Good day, and welcome to the Cineplex Inc. Q2 2020 Analyst Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Melissa Pressacco, Senior Manager of Communications and Investor Relations. Please go ahead, Ms. Pressacco.
Thank you, Cody, and good morning, and welcome. Before we begin, I would like to remind you that certain statements being made are forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results could differ materially from those expressed in the forward-looking statements. Factors that could cause results to vary include, among other things, the negative impact of the COVID-19 pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national and world events, discovery of undisclosed material liabilities, and general economic conditions. I will now turn the call over to our President and CEO, Ellis Jacob.
Thank you, Melissa. Good morning and welcome to Cineplex Inc.'s second quarter 2020 conference call. We are glad you could join us today. On the call this morning, we will take a brief look at the second quarter results and the severe impact that COVID-19 has had on the numbers, as well as provide an update on the status of the litigation between Cineplex and Cineworld Group. We will also provide an update on our reopening plans and how we are positioning the company for continued success in the future. Our Chief Financial Officer, Gord Nelson, is on the call to provide a financial overview, including our liquidity position, which will be followed by our customary question and answer period.
Like so many other businesses in Canada and around the world, and as a direct result of the global pandemic, our locations were closed for almost the entire second quarter, only beginning to reopen in select markets during the last few weeks of June, where it was deemed safe to do so. While Gord will go into more detail in a moment, it goes without saying that our second quarter results were severely impacted by COVID-19, resulting in substantial decreases when compared to last year. Although our physical doors were shut during this time, the team has worked harder than ever before to mitigate the negative impact, prepare for reopening, and support the long-term stability of the company. Beginning in mid-March and continuing throughout the second quarter, we remained laser-focused on significantly reducing operating costs and capital expenditures.
In our efforts to reduce operating costs, we continued working with our landlords and real estate partners to abate and defer rents, eliminated all variable spending, and worked with our suppliers to renegotiate and revise contracts. We benefited from government wage subsidy programs. In addition to laying off our entire part-time field workforce during the closure period, our corporate employees took voluntary temporary salary reductions to help alleviate the financial burden. While we were able to dramatically reduce our cash burn, we also remain committed to growing and supporting the diversified areas of our business. This included Cineplex Digital Media, our expanded food delivery services through Uber Eats and SkipTheDishes, and our online Cineplex Store, which experienced significant growth as people consumed more content from home. We also took meaningful action to provide further financial stability throughout the recovery period and to ensure that our long-term liquidity needs were met.
This included obtaining relief from certain financial covenants under our credit facilities and securing additional financing in the form of a convertible unsecured subordinated debenture issued subsequent to quarter end. While our business strategy remains the same, in the short and medium term, we are focusing on a smaller number of projects and priorities supported by a sustainable financial model. As we monitor revenues and plan for our future, subsequent to quarter end, we had to make the difficult but necessary decision to reduce the size of our workforce. We reworked our teams, consolidated our organizational structures, and had to say goodbye to a number of colleagues across the Cineplex ecosystem. As we navigate through these unprecedented times, we will continue to take bold action in a variety of areas and make those tough but required decisions to position Cineplex for sustained success. This includes our agreement with Topgolf.
Unfortunately, given the global pandemic, Cineplex and Topgolf have agreed to mutually terminate their partnership. The current environment is simply not an opportune time for us to invest in these large development projects. We hope to see Topgolf come to Canada in the future. Before I shift gears to our measured reopenings, I would like to share an update regarding the Cineworld litigation. As you know, on July 3rd, Cineplex filed its statement of claim in the Ontario Court, seeking damages after Cineworld wrongfully repudiated the transaction to acquire our company. Since then, the court has set a timeline to get to trial. While the trial is tentatively set to begin in September 2021, delays are possible. Having said that, we are diligently working to advance the legal process and seek to recover all damages as outlined in the claim. Turning the focus to our measured reopening.
Since we closed our doors in mid-March, the team has been diligently preparing for our safe return. We have used this time to carefully re-examine all of our buildings and processes. We worked with the country's top infectious disease experts to develop and implement an industry-leading program with end-to-end health and safety protocols across the board so that our guests feel confident and relaxed when they return to our venues. I'm pleased to share that as of today, we have reopened over 80% of our theater circuit with 137 theaters across Canada in all major markets. All of our locations of The Rec Room and Playdium are now all open. Early results are encouraging, and our guests are delighted to be back, almost as delighted as our teams were to reopen our doors and get back to doing what we do best: providing some much-deserved entertainment, fun, and escape.
