend to provide further updates until it is appropriate to do so. As we evaluate all paths, it's worth stepping back and recognizing the industry backdrop supporting this business. One of my first opportunities to represent Cineplex was at the Cinema United Fall Summit in Los Angeles, where I met with studio partners and leaders from across the exhibition industry. I came away from those conversations increasingly encouraged by the industry's trajectory. There's broad confidence in the future of the film slate, the strength of the movie-going experience as a whole, and the critical role that exhibitors play within the entertainment ecosystem. That optimism is supported by tangible developments across the industry. As part of the proposed Skydance merger, Skydance has committed to a minimum of 30 annual theatrical film releases, a minimum 45-day exclusive theatrical window, and no changes to film rental terms. This is a meaningful commitment providing greater certainty around content supply and reinforcing the long-term growth prospects of theatrical exhibition. We're also seeing more commitment from non-traditional content providers. Netflix has become increasingly active in theatrical distribution, with a growing number of titles being released with extended windows, and that's highlighted by the upcoming release of Narnia: The Magician's Nephew in early 2027. At the same time, entirely new sources of content are emerging. Recent horror films like Backrooms and Obsession demonstrate that highly engaged digital audiences can translate into theatrical success. Many of these audiences are younger consumers, particularly Gen Z moviegoers, reinforcing that when the content resonates, audiences of all generations will choose to experience it together on the big screen. We're seeing more content being produced for theatrical release, greater support for meaningful windows, and an increasingly diverse range of content. Beyond exhibition, we see compelling opportunities across our other lines of business. In our media business, cinema remains one of the few environments that consistently delivers engaged audiences at scale. Advertisers also value its ability to reach sought-after demographics, including Gen Z and newcomers to Canada. Together, these attributes make cinema a powerful platform for brands seeking to connect with consumers during critical moments that matter. As a high-margin, capital-light platform, we view media as a strategically important business that is well positioned to benefit from a strengthened theatrical environment. Our location-based entertainment business is another key component of our diversified strategy. Through The Rec Room and Playdium, we have built a differentiated platform that extends Cineplex's leadership in out-of-home entertainment while leveraging our core strengths in hospitality, guest service, and food service. As consumers increasingly seek social experiences, we believe the business is well positioned to benefit from these long-term trends. Underpinning all of this is our Scene+ loyalty program, which has now grown to over 16 million members, allowing us to connect with and reach consumers beyond Cineplex's customers while driving engagement across the broader loyalty ecosystem. As we enter this next phase with a healthier balance sheet and increased visibility into future content, this will create a significant opportunity for Cineplex, and my focus is on ensuring that we can capitalize on it. It starts with operational excellence. Across all of our businesses, we're focusing on executing at a high level, improving productivity, and ensuring we're maximizing the benefits of increased content supply. We will continue to invest in and optimize our assets while maintaining a disciplined approach to cost management and return-driven, efficient capital allocation. My focus is simple: listen, learn, assess, and then execute. While I'm still early in my tenure, everything I've seen so far reinforces my belief that Cineplex has exceptional people, assets, and growth potential. When we look ahead, we see encouraging signs across the industry with forecasts currently calling for North American box office to exceed $10 billion in 2026, which would mark the first time the industry has reached that level since 2019. Momentum remained strong in October with Cineplex box office revenue increasing 42% over the prior year. Results were driven by the surprise success of the documentary, You Can See Everything, underscoring the importance of diversified content and our ability to attract audiences across a broad range of genres. Cineplex continues to outperform the domestic market with year-to-date box office revenue through October increasing by 25% versus industry growth of 21%. In fact, year-to-date box office has already surpassed Cineplex's full-year 2025 results with 2 full months remaining in the year. The balance of 2026 features a strong film slate, including The Hunger Games: Sunrise on the Reaping, released in Canada by Cineplex Pictures, as well as Avengers: Doomsday, Dune: Part Three, and Jumanji: Open World. Early consumer interest and advance sales have been exceptionally strong, reinforcing our confidence in the momentum heading into the year end and the strength of the film slate ahead. As our visibility into the 2027 and 2028 film slate increases, it supports our view that the industry recovery has evolved into a sustainable growth story. With our market leadership, diversified businesses, and strong balance sheet, we believe Cineplex is uniquely positioned to capitalize on the opportunities ahead and create value for shareholders. With that, I'll turn it over to Gord to review the financials in more detail.

