Q2 2020 Cineplex Inc Earnings Call
Please standby.
Good day and welcome to the Cineplex Inc. Q2, 2020 analysts call today's conference is being recorded.
This topic I'd like to turn the conference over to Mr. myself for Soco Senior manager of Communications and Investor Relations. Please go ahead mr. cycle.
Thank you Cody and good morning, and welcome before we begin I would like to remind you that certain statements being made a 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 very include among other things the negative impact of the told at night gene pandemic adverse factors generally I countered in the film exhibition industry risks associated with other national on World events discovery of I'm just.
Close to material liabilities and general economic conditions, I will now turn the call over through our president and CEO outlets Jacob.
Thank you Melissa good morning, and welcome to Cineplex Inc. second quarter Twentytwenty comps.
Yeah glad you could join us today.
On the call. This morning, we will take a brief snowcapped the second quarter results and that's sort of your can talk that's cool wouldn't 19 has had on the numbers as well as provide an update on the status of the litigation between Cineplex instead of World Group.
We're also it's quite an update on <unk> reopening plans and how we are positioning the company continued success in the future.
Oh, Chief Financial Officer, Gordon Nelson is on the call to provide a financial or are you, including our liquidity position, which will be followed by a customary question in cancer period.
[noise] like so many other businesses encana doing around the world Kinda <unk> has arisen direct result overtime that make all locations will close for almost the entire second core.
Only beginning to reopen in select markets. During the last few weeks of June where it was deemed safe to do.
Well Gord will go into more detail in a moment it goes without saying that <unk> second quarter results was the yearly constructed by coal with 19, resulting in substantial decreases when compared to last year.
And although a physical doors or shop. 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 order, we remain laser focused on significantly reducing operating costs of capital expenditures.
And I efforts to reduce operating costs, we continue working with all landlords and real estate partners to abate and deferred rent eliminated all variable spending and worked with us applies to renegotiate and revise contract.
We benefited from government await subsidy program.
In addition in addition to laying off our entire part time fuel workforce during the closure period, our corporate employees still voluntary temporary salary reductions to help alleviate the financial burden.
Well, we were able to dramatically reduce our cash burn we also remain committed to growing and supporting the diversified area so far business.
This included Cineplex digital media like expanded food delivery services through over eat sounds good the dishes and all online Senate black stole which experienced significant growth that's people consume more content from hole.
We also took meaningful actions to provide further financial stability throughout the recovery period and do it shows that our long term liquidity needs to have met.
This included of gaining relief from certain financial covenants under our credit facilities and securing additional financing in the form of convertible unsecured subordinated debentures issued subsequent to quarter at.
Well I loved business strategy remains the same in the short and medium to 'em, we are focusing on a small number of projects and priorities supported by a sustainable financial model.
As we monitor revenues and plan for all future subsequent to quarter and we have to make the difficult but necessary decision to reduce the size of our workforce. We reward dark teams <unk> consolidated organizational structures and have to say goodbye to a number of quality across the cineplex ecosystem.
And as we navigate through these unprecedented times, we will continue to take bold action in a variety of area that make the stuff that required decisions dispositions cineplex with sustained success.
This concludes our agreements with Dr. Paul.
Unfortunately, given the global pandemic set up like some thought calls have agreed to mutually terminated that partnership.
The current environment is simply not an opportune time for us to invest in these large development projects, but we hope to see top golf gone through Canada in the future.
Before I shift gears to a measured reopening I would like this and updates regarding the since the war litigation.
How do you know on July 3rd Cineplex violent state Linda claim in the Ontario, cool seeking damages up to send the world wrongfully repudiated the transaction to acquire a company.
Since then the court has set the timeline to get to trial why the trial as tentatively set to begin at September 2021 delays a possible having said that we are diligently working to advance the legal process and seek to recover all damages as outlined in the play.
Turning to focus do a measured reopening since we closed doors in mid March the team has been diligently preparing for a safe return.
We have used this time to carefully read examine all off our buildings and processes.
We worked with the country stop infectious disease experts to develop and implement an industry leading program with end to end health and safety protocols across the board. So that I guess feel confident and relaxed Wendy returned to our venue.
