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Edited Transcript of GC.TO earnings conference call or presentation 5-May-20 3:00pm GMT

Q1 2020 Great Canadian Gaming Corp Earnings Call

Richmond May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Great Canadian Gaming Corp earnings conference call or presentation Tuesday, May 5, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matthew A. Newsome

Great Canadian Gaming Corporation - VP of Finance

* Rodney N. Baker

Great Canadian Gaming Corporation - President, CEO & Director

* Terrance M. Doyle

Great Canadian Gaming Corporation - President of Strategic Growth & Chief Compliance Officer

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Conference Call Participants

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* Chris Colvin

Breach Inlet Capital Management, LLC - Founder & Portfolio Manager

* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* George Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Sabahat Khan

RBC Capital Markets, Research Division - Analyst

* Sanjay Sen

BloombergSen Inc. - President, CIO & Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Great Canadian Gaming Corporation First Quarter 2020 Results Conference Call. (Operator Instructions) Also note that the call is recorded on Tuesday, May 5, 2020.

I would like to turn the conference over to Mr. Terrance Doyle. Please go ahead, sir.

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Terrance M. Doyle, Great Canadian Gaming Corporation - President of Strategic Growth & Chief Compliance Officer [2]

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Thanks, Sophie, and good morning, everyone, and welcome to Great Canadian Gaming Corporation's conference call to review the company's financial results for the first quarter ended March 31, 2020. Joining me on the call this morning is Rod Baker, the company's Chief Executive Officer; Matt Anfinson, the company's Chief Operating Officer; and John Russo, the company's General Counsel and Chief Privacy Officer.

I would like to remind listeners that the latter portion of this call is reserved for institutional investors and analysts. Any media-related inquiries can be directed towards Chuck Keeling, Executive Vice President, Stakeholder Relations and Responsible Gaming. He can be reached at 604-247-4197.

Before we begin, I must caution all listeners that this conference call may contain forward-looking statements that reflect management's expectations regarding the company's future. These statements, which will be identified by words such as anticipate, believe, except (sic) [expect] or similar expressions are based on information currently available to the company. Investors should not place undue reliance upon these statements, which involve significant risk, uncertainties and assumptions. These statements are made as of the date of this call, and the company assumes no obligation to update or revise them to reflect new events or circumstances.

Unless otherwise indicated, all financial information in this call is presented in Canadian dollars and is in accordance with international financial reporting standards or IFRS. Except for adjusted EBITDA, which is a non-IFRS term defined in the company's MD&A.

Unless otherwise noted, all financial information for the comparative period excludes the results of the U.S. region as they have been presented as discontinued operations after Great American Gaming Corporation was sold on June 27, 2019.

I will now pass the call to Rod, who will begin with some opening remarks. Matt will then review Great Canadian's financial results and overall operations, and Rod will follow with some commentary on the company's liquidity and outlook.

Rod?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [3]

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Thank you, Terrance. Good morning, everyone, and thank you for joining us today. I would like to start off the call by expressing my gratitude to the health care workers on the frontlines, grocery, transport and all other essential personnel helping to keep communities running during this COVID-19 coronavirus pandemic. The dedication and efforts are beyond measure.

In these uncertain times, our thoughts are foremost on the health and well-being of our team members, guests and our communities. As part of the company's efforts to contribute to the containment of the pandemic, we temporarily suspended the operations of all of our gaming facilities effective March 16, 2020.

In addition to the temporary suspension of our operations, the government of Ontario mandated the closure of all noncritical construction projects effective April 4, 2020, which temporarily halted the remainder of the company's Ontario capital projects under development.

During this call, we will go over our first quarter 2020 results and provide an overview of the operating and financial measures taken by the company in response to the temporary suspension of operations.

I'm now going to pass the call to Matt to comment on the financial highlights for the quarter -- the first quarter of 2020.

Matt?

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Matthew A. Newsome, Great Canadian Gaming Corporation - VP of Finance [4]

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Thank you, Rod. The first quarter of 2020 started well. Results were strong until the days leading up to the temporary suspension of operations in response to the pandemic. Great Canadian's revenues for the first quarter of 2020 were $273.8 million, a decrease of 10% or $29 million when compared to revenues of $302.8 million in the first quarter of 2019. The decrease was primarily due to the closure of all gaming facilities and ancillary amenities across the country on March 16, partially offset by improved revenues during the quarter in the period prior to the gaming facility closures.

Adjusted EBITDA was $103 million in the first quarter of 2020, which decreased by 6% or $6.3 million when compared to the same period in 2019, due to the above-mentioned facility closures, which had a negative impact on revenues. The company took measures to significantly reduce its operating expenses in response to the decline in revenues from the gaming facility closures.

Shareholders' net earnings from continuing operations of $19.2 million in the first quarter of 2020 decreased by $11.8 million when compared to the same period in 2019, primarily due to the decrease in adjusted EBITDA, increased business acquisition, restructuring and other expenses primarily related to preopening costs of the Pickering Casino Resorts in the GTA and the gain on sale of land that incurred in the first quarter of 2019.

Other notable events during the first quarter of 2020 include the issuance of the company's senior unsecured debentures for an aggregate value of $180 million on March 2, 2020, and a subsequent closing of an additional $9 million through the over-allotment that closed on April 30, 2020. This has provided the company a diversified financing structure by rebalancing interest rate exposure and varying loan maturity profile.

