Cineplex Inc

TSX:CGX

Earnings Call Transcript 2020-Q2

[Operator]

Good day and welcome to the Cineplex Inc. Q2 2020 Analyst Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Melissa Pressacco, Senior Manager of Communications and Investor Relations. Please go ahead, Ms. Pressacco.

[Melissa Pressacco]

Thank you, Cody, and good morning, and welcome. Before we begin, I would like to 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 could differ materially from those expressed in the forward-looking statements. Factors that could cause results to vary include, among other things, the negative impact of the COVID-19 pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national and world events, discovery of undisclosed material liabilities and general economic conditions.I will now turn the call over to our President and CEO, Ellis Jacob.

[Ellis Jacob, President, CEO & Director]

Thank you, Melissa. Good morning, and welcome to Cineplex Inc.'s Second Quarter 2020 Conference Call. We are glad you could join us today. On the call this morning, we will take a brief look at the second quarter results and the severe impact that COVID-19 has had on the numbers as well as provide an update on the status of the litigation between Cineplex and Cineworld Group. We will also provide an update on our reopening plans and how we are positioning the company's continued success in the future.Our Chief Financial Officer, Gord Nelson, is on the call to provide a financial overview, including our liquidity position, which will be followed by a customary question-and-answer period. Like so many other businesses in Canada and around the world and as a direct result of the global pandemic, our locations were closed for almost the entire second quarter, only beginning to reopen in select markets during the last few weeks of June, where it was deemed safe to do so.While Gord will go into more detail in a moment, it goes without saying that our second quarter results were severely impacted by COVID-19, resulting in substantial decreases when compared to last year. And although our physical doors were shut during this time, the team has worked harder than ever before to mitigate the negative impact, prepare for reopening and support the long-term stability of the company.Beginning in mid-March and continuing throughout the second quarter, we remain laser-focused on significantly reducing operating costs and capital expenditures. In our efforts to reduce operating costs, we continued working with our landlords and real estate partners to abate and defer rents, eliminated all variable spending and worked with our suppliers to renegotiate and revise contracts. We benefited from government wage subsidy programs. And in addition to laying off our entire part-time field workforce during the closure period, our corporate employees took voluntary temporary salary reductions to help alleviate the financial burden. While we were able to dramatically reduce our cash burn, we also remain committed to growing and supporting the diversified areas of our business.This included Cineplex Digital Media, our expanded food delivery services through Uber Eats and Skip the Dishes and our online Cineplex Store, which experienced significant growth as people consumed more content from home. We also took meaningful action to provide further financial stability throughout the recovery period and to ensure that our long-term liquidity needs were met. This included a pain in feigning relief from certain financial covenants under our credit facilities and securing additional financing in the form of a convertible unsecured subordinated debenture issued subsequent to quarter end.While our business strategy remains the same, in the short and medium term, we are focusing on a smaller number of projects and priorities supported by a sustainable financial model. As we monitor revenues and plan for our future, subsequent to quarter end, we had to make the difficult, but necessary decision to reduce the size of our workforce. We reworked our teams, consolidated our organizational structures and have to say goodbye to a number of colleagues across the Cineplex ecosystem.And as we navigate through these unprecedented times, we will continue to take bold action in a variety of areas and make those tough, but require decisions to position Cineplex for sustained success. This includes our agreement with Topgolf.Unfortunately, given the global pandemic, Cineplex and Topgolf have agreed to mutually terminate their partnership. The current environment is simply not an opportune time for us to invest in these large development projects, but we hope to see Topgolf come to Canada in the future.Before I shift gears to our measured reopenings, I would like to share an update regarding the Cineworld litigation. As you know, on July 3, Cineplex filed its statement of claim in the Ontario court seeking damages of to Cineworld wrongfully repudiated the transaction to acquire our company.Since then, the court has set a time line to get to trial, while the trial is tentatively set to begin in September 2021, delays are possible. Having said that, we are diligently working to advance the legal process and seek to recover all damages as outlined in the claim.Turning the focus to our measured reopening. Since we closed our doors in mid-March, the team has been diligently preparing for a safe return. We have used this time to carefully reexamine all of our buildings and processes. We worked with the country's top infectious disease experts to develop and implement an industry-leading program with end-to-end health and safety protocols across the board, so that our guests feel confident and relaxed when they return to our venues.I'm pleased to share that as of today, we have reopened over 80% of our