I'm pleased to share that has off today, we ever reopened over 80% of far theater circuit with 137 theaters across Canada in all major markets plus all four locations of the recruitment palladium on now all open.
Well the results are encouraging and I guess I'm delighted to be back almost that delighted to adopt teams work to reopen outdoors and get back to doing what we do best providing some much deserved entertainment fun and its escape.
Speaking on Hughes from all levels of government off phased approach to reopening continues to evolve and is driven by provincial regulations on safety guidelines. The availability of first run film product social norms around physical distant thing and attendance levels that theaters and other.
And use that have reopened.
We remain extremely strategic and our jobs in our approach as we welcome all gas back kind of build consumer confidence.
And speaking of course, Ron film product today, it's truly a momentous Dave for cineplex and for the industry.
After five last month. The day, we are welcoming I've got stuck with new first one content and we couldn't be more thrilled.
We have three new titles coming through the big screen today, including the exclusive Canadian release of the sponge, Bob movies I'm, John to run the thriller unhinged and the highly anticipated, Quebec Fillmore SEC M. All also of note Christopher Nolan instead, it will be released in Canada on August.
27, artificially international the release, which is a week before the United States. This isn't something that would have happened in threeq orbit and is a testament to the strength of our reopening plans and the studios belief in our business on the theatrical model.
Having said that we were all very surprised to learn of Disney's decision to send moves on straight to premium video D or you bought.
While we were excited to bring the phone to the big screen and we're confident that would perform well enough theaters Disney's a valued partner and why 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 up there 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 shorten theatrical window is 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 to theatrical window and we will continue to have these discussions and moving forward.
And speaking with our partners. They have assured me that the theatrical the right and it's still important to that they know that the global theatrical box office for a film often represents 50% off more off its overall revenue.
Which means that significantly shortening theatrical window, but have a serious impact on the latter part also films life.
Hi, guys exhibitors, we are the engine that drives the train sets the stage stage for additional downstream revenues for a film from the creation of sequels to merchandising often do nitties the team pocket traction and other offshoots <unk>.
We create great brand awareness and loyalty for our distribution partners.
Not to mention providing the social and audio visual experience that guests love and craved, especially right now.
In fact, as we continue to look at new ways to attract different audiences. We are working with Roger sports snap on T.S. and to bring select NHL and Raptor playoff games to the big screen and mission is free with a $5 donation to the boys and girls club off Canada, and the 10 minutes has been incurred.
<unk>.
Looking ahead, that's still a very strong backlog of titles.
The back half of the year continues to ramp up.
In addition to tenants that I already mentioned, we have wonder woman 1980 fall that on denial block window widow Candyman, Jim books bought in no time to dive Pixar. So Westside story from Steven Spielberg doing directed by pullback someone didn't even know and crudes do among others hitting the big screen.
Well 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 Twentytwenty, including top garden Maverick fast and furious nine quiet place do you get terminals and minions the rise of group.
This of course in addition to titles previously announced for 2021, such as the Batman Jurassic World.
Dominion sync two mission impossible, seven and crew low.
Well, what I know for certain is that these fast five months up giving us all a new appreciation for the importance of friends and family and the power of shared experiences with builds we love.
You know people I've missed the wonder of the big screen and craving that socialist fraction after being constrained in their homes for a month.
And we are excited to now be in a position to see new welcome them back.
[noise] Cineplex says when entertaining Canadians 100 years and this has certainly been up order. Unlike any other company or the industry has experienced.
Well I was so much of what is happening right now as I would've thought 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 science.
I remain confident in our ability to evolve and emerge stronger in this new world, particularly without passionate and dedicated employees, who have worked tirelessly throughout the stuff science.
I would like to thank the team for their resilient sense perseverance in the face of such adversity as we forged your head to the next phase of our future together.
I would also like to thank thought committed board of directors, who have provided great knowledge and guidance throughout this period.
With that I will allow pass the call over to Gordon Nelson.
Hi, Thanks else I'm pleased to present, the condensed summary of the second quarter results for Cineplex Inc. and to provide additional details on the financial impacts of cold at night teams on our operations for your further reference our financial statements and Mdna haven't filed on SEDAR and are also available on our Investor Relations website at <unk>.