We note that there was a government-mandated closure of all noncritical construction projects effective April 4, 2020. The revised timelines for the continuation of the developments will be reassessed once the terms and reopening timing of the government-mandated closures are better understood and workplace conditions can proceed in a safe and appropriate manner.

I will now pass the call back to Rod for an update on outlook.

Rod?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [5]

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Thank you, Matt. In response to the closures, the company has made significant operational contractual adjustments that were deemed necessary in response to the pandemic. We reduced and deferred our human resources and property marketing and administration expenses in an effort to minimize its cash outflows during the suspension period. We drew $375 million of cash in our various revolving credit lines before the closure of our sites, combined with the receipt of $189 million of cash proceeds from issuance of our unsecured debentures, increasing our cash liquidity position as well as our debt levels on a dollar-per-dollar basis.

As at March 31, 2020, the company had a cash balance of $881.9 million and $858.9 million of available undrawn credit on its credit facilities subject to applicable covenants. Furthermore, subsequent to quarter end, the company executed amendments to each of its credit agreements to temporarily waive certain financial and other covenants in order to provide us with additional flexibility through these challenging times. Management continues to actively monitor the company's liquidity position with the expectation that we will remain closed for the foreseeable future.

Given the dynamic nature of the pandemic, the duration and magnitude of the temporary suspension remains unknown, including the impact of any additional health and safety measures introduced on reopening. Accordingly, the long-term impact on the company's consolidated results of operations, cash flows and financial position cannot be reasonably estimated at this time.

The health and safety of our guests and team members is Great Canadian's primary concern during this period and will be a foundational element in our decision-making as we move forward. I would also like to acknowledge the hardship being faced by a significant portion of our workforce who are on temporary suspension. We look forward to the day that we can welcome them back. The remaining Great Canadian team members are working tirelessly to make sure that the company is in the best possible position as we work forward through this period.

We are anticipating that the startup and post-launch ramp-up period of our gaming facilities and capital projects under development will be a demanding time for Great Canadian and are very fortunate to have so many dedicated and hard-working team members, including invaluable oversight from our Board of Directors, leading us as we navigate this future.

I would like to conclude by reiterating our gratitude for the dedication that our shareholders have shown us during this unprecedented time. We remain committed to working hard in making the best possible decisions to guide the company through this very difficult period.

Terrance, we can now invite questions.

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Terrance M. Doyle, Great Canadian Gaming Corporation - President of Strategic Growth & Chief Compliance Officer [6]

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Thank you. Thanks, Rod. Before we begin today's question-and-answer session, I would like to remind everyone that questions will be reserved for institutional investors and analysts. I would also like to reiterate the company's Investor Relations philosophy, which encourages investors and analysts to utilize this public conference call as their principal medium for speaking with Great Canadian senior management.

Sophie, we can now go to the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from George Doumet at Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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I understand this is probably a tough question to answer. But how do you see, I guess, gaming behavior changes within that of our patrons once the casinos finally do open, anecdotally, I think, about touching chips and certain things like that? And maybe talk a little bit about how you see that?

And are you ultimately worried that we could lose some folks to maybe the online offering? Just thoughts around that, please.

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [3]

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Sure. I mean I'm obviously on the inside more than you, but that's a question that I think is a very challenging one for anyone to answer at this point in time. And I think there's -- the most thoughtful lens on it at this point in time would be a graduated lens over time.

I think we're dealing with a scenario that's a compounding of, obviously, a very, very significant health issue that has some concrete aspects to it. And will also have some emotional aspects to it, I think, for the foreseeable future, certainly until we have a vaccine in place. I think that will cause all businesses significant challenges, including ours.

I think there's other pieces as well to it where people have changed behavior by not enjoying our experience for some amount of time as well as the economic challenges that many are going to have with their levels of discretionary dollars. So I think there's a number of factors. The health aspect of it being, I think, the predominant one for our particular industry.

I think there's no question that there will be an impact and certainly, that impact will be more hard felt in the early days, and I think less so through the evolution of time. But for me to go and tell you right now, what I think that profile looks like would be, frankly, reckless in my mind and inappropriate for you to rely on. I do think that there are some items that work to our favor and our strengths a little bit as we are faced with a very, very challenged environment today, obviously, but also I think what's going to be a very difficult environment when it's safe and appropriate to open.

And a couple of the themes, for those of you that have followed us a long time you hear over and over again because it's really what the fabric of our industry is all about is that we talk about how we are highly regulated, and we talk about compliance. And I think those features, although, to a large extent, we try to hide them from our guests as they go to enjoy an entertainment experience, those are the foundational elements of our industry. And I think those are the foundational elements that will serve us well as we navigate the reopening of our facilities and the reopening of our construction sites.

And highly regulated are basically code language for we've got a lot of rules. We've got an awful lot of rules. We've got procedures and compliance we understand fully and 100% through every one of our team members. And frankly, virtually through every one of our guests that we need to follow the rules, otherwise, they will not be allowed to participate in our environment.

And so as we talk about those rules in terms of the integrity of gaming, I think that same philosophy and approach and those that rule-based environment, and frankly, boundaries, will serve us very well as we reopen and invite guests back into our facilities. And you read certain things, not to digress, where governors are saying businesses reopened and guests don't want to wear a mask and therefore are, saying, well, we can't enforce that so we don't have to do that.