theater circuit with 137 theaters across Canada in all major markets. Plus all of our locations of the Rec Room and Playdium are now all open. Early results are encouraging, and our guests are delighted to be back, almost as delighted as our teams were to reopen our doors and get back to doing what we do best, providing some much-deserved entertainment, fun and escape.Taking our CEWS from all levels of government, our phased approach to reopening continues to evolve and is driven by provincial regulations and safety guidelines, the availability of first-run film product, social norms around physical distancing and attendance levels at theaters and other venues that have reopened. We remain extremely strategic and agile in our approach as we welcome our guests back and build consumer confidence.And speaking of first-run film product, today is truly a momentous day for Cineplex and for the industry. After 5 long months, today, we are welcoming our guests back with new first-run content, and we couldn't be more thrilled. We have 3 new titles coming to the big screen today, including the exclusive Canadian release of The SpongeBob Movie: Sponge on the Run; the thriller, Unhinged and the highly anticipated Quebec film, Mon cirque à moi. Also of note, Christopher Nolan's Tenet will be released in Canada on August 27 as part of the international release, which is a week before the United States. This isn't something that would have happened pre-COVID and is a testament to the strength of our reopening plans and the studio's belief in our business and the theatrical model.Having said that, we were all very surprised to learn of Disney's decision to send Mulan straight to premium VOD or PVOD. While we were excited to bring the film to the big screen and were confident that it would perform well in our theaters, Disney is a valued partner. And while we are disappointed, we respect their decision.That said, Disney has assured us that the decision was a one-off as a result of the pandemic environment and that they are so very committed to the theatrical window, which leads me to our next topic.I know there's been a lot of speculation and noise in the media over the past few weeks regarding shortened theatrical windows that I would like to address. Cineplex is not changing its release windows at this time. Over the years, I've had many conversations with our studio partners about the importance of the theatrical window, and we will continue to have these discussions moving forward.And speaking with our partners, they have assured me that the theatrical run is still important to them. They know that the global theatrical box office for a film often represents 50% or more of its overall revenue, which means that significantly shortening the theatrical window could have a serious impact on the latter part of a film's life.As exhibitors, we are the engine that drives the train and sets the stage for additional downstream revenues for a film from the creation of sequels, to merchandising opportunities, to theme park attraction and other offshoots. We create great brand awareness and loyalty for our distribution partners. Not to mention, providing the social and audiovisual experience that guests love and crave, especially right now.In fact, as we continue to look at new ways to attract different audiences, we are working with Rogers Sportsnet and TSN to bring select NHL and Raptor playoff games to the big screen. Admission is free with a $5 donation to the Boys & Girls Clubs of Canada and attendance has been encouraging.Looking ahead, there's still a very strong backlog of titles as the back half of the year continues to ramp up. In addition to Tenet that I already mentioned, we have Wonder Woman 1984, Death on the Nile, Black Widow, Candyman, James Bond No Time to Die, Pixar Soul, West Side Story from Steven Spielberg, Dune directed by Quebec's Nolan Denis Villeneuve and Croods 2, among others hitting the big screen. While there could still be some movement over the course of the year, we expect 2021 to be a very strong year at the box office. Several key titles have shifted from 2020, including Top Gun: Maverick, Fast and Furious 9, A Quiet Place II, The Eternals and Minions: The Rise of Gru. This, of course, in addition to titles previously announced for 2021, such as the Batman, Jurassic World: Dominion, Sing 2, Mission Impossible 7 and True Love.What I know for certain is that these past 5 months have given us all a new appreciation for the importance of friends and family and the power of shared experiences with those we love. We know people have missed the wonder of the big screen and are craving that social interaction after being constrained in their homes for months. And we are excited to now be in a position to safely welcome them back.Cineplex has been entertaining Canadians for over 100 years, and this has certainly been a quarter unlike any our company or the industry has experienced. While so much of what is happening right now is out of our control, our priority over the past several months has been on what we can control, decreasing costs, trimming our CapEx and securing the financial relief and resources we need to ensure the financial health of the company during these uncertain times.I remain confident in our ability to evolve and emerge stronger in this new world, particularly with our passionate and dedicated employees, who have worked tirelessly throughout these tough times. I would like to thank the team for their resilience and perseverance in the phase of such adversity as we forge ahead to the next phase of our future together. I would also like to thank our committed Board of Directors who have provided great knowledge and guidance throughout this period.With that, I will now pass the call over to Gord Nelson.