Our next dot com.
Our Mdna 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 on our responses to the ongoing effects of Tobin my team with a commentary on cost control and liquidity initiatives and outlook.
[noise] the cobot 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 acute you twentytwenty.
Although the core businesses were shut down for the quarter. We did have some revenue contributions from our home delivery 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 was somewhere else private prior to receive the termination notice on June 12 Twentytwenty.
Once we optimize our position with respect to these items, our focus turn 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.
[noise], which costs are largest fixed costs, our monthly total occupancy costs, including lease costs and weeks related costs, such as Cam and taxes, it's just over $20 million a month.
During the mandated closure period, we maintained strong communication channels, our landlord partners.
When applying 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 a 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 EBITDA 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 movie where we might have exchange 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 thirtyth.
The benefits of the initiatives taken in Q2 will continue to provide relief through the remainder of Twentytwenty.
[noise] payroll is our largest semi fixed costs, what the mandated closure. We immediately 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 material were materially reduce our theater payroll to approximately $234000 in Q2 2020 from approximately 41.1 mill.
Only in dollars and the prior year quarter.
Our total company employee salaries and benefits as identified in the 12 of the financial statements decreased $11.6 million from $79.4 million in the prior year.
Looking forward the government government has announced the continuation of the cues program until December 19th Twentytwenty, which will continue to benefit the company through Q3, and Q4 and potentially higher subsidy rates.
In July the company initiated a restructuring process, which will result in the elimination of our approximately 130 rules for an annualized savings of approximately $12 million.
Approximately half of the savings relates to G and H and hospital Lake Opex savings in the various businesses.
We expect restructuring costs of approximately.
$9 million to be reflected in the remainder of Twentytwenty.
As we look forward, we will continue to benefit from the cues program to its expiring in Q4 and will drive future savings as a result, the recent restructuring process.
With respect to or other supplier partners an expense control, we put in immediate expensed in Capex curtailment programs during the closure period and worked with our supplier partners to provide elements of relief, including 16 or reduced amounts of contractual monthly services and payment deferrals.
End abatements, you can see the benefits of these initiatives and the substantial cost reductions in a number of our controllable cost categories.
[noise] with all the previous auctions previously described we were able to achieve our projected monthly cash burn rate of approximately $15 million to $20 million per months before working capital a mission.
[noise] in addition to the cost controls we focused on managing our working capital to ensure that we were 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 world, 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 29th and the convertible debenture offering was announced on July 7th [noise].
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 Thirtyth. We were required under refers to classify that that as a current liability as at June 30.
[noise] the convertible debenture offering was successful with the full over allotment 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 pay down.
With a debt balance of $664 million as at June Thirtyth, and net proceeds of approximately $304 million from the offering our pro forma debt balance as of June thirtyth would've been approximately $360 million.
It was a commitment or borrowing capacity of $700 million, our pro forma borrowing availability as at June thirtyth would've been approximately $340 million [noise].
In addition to the convertible debenture offerings, we are investigating extracting value from our owned real estate portfolio, which includes our head office building in Toronto.
[noise] LS mentioned, the mutual termination of the agreement was top golf.
In addition to removing the previously forecast capex related to top golf, we're 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 can 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.
Thank you if you'd like to ask a question pretty signal pressing star what is your telephone keypad, if you're using a speakerphone. Please make sure that your mute function, it's turned out to layer signal to reach our equipment.
And then a star one if you'd like to ask a question.
Well take our first question from tear it was hard with TD Securities. Please go ahead.
Yeah, good morning, everybody.
Your your well and say.
I realize that the environment extremely fluid right now, but I was wondering if what what Q3 hospitals or what some of the feedback that you're getting some of the studios with respect to releases for the balance of the Aaron.
I guess is there any immediate concerns or <unk>.
Oh, Yes, Q4, EBITDA <unk>, what that might need for your company.
That's a great question and as we've seen and we see today, we are going to be releasing three movies Tonight and we are also releasing movies ahead of the U.S., which a you know gives us a lot of so vote of confidence.
