Reading International, Inc.
Q3 2022 Earnings Call Transcript

Published: 13 Nov 2022

[Andrzej Matyczynski:]

Thank you for joining Reading International's earnings call to discuss our 2022 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 will just 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 third 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 non-recurring in accordance with the two year SEC requirement for determining an item is non-recurring, infrequent or unusual in nature. We believe adjusted EBITDA is an important supplemental measure of our performance. In today's call, we'll also use an industry accepted financial measure called theater level cash flow TLCF, which is a 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 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 third quarter results and discuss our strategies for navigating Reading through the post-COVID operating landscape, followed by Gilbert, who provide a more detailed financial review. Ellen.

[Ellen Cotter:]

Thanks, Andrzej, and thank you everyone for joining our call today. Following the third quarter 2022 we remain confident in Reading's future, including our operational recovery from the pandemic. And our two business, three country internationally diversified business strategy that we believe will continue to serve as a strong foundation for our company and our stockholders. Our third quarter 2022 global revenues were $51.2 million, representing a 61% increase versus Q3 2021 and a 27% reduction from the pre-pandemic Q3 2019 quarter, or 73% of Q3 2019 global revenues. We generated these global revenues despite some acute challenges, including a significantly weaker movie slate opening during the months of August and September 2022, inflationary cost pressures, supply chain and labor shortage issues and foreign currency headwinds impacting Australian and New Zealand results that Gilbert will touch on later. Despite these ongoing challenges, from an operational progress perspective, we reduced our Q3 2022 operating loss by 39% versus Q3 2021 to $6.7 million. And following our positive Q2 2022 EBITDA of $7.7 million we also generated positive EBITDA of $3.9 million in Q3 of 2022. Unlike comparable quarters in 2021, these 2022 quarters did not reflect significant EBITDA from asset monetization. Recall that during this 2021 period, we successfully monetized our Auburn/Redyard, Royal George and Invercargill property, in addition to two other properties, in order to address our liquidity crisis raised by the pandemic. Recognizing that 94% of our Q3 2022 global revenues were generated by our global cinema circuit, we know we're not out of the woods just yet. However, during the quarter, cinema audiences demonstrated again a real willingness to return to the big screen when the content is compelling, and/or the price is right. Q3 2022 offered moviegoers a great mix of titles that attracted different audiences. Even though August and September presented a much softer opening movies slate but disappointing box office, July of 2022 was a strong month thanks to well received franchise pictures like Thor

[Gilbert Avanes:]

