Reading International, Inc.
Q2 2020 Earnings Call Transcript

Published: 17 Aug 2020

[Andrzej Matyczynski:]

Thank you for joining Reading International's Earnings Call to discuss our 2020 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, I'll start as usual by stating that 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 2020 second 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 operation. Such costs include legal expenses relating to extraordinary litigation and any other items that could 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; and also property level cash flow, PLCF, which is property-level revenue less direct property-level expenses. 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 the results for the second quarter 2020 and discuss in more detail Reading's precautions and strategies in navigating the COVID-19 pandemic, followed by Gilbert, who will provide a more detailed financial review. Ellen?

[Ellen Cotter:]

Thanks, Andrzej, and welcome, everyone, to the call, and thanks for joining us today. As Andrzej just said, we'll touch on the second quarter results, and we'll touch on our efforts through the quarter to preserve the company's value and to continue to build it for the future. We'll spend more time updating you on where we are today and what we see for the immediate future. At $3.42 million, our Q2 2020 consolidated total revenues were not a surprise, when you take into account the government-mandated closure of our 60 global cinemas and 3 U.S. live theaters for just about the entire calendar quarter. For the first time ever, our quarterly revenues from real estate, at $2.2 million, exceeded our cinema revenues of $1.2 million. Our Q2 2020 was severely impacted by the COVID-19 crisis. All of our 24 U.S. movie theaters and 3 live theaters were closed to the public through the entire quarter. Our 23 Australian theaters were closed for most of the second quarter. 17 cinemas reopened under a staggered timetable throughout June, with the remaining 6 theaters in New South Wales opening on July 1, 2021. And those cinemas that did reopen did so with a 1.5 meter distancing in auditoriums that led to non reclining theaters operating at approximately 25% seating capacity and recliner auditoriums operating approximately 50% seating capacity. However, the primary challenge for Australian cinemas has been the lack of major studio temple releases. Our 10 New Zealand theaters were closed for most of the second quarter as well. They all reopened during the first week in June, except for Courteney Central that remained closed due to seismic concerns. Again, the biggest challenge has been the lack of major studio temple releases. Our Australian real estate portfolio currently includes 80 third-party tenants. Through the second quarter, our centers in Australia, Newmarket Village, Auburn Redyard, Cannon Park and the Belmont Common remained open, but many tenants operated with trading restrictions. During Q2, we granted rent relief in the amount of AUD 565,000 in terms of abatements over the portfolio to many of our smaller tenants. For the most part, our anchored tenants continued to meet their rental obligations. The Q2 consolidated revenues were also negatively impacted by the further weakening of the Australian and New Zealand dollars against the U.S. dollar by 6.1% and 6.7%, respectively, as of June 30, 2020. So because COVID-19 caused a virtual elimination of our revenues, we reported a segment operating loss for the second quarter 2020 of $18.1 million, a negative EBITDA of $17 million and a second quarter 2020 net loss of $22.7 million. The second quarter of 2020, probably the most challenging quarter this company will ever have experienced, was principally about cash and asset value preservation. As a proactive move to protect our liquidity, at the end of March 2020, we drew down on all our credit lines. As of June 30, 2020, our cash position was $40.4 million. And as of that same date, our overall bank debt was $275.9 million. As of today, we've amended our credit agreements and received financial covenant waivers well into 2021 from National Australia Bank and Bank of America. We continue to work with Westpac, which has been our lender in New Zealand for over 15 years. Gilbert will describe these agreements in more detail in a few minutes. However, getting the financial covenant waivers into 2021 has provided us with the needed relief as we bridge the gap to reopening. We obtained rent relief from virtually all of our landlords. Our biggest fixed cost is our leases. While we own the property in 12 of our cinemas around the world, we leased 48 theaters from third-party landlords. We renegotiated the rent deals for almost all of our U.S. cinemas. Typically, these deals allowed for deferral of rent until movies started to be released and thereafter, an extended payback period. We also got rent deferrals and some abatements in Australia and New Zealand. Today, our income statement only reflects the effects of abatement deals since we've continued to accrue the full rental obligation that's been deferred. However, we believe that the payback periods we negotiated are sufficiently long to prevent us from being choked by an avalanche of deferred rent payments. We work to generate alternative sources of income. We were delivering through the second quarter -- through the second quarter, we were delivering and offering curbside pickup for food from a variety of our U.S. cinemas. And we're booking now private showings and gaming at certain cinemas. In addition, we have deferred all our major CapEx projects, except for the completion of 44 Union Square, the tenant improvement obligations for our new Culver City tenant and our consolidated theaters at the Kahala Mall in Honolulu. While we unfortunately did not qualify for PPP financing, we did lay off most of our cinema employees. But did retain key managerial employees and retained almost all of our employees in Australia and New Zealand. While we've been closed, we've been developing new cleaning and sanitization protocols, and physically preparing our cinemas for reopening in a world where COVID-19 may be an ongoing part of our lives for this foreseeable future. Through the quarter, we also continued to advance our 3 most significant real estate projects