As to what we have done to make the environments safe for our gas 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 that titles will stay on those particular dates or if they will move on Ah you know.
2021, or other changes that may take place, but at the moment, we feel pretty comfortable but again it depends on what happens with covert 19 and its impact on our.
Our guests and be slow off a phone brought up two theaters.
I'll turn it over to Gordon now or.
Capex also then with respect to the covenants.
I think what we're seeing as we're seeing more impact in Q3 with some of it the way closure, so whereas I would have said you know number of weeks ago at the beginning of July.
You know we would have thought that we might have been in Katrina breakeven position for the back half of the year.
Given some of the recent delays in announcements in Q3 is you know I would suggest that you know, we're probably not we will not be in that breakeven position in Q3 will be weaker than we initially thought.
With that said as else comment as on you know the where we believe Q4 will be I think also with respect to some of my commentary you know at our Q1 results release enduring convertible debenture off rate has there been a few things that have come into play since then so one.
It is be the convertible debenture offering was very successful in the fall over allotment option.
Option was exercised.
You know I provided you with the pro forma.
That amounts today of about $360 million.
Got it earlier.
Today about.
Exploring opportunities to extract value from our real estate portfolio, including our office so.
I know you've done the math and you can kinda back in you know for at 360 million today in terms of that says where might we be at the end of the year.
You know somewhere probably between 360, which when you back in the covenant about as you're talking about an EBITDA level of somewhere between 20 and $24 million.
Which would be roughly 32%.
It's 39% of last year's EBITDA level. So a significant decline were looking for I think as we do see the ramp up is.
Really be dependent on.
On the benefits and the strength themselves that we see the one good piece of news that we have or a certain other good piece of news that we have since we last spoke was the extension of the cues benefit program.
In essence till the end of last year.
So there's a number of balls up in the air right now there so.
There is still feeling comfortable that but as al said this today marks a monumental day, where we're seeing the first kinda major release coming though.
That's a that's good color guys. I guess, you know maybe just thinking about it say you kept close to your your customer base.
Base. During this period, just wondering if you've got up.
On the ground.
Hi.
Maybe at the follow up to that confidence.
Sure.
It's hard to put in place.
Yes, Derek and the we have seen a great response, a based on the library titles that we have out as we opened up across the country and you know we're 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 gas back to have an experience where they feel.
You know safe and can enjoy it and that's something that we worked really really hard when we started with launching reserve seating with the 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 or as a result, what they've experienced our theaters.
And we've limited the food offerings to start because we just want to be a cautious as we.
The move forward and it's been very very positive or on the safety side and we've done you know a lot of surveys and we have seen now families starting to come back to our theaters.
Oh I'll re queue. Thanks for taking my questions.
Thank you.
Thank you well take our next question from Arabic Gallup had today.
Fortunately please go ahead.
Got it thanks for taking my questions just a couple from me.
Got it just to go back to the a that covenant obviously the reinstatement in Q4 can you just to clarify the exact I'm sort of I guess, the yeah adopt calculation bad it's going to be studies that Q4 in into fall is back that be the Ah Ah I guess do that denominator, a flaw that calculus.
They should obviously, which some adjustments.
And then secondly for Atlas.
You could you comment on BMC Universal deal is that something that you would even generally consider as a model.
At least maybe selected or with some of the studios. Thanks.
I think there have been a salt score and 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 ER with what the covert pandemic is Q2 in Q3 little 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 four and then as we get into Q1, it'll be Q4 plus Q1.
Normalized multiplied by two.
And as we get into Q2 up next year. It will be Q4, plus Q1, plus you too.
Divided by three multiply by four and then when we hit a Q3 of next year that will be the will will be revert back to you know the proper LTM calculation.
Or window on your question regarding D. N C universe. So it's a you know hard for us to comment on what the or peers are doing in other parts of the world of specifically in this case North America, but as an exhibit or are we have always been in communications with them.
Our distributor partners and we work closely with them as you know we were one of the first companies in the world to create the cineplex stole which allows us to have Oh, gosh watch movies or at home and the whole relationship with bricks and clicks. So we will continue to.
