Earnings Transcript for RDI - Q3 Fiscal Year 2023

Andrzej Matyczynski: Thank you for joining Reading International’s Earnings Call to discuss our 2023 Third Quarter Results. My name is Andrzej Matyczynski, and I’m Reading’s Executive Vice President of Global Operations. With me as usual are Ellen Cotter, our President and Chief Executive Officer; and Gilbert Avanes, our Executive Vice President, Chief Financial Officer and Treasurer. Before we begin the substance of the call, I’ll run through the usual caveats. In accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, certain matters that will be addressed in this earnings call may constitute forward-looking statements. Such statements are subject to risks, uncertainties and other factors that may cause all our actual performance to be materially different from the performance indicated or implied by such statements. Such risk factors are clearly set out in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements. In addition, we will discuss non-GAAP financial measures on this call. Reconciliations and definitions of non-GAAP financial measures, which are segment operating income, EBITDA and adjusted EBITDA are included in our recently issued 2023, third quarter earnings release on the company’s website. We have adjusted where applicable the EBITDA items we believe to be external to our business and not reflective of our cost of doing business or results of operations. Such costs include legal expenses relating to extraordinary litigation and any other items that we can consider to be non-recurring in accordance with the two-year SEC requirement for determining whether an item is non-recurring, infrequent or unusual in nature. We believe that the adjusted EBITDA is an important supplemental measure of our performance. In today’s call, we also use an industry-accepted financial measure called Theater Level Cash Flow - TLCF, which is theater level revenue less direct theater level expenses. ATP, average ticket price is also used as an accepted industry acronym. We will also use a measure referred to as F&B Spend Per Patron - SPP, which is a key performance indicator for our cinemas. The F&B SPP is calculated by dividing cinema’s revenues generated by food and beverage sales by the number of admissions at that cinema. Cash Flow Pre-Occupancy, CFPO is an internal measure that we used to show the profitability of a particular location on the level playing field. This measure ignores the ownership versus leasing issues associated with the location by excluding depreciation/amortization and/or rent, common area costs and rail property taxes. Please note that our comments are necessarily summary in nature, and anything we say is qualified by the more retail disclosure set forth in our Form 10-Q and other filings with the US Securities and Exchange Commission. So with that behind us, I'll turn it over to Ellen, who will review our 2020 third quarter results and discuss our business strategy going forward, followed by Gilbert, who will provide a more detailed financial review.

