Reading International, Inc.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Andrzej Matyczynski:]

Thank you for joining Reading International’s Earnings Call to discuss our 2020 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 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.

[Ellen Cotter:]

Thanks, Andrzej. Thank you, everyone, for joining our call today. I’d like to start by saying that all of us at Reading International hope that you, your family and your friends remain healthy amid the continuing challenges with COVID-19. The COVID-19 crisis and its wide-ranging implications significantly affected our third quarter results. Governments have forced cinema closures, causing major studios to postpone their movies or move them off the theatrical release schedule and go directly to online platforms. Where we have been permitted to reopen, we are typically being required to operate with government-imposed seat capacity restrictions and in some cases, have not been able to sell food and beverages. At $10.2 million, our Q3 2020 consolidated total revenues represented a significant decrease versus Q3 in 2019. This depressed level of revenues resulted in a segment operating loss of $14.3 million, negative EBITDA of $11.7 million and a net loss of $19.2 million. Needless to say, it’s been a very difficult operating environment for us. But to date, our company has weathered the storm, and we anticipate that it will continue to do so. This is the product of

[Gilbert Avanes:]

Thank you, Ellen. Consolidated revenue for the third quarter 2020 decreased significantly, by 86% to $10.2 million compared to the same period last year. For the nine months ended September 30, 2020, revenue decreased by 70% to $62.8 million from the nine months ended September 30, 2019. These year-to-date decreases are primarily driven by temporary COVID-19 related closures of our 60 global cinemas and three live theaters in compliance with governmental directive starting in March 2020. We were able to recover some of the revenue losses in the second and third quarter due to the reopening of most of our Australia and New Zealand theaters in June and July of 2020, excluding our Courtenay Central cinema, which continues to be closed due to seismic issue, and partially reopened in the U.S. cinemas circuits. Additionally, during the third quarter of 2020, the Australian dollar and the New Zealand dollar strengthened by 4.4% and 2.1%, respectively, against the U.S. dollar. Net income attributable to RDI common stockholders decreased by $20.1 million to a loss of $19.2 million for the third quarter of 2020 compared to the net income of $0.9 million in the same period of the prior year. Basic earnings per share for the quarter ended September 30, 2020, decreased by $0.92 from prior year quarter to a loss of $0.88. For the nine months ended September 30, 2020, net income attributable to RDI common stockholders declined by $48.9 million to a loss of $47.8 million, compared to the first nine months ended September 30, 2019. Basic earnings per share decreased by $2.25 to a loss of $2.20 compared to the same period of last year. Non-segment G&A expenses for the third quarter and the first nine months of 2020 decreased by 35% and 21% to $2.9 million and $11.2 million, respectively, due to the affirmation on the PL by Nevada Supreme Court of $0.8 million judgment entered in favor of our company in the James Cotter, Jr. derivative litigation. In addition, both the third quarter and year-to-date decreases are also due to savings in payroll costs as a result of wage subsidy programs in Australia and New Zealand, a reduction in corporate staff, along with reduction costs related to corporate airfare and travel as a result of COVID-19 travel restriction, a decrease in professional and legal services. The wage and subsidy program is currently experienced in New Zealand. The wage subsidy program in Australia currently goes through December 31, 2020, but was extended to March 27, 2021 under a reduced rate scheme, which requires a further application to be submitted for the first quarter of 2021. No assurance can be given that we will qualify for this scheme in Q1 2021 or if our application will be successful. Income tax benefit for the quarter and nine months ended September 30, 2020 increased by $1 million and $6.2 million, respectively, compared to the same period of the prior year. This is primarily driven by tax benefits from the carryback of the company’s 2019 net operating losses as a result of CARES Act, the 2015 and 2016 tax years where the federal tax rate was 35%, offset by an increase in valuation allowance in 2020. The carryback of 2019 net operating loss and the refund claim for 100% of the remaining alternative minimum tax credit will result in a tax refund of