Reading International, Inc.
Q1 2022 Earnings Call Transcript

Published: 17 May 2022

[Andrzej Matyczynski:]

Thank you for joining Reading International's earnings call to discuss our 2022 first quarter results. My name is Andrzej Matyczynski, and I am 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 will just try run through the usual caveats. In accordance with the safe harbor provision of the Private Securities Litigation Reform Act of 1995, certain matters 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 2022 first quarter earnings release on our 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 operation. Such costs include legal expenses relating to extraordinary litigation and any other items that can be considered nonrecurring in accordance with the 2-year SEC requirement for determining 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. We will also use a measure referred to as food and beverage, 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 U.S. Securities and Exchange Commission. So with that behind us, I'll turn it over to Ellen, who will review our 2022 first quarter results and discuss our strategies for navigating Reading through the post-COVID operating landscape followed by Gilbert, who will provide a more detailed financial review. Ellen?

[Ellen Cotter:]

Thank you, Andrzej, and thanks, everyone, for joining the call today. The first quarter of 2022 represented another positive and encouraging step in our operational recovery from the global pandemic. Virtually all of our operations were trading throughout the first quarter of 2022 and have continued to trade through today. All of our cinemas were opened during the quarter except for 2 closed for non-COVID and continue to be open today. Our global circuit delivered strong grosses from The Batman, which, to date, has delivered a global box office of over $760 million and Uncharted, which exceeded everyone's expectations by grossing to date over $395 million globally. Both of our live theaters in New York City hosted public performances through the first quarter of 2022 and continue to be open today. And in Australia and New Zealand, all third-party tenants were open for business through the first quarter of 2022 except for one tenant completing a new fit out. Overall, our Q1 2022 consolidated total revenues of $40.2 million nearly doubled from $21.3 million in Q1 of 2021. And since the pandemic began, the $40.2 million in quarterly consolidated total revenues represented the best first quarter and the second highest quarter for the pandemic period. At $37.3 million, our Q1 2022 global cinema revenue increased 106% compared to Q1 2021. Since the onset of the COVID-19 pandemic, we delivered the second highest quarterly cinema revenues, just below the highest, Q4 of 2021 and the best first quarter for global cinema revenue during the pandemic period. While these results demonstrate significant improvement from the first quarter of 2021, this past quarter was burdened by a few factors

[Gilbert Avanes:]

Thank you, Ellen. Consolidated revenues for the first quarter of 2022 increased by 89% to $40.2 million compared to the same period last year. This increase was attributable to the majority of our cinema operating during the first 3 months of 2022 compared to the same period in 2021, where some of our cinemas went through a temporary closure with reduced seating capacity as a result of social distancing and the release of more blockbuster firms such as The Batman, Spider-Man

[A - Andrzej Matyczynski:]

Thanks, Gilbert. First, I'd like to thank our stockholders for forwarding questions to our Investor Relations e-mail. And as always, in addition to addressing some of your questions in Ellen's discourse, we've also compiled a set of questions and answers representing the most common questions and recurring themes e-mailed to us. So our first question, can you elaborate on prior year's $4 million accrual for the settlement of certain wage and hour claims? Was this amount reflective of multiple years of claimed activity or single year? And does the settlement involve Reading bearing a higher level of wage costs annually going forward? Ellen?

[Ellen Cotter:]

Stipulation and agreement for class-action settlement involves our California cinema employees who work for the company at its various cinemas in California from early 2015 through the preliminary court approval date. At this point, we expect that the preliminary court date will occur sometime during the second or third quarter of 2022. The settlement amount reflects, in addition to actual back compensation to employees, plaintiff's attorneys' fees and various statutory penalties and interest. We negotiated the right to contribute any unclaimed portion of the settlement amount to the Will Rogers Charity, which supports employees who serve the motion picture industry. Going forward, we anticipate that because of the increases in both minimum wage rates and related employment costs across the country, labor will continue to be a constant operational focus for us. However, we don't believe that the agreement for class-action settlement itself will directly impose material increases in our labor cost for our U.S. circuit going forward.

[Andrzej Matyczynski:]

Thanks, Ellen. Our next question talks about our debt situation. It looks like it was a sizable BofA U.S. term loan that got reclassified to cause current liabilities to substantially increase. What is the timing and status of paying off or replacing this loan with longer-term financing? Gilbert?