[Gord Nelson, Chief Financial Officer]

Thanks, Ellis. I am pleased to present a condensed summary of the second quarter results for Cineplex Inc. and to provide additional details on the financial impacts of COVID-19 on our operations. For your further reference, our financial statements and MD&A have been filed on SEDAR and are also available on our Investor Relations website at cineplex.com.Our MD&A and earnings press release includes a fulsome narrative on the operational results. So I will focus on highlighting and quantifying some of the key items. These include the impacts and our responses to the ongoing effects of COVID-19 with a commentary on cost control and liquidity initiatives and outlook.The COVID-19 pandemic had a material negative impact on all aspects of Cineplex's core businesses, resulting in material decreases in revenue, results of operations and cash flows for Q2 2020. Although the core businesses were shut down for the quarter, we did have some revenue contributions from our home food delivery, digital place-based media and digital commerce businesses.Our immediate focus upon the mandated closure was on cost minimization and managing liquidity while maintaining the terms of the arrangement agreement with Cineworld prior to receipt of the termination notice on June 12, 2020. Once we optimize our position with respect to these items, our focus turned to our reopening plans.With respect to cost control, I want to provide some additional details on our largest fixed and semi-fixed costs, our lease costs and our payroll expenses. Lease costs are our largest fixed costs. Our monthly total occupancy costs, including lease costs and lease-related costs such as CAM and taxes, is just over $20 million a month.During the mandated closure period, we maintained strong communication channels with our landlord partners in identifying opportunities for relief during these unprecedented times. Our focus has been on working with them to identify opportunities for abatements during the closure period, to convert fixed components of rent to variable rent during the reopening period and to jointly look for other opportunities under our existing lease agreements.During the second quarter, we have reflected approximately $11.9 million in savings in the EBITDAaL calculation. It is important to note that discussions are ongoing, and this savings number only represents amounts agreed upon to date and also does not include scenarios, where we might have exchanged or sold certain lease rights such as density, exclusivity or build rights in return for cash or rent payment holidays.To date, these lease rights transactions are in excess of $20 million and are not reflected in the Q2 financial statements as the agreements were executed after June 30. The benefits of the initiatives taken in Q2 will continue to provide relief through the remainder of 2020.Payroll is our largest semi-fixed costs. With the mandated closure, we immediately initiated temporary layoffs and reduced full-time employee salaries across the board by agreement with the employees. These were voluntary permanent reductions and not deferrals. We reviewed and applied for government subsidy programs where available, including the Canada Emergency Wage Subsidy.During Q2, we benefited from approximately $20.2 million in subsidies, primarily under this program, and we're able to materially reduce our theater payroll to approximately $234,000 in Q2 2020 from approximately $41.1 million in the prior year quarter.Our total company employee salaries and benefits, as identified in Note 12 of the financial statements, decreased to $11.6 million from $79.4 million in the prior year.Looking forward, the government has announced the continuation of the CEWS program until December 19, 2020, which will continue to benefit the company through Q3 and Q4 and a potentially higher subsidy rates.In July, the company initiated a restructuring process, which will result in the elimination of approximately 130 roles for an annualized savings of approximately $12 million. Approximately half of the savings relates to G&A and half related to OpEx savings in the various businesses. We expect restructuring costs of approximately $9 million to be reflected in the remainder of 2020.As we look forward, we will continue to benefit from the CEWS program through its expiry in Q4 and will drive future savings as a result of the recent restructuring process. With respect to our other supplier partners and expense control, we put in immediate expense and CapEx curtailment programs during the closure period and work with our supplier partners to provide elements of relief including ceasing or reduced amounts of contractual monthly services and payment deferrals and abatements.You can see the benefits of these initiatives and the substantial cost reductions in a number of our controllable cost categories. With all the actions previously described, we were able to achieve our projected monthly cash burn rate of approximately $15 million to $20 million per month before working capital initiatives.In addition to the cost controls, we focused on managing our working capital to ensure that we are optimizing our cash position. As a result of the cost savings and working capital initiatives, we were not able to -- we were not only able to secure benefits, which will extend into future quarters, but we're also able to remain in a debt-neutral position during the second quarter.I would now like to focus on our liquidity initiatives and, in particular, the recent credit facility amendment and convertible debenture offering. The credit facility amendment was executed on June 29, and the convertible debenture offering was announced on July 7. We described the provisions of the amendment on our Q1 call and the details are disclosed in our financial statements.Given that we had an amendment that was conditional on financing and this financing wasn't in place at June 30, we were required under IFRS to classify the debt as a current liability as at June 30. The convertible debenture offering was successful with the full overallotment option being exercised.Total proceeds net of commissions was approximately $305 million and was used to pay down the existing credit facility with $100 million being a permanent paydown. With a debt balance of $664 million as at June 30 and net proceeds of approximately $304 million from the offering, our pro forma debt balance as at June 30 would have been approximately $360 million.With a commitment or a borrowing capacity of $700 million, our pro forma borrowing availability as at June 30 would have been approximately $340 million. In addition to the convertible debenture offering, we are investigating extracting value from our owned real estate portfolio, which includes our head office building in Toronto.Ellis mentioned the mutual termination of the agreement with Topgolf. In addition to removing the previously forecast CapEx related to Topgolf, we are looking to bring CapEx down to approximately $50 million for the next 12 months from our previously estimated run rate of approximately $150 million. This CapEx reduction, coupled with the elimination of our dividend, will provide approximately $200 million in additional liquidity as compared to prior years.We have taken a number of significant steps during Q2 to manage our costs and improve our liquidity position and balance sheet. Despite the current environment, we feel very comfortable with where we have positioned the company today. As we look ahead, we continue to focus on the reopening of our businesses and continuing to explore further opportunities for cost reduction and value creation.That concludes our remarks for this morning. And we'd now like to turn the call over to the conference operator for questions.