Thank you Ellen. Consolidated revenues for the third quarter of 2022 increased by 61% to $51.2 million, when compared to the same period of prior year, which is 73% of comparable 2019 pre-pandemic revenue for the same quarter. Consolidated revenues for the nine months ended September 30, 2022 increased by 75% to $155.9 million when compared to the same period last year, which is 75% of comparable 2019 pre-pandemic revenue for the same nine months period. These increases were attributable to a strong film slate as well as substantially all our cinemas operating during the first nine months of 2022 compared to the same period in 2021 when a portion of our cinemas were closed due to local government COVID mandates for part of the reporting period. Net loss attributable to our company for the quarter, ended September 30, 2022 improve by $4.9 million, a loss of $5.2 million when compared to the same period in 2021. Basic loss per share was $0.23 for the quarter ended September 30, 2022 compared to a basic loss per share of $0.46 for the quarter ended September 30, 2021. This was primarily due to an increase in cinema revenue related to a much stronger film slate, which drove higher attendance, partially offset by the weakening of the Australia and New Zealand dollars. During the third quarter of 2022 both Australia and New Zealand dollars devalued against U.S. dollars. The average Australian dollar exchange rate against the U.S. dollar for the three months in Q3 2022 decreased 7% compared to the same period in 2021. The average Zealand dollar exchange rate against the U.S. dollar for the three months in Q3 2022 decreased 12.5% compared to the same period in 2021. The devaluation of the Australia and New Zealand currency, negatively impacts segment operating income and positively impacts segment operating loss in U.S. dollar terms. Net income attributable to Reading International, Inc., for the nine months ended September 30, 2022 decreased by $54.5 million from an income of $31.6 million to a loss of $23 million when compared to the same period in 2021. Basic loss per share was $1.04 for the nine months ended September 30, 2022 compared to the basic earnings per share of $1.45 for the nine months ended September 30, 2021. This was mainly due to the sale of assets during the same nine months of the prior year partially offset by our increased cinema income and decreased income tax expense. For the third quarter of 2022, income tax expense increased by $1.2 million to $0.3 [ph] million compared to the COVID impaired prior year period, primarily related to an increase in valuation allowance and partially offset by a decrease in GILTI tax in 2022. For the nine months ended September 30, 2022, income tax expense decreased by $10.9 million to income tax expense of $1.5 million compared to the equivalent prior year period. The change between 2022 and 2021 is primarily due to a decrease in pre-tax income in 2022, mainly due to the non-recurring monetization of assets in 2021 that were not repeated in 2022 as well as changing GILTI tax valuation allowance and unrecognized tax benefit in 2022. Turning now to our cash flow, for the nine months ended September 30, 2022, net cash used in operating activities increased by $8.4 million to $26.1 million when compared to the same period in 2021. This was driven by $39.4 million increase in net change in operating assets and liabilities primarily resulting from taxes payable and accounts payable and accrued expenses offset by $31.1 million decrease mainly attributable to the improved cinema operating performance compared to the prior year period. Cash used in investing activities during the nine months ended September 30, 2022, was $6.4 million. There was no repeat of the monetization of certain assets in the nine months to September 30, 2021, which led to a rise of $133.7 million of cash from investing activity in this period. Cash used in financing activities decreased by $33 million to $7.9 million during the nine months ended September 30, 2022 primarily due to using proceeds from asset sales to pay down debt as well as paid off non-controlling interest in 2021. Shifting to our financial position, our total assets on September 30, 2022 were $589.7 million compared to $687.7 million on December 31, 2021. This $98 million reduction was primarily driven by a decline in cash and cash equivalent by which we fund our ongoing business operation and paid down debt, asset depreciation and amortization of leases. As of September 30, 2022 our total outstanding borrowings were $219.4 million compared to $236.9 million on December 31, 2021. This decrease was due to the pay down of debt, and foreign exchange rate impact on our non-U.S. debt. Our cash and cash equivalents as of September 30, 2022, were $39.6 million. We exercised the second six months extension for our Raleigh [ph] National Loan. After balance date, but before filing the Q, we were also extending the closing of our agreements to purchase the ground lessee interest underlying of Village East Cinemas $5.9 million to July 1, 2024. We are currently in compliance with our loan covenants. While no assurance can be given, we believe that our relationship with our various lenders are good, and anticipate that we'll either refinance or obtain extension for the current portion of our debt. We continue to be in compliance with the terms of our loan agreement without the need for additional loan modifications. We believe that our lenders continue to understand our current situation relating to COVID-19 pandemic and its aftermath, knowing that it was clearly not of our making, and that we are doing everything we can to deliver on our strategic priorities. We feel that we can continue to have good relationship with our lenders. We did not repurchase any shares in the third quarter of 2022. Due to the COVID-19 pandemic and its impact on our overall liquidity, our stock repurchase program has and will likely continue to take lower capital allocation priorities for the foreseeable future. I will now turn it over to Andrzej.

[A - Andrzej Matyczynski:]

Thank you, Gilbert. As usual, for those questions that we did not address in the presentations by Ellen and Gilbert, we've put together three or four questions that we will address now. The first one of those, which Ellen will take, what are you hearing and seeing with respect of an increase in the quantity of film to be premiered in theaters, versus reduced number of film studios, have directed to theaters even now post pandemic. Ellen?