We have a really special ability in our industry to run the safest environment, I believe, of any restaurant, bar, sporting events, even grocery store experience, pharmacy. We have eyes in the sky, boots on the ground through surveillance and security and procedures and protocols as well as every one of our team member to go and manage the environment in as safest manner as possible. And our guests know that.

And the reality is when people understand what the game plan and rules are, 99% of them abide by it. So I think we'll be able to create a very safe and comforting environment compared to many, many other businesses, let alone entertainment experiences out in the marketplace. And for those very few that, for whatever reason, will not abide by the protocols that will be instituted when we reopen, they will be dealt with the very small 0.1% that don't follow our current rules, and it's called barring people.

So I think there's going to be lots of challenges. I think we're definitely going to have a ramp-up. I think we will have customers that will not return absolutely. But I also think through all of this and a massive amount of work that we're doing in collaboration and cooperatively with our crown partners, we will be setting up an environment that will be safe and appropriate at the -- for -- at the right time to reopen. And I believe our guests will understand and see that and be comforted by it, and continue to enjoy the amenities that we offer.

But this is not going to be an easy straight line, and I have no expectation that the ramp-up is going to be immediate and back to the levels that we saw just a couple of months ago.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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That's really helpful.

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [5]

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I took a little more just to check off everything, the questions at one, I hope that was okay.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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That was really helpful. Can you maybe talk a little bit about some of the initiatives the BCL -- BCLC, sorry, is doing to support us maybe operationally or financially during these difficult times?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [7]

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Look, I don't think it's appropriate for me to get into any details of how we are working collaboratively and cooperatively with any of our stakeholders, whether it's our crown, our regulators, our banks, our suppliers, our construction trades. I really think that, that would be disingenuous.

I would tell you, as we have disclosed, and I am very, very appreciative and grateful. There has been a coming together of all stakeholders that we touch with the realization clearly that this is a very, very difficult period of time. And all of us, including ourselves, are not only thinking of ourselves. We're thinking of the greater good, realizing that we need to think a bit from everyone's perspective in order to get through these scenarios.

And so we have contractual relationships, and there would be no surprise that virtually all of our operating agreements did not contemplate extended suspension of operations of our facilities. And that would have put us off site with all of our agreements other than I think it was Nova Scotia, who had -- there's a force majeure specifically relating to this.

So it starts with something as simple as understanding that and working through that, all the way through to some of the other requirements and some of the other items that are not necessarily critically important now but are -- they're cost centers for accomplishing activities. So there's a lot of good work and thinking going on in a collaborative, but appropriate fashion with all stakeholders to help the industry work through this period.

And look, I've said this many times and in some respects, if you a shareholder, it might unnerve you. The reality is the bricks-and-mortar happen to be held within our corporate entity. But I think there's a very strong realization, particularly with our crown partners and our provinces and our local communities that we all own this business together. This is all of ours. And it's important, particularly in these extremely challenging times, that we all come to the table and understand that and do what we all can in order to get to a much better future as efficiently and as effectively as we can.

So there's lots of good stuff that's going on. I could tell you, George, there's a massive, massive amount of work. People are very focused, both within Great Canadian and also at not only crowns, but the regulators and our banking partners and suppliers and construction trades to do what we all can to put us in the best position as we not only go through this, but come out the other side.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay. And maybe on the last one, maybe I'm tiptoeing a little bit on this question. But I guess what you're saying, I guess, is reading between the lines that both BCLC and OLG and whatever structure they had in place, be it straight or thresholds or anything. They do understand that this is probably a multiyear phenomenon, and they're willing to be cooperative above and beyond just the period of when the casino opens and kind of look out a few years out in terms of being available?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [9]

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No, I didn't say that. And I specifically won't say that. I'm never going to speak for anybody, even if they said anything in particular about a particular item other than that, that we disclosed in writing. It would be wholly inappropriate. And this is a process, and it's going to be a multi-week, multi-month, potentially even multiyear process. And you would be absolutely not reading into what I said properly if the conclusion was that statement that you made.

What I said was, right now, we're working very cooperatively through many things. We have a great many things yet to work through. Many more things yet still to work through than we've already gone and partially tackled here. This is early days.

And I don't want to mislead you or be disingenuous to any stakeholder that we may be having conversations with today or down the road as to what our expectations are for or from them or, frankly, from or for us to them at this point in time. So please don't step further than the good thoughts, and I think the collaborative work that is going on right now.

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Operator [10]

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Next question will be from Derek Dley at Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [11]

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I appreciate the color that you can provide us here. Just in terms of your commentary in the way traffic and revenue was tracking up into, call it, the 2 weeks before the closure or shortly before the closure. Can you just put in context of the magnitude of how you were doing? It seems like things were positive and up year-over-year in terms of revenue and traffic, both in Ontario and B.C.?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [12]

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Sure, Derek. So things were up and things were good. I think if you -- when you have an opportunity to read our fine print, there's a comment there about the days before the closure of May 16. So in the days before the closure of May 16, we saw some accelerating degradation more concentrated within certain facilities than others, and then obviously be closed on May 16.

If you go literally a week earlier than that, I would say, from a math perspective, it was almost business as usual. And if you interpolate out basically 2 weeks of full suspension and then some number of days of incremental degradation over some number of days, I think you could see that business was pretty decent before. And when you spend a little more time, I think you'll come to realize that business was more decent in Ontario than our other geographies.

