Earnings Transcript for RDI - Q4 Fiscal Year 2023

Andrzej Matyczynski: Thank you for joining Reading International’s Earnings Call to discuss our 2023 Fourth Quarter and Full Year Results. My name is Andrzej Matyczynski, and I’m Reading’s Executive Vice President of Global Operations. With me 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 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 fourth 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 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 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 a cinema’s revenues generated by food and beverage sales by the number of admissions at that cinema. Please note that our comments are necessarily summary in nature, and anything we say is qualified by the more detailed 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 2023 fourth quarter and full year results and discuss our business strategy going forward, followed by Gilbert, who will provide a more detailed financial review. Ellen?

Ellen Cotter: Thanks, Andre. Welcome, everyone to our call today, and thanks for listening in. From a top-line perspective, 2023 was another year of meaningful progress in our recovery from the pandemic. Thanks to blockbuster and record-setting performances in 2023 of original movies like Barbie, Super Mario Bros. Movie, and Oppenheimer, each of which offered a fresh story and collectively appealed to a variety of audiences, we delivered $222.7 million in total revenue, which represented a 10% increase over 2022 and 80% of our 2019 total revenue of $276.8 million. Our 2023 global cinema revenue was $207.6 million, which increased 9% compared to 2022 and equates to 79% of 2019's global cinema revenue. Our real estate division delivered solid 2023 results. Despite the 2021 monetizations of certain cash generating assets, Auburn Red Yard in Australia, Invercargill in New Zealand, and the Royal George Theatre in Chicago, our 2023 global real estate revenue of $15.1 million represented a 28% increase over 2022, driven by rent from Petco, our flagship tenant at 44 Union Square in New York City, improved performance of our live theaters in New York and sustained performance of our third-party tenant real estate portfolio in Australia and New Zealand, which as of December 31, 2023 had achieved a 97% occupancy rate. These results were achieved notwithstanding the Hollywood strikes that I'll touch on in a moment, but also decreases in the value of the Australian and New Zealand dollars vis-à-vis our reporting currency, U.S. dollars. This FX change impacts us, as historically about 50% of our revenues are generated in Australia and New Zealand. Through this recovery year, our team remained focused on our operations and generating the best results for our guests, tenants, and other stakeholders and the company. At $3.9 million, our 2023 segment operating result improved 13.5% from an operating loss of $11.2 million in 2022. In 2023, we reduced our global cinema operating loss by $11.84 million to deliver a positive cinema operating income of $124,000. And our global real estate operating income of $3.8 million represented a significant increase of 649% over 2022. Between May 2023 and November of 2023, the WGA and SAG strikes disrupted film production and prohibited screen actors from any promotional activities, causing the postponement of several movies from 2023 into 2024 and pushed some '24 titles into 2025. We also believe that the gross box office of certain major films that stayed on the schedule and released after July of 2023 fell short of their full potential due to the sidelining of screen actors who would otherwise have been promoting their films. We believe that certain cast-driven movies like Haunted Mansion, Blue Beetle, and Expendables 4 underperformed at the box office due to the prohibition on screen actors during the strike. It perhaps goes without saying that the Hollywood strikes had an overall negative impact on our fourth quarter '23 results and dampened the positive trajectory that we were on. At $45.3 million, our Q4 2023 total revenue decreased by 4% compared to the fourth quarter in 2022. However, our fourth quarter 2023 operating loss of $7 million improved by 17% from an operating loss of $8.4 million in Q4 of 2022. Additionally, our Q4 2023 $2.2 million adjusted EBITDA loss was a 51% improvement over the adjusted EBITDA loss of $4.6 million in Q4 of '22. And circling back to our improved overall operational performance during the full year of '23, we delivered a positive $7.8 million in adjusted EBITDA, a significant improvement over the negative adjusted EBITDA of just $55,000 reported in 2022. And if you exclude the impacts from our asset monetizations, a positive $7.8 million in adjusted EBITDA represented our highest adjusted EBITDA since the pandemic. And now our reported 2023 net loss of $30.7 million improved by 15% versus 2022. That loss did include $19.4 million in interest expense, which is reflective of an over 500 point increase in interest rates over the last couple years. Understanding the pressing need to enhance our liquidity and fortify our balance sheet, we've continued to divest certain strategically selected assets from our real estate portfolio to secure the company's long-term sustainability and reinforce short-term liquidity. In October of 2023, we sold our property in Maitland, New South Wales for AUD2.8 million. In February of 2024, we sold our Culver City office building for $10 million in anticipation of moving into less expensive Los Angeles office space. These two asset sales followed another five assets sold in 2021 in order to maintain our liquidity during historically tough times. Each of these seven assets was selected based on a critical evaluation of several factors, which led us to conclude that each of these assets