The Profitable Exhibitionist

Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF), unlike most companies, had a difficult year-over-year comparable: Its screens–and sales–during the third quarter of 2008 were lit up by The Dark Knight, the Batman Begins sequel and the second-highest grossing North American release ever (behind Titanic).

But Cineplex is still enjoying its epic ride on Hollywood’s franchise wave. Harry Potter and the Half-Blood Prince, the sixth and penultimate film in the iconic series, accounted for 12.3 percent of ticket sales as Canada’s leading cinema operator recorded a record CAD155.9 million in box office sales and profit growth of 11 percent.

Total revenue was CAD257.5 million, up from CAD239.1 million in the third quarter of 2008 and the highest quarterly total reported by the fund since its inception. Concession revenues were up 9.1 percent, boosted by higher attendance and bigger appetites: Tickets sold increased 4.4 percent, while average concession revenue per movie-goer rose 4.5 percent to a record CAD4.15.

A November 2008 price increase, reflected in the 3 percent increase in average total revenue per customer, had no impact, even as budgets have generally tightened during the recession. This is further evidence that movie-going is as recession-resistant an activity as there is. It’s still a cheap summertime family outing compared to going to a Major League Baseball game, for example.

Distributable cash year-to-date was CAD95.9 million, up 20 percent from 2008 levels for the first nine months of the year. Cineplex reported a year-to-date payout ratio of 56 percent, down from 65.9 percent in 2008.

The fund’s existing credit facility doesn’t mature until 2012, meaning it won’t have to deal with current refinancing risks brought on by the credit crisis. This CAD130 revolving facility is available to finance acquisitions, new construction and working capital; Cineplex reported a leverage ratio of 1.71 times, well below the covenant-dictated limit of 3.0 times.

Between the excess cash it generated and the amount available under its credit facility Cineplex is in solid financial position. Management has not yet indicated what it plans to do about impending 2011 taxation.

As much as Cineplex’ numbers suggest that the company is resistant to economic downturns, there’s no escaping the conclusion that it’s captive to the quality of the productions coming out of Hollywood. Simply put, the record numbers recorded in the third quarter were the result of a great film lineup.  

The third quarter of 2008 was strong at the top–Heath Ledger’s final performance lived up to the buzz and attracted even more movie-goers than the 2005 film that re-booted Warner Bros. key franchise–as The Dark Knight accounted for 22 percent of ticket sales. Even more encouraging than record-setting third quarter 2009 numbers is the depth of films: No. 2 on Cineplex’ ticket-sales list was Ice Age: Dawn of the Dinosaurs, also a sequel but one presented in glorious, premium-priced 3D.

Three of the top five films (in terms of share of Cineplex tickets sold) were geared toward family audiences. Thus the 9 percent concession revenue gain is largely a function of product mix: As management noted in its discussion of quarterly results, family audiences tend to spend more at the concession stand.

Confirming the obvious trend toward film franchises, The Twilight Saga: New Moon inspired record advance ticket sales for Cineplex, as teen girls of all ages secured their spots in the theater ahead of time at a record pace. This bodes well for fourth-quarter numbers, even before the holiday movie-going rush gets underway.

Filmmakers and studios seem to have perfected the franchise model: Harry Potter, The Lord of the Rings, Ironman, Batman, Spiderman, X-Men and the various other superhero films have provided reliable fodder for exhibitioners for a decade. The improvement in 3D projection, along with the expansion of IMAX offerings, promises to sustain the flow of movie-goers even if or when the current franchise formula wears off.

The positive impact of new-wave 3D and IMAX offerings, including the recent Harry Potter film, suggests as well that the actual experience of going to the movies is still a significant draw. This growing number of experiential films has clearly helped put people into the cinema and gotten them to pay more.

The entire film exhibition industry is converting to digital projection technology, which includes the installation of 3D-capable systems. As of the end of the third quarter Cineplex had installed 169 digital projectors in 79 theatres, including 129 screens with RealD 3D technology. The fund has a commitment to install RealD 3D systems on 175 screens.

The 3D releases Up!, Monsters vs. Aliens and Ice Age: Dawn of the Dinosaurs all placed in the top 10 best-performing films for during the first nine months of 2009; with its 129 3D screens Cineplex is well-positioned to take advantage of future 3D releases, including Avatar, director James Cameron’s first release since Titanic, which will hit screens during the fourth quarter.

Canadian Edge subscribers can find out what to do about Cineplex Galaxy and catch up on third quarter earnings reports from select How They Rate-covered trusts and high-yielding corporations in The Roundup, below.

Update: Harper’s Majority

After picking up two more seats in Parliament in recent by-elections, Prime Minister Stephen Harper is closer than ever to his coveted majority.

His Conservative Party won back a seat it had long held in Nova Scotia. The Tory win in Montmagny-L’Islet-Kamouraska-Riviere du Loup in Quebec’s lower St. Lawrence region was a stunning upset; the party had written the seat off a few months ago.

This result–the Conservatives now hold 11 seats in Quebec–suggests Harper’s party, not Michael Ignatieff’s Liberal Party, is now the federal alternative to the separatist Bloc Quebecois. The two wins boost the Conservatives to 145 seats in the House of Commons, while the Liberals remain at 77. The Bloc is at 48, the New Democratic Party holds 37 seats, and there’s one Independent.

The next election to the House of Commons is tentatively scheduled for Oct. 15, 2012. Sitting prime ministers can dissolve Parliament and call an early election at their discretion. In order to trigger an election, all three opposition parties in the House of Commons–the Liberals, the NDP and the Bloc–would have to defeat the government in a no-confidence motion.

Cold Reception

Canada holds the rotating presidency of the Group of Seven (G7) industrialized economies in 2010. As such it gets to choose where the increasingly irrelevant group meets.

In a move designed to showcase its northern territories and to further assert its dominion over the North Pole and its considerable resource potential, finance ministers and central bankers from Canada, the US, the UK, France, Germany, Italy and Japan will meet in Iqaluit, the remote capital of Nunavut, where the ground never thaws and winter blizzards can last for days, from February 5 to February 7.

Though it will be dark most of the day, attendees will be able to enjoy the Northern Lights. And there will be little problem accomplishing what Canadian Finance Minister Jim Flaherty described: a gathering in the fashion of a fire-side chat. No doubt there will be demand for fire: The average temperature in Iqaluit in February is 29 degrees Celsius below zero; wind chills could bring that down to as cold as minus 50 degrees Celsius, which means exposed skin would freeze within five to 10 minutes.