[Gilbert Avanes:]

Thank you, Ellen. Consolidated revenue for the second quarter 2020 decreased significantly by 96% to $3.4 million compared to the same period of last year. For the 6 months ended June 30, 2020, revenue decreased by 62% to $52.7 million from the 6 months ended June 30, 2019. These decreases are primarily driven by the temporary COVID-19 related closure of our 60 global cinemas and 3 live theaters in the compliance with governmental directives. We were able to recover some of the revenue losses in the second quarter when we reopened most of our Australian and New Zealand theaters in June and July 2020, excluding our Courtenay Central cinema, which continues to be closed due to seismic issues. Additionally, the Australian dollar and New Zealand dollar depreciated by 6.9% and 6.8%, respectively, against the U.S. dollar measured as of June 30, 2020, which should also be factored in the year-over-year decline. Net income attributable to the RDI common stockholders decreased by $25 million to a loss of $22.7 million for the second quarter of 2020 compared to the net income of $2.3 million in the same period in the prior year. Basic earnings per share for the quarter ended June 30, 2020, decreased by $1.14 to a loss of $1.04 from the prior year quarter. For the 6 months ended June 30, 2020, net income attributable to RDI common stockholders declined by $28.8 million to a loss of $28.6 million compared to the first 6 months ended June 30, 2019. Basic earnings per share decreased by $1.32 to a loss of $1.31 compared to the same period of last year. Non segment G&A expense for the second quarter and first 6 months of 2020 decreased by 16% and 15% to $3.9 million and $8.3 million, respectively, due to lower legal expenses when compared to the same period in 2019. In addition, in Australia and New Zealand, we have received wage subsidies from the local government that covers the majority of our payroll expenses. We anticipate continuing to benefit from the wage subsidy program in New Zealand and Australia through August 2020 and September 2020, respectively. The wage subsidy program in Australia is to be extended but has yet to be codified. Income tax benefit for the quarter and 6 months ended June 30, 2020, increased by $3.2 million and $5.2 million, respectively, compared toward the same period of the prior year. This is primarily driven by the tax benefit from the carryback of 2019 net operating loss as a result of the CARES Act to the 2015 and 2016 taxation year, when the federal tax rate was 35%, offset by an increase in valuation allowance in 2020. For the second quarter of 2020, our adjusted EBITDA decreased by $28.8 million compared to the same period -- prior year period to a negative adjusted EBITDA of $16.9 million. For the 6 months ended June 30, 2020, our adjusted EBITDA declined by $35.2 million to a negative adjusted EBITDA of $18.6 million. This decrease was primarily due to the flow-through of the net loss in the second quarter and for the year-to-date 2020, driven by COVID-19 related factors. Shifting to cash flow. For the 6 months ended June 30, 2020, net cash used by operations increased by $26.2 million to a net cash used of $23.1 million when compared to the same period of prior year. This was primarily driven by $29.7 million lower cash inflow from operating activities as well as the $3.5 million decrease in net operating assets. Cash used in investing activities during the 6 months ended June 30, 2020, decreased by $10 million to $14 million due to a significant decrease in our cinema refurbishment activities compared to the same period in 2019. Cash provided by financing activities was $63.2 million during the first 6 months ended June 30, 2020, and was primarily a result of $87.2 million of new borrowings, offset by $22.3 million of loan repayments. The proceeds of the new borrowings are primarily being used for working capital for ongoing operations in the U.S., Australia and New Zealand as we weather the impact of COVID-19 global pandemic. Turning now to our financial position. Our total assets at June 30, 2020, increased to $687.8 million compared to $675 million at December 31, 2019, primarily driven by the increase in cash and cash equivalent, partially offset by the decline in foreign exchange rates in Australia and New Zealand dollars. As of June 30, 2020, our total outstanding borrowing was $275.9 million. Our cash and cash equivalent at June 30, 2020, were $40.4 million, which includes approximately $22.9 million in U.S., $3.8 million in Australia and $13.7 million in New Zealand. The required shutdown and other operational impact on our business due to COVID-19 pandemic related issue has severely reduced our liquidity from operational sources. As Ellen mentioned, we have successfully negotiated certain modification to our loan agreement with Bank of America, National Australia Bank and Westpac for the quarter ended June 30, 2020, and in some cases, into the future. These loan modifications include changes to some of the covenant compliance terms and waivers to certain covenant testing period for these lenders. We currently have no covenant breaches for which low modifications or waivers to the covenant testing periods have not been obtained. On August 7, 2020, we modified certain financial covenants within our Bank of America credit facility and received waivers for the quarterly financial covenants test for measurement period through September 30, 2021. The test of these financial covenants resume for measurement period ending December 31, 2021. The modifications also include new covenants related to maintenance of certain liquidity level and increases the interest and fees payable through the duration of the credit facility. The company also entered into an amendment with National Australia Bank to its AUD 120 million loan facility dated as of August 6, 2020, that, among other changes, modifies the fixed charge coverage ratio testing for the quarterly through June 30, 2021, so the ratio testing is calculated on each respective quarter's trading performance as opposed to annually and waived the leverage ratio testing through the quarter ended June 30, 2021. The NAB amendment also increased the interest and fees payable on the NAB facility. With respect to Westpac facility on July 27, 2020, Westpac waived the interest cover ratio test through July 31, 2020, with testing of the covenants resuming September 30, 2020. The Westpac amendment increased interest and fees and continued a $10.3 million term deposit. The longer the COVID-19 pandemic and the associated legal and practical limitation on our business exists, the more likely in the absence of other actions by our company that we will be unable to continue to comply with these covenants. However, in such an event, our company expects to be able to obtain an amendment or a waiver from its lenders, but no assurance can be given. In the absence of such waivers, it is our current intention to look to our real estate assets to provide needed liquidity. Prior to COVID-19 pandemic, our global operations strategy had been to conduct businesses mostly on a self-funding basis by country, except for the funds used to pay and appropriate share of our U.S. corporate overhead. However, the need to close our theaters and to offer rent concession to certain of our tenants have reduced revenues and adversely impacted our operational liquidity sources. As mentioned before, through liquidity management practices, we are actively -- and where feasible, postponing or reprioritizing our capital expenditures based on the assessments of the conditions and liquidity requirement during this time. These determinations will be impacted by the timing of our cinema reopening, which will likely vary from jurisdiction to jurisdiction. With that, I will now turn it over to Andrzej.