[Operator]

[Operator Instructions] We'll take our first question from Derek Lessard with TD Securities.

[Derek J. Lessard, Research Analyst]

I hope you're well and safe. I realize that the environment is extremely fluid right now, but I was wondering if with Q3 half over, what are some of the feedback that you're getting from the studios with respect to releases for the balance of the year? And I guess, is there any immediate concerns or risks around your Q4 EBITDA and what that might mean for your covenant?

[Ellis Jacob, President, CEO & Director]

That's a great question. And as we've seen and we see today, we are going to be releasing 3 movies tonight, and we are also releasing movies ahead of the U.S., which gives us a lot of vote of confidence as to what we have done to make the environment safe for our guests. And given the balance of the year, there's still some very strong titles that are available to us. The issue is we don't know at this stage if the titles will stay on those particular dates or if they will move on to 2021 or other changes that may take place. But at the moment, we feel pretty comfortable. But again, it depends on what happens with COVID-19 and its impact on our guests and the flow of film product to theaters.I'll turn it over to Gord now.

[Gord Nelson, Chief Financial Officer]

Yes. And with respect to the covenants, I think what we're seeing is, we're seeing more impact in Q3 with some of the delayed closures. So whereas I would have said, a number of weeks ago at the beginning of July, we would have thought that we might have been in a potentially in a breakeven position for the back half of the year given some of the recent delays and announcements in Q3 is, I would suggest that we're probably -- we will not be in that breakeven position in Q3, we will be weaker than we initially thought.With that said, as Ellis commented on where we believe Q4 will be, I think also with respect to some of my commentary at our Q1 results release and during the convertible debenture offering, there have been a few things that have come into play since then. So one is the convertible debenture offering was very successful and the full overallotment option was exercised. I provided you with the pro forma debt amounts today of about $360 million. I chatted earlier today about exploring opportunities to extract value from our real estate portfolio, including our office. So -- and I know you've done the math, and you can kind of back in for at $360 million today in terms of debt as where it might we be at the end of the year, somewhere probably between $300 million and $360 million, which when you back in the covenant amount as you're talking about an EBITDA level of somewhere between $20 million and $24 million, which would be roughly 32% to as high as 39% of last year's EBITDA level. So a significant decline we're looking for, I think, as we do see the ramp-up is really be dependent on the benefits and the strength of the films that we see. The 1 good piece of news that we have -- or sorry, another good piece of news that we have since we last spoke was the extension of the CEWS benefit program, in essence, till the end of last year. So there's a number of balls up in the air right now, Derek. So we still feel comfortable. But as Ellis said, this today marks a monumental day where we're seeing the first kind of major release coming out.

[Derek J. Lessard, Research Analyst]

That's great color, guys. I guess maybe just speaking about -- you did say that you've kept close to your customer base during this period. Just wondering if you've got a -- on-the-ground sense of pent-up demand, and maybe as a follow-up to that, confidence in the safety measures that you worked hard to put in place?

[Ellis Jacob, President, CEO & Director]

Yes, Derek. And we have seen a great response based on the library titles that we have out there as we've opened across the country. And we are trying to put as much content on the screen. We've got the Raptor games. We've also got the NHL and the playoffs. So it's about bringing our guests back to have an experience where they feel safe and can enjoy it. And that's something that we work really, really hard, when we started with launching reserve seating with proper physical distancing. And yes, we have had reduced capacity in the auditoriums, but we want to make sure that people come, our guests enjoy the experience and they come back as a result of what they've experienced at our theaters. And we've limited the food offerings to start because we just want to be cautious as we move forward. And it's been very, very positive on the safety side. And we have done a lot of surveys, and we have seen our family starting to come back to our theaters.

[Operator]

We'll take our next question from Aravinda Galappatthige from Canaccord Genuity.

[Aravinda Suranimala Galappatthige, Managing Director]

Just a couple from me. Gord, just to go back to the covenant, obviously, the reinstatement in Q4. Can you just sort of clarify the exact sort of, I guess, the EBITDA calculation there? It's going to be sort of -- is it Q4 x 4? Is that going to be the -- I guess, the denominator for that calculation, obviously, with some adjustments. And then secondly, for Ellis, I was wondering that you could maybe comment on the AMC-Universal deal. Is that something that you would even generally consider as a model at least maybe selectively with some of the studios?