Taking our cues from all levels of government, our phased approach to reopening continues to evolve and is driven by provincial regulations and safety guidelines, the availability of first-run film product, social norms around physical distancing, and attendance levels at theaters and other venues that have reopened. We remain extremely strategic and agile in our approach as we welcome our guests back and build consumer confidence. Speaking of first-run film product, today is truly a momentous day for Cineplex and for the industry. After five long months, today we are welcoming our guests back with new first-run content, and we couldn't be more thrilled.
We have three new titles coming to the big screen today, including the exclusive Canadian release of The SpongeBob Movie: Sponge on the Run, the thriller Unhinged, and the highly anticipated Quebec film [inaudible]. Also of note, Christopher Nolan's Tenet will be released in Canada on August 27th as part of the international release, which is a week before the United States. This isn't something that would have happened pre-COVID and is a testament to the strength of our reopening plans and the studio's belief in our business and the theatrical model. Having said that, we were all very surprised to learn of Disney's decision to send Mulan straight to premium VOD or PVOD.
While we were excited to bring the film to the big screen and were confident that it would perform well in our theaters, Disney is a valued partner, and while we are disappointed, we respect their decision. That said, Disney has assured us that the decision was a one-off as a result of the pandemic environment and that they are still very committed to the theatrical window. Which leads me to our next topic. I know there's been a lot of speculation and noise in the media over the past few weeks regarding shortened theatrical windows that I would like to address. Cineplex is not changing its release windows at this time. Over the years, I've had many conversations with our studio partners about the importance of the theatrical window, and we will continue to have these discussions moving forward.
In speaking with our partners, they have assured me that the theatrical run is still important to them. They know that the global theatrical box office for a film often represents 50% or more of its overall revenue. Significantly shortening the theatrical window could have a serious impact on the latter part of a film's life. As exhibitors, we are the engine that drives the train and sets the stage for additional downstream revenues for a film from the creation of sequels to merchandising opportunities to theme park attractions and other offshoots. We create great brand awareness and loyalty for our distribution partners. Not to mention providing the social and audiovisual experience that guests love and crave, especially right now.
In fact, as we continue to look at new ways to attract different audiences, we are working with Rogers Sportsnet and TSN to bring select NHL and Raptor playoff games to the big screen. Admission is free with a CAD 5 donation to the Boys and Girls Club of Canada, and attendance has been encouraging. Looking ahead, there's still a very strong backlog of titles as the back half of the year continues to ramp up. In addition to Tenet that I already mentioned, we have Wonder Woman 1984, Death on the Nile, Black Widow, Candyman, James Bond: No Time to Die, Pixar's Soul, West Side Story from Steven Spielberg, Dune directed by Quebec's own Denis Villeneuve, and Cruella too, among others, hitting the big screen.
While there could still be some movement over the course of the year, we expect 2021 to be a very strong year at the box office. Several key titles have shifted from 2020, including Top Gun: Maverick, Fast and Furious 9, A Quiet Place 2, Eternals, and Minions: The Rise of Gru. This, of course, in addition to titles previously announced for 2021, such as The Batman, Jurassic World: Dominion, Sing 2, Mission: Impossible 7, and Cruella. What I know for certain is that these past five months have given us all a new appreciation for the importance of friends and family, and the power of shared experiences with those we love. We know people have missed the wonder of the big screen and are craving that social interaction after being constrained in their homes for months.
We are excited to now be in a position to safely welcome them back. Cineplex has been entertaining Canadians for over 100 years. This has certainly been a quarter unlike any our company or the industry has experienced. While so much of what is happening right now is out of our control, our priority over the past several months has been on what we can control, decreasing costs, trimming our CapEx, and securing the financial relief and resources we need to ensure the financial health of the company during these uncertain times. I remain confident in our ability to evolve and emerge stronger in this new world, particularly with our passionate and dedicated employees who have worked tirelessly throughout these tough times.
I would like to thank the team for their resilience and perseverance in the face of such adversity as we forge ahead to the next phase of our future together. I would also like to thank our committed Board of Directors who have provided great knowledge and guidance throughout this period. With that, I will now pass the call over to Gord Nelson.