Thanks, Bill. I am pleased to present a condensed summary of Cineplex's record third quarter results. For additional detail, our financial statements, MD&A, and an earnings release are available on SEDAR+ and our investor relations website at cineplex.com. Those materials provide a comprehensive discussion of our operating results, so I will focus my remarks on key highlights, as well as liquidity, capital allocation, and outlook. Unless otherwise stated, all amounts discussed today relate to continuing operations. Our third quarter results included record revenue and per patron metrics, significant increases in Adjusted EBITDA and free cash flow, and a substantial reduction in simple leverage ratio to 2.9x. Since 2024, we have reduced leverage by roughly 2.6 turns, reflecting the significant progress we have made in strengthening our balance sheet. Total revenues were $440.2 million, an increase of 26.2%, driven primarily by a 23.1% increase in theater attendance to 14.8 million guests. This was the highest quarterly revenue in the company's history, reflecting strong content and higher per guest spending. Consolidated Adjusted EBITDA more than doubled to $70.7 million from $33.3 million in the prior year, demonstrating the significant operating leverage in our business. The quarter exceeded market expectations with Adjusted EBITDA coming in approximately 14% above consensus estimates. Adjusted free cash flow was $52.9 million, more than tripling from the prior year, driven by improved operating performance and stronger profitability. Let's take a closer look at the segments. Film entertainment and content delivered a record quarter across nearly every key operating metric. Attendance increased by approximately 2.8 million guests, or 23.1%, driving all-time record box office revenue, record theater food service revenue, record per patron metrics, and the highest quarterly Adjusted EBITDA in this segment's history. BPP exceeded $14 for the first time in the company's history. Premium price offerings accounted for 51.4% of total box office revenues during the quarter, highlighted by exceptional demand for Oppenheimer, which regularly sold out across our 8 IMAX 70mm auditoriums. Record BPP combined with strong attendance growth contributed to box office revenues increasing 35.2%, outperforming the domestic industry by approximately 7%. Theatre food service revenue increased 27%, driven by higher attendance and a record CPP, which increased 3.5% over the prior year. This was primarily due to strategic pricing initiatives and record merchandise sales. Spider-Man: No Way Home highlights the success of our retail offering, reaching record levels and making it the most successful merchandise program in Cineplex's history. Other revenues increased 24% over the prior year, reflecting an increased online booking fee revenues associated with stronger attendance, as well as contributions from Cineplex Pictures. Theater payroll and theater operating expenses remained well controlled with cost increases significantly below attendance and revenue growth. Combined with the higher attendance and per patron spending, this resulted in segment Adjusted EBITDA increasing 115.6% to a record $72.9 million. The quarter provides a clear illustration of the high operating leverage in our exhibition business. With $39.1 million of incremental segment Adjusted EBITDA on 2.8 million guests, that equates to approximately $14 of incremental EBITDA per additional guest, which is roughly in line with the contribution per patron framework we have previously discussed. In the media segment, revenues remained relatively flat compared to the prior year. This performance reflects healthy advertiser demand, despite a difficult comparison against elevated pharmaceutical advertising in the prior year. Results were also impacted by the timing of client spending, as some advertisers shifted a greater portion of their annual budgets into the first half of the year around the Olympics and the FIFA World Cup. Adjusted EBITDA for the media segment was $15.1 million, and Adjusted EBITDA margin was 79.5%, remaining substantially consistent with the prior year period. Location-based entertainment revenues were $34 million, a decrease of 1.7% compared to the prior year. The decline was generally consistent with broader industry trends as consumers continue to navigate macroeconomic pressures and a more cautious discretionary spending environment. Despite the modest revenue decline, adjusted store-level EBITDA improved as the business continued to benefit from operational efficiencies and disciplined expense management. At the segment level, Adjusted EBITDA was $4.8 million compared to $4.6 million in the prior year period. G&A expenses for the quarter were $22 million, 8.8% higher than the prior year. The increase was primarily attributable to approximately $9 million of incremental LTIP expense and a prior year benefit from lower incentive compensation accruals. Together, these items accounted for approximately $1.5 million of the $1.8 million year-over-year increase in G&A. Moving on to capital allocation and liquidity, we ended the quarter with $137.3 million of cash on the balance sheet and no drawings under our $100 million covenant-light revolving credit facility. Improving operating results and stronger cash generation have increased our capacity to execute our capital allocation priorities. As a reminder, our capital allocation priorities are to maintain our assets, strengthen the balance sheet, provide shareholder returns through share repurchases and/or dividends when appropriate, and selectively invest in attractive growth opportunities. For the quarter, net capital expenditures were $12 million, with spending directed towards maintaining and enhancing our asset base and investing in premium formats. Our full-year capital expenditure guidance remains unchanged at $50 million. We expect our financial position to continue improving through the fourth quarter. Holiday gift card and certificate sales historically provide a meaningful working capital benefit, which is expected to be supplemented this year by continued momentum at the box office. As a result, we expect further deleveraging by year end, increasing our borrowing capacity and providing greater capital allocation flexibility as we enter 2027. As we look ahead, we remain encouraged by the momentum in our business and the strength of the content environment. Supported by a stronger balance sheet and growing cash flow, we remain focused on capitalizing on opportunities across each of our operating segments and creating shareholder value. With that, I will turn it back to the operator for questions. Thank you.