would ultimately not be core to our long-term prospects. Over the last few months, to continue to reduce debt and interest expense, which may end up being at elevated levels for another 12 to 18 months, we're taking steps to monetize a few more assets. And in addition to asset sales over the last few months, we recently completed negotiations with Bank of America, Bank of Hawaii, and the National Australia Bank that will result in assistance and relief from our major lenders. Each of these banks have agreed, in essence, to support the company through 2024 as we work our way through the impact of the Hollywood strikes. So following the start of the unprecedented pandemic that devastated the global cinema industry, we've struggled with pressures from interest rates, inflation, supply chain troubles, the devaluation of the Australian and New Zealand currencies, and now the Hollywood strikes. We're fortunate to have strong real estate assets to fall back on that have provided us a bridge to a time when the cinema industry can find a consistent pace again. We expect that the flow of movies will increase near the end of 2024 and continuing into 2025. On that note, let's look more closely at our global cinema business, which historically has provided the foundational cash flow to support our asset growth. While the 2023 year didn't meet pre-pandemic levels, a diversified movie slate delivered some terrific results on a picture-by-picture basis, which has to reinforce one's belief in the long-term prospects of the theatrical experience. The premieres of Barbie and Oppenheimer, both released on July 21, led to the fourth biggest box office 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 box office, making it the highest-grossing opening weekend for a non-franchise film ever. Similarly, Oppenheimer has grossed over $960 million at the global box office, becoming the third highest-grossing film of the year. It's now the highest-grossing World War II movie of all time, as well as the highest-grossing biographical movie of all time. The Super Mario Bros movie has generated over $1.3 billion globally, making this the biggest video game opening of all time. Sound of Freedom, deemed an unexpected summer blockbuster in the U.S., exceeded expectations by generating over $250 million in global box office. Its stellar performance positions itself among the highest grossing independent films in cinematic history. On October 20, audiences retreated to the release of Martin Scorsese's Killers of the Flower Moon, which was produced and streamed by Apple. As of today, it's grossed over $157 million globally. This film helped deliver the best wide release debut for a film produced by a streaming service. Horror enthusiasts were thrilled by the debut of Five Nights at Freddy's on October 27. The adaptation of the popular video game stunned audiences, pulling in a remarkable $132 million during its opening weekend alone. Since then it's continued its positive momentum, accumulating almost $300 million in global box office. It achieved the distinction of the highest North American opening for a PG horror film in more than two decades, while also boasting the highest opening weekend for a Halloween-themed movie in over the last 12 years. The long-awaited Wonka hit theaters in early December of 23. The Warner Bros. movie is the highest-grossing live-action musical post-COVID-19 and has earned over $632 million globally. In Q4 of 23, concert films generated sizable revenue for our industry. The Swifties, their families, and friends came out for the Taylor Swift ERAS Tour movie, making it the highest-grossing concert film and the highest-grossing documentary of all time. As of today, it's grossed over $261 million globally. And Renaissance, a film by Beyonce, added to the concert film genre and has generated almost $44 million as of today, making it the fifth-highest-grossing concert movie of all time. While the strong box office was a key factor in our annual improved performance, throughout 2023, our executive programming, operating, and marketing teams were dedicated to optimizing the profitability of our global cinema circuit. Our programming team focused throughout the year on curating original series and programming to captivate audiences, effectively driving additional ticket sales. The operating team has worked diligently to ensure smooth day-to-day operations, enhancing customer service, and optimizing efficiency and theater management. Simultaneously, our marketing team has executed strong campaigns, leveraging digital platforms, social media, and key partnerships to promote our cinemas and attract a broader audience. Our executive team has taken decisive actions to drive higher income, including renegotiating leases across our portfolio and implementing strategies to mitigate cash losses while seeking strategic initiatives to improve financial sustainability in select theaters. Our management teams worked almost every line on the P&L to improve our overall profitability. In fact, we set up multiple records or we set multiple records throughout the fourth quarter and full year of '23 on a functional currency basis. For instance, our box office per capita and F&B SPP for all three of our cinema divisions reached annual record highs for the full year of '23. And for the fourth quarter '23, our U.S. and New Zealand cinemas recorded their highest quarter ever for their respective box office per capitas when measured in local currency. The fourth quarter 2023 Australian F&B SPP was the highest quarter ever recorded, again when measured in local currency. While 2023's box office momentum was terrific, the last quarter was adversely impacted by the Hollywood strikes, which has had a continuing impact into early 2024. While at the end of first quarter we saw encouraging releases like Dune