Thanks, Ellis. I am pleased to present a condensed summary of the second quarter results for Cineplex Inc., and to provide additional details on the financial impacts of COVID-19 on our operations. For your further reference, our financial statements and MD&A have been filed on SEDAR and are also available on our investor relations website at cineplex.com. Our MD&A and earnings press release includes a fulsome narrative on the operational results. I will focus on highlighting and quantifying some of the key items. These include the impacts and our responses to the ongoing effects of COVID-19, with a commentary on cost control and liquidity initiatives and outlook. The COVID-19 pandemic had a material negative impact on all aspects of Cineplex's core businesses, resulting in material decreases in revenue, results of operations, and cash flows for Q2 2020.
Although the core businesses were shut down for the quarter, we did have some revenue contributions from our home food delivery, digital place-based media, and digital commerce businesses. Our immediate focus upon the mandated closure was on cost minimization and managing liquidity while maintaining the terms of the arrangement agreement with Cineworld prior to receipt of the termination notice on June 12th, 2020. Once we optimized our position with respect to these items, our focus turned to our reopening plans. With respect to cost control, I want to provide some additional details on our largest fixed and semi-fixed costs, our lease costs, and our payroll expenses. Lease costs are our largest fixed costs. Our monthly total occupancy costs, including lease costs and lease related costs such as CAM and taxes, is just over CAD 20 million a month.
During the mandated closure period, we maintained strong communication channels with our landlord partners in identifying opportunities for relief during these unprecedented times. Our focus has been on working with them to identify opportunities for abatements during the closure period, to convert fixed components of rent to variable rent during the reopening period, and to jointly look for other opportunities under our existing lease agreements. During the second quarter, we have reflected approximately CAD 11.9 million in savings in the EBITDAaL calculation. It is important to note that discussions are ongoing, and this savings number only represents amounts agreed upon to date, and also does not include scenarios where we might have exchanged or sold certain lease rights, such as density, exclusivity, or build rights in return for cash or rent payment holidays.
To date, these lease rights transactions are in excess of CAD 20 million and are not reflected in the Q2 financial statements as the agreements were executed after June 30th. The benefits of the initiatives taken in Q2 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. 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 CAD 20.2 million in subsidies, primarily under this program, and were able to materially reduce our theater payroll to approximately CAD 234,000 in Q2 2020 from approximately CAD 41.1 million in the prior year quarter.
Our total company employee salaries and benefits, as identified in note 12 of the financial statements, decreased to CAD 11.6 million from CAD 79.4 million in the prior year. Looking forward, the government has announced the continuation of the CEWS program until December 19th, 2020. Which will continue to benefit the company through Q3 and Q4 and at potentially higher subsidy rates. In July, the company initiated a restructuring process which will result in the elimination of approximately 130 roles for an annualized savings of approximately CAD 12 million. Approximately half of the savings relates to G&A and half relates to OpEx savings in the various businesses. We expect restructuring costs of approximately CAD 9 million to be reflected in the remainder of 2020. As we look forward, we will continue to benefit from the CEWS program through its expiry in Q4, and we'll derive future savings as a result of the recent restructuring process.
With respect to our other supplier partners and expense control, we put an immediate expense in CapEx curtailment programs during the closure period and worked with our supplier partners to provide elements of relief, including ceasing or reduced amounts of contractual monthly services and payment deferrals and abatements. You can see the benefits of these initiatives in the substantial cost reductions in a number of our controllable cost categories. With all the actions previously described, we were able to achieve our projected monthly cash burn rate of approximately CAD 15 million-CAD 20 million per month before working capital initiatives. In addition to the cost controls, we focused on managing our working capital to ensure that we were optimizing our cash position.
As a result of the cost savings and working capital initiatives, we were not only able to secure benefits which will extend into future quarters, but we were 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. 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 30th, we were required under IFRS to classify the debt as a current liability as of June 30th.
The convertible debenture offering was successful, with the full over-allotment option being exercised. Total proceeds net of commissions was approximately CAD 305 million and was used to pay down the existing credit facility, with CAD 100 million being a permanent paydown. With a debt balance of CAD 664 million as of June 30th and net proceeds of approximately CAD 304 million from the offering, our pro forma debt balance as of June 30th would have been approximately CAD 360 million. With a commitment or borrowing capacity of CAD 700 million, our pro forma borrowing availability as of June 30th would have been approximately CAD 340 million. In addition to the convertible debenture offering, we are investigating extracting value from our owned real estate portfolio, which includes our head office building in Toronto. Ellis mentioned the mutual termination of the agreement with Topgolf.