[Gord Nelson, Chief Financial Officer]

Thanks, Aravinda. So, it's Gord. So yes, good point. So just to clarify the calculation of the covenants going forward. So typically, the covenants are calculated on an LTM basis. Given the fact that with the COVID pandemic is Q2 and Q3 will, in essence, be forever omitted from the calculation. So as we move to Q4, it will, in essence, be kind of a normalized or adjusted Q4 multiplied by 4. And then as we get into Q1, there'll be Q4 plus Q1 normalized multiplied by 2. And as we get into Q2 of next year, it will be Q4 plus Q1 plus Q2 divided by 3, multiplied by 4. And then when we hit Q3 of next year, that will be the -- will be revert back to the proper LTM calculation.

[Ellis Jacob, President, CEO & Director]

Aravinda, on your question regarding the AMC-Universal, it's hard for us to comment on what our peers are doing in other parts of the world, specifically in this case, North America. But as an exhibitor, we have always been in communications with our distributor partners, and we work closely with them. As you know, we're one of the first companies in the world to create the Cineplex Store, which allows us to have our guests watch movies at home and a whole relationship with bricks and clicks. So we will continue to have discussions, but I'm not making comments as to where we think things will end up because each studio has a different thought process, and we are talking to all of them.

[Operator]

We'll now take our next question from Adam Shine with National Bank Financial.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

Maybe Gord, couple of questions regarding costs. On the U.S., there were calls in recent weeks and seeing some commentary by each of them talking about what costs are likely to be just to deal with some of the health and sanitation issues that you guys have talked about also today. So maybe you can quantify those, if possible. Also, with respect to the termination of Topgolf, it sounds like that was mutually agreed to, as that was alluded to, from the outset. Any particular costs to be incurred perhaps into Q3, just to officially terminate that relationship? And then maybe 1 more after that, if you don't mind.

[Gord Nelson, Chief Financial Officer]

Okay. So I'll handle those 2 questions. And so first of all, with respect to the health and safety measures that we'll put in place in all our venues going forward, I think, first and foremost, Ellis made some great comments. I think we have world-class health and safety initiatives that we're putting in place. The actual cost related to PPE is actually quite immaterial, it's less than $1 million. And I would say that where the additional costs are that you're seeing are going to be related to the labor costs of the additional staff doing the cleaning initiatives. And as I've mentioned, we're going to benefit from the extended CEWS program. And as we look into kind of this near-term period right now that we're in, the amount of the benefit that we would expect would be applicable to us is actually going to increase over it has been for the last couple of quarters to approximately 85%. So we'll be able to offset, in essence, 85% of the labor costs and then the cost of supplies, cleaning supplies and other protocol is less than $1 million. So we will not have significant material additional expenses related to PPE initiatives. With respect to Topgolf, I would say that, again, there will be no additional amounts related to the termination of that agreement. No material termination amount, so insignificant.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

Right. And just in terms of asset sales, I guess the specificity of your remarks are sort of more focused on real estate and [ already ] the headquarter building in Toronto. Are any other asset sales or considerations on the table? And I say that within the context of obviously specific units, or does it seem to be that level of urgency taking that particularly on the back of the convertible offering?

[Gord Nelson, Chief Financial Officer]

Right. And Adam, I think, in my commentary, I spoke specifically about the office building. And I think, in the environment that everyone is in today, I think companies are determining that potentially not as much office space is required as they look forward. So that -- and the best use for the building that we're in today, it would be like residential from a value creation perspective. So that would be 1 opportunity we would look at. With respect to the other businesses, which you're getting to is, I did mention that we would look at value creation opportunities. So if we thought there was an opportunity, where a business was valued more than we were, in essence, getting value for, we would potentially consider it. But yes, I think we've taken a number of measures to date such that we have covered our liquidity concerns.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

So, perhaps maybe just 1 for you, Ellis. I don't know how to possibly ask the question specifically as to, a relative level, which is going to be [ procured involving tickets ], but just any early read or commentary around what presales might be looking like going into this weekend, let alone the event of Tenet a couple of weeks from now?

[Ellis Jacob, President, CEO & Director]

Look, a good example is, last week, we opened a movie called Peninsula, which is a Korean movie. It's called Train to Busan, and we opened it a couple of weeks ahead of the U.S. And I got to be honest with you. We were surprised by the uptake of individuals and guests coming to a movie in our theaters across Canada. And that's a Korean movie and still did extremely well. So we are quite excited about the movies opening tonight. And we think the movie in Quebec should do really well. It stars Patrick Huard, and it's been highly anticipated for a long period of time. And we will just have to wait and see. The tickets for Tenet don't go on sale until next week. So we don't know yet what the impact of that is going to be. But from what I hear, the movie is awesome, and we're all looking forward to seeing it.

[Operator]

We'll hear next from Drew McReynolds with RBC.

