Impressive July Box Office Numbers Should Help Cineplex

As I have previously written, Cineplex (TSX:CGX:CA), (OTCPK:CPXGF) is the largest movie theater chain in Canada. The company has other significant business segments, including location based entertainment venues, which compete with Dave & Buster's (PLAY).

Cineplex is scheduled to report its Q2 2023 earnings on August 10, 2023. With the movie theater market seemingly on fire with the Barbenheimer phenomena, against a backdrop of strikes from the Writers Guild of America and Screen Actors Guild, now is an opportune time to look at recent developments with this company.

July 2023 Better Than July 2019 for North American Domestic Box Office

According to Box Office Mojo, the “Domestic” Box Office (which includes Canada and the USA) for the month of July 2023 exceeded the same per-pandemic period of July 2019 by about three percent. The pre-pandemic period is often used as a comparable in the Canadian theatrical business as 2019 represents the last full year that cinemas operated without restrictions in Canada.

Cineplex’s Most Recent Earnings Report

For the first quarter ended March 2023, the company reported a net loss of $30.2 million (all amounts in this article are in Canadian dollars unless indicated otherwise). As the first quarter is typically not when the blockbuster Hollywood fare is released, management comments made during the conference call are of greater note.

CFO Gord Nelson noted:

“We achieved 96% of our pre-pandemic 2019 April box office and 102% of our pre-pandemic combined box office and theater food sales on 86% of the pre-pandemic attendance level.

In addition, as [CEO] Ellis [Jacob] mentioned, our EBITDA for the month of April alone is higher than our EBITDA for the entire first quarter of 2023 and is also higher than EBITDA for the month of April 2019.”

Recall that April is part of the quarter that is about to be reported. Since then, the company has also reported May and June box office numbers. May reached 69 percent of the pre-pandemic June 2019 comparable. June reached 98 percent of pre-pandemic comparable. For the quarter, Cineplex’s box office reached 87 percent of the pre-pandemic comparable.

Comparables to 2019 are also of note given management’s comments in the last conference call:

“Now let's talk about a world where we return to around 75% to 80% of the pre-pandemic attendance levels. Again, this is below the 86% level we experienced in April 2023. In this world, we have suggested and our analyst models would also concur that in this world, Cineplex could achieve approximately 100% of its pre-pandemic EBITDA level of approximately $230 million.”

As noted above, the company was above 87 percent box office for the quarter it is about to report. Further, as mentioned at the beginning of this article, the domestic box office was at 103 percent of 2019 for the month of July 2023.

Note that I wrote the words "attendance" and "box office" in bold above. The reported box office revenue per patron was $11.13 ("BPP") in the second quarter of 2019. Concession revenues per patron ("CPP") were $7.04 in the same quarter. This compares to $12.63 BPP and $8.85 CPP in the most recently reported Q1 2023.

In other words, we can see that BPP rose by 13 percent and CPP rose 26 percent in the above two periods that I compared. This, I presume, in part explains how the company can return to higher earnings with only 75 to 80 percent of pre-pandemic attendance levels.

Attendance vs. Box Office and Concession Sales

So how may this all translate for the quarter about to be reported? The company reported that "Furthermore, combined box office and theatre food service revenues in the second quarter of 2023 reached 92% of the same period in 2019."

We have to do some reverse math to guesstimate attendance here. If the average patron in Q1 2023 spent $12.62 on BPP and $8.85 on CPP that totals $21.47 per patron. I will assume for my calculations that these metrics are identical in Q2 of 2023.

If we look back to Q2 2019, the average patron spent $11.13 BPP and $7.04 CPP for a total of $18.17 per patron. The company reported 17.0 million patrons in that quarter, which would lead to a combined BPP and CPP of about $309 million.

The company has already told us that "combined theater and food service revenues" was 92 percent between the comparable periods mentioned above. 92 percent of $309 million is $284 million.

We then divide the $284 million by $21.47 per patron and get 13.2 million patrons. That puts the company right at about 78 percent in attendance based on my math.

In other words, Cineplex appears to have met its 75 to 80 percent goal, but its selective use of language made it a little bit of work to figure that out.