I 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.
Great. Thank you possibly.
Thank you.
Thank you will not take our next question from Adam Shine with National Bank Financial. Please go ahead.
Well good morning, gorgeous public cloud security costs.
Oh yeah.
Good grew calls in recent weeks it seems so called that carried by each of them.
<unk> costs are likely to be just to deal with healthy quantitation issues.
Okay.
Did you quantify those if possible.
So which is that sort of 10 days the top golf it sounds like.
Which we agreed to it that was alluded to from the outset indeed.
<unk> costs to be incurred perhaps.
Hi, just this week terminate lack relationship.
One more.
Okay. So I know some questions and so.
First of all with respect to the health and safety measures that will put in place.
And all our venues going forward I think first and foremost else made some great comments.
I think we have world class health and safety initiatives that we're putting in place.
The actual costs related to P. P E.
Is actually quite immaterial, it's less than a million dollars and I would say that where the additional costs are that you're seeing or are there would be related to the labor costs.
Of the additional stops.
Doing the cleaning initiatives and as.
You know as I've mentioned, we're going to benefit from the extended accused program and as we look into kind of this near term period right now that we're in.
Is the amount of the benefit that we would expect will be applicable to us is actually going to increase all for 'em. 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 costs of supplies.
Cleaning supplies and other protocol is less of the million dollar. So so we will not have significant.
Material additional expenses related to PPL energy initiatives.
With respect to top golf.
I would say that again.
There'll be no.
Additional amounts related to the termination about agreement no material termination about.
Great So insignificant too.
Right.
In terms of asset sales.
The <unk>.
We're focused on real estate.
The headquarters building into until.
Our opposite.
Sales are considerations on the payable.
I'd say that depend upon takes blogs.
You know obviously specific units or.
Doesn't seem to be that love the urgency to do that particularly on the back.
A lot.
Right and Adam I think I'm, you know my commentary I spoke specifically.
You know about the office building and I think you know any environment that everyone is in today I think companies like determining that potentially not as much office space as required as they look forward.
So that and the best.
Use for this for the building that we're in today.
It would be.
Like residential from a value creation perspective, so so that would be when opportunities look at.
With respect to.
The other businesses, which you're getting too as I did mention that you know we would look at value creation opportunities. So.
We thought there was an opportunity where a business was valued more than we were in essence getting value for it for you know we would potentially consider it but I think we've taken a number of measures to date such that you know we've covered.
Liquidity concerns.
But just one for you all its.
I don't know how <unk>.
The question.
Two.
A relative.
Lots, which you could care less about it but any early read or commentary.
[noise] fields might be looking like going into this weekend, let alone.
A couple weeks.
Okay. Good example is Ah you know last week, we opened a movie called Peninsula, which is the Korean movie, it's called Crane to boost on 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 off.
Individuals and guests coming to a movie in our theaters across Canada, and that's a Korean a movie and still did extremely well. So we're quite excited about the movie's opening Tonight and we think a you know the the movie.
In Quebec should do really well it start it starts basket acquired and a it's been highly anticipated for a long period of time, and we will just have to wait and see that tickets for 10 and don't go on sale till next week. So we don't know yet what the impact of that is going.
The but from what I hear the movie is awesome and we're all looking forward to seeing it.
Great. Thanks, a lot.
Thank you.
Thank you will hear next from true Mick Reynolds with RBC.
Yeah. Thanks, Thanks, very much and good morning and.
Oh seaborne. Thank you for all the detail provided are extremely helpful.
Couple of follow ups for me on the.
You spent in 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 to provide some perspective on that.
And then on the location based entertainment deployment for the palladium than a record teams can you remind us what is in progress and.
Requiring to be finished within that 50 million Capex budget now that trough golf is is out of the equation are you.
Continuing to expand the footprint.
And then lastly, with respect to be L. B E locations that are open can you comment on what you're seeing in terms of capacity or or revenue levels, perhaps it's too soon to really glean anything but that's it for me at you.
Okay do so I'll take the class.
First question, which was related to me amusement and the digital media businesses. So so again.
And just to give a bit more color to what was in the M&A.