In addition to removing the previously forecast CapEx related to Topgolf, we are looking to bring CapEx down to approximately CAD 50 million for the next 12 months from our previously estimated run rate of approximately CAD 150 million. This CapEx reduction, coupled with the elimination of our dividend, will provide approximately CAD 200 million in additional liquidity as compared to prior years. We have taken a number of significant steps during Q2 to manage our costs and improve our liquidity position and balance sheet. Despite the current environment, we feel very comfortable with where we have positioned the company today. As we look ahead, we continue to focus on the reopening of our businesses and continuing to explore further opportunities for cost reduction and value creation. That concludes our remarks for this morning, and we'd now like to turn the call over to the conference operator for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you'd like to ask a question. We'll take our first question from Derek Lessard with TD Securities. Please go ahead.
Yeah, good morning, everybody, and hope you're well and safe. I realize that the environment is extremely fluid right now, but I was wondering if with Q3 half over, what is some of the feedback that you're getting from the studios with respect to releases for the balance of the year? I guess, is there any immediate concerns or risks around your Q4 EBITDA and what that might mean for your covenant?
That's a great question. As we've seen and we see today, we are going to be releasing three movies tonight. We are also releasing movies ahead of the U.S., which gives us a lot of vote of confidence as to what we have done to make the environment safe for our guests.
Given the balance of the year, there's still some very strong titles that are available to us. The issue is we don't know at this stage if the titles will stay on those particular dates or if they will move on to 2021 or other changes that may take place. At the moment, we feel pretty comfortable. Again, it depends on what happens with COVID-19 and its impact on our guests and the flow of film product to our theaters. I'll turn it over to Gord now.
Yeah, thanks. With respect to the covenants, I think what we're seeing is we're seeing more impact in Q3 with some of the delayed closures. Whereas I would've said a number of weeks ago or at the beginning of July, we would've thought that we might have been potentially in a breakeven position for the back half of the year. Given some of the recent delays and announcements in Q3, I would suggest that we will not be in that breakeven position and Q3 will be weaker than we initially thought. With that said, as Ellis commented on where we believe Q4 will be, I think also with respect to some of my commentary at our Q1 results release and during the convertible debenture offering, is there have been a few things that have come into play since then.
One is the convertible debenture offering was very successful and the full over-allotment option was exercised. I provided you with the pro forma debt amounts today of about CAD 360 million. I chatted earlier today about exploring opportunities to track value from our real estate portfolio, including our office. I know you've done the math, and you can kind of back in if we're at CAD 360 million today in terms of debt is where might we be at the end of the year. Somewhere probably between CAD 300 million-CAD 360 million, which when you back in the covenant amount is you're talking about an EBITDA level of somewhere between CAD 20 million-CAD 24 million, which would be roughly 32%-39% of last year's EBITDA level.
A significant decline we're looking for, I think, as we do see the ramp-up is really be dependent on the benefits and the strength of the films that we see. Another good piece of news that we have since we last spoke was the extension of the CEWS benefit program, in essence, till the end of last year. There's a number of balls up in the air right now, Derek. We're still feeling comfortable with, but as Ellis said, today marks a monumental day where we're seeing the first kind of major release coming out.
That's great color, guys. You did say that you've kept close to your customer base during this period. Just wondering if you've got an on-the-ground sense of pent-up demand and maybe as a follow-up to that, confidence in the safety measures that you've worked hard to put in place?
Yes, Derek, we have seen a great response based on the library titles that we have out there as we've opened across the country. We are trying to put as much content on the screen. We've got the Raptors games. We've also got the NHL and the playoffs. It's about bringing our guests back to have an experience where they feel safe and can enjoy it. That's something that we worked really hard when we started with launching reserve seating with proper physical distancing. Yes, we have had reduced capacity in the auditoriums, but we want to make sure that people come, our guests enjoy the experience, and they come back as a result of what they've experienced at our theaters. We've limited the food offerings to start because we just want to be cautious as we move forward.
It's been very positive on the safety side. We've done a lot of surveys, and we are seeing our families starting to come back to our theaters.
Okay. I'll let you. Thanks for answering my questions.
Thank you.
Thank you. We'll take our next question from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.
Good morning. Thanks for taking my question. Just a couple from me. Gord, just to go back to the covenant, obviously the reinstatement in Q4. Can you just sort of clarify the exact EBITDA calculation there? Is it Q4 into four? Is that going to be I guess the denominator for that calculation, obviously with some adjustments? Secondly, for Ellis, I was wondering whether you could maybe comment on the AMC Universal deal. Is that something that you would even generally consider as a model at least maybe selectively with some of the studios? Thanks.
