Cineplex Inc

TSX:CGX

Earnings Call Transcript 2020-Q3

[Operator]

Good day, and welcome to the Cineplex Inc. Q3 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 Communications and Investor Relations. Please go ahead, Mr. Pressacco.

[Melissa Pressacco]

Thank you, Celestina. Good morning, and welcome to Cineplex's Third Quarter 2020 Conference Call. With me today is Ellis Jacob, our President and Chief Executive Officer; and Gord Nelson, our Chief Financial Officer. Before I turn the call over to Ellis, let me 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 Ellis Jacob.

[Ellis Jacob, President, CEO & Director]

Thank you, Melissa. Good morning, and welcome to our Q3 2020 conference call. We are glad you could join us today. I hope you and your families are well and staying healthy. This morning, much like Q1 and Q2 2020 earnings calls, we are not going to spend a lot of time on the actual financial results. Instead, we will provide an update on the most recent actions we are taking to manage through this crisis. The status of our resumed operations as we safely welcome guests back to our venues and what we are doing to position the company for continued success looking forward. As always, we will conclude the call with our customary questions-and-answer period. COVID-19 continues to significantly impact the financial performance of many businesses in Canada and around the world. And while we are feeling the effects of the pandemic much longer than we had originally anticipated, we are encouraged by the recent news of a vaccine available in the near future. In the meantime, we are confident in our ability to navigate through the remainder of the storm and ensure the long-term success of the company. Throughout our 100-plus year history, we have faced adversity and have always emerged well positioned for future growth, and this time will be no different. Despite the tough industry and economic conditions, we remain confident in 3 key areas. First, we are confident in our response to COVID-19 and the actions we've taken to stabilize the company's financial position. Second, we remain confident in our business reopening plan as we safely welcome guests back to the theaters and entertainment venues where and when permitted. And third, we remain confident in the exhibition industry's ability to recover in the long-term as we look ahead to an exciting film slate in 2021 and beyond. While Gord will go into more detail in a moment, it goes without saying that much like the first and second quarter, our third quarter results were again severely impacted by COVID-19, resulting in substantial decreases when compared to last year. Although we were able to reopen all of our venues with the phased approach during the quarter, the combination of capacity restrictions and a lack of film product impacted our revenues. However, during this time, the team continued to work harder than ever to adapt our operations, manage our cash burn and strengthen Cineplex's financial position. Building on our response to the pandemic in the second quarter, we remain laser-focused on significantly reducing capital expenditures and our 2 primary operating costs, lease costs and payroll which Gord will elaborate on shortly. Overall, in the short and medium term, we are focusing on a smaller number of projects and priorities supported by a sustainable financial model. As a result, we have reduced our operating costs and overheads accordingly to reflect this. In addition, we raised over $300 million in additional financings, obtained extended relief under our credit facilities, materially reduced our net cash lease outflows by approximately $58 million, received approximately $22.5 million in wage subsidies and are generating a substantial tax asset from our operating losses, which we will realize in 2021. We also began the sales process of our head office, which we expect to complete in early 2021. We remain focused on all other revenue-generating areas of our business, including Cineplex Digital Media, our expanded food delivery services SkipTheDishes and Uber Eats and our online digital movie platform, the Cineplex Store, which has experienced significant growth this year. So far this year, our Cineplex Store customer base has grown by 41% to 1.8 million registered users, and we have completed more than 2 million transactions. To drive additional revenue through our groups and events business since reopening, we have been promoting private events at our venues, and we announced that to ramp up marketing efforts for this program. Today, I'm pleased to officially launch Private Movie Nights at Cineplex, which offers movie lovers an easy and affordable way to reserve an entire auditorium with up to 20 guests starting with an accessible price point of just $125. With people looking for creative and safe ways to come together, particularly as the holidays approach, Private Movie Nights and venue rentals The Rec Room and Playdium are great options to share the social experience with family and friend safety. Moving on to our resumed operations and reopenings during the quarter we remain confident in our guests' mounting desire to return to our theaters and entertainment venues as well as the industry-leading health and safety protocols we have put in place to keep them safe. After almost 4 months of closure during the pandemic and as restrictions lifted across individual provinces, we moved ahead with our phased approach to reopening our theaters and entertainment venues in late June and July. Then on August 21, we became 1 of the first major theater circuits in North America to reopen all of its theaters across the country, coast to coast. During the third quarter, with the first major film release in 5 months, Tenet we proudly welcomed 1.6 million guests back to our theaters. This signaled to us as well as our studio partners that Canadians have missed the magic of the big screen and are confident in the rigorous health and safety profiles we have put in slates in our venues. As you've heard me say before, the health and