Earnings Transcript for RDIB - Q2 Fiscal Year 2023

Andrzej Matyczynski: Second Quarter 2023 Conference Call. Thank you for joining Reading International’s Earnings Call to discuss our 2023 Second Quarter 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, as usual, I’ll run through the 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, 2nd 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 nonrecurring in accordance with the 2-year SEC requirement for determining whether an item is nonrecurring, infrequent or unusual in nature. We believe 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. 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 U.S. Securities and Exchange Commission. So with that behind us, I’ll turn it over to Ellen, who will review our 2023, 2nd quarter results and discuss our business strategy going forward, followed by Gilbert, who will provide a more detailed financial review. Ellen, over to you.

Ellen Cotter: Thanks, Andre, and thank you, everyone, for listening to the call today. We were very pleased with our second quarter 2023 operational results, which continued to move reading in the right direction. At $65.1 million, our second quarter global total revenue represented the highest global total revenue since Q4 2019 and 85% of our Q2 2019 global total revenue. We delivered this result despite a weakening by 6.5% and 4.8% of the Australian dollar and New Zealand dollar average exchange rates, respectively, against the U.S. dollar. The foreign exchange needs to be kept in mind when reviewing our results as almost half of our total revenue is generated in Australia and New Zealand. Our Q2 global operating income of $1.8 million represented the highest global operating income since Q4 2019 and improved by over 200% compared to Q2 2022. Thanks to a stronger film slate, including the phenomenal success of Super Mario Brothers, franchises such as Guardians of the Galaxy, Spider-Man, Fast and Furious and Transformers and the Disney hit Little Mermaid. Coupled with the strong operational performance from our cinema management teams, our global cinema revenue topped $61.1 million. While our second quarter 2023 global cinema revenue decreased by 1% compared to the second quarter 2022, it did represent 84% of 2019’s second quarter global cinema revenue. I’ll note that Q2 last year represented the all-time highest cinema revenue ever for our Australian circuit, and at that time, the Australian dollar was trading at a level of 6.9% higher than at the end of the most recent quarter. Our real estate business is also getting stronger. Our second quarter benefited from the rental stream from our new tenant at 44 Union Square, Petco, Which on June 1, 2023, opened its flagship retail location in New York City, a uniquely designed one-stop health and wellness destination for pets. The strong performance of our live theaters in New York City, which delivered the best theater level cash flow since Q3 2019, when we also had the Royal George opened, and the continued solid and steady performance of our 72 third-party tenant real estate portfolio in Australia. Our Q2 2023 real estate revenue of $4 million represented a 46% increase compared to Q2 last year, an 8% improvement compared to the same period in 2019 and the highest since Q4 2019 when we still had the Auburn Redyard and Royal George assets in our portfolio. Our Q2 2023 real estate operating income of $1.3 million represented an increase of over 1,500% compared to the same period in 2022, and 95% of Q2 2019 to operating income, despite our having sold 5 properties in order to mitigate the pandemic impacts. Delivery of this continued improving operational performance resulting in a $6.7 million of adjusted EBITDA came despite headwinds facing our company from inflationary cost pressures, supply chain and labor challenges and the weakening of the Australian and New Zealand dollars against the U.S. dollar. As of June 30, 2023, we reported cash and cash equivalents of $15.5 million and had a global debt balance of $213.8 million. Which excluded deferred cinema rent obligations that arose due to the pandemic and is also lower than our December 31, 2022 debt balance of $215.6 million. We’re mindful of our upcoming 2023 and 2024 debt maturities, the current high interest rate lending environment and the need to improve our liquidity and strengthen our balance sheet. So in an effort to protect the interest of our stockholders and ensure the long-term viability of our company, our Board has decided to put certain additional assets up for sale, which I’ll touch on in more detail later in the call. 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. We saw our cinema audiences return to the big screen again, when the content was compelling and the marketing was right. The global cinema industry witnessed a sensational April 5 release of the Super Mario Brothers movie, which has grossed almost $1.4 billion globally and is now the second highest grossing animated film of all time. And the strong box office performance of Guardians of the Galaxy Volume 3, which has grossed over $845 million globally; Fast X, which has grossed almost $705 million globally; and Spiderman