approximately $5.1 million receivable at September 30, 2020. For the third quarter of 2020, adjustable EBITDA decreased by $20.7 million compared to the same prior year to a negative adjusted EBITDA of $11.6 million. For the nine months ended September 30, 2020, our adjusted EBITDA declined by $56 million to a negative adjusted EBITDA of $30.3 million. This decrease was primarily due to the flow-through of the net loss in the third quarter and for the year-to-date 2020, driven by COVID-19-related factors. Shifting to cash flow for the nine months ended September 30, 2020. Net cash used by operating increased by $38.8 million to net cash used of $28 million when compared to the same period of prior year. This was primarily driven by $51.3 million lower cash inflow from operating activities as well as $12.4 million decrease in net operating assets. Cash used in investing activities during the nine months ended September 30, 2020 decreased by $16.5 to $16.6 million, resulting from completion of the construction, except for minor punch-list items of our 44 Union Square property along with suspension of our cinema refurbishment activities due for COVID-19 shutdown when compared to the same period in 2019. Cash provided by financing activities was $57.3 million during the first nine months ended September 30, 2020 and was mainly a result of $87.8 million of new borrowings, offset by $28.9 million of loan repayments. The proceeds of the new borrowings are primarily being used to provide working capital for ongoing operations in 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 September 30, 2020 decreased slightly to $673.4 million compared to $675 million at December 31, 2019, primarily driven by a decrease in operating, lease write-off use asset, offset by an increase in cash and cash equivalents. As Ellen mentioned, during the third quarter of 2020, we paid down $5.8 million on our Bank of America revolving credit facility. As of September 30, 2020, our total outstanding borrowings were $274.1 million. Our cash and cash equivalents at September 30, 2020 were $27.8 million, which includes approximately $8.8 million in U.S., $6.2 million in Australia and $12.8 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 our operational sources. We have successfully negotiated certain modifications to our loan agreement with Bank of America, NAB and Westpac for the quarter ended September 30, 2020, and in some cases, into the future. These loan modifications include changes to some of our covenant compliance terms and waivers to certain covenant testing period. We currently have no covenant breaches for which loan modifications or waivers to the covenant testing periods have not been obtained. And to date, it has not been necessary for us to seek modifications or waivers with respect to our other loan agreements, as we continue to be in compliance with the terms of such loan agreements without the need for any such modification or waivers. We believe that our landlords understand that current situation is not of our making that are – that we are doing everything that can be reasonably done and that our relationship with our lenders is good. With respect to our Westpac facility, on September 15, 2020, Westpac waived interest coverage ratio test through September 30, 2020. 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 lender, but no assurance can be given. In the absence of such waivers, it is our current intention to look to our real estate asset to provide needed liquidity. Total debt against our 44 Union Square property in Manhattan aggregates to $40.1 million. We are currently seeking takeout financing for that property. And while no assurance can be given, we are optimistic that a refinancing freeing of substantial capital can be finalized this year. This would allow us to have increased liquidity while we manage our business in light of COVID-19 impact. We did not repurchase any shares in the third quarter. And due to COVID-19 pandemic and its impact on our overall liquidity, our 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 Andrzej.

[Q -:]

[A - 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 as many of your issues in the prepared remarks. However, we have also compiled a set of five questions and answers representing the most common questions and recurring themes e-mailed to us. So the first question, which Ellen will answer, has the company consulted with bankruptcy counsel, and would a prepackaged bankruptcy or any combination of possible in- or out-of-court restructuring solutions potentially get some relief with regard to the various facilities with BofA as an administrative agent? Is the BofA debt recourse to the company? Or is its collateral pool limited to some subset of the operating cinema assets in the U.S. Ellen?