[Drew McReynolds]

Ellis and Gord, thank you for all the detail provided, they're extremely helpful. A couple of follow-ups for me. On the amusement and digital media side of the business, we clearly saw what the performance was in Q2 on the revenue side. Wondering how that kind of ebbs and flows from here, can you provide some perspective on that? And then on the location-based entertainment deployment for the Playdiums and Rec Rooms, can you remind us what is in progress in requiring to be finished within that $50 million CapEx budget now that Topgolf is out of the equation? Are you continuing to expand the footprint? And then lastly, with respect to the LBE locations that are open, can you comment on what you're seeing in terms of capacity or revenue levels? Perhaps it's too soon to really glean anything, but that's it for me.

[Gord Nelson, Chief Financial Officer]

Okay, Drew. So I'll take the -- the first question, which was related to the amusement and the digital media businesses. So again, and just to give a bit more color to what was in the MD&A. The amusement business of Player One Amusement Group runs 2 major revenue streams, 1 being equipment sales and then the second being, what they call the route business, which is really when it's our owned equipment and it's in third-party venues, and we're taking a rev share out of the revenue drive from those venues. So -- and the majority of those venues are going to be entertainment-type destinations or hotels, our primary customers and retail destinations. So the route business given -- and that business is both in Canada and the U.S. So the route business was, in essence, shut down. Through mandated closures of retail, entertainment and hotel-type destinations. So the revenues declined significantly in the second quarter. We did have some small revenues from equipment sales, but that was really the only material form of revenue that the amusement business derived. So as entertainment, hotels, destinations reopen, we'll look to see that business ramp up to its more traditional trend levels.From the digital media business perspective, again, we're -- there are 3 elements to the revenue streams there, primarily. One is related to the service model with our third-party customers. And I usually refer to that [ moiety ] annuity model. There's an advertising revenue stream derived from our mall network and then there's an equipment sale revenue stream. So -- and again, just as a refresher, so our verticals that we're in are QSRs, retailers and financial institutions and then the advertising revenue stream is primarily derived through our mall network. So again, with closures of the majority of those locations throughout globally is the advertising revenue stream from that business was materially curtailed. The equipment sales business or a component of the business was significantly curtailed as locations were shut down. So really, the only remaining revenue stream was sort of a technology licensing fee. We weren't creating a lot of new content because there wasn't a creative content fee being derived. And so again, in that business, those various elements of the revenue stream were reduced materially, and we would expect those to kind of rebound as our customers and those key verticals are reopened. Hopefully, that provides a bit of color on the kind of the revenue mix that we experienced in the second quarter.

[Ellis Jacob, President, CEO & Director]

And looking at the location-based entertainment, which you asked about, as I mentioned in my script, we have all of them open now. But again, we are running at about 20% to 25% of prior year numbers. Because of limited capacity and the limit offerings that we have in the box, and they continue to improve as our guests are more comfortable coming in. And looking at going forward, in 2020, we will probably open 1 Playdium and 1 Rec Room by the end of the year. And then in 2021, probably in the first quarter, we'll open another Rec Room. I think we announced that previously, so it would be the one in Brentwood, in D.C. and then Barrie, Ontario for Q1 2021. And the Playdium will be in Dartmouth which is in Nova Scotia. So that's -- we've really been very focused on curtailing our capital spending, as Gord had mentioned. But our focus is to continue to be very selective and to get the best return for our shareholders and the company.

[Gord Nelson, Chief Financial Officer]

And Drew, just a comment on that. Drew, I think this doesn't diminish our belief and the opportunity for Rec Room and Playdiums. But I think what it does do is, it may be prudent to pause with the evolving retail landscape out there. I believe there will be a number of short-run impacts in terms of what shopping destinations look like going forward, and there could be opportunities for better deals for us going forward. So it's probably prudent to actually pause a little bit in the short term.

[Operator]

Your next from Tim Casey with BMO.

[Tim Casey, Equity Research Analyst]

Clarification first and then a couple of questions. Gord, on the $20 million in lease rights sales, can you just clarify that? Is that how should we think about that? Is that a run rate or a lump sum? Is it cash? How should we approach that?

[Gord Nelson, Chief Financial Officer]

Yes. So look, I think what you're going to see, and this will be very interesting, and you'll likely will see that into Q3. And I think the amount will be higher than that as we're looking and exploring other opportunity. Well, again, I'll just provide a little bit more color on that. So when we're looking at rights that we have under lease, and I characterize some of those rights, potential rights in my script. So a build right, a density right, those types of things. When we have something that's desired by a landlord, in essence, we are selling a right as opposed to reducing a rent amount at that point in time. So I gave you an estimate of something that we believe will be in excess of $20 million. I suggest what you'll see is in the third quarter financial statements as we finalized some of these agreements as you will see kind of a density rights sale for the magnitude, something in excess of $20 million, as I described. And then -- so the next question is, what is the form of payment for that sale transaction? And so I think this is where your question is coming from. And so as I described, we were exploring all our lease rights, all abatement-type options. And so what I would suggest is the form of payment for those lease rights, so instead of the money coming to us, we will just not pay cash rent for a number of months until we actually start -- until we're caught up to that value. So in essence, it's like a payment over time through us not paying rent. Does that make sense?