[Ellen Cotter:]

All right. Our global programming teams are confident in the quantity and quality of content to be released theatrically in the next few years. Over the past few years, the wide ranging impacts of the pandemic definitely caused a reduction in the number of Hollywood movies being released theatrically. And that reduction in content has been a challenge for the industry across all of our markets. Knowing the value that the studios -- that most of the studios plays on the theatrical window, but recognizing that it'll take some time for production schedules to normalize over the next few years we anticipate that the quantity of Hollywood movies will increase from current levels and begin to approach pre-pandemic levels over the next few years. The 2023 lineup that's been announced so far looks really promising. Disney's got multiple Marvel movies on their release schedule, starting with Ant-Man in February. Warner's and DC Comics will deliver Shazam! and another Aquaman. Barbie and Wonka also look like they'll have wide appeal. Sony has Spider-Man

[Andrzej Matyczynski:]

Thank you, Ellen. The second question relates to $5.9 million purchase price under the option for the Village East ground lease. As that lease continues to amortize off, if no adjustment to the purchase price, have the rents the theater has been paying to related party Sutton Hill Capital already been adjusted down to just the ground lease costs. Gilbert?

[Gilbert Avanes:]

We exercised this option on August 28, 2019. Accordingly, we're legally obligated to close. Due to cash constraint however, we have negotiated various extension of our obligation to close, most recently to July 1, 2024.

[Andrzej Matyczynski:]

Thanks, Gilbert. We received several questions about the status of the Cinemas 1, 2 and 3 and the company's development plans. Stockholders have inquired as to why we have not sold the building and used the proceeds to repurchase shares. Ellen?

[Ellen Cotter:]

We believe that our Cinema 1, 2, and 3 building in New York City, which is located on Third Avenue across the street from Bloomingdale's continues to be a key long term asset. Right now we're operating the building as a three screen cinema. And we've determined it's not the optimal time to shut down a cash flowing venue and commence redevelopment and/or to commence the sale process, when the New York City prices have been negatively impacted by the pandemic, and now the current macroeconomic environment. Accordingly, this asset is not held-for-sale. At the current time, we're also engaged in the negotiation of various loan extensions, re-financings and rent modifications. While we share the view that our shares are materially underpriced, in light of the company's current conditions in negotiations, we don't believe now's the time to activate our stock repurchase program.

[Andrzej Matyczynski:]

And keeping in line with the stock repurchase program, our final question is an amalgam of questions centered on the company's willingness and ability to repurchase the stock. What better use of money is there than buying back shares at these prices? In light of the very cheap RDI stock price, what additional assets could be monetized and used to pay down costly and/or near term debt and thereafter fund the buyback of more deeply undervalued RDI shares? And are there any loan covenants preventing share repurchases? Let me address this. As mentioned in prior earnings calls, we still must face the reality of the COVID effect, ebbing though it may be. Based on our reported numbers, we have supported our business in the first nine months of 2022 to the tune of some $25 million excluding debt repayment and including what we would consider minimal investment in the CapEx need of our business. We are working diligently with our lenders to minimize the impacts of current debt repayment schedules. We had an unrestricted cash balance of approximately $14 million on September 30, 2020. The aforementioned the dollar amounts remained substantially unchanged from June 30 of this year. As stewards of our shareholders money, we need to be certain that what has so far been a strong recovery from the COVID era is sustainable for the future. And we must avoid being placed in a position of either having to sell more assets, taking on expensive debt and/or diluting existing shareholders by issuing stock. Whilst there are no direct loan covenants that would preclude us from repurchasing our stock on the open market, we are in the process of renegotiating various lending arrangements, and we do have liquidity covenants to consider. We believe that our lenders take comfort from our cash balances, even though they do not have any security interest in such deposits. Management reviews and discusses our cash position and capital allocation on an almost daily basis. And buying back a bunch of our shares continues to be an option that forms part of those discussions. We continue to balance the needs of the business so that there is a business to manage in the future against the opportunity currently afforded to us based on the current stock price.

[Andrzej Matyczynski:]

So that marks the conclusion of the call. As usual, we appreciate your listening to the call today. Thank you for your attention, and we wish everyone good health and safety.