safety of our employees and guests is our top priority, and we are proud that no outbreaks or transmissions of COVID-19 can be attributed to movie theaters. Our guests are happy to be back, not just anecdotally, but our data validates this as well. Surveys conducted by our team during the quarter showed that 95% were satisfied with their overall experience, 96% were satisfied with overall cleanliness and 95% were satisfied with auditorium health and safety. Once more, these figures are actually up from the same period 1 year ago, reflective of our strong focus of effort and execution excellence by our operations teams. When we look at movie going, we know that it doesn't pose the same risk as other indoor services and gathering. The spacious footprint and headroom naturally offers a great ability for guests to physically distance both in the lobby and the auditoriums. We deliver an manageable and predictable flow of guests that most other businesses cannot replicate by staggering our show times and implementing reserve seating with physically distant spacing. We know that the magic of the movies and escaping to a movie theater provides guests and their families with a safe and temporary break from the mounting pressures and anxiety created by the pandemic. This is what so many of us need right now, a safe escape, especially as we approach the long winter months. We continue to take our cues from the government as they respond to the second wave across the country and adjust provincial regulations and safety guidelines as required. We know there is a risk we may be required to shut down our theaters and venues again, such as the recent reinstated temporary closures in Ontario, Québec and Manitoba. In response to public health authorities, we have made proactive operational changes and will continue to adjust as required. Future adjustments will depend on how the COVID case numbers evolve over time, but we continue to actively work with government regulators to advocate for our safety protocols within our revenues and the 0 transmission record we've provided to date. Of course, we are encouraged by the recent news of the successful trial of COVID-19 vaccines. As initial reports suggest, a COVID-19 vaccine could be available within the first half of 2021, and this is an important milestone. As the vaccine becomes widely available, COVID cases will reduce, restrictions will loosen and attendance numbers will rebound as guests seek out social experiences, especially when the deferred film content hits the big screen. Looking at what's happening in Japan, since the government eased restrictions on movie theaters and allowed them to open at full capacity in mid-October the country's box office has been booming, and there remains no claims of COVID-19 transmission in a cinema. The recent release of an anime film shattered the record for the biggest opening weekend in Japanese history, surpassing the 3-day total of Frozen 2 when it opened in Japan last year. This is a clear sign that Japan's movie industry has rebounded from the damage caused by the coronavirus, just as the exhibition industry will rebound in Canada and in other parts of the world. As we look to the remainder of 2020 and into 2021, we remain extremely strategic and agile in our approach, and I'm more than confident in the team's ability to pivot as needed through these challenging times. Which leads me to the final key area, our confidence in Cineplex and the exhibition industry's ability to rebound in 2021 as evidenced by our guest desire to return to the theaters and the upcoming film slate. As I mentioned earlier, guests are craving human connection and sharing social experiences with the ones they love. We know that when new movies are released, they will want to come back and experience it in the theater. And while there's still a risk that the schedule could shift again, right now, we have the following films to look forward to for the balance of 2020. The Croods: A New Age, Funny Boy, All My Life, Nomadland, this year's TIFF People's Choice Award winner, the Tom Hanks films News of the World and, of course, Wonder Woman 1984, among others, hitting the big screen. As you know, many key titles shifted from 2020 into next year, which when combined was previously announced for 2021, makes for a very exciting year at the box office. These are first run titles that are ready to be released and that studios want and need to land in theaters. Even though certain titles have shifted, studios have assured us they are still supporting theatrical releases. Which is why when we look at 2021, we can't help but expect it will be an even bigger year than originally anticipated. Given the sheer volume of titles, it looks like we may have a new major release almost every week. These include James Bond: No Time to Die, Top Gun: Maverick, Fast & Furious 9, A Quiet Place 2, The Eternals, Minions: The Rise of Gru, Black Widow, Candyman, West Side Story, Sing 2, Mission: Impossible 7 and School Life. When I look back at the past 8 months, I'm extremely proud of our team's ability and focus in this environment and everything we have accomplished. We have fortified the financial position of our company, raised the necessary funds to extend our financial runway and developed the gold standard in health and safety protocols to safely welcome guests back. We have worked hard to mitigate the impact of COVID-19 on our business, and we will continue to do so. Although we know a vaccine is on the horizon, we also recognize that there will be challenges ahead. We are confident in the measures we have put in place to manage through this pandemic and softened the negative impact on our business. As we look to the future, we will remain extremely strategic and agile in our approach to operating the company. We will review and refine our plans across the entire business and continue to take the necessary steps to ensure Cineplex remains on solid financial ground and is well positioned for a strong and healthy future. With that, I will pass the call over to Gord. Thank you.