Thanks, Aravinda. It's Gord. Yeah, good point. Just to clarify the calculation of the covenants going forward. Typically, the covenants are calculated on an LTM basis. Given the fact that with the COVID-19 pandemic, Q2 and Q3 will, in essence, be forever omitted from the calculation. As we move to Q4, it will, in essence, be kind of a normalized or adjusted Q4 multiplied by 4. As we get into Q1, it'll be Q4 plus Q1, normalized, multiplied by 2. As we get into Q2 of next year, it'll be Q4 plus Q1 plus Q2, divided by 3, multiplied by 4. When we hit Q3 of next year, we'll revert back to the proper LTM calculation.
Aravinda, on your question regarding the AMC Universal, it's hard for us to comment on what our peers are doing in other parts of the world, specifically, in this case, North America. As an exhibitor, we have always been in communications with 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 Store, which allows us to have our guests watch movies at home, and the whole relationship with bricks and clicks. We will continue to have discussions, but I'm not making comments as to where we think things will end up, because each studio has a different thought process, and we are talking to all of them.
Great. Thank you. I'll pass along.
Thank you.
Thank you. We'll now take our next question from Adam Shine with National Bank Financial. Please go ahead.
Thanks a lot. Good morning. Maybe, Gord, just a couple of questions regarding costs. On the U.S. exhibitor calls in recent weeks, there's been some commentary by each of them talking about what costs are likely to be just to deal with some of the health and sanitation issues that you guys have talked about also today. Maybe you can quantify those if possible. Also, with respect to the termination of Topgolf, it sounds like that was mutually agreed to, as Ellis alluded to from the outset. Any particular costs to be incurred, perhaps into Q3, just to officially terminate that relationship? Then maybe one more after that, if you don't mind.
I'll handle those two questions. First of all, with respect to the health and safety measures that we'll put in place in all our venues going forward, I think first and foremost, Ellis made some great comments. I think we have world-class health and safety initiatives that we're putting in place. The actual costs related to PP&E is actually quite immaterial. It's less than CAD 1 million. I would say that where the additional costs are that you're seeing are going to be related to the labor costs of the additional staff doing the cleaning initiatives. As I've mentioned, we're going to benefit from the extended CEWS program.
As we look into Canada's near-term period right now that we're in, is the amount of the benefit that we would expect would be applicable to us is actually going to increase over, it has been for the last couple of quarters to approximately 85%. We'll be able to offset, in essence, 85% of the labor costs. The cost of supplies, cleaning supplies, and other protocol is less than CAD 1 million. We will not have significant material additional expenses related to PP&E initiatives. With respect to Topgolf, I would say that again, there will be no additional amounts related to the termination of that agreement, no material termination amounts.
Great.
Insignificant.
Right. Just in terms of asset sales, I guess the specificity of your remarks are sort of more focused on real estate than to arguably the headquarter buildings in Toronto. Are any other asset sales or considerations on the table? I say that within the context of obviously specific units, or there doesn't seem to be that level of urgency to do that, particularly on the back of a convertible offer.
Right. Adam, I think in my commentary, I spoke specifically about the office building, and I think in the environment that everyone is in today, I think companies are determining that potentially not as much office space is required as they look forward. The best use for the building that we're in today would be residential from a value creation perspective. That would be one opportunity we would look at. With respect to the other businesses, which you're getting to, is I did mention that we would look at value creation opportunities. If we thought there was an opportunity where a business was valued more than we were, in essence, getting value for, we would potentially consider it. Yeah, I think we've taken a number of measures to date such that we have covered our liquidity concerns.
The last, maybe just one for you, Ellis. I don't know how to possibly ask the question specifically as to a relative level which is going to be precarious in this environment, but just any early read or commentary around what pre-sales might be looking like going into this weekend, let alone the advance of Tenet a couple of weeks from now?
Look, a good example is last week we opened a movie called Peninsula, which is a Korean movie. It's called Train to Busan, and we opened it a couple of weeks ahead of the U.S., and I got to be honest with you, we were surprised by the uptake of individuals and guests coming to a movie in our theaters across Canada, and that's a Korean movie, and still did extremely well. We are quite excited about the movies opening tonight, and we think the movie in Quebec should do really well. It stars Patrick Huard, and it's been highly anticipated for a long period of time, and we will just have to wait and see. The tickets for Tenet don't go on sale till next week, so we don't know yet what the impact of that is going to be.