Ellen Cotter: Thanks, Andre. Welcome, everyone to our call today, and thank you for listening in. During 2023, we've demonstrated that we're clearly on the path to recovery. During each quarter of this year, we've delivered operational results that were an improvement over 2022 and in some cases, we established new record highs. Our third quarter of 2023 was a continuation of that story. At $66.6 million, our third quarter Global total revenue represented the highest since Q4 of 2019, a 95% of our Q3 2019 global total revenue. At $1 million, our Q3 global operating income represented 115% improvement compared to Q3 2022 and was the second highest since Q4 of 2019. Each of our global operational divisions, cinema, live theater and real estate, contributed to the quarter's success with each division delivering higher cash flow results compared to the third quarter of 2022. Thanks to a stronger movie slate led by the phenomenal success in July at Barbenheimer, coupled with a strong operational performance from our cinema management teams, our global cinema revenue topped $62.7 million, which was 30% better than Q3 2022, represented 94% of Q3 2019 and was the highest third quarter achieved since Q4 of 2019. At $5.1 million, our Q3 2023 real estate revenue represented a 24% increase over the same quarter last year and a record third quarter for our US real estate provision. Our Q3 2023 real estate operating income of $900,000 represented an increase of over 700% compared to the same period in 2022. These third quarter real estate results were driven by the rental stream from Petco, our new tenant at 44 Union Square that opened its flagship retail store in New York in June of 2023, the strong performance of our live theaters in New York City, which delivered the highest third quarter theater-level cash flow since the pandemic, and the continued solid and steady performance of our third-party tenant real estate portfolio in Australia and New Zealand, which now has 77 third-party tenants and a 97% occupancy rate in available space. Delivery of this continued improving operational performance resulting in $6.1 million of adjusted EBITDA, a 59% increase from the third quarter last year, came despite headwinds facing our company from release schedule changes due to the Hollywood strikes, lack of SAG talent promoting any movies through most of the quarter, which we believe impacted the potential gross box office of certain cash-driven movies like Haunted Mansion, A Haunting In Venice, Strays and Demonte. The weakening again of the Australian dollar and New Zealand dollar against the US dollar, which has a major impact on us, for more -- as more than half of our revenues are generated from Australia and New Zealand. Though our operational results are encouraging and demonstrate our business moving in the right upward trajectory, we remain focused on our debt and liquidity conditions and further recognize that the duration of the recently settled Hollywood strikes will negatively impact our box office in 2024. Given our upcoming 2023 and 2024 debt maturities, coupled with the current interest rate environment, which has resulted in the payment of over $5 million in interest in just the third quarter, we've recognized the urgency to improve our liquidity and strengthen our balance sheet. As we have previously reported, we intend to monetize the built-in gain in some of our real estate assets to ensure the company's long-term viability. In October of 2023, we sold our property in Mainland, New South Wales for AUD2.8 million. It had a book value of AUD1.4 million. Two other assets are currently being held-for-sale, and we're evaluating the rest of our portfolio for strategic options to pursue while taking into account suboptimal market conditions for commercial real estate. With that, let's look more closely at our global cinema business, which has provided the foundational cash flow to support our asset growth over the last few decades. As I just mentioned, the strong diversified movie lineup drove our impressive third quarter box office results for our global cinema business. The premiers of Barbie and Oppenheimer, both released on July 21st, led to the fourth biggest box office opening weekend in history. As of today, Barbie has grossed over $1.4 billion globally and is the highest grossing film of 2023. Its opening weekend generated over $337 million in worldwide grosses, making it the highest grossing opening weekend for a non-franchise film ever. Similarly, Oppenheimer has grossed over $949 million at the global box office, becoming the third highest grossing film of the year. This impressive box office performance has allowed it to become the highest grossing World War II movie of all time as well as the highest grossing biographical movie of all time. Not only was Barbenheimer a cultural phenomenon, other films contributed to our third quarter results, including Sound of Freedom, the unlikely summer box office hit that's now one of the most successful independent films of all time and fan favorite franchises return to the big screen such as Mission Impossible, Indiana Johns and Teenage Mutant Ninja Turtles. While the strong box office was the key to our third quarter success, our global cinema management teams worked almost every line on the P&L to improve our overall profitability. In fact, our cash flow preoccupancy per capita for the third quarter 2023 was the highest that that metric has ever been for any third quarter ever in each of our cinema divisions in the US, Australia and New Zealand. This winning combination of box office and management prowess drove our third quarter 2023 global cinema operating income to improve by 306% to $4.4 million compared to an operating loss of $2.1 million during the third quarter of 2022. The box office momentum experienced during the third quarter of 2023 supports our optimism for the cinema industry and our company as a whole as we head into the final weeks of 2023. The fourth quarter has even started out somewhat better than we anticipated given the uncertainty created by the actor strike. On October 13th, the Swifties came out and rolled forth for the opening weekend of Taylor Swift