[Ellen Cotter:]

Our Board is focused on the best interest of the company. Through preserving stockholder value and guiding the company’s survival and future prosperity. My sister and I and our family collectively own over 20% of the equity of our company, and we’re fully aligned with all the stockholders in this regard. We work with a range of advisers and are confident we have the expertise that we need at this time. We’re focused on specific negotiations with our landlords and our lenders. Right now, we consider our relations with both groups to be good. Our landlords and our lenders have been reasonable and cooperative through the whole pandemic. Our credit facilities are not cross-collateralized. Our $55 million credit facility with Bank of America and Bank of Hawaii is secured only by our domestic cinema assets. Our $120 million facility with National Australia Bank is secured only by our Australian assets. Our $32 million Westpac facility is secured only by our New Zealand assets. None of these loans provide for recourse against Reading or against any other assets. Our single-asset U.S. real estate loans have certain guarantee provisions but have sufficient equity cushions as to render those guarantees, in our view, immaterial. We’ve got several debt-free properties

[Andrzej Matyczynski:]

Thanks, Ellen. Don’t step back from the microphone just yet. We have another question for you. In light of the increased liquidity challenges facing the company from COVID-19 closures and long-term attendance loss, combined with the very cheap RDI stock price, what real estate, including Cinemas 1, 2 & 3, doesn’t offer optimal returns to monetize, pay down debt and eventually, post-pandemic fund buyback of more shares? Ellen?

[Ellen Cotter:]

Okay. Let me focus on the Cinema 1, 2 and 3 here. Based on recent pre-COVID-19 appraisals, the value of this asset is significant. We don’t believe a sale during the height of the COVID-19 pandemic will be the best course for the company and its stakeholders. Because of the value of this asset, we need to have greater certainty about New York City and its recovery before determining next steps. Likewise, we will not be pursuing a development in the short-term until we have greater clarity about New York City as a market and the highest and best use for the property. In the interim, we’ll continue to operate the space as a movie theater and generate cash flow.

[Andrzej Matyczynski:]

Given the increased M&A environment, Ellen, would you contemplate participating in this as things return?

[Ellen Cotter:]

Since the onset of COVID, we’ve looked at the materials for the sale of a few theater circuits. However, given our immediate liquidity situation, the more realistic outcome for us at the moment is to pursue single theater opportunities in strategic key markets. We’re thankful that we imposed a disciplined, methodical and rigorous approach to analyzing any theater opportunity over the last five years. And that same analysis will be applicable to new opportunities arising as a result of the COVID-19 pandemic.

[Andrzej Matyczynski:]

Thanks, Ellen. Gilbert, following the waivers we received, what are the key financial covenants on our current bank debt?

[Gilbert Avanes:]

Predominantly, our covenants have stayed the same, and waivers have been obtained. But where covenant testing is still required, the thresholds have been lowered in order to provide relief where necessary. In addition to these modifications, we have additional liquidity testing that is now required. As we move forward, we’re continuously working closely with our banks to ensure we are meeting all requirements.

[Andrzej Matyczynski:]

The leverage looks to remain elevated for the foreseeable future, Gilbert. Do you think land or sale – asset sales are in the cards to pay down debt?

[Gilbert Avanes:]

Our strategy of having our two diverse businesses and historically using the cash generated from our cinema business to invest in our real estate business has given us the ability to grow a strong, diverse real estate portfolio in three different countries. These strong real estate assets have assisted in carrying us through during this difficult period. We currently have finished the construction phase of our 44 Union Square property and looking to move our loan from construction financing to conventional loan, which would provide us with increased flexibility as we continue to work through the COVID-19 pandemic. We also have been assessing our objectives that are within our three-year strategy to make sure any decisions we make would align and create long-term value for our stockholders. While it is not in our plan right now to sell any of our land or asset, we continuously assess our position on an ongoing basis.

[Andrzej Matyczynski:]

Thanks for the answer, Gilbert. With that, we’ll mark the conclusion of the call. We appreciate you listening to the call today. We thank you for your attention and wish everyone good health, and please stay safe in these COVID times.