Gilbert Avanes: Thank you, Ellen. Consolidated revenues for the quarter ended June 30, 2023, increased slightly by $0.5 million to $65.1 million when compared to Q2 2022. This increase was primarily driven by an increase in real estate revenue, which was due to receiving rent from our 44 Union Square tenant that did not occur in the same period of the prior year. Partially offset by a decreased attendance in our Australia and New Zealand circuit as a result of record quarterly attendance in Q2 2022. Consolidated revenues for the six months ended June 30, 2023 increased by $6.1 million to $110.9 million when compared to the same period in the prior year as a result of the rent revenue received from our 44 Union score tenant Petco, and increased attendance in our U.S. circuit. Net loss attributable to Reading International for the quarter ended June 30, 2023, increased by $0.3 million to a net loss of $2.8 million when compared to the same period in the prior year. Basic loss per share increased $0.01 to a basic loss per share of $0.12 for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022. These results are due to a decrease in other income and increased interest expense, partially offset by better segment results. Net loss attributable to Reading International for the six months ended June 30, 2023, decreased by $3.9 million to a loss of $13.9 million when compared to the same period in 2022. Basic loss per share was $0.63 for the six months ended June 30, 2023, compared to a basic loss per share of $0.81 for the six months ended June 30, 2022. This was due to increased attendance in our U.S. cinema circuit as more patrons return to the theaters. The rent revenue received from our 44 Union Square tenant Petco during the first six months of the year that did not yet occur in 2022, impairment expenses that were incurred in 2022 that were not incurred in 2023, and decrease in depreciation and amortization due to delay in our capital spending. Our total company depreciation and amortization, impairment and G&A expenses for the quarter ended June 30, 2023, decreased by $3.3 million to $9.8 million compared to the same quarter in prior year. Depreciation, amortization, impairment and G&A expenses for the six months ended June 30, 2023, decreased by $4.8 million to $19.6 million compared to the same period in prior year. These decreases are due to impairment expenses that were incurred in 2022 that did not reoccur in 2023, decreasing depreciation and amortization due to delay in capital spending. For the second quarter 2023, income tax expense decreased by $1.6 million to an income tax benefit of $0.1 million compared to the equivalent prior year period. For the six months ended June 30, 2023, income tax expense decreased by $1.7 million to income tax benefit of $0.6 million compared to the equivalent prior year period. The change between 2023 and 2022, is primarily due to a decrease in both reserves for unrecognized tax benefit and reserves for valuation allowance in 2023. For the second quarter of 2023, our adjusted EBITDA decreased by $1 million compared to the same prior year period to $6.7 million. This decrease was primarily the result of weakened cinema operations performance in our Australian and New Zealand circuit and $1.5 million increase in interest expense. For the six months ended June 30, 2023, our adjusted EBITDA increased by $3.2 million to $3.8 million compared to the same prior year period. This increase is due to improved net income loss as a result of increased real estate rental income due to rent from our Petco tenant, which was not incurred in the same time period in the prior year compared to the first six months of 2023. Shifting to cash flow. For the six months ended June 30, 2023, net cash used in operating activity decreased by $8.7 million to a net cash used of $8.8 million when compared to the same prior year period. This was driven by an improved cinema operating performance compared to the prior year period, recognition of rental income from our tenant at 44 Union Square property, which did not occur in the same period of prior year and an increase in net operating assets and liabilities. Cash used in investing activities for the six months ended June 30, 2023, was $3.4 million, a decrease of $0.3 million compared to the same period of the prior year. Cash used in financing activities for the six months ended June 30, 2023, decreased by $3.5 million – $2.7 million due to borrowing on an existing facility. Turning now to our financial position. Our total assets on June 30, 2023, were $552.2 million compared to $587.1 million on December 31, 2022. This decrease was driven by a $14.4 million decrease in cash and cash equivalents for which we funded our ongoing business operations. As of June 30, 2023, our total outstanding borrowings were $213.8 million compared to $215.6 million on December 31, 2022. Our cash and cash equivalent as of June 30, 2023, were $15.5 million, which includes approximately $8.9 million in U.S., $6 million in Australia and $0.6 million in New Zealand. Further to address 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 the 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. And our Cinemas 123 Term Loan extended on June 28, 2023, from July 3, 2023 to October 3, 2023, to allow additional time to complete a refinancing with that lender. 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 noncurrent. We have begun active process to monetize certain assets as we monitor the cinema market conditions. As we continue to focus on preserving our liquidity, no shares were purchased during the quarter ended June 30, 2023, and our start – 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.

Andrzej Matyczynski: Thanks, Gilbert. Firstly, 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 some additional insights from management. The first question. You say your Viaduct and adjacent parcels will be a focus in 2023. Recently, Reading’s ownership of these properties has been the subject of media attention in Philadelphia. What are Reading plans for these Philly properties at or near the Viaduct and Rail Park? Ellen?