The amusement.
Business of player when amusement group.
Runs to.
Make kind of major revenue streams onebeacon equipment sales.
And then the second being what they call the roads business, which is you know really when its Ireland equipment and it's in third party venues and and Ah. We're taking a reps there you know out of the out of the revenue derived from from those vendors, so and the majority of those venue.
Is there going to be entertainment type destinations or hotels.
Our primary customers and retail destinations. So so the route businesses.
Given and that businesses in both in Canada.
So the 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 wasn't really the only material a form of revenue the Ti Vo Smith business. It's arrived so as entertainment.
Telx destinations.
Reopen as usual, we'll look to see that business ramp up to us more traditional trend levels from the digital media business perspective.
Again.
You know where there are three elements to the revenue streams, they're primarily one is related to the service model.
With our third party customers.
And I, usually suffered a lot more do you duty model, there's an advertising revenue stream derived from our mall network and then there was an equipment sale.
Revenue stream, so and again were met just as a refresher so.
Our.
Our verticals that were in our Qs ours.
Retailers and financial institutions, and then the advertising revenue stream is primarily derived through a mall network. So again with closures of the majority of those locations throughout globally.
As.
The advertising revenue stream from that business was materially curtailed.
The equipment sales business or component of the business.
Was significantly curtailed as locations where shutdown so really the only remaining revenue stream was for the technology licensing gene, we weren't creating a lot of new content, because so there wasn't a creative content he being derived.
And and so again in that business those various elements of the revenue stream wherever based materially and we would expect those together rebound as you know our customers in those key verticals.
But hopefully that provide color on the kind of the revenue mix that we experienced in the second quarter and looking at the location based entertainment do if you asked about as I mentioned a in my script do we have all of them open now, but again or you know we are running at about a 20.
He did 25% of by your numbers because of limited capacity and a limited offerings that we haven't the box and they continue to improve.
As a against some more comfortable coming in and looking at going forward. A in 2020, a we will probably open one palladium and one record them by the end of the year and then in 2021, probably in the first quarter will open another Iraq.
<unk>.
I think we announced that a previously so it would be the one in Brentwood and <unk>.
We see and then Barrie, Ontario for Q1 2021.
Palladium will be in dark mint, which isn't Nova Scotia. So that's we've really been very focus on curtailing Ah ha will capital spending as Gordon mentioned, but our focus is to continue to be very selective and to get the best return for our shareholders and the company and.
Andrew just took on a comment I'm not too I think.
No.
Hey.
This doesn't diminish our our belief and the opportunity for a recruitment palladium is but I think what it does do is [noise].
It may be prudent to pause with the evolving retail landscape out there.
You know I believe there'll be a number of short run impacts in terms of what shopping destinations look like going forward and everything there could be opportunities.
For a better deals for us going forward, so, it's probably prudent to actually pause a little bit in the short term.
Yeah understood. Thank you I think you both that.
Thank you very much.
Thank you will hear next from Tim Casey with BMO.
Thanks, Good morning, a clarification first and then a couple of questions.
George on the $20 million in lease rates sales.
Can you just clarify that is that.
Should we think about that that it would be rate or a lump sum cash oh actually repurchase.
Yeah. So look at I think what you're gonna see and this will be very interesting then you'll likely well see that until Q3 and I think the amount will be higher than that does we as we're looking in exploring other opportunities. Both again I'll just provide a little bit more color on that so when we're looking at rights that we have under.
At least that I'd characterize some of those rights potential rights and then my script. So you know that build write a density right.
You know.
Those types of things when we have something that's desired by a landlord in essence, we are selling their rights as opposed to.
You know.
Reducing their rent them out at that point in time so.
I gave you you know an estimate of something that we believe will be an excess of $20 million.
I suggest what you'll see is in the third quarter financial statements as we finalize some of these agreements as you will see.
Kind of get density writes a sale.
For the magnitude you know something in excess of $20 million as I described.
And then so the next question is what is the form of payment so that sale transaction and so I think this is where your question is coming from and so as I described where we were exploring all or at least right all abatement type options and so what I would suggest.