Now let -- I want to -- because I always -- I'm the kind of guy that you got to call a spade a spade. So I've been doing for -- I added up now, and I almost freaked out. I've been involved with Great Canadian for 46 quarterly conference calls. And over those 46 quarters, we tried to politely play the weather card twice because we don't like to blame other things. So -- and the second time in my 46 quarters was Q1 of last year.

So the comp for Q1 of last year, particularly in Ontario, we had some very challenging weather that impacted our business, and it compounds when it falls over weekends in particular. And we disclosed that. So I don't want you being left with too much getting -- obviously, before the world changed here that things were like walking along at 4x. They were doing well, but they were walking along at 2x, not 4x.

So just to be totally fair and transparent and to help you triangulate quarter-over-quarter a little bit, I think you need to temper some of the goodness a little bit from that perspective.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [13]

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No, that's a good reminder. And just in terms of some of your construction or expansion projects. Pickering was one notably that was slated to be, at least on the casino portion, complete by the end of March, I believe. And I'm sure it wasn't quite. But how much of that build is really left, like, were you guys -- were you closed? Were you on your previous timelines moving into COVID and now -- obviously, now the closure of nonessential construction in Ontario?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [14]

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Yes. So we were on our previous time lines as we had disclosed, and the facility was going to be completed when we had said by the end of the quarter. There was no decision that was ultimately made in terms of the mark date and the launch state and what not. So I wouldn't want to sit here and say that it was going to 100% guaranteed be open on the 31st. It might have been a few days in terms of the opening.

But absolutely, it was on track and on budget. Unfortunately, it's been shovels down since the fourth. And things need to obviously start up again in order to consider how that might reopen and in what way and at what point in time.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [15]

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And then in terms of the CapEx that you had sort of earmarked for the year, obviously, we've seen a big slowdown or 0 CapEx for the most part in -- during the front part of Q2 here. Should we sort of think of that as just pushing out some of these projects a little bit further? Do you -- or are you -- is your intention to try and make some of that up over the balance of 2020 and 2021?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [16]

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I think it's premature for us to say what our plans are at this point in time. I think it could be certainly broken down into a number of items. We've obviously had a suspension, but we're working full tilt. So we have a bunch of bills for work that's been done that have to be addressed from a financial perspective. Now we're not actually spending money and moving the projects forward.

We will come to a point in time, as you said, when we will have the opportunity in a safe and appropriate fashion to restart all projects and in particular, our 2 major initiatives being both Pickering and Woodbine facilities. It would be premature for me at this point in time to give you any commentary on when that will happen, whether we would try and accelerate things, whether they would fall back to the same timeline as they were on. I think there's just way too many variables still to be understood, including construction site, timing, health requirement regulations, capital liquidity, the market.

And then I think also the opening side of things in terms of Pickering as a short-term initiative, looking at the operating environment in the early days and what we foresee. So I think there's many, many items yet that have to be worked on, as I mentioned earlier, and I apologize if we can't give you more visibility and clarity on that. But if I did, I would be misleading you because we have, I think, a bunch more that we can do.

And as time passes, more clarity comes to the table that will help us make better decisions. So anything that I say today would be a very unthoughtful decision and piece of feedback for you. So I apologize for that.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [17]

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No, no, that's fine. That's fine. And then last one for me. Just on the service provider fee that you're still going to be receiving from the OLG. Has there been a change in the magnitude or amount of that fee per annum? And can you remind us what that was?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [18]

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No. So those are contractual and they're fixed, subject to CPI. So -- and they have been disclosed in the past. And so I will repeat them now for the -- and they're on a bundle-by-bundle basis and this is an annual number. So the GTA is roughly $74 million, the West GTA is roughly $44 million, and our East Bundle is roughly $27 million.

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Operator [19]

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Next question will be from Sabahat Khan at RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [20]

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All right. Thanks. Some of the color you provided around just kind of the ratcheting back on labor and so forth, can you maybe walk us through the flexibility that you have to sort of unwind that labor and then slowly bring it back? Are you able to bring back a portion in place for certain months? And how are you broadly managing your human resources for the next few quarters after sort of the lockdown ends? Or even during the lockdown, sort of either furloughed or how are you dealing with that?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [21]

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Look, it's a very, very challenging period of time. And it's not a happy period of time, and we have a great many team members who are not working right now, and that's extremely challenging for them. And we feel terrible about that. Equally, we have a much smaller number of team members who are working like crazy in stress cases in a whole bunch of other ways trying with as much passion and determination as they can to get us reopened as soon as possible. So that we can, as I mentioned in my prepared remarks, invite back our remaining team members.

It's a very, very difficult period. We've tried to balance that out in the best way we can, realizing we have everywhere on the continuum from 25 bricks-and-mortar sites dispersed across the country that need to be safe and secure and in care and maintenance mode all the way up through to a guy that talks too much like me, making sure that we're doing everything that we can to put the pieces in place to get our business reopened as soon as possible in a safe and appropriate fashion. And that takes quite a few team members.

If you think through on-site security, surveillance, even when we're suspended, some operational people. Obviously, HR, as much as we have many people who are not actively at work right now. It's an insanely busy period for our team members there. So it's a very, very difficult period of time. And I don't like to talk about people lightly or in terms of math because these are all our team members. And frankly, people are suffering tremendously through this period of time.