[Gord Nelson, Chief Financial Officer]

Thanks, Ellis. I am pleased to present a condensed summary of the third quarter results for Cineplex Inc. and to provide additional detail on the ongoing 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. And in addition, our credit facility amendment has been filed on SEDAR this morning. 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, including commentary on cost control, accounting matters, liquidity initiatives and outlook. The COVID-19 pandemic continued to have 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 Q3 2020. As a result, we continue to focus on cost control and liquidity. 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. During Q2 and Q3, 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 Q2 and Q3 period, we were able to materially reduce net cash lease outflows by approximately $58 million, which includes approximately $37 million in lease savings and $21 million as a result of the sale of certain restrictive rights to landlords. We anticipate further savings will be secured during the fourth quarter of this year as well into 2021. The benefits of the initiatives taken in Q2 and Q3 will continue to provide relief through the remainder of 2020. Payroll is our largest semi-fixed cost. With the mandated closure, we immediately initiated temporary layoffs and reduced full-time employee salaries across the board by agreement with the employees. We reviewed and applied for government subsidy programs where available, including the Canada Emergency Wage Subsidy. During Q3, we benefited from approximately $22.5 million in subsidies primarily under this program, and we were able to materially reduce our theater payroll to approximately $3.9 million in Q3 2020 from approximately $40.9 million in the prior year quarter. Our total company employee salaries and benefits for the quarter as identified in Note 12 of the financial statements, decreased to $21.7 million from $78 million in the prior year. 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 relates to OpEx savings in the various businesses. During Q3, the company recorded approximately $5.4 million in restructuring expenses related to this initiative. As we look forward, we will continue to benefit from the CEWS program through its expiry in June 2021 and will derive future savings as a result of the recent restructuring process. With respect to other supplier partners and expense control, we put in place immediate expense in CapEx curtailment programs during the closure period and worked with our supplier partners to provide elements of relief, including eliminating or reducing amounts due for contractual monthly services, in addition to payment deferrals and abatements. You can continue to see the benefits of these initiatives in the substantial cost reductions in a number of our controllable cost categories. In addition, we continue to monitor other subsidy and relief programs, which could benefit Cineplex. With all the actions previously described, we were able to continue to achieve our projected monthly cash burn rate of approximately $20 million per month before working capital. During the second quarter, we had a positive source of working capital of approximately $69 million as we were negotiating concessions with our landlord and other supplier partners. And during the third quarter, we had a use of working capital of approximately $35 million as we settled amounts outstanding as a result of these successful negotiations. In total, during the second quarter, this positive working capital impact offset the net cash burn, whereas during the third quarter, this use of working capital was additive to the net cash burn. I would now like to discuss select accounting impacts during the quarter. As I mentioned during last quarter's call, we had completed a thorough review of our rights under our lease agreements and where we thought we had attractive rights. We approached landlords to monetize some of these rights. During the third quarter, we monetized approximately $21 million in lease rights, and this is reflected as proceeds on our statement of cash flows. And we have recorded a gain of approximately $14 million on these transactions after derecognizing the component of our right-of-use assets. We issued approximately $316.3 million in face value of convertible debentures during the third quarter. Of this total, approximately $91.3 million has been reflected as an equity component in our financial statements. I refer you to Note 10 of our financial statements for further details. With respect to the previously announced programs that will eliminate approximately 130 employees, we recorded a restructuring charge of approximately $5.4 million during the quarter. And finally, we recorded a goodwill impairment charge of $65.6 million which was related to a triggering event caused by the substantial decline in our share price as at quarter end. I would now like to focus on some of our liquidity initiatives. We entered into the second credit agreement amendment with our bank syndicate on November 12. This amendment extends the suspension of financial covenant testing until the second quarter of 2021, but provides for a monthly liquidity test until the financial covenants are reintroduced. Please refer to our financial statements and our MD&A for further details on this amendment. This amendment provides additional relief during the extended closure and reopening period. As previously mentioned, we issued approximately $316.3 million in face value of debentures during the quarter. Of this issuance, $100 million of the proceeds was used to permanently pay down the current credit facility. 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, and other assets, which would include some of our equity investments. With respect to the building, we initiated a sales process in September 2020 and expect to close this transaction in early January 2021. While 2020 has been a challenging year from an operating perspective, Cineplex has historically been a tax paying entity. And the losses created in 2020 will be eligible for carryback and for refund upon filing our 2020 tax returns. In Note 5 in our financial statements, we identify approximately $78 million in operating losses available for carryforward and carryback. Some of these are in losses -- sorry, some of these losses are in entities that are not eligible for carryback, but we estimate a refund of approximately $60 million as a result of loss carrybacks when we file our tax returns in early 2021. We are continuing 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 and Q3 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.And 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] Our first question from Derek Lessard from TD Securities.