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. We'll hear next from Drew McReynolds with RBC.
Thanks. Thanks very much. Good morning, Ellis and Gord, thank you for all the detail provided. Extremely helpful. Couple follow-ups from me. On the [inaudible] and digital media side of the business, we clearly saw what the performance was on Q2 on the revenue side. I'm wondering how that kind of ebbs and flows from here. If you can provide some perspective on that. On the location-based entertainment deployment for the Playdium and Rec Rooms, can you remind us what is in progress and requiring to be finished within that CAD 50 million CapEx budget now that Topgolf is out of the equation? Are you continuing to expand the footprint? Lastly, with respect to the LBE locations that are open, can you comment on what you're seeing in terms of capacity or revenue levels?
Perhaps it's too soon to really glean anything, but that's it for me. Thank you.
Okay, Drew. I'll take the first question, which was related to the amusement and the digital media businesses. Again, and just to give a bit more color to what was in the MD&A, the amusement business of Player One Amusement Group runs two kind of major revenue streams, one being equipment sales, and then the second being what they call the routes business, which is really when it's our own equipment and it's in third-party venues and we're taking a rev share out of the revenue derived from those venues. The majority of those venues are going to be entertainment-type destinations or hotels, or our primary customers, and retail destinations. The route business, and that business is in both in Canada and the U.S. The route business was, in essence, shut down through mandated closures of retail, entertainment, and hotel-type destinations.
The revenues declined significantly in the second quarter. We did have some small revenues from equipment sales, but that was really the only material form of revenue that the amusement business derived. As entertainment, hotels, destinations reopen, as you know, we will look to see that business ramp up to its more traditional trend levels. From the digital media business perspective, again, there are three elements to the revenue streams there, primarily. One is related to the service model with our third-party customers, and I usually refer to that more as the annuity model. There is an advertising revenue stream derived from our mall network, and then there is an equipment sale revenue stream. Again, just as a refresher, our verticals that we are in are QSRs, retailers, and financial institutions, and then the advertising revenue stream is primarily derived through our mall network.
Again, with closures of the majority of those locations throughout globally, the advertising revenue stream from that business was materially curtailed. The equipment sales business or component of the business was significantly curtailed as locations were shut down. Really the only remaining revenue stream was sort of the technology licensing fee. We weren't creating a lot of new content because there wasn't a creative content fee being derived. Again, in that business, those various elements of the revenue stream were reduced materially, and we would expect those to kind of rebound as our customers in those key verticals are reopened. Hopefully, that provides a bit of color on the kind of revenue mix that we experienced in the second quarter.
Looking at the location-based entertainment, which you asked about, as I mentioned in my script, we have all of them open now. Again, we are running at about 20%- 25% of prior numbers because of limited capacity and the limited offerings that we have in the box, and they continue to improve as our guests are more comfortable coming in. Looking at going forward, in 2020, we will probably open one Playdium and one Rec Room by the end of the year. Then in 2021, probably in the first quarter, we will open another Rec Room. I think we announced that previously, so it would be the one in Brentwood in B.C., and then Barrie, Ontario for Q1 2021. The Playdium will be in Dartmouth, which is in Nova Scotia. We have really been very focused on curtailing our capital spending, as Gord had mentioned.
Our focus is to continue to be very selective and to get the best return for our shareholders and the company.
Drew, just on a comment on that, too. I think this doesn't diminish our belief and the opportunity for Rec Room and Playdium, but I think what it does do is it may be prudent to pause with the evolving retail landscape out there. I believe there will be a number of short-run impacts in terms of what shopping destinations look like going forward, and there could be opportunities for better deals for us going forward. It's probably prudent to actually pause a little bit in the short term.
Yes, understood. Thank you both for that.
Thank you very much.
Thank you. We'll hear next from Tim Casey with BMO.
Thanks. Good morning. Clarification first, then a couple of questions. Gord, on the CAD 20 million in lease rights sales, can you just clarify that? How should we think about that? Is that a run rate or a lump sum? Is it cash? How should we approach that?
Yeah. Look, I think what you're going to see, and this will be very interesting, and you likely will see that into Q3.
Okay.
I think the amount will be higher than that as we're looking and exploring other opportunities. Again, I'll just provide a little bit more color onto that. When we're looking at rights that we have under a lease, and I characterized some of those potential rights in my script. A build right, a density right, those types of things. When we have something that's desired by a landlord, in essence, we are selling a right as opposed to reducing a rent amount at that point in time. I gave you an estimate of something that we believe will be in excess of CAD 20 million.