[Tim Casey, Equity Research Analyst]

Yes. But the -- you'll provide a final number and some clarity on how long that relief will take in terms of how long you'll forbear cash rent costs associated with those right?

[Gord Nelson, Chief Financial Officer]

Yes. And look, I mean, I can give you some type of indication right now, as I would expect, based on -- and again, it's property by property, landlord by landlord. So depending on the value of that right -- of those rights, it could be -- and again, across a number of properties, it could be anywhere in the -- sort of 6- to 12-month range.

[Tim Casey, Equity Research Analyst]

Got you. Okay.

[Gord Nelson, Chief Financial Officer]

But again, that is only going to be for those specific landlords.

[Tim Casey, Equity Research Analyst]

Yes. Got you. Okay. Ellis, a question for you. You mentioned in your opening remarks that you were still pursuing the same strategy. I just wanted to push back a little on that. Given you cut CapEx by $100 million and suspended the dividend indefinitely, and obviously, Topgolf is part of this. But is it -- are you not really -- are you not going to have to change strategies from your growth and diversification strategy pre-COVID given the pressures on the business right now and the outlook going forward? Can you just talk about that a bit, please?

[Ellis Jacob, President, CEO & Director]

Yes. And you are correct, as I said that, but we are definitely slowing down our capital commitment. And we are making sure that we make the company as strong as possible as we move forward and reinvest our capital once we are in a much stronger position going forward. And we believe in our model as we move forward through the next number of months. But again, the variance is how quickly do movies come back and our guests as we go forward with the plan. And we are quite overall excited. And this weekend is going to be an interesting position that we'll see with the first run product coming back to our theaters. So yes, you are right. Is it going to be exactly like we were looking at before? No, there will be reviews, and we will be looking at our capital spend and our overall cost containment and strengthening our balance sheet as we move forward because we want to make sure that we bulletproof the company.

[Tim Casey, Equity Research Analyst]

And last question, can you comment on your confidence in your ability to maintain operating margins in 2021? Obviously, 2020 is a loss year. But assuming we are in some sort of normal operating environment next year, revenues are probably still going to be down. How confident are you that you can maintain operating margins when you don't have the CEWS program and you're on a more normal footing with landlords and things like that?

[Gord Nelson, Chief Financial Officer]

Yes. So I mean -- and that question is more relative to, I guess, 2019 versus 2020 obviously.So look, what we've always -- and a lot of it depends on, as we look at the ramp-up in some of the other businesses. So we are expanding relative to 2019 more Rec Rooms out there, so we'll have additional -- Rec Room, we continue to have success in the digital signage business. And as -- also, we continue to deploy technology and look at opportunities to provide additional offerings from the exhibitor side to our customers. That -- well -- and that's either through content offerings, different types of pricing options or programs that will provide for increased frequency or other viewing options. So as those ramp up and how quickly those ramp up is, should we get back to the 2019 level, that's where we would hope to get to.

[Operator]

[Operator Instructions] We'll take our next question from Jeff Fan with Scotiabank.

[Matthew Hofmann, Research Associate]

It's actually Matt Hofmann on the line this morning on Jeff's behalf. A couple of questions from me. You previously talked about expecting a minus 40% box office attendance in the back half of the year. Can you comment on this in relation to how the film slate has evolved? And then on the film slate, when you talked about Tenet and the model of moving it ahead of the U.S. release, do you see this as something other studios will be open to if the U.S. situation continues to be an issue? And then on the wage subsidy, in the press release, you talked about the 85% benefit earlier in the call. Can you clarify the time frame that you're expecting to kind of be at the maximum benefits of the wage subsidy? Are you seeing this for the entire Q3 and Q4? And then lastly, just a quick one on working capital. You had cash generation here. Can you comment about how that might come back as you reopen?