Form of payment for those lease rights on some of the money coming to us as we will just not paying cash rent.
For a number of months until of exercise at until you know with caught up to.
You know that value. So so in essence, that's like a payment over time.
Bring us not paying rent.
Does that make sense yep yep. Thank you.
But the.
Well you will provide a final number and <unk> and some clarity on how how long that relief will take concerns like how long you know forebear cash rent costs associated with those rights.
Yeah, I'm looking at I mean, I can give you some type of indication right now as I would expect that they saw and again as it is.
Property by property landlord by landlord until depending on the value of that right of those rights.
You know could be and again across a number of properties or could be anywhere you know in the.
You know.
Sort of six to 12 month range.
Okay, but again as it's only going to be for those specific level. So.
Got you okay.
Elyses question for you you you mentioned in your opening remarks that.
You know you were still true to the change strategy.
No just wanted to push back a little on that you didn't you.
Capped at 500 million gain in suspending the dividend indefinitely.
You know obviously topped off as part of this but he is a you're not really are you not gonna have to change strategies from.
Your growth and diversification.
Strategy pretty cold goods.
Given the you know there.
Pressures on the business right now and.
Yeah look going forward.
Just talking about kind of that says.
Yes, and yes, you are correct as I said that but we are definitely slowing down a war capital commitment and we are making sure that we make the company as strong as possible as we move forward and reinvest all capital once we are in a much stronger.
Position going forward.
And we believe in our model as we you know move forward through.
The next number off month, but again the variances how quickly do movies come back and our cats as we go forward with the plan and we have quite a you know overall excited.
And this weekend is going to be an interesting position that we'll see what the first one product coming back to Oh theaters.
So yes, you are right.
Is it going to be exactly like we were looking at before no. There will be reviews and he 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 weve bullet proof the company.
Thank you at that and last question can you comment on your confidence in your ability.
To maintain a operating margins through 2021, obviously 2020 is it's a last year, but assuming we're in some sort of normal operating environment next year revenues are probably still gonna be down how confident are you. There you can maintain operating margins.
When you don't have the huge program again, you know you're on a more normal footing with landlords and things like that.
Yes, I mean, and then that question is more relative to I guess 2019.
Yeah first yes.
20, obviously, so I'm looking what we've always and that a lot of it depends on you know as we look at the ramp up in some of the other businesses. So we are expanding relative to 2019.
You know more recrews over there so we'll have additional cocky rec room.
You know a continued 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, but well and that's either through content offerings.
Different types of pricing options of programs.
That will provide provide for and Chris increased frequency or other reviewing options. So you know as those ramp up and how quickly those ramp up is you know should we get back. After the 2019 level is that's where we would hope to get too.
Thank you.
Thank you.
Thank you would take it as a reminder, that star one if you'd like Cascade question well take our next question from Jeff Fan with Scotia Bank.
Hi, Good morning, it's actually my comment on the line this morning on behalf.
Couple of questions from me you previously talked about it but I'm expecting a minus 40%.
Box office attendance in the back half of the year can you comment on this in relation to.
Hi, there sounds like it has evolved and then on the film slate.
When you talked about tenet and the model up moving get ahead of the U.S. remedies do you feel just said something other studios will all be opening too.
Yes, the U.S. situation continues to.
I have been issue.
And then on the wage subsidies.
The press release, you talked about the 85% benefit and earlier in the call can you clarify the timeframe that you're expecting to kind of being a maximum benefit for the wage subsidy or anything that's for the entire.
Q3 in Q4.
And then lastly, just a quick ones on working capital.
It's cash generation here can you comment about how that might come back any reopened.
Thanks, a lot so scores so I will take the the the box office forecast question accused question and the working capital question also child of tenants. So yeah. When we released the Q1.
Results.
And looked at the film release schedule, we made a comment and then sorry during the prospectus offering to we talked about a minus 40%.
Box office number as being a breakeven level for.
For our operations and at the time, we suggested that we thought that Q3 Q4.
So the back half of a year, we would operate at approximately breakeven level, which is the minus 40%.
As I said, a little bit earlier.
Today is given some of the shifts now it is Q3, we believe.
We'll now not be a strong.