[Andrzej Matyczynski:]

Thanks, Gilbert. First, I'd like to thank our stockholders for forwarding questions to our Investor Relations email. We have tried to address many of the questions we received in our remarks today. But as usual, in addition, we have compiled a set of questions and answers representing some of the most common questions and recurring themes e-mailed to us.

[Andrzej Matyczynski:]

The first question, can you provide more details about your current liquidity position by geography as of August 12? Please highlight the flexibility with which you can move cash around and also walk through how long that liquidity takes you, assuming theaters remain closed and the third quarter rent abatements provided to Australia and New Zealand tenants remain in place. Gilbert?

[Gilbert Avanes:]

Given the challenges COVID-19 has created for our business, liquidity is of paramount important to us, and we monitor it on a day-to-day basis. As of August 11, 2020, our consolidated cash and cash equivalent totaled $35 million, which includes approximately $16.9 million in U.S., $4.7 million in Australia and $13.4 million in New Zealand. With our U.S. cinemas anticipated to reopen in the near future, we expect to begin seeing our operating cash flow resume again, as we have seen in Australia and New Zealand. With the new temporary terms in place, regarding our current waivers and loan modification to our bank covenants, we are not able to move funds between these facilities. While this does limit us, we see this as a temporary situation that will not hinder our operations in the long term. Even with these restrictions, we will be able to reopen within each of the 3 countries and continue operation as COVID-19 avoidance regulations allow.

[Andrzej Matyczynski:]

Thanks, Gilbert. Perhaps, Ellen, you could deal with this next question. How are you thinking about margins during the ramp-up? How are you thinking about the demand recovery curve?