Gilbert Avanes: Thank you, Ellen. Consolidated revenues for the quarter ended December 31, 2023 decreased by $1.9 million to $45.3 million when compared to Q4 2022. This decrease was primarily driven by a weaker film slate in Q4 2023 compared to the fourth quarter of 2022. Consolidated revenues for the 12 months ended December 31, 2023 increased by $19.6 million to $222.7 million when compared to the same period in the prior year. This is a result of improved performance across our U.S. and Australia cinema circuit due to a stronger movie slate and the new rental stream from Petco at 44 Union Square which began in the fourth quarter of 2022, offset somewhat by the decrease in the value of our Australian and New Zealand currencies. Net loss attributable to Reading International, Inc., for the quarter ended December 31, 2023 decreased by $0.8 million to a net loss of $12.4 million when compared to the same period in the prior year. Basic loss per share decreased by $0.04 to a basic loss per share of $0.56 for the quarter ended December 31, 2023 compared to the quarter ended December 31, 2022. These results are due to increased real estate revenues along with the decreased cinema expenses, decreased depreciation and amortization expense partially offset by increased interest expense and reduced cinema segment revenues as a result of lower attendance in the fourth quarter of 2023 compared to 2022. Net loss attributable to Reading International, Inc., for the 12 months ended December 31, 2023 decreased by $5.5 million to a loss of $30.7 million when compared to the same period in 2022. Basic loss per share of $1.38 for the 12 month ended December 31, 2023 compared to the basic loss per share of $1.64 for the 12 months ended December 31, 2022. This decrease was due to improved segment operating performance from both cinema and real estate, decreased depreciation and amortization expenses, decreased G&A expenses partially offset by a $5 million increase in interest expense due to a rise in interest rates and the $7 million decrease in other income. Our total company depreciation and amortization impairment and G&A expenses for the quarter ended December 31, 2023 decreased slightly by $0.2 million to $9 million compared to the same quarter in prior year. Depreciation amortization impairment and G&A expense for the 12 months ended December 31, 2023 decreased by $5.3 million to $38.6 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 occur in 2023 and decreased depreciation and amortization due to delay in capex spending. For the fourth quarter 2023 income tax benefit decreased by $1 million to an income tax expense of $0.3 million compared to the equivalent prior year period. The change between the fourth quarter of 2023 and the fourth quarter of 2022 is primarily related to an increase in reserve for unrecognized tax benefit in 2023. For the 12 month ended December 31, 2023 income tax expense decreased by $0.2 million to income tax expense $0.6 million compared to the equivalent prior year period. The change between the 12 months of 2023 and the 12 months of 2022 is primarily related to the monetization of certain of our real estate assets. For the fourth quarter of 2023 our adjusted EBITDA loss decreased by $2.4 million to a loss of $2.2 million compared to the same prior year period. This decrease was primarily the result of lower cinema expenses. For the 12 months ended December 31, 2023 our adjusted EBITDA increased to $7.8 million from basically zero compared to the same prior year period. This increase is due to improved cinema operations and increase in real estate rental income due to rent from our Petco tenant which commenced in the fourth quarter of 2022 along with the decreased depreciation and amortization partially offset by increased interest expense and increased cinema expenses. Shifting to cash flows, for the 12 months ended December 31, 2023 net cash used in operating activities decreased by $16.6 million to a net cash use of $9.7 million when compared to the same prior year period. This was driven by a $14.8 million decrease in net change in operating assets and liability primarily resulting from taxes payables, film rent payables and prepaid and other assets plus better operating result compared to prior year. Cash used in investing activities for the 12 months ended December 31, 2023 decreased by $6.8 million to cash used of $2.7 million. This is mainly due to delay in CapEx spending and the sales of our Maitland property in Australia for the fourth quarter of 2023. Cash used in financing activities for the 12 months ended December 31, 2023 decreased by $9.9 million to $6.7 million due to reduced debt payment compared to prior year plus $4.1 million draws on our loan with Emerald Creeks Capital. Turning to our balance sheet, please note the consolidated balance sheet contained in our earnings release issued by Reading on April 1, 2024 contained an incorrect classification of debt which did not take into account the amendment of our Bank of America facility which was entered into on March 27, 2024. As of December 31, 2023, the debt current portion of balance sheet is $34.5 million and the debt long-term portion is $146.6 million. A corrected earnings release has been issued by Reading. The disclosure regarding Reading's debt contained in the annual report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission on March 29, 2024 is correct. Turning now to our financial position, our total assets on December 31, 2023 were $533.1 million compared to $587.1 million on December 31, 2022. This decrease was driven by a $17 million decrease in cash and cash equivalents from which we funded our ongoing business operations, an $18.9 million decrease in operating leases, right-of-use assets, and a $24.5 million decrease in operating properties offset by an increase in asset growth held for sale of $11.2 million. As of December 31, 2023, our total outstanding gross borrowings were $210.3 million compared to $215.6 million on December 31, 2022. Our cash and cash equivalent as of December 31, 2023 were $12.9 million, which includes approximately $7.1 million in the U.S., $5.2 million in Australia, and $0.7 million in New Zealand. Further to address the liquidity pressure on our business, we are working with our lenders to restructure certain debt facilities, and we have selected certain real estate assets for potential monetization and have listed them for sale. As Ellen mentioned, we sold our Maitland property in Australia during the fourth quarter of 2023 for AUD2.8 million, and during the first quarter of 2024, we completed the sale of our Culver City office building for $10 million and fully discharged the related mortgage. During 2023 and the first quarter of 2024, we modified our Bank of America loan in the first quarter of 2023, extending the maturity date of the facility to September 4, 2024, and on March 27, 2024, we further extended our Bank of America, Bank of Hawaii loan maturing date to August 18, 2025, together, with the relaxation of certain financial covenants. We just completed a modification of our revolver corporate market loan facility with NAB, which will be reported on in the next 10-Q. In September 2023, we extended the maturity date from October 3, 2023, to October 1, 2024 on our Cinemas 123 Term loan. In November 2023, we extended our Westpac loan maturity date to January 1, 2025. On January 26, 2024, we extended our Santander loan maturity to June 1, 2024. With that, I will now turn it over to Andre.