[Derek J. Lessard, Research Analyst]

Two questions for me. Maybe 1, first one is for Ellis. I'm just interested in what you're hearing maybe in terms of Hollywood production schedules and the slate for next year. Of course, assuming that, that's an improvement in the COVID situation [ going forward ] I was just wondering how much you think you can squeeze out of the restrictive lease rights, it was $21 million, all of it?

[Ellis Jacob, President, CEO & Director]

Thank you for your question, Derek. As it relates to production, production still continues in a number of parts of the world and also locally with proper procedures that they are following. They are looking to continue with productions. That being said, there have been delays along the way. But with the backlog of product from 2020 moving into 2021, I don't think it should be a concern as we move forward with the number of big movies that will be available for the exhibition side of the business.

[Gord Nelson, Chief Financial Officer]

And then on the lease rates section, during the last call, I mentioned that we expected in excess of $20 million. That was our focus for lease rates transactions. We delivered $21 million during the quarter. We continue to discuss with landlords. But at this point in time, I would say that there's no kind of material additional rights that with respect to discussions in progress.

[Operator]

And we'll take our next question from Jeff Fan from Scotiabank.

[Jeffrey Fan]

Just a quick clarification on Gord's comment about the tax refund. Did you say that was 6-0, $60 million?

[Gord Nelson, Chief Financial Officer]

Yes.

[Jeffrey Fan]

And then maybe -- $60 million. Okay. And not -- you expect to receive that in early 2021?

[Gord Nelson, Chief Financial Officer]

Yes. So on the filing of the 2020 tax returns, which we will file as soon as we possibly can is the refund would come after the filing of those tax returns. So select returns in those entities of which those losses will be available to be carried back.

[Jeffrey Fan]

Okay. Excellent. Regarding the cash burn looking forward, you guys have done a good job of keeping it within the range of about $15 million to $20 million per month before working capital. I'm wondering if you can give us a sense as to whether that's going to continue through Q4 and what we should assume for working capital use or source for Q4? And then while you think about that, maybe a bigger picture question, looking out a little bit further, the covenant relief extension for 6 months. How do you know -- how do you think about the 6-month period, whether that's enough? What are some of the assumptions that you think are really important to get us to get you to that 6-month extension that, that would be sufficient?