Gilbert Avanes: Thank you, Ellen. Consolidated revenues for the quarter ended September 30, 2023 increased by $15.4 million to $66.6 million when compared to the Q3, 2022. This increase was primarily driven by increased revenue as a result of strong film slate and rent recognized in Q3 2023 from our Petco tenancy at our 44 Union Square property that did not occur in the same period of the prior year. Consolidated revenue for the nine months ended September 30, 2023, increased by $21.5 million to $177.4 million, when compared to the same period of the prior year, as a result of the improved performance across our worldwide cinema circuit due to a stronger movie slate and the new rental stream from Petco at 44 Union Square, offset somewhat by the decrease in the value of Australia and New Zealand currencies. Net loss attributable to Reading International for the quarter ended September 30, 2023, decreased by $0.8 million to a net loss of $4.4 million, when compared to the same period in the prior year. Basic loss per share decreased by $0.03 to a basic loss per share of $0.20 for the quarter ended September 30, 2023, compared to the quarter ended September 30, 2022. These results are due to improved segment revenue, decreased depreciation and amortization expense, partly offset by increased interest expense and decreased other income. Net loss attributable to Reading International for the nine months ended September 30, 2023, decreased by $4.7 million to a loss of $18.3 million when compared to the same period in 2022. Basic loss per share was $0.82 for the nine months ended September 30, 2023, compared to a basic loss per share of $1.04 for the nine months ended September 30, 2022. That was due to better cinema segment results, due to increased attendance in our US cinema circuit, as more patrons return to the theater and stronger film slate. The rent recognized from our 44 Union Square tenant Petco during the first nine months of the year that did not occur in 2022, decreased G&A expenses and depreciation and amortization expenses, improved impairment expenses that were incurred in 2022 that were not incurred in 2023, partially offset by increased interest expense and a decrease in other income. Our total company depreciation, amortization, impairment and general and administrative expenses for the quarter ended September 30, 2023, decreased slightly by $0.3 million to $10 million compared to the same quarter in the prior year. Depreciation, amortization, impairment and G&A expenses for the nine months ended September 30, 2023, decreased by $5.1 million to $29.6 million compared to the same period in the prior year. These decreases are due to impairment expenses that were incurred in 2022 that did not reoccur in 2023 and decreased depreciation and amortization due to delay in CapEx spending. For the third quarter 2023, income tax expense increased by $0.6 million to income tax expense of $0.9 million compared to the equivalent prior year period. The changes between third quarter of 2023 and the third quarter of 2022 is primarily related to increase in reserve for valuation allowance in 2023. For the nine months ended September 30, 2023, income tax expense decreased by $1.2 million to income tax expense of $0.3 million compared to the equivalent prior year period. The changes between nine months of 2023 and nine months of 2022, is primarily related to the decreases in reserve for unrecognized tax benefits in 2023. For the third quarter of 2023, our adjusted EBITDA increased by 0.2 -- by $2.3 million compared to the same prior year period to $6.1 million. This increase was primarily the result of strengthened cinema operating performance and rent from our Petco tenant. For the nine months ended September 30, 2023, our adjusted EBITDA increased by $5.4 million to $10 million compared to the same prior year period. This increase is due to an improved net income loss as the result of improved cinema operations and an increase in real estate rental income due to the rent from our Petco tenant, which was not incurred in the same time period in the prior year. Shifting to cash flow for the nine months ended September 30, 2023, net cash used in operation activities decreased by $19.7 million to net cash used of $6.4 million when compared to the same prior year period. This was driven by an improved cinema operating performance compared to the prior year period, received of rental income from our tenants at our 44 Union Square property, which did not occur in the same period of prior year and increase in operating liabilities, primarily impacts payable, accounts payable and accrued expenses. Cash used in investing activities for the nine months ended September 30, 2023, was $6.2 million, which stayed relatively flat compared to the same period of the prior year of $6.4 million. Cash used in financing activities for the nine months ended September 30, 2023, decreased by $4.1 million to $3.9 million due to borrowing on our existing facility. Turning now to our financial position. Our total assets on September 30, 2023, were $532.6 million compared to $587.1 million on December 31, 2022. This decrease was driven by an $18 million decrease in cash and cash equivalents for which we funded our ongoing business operations and a $19.7 million decrease in operating lease write-off use asset. As of September 30, 2023, total outstanding borrowings were $208.6 million compared to $215.6 million on December 31, 2022. Cash and cash equivalent as of September 30, 2023, were $11.9 million, which included approximately $5.5 million in the US, $5.6 million in Australia and $0.7 million in New Zealand. Further to address the liquidity pressure on our business, we have closed some of our underperforming cinemas, and we have selected certain real estate assets for potential monetization and have listed them for sale. In Q1 2023, we modified our Bank of America loan, extending the maturity date of the facility to September 4, 2024, and in May 2023, our required monthly repayment of $725,000 commenced. Now September 29, 2023, we paid down $1.2 million of our Cinemas 123 Term Loan and extended the maturity date from October 3, 2023 to October 1, 2024. In August 2023, we modified our revolving corporate market loan facility with NAB with certain covenants and extended this facility maturity date to July 31, 2025, to continue to maintain the debt as non-current. As we continue to focus on preserving our liquidity, no shares were purchased during the quarter ended September 30, 2023, and our stock repurchase program has and will likely continue to take a lower capital allocation priority for the foreseeable future. With that, I will now turn it over to Andre.

A - Andrzej Matyczynski: Thanks, Gilbert. First, I'd like to thank our stockholders for forwarding questions to our Investor Relations e-mail. In addition to addressing many of your questions in the prepared remarks from Ellen and Gilbert, we've selected a few additional questions to offer additional sites from management. The first question for Ellen, we received a number of inquiries about our assets in Wellington, New Zealand, seeking an update as to where we are in the development process.