A - Andrzej Matyczynski: Thanks, Gilbert. First, I'd like to thank our stockholders, as usual, for forwarding questions to our investor relations email. 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 insights from management. The first question regarding our development in Wellington. The City of Wellington has reportedly an agreement to purchase and lease back land underneath Reading's Courtney Central Shopping Centre. How come Reading has made no mention whatsoever what has become part of the public discussion and record of the Wellington City Council? What monetization, financing, redevelopment plans are you pursuing with the Council regarding the Courtney Central property or properties? What is the timing and or milestones toward finalizing a larger development plan for Courtney Central? Ellen?

Ellen Cotter: As widely reported in the New Zealand press, in 2023, we signed a non-binding commercial term sheet with the Wellington City Council to assist in the redevelopment of our Courtney Central building. This commercial term sheet includes confidentiality obligations for both parties. Therefore, we're unable to provide any further details at this stage. We remind our stockholders that we can provide no assurance that a final deal will ever be struck. From Reading's perspective, its assets in Wellington, New Zealand have been and continue to be core assets and they represent a long-term value opportunity for our stockholders. Since Courtney Central opened in 2002 and up until its temporary closure in January of 2019 due to seismic safety concerns, the building has been a critical part of our overall cash flow. The cash flow from this building was the foundation of our New Zealand business. In January of 2019, we made the very difficult decision to effectively shut the building down when we discovered a seismic issue that could potentially put people using the building at risk. Following that decision that has cost our company many millions of dollars, we've dealt with a global pandemic that devastated the cinema business, the fastest and highest interest rate tightening in history, record high inflation, and the unprecedented Hollywood strikes. Nevertheless, we remain committed to strengthening and recreating a first-class destination at Courtney Central for Wellingtonians and the visitors to this important capital city. The anchor of this destination would be a world-class 10-screen cinema that would delight the moviegoers of Wellington again. Wellington is one of the most creative cities in the world and is now vital to Hollywood's creative engine. Our goal would be to deliver the community one of the best cinematic experiences audiences could have anywhere in the world. As I mentioned earlier, despite the frustrating hurdles that the theatrical business has endured over the last four years, we see light at the end of the movie slate tunnel. The 2025 movie slate looks very exciting and ends with a bang with Avatar 3, a movie with very important ties to Wellington. While the redevelopment schedule would not result in Courtney Central being open during 2025, the encouraging upcoming release slate in 2025 and beyond, together with the renewed commitment of the major studios to the theatrical exclusive window, support why Reading is so committed to getting its assets reactivated again in Wellington.