Further, for the month of July 2023, if Cineplex tracked or outperformed the domestic box office increase of 3 percent relative to 2019, that is significantly higher than the 87 percent box office comparable of the second quarter. That bump alone ought to bring the company closer to the threshold to $230 million in EBITDA, should the company be able to maintain the improving momentum.

Company's Path To Dividend and Debt Reduction

In the last conference call, CFO Gord Nelson also highlighted managements path to a return of the dividend and reduction of debt. Specifically, he stated:

“Now let's talk about our balance sheet. At the end of Q1 2023, we had approximately $922 million face value of debt, including $316.3 million in convertible debentures which have a conversion price of $10.94. All of our equity research analysts have a one-year target price in excess of this conversion price.

In this scenario, we believe that the convertible debentures would convert to equity and with the adjusted current debt balance of $606 million, excluding the converts, we would be at the low end of our target leverage ratio range of 2.5 times to 3.0 times and on the path to consider the reintroduction of a dividend.”

Impact on Debt and Share Count

This would put Cineplex below its pre-pandemic long-term reported debt level of $625 million.

I have previously written that since the pandemic began, Cineplex has managed to not dilute its stock. Shares have held steady at around 63.3 million shares since prior to the pandemic. I contacted investor relations after the above comment was made by management. On May 15, 2023 Cineplex confirmed to me that, at that time, they estimated a total share impact of 28.9 million shares on conversion ($316.3 million face value divided by conversion price of $10.94).

That would lead to about 92.2 million shares outstanding. That amounts to about a 32 percent dilution rate, as a theoretical $10 share would now be worth about $6.80 if the market capitalization remained the same. In December 2019, prior to an ill-fated Cineworld takeover offer, the stock traded at $25 per share and paid a $0.15 monthly dividend.

Potential Impact On Stock Price

If the stock and its dividend returned to pre-pandemic levels, accounting for dilution, the share price would be $17 and the monthly dividend would be $0.10. This would result in an annual yield of about seven percent, which would seem reasonable in today’s market. A $17 share price would be almost double the closing price prior to writing this article of $9.20.

What If The Stock Never Reaches $11?

Management has based its debt reduction assumption on the stock reaching a target price of $10.94. Since making these comments, the stock has not reached this price. It would not be surprising if some investors were on the sidelines, thinking that conversion leading to dilution of shares may lead to a lower buying opportunity later. Perhaps some short-sellers are even interested in seeing that the $11 price is never reached so that the company’s path to a dividend and debt reduction is jeopardized.

As mentioned above, management has stated that 75 percent of pre-pandemic attendance numbers could get it to EBITDA of $230 million per year. The convertible debentures mature in September 2025.

That is over two years away. I will leave it to investors to evaluate if that is enough time to repay over $300 million in convertible debt and whether they believe current strong box office trends will continue, in the hypothetical scenario where this stock never manages to reach $11 during the required period of conversion.

While the box office results appear good, and I expect them to translate to improved earnings and guidance when the company reports on August 10, I raised this issue as it may be something impacting the short term price of the stock.

Hollywood Strikes

Another issue that may be concerning investors is the current shutdown of Hollywood production due to strikes from the Writers Guild of America and Screen Actors Guild. In the previous conference call, management indicated that the WGA strike was not expected to have a material impact on the company.

CEO Ellis Jacob further noted that:

“Typically, these strikes have a greater impact on short-term content delivery cycles, including content for network TV and streamers.”

While I will not try to predict the outcome of the strikes, it is well reported that many major content streamers are losing money on streaming, and with so much competition in the streaming space, there is an incentive to bring the strikes to an end that hopefully satisfies all parties involved.

Conclusion

Cineplex has outlined to investors a path to debt-reduction and return of a dividend. The company has indicated that obtaining box attendance levels in the 75 to 80 percent range of pre-pandemic levels would help it along this path. If this path is attained, existing shareholders may be diluted by about a third, however the stock price could double based on historic prices and the potential dividend yield. Based on July box office numbers the public has shown there is a demand for theatrical viewing that could well exceed Cineplex's targets to achieve its goals.

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