[Gord Nelson, Chief Financial Officer]

Yes. Thanks, Jeff. So with respect to the first part of your question on kind of cash [ burn ] as we look forward is, there's a number of mitigating factors as we look forward. The 1 thing that we're very pleased with is Government of Canada has announced the extension of the CEWS program until June 2021. Now they have not -- and they've continued to kind of increase the amount of the benefit throughout the remainder of 2020 but they -- at this point in time, they have not provided the details with respect to the first 6 months of 2021. So we have been encouraged by the increased amount of subsidy available under CEWS program. The extension of the CEWS program from which was originally provided earlier this year. In addition, as we look with our rent abatements and continue to work with our landlord partners, as I mentioned, is those benefits look to extend through the remainder of 2020. And then likely not as significantly, but we continue to work with our landlord partners into 2021. So -- and then as we look through 2020, and the remainder of 2020, as Ellis mentioned, we've got some encouraging product being released into December. And so to the extent that we can provide some incrementally positive results from being open. You put all those factors together. And as I've always said, is we hope that we can manage to keep our cash burn rate around $20 million a month, but I would expect that to continue. On the second question related to covenant relief and the assumptions behind that covenant relief. Is -- as we mentioned, the earnings test has been extended until the second quarter of 2021. In its place, there's been a liquidity test, which looks at the headroom that we have available under our borrowing facility and the credit facility amendment has been filed on SEDAR this morning. And so I invite you to look at the monthly details as provided in the credit facility as filed. So the assumptions with respect is -- so first and foremost, there's a number of liquidity events which I sort of referred to in my script this morning. Including the sale of our office building, which we expect to happen in early January 2021. You asked the question regarding the tax refund. That we expect on the filing of our 2020 tax returns. So those are 2 material inflows that we expect to occur within the first half of 2020. On the reintroduction of the earnings test. And then as we look at Q2, as you've seen, obviously, we're expecting a tough winter as the environment around us, what is the extension of COVID. But as we see films shift and we see them shift into early Q2 is we are confident or relatively confident. And with the announcement of a vaccine becoming available is -- there is an end in sight. And then obviously, with respect to our liquidity matters, I also mentioned that we're exploring other potential asset sales and opportunities to create value and create liquidity. A number of balls in the court. Unfortunately, I can't detail any of them specifically at this point in time, but I just want to make people feel comfortable that we're exploring anything and everything.

[Operator]

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

[Aravinda Suranimala Galappatthige, Managing Director]

I hope you're well. A couple from me. First of all, on the changes and adjustments to the lease payments. Gord, can you just talk to what that structure is? I understand the monetization of the rights. But in terms of lowering the ongoing payments, is that based on a new kind of flexible, or call it, variable structure? Has that been negotiated? Or is that sort of more quarterly negotiations that are happening that are constantly, you have to kind of go back? I wanted to understand the cost construct of that. And secondly, with respect to asset sales beyond the sale of the head office, what would be the other equity investments that you were -- I think you alluded to? And then a bigger picture question for Ellis. In terms of the returns, sort of the examples we have globally, Japan, and I think even China sort has sort of come back quite well. Do you -- like how do you see sort of the potential trends? I know it's a very futuristic question. But is there a danger that, unlike in China and Japan where the closures were more limited in terms of periods that if there's an extended closure that film going tendency could sort of be affected as the closure period is extended? I just want to get your thoughts on that standpoint. I'll leave it there.

[Gord Nelson, Chief Financial Officer]

So Aravinda, it's Gord. So I'll take your first 2 questions, and then leave the third 1 for Ellis. On your first question regarding kind of the cost and the structuring of the rent concessions that was delivered during Q2 and Q3. First of all, I want to ensure that people understand. And it's important to look at kind of Q2 and Q3 together as opposed to one quarter in isolation because we were negotiating, dealing with our landlords primarily throughout Q2 and into Q3 and then papering those agreements in Q3. So the net impact is really when I think you should look at both Q2 and Q3 together, and that's where we described the significant amounts that were delivered up over that time period. Now your question is purely on the rent abatements number. And so what I want to stress to everyone is that these are not deferrals. So this is really permanent forgiveness this of rent during the closure and reopening period. This is not rent that we're going to repay over a future date. This is a negotiated permanent forgiveness of a component of rent during the closure period. And so we've continued to work with our landlord partners to provide relief throughout the remainder of 2020 and into 2021. And the element of relief is typically provided in some of the abatements. So full abatement that we received during certain closure periods as well as I described as conversion of some elements of rent to a variable component of rent, which is when we pay rent based on how successful the revenue was in the boxes and/or reduced fixed amounts as the business is projected to ramp up over the next number of months. So hopefully, that answers your question on kind of the structure of those rent concessions. With respect to your second question, the other liquidity events, which include potentially asset sales and equity investments, in particular, we have a number of equity-related investments on our balance sheet. We have investments in the cinema partnership. We have investments in some VR companies. We have an investment in SCENE, as an example, a loyalty partnership. We have a number of investments out there that have potential value that we could potentially look for some liquidity on.