I do think there will be a phased approach as we go and grow our business. It's -- we have a variable cost structure. But by and large, we have a very, very heavy fixed cost structure. If our sites are closed, that's one thing. As soon as we open our sites, there's a very, very heavy financial burden on opening a site. A big part of it is a core group of team members that need to be there when a site is operational. You know how complicated our business is, how many assets are to it.

There's obviously an incrementality portion to team members being on-site or not as gross gaming revenues grow materially. And that will be more so the case, obviously, on the table side, as you are aware, tables is more labor intensive. But there is a very, very significant chunk of team members that will be welcomed back as soon as we open our doors, which is both, I think, a very good thing. It's also something that we have to be very cognizant of when we open up that we can do it in a cost-effective fashion and have a business that from a financial perspective remains in a solid position.

So I think you'll see the cost structure will go up very, very materially from what it is right now in suspension mode, and then there'll be incrementality beyond that as we get traction and grow more revenues. And not to scare you, but I just -- in 2019, our total P&L costs were $1,050,000,000. $150 million of that was amortization. So noncash. 2019, call it a full up and running right through the year before a Pickering addition, $900 million of annual cost to run our business.

So it's a very substantive number and a big part of it is going to kick in as we open facilities. So we have some challenges ahead of us for sure. And I think I don't want to overly comfort people. The comfort that I can give you is we are extremely sensitized to all of these matters, and that's why we're doing a serious amount of work to make sure that we set ourselves up for the best path forward with the most success and the most financial stability that we can.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [22]

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Okay. And then just on the commentary you had in your disclosures around the waiver of some covenant-related metric. I guess, how should we think about that? Does that -- is that -- am I reading that correctly in the sense that covenants are waivered over the near-term for some period of time? Or did you get some sort of flexibility on that? Can you maybe help us think a little bit through kind of the capacity you have on that front?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [23]

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Sure. So our banking partners have been supportive and very thoughtful to work with. So we have received waivers against covenants and some other items that were nonfinancial covenants in nature for a certain amount of time within all 4 of our banking arrangements.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [24]

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Okay. And then the project level that -- is it fair to assume that step doesn't apply toward your calculations?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [25]

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So each one is different. And I think if you -- I'm going to take you down a little bit deeper. The GTA we've disclosed does not have financial covenants, but it does have other covenants like continuity of business operations or continuity of the development program, so it had nonfinancial covenants. Our remaining facilities all have financial covenants, including the ones that are, quote -- you call them construction-related, if you were referring to say the West GTA, we have financial covenants in there. But the GTA, we do not have financial covenants in there, but we do have other types of covenants in there. As I said, this continuity-type covenants.

So it's a little bit of a mixed bag, and it's difficult to answer that with one answer.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [26]

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Okay. That's fair. And then just in terms of kind of the cost that you're talking about. Were you able to apply for or qualify for some of these wage subsidy programs from the government? Or would your -- the fixed payments that you're receiving or continue to receive kind of be an offset that you may not qualify? Have you looked into or qualified for any of those programs?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [27]

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So we've looked into all of the programs in detail. Many of the programs are not necessarily qualifying there at the employee level. And we've -- I think we've done as best job we can in educating our team members and supporting them, informing them what is available out there through the myriad of government offers of support opportunities. Some of them are also corporate-driven and corporate-based, and we have spent a lot of time looking at all of them.

They are very complicated. They have been releasing information over time, which has made it be difficult to land in the early days on anything that makes sense or not. You mentioned considerations there, whether you could qualify or not.

There's a number of other considerations, whether businesses or entities within businesses can qualify for some of these programs or not. And I can tell you that in some places, we absolutely do not qualify for some of them but I really don't want to get into the details of which ones we do or which ones we don't and where we're sitting right now. And, frankly, where we might even be going in the time ahead. I don't think that, that's the right kind of detail that should be presented publicly.

I would leave you with, hopefully, the comfort that we are doing our level best to navigate all aspects of this, including those that may present opportunities for ourselves and our team members. And if there's a case where it does make sense, we are absolutely going to or have accessed those.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [28]

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Okay. Just a couple of quick ones for me left. On the kind of the total cost number that you referenced for 2019, I know you mentioned you don't want to get into discussions you're having with your partners and stakeholders, the banks, lenders and so -- the lenders and landlords. But can you make a general statement on whether just directionally speaking, relative to the cost last year, were you able to get some relief in some areas if we think about the costs you might incur over the coming quarters? Or should we assume a similar run rate ex the kind of the HR component?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [29]

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So I think our team has done a really, really fantastic job in, as I mentioned, not only on the HR side, but property marketing and admin. There are great many costs in addition to HR costs that we've been able to not incur or defer as we've gone into suspension period. Obviously, things like marketing costs, which are big line items for us as well that -- those initiatives have been 100% curtailed through the suspension period.

And there's a whole host of other items. There are some -- I wouldn't want to call them stranded costs, but there are some real costs, and they're significant that we need to continue to fund. But they are much, much less material than that total aggregate up and running across the entire system number that I mentioned a short while ago there.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [30]

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Okay. And then on the covenants that we talked about earlier, are you able to share what or just how long those covenants are waived for? Or is that sort of an ongoing discussion?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [31]

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So I think we actually had some clarity in our disclosures but I think we should look at it a certain way here. And I think we should look at this way with all stakeholders, and I think it's more than fair and appropriate.