[Ellen Cotter:]

As I mentioned earlier, we're opening in the U.S. on a stacker basis. We'll open select theaters in Hawaii in a few weeks but not open cinemas or live theaters in New York City or cinemas in California until later in 2020 when the government gives us the okay. So even with Australia and New Zealand maintaining their current trading status, our operating margins during 2020 ramp-up will not look great. For the remainder of 2020, we'll be very focused on our operating costs and maintaining liquidity levels, but we're not diluting ourselves, their costs will be higher. One of the big concerns we have is ensuring that our guests understand our dedication to the highest cleaning and sanitization standards. Our goal is for our guests to leave our theaters knowing their health and well-being is our highest priority. So compounding this will be the fact that we may have seat count reductions and the fact that we'll not likely be able to maximize our showtime schedule during the remainder of 2020. However, once our U.S. cinemas are substantially opened and our Australian and New Zealand theaters continue to operate, and there's a consistent flow of major studio releases, and the public maintains a positive perception about the cinema industry's dedication to health and well-being, we anticipate that the pent-up demand will absolutely serve us very well. The 2021 release calendar looks really strong, so we may return to more consistent cash flows and operating levels in 2021. And we believe our laser focus on cost and liquidity in 2020 will help us with processes and procedures to improve our overall operating margins into the future. Based on the 2022 release schedule announced to date, we're really excited about 2022, and it would be so nice to set another record box top this year in 2022.

[Andrzej Matyczynski:]

Thanks, Ellen. So what will our ticket pricing look like once we open our U.S. assets, Ellen?

[Ellen Cotter:]

Well, we know that -- as I just mentioned, that the operation of our U.S. cinema is going to be more expensive. Our costs related to labor, our new cleaning and sanitization protocols will all add pressure to our margins. And as I just mentioned, our revenues will be constrained by various factors. In light of these pressures and following up on our Q1 earnings call, we'll be doing a full pricing review to take into account all relevant factors and make a determination as to ticket pricing that would improve our overall profitability in each market. We do note, however, that we think that our standard weekend pricing will reflect upward price movements.

[Andrzej Matyczynski:]

Thanks, again. Now a more strategic question. Given the difference in market valuation, do you believe there's value in separating the real estate and the theater business, Ellen?

[Ellen Cotter:]

Over the years, we've talked about separating our 2 businesses. It's been and continues to be our belief that the interest of our company and stockholders generally is best achieved by continuing our current diversified business plan. At the present time, our cinema revenues are obviously depressed. However, we don't believe that this is a permanent condition, and we take comfort in the slate of movies to be released during the fourth quarter and into 2021 and 2022. It's our cinema and live theater operations that have allowed us to amass the real estate portfolio we enjoy today. In addition, the majority of our real estate assets, particularly in Australia and New Zealand, are anchored by one of our cinemas. This has not been by accident, but by design, as we believe the synergy between the cinemas and the majority of the real estate assets in our portfolio creates true value for our stockholders. And it's our line of credit -- support -- lines of credit supported by, in part, those real estate assets that are providing us with the liquidity we need today to continue our business during the COVID period.

[Andrzej Matyczynski:]

Thanks, Ellen. So we'll wind this up with a final question that I'll I field. In the recent past, the company has attended less investment conferences. What additional Investor Relations proactive steps will the company take to better educate the market about Reading? With the current pandemic and the unlikelihood we will see in-person investor conferences in the near future, what if any increasing number of online conferences that are being offered has or is Reading pursuing? Well, since the COVID-19 shutdown in mid-March, the company has been focusing on addressing the issues caused by that closure of all our cinemas and a substantial part of our real estate portfolio. We did, however, attend the virtual Gabelli conference in early June of this year. The workload-related drop of coverage by B. Riley has driven our more customary attendance at these conferences down from between 2 and 3 a year to only 1 or 2. We have been reviewing the remote conferences that are becoming the norm in the pandemic era and have narrowed our field to 2 or 3 potential candidates of which we will choose 1 to participate in during the September, October time frame. For 2020, we do not envision participating in more such conferences, but we'll reevaluate such participation, either remotely or in person in early 2021 for the coming year. That marks the conclusion of the question-and-answer session and the call. We appreciate, as always, you listening to the call today. Thank you for your attention. And we wish everyone a good health and safety.