[Ellis Jacob, President, CEO & Director]

Thank you, Aravinda, and no question about how guests returning to the theater. And what would be a great example is this week when we had the holiday on Tuesday, for Remembrance Day, in a number of provinces. And when I look at the numbers, for example, for Alberta, British Columbia and Nova Scotia, the numbers were significantly higher than what we were seeing in previous weeks. And there was really no change in the type of product that was out there. And they're -- other than Tenet, which is long in the tooth, there wasn't any really big movies. But our guests were out there. They love the magic of the movies, and they wanted to be in an environment which was safe with their families. And we are providing that with the physical distancing and making sure that we are staggering our show times and implementing reserved seating and all of those different categories. So to me, I think what we're going to see is as the theaters continue to be allowed to increase capacity and open, our guests are going to want to come back. And Japan saw that, we have seen that in Australia in a big way, too. Taiwan, China, there's a lot of locations where the numbers are just astronomical compared to what they were even pre-COVID. So we have in the struggle because of where we are today, but we see the light at the end of the tunnel, looking at some of the other countries and what they've been able to achieve. So that puts me in a much more positive thought process as we move forward.

[Operator]

And we'll take our next question from Adam Shine from National Bank Financial.

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

Maybe 1 for you, Gordon, then I'll tie it in for Ellis. So Gord, I guess, a number of us might have assumed that you would have certainly gotten the second relief into Q1 at the very least, you got it into Q2. And I'm just curious, the last concession or the first concession that you got in terms of the waiver sort of created an annualization test for the leverage in Q4 and that's not necessarily the case going into Q2. So I'm just wondering, maybe you can answer the first part and then tie it into Ellis' answer. Is there this ongoing concern that with all these ongoing postponements that wide play games, guessing as to what exactly is going to be the real reboot of new releases in Q2? Or could that bleed into Q3 next year? Is that part of the consideration at all? Or it was just a cleaner way to approach, will continue to be, obviously, an extended period of uncertainty.

[Gord Nelson, Chief Financial Officer]

Yes. So look, I think from -- there's obviously risk elements from the bank's perspective that they want to cover. And so looking for 2 more quarters. There's announcement of a vaccine, the release schedule kind of lining up that will go -- oncoming in early April that but Q2 will be the quarter that the industry returns strong. And so the leverage test in Q2 of 2021 is an annualized amount, so it is, in essence, 4x the Q2 results for the earnings test. There are some elements of the credit facility amendment, including elements related to CapEx and others that are more on an LTM basis. But the earnings test in Q2 2021 is based on, in essence, a 4x Q2 earnings result. So I think it's a vote of confidence from our lending syndicate that there's going to be a tough winter as we go through with respect to COVID-19 but the spring looks encouraging in our business.

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

Okay. So maybe -- sorry, Ellis, I'll ask you a more detailed question in a moment. But so Gord, I guess I initially misread it. I thought there was a full suspension of the covenant test all the way through the Q2. But indeed, what was originally created as an annualized test in Q4 is really just getting postponed out to the Q2, correct? That's a better read.

[Gord Nelson, Chief Financial Officer]

Yes. That's correct.