As it was as we believed.
You know three or four weeks ago.
And and so therefore.
You know I would suggest that we're gonna be into like loss position in the bottom of the but EBITDA loss position.
As opposed to breakeven until then we will be greater than a minus 40% situation.
From a box office perspective, primarily due to the impacts in Q3.
And I'll take all your three questions then turn it over to almost for tenant them. So so on the queues side of things you know you are.
Correct that there's both him a multiplier there's an index.
That is applied to the 75% cues rate.
I mean that indexes based on sort of year over year performance role and how your business has been impacted.
Like all of it.
So I would expect and as a 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 flat 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 I'm not going to provide a number. It gives you a reverse engineer it to figure out what the box office forecast is and then we're still a little bit you know.
Uncertain on that but.
So anyway. So so after an 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 you know we put a number of working capital.
Initiatives in place during the second quarter that was able to provide you know a significant source.
Working capital during the second quarter.
What I would expect from your perspective, and we look at historically, we have a huge source of working capital in the fourth quarter as we're settling corporate tickets as we're selling corporate coupons and as we're selling advertising campaign campaigns in that Christmas ramp up period.
So we would typically have a huge source and Q4.
Given that we put in in a number of initiatives in Q2.
Based on 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, it to be relatively neutral for the back half.
And then LS I'll, let you. Thank you Gord and actually a Great example is Ah Tonight to where we are releasing a number of movies with sponge, Bob which is a movie that released theatrically in Canada, but it's actually going to be in CBS streaming service and 2021, So we work with.
Our partners at Paramount and we are both very excited that you know it's a feature is being released theatrically the movie Unhinged, which is also think Tonight is opening a week ahead of the U.S. opening and then as you mentioned tenant 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.
You know as a result of the era opened 19 Ah challenges and the whether that would make a difference as to releasing it a first internationally and in Canada. The same time. So if we continue to perform and we are able to deliver I would think that the studios with.
Very closely with us as we move forward.
Thank you.
Thank you, we'll take our final question from Derica side with TD Securities.
Yeah, just one.
Follow up for me.
The lumpy the right there.
We recorded a 40 million dollar expense in the quarter.
But just wondering how do I.
Reconcile that with some of the it makes you.
It's probably box.
Yeah. So interesting question there.
And so.
You know on.
Unfortunately, you know it for 16.
It's very focused on the balance sheet as oppose to the income statement.
And and so we've used the bodell concept so after leases to to provide some form.
You know, where we believe is the correct amount to look at you know after reflecting kind of at least cost. So what was typically appear in occupancy expense on the P. and now is anything that is not on rent relief.
So your can your taxes, if you had a percentage rent closet would be the percentage rents amounts as well as insurance so that stays on the piano.
The rent fixed rent them out what typically go to the balance sheet.
So what we have shown and that sort of in in and out and Derek if you're looking at the occupancy section of the M. DNA is I believe we provide footnote five which which says.
And for his box or EBITDAO calculation in the non-GAAP measures.
Is that amount as before.
Reflecting.
Savings amount because what we're showing there's there's an essence it in and then out on those rent payments. So.
About 40 million in theater lease payments, we've put noted.
I believe what comply.
That does it excludes the impact of about $12 million savings, which is what we show in the but they'll calculation. So I know, it's looking I know, it's very confusing and I think rental abatement and adjustments.
We'll be challenge and across all reporters air but does that help.
Nope, that's a perfect color guard.
And in terms of the abatement.
Should we expect that Boeing Florida or was that a one time offset.
No and what and what I'm, suggesting on that is.
You know as we look forward, what we have done as we have provided.
An amount based on agreements really as as that reporting as a sort of got reporting date.
We are still in progress of.
Finalizing agreements with a number of other landlords. So and then with respect to Q2 in 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.
Look like cycles.
Thank you.
So I just want to thank everybody for lending up call. This morning, and we look forward to connecting with you again soon at tower E. G. M. This fall.
Sales will be circulated shortly and thank you very much and have a great. We can make a visit but.
Okay. Thank you that desk.
Thank you that does conclude todays conference to kill for your participation you may now disconnect.
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