I suggest what you'll see is in the third quarter financial statements, as we finalize some of these agreements, is you will see kind of like a density rights sale for the magnitude, something in excess of CAD 20 million, as I described. The next question is: what is the form of payment for that sale transaction? I think this is where your question is coming from. As I described, we were exploring all our lease rights, all abatement type options. What I would suggest is the form of payment for those lease rights. Instead of the money coming to us, is we will just not pay cash rent for a number of months until we've caught up to that value. In essence, it's like a payment over time through us not paying rent. Does that make sense?
Yep. Thank you. You'll provide a final number and some clarity on how long that relief will take in terms of how long you'll forego cash rent costs associated with those rights?
Yeah. Look, I can give you some type of indication right now as I would expect that based on-- and again, it's property by property, landlord by landlord. Depending on the value of those rights, it could be, and again, across a number of properties, it could be anywhere in the sort of 6-12 month range.
Got you. Okay.
Again, as it's only going to be for those specific landlords.
Yeah. Got you. Okay. Ellis, question for you. You mentioned in your opening remarks that you were still pursuing the same strategy. I just wanted to push back a little on that, given you've cut CapEx by CAD 100 million and suspended the dividend indefinitely, and obviously topped off as part of this. Are you not going to have to change strategies from your growth and diversification strategy pre-COVID? Given the pressures on the business right now and the outlook going forward, can you just talk about that a bit, please?
Yes, you are correct, as I said that, we are definitely slowing down our capital commitment, and we are making sure that we make the company as strong as possible as we move forward and reinvest our capital once we are in a much stronger position going forward. We believe in our model as we move forward through the next number of months. Again, the variance is how quickly do movies come back and our guests as we go forward with the plan. We are quite overall excited. This weekend's going to be an interesting position that we'll see with first-run product coming back to our theaters. Yes, you are right. Is it going to be exactly like we were looking at before?
No. There will be reviews and we will be looking at our capital spend and our overall cost containment and strengthening our balance sheet as we move forward because we want to make sure that we bulletproof the company.
Thank you for that. Last question. Can you comment on your confidence in your ability to maintain operating margins in 2021? Obviously 2020 is a lost year, but assuming we're in some sort of normal operating environment next year, revenues are probably still going to be down. How confident are you that you can maintain operating margins when you don't have the CEWS program and you're on a more normal footing with landlords and things like that?
Yeah. That question is more relative to, I guess, 2019 versus 2020, obviously. Yeah. Look, a lot of it depends on as we look at the ramp-up in some of the other businesses. We are expanding relative to 2019. More Rec Rooms out there, we'll have additional content in The Rec Room. We continue to have success in the digital signage business. As also we continue to deploy technology and look at opportunities to provide additional offerings from the exhibitor side to our customers. That's either through content offerings, different types of pricing options or programs that will provide for increased frequency or other viewing options. As those ramp up and how quickly those ramp up is should we get back up to the 2019 level is that's where we would hope to get to.
Thank you.
Thank you.
Thank you. Once again, just a reminder that it's star one if you'd like to ask a question. We'll take our next question from Jeff Fan with Scotiabank.
Hi, good morning. It's actually Matt Hoffman on the line this morning on Jeff's behalf. A couple questions from me. You previously talked about expecting a -40% box office attendance in the back half of the year. Can you comment on this in relation to how the film slate has evolved? On the film slate, when you talked about Tenet and the model of moving it ahead of the U.S. release, do you see this as something other studios will be open to if the U.S. situation continues to be an issue? On the wage subsidy, in the press release, you talked about the 85% benefit and earlier in the call. Can you clarify the timeframe that you're expecting to be at the maximum benefit for the wage subsidy? Are you thinking this for the entire Q3 and Q4?
Lastly, just a quick one on working capital. You had gained cash generation here. Can you comment about how that might come back as you reopen?
Thanks, Matt. It's Gord. I will take the box office forecast question, the CEWS question, and the working capital question. I'll also chat about Tenet. Yeah, when we released the Q1 results and looked at the film release schedule, we made a comment, and sorry, during the prospectus offering too, we talked about a -40% box office number as being the breakeven level for our operations. At the time, we suggested that we thought that Q3 and Q4, the back half of the year, we would operate at an approximate breakeven level, which is the -40%. As I said a little bit earlier, today is given some of the shifts now is Q3 we believe will now not be as strong as it was as we believed three or four weeks ago.