Ellen Cotter: As you know, our company owns the Reading Viaduct, which is an elevated Rail Track in Philadelphia. Which some city and neighborhood leaders would like to convert into an extension of the small existing Rail Park adjacent to our property. Over the last few years, we’ve had discussions with various civic leaders about how we can work together with the City of Philadelphia and the communities surrounding the Reading Viaduct to achieve a positive outcome for Philadelphia and for our stockholders. Our consistent position has been that any outcome must protect the stockholders of Reading and ensure that we’re receiving fair value for our assets. Right now, those discussions are ongoing. Relatedly, we understand that when it returns from its summer recess, the City Council will consider a proposed ordinance that would authorize the city’s administration to acquire in whole or in part, our interest in the Viaduct for fair market value.

Andrzej Matyczynski: Thanks, Ellen. The next question regarding our rent obligations. These deferred rent – our deferred rent obligation is down to only $2 million. I seem to think of our higher amount was mentioned only a quarter or two ago. What is the timing for cash payoff of these amounts? Gilbert, can you handle that?

Gilbert Avanes: On June 30, 2023, balance sheet contained accrual rent liability for approximately $9.5 million, which includes amounts owed under deferred deal executed by us during the pandemic, but also includes accruals for amounts that are either being currently negotiated or are under dispute with certain landlords. However, despite these negotiation and disputes, accounting rules require us to accrue for the full rent amount pursuant to the original lease. Included within the $9.5 million and separately reported in our 10-Q in the financial footnotes, the $2 million figure reflects any accrual third-party rent expense arising out of signed pandemic deferral deals that are owned more than 12 months from the date of our balance sheet. Those particular obligations, which deferring due dates could extend out up to 48 months from today.

Andrzej Matyczynski: Thank you, Gilbert. Turning to some of our renovations. When will Dallas Angelika, Rouse Hill and the Palms, start their renovations. And will they need to close completely or how many auditoriums will be down at a time? About how much is budgeted for cash costs on these renovations? Ellen, we’ll leave that for you.

Ellen Cotter: All right. Starting with the Angelika Dallas. We’re starting our renovation during the fourth quarter of ‘23, and we’ll convert certain auditoriums to recliner seating, elevate the food and beverage offer, renovate the lobby and create a bookstore. At this time, we anticipate that partial closures through the renovation period will occur and will never close completely. And we anticipate completing the renovation by the first quarter of ‘24. In Australia, we anticipate starting the renovation for our Reading Cinemas at Rouse Hill during the fourth quarter of ‘23. And the scope will include adding another reclining auditorium, F&B and lobby upgrades. And like the Angelika in Dallas, the renovations will occur when the theater is substantially opened. In New Zealand, we’re still reviewing the timing for the renovation of the Reading Cinemas at the Palms. And with respect to reporting on the budgeted cash costs, we can’t report on those precise budgets for particular locations as the information is confidential with our landlords.

Andrzej Matyczynski: Thank you, Ellen. Regarding the costly 10.75% Bank of America U.S. Cinema Term Loan. Is Reading’s plan to retire this loan via its updated principal pay-down schedule? Or refinance some remaining balance into new longer-term U.S. cinema financing? Also, given that the current variable rate on this loan, do you feel refinancing will be at similar, higher or lower interest rate spreads. Gilbert?

Gilbert Avanes: We are closely monitoring, our policymakers assess the economy, inflation and the appropriate monetary policy. As you know, certain bank begun announcing rate increases in March 2022. To date, these increases have totaled 525 basis points. As we are operating in a high interest rate environment, we expect refinancing in the near future will likely be at a similar or higher interest rate spread. We are intending to retire this loan following the updated principal pay-down schedule. However, to protect the interest of our shareholders and to ensure long-term viability of our company, we will continue to work with our banking partner and explore different financing options.

Andrzej Matyczynski: Thanks, Gilbert. Our last question regarding Investor Relations. Investors appreciate the Barbenheimer press release. Hopefully, it is a continuing trend for updating shareholders. Our shares remain extremely undervalued and haven’t participated in the recent run-up of other cinema stocks. Is the company going to do more roadshows? Is there a way to get sell-side coverage? We need to reach more investors with the company’s story. I’ll handle that one. Now that we see ourselves more firmly on the post-COVID path to recovery, we are committed to communicate more frequently with our shareholders and to keep them informed of the progress we are making. In addition to conferences like Gabelli, at which we attended and presented in early June of this year. We are working on several additional initiatives, namely, if achievable, at least 2 non-deal road shows before the end of the year as well as an additional Microcap conference also before year’s end. We are also continuing to investigate several different options to provide more analyst coverage for our stock, a process that has been ongoing for some time but has not yet borne fruit. With those remarks, that marks the conclusion of the call. As usual, we appreciate you listening to the call today. Thank you for your attention, and we wish everyone good health and safety.

Q - :