The kind of conversations that we're having frankly with everybody, but let's talk about the banks for a moment, are months, not years and months, not weeks. And I think it's fair because nobody knows where the environment is going, and how much things will change. And I think the right amount of time that's fair and appropriate for stakeholders on both sides of the equation is to have sufficient runway to do lots of good things to get to a better place and a place that's much better known as well in terms of where we're going forward. Because right now, we have very little visibility on the particulars of timelines and what not.

So really, I think you should think in terms of we have flexibility for quite a number of months, not quite a number of weeks. But not quite a number of years. So I think it puts us in a very good place to do a lot of work and stay focused with supportive stakeholders and to help develop the plan and get clarity on the reopening, timing and strategy and protocols and all of that that goes along with it.

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Sabahat Khan, RBC Capital Markets, Research Division - Analyst [32]

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Great. And then just last one for me. I know you mentioned that, obviously, the reopening process is TBD, and there's a lot of uncertainty. But is there -- have you had discussions on the date with the government? Because some of the other retailers that we talked to who were under closure since March, some of them have started to kind of talk about dates in May and so forth that they're reopening. Are those the type of discussions you're having with the government yet?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [33]

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No, those are not the type of conversations that are being had at this point in time. I think it's too premature for our industry, to be honest. I would also want to just connect it a little bit. Those would be the conversations that we would collaboratively be having with our crown partners and, obviously, relying on health authorities and guidance and direction from our provinces.

But the conversations would be had through the crown corporation with the government as opposed to when you said us talking to the government. So I just -- I didn't want to -- I wanted to be clear in terms of the roles that we foresee going forward in managing it. I didn't want there to be any misunderstanding publicly out there that we were having direct conversations with any of the governments or provinces.

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Operator [34]

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Next question will be from [Simon Chu] at [Rollout Associates].

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Unidentified Analyst, [35]

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I guess, just one question. Do you see any opportunities in terms of other Ontario bundle operators that might not have the liquidity or the balance sheet that you have right now? Is there any potential for some opportunities or M&A when we come out of this?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [36]

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So Simon, I think coming out of this is absolutely the lowest thing on our priority in terms of other opportunities. We are very focused right now on our business at hand and what we need to accomplish. This is -- I'm not that old, but I'm old enough to have been in business for 35 years. This is by far the most challenging period I've ever been through bar none, and we need all of our resources focused on our business and setting ourselves up for the most success we possibly can going forward.

So that is our singular focus right now. Anything beyond that in terms of M&A opportunities in Ontario or anybody -- or anywhere else in the world is not on our radar screen at this point in time.

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Unidentified Analyst, [37]

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Got it. I appreciate the clarity on that. And then just a housekeeping question. Were there any revenue for permitted CapEx in Q1 in Ontario?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [38]

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So I think you bring up a good point. The Ontario bundles have the permitted capital expenditure revenue item. And as we've disclosed over the past 3 years, that is an item that hit our revenues and also our balance sheet in the second quarter -- of our second quarter of every year. So in Q2 is when we will see the full benefit of the permitted capital expenditures or PCE, as we call it, in relation to our 3 Ontario bundles.

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Unidentified Analyst, [39]

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And then how material would that be this year versus sort of the number last year?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [40]

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So it just goes up by a little pitch, and it's roughly $24 million this year in totality between the 3 bundles.

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Unidentified Analyst, [41]

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This year, okay. So we should expect to see that next quarter?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [42]

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Yes. So in Q2, that's going to thankfully help us partially offset what's going to be our operating cash flow burn rate.

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Operator [43]

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Next will be David McFadgen at Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [44]

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Just following up on that last question. You talked about the PCE revenue helping to offset the operating cash burn. Could -- assuming, let's say, the operations remain closed for the entire Q2. Can you tell us what the operating cash cost would be in the quarter just to help us model it?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [45]

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So look, I've thought long and hard about how much visibility to give all of you in Q2, realizing that whatever I say will 100% be wrong and will also change extremely materially as our environment changes and construction and/or reopening initiatives start to gain traction. So it's a very, very misleading analysis, and you guys shouldn't hold me to it, but I'm prepared to walk you through a little bit of that since you've asked and nobody else did. But I want to earn points with you on it, too. So here it goes.

And again, huge caveat that it will be wrong. And this is neither accounting or cash flow, it's the bastardization of both of them. So it's not going to show up anywhere at the end of Q2. But if you did make an assumption that we stayed more or less as we are right now through Q2, the roughest numbers that we have will be a cash outflow of $132 million in total, made up of our development program, obviously, was well underway. And as we talked about with Derek how Pickering was getting very close. So we had very big payables there.

So we have $77 million of that is construction payables that we're dealing with right now and paying. We have -- and this is going to be a lumpy number because of debenture interest that is not every quarter and even some of our other facilities because depending on how long our VAs are for -- there's lumpiness in paying. But if you look at our now new leverage level of roughly $1.5 billion, you have roughly $15 million of cash expense a quarter. So that $15 million. And our reasonably best estimate for our operating loss after factoring in the $24 million of PCE benefit, which obviously is a benefit for this quarter only, is about $40 million for the quarter. So that's $132 million negative cash.