[Gord Nelson, Chief Financial Officer]

Thanks, Matt. So it's Gord. So I will take the box office forecast question, the CEWS question and the working capital question. Ellis will chat about Tenet. So yes, when we released the Q1 results and looked at the film release schedule, we made a comment -- and sorry, during the prospectus offering, too, we talked about a minus 40% box office number as being the breakeven level for our operations. And at the time, we suggested that -- we thought that Q3 and Q4, so the back half of the year, we would operate at an approximate breakeven level, which is the minus 40%. As I said a little bit earlier, today given some of the shifts now, Q3 we believe would now not be as strong as it was as we believed 3 or 4 weeks ago. And so therefore, I would suggest that we're going to be into a loss position in the back half of -- of EBITDA loss position as opposed to breakeven. And so that we would be in greater than a minus 40% situation from a box office perspective, primarily due to the impacts in Q3.And I'll take all your 3 questions and then turn it over to Ellis for Tenet. And so on the CEWS side of things, you are correct that it's both a multiplier, there's an index that is applied to the 75% CEWS rate and that index is based on sort of year-over-year performance and how your business has been impacted by COVID. So I would expect -- and again, as I mentioned, as we go through the ramp-up through Q3 is that for the majority of Q3 is, we will be at kind of the max level, so that 85% level. And then as we get into Q4, we will be below that level. And I'm not going to provide a number because you will reverse engineer it to figure out what the box office forecast is. And we're still a little bit uncertain on that. But -- so anyway, so that 85% for most of the third quarter and less than that for the fourth quarter.And then the last question was on working capital. And we put a number of working capital initiatives in place during the second quarter that was able to provide a significant source of working capital during the second quarter. What I would expect from your perspective. And look, historically, we have a huge source of working capital in the fourth quarter as we're selling corporate tickets, as we're selling corporate coupons, and as we're selling advertising campaigns in that Christmas ramp-up period. So we would typically have a huge source in Q4. Given that we put it in a number of initiatives in Q2, we may see some of those reverse in Q3. But what I would suggest, and I think what I said -- what I've said historically is that, if there's any negative impact in Q3 related to working capital, it will be offset by positive impacts -- the historical positive impacts in Q4 to be relatively neutral for the back half. And then Ellis, I'll let you...

[Ellis Jacob, President, CEO & Director]

Yes. Thank you, Gord. And actually, a great example is tonight where we are releasing a number of movies with SpongeBob, which is a movie that's being released theatrically in Canada, but it's actually going to be in CBS streaming service in 2021. So we work with our partners at Paramount, and we are both very excited as this feature is being released theatrically. The movie Unhinged, which is also opening tonight is opening a week ahead of the U.S. opening. And then as you mentioned, Tenet is also going to be opening in Canada on August 27, which is in line with the international release. About the future, it's largely going to depend on how the U.S. states open as a result of their COVID-19 challenges and whether that would make a difference as to releasing it first internationally and in Canada at the same time. So if we continue to perform and we are able to deliver, I would think that the studios would work very closely with us as we move forward.

[Operator]

We'll take our final question from Derek Lessard with TD Securities.

[Derek J. Lessard, Research Analyst]

Just 1 follow-up for me. On the -- on the rent expense, you still recorded a $40 million expense in the quarter, and that was up a little bit. Just wondering how do I reconcile that with some of the abatements you agreed to with the landlord that it was close to $12 million?

[Gord Nelson, Chief Financial Officer]

Yes. So interesting question, Derek. And so unfortunately, IFRS 16 is very focused on the balance sheet as opposed to the income statements. And so we've used the EBITDAaL concept, so after leases, to provide some form of where we believe is the correct amount to look at after reflecting kind of the lease cost. So what would typically appear in occupancy expense on the P&L is anything that is non-rent related. So your CAM, your taxes, if you had a percentage rent clause, it would be the percentage rent amount as well as insurance. So that stays on the P&L. The rent -- fixed rent amount would typically go to the balance sheet. So what we have shown and it's sort of in and out. And Derek, if you're looking at the occupancy section of the MD&A, there I believe we provide footnote 5, which says -- and refers back to our EBITDAaL calculation in the non-GAAP measures is that amount is before reflecting savings amount because what we're showing there is, in essence, in and out on those rent payments. So with about $40 million in-theater lease payments, we've footnoted, as I believe, footnote 5, even with that, there's -- it excludes the impact of about $12 million of savings, which is what we show in the EBITDAaL calculation. So I know it's -- look, I know it's very confusing. And I think rent abatements and adjustments will be challenging across all reporters out there, but does that help?

[Derek J. Lessard, Research Analyst]

No. That's perfect color, Gord. And in terms of the abatements, should we expect that going forward? Or was that a onetime offset?

[Gord Nelson, Chief Financial Officer]

No. And what I'm suggesting on that is, as we look forward, what we have done is we have provided an amount based on agreements really as at reporting -- as at sort of reporting date. We are still in progress of finalizing agreements with a number of other landlords, so -- and with respect to Q2 and Q3. So that number should go up, and you should see more abatements, cumulative abatements in Q3 as we get closer to finalizing agreements with all our landlords.

[Ellis Jacob, President, CEO & Director]

So I just want to thank everybody for joining our call this morning, and we look forward to connecting with you again soon at our AGM this fall. Details will be circulated shortly. And thank you very much, and have a great weekend, and make a visit to a Cineplex theater. Thank you.

[Operator]

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.