Andrzej Matyczynski: Thanks, Ellen, for that comprehensive answer. The next question is regarding the quarter's actual dollar per cap concession versus last year's same quarter. Can you provide that for each market, US and either Australia, New Zealand, separately or as a down-under group? To what do you attribute the changes? Gilbert, can you field this?

Gilbert Avanes: The US food and beverage per capita in Q4 2023 was $7.76, which decreased by $0.10 or 1% from Q4 2022 through a healthy food and beverage spent per patron. The reason that the Q4 2023 US SPP reduced slightly was certain location had greater sensitivity to inflationary pressure and prevailing economic conditions. The Australia food and beverage per capita in Q4 2023 was Australia and $7.84, which decreased by $0.04 or 0.5% from Q4 2022. Our food and beverage increased due to launch of our Angelica at South City Square and Reading Cinemas in Busselton, each of which offer elevated food and beverage by Angelica, offers alcohol. Our SPP was also positively improved by the success of the Taylor Swift promotional cup initiatives, with stocks selling out in the first week. The New Zealand food and beverage per capita in Q4 2023 was NZD6.73, which decreased by NZD0.20 or 3% from Q4 2022. The dip in quarterly SPP was directly related to the prevailing economic condition in New Zealand with high inflation negatively impacting consumer spending, highlighted by three consecutive months of SPP decline.

Andrzej Matyczynski: Thanks Gilbert. Ellen, do you have any concerns about the credit worthiness of Petco as your tenant at 44 Union Square? Credit markets are pricing their loans worse than the average single B loan and the discount margin is almost 250 basis points higher than the OAS on high yield credit. Their stock has 30% short interest and their leverage is over eight times net debt 2024, expected EBITDA. Can you help us understand what protections you might have in your lease agreement that help mitigate the potential impact here?

Ellen Cotter: We monitor the activities of our major tenants. Given the foot traffic of the new flagship location, we're not concerned about our Petco lease. While the terms of the lease are confidential, I can share with you that the store is, in our view, very successful and reflects a major capital investment on the part of Petco. With that said, the company has the usual and customary landlord rights expected for a commercial landowner in New York City. It's been reported by the retail press that at 44 Union Square, Petco has elevated the pet-human bond in this New York City flagship and caused the design of the store in another galaxy. This Petco store is not just about picking up pet treats or dropping your dog off for grooming. They have created theater through great visual merchandising store design and merchandise operations.

Andrzej Matyczynski: Thanks, Ellen. Our next question regarding corporate HQ staff and operating costs. With the Culver City office building sale, what are your plans and expectations for this office's corporate staff and projected personnel and other Los Angeles overhead costs compared to the most recent year? Ellen, can you take this?

Ellen Cotter: Our plans are to move the team in Los Angeles down to a new office space in Downtown LA. We're working on finalizing the lease now and expect that we should be officing in the space within the next six to eight weeks. Moving to Downtown LA will significantly cut the commute time for most of our employees. With the office moved downtown, the elimination of debt, taxes, and other operational expenses related to the 5995 building in Culver City, we do expect to see a sizable reduction in our Los Angeles G&A costs. In terms of personnel, though, we expect to maintain similar staffing levels in 2024, similar to what we've had in 2023.

Andrzej Matyczynski: Thanks, Ellen. And our last question, which I'll handle, is regarding our Maitland property. Maitland, about how much did Maitland Cinema earn or lose in 2023? What influenced the decision not to lease back for a longer period? Buyer's alternative plans? Do you expect the Maitland Cinema to be profitable over the two-year lease back? And do you desire to maintain a theatre here beyond that short term? Well, the site has been a positive contributor to our Australian circuit for over the past five years, when you take into account our internal rent structure. However, the cinema over recent period encountered competition when a new state-of-the-art cinema opened close by, which also influenced our decision to sell. This issue, coupled with the potential plans the buyer may have for the site, drove the lease back period. A decision as to whether that period is shorter or longer will respectively lie with the buyer or ourselves. Such a decision on our part would be made closer to the conclusion of the two-year term. And with that, that brings us to the end of our conference call here. As usual, we'd like to thank all of our stockholders, not only for sending the questions, but for sticking with the company over these tight periods. And we'd like to wish you all the very best for the coming year. Thank you very much.