Now we have some financing initiatives as well as cash outflow that are going to look after that number. I would remind you that since March 31, the over-allotment of the debenture issue brought in another $9 million gross. So we have $9 million there that we can put toward the $132 million outflow. We have both construction debt at the GTA partnership level and the West GTA level that should be able to fund another $53 million of that $132 million, which means we have a total, I think, financing ability of $62 million.

The next point is an unwinding of working capital. Obviously, when you're going along and you have a regular business, your working capital stays within a certain level because old payables get paid and new ones replace it, unless the business is growing materially or declining. Obviously, when the business suspends, you have a more wholesome unwinding of noncash working capital. And so we've looked, obviously, very closely at our receivables and our payables and we have another fortunate event this Q2 along the lines of the PC, but from a different perspective.

But I don't want to get into too much detail, but our operating agreements in our 3 Ontario bundles have a holdback over the course of the fiscal year of a certain amount of our revenues that becomes a receivable for us that gets paid once the financials are finally determined in Q2 of every year, and that's a fairly substantial number. That number basically offsetting other payables that we need to pay results in a net working capital improvement of our cash balance of $15 million in Q2.

So of that $132 million of cash that we're going to spend in Q2, $15 million of that is going to be looked after by an unwinding of our working capital, which is great. Which leaves us with roughly a cash depletion in Q2, all else being equal staying as we more or less are now in full suspension of $55 million in Q2. So it's a very significant number.

And obviously, we're also increasing our debt by $62 million. So from a shareholder value perspective, it's $55 million or $1 a share out, and it's more than $1 a share in incremental debt that we're going to suffer as we -- if we were to remain in suspension in current mode through Q2 now. So it's pretty painful. We're very focused on it. We're trying to manage things as intelligently as we can, realizing that it's a very difficult situation.

And we have a great many assets that were stopped, like, dead in their track, and it's a difficult position to be in. But so that's a very detailed picture of Q2 assuming things stay as they stay currently. Obviously, if we start to work on the future a little more heavily, then that's going to obviously have an impact here on these numbers.

David, you owe me big time now.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [46]

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That's very helpful. That $40 million a quarter net of the PC revenue, that's net of those fixed fees, right?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [47]

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Correct? Right?

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [48]

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Okay.

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [49]

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That so that -- yes. That's -- and that's also -- we get a little bit of rent on one of our -- so there's some -- there's some other incidentals in there in terms of revenues. But yes, that's net of everything.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [50]

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Okay. And then if I can just go on to the revenue threshold. So you've disclosed in your MD&A that while you're -- while you've ceased operations, you won't be paying any of the revenue thresholds and that as you start-up operations, again, it's going to gradually increase. And I was wondering if you could -- I don't know, provide any sort of color on how that might gradually increase, like, if they're going to go back to what it was over 2 years, 6 months? Any help there that we can use to model?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [51]

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I can provide you no color. I can also -- I will say one thing that just so that you understand where we are in this process, we have not even had our first conversation with our OLG stakeholder partner in that respect. We are still totally focused on matters that need to be addressed long before we can even get to that. So I cannot give you any color as we have not even started any conversations in that respect at this point in time.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [52]

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Okay. And then I don't know if you saw, but Nevada put out last Friday some guidelines on reopening and they're talking about reducing the gaming capacity at least temporarily by 50%, reducing the number of positions in the tables probably by 50% and other things. I don't know if you've looked at those. I was just wondering what your -- how you think Ontario and B.C. and so on might have some guidelines for when you reopen. Any thoughts on that? Or it's just too early?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [53]

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So we've looked at all guidelines that have been put out. We've -- I've even wasted my time listening to crazy mayors and stuff like that, too.

Look, the health and safety of our team members and our guests and our communities is paramount, and it's our first priority. And I say that not just to be altruistic. I say that being a capitalist mercenary. Our long-term interest and value creation totally rests on making sure we are at our very best in early days here in all respects, including having a safe and appropriate environment. We're going to do whatever it takes in order to accomplish that. If we don't do that, we could be forever damaging, what is, I think, an absolutely tremendous and unique franchise.

So I think there are a great, great, great many strategies and protocols and procedures that our team is working very thoughtfully in collaboration with our crown partners on what all of those look like and how they might come together and at what point in time to drive an appropriate and safe environment when we can reopen. And some of those items that you mentioned would absolutely be up for consideration as potential appropriate strategies and protocols and procedures to have at certain points in time as if -- when we reopen.

But I don't think it's -- I think it's a waste of all of our time for you and I to start talking about capacity, how many people at a table and for how long? Plexiglass or not? How far apart lines should be on the floor or stars, all that kind of stuff. I mean there's a great amount of technology that's being developed out there right now, not only through businesses that are closed, but for those essential businesses that are open. I think there's lots of learnings. I think there's lots of learnings also on what's more safe and less safe.

As I said, I think we have really tremendous DNA in our highly regulated environment and our compliance focus to be able to execute better than virtually every other industry out there in terms of these strategies to keep our team members and our guests safe, and we're very focused on creating that environment. So it could include those things that you mentioned. It could include a whole bunch of other things. But I don't think at this point in time I can give you any particular visibility on anything in particular.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [54]

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Okay. Any idea when the construction would resume? Because I think in Ontario, they're allowing construction to resume and as just any thoughts on that for you?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [55]

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So no, we have no visibility on that yet. I think there was earthworks. So, as I said, new teams moving dirt around. There was an announcement that, that will be coming back online. So I think, look, governments are trying to do things in a safe and appropriate fashion and whether things accelerate or whether things slow down or pause or whether they stay at a certain phase, your assessment would be just as thoughtful as mine.

