These are cautiously optimistic times for Canada's media and entertainment players. Ongoing vaccinations are leading to something like a return to normal—people back in offices, kids back in schools, live entertainment events at full capacity—even as the emergence of coronavirus variants compel our ongoing vigilance. So, as the industry gets back to work and financial supports subside, there remain important cash flow challenges and opportunities to consider.
To explore what lies ahead in this space, I spoke with Katherine Forbes, a partner in KPMG's Restructuring & Turnaround practice. Our conversation has been edited for clarity and length.
Lesley Luk: We can all agree that it's exciting to see companies opening up, productions getting back on track, and live events being in person again. At the same time, we know that there is some degree of lingering uncertainty. What are you seeing?
Katherine Forbes: In the entertainment sector, the conversation around uncertainty has more to do with being able to execute on projects, particularly in meeting project milestones, which depends largely on the ability to secure the labour resources required, availability of sites, equipment, access to resources for building sets, and a number of other key inputs into a production. Many projects were put on hold over the last 20 months and COVID measures are still in place today, so I'd expect you're seeing, Lesley, that project timelines are still longer than usual and there remains a shortage of resources relative to demand. Unsurprisingly, that comes with price inflation and continued incremental costs in production. Each of these factors can directly impact cash flow—both from a timing and profitability standpoint.
LL: I do, and I agree that's critical. Production houses definitely put projects on hold at the beginning of the pandemic, and after they started opening up, many found the cost of production had increased. For example, one of my clients put their entire cast and crew up in a hotel to keep them separated over the whole filming period because they didn't want any outside contamination.
KF: And those increased costs aren't just going away, either. They will be around until Canada fully recovers and no extra precautions are needed. Production houses need to continue to consider these costs when budgeting out projects so they aren't surprised later on with unabsorbed costs eating into their profitability.
LL: Shifting from content production, a lot of media and advertising organizations were also hit hard during the pandemic because companies weren't buying ads. Where do things stand now?
KF: Many advertising companies impacted in this way were able to take advantage of government support during this period—most importantly the Canada Emergency Wage Subsidy (CEWS), which has had a meaningful impact on liquidity and the bottom line for many businesses across various sectors. With CEWS having ended on October 23, 2021, businesses can look to the Canada Recovery Hiring Program (CRHP), which has its own set of requirements to qualify, namely around hiring and increased work hours. Additionally, there continued to be easy access to debt financing, whether backed by the government or not, for those in need of incremental liquidity to weather the pandemic, including now when additional working capital is likely required to ramp back up from a revenue perspective as subsidies wind down.
As subsidies eventually end, businesses will have their full payroll (and other) costs back on their income statements, and some companies will be faced with the fact that they've taken on more debt over this period. They'll have to figure out how to best service that debt.
LL: Let's talk about the live entertainment space because live concerts and shows are starting to pick up. How will organizations manage the return to full capacity?
KF: That's a good question. When capacity was reduced, there were inflationary costs. This, compounded with fewer tickets sold, led to the increase in ticket prices for live events. We're still seeing these increased costs, even with capacity back to 100 per cent, because the cost of operations remains high. There's also uncertainty around how long it'll be until we witness a return to normal because there's always a likelihood of live events being cancelled at the last minute. As a business, you can't rely on the fact that you're going to be able to accurately predict attendance rates relative to government restrictions or the price you've set well in advance. So, the questions become: "How does that price interact with your recoveries on a particular project in various attendance scenarios?" and "Can we afford a couple of loss leaders at the beginning just to be there and connect with the audience?"
Some companies didn't have too much debt coming into the pandemic and were able to navigate the shutdown period and this reopening. But not all businesses have the balance sheet to be able to take some losses at the beginning, at least not on their own. And if they need outside capital, they need to think about the best way to structure that.
LL: About access to capital, we talked a little bit about debt financing early on, but what can companies in the industry do to access the capital they need to take advantage of opportunities in their business?
KF: Debt financing has also been widely available, and we've seen competitiveness among the Schedule A banks as well as alternative lenders. So, if you're somewhat bankable, you're going to be able to access financing. For how long this will remain the case, I don't know.
M&A activity has also been frothy. So, there's been easy access generally to equity financing as investors look for returns, for companies in need of a partner or who can't comfortably take on additional debt.
In either case, lenders or interested purchasers/investors will want to see projections. Given the extent of continued uncertainty, it can be difficult to agree on a set of assumptions. That said, there are some scenarios you can run to forecast out potential outcomes and their impact on future profitability and cash needs.
LL: How can companies continue to prepare for the unknown and uncertainty?
KF: I would say they shouldn't just rely on history. You can't just dust off your budgets from two years ago and assume that everything will resume as it was post-pandemic. There are still many uncertainties in forecasting revenues, in terms of how people will behave, the way they will consume content, how and to what extent they will attend events, and the advertising dollars that will follow those activities. Expectations around the costs of production and otherwise need to be realistic for this environment, too.
But, yes, it's certainly going to be tough to forecast. Even now, we see companies grasping for insights from the few months they were truly open over the past two years. That doesn't give them much to go on because they were blips in time, and no one can say for sure how much of that behaviour is sustainable. If it's pent-up demand, how long will it last? Will it have a long tail, or will people get over that initial excitement and stay home more than previously?
LL: That means using forecasts as a business tool rather than just a budgeting activity conducted at the beginning of the year and kept static. It's a way of adjusting to various factors as they appear and maintaining visibility into the business to respond more proactively to the changes you're seeing.
KF: Exactly. Overall, I believe moving forward is not about trying to return to where you were before the pandemic but taking a fresh look at where you stand today and what your reasonable expectations are in the coming 12 months in terms of revenues—and the costs to achieve them—because they might not be the same as before.
Ultimately, it will take time to see how this all plays out. As we move along, though, companies can benefit from forecasting more frequently than they may be used to—and from adopting a more agile model that can respond to changes as they arise. In predicting liquidity needs, that requires understanding those peaks and valleys on a month-to-month basis, and not just averaged over time, to make sure you'll have the appropriate access to capital to operate effectively.
If there's one overarching message, it's that you need to be agile, and it's easier to do that with timely visibility into the business. The good news is many media and entertainment businesses have proven themselves adept at making quick, meaningful changes in response to disruption. Continued application of skills will carry businesses in the industry forward as we all navigate this next phase.