[Gilbert Avanes:]

The Bank of America line of credit was converted into a term loan with scheduled repayment maturing on March 6, 2023. As with all loans that come up for refinancing, we work diligently with the current lenders and at the same time, reach out for competitive bids from other lenders for most of the beneficial long-term loan financing. We believe that our company has sufficient resources to meet its obligation as the loan becomes due.

[Andrzej Matyczynski:]

Thanks, Gilbert. Sticking with the debt situation, now that the 44 Union Square loan can be repaid without penalty, what are your prospects, timing and status toward replacing this loan with a lower rate and longer-term financing? Gilbert?

[Gilbert Avanes:]

Our current 44 Union Square loan with Emerald Creek Capital provided sufficient funding to absorb the construction loan as well as additional funding for the building. During the first quarter of 2022, we achieved a company milestone by signing a long-term lease with a leading international retail to occupy 3 levels of our 44 Union Square property in New York City. We're currently working actively with potential tenants for the remaining floors. We continuously monitor the net benefit and the timing for Union Square refinancing based on building's current lease status as compared to the refinancing benefit derived from negotiating ladder with a fully leased building.

[Andrzej Matyczynski:]

Thanks, Gilbert. Continuing on the 44 Union Square but on the operational side, when does Reading expect the new lease at 44 Union Square to begin to cash flow to us? How much time is typical in a lease location such as 44 Union Square before a landlord can expect to see cash flow being collected once the tenants is signed? For example, what duration of free rent is typical of these deals? Or are we publicly offering? Ellen, would you like to handle this?

[Ellen Cotter:]

Thanks, Andrzej. Based on our particular lease terms and the construction schedule for completion of the landlord's work, which is already underway at 44 Union Square, we expect cash rent to be paid at some point before the end of the fourth quarter of 2022. And based on discussions with potential tenants and our brokers about the leasability of 44 Union Square, the length of a free rent period, if any, is subject to multiple variables or various economic terms supporting a deal. For instance, the particular use, the base rent, the term, the tenant allowance and the extent of any potential landlord work may all factor into how long, if any, a free rent period is offered for a potential tenant.

[Andrzej Matyczynski:]

Thank you, Ellen. Our last question relates to real estate and our ability to fund any buyback of our shares. In light of the very cheap RDI stock price, what real estate, including Cinemas 1, 2 and 3, doesn't offer optimal returns to monetize that parcel, pay down costly and/or near-term debt and eventually, post-pandemic, fund the buyback of more deeply undervalued RDI shares? Well, our stock repurchase program, as Gilbert mentioned, has been extended by our Board on management's recommendation for another 2 years through March 10, 2024. We continue to balance our CapEx and OpEx requirements, together with our commitment to our stock repurchase program. And we'll recommence that program as circumstances allow. But clearly, given current cash needs and opportunities, we do not foresee using material assets to buy back stock in the immediate future. We need a while longer to judge the strength of the rebound in cinema attendances. Currently, we have no plans to further monetize any of our remaining real estate assets. Historically, our approach to real estate assets has been predominantly a buy-and-hold strategy. However, due to the COVID-19 pandemic, we monetized assets that had minimal impact to our historical cash flows that have greatly appreciated in value, and which would require substantial capital investment to take them to their next level of value. We generated $141.9 million in cash, unlocking book profits of $90.2 million. We did not take on any high-interest rate debt or dilate stockholders by issuing equity at the stretched prices. In addition, we further enhanced our financial position by giving us the ability to pay down debt. The monetization of these assets has strengthened our balance sheet in a time of global uncertainty. At this time, we believe our balance sheet is well positioned to provide our company with continued flexibility to allow the cinema industry and our cinema cash flows time to rebound. As we have already said, we believe our retained real estate assets, 44 Union Square, Cinemas 1, 2 and 3 in New York, our assets in Wellington, New Zealand, Newmarket Village in Brisbane, Cannon Park in Townsville, the Belmont Common in Western Australia and our Viaduct product properties in the Arts District of Philadelphia all continue to offer substantial opportunities to create future long-term value for our stockholders. Also, it is to be remembered that the monetization of future assets would trigger the recognition of material taxable gains, involve transaction costs and limit our long-range strategic opportunities to add value to these assets. 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.