We're obviously watching closely, and we're very supportive of whatever our provincial governments deemed to be safe and appropriate for our communities. And we're going to follow along in an appropriate fashion from the guidance that we're given by those authorities. But at this point in time, it would be premature for me to make any assessment on what I think our timing is in any of these respects.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [56]

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Okay. If we could -- like just hypothetically, let's say, casinos are allowed to open, say, in a month. It's all hypothetical. How long do you think it would take for Pickering to open up because it sounds like you're pretty close to opening if this virus didn't hit?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [57]

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So I'm not going to comment on when any particular facility would open or not, including and especially Pickering. The only comment that I would make in terms of opening whenever we decide that we have a firm opening that we have a go, we have an inordinate amount of work in order to bring people back to get everything organized to actually open the doors, and we would be looking at 3 weeks to a month from a definitive let's open date until we can actually open.

So that's not going to help you with when things are going to open. That's just going to help you, but there is an interim gestation at a minimum once the date is known that it's going to take a certain amount of time after that known date in order to actually physically open our properties.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [58]

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Okay. And given that construction is sort of on hold for Woodbine, in the past, your target was to have this redeveloped in Q1 2022. Do you think for modeling purposes, we should just assume that it's going to open 1 year later or early January 2023, just -- we should just take that approach? Any thoughts there?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [59]

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I don't have any thoughts for you. Obviously, if we're closed for a very material period of time, it becomes more challenging to hit historical deadlines, if you've lost very material chunks of time. I think that's just a truism. Sometimes things can be done to accelerate projects, but there's only so much that can be done. There's also a cost element to acceleration or extreme acceleration.

So there's many dynamics from which it's so uncertain, I cannot tell you how to model. But if we have a long passage of time here, then I think it's natural that you would think about losing at least some amount of that time in terms of the development profile.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [60]

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Okay. And then just earlier on the call, there was some discussion about how the business was doing. It was doing fairly well up until this virus hit. Can you give us sort of an indication how much the revenue is up on a percentage basis, up until the time in the quarter before the virus hit? I don't know if you can provide that, but it would be helpful.

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [61]

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Honestly, I don't actually have it on my fingertips right now. But I think, as I said, the business was up, principally in Ontario, which was a good thing. But I also wanted to temper it because our comp was quite low last year. So it was a decent percentage in Ontario, not so in our other jurisdictions, right? Some of that percentage increase was not earned, not organic, it was because of our low comp base in our view. So -- but I don't have the numbers here now. And sorry, I can't give it you.

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Operator [62]

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Our next question will be from Chris Colvin at Breach Inlet Capital.

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Chris Colvin, Breach Inlet Capital Management, LLC - Founder & Portfolio Manager [63]

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Rod, thank you for the color. You answered most of my questions, but I just want to clarify on the second quarter, you said there'd be a cash outflow of $132 million. And then I thought you said you would have to net that against $15 million, but you arrived at a net number of $55 million. So what am I missing? There's $132 million gross, how did you get the $55 million net?

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [64]

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So $132 million gross, we're hopeful that we're going to finance $62 million of that with leverage. So we're going to increase leverage by $62 million. We're going to liquefy net working capital to the tune of $15 million. So we're going to actually generate $50 million out of net working capital unwind in Q2 and then the residual is $55 million should be funded and drawn out of our existing cash balances as of March 31.

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Operator [65]

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Next question is from Sanjay Sen at Bloomberg.

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Sanjay Sen, BloombergSen Inc. - President, CIO & Director [66]

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Rod, all of my questions are...

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [67]

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Wow. I've never heard you on a call, Sanjay.

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Sanjay Sen, BloombergSen Inc. - President, CIO & Director [68]

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Well, I know it's -- and maybe it will be another 10 years when you do. But all those guys, they had all the great questions, and you -- I'm stunned too, the amount of detail you have given and the warmth between you and everybody has been stunning to see. So thanks, for everything.

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [69]

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Thank you for your comments. What's your question?

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Sanjay Sen, BloombergSen Inc. - President, CIO & Director [70]

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They were all done. You did a great job like qualitatively talking about the nature of costs that you we're keeping and taking out. And then as you said, just giving people a stab at the quantitative side of what the cost -- the cash burn and what you were going to use from working cap. And so yes, it was -- those were are all my questions, really, was just like what's your cost structure right now. But you did that.

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Rodney N. Baker, Great Canadian Gaming Corporation - President, CEO & Director [71]

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All right. Okay. Well, thank you for calling in.

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Operator [72]

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And at this time Mr. Doyle, we have no other questions. So please proceed.

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Terrance M. Doyle, Great Canadian Gaming Corporation - President of Strategic Growth & Chief Compliance Officer [73]

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Thanks, Sophie, and thanks, everyone, for your participation in this morning's call. Before we conclude, I would like to remind listeners that forward-looking statements were made during this call. For those who joined midway, I encourage you to listen to the replay of this call to hear my earlier comments regarding these forward-looking statements. This replay will be available through the Investor Relations sections of our website at www.gcgaming.com. This now concludes our call. Thank you.

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Operator [74]

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Thank you, Mr. Doyle. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.