Ellen Cotter : With respect to our properties in Wellington, we remain committed to finding a path to redeveloping those properties, which includes Courtenay Central that's been temporarily closed since January of 2019. As a reminder, Courtenay Central, which is one of those three parcels we have in the Wellington, CBD was the foundation of our New Zealand business. It was the cash flowing asset that power both our cinema and real estate businesses in that country. In 2019, we closed the majority of the building in Wellington due to seismic issue that we discovered that could potentially put the families of Wellington at risk. We're committed to the people-first approach that we've taken to-date. We also recognize the economic challenges that have occurred over the last several years that have impacted our business, and we continue to take actions that we believe are in the best interest of our company and our stockholders. We continue to be impressed by the recent elevation of Wellington City by its counsel with the spectacular opening of Tākina and the upgrades and creativity behind the St. James Theater. No, no assurances that's can be given that we'll be successful in completing those redevelopment plans. Our management team is very focused on and dedicated to working with various stakeholders to find a workable path to commencing our redevelopment. As we continue to work towards finding that path, we believe that the outcomes will be exciting, not only for Wellingtonians and tourists to this capital city, but also our stockholders.

Andrzej Matyczynski: Thank you, Ellen. Interest expense as far in 2023 has exceeded a EBITDA. Do you think that you are in a position where you can effectuate asset sales large enough to address your debt and once again have EBITDA exceed interest expense? On what time line should investors expect that you are able to regain this position? Can you provide any color on the status of your attempts to sell Culver City headquarters or the Williamsport property? Gilbert, can you answer this multi-part question, please?

Gilbert Avanes: We are actively pursuing monetization of certain assets as detailed in our Q2 to provide sufficient funds to provide appropriate liquidity to meet our obligations. We have good relationship with our lenders, and we have been able to extend our loans. During the last quarter, we extended our largest loan with NAV to July 31, 2025, as well as extended our Cinemas 123 loans to October 1, 2024. The recent end of Hollywood strike gives us more confidence that 2023 will end on a positive note, delivering a market improvement over 2022. Regarding Williamsport, as Ellen mentioned, the offers we have received are not reflective of their fair value. And with respect to our Culver City office, we expect the building to be sold in the first quarter of 2024.

Andrzej Matyczynski: Thanks Gilbert. Ellen, are there additional underperforming theaters that you have identified for near-term closure? And what is the estimated timing and future savings?

Ellen Cotter: As we mentioned earlier, in the US, we've closed four underperforming theaters since late 2022, each of which was either at the end of its term or on a month-to-month tenancy. And we estimate that the cash savings from those theaters to be well over $1 million annually. As of today, we haven't closed any underperforming theaters in Australia or New Zealand. As leases become due, where option terms come up, reviewing the historic cash flow from the theater and the projected CapEx necessary to keep the theater competitive. If we're not confident that we'll make double-digit return on our invested dollars, it's our current intention not to exercise the option or seek to put in place a new lease. Our management teams are laser-focused on ensuring that each theater has the potential to generate sufficient cash flow into the future. During 2024, we'll be reviewing a few more theaters in the US for potential closure. However, in each instance, we'll seek to work out with the landlord a deal that's well-balanced and that could potentially give us the confidence that the venue will provide cash flow that meets our targets.

Andrzej Matyczynski: Thanks Ellen. And finally, a last question for you as well. What are the Reading's intermediate term plans to maximize and optimize value of each of the Minetta Lane and Orpheum Theater sites?

Ellen Cotter: Our current plan is to continue to operate the Orpheum and Minetta Lane, each of them as Off-Broadway venues. Given the cost of Broadway productions today, there's considerable interest in the city in Off-Broadway venues. And our Minetta Lane has been the home of audible theater for more than the past five years and they've indicated an interest in renewing their license on a multiyear basis. It may be that at some point in the future, a sale or redevelopment of one or both of these properties might make more sense than continuing to enjoy the cash flow from their operations live theater venues. But we don't believe that time is now, particularly taking into account the current market conditions, interest rates, and the cost of development.

Andrzej Matyczynski: And that brings us to the end of the conference call. I would like to thank everybody that participated and sent questions for some information from the management team. We appreciate you listening to the call today. Thank you for your attention and wish everyone good health and safety.