Therefore I would suggest that we're going to be into a loss position in the back half of EBITDA, loss position as opposed to breakeven, so that we would be in a greater than a -40% situation from a box office perspective, primarily due to the impacts in Q3. I'll take all your three questions and then turn it over to Ellis for Tenet then. On the Qs side of things, you are correct that there's both a multiplier or there's an index that is applied to the 75% Qs rate. That index is based on sort of year-over-year performance, and how your business has been impacted by COVID-19.
I would expect, and again, as I mentioned, as we go through the ramp-up through Q3, is that for the majority of Q3 is we will be at kind of the max level, so that 85% level. Then as we get into Q4, we will be below that level. I'm not going to provide a number because you will reverse engineer it to figure out what the box office forecast is. We're still a little bit uncertain on that. Anyway, at the 85% for most of the third quarter, and less than that for the fourth quarter. Then the last question was on working capital. We put a number of working capital initiatives in place during the second quarter that was able to provide a significant source of working capital during the second quarter.
What I would expect from your perspective, and look at historically, we have a huge source of working capital in the fourth quarter as we're selling corporate tickets, as we're selling corporate coupons, and as we're selling advertising campaigns in that Christmas ramp-up period. We would typically have a huge source in Q4. Given that we put in a number of initiatives in Q2, you may see some of those reverse in Q3. What I would suggest, and I think what I said, and what I've said historically, is that if there's any negative impact in Q3 related to working capital, it will be offset by positive impacts, the historical positive impacts in Q4 to be relatively neutral for the back half. Ellis, I'll let you on.
Thank you, Gord. Actually a great example is tonight where we are releasing a number of movies with SpongeBob, which is a movie that's being released theatrically in Canada, but it's actually going to be in CBS streaming service in 2021. We work with our partners at Paramount, and we are both very excited as this feature is being released theatrically. The movie Unhinged, which is also opening tonight, is opening a week ahead of the U.S. opening. As you mentioned, Tenet is also going to be opening in Canada on August 27th, which is in line with the international release. About the future, it's largely going to depend on how the U.S. states open as a result of their COVID-19 challenges and whether that would make a difference as to releasing it first internationally and in Canada at the same time.
If we continue to perform and we are able to deliver, I would think that the studios would work very closely with us as we move forward. Thank you.
Thank you. We'll take our final question from Derek Lessard with TD Securities.
Yeah, just one follow-up for me. On the rent expense, you still recorded a CAD 40 million expense in the quarter. That was up a little bit. Just wondering how do I reconcile that with some of the abatements you'd reached with the landlords, I think was close to CAD 12 million.
Yeah. Interesting question, Derek. Unfortunately, IFRS 16 is very focused on the balance sheet as opposed to the income statements. We've used the EBITDAaL concept, so after-leases to provide some form of what we believe is the correct amount to look at after reflecting kind of the lease cost. What would typically appear in occupancy expense on the P&L is anything that is non-rent related. Your CAM, your taxes. If you had a percentage rent clause, it would be the percentage rent amount as well as insurance. That stays on the P&L. The fixed rent amount would typically go to the balance sheet.
What we have shown, and it's sort of an in and an out, and Derek, if you're looking at the occupancy section of the MD&A, I believe we provide footnote five, which says and refers back to our EBITDAaL calculation in the non-GAAP measures, that amount is before reflecting savings amount because what we're showing there is in essence an in and an out on those rent payments. With about CAD 40 million in theater lease payments, we've footnoted as I believe footnote five, that it excludes the impact of about CAD 12 million of savings, which is what we show in the EBITDAaL calculation. I know it's very confusing, and I think rent abatements and adjustments will be challenging across all reporters out there. Does that help?
No, that's a perfect color, Gord. In terms of the abatements, should we expect that going forward or was that a one-time offset?
No, what I'm suggesting on that is as we look forward, what we have done is we have provided an amount based on agreements really as that sort of reporting date. We are still in progress of finalizing agreements with a number of other landlords with respect to Q2 and Q3. 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.
Okay. Thanks for that color, Gord. That's it for me.
Thank you. I just want to thank everybody for joining our call this morning, and we look forward to connecting with you again soon at our AGM this fall. Details will be circulated shortly. Thank you very much and have a great weekend, and make a visit to a Cineplex theater.
Thank you.
Thank you.
Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.