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

Okay. Perfect. Okay, which makes my question rather moot, I guess, in the scheme of things, but thanks for that clarification. So Ellis, I guess the question to you is -- look, you've always said, you don't have control over the product. You set the table and the table is certainly being set, and you guys are doing a great job in regards to controlling costs and things that you can control. But like can you get us under the hood or into some of the conversations with the studios? We all know, and you've even put in your release that California, call it, L.A., specifically in New York, New York City specifically, are issues that the industry look to in terms of resolving to maybe ease up on some of the studios inclination not to move at the present time. But as we look out, let's say, to Wonder Woman, as maybe the last hope for a big movie to close out this year. What's the risk of that just getting pushed out, obviously, and then really not much showing up in Q1. And we really do wait ultimately for No Time to Die as a real first movie really post pandemic.

[Ellis Jacob, President, CEO & Director]

Yes. So Adam, I mean, as we've seen a number of movies have moved from 2020 to 2021. And Wonder Women is 1 that we keep talking to our studio partners at Warner Brothers. But again, the challenge is, like you mentioned, the whole issue of where New York and L.A. are when the opening date arrives. And they also have to have a couple of weeks to market the movie. And further to that, Europe in many, many locations and countries have been closed down again. So they look at it from an overall perspective and say, what position will this movie be in? And how much can we release it across the world and also in specific markets in North America? So that one is still one that's being discussed. But again, it's something that if they move, they would probably move it into the first or second quarter of 2021. But at the moment, they haven't indicated that, but the risk is there that, that could also move from its current date. And we still have other movies. We are opening Freaky and a number of movies through the next couple of weeks. They're not massive titles. But they do bring people back to the theaters, which to me is really important.

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

Maybe just 1 follow-up. It's -- other than Tenet and Christopher Nolan's concession to the industry. It really has been every man for himself during the pandemic. Is there is there any sign that perhaps the studios offer some concessions to the industry as we move into 2021, be it film splits or other considerations?

[Ellis Jacob, President, CEO & Director]

I think, Adam, that goes to a much broader discussion as to where is the movie playing and how long it plays in the theaters and all of the windowings that we've discussed for years and years, and there could be adjustments based on that. But I'm not and the Board is not concluding that as far as viable projections going forward.

[Operator]

We'll take our next question from Tim Casey from BMO.

[Tim Casey, Equity Research Analyst]

Gord, could you walk us through that earnings test in Q2 in terms of the -- I guess, the designator and the numerator? I mean, what is the debt calculation used in that? And maybe just walk us through any adjustments to a traditional report of EBITDAaL, anything you get to add or take it away or just so we can get a sense of what banks are, I guess, expecting the low end of projected EBITDAaL to be to satisfy that test?

[Gord Nelson, Chief Financial Officer]

Yes. So debt as defined in the covenant would be credit facility debt only. So to make it clear to everyone on this call, it excludes amounts due under the convertible debentures. And then earnings. So earnings would be Q2 EBITDAaL adjusted for unusual or nonrecurring items. And then that would be [ a multiple ] of Q2 EBITDAaL adjusted for unusual or nonrecurring noncash items, would be then multiplied by 4. And that would be your annualized earnings amount. And then not -- and so those are your 2 elements: the annualized earning amount and then the debt balance under the credit facility. Does that help clarify?

[Tim Casey, Equity Research Analyst]

Sure it does. Just 1 follow-up, if I could. Just speaking to working capital. Usually, you get a big source of working capital in Q4 when people buy gift cards, and then that reverses usually in Q1. If you could walk through what your assumptions are on how those swings will go this year. And then just to the working capital buildup in Q2, I think it was close to $70 million. And roughly half of that, maybe a little more reversed in Q2. How should we think about that? Is there more -- I guess, what's the working capital outlook look like over the next couple of quarters?

[Gord Nelson, Chief Financial Officer]