[Operator Instructions] Our first question comes from Joey Chan with Scotiabank. You may proceed.

First, on the strategic review, is there any update you can provide on where you are in the process? And can you help us understand the range of options being considered, whether that's potential transactions or asset changes versus broader operational changes to the business or potentially both?

Yes. Hi, Joey. On that one, we're really not able to provide updates on the review process. It's focused on trying to maximize value overall for shareholders. And as you can imagine, that includes a really broad range of options. But we're not going to be able to provide an update on exactly where we're at in that process or a specific timeline for the process.

Okay. Given that your leverage is now within your target range, is implementation of a dividend or doing more buybacks during this strategic review period a possibility, or do you have to wait until after the process is completed?

Yes, Joey, thanks for the question. And as I mentioned, hitting our target leverage ratio range is a key milestone for us. What it does is it creates additional flexibility as we look forward into the remainder of the year, and particularly into 2027 and beyond. It creates lots of options at this point in time, and we will continue to evaluate those and select what we think is the most appropriate path forward.

Okay. And then just one last one on the box office outlook heading into next year. How would you characterize the film slate in 2027 relative to 2026? And how should we think about the cadence of new releases throughout the year?

Sure. Yes, hi, it's Bill. I'll take that, Joey. We're pretty optimistic about what 2027 looks like. There's broad studio movies across every quarter distributed throughout the year, including what we know will be an incredibly strong carryover slate of films that release in 4Q '26, December, that will roll to 1Q '27. And listen, a part of the movie business is also the surprises, right? You never see some of these movies coming in the magnitude that they're going to be able to go to. For us, it's about operationally making sure we're maximizing every film that comes through our screens. And there's always going to be some surprises to the upside. There will be surprises to the downside in some of these films, and that is the nature of the business. But the overall view, when I look at it from the quantity of movies being released, the consistency of windows, the studio commitment to market those movies as exclusive theatrical releases, I think it's really constructive as to how that's going to drive stability in 2027 and then looking even further into 2028.

Okay, great. Thank you. I'll pass the line.

Thank you. Thanks, Joey.