Investing.com -- Fitch Ratings has revised the outlook for Cineplex, Inc. to negative from stable while affirming its long-term issuer default rating (IDR) at ’B’. The agency downgraded the CAD$100 million senior secured revolving credit facility and CAD$575 million senior secured notes to ’BB-’ with a recovery rating of ’RR2’ from ’BB’/’RR1’. This was due to changes in the company’s gross credit earnings before interest, taxes, depreciation, and amortization (GC EBITDA).
Cineplex’s IDR is backed by its 73% share of the Canadian box office market, diverse revenue sources, and efficient entertainment ecosystem monetization. Despite a smaller scale, lower historical EBITDA margins, and weaker free cash flow compared to U.S. counterparts, Cineplex has potential for deleveraging as audience numbers are predicted to rebound this year with an attractive film lineup.
Fitch expressed concerns about Cineplex’s ability to increase margins after disruptions to the 2024 film supply and maintain attendance levels amid rising competition from streaming services, especially for smaller-format movies. The agency also highlighted the challenge of adapting to a more streamlined film release schedule.
In 2023, strikes by writers and actors’ unions lasting over 110 days led to significant disruptions in American film and TV content production. This strike, combined with pandemic-related supply-chain challenges, extended delays in the standard film creation cycle and created post-production and release bottlenecks in 2024. Consequently, about $1.5 billion in film content was rescheduled for release in 2025, resulting in a significant shortage of major films in the first half of 2024.
Fitch anticipates a considerable recovery in fiscal 2025, driven by a more robust film slate and a more normalized theatrical release schedule in the short to medium term. Box office revenues for 2025 are expected to recover to the $9.0 billion-$9.5 billion range.
Cineplex’s EBITDA margin fell significantly to 7.0% in 2024 from 11.3% in 2023 due to the shift in the release schedule. This shift notably affected attendance levels in the first half of 2024, causing a 10% drop in attendance for the year. Despite sustained increases in ticket and food prices throughout the year, Cineplex’s EBITDA and EBITDAR leverage rose to 8.0x and 7.0x, respectively, from 5.2x and 6.6x in 2023.
For 2025, Fitch expects Cineplex’s EBITDA and EBITDAR leverage to return to around 5.0x and 6.0x, respectively, by year-end, due to recovered attendance levels and margin gains. Cineplex is also expected to continue implementing a consistent financial policy focused on its deleveraging strategy.
Cineplex, with a 73% share of the Canadian box office market, has a solid market position, enabling operational efficiencies and cost advantages. The company’s diversified business mix extends beyond traditional movie exhibition by including non-movie entertainment and media services, setting it apart from regional competitors like Landmark Cinemas.
Movie theater exhibitors are highly dependent on the quality, quantity, and timing of film production, which are beyond management’s control. Since the pandemic, the theatrical film industry has faced increasing competition from at-home distribution channels, including direct-to-consumer streaming services owned by film studios such as Disney+ or Max. Over the past three years, studios have worked to normalize theatrical release schedules, acknowledging the economic importance of the theatrical window.
Cineplex’s strategy prioritizes accessible entertainment options for Canadians while optimizing and diversifying revenue mix and operational risks. It includes various exhibition formats, a diversified film slate, and increasing 10% revenue contribution from foreign films to diversify from Hollywood. Entertainment options for non-moviegoers include location-based entertainment venues, The Rec Room (targeting millennials), and Playdium (targeting families). In 2024, Cineplex generated total revenue of 42% from Box Office, 35% Food Service, 10% Media, and 13% Amusement and Other.
As of Dec. 31, 2024, Cineplex’s liquidity position was $176 million, consisting of $84 million in cash on hand and $92 million available under its $100 million revolving credit facility. Fitch expects free cash flow generation to gradually improve throughout the rating horizon, moving towards a low-single-digit free cash flow margin, supported by an improving attendance and higher quality of the film slate.
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