Yes. Thanks, Tim, for that question. And also thanks for the reminder because I do look back at my notes and I realize, Jeff had asked that component of the question, and I think I may have missed the response to that. So yes, as we look forward, like, typically, in a traditional year. As you all know, the Q2 and Q3 are relatively working capital neutral. There's typically a big source of working capital in Q4 as we sell corporate gift cards and gift certificates to customers as well as have the significant ramp-up to the holiday business from a media perspective. And then in Q1, there's typically a large drain in working capital. So that would be a typical year. We're not in a typical year right now. So in -- and as you noted, and as I noted in my call script, too, is we had a large source of working capital in Q2 as we dealt with our suppliers and our partners and our landlord partners. And as we came to terms with negotiated agreements with them, we paid and made full on our obligations to those partners during Q3. So a large source in Q2 followed by -- and as you noted, a drain in Q3. So as I looked at Q4 and the big question is, and it's a bit unknown, is I would fully expect we're not going to get that material large source of working capital in Q4 that we would typically get because I'm a little bit uncertain about consumer demand for purchasing gift cards during the pandemic. So I believe there will be a source, it's just -- I don't believe it will be in the magnitude that it has been historically. And then vice versa, I would expect the same thing. The large drain in Q1 to be not as significant. So relatively neutral over the 2 quarters. And -- but not having the same degree of variability that we would historically. I hope that helps.

[Tim Casey, Equity Research Analyst]

It sure does. And just to clarify on the big source in Q2. Is there more of that to reverse? Or do you think that's going to stick?

[Gord Nelson, Chief Financial Officer]

I think that's pretty -- no. I mean, part of it, too, is the collection of receivables. So we had -- and you can see our receivable develop at the end of Q3. So there's a large source that was really a collection -- the enhanced collection of receivables of which with the low business volumes and et cetera, the receivable balances that sort of historically low level right now.

[Operator]

[Operator Instructions] And we'll take our next question from Drew McReynolds from RBC.

[Drew McReynolds]

Can you hear me?

[Ellis Jacob, President, CEO & Director]

Yes, we can hear you now.

[Drew McReynolds]

Okay. Super. Little bit choppy on the phone. A couple of, I guess, follow-ups for me. On Adam's question around new releases. I guess for you, Ellis, just to be clear, I know it's soon but doesn't it make sense at some point, for studios to do some releases to what's been done in [ past ]. So I just want to confirm that isn't on the toe at this point? And then secondly, I also may have missed from the, I guess, [ from the head offs ] what kind of financial inflows these for you guys in Q1, assuming is was...

[Ellis Jacob, President, CEO & Director]

The first question, Drew, that you asked, were you talking about the different ways that the studios are releasing their movies? Because it wasn't clear when I heard the question.

[Drew McReynolds]

Yes. That's right, Ellis. So you obviously got a weekly in the I think back [ in August ] and just -- I guess, the world [ doesn't get ] in an equal measure or get them seen in an equal measure, doesn't it make sense for the studios, just kind of a little bit more tactile on the release slate for [indiscernible]

[Ellis Jacob, President, CEO & Director]

Yes. And the studios are really committed to the theatrical experience. And all the big movies, it really works to their advantage because I always say we are the engine that drives the train and the fact that we create the sequels of the studios, we create the benefits for merchandising and for theme park rights and all of those kinds of things. So will there be changes, there will be changes, but I don't see that happening with the big blockbuster movies that the studios have made and will keep them for release as we move forward into 2021. And there will be changes in how different studios approach the movies. And during the COVID period, we are always talking to them about ways that we can benefit both Cineplex and the studio partner as we move forward. And part of that is we have the Cineplex Store, which is basically being used regularly now given the situation we are faced with, with COVID.

[Gord Nelson, Chief Financial Officer]

And then I think on your second question which was related to the building. Obviously, as I described, we're in the middle of negotiations with a number of parties. So I don't want to signal a value. I will note, though, that -- and Drew, I'm not sure whether it was you or someone else noted that in the previous credit agreement, there was a provision on the sale of the building that indicated a minimum proceeds amount of $50 million. So that's the only number I will provide, is that I will confirm that, yes, that was in the agreement, but we're currently in negotiations right now. So that's all I can say.

[Operator]

And it appears there are no further questions at this time. Mr. Ellis Jacob, I'd like to turn the conference back to you for any additional or closing remarks.

[Ellis Jacob, President, CEO & Director]

Thank you very much. Thanks again for joining our call this morning. We look forward to speaking with you again in the New Year for our fourth quarter and year-end results. Until then, on behalf of the entire senior leadership team at Cineplex, we wish you and your families a safe and joyful holiday season. Thank you, and have a great weekend.

[Operator]

Thank you. And again, that does conclude today's call. You may now disconnect.