Reading International, Inc.
Q1 2016 Earnings Call Transcript

Published: 17 May 2016

[Andrzej Matyczynski:]

Hello everyone. Thank you for joining Reading International's Earnings Call to discuss our First Quarter 2016 Results. My name is Andrzej Matyczynski. I'm Reading's Executive Vice President of Global Operations. With me are Ellen Cotter, our President and CEO; and Dev Ghose, our Chief Financial Officer and Executive Vice President. Before we begin the substance of the call, I wanted to begin 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 risk, 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 public update or revise any forward looking statements. So, with that behind us, Dev will be talking to us about the financial results for the first quarter a little later. But first I'll turn the call over to Ellen who'll update us on the operations of the company.

[Ellen Cotter:]

Thanks, Andrzej and thank you everyone for joining us today for our first earnings call. We hope these earnings calls will provide you with a better understanding of our strategy and results and they'll be part of our efforts to enhance our communications with you going forward. For those of you new to Reading let me start with a quick overview of our company. We're both a cinema and real-estate company. We've 57 cinemas with 461 screens in the United States, Australia and New Zealand. And in those three countries we also manage and develop real-estate including three off-Broadway theatres. Our focus is on building long term value for our stockholders through the opportunistic and synergistic development of entertainment and real-estate assets. This value creation comes from the complementary nature of our existing entertainment and real-estate portfolio and the pursuit of new opportunities which meet our investment criteria. For years our cinemas have provided a steady cash flow to support our real estate development. Our real estate management development has and will continue to enable us to develop a strong property portfolio and create long term value for our stockholders. Being an anchor tenant in our own entertainment themed centers gives us the ability to leverage operational and marketing strategies across our centers to drive incremental profitability. This is a win-win not only for Reading as both landlord and tenant, but also for our third party tenants and ultimately our stockholders. Now let me turn to our cinema business which as I mentioned provides us with steady cash flow. Through our implementation of various operational and marketing efforts our global cinema strategy is to create inspiring cinema experiences for our guests. We manage our cinemas under various brands; in the U.S., under the Reading Cinema, Angelika Film Center, Consolidated Theatre and City Cinemas brands. As you may know the Angelika Film Center in New York City is one of the highest grossing dedicated art houses in North America. Because of this Angelika and now others in our circuit were known in the U.S. for a focus on specialty film programming. In Australia and New Zealand we operate under the Reading Cinemas brand. Overall our global cinema business had a strong first quarter. In fact the first quarter of 2016 represented a record historical first quarter in terms of total cinema revenue. Our global cinema revenues increased by 8% to $61.3 million. First quarter cinema operating income increased by 21% to $7.7 million. As Dev will elaborate on later we drove this increase despite a weakening of the Australian and New Zealand dollars against the U.S. dollars. Our performance this quarter was helped by several great releases, Batman v Superman

[Dev Ghose:]

Thank you, Ellen. Before I start, let me state that we may discuss non-GAAP financial measures on this call. Reconciliations and definitions of non-GAAP financial measures which are segment operating income and EBITDA are included in our first quarter 2016 earnings release recently issued and on the Company’s Web site at www.readingrdi.com/press-releases. Now I’ll discuss the financial results for the quarter ended March 31, 2016. We started very strong for 2016 the first quarter of 2016 represented for us one of our strongest quarters in our history. Segment operating income at $9.8 million, represents the second highest quarterly level in the history of the Company and was not significantly behind the record levels attained in the second quarter of 2015. We grew consolidated revenue by 7% to $64.8 million. Growth was impacted by the weakening Australian and New Zealand dollars against the U.S. dollar. In local currencies and by geographic location revenue growth for the U.S. was 13%, Australia was 8% and New Zealand was 26%. Net income was lower by $892,000 from the same period a year ago, which was due to a significantly higher realized gain on the sale of certain property in 2015. In the first quarter of 2016, we closed the sale of a property in Taupo, New Zealand for NZD1.2 million. Consequently earnings per share slightly declined from $0.13 in the first quarter of 2015 to $0.10 in the first quarter of 2016. Looking now at cash flows, there we drove significant improvements, our net cash provided by operations for the first quarter of 2016 was 4.4 million approximately six times more than what we collected in the same quarter of the prior year. We spent $4.2 million on property and leasehold enhancements for the first quarter of 2016 mainly on our cinema locations which is consistent with the strategic priorities Ellen mentioned earlier on investing and delivering best in class cinematic experiences to our customers. We believe we will be able to earn higher returns as a result of improving our cinemas amenities. For the quarter we also repaid borrowings by $6.8 million. Interest expense was lower by 27% due to the renegotiation of our loan facility in Australia as well as from the effect lower debt balances due to the repayment of our current loan. Our general and administrative expenses were higher by $1.6 million due to higher legal and audit expenses and for expenses related to the change in status of certain executives. We believe that approximately a $1 million of this increase is attributable to one-time non-recurring items. The first quarter 2016 earnings which we released recently in a press release is posted on our website and mirrors what I just presented. Going into depth with regard to our segment results in the cinema business operating income for the first quarter of 2016 increased 21% or 1.4 million compared to the prior year to 7.7 million primarily driven by higher admission and concessions revenues partially offset by unfavorable foreign exchange average rate movements on foreign operations. The first quarter 2016 revenue in the United States increased by 14% or 4.2 million primarily driven by increased attendance, higher ticket prices and higher concessions revenue. Australian cinema revenue decreased by 3% or $685,000 primarily due to the unfavorable impact from foreign exchange average rate movements. When expressed in local currency Australian cinema revenues increased by 7% or AUD1.8 million due to higher admissions. In New Zealand cinema revenue increased by 16% or 878,000 mainly due to higher admission revenue and higher concession revenue as a result of higher attendance and the opening of our new LynnMall cinema in November 2015 which was partially offset by unfavorable impacts from foreign exchange movements. When expressed in local currency however New Zealand cinema revenues increased by a strong 32% or NZD2.3 million. The three top grossing films for the first quarter of 2016 were Deadpool, Star Wars

[Andrzej Matyczynski:]

Thank you, Dev. With that, I’d like us to address a few recurring questions we’ve received during the quarter with regards to our strategy and performance. The first question; why did you decide to start host quarterly conference calls? I think my colleague Dev can best address that issue.

[Dev Ghose:]

Thanks Andre. So I’ve go in beginning to host quarterly earnings calls now, to enhance our communications and our relations with our stockholders and other stakeholders. We work very hard to drive value for our stockholders and hope that these calls help demonstrate our commitment to achieving this very important objective.

[Andrzej Matyczynski:]

Thanks, Dev. Next question; would you consider selling Cinemas 1, 2 and 3 instead of the redevelopment? I think this one is for you Ellen.

[Ellen Cotter:]

Thanks Andre. We’ve spent a considerable amount of time evaluating the Cinema 1, 2 and 3, and had to leverage this asset to best drive value for our stockholders. Today, we believe redeveloping the property is in the best interest of our stockholders as it will create incremental value. As we’ve already publicly reported, we were pleased to get the consent of our partners to redevelop the property. And together with the owners of the 2,600 square foot parcel next to ours on the corner 60th Street and Third Avenue we’ve completed a preliminary feasibility study for the joint development of our property. Today, we’ve evaluating the potential to redevelop with various components, retail, residential and/or hotel. The combination of our properties would produce the ability to construct up to approximately 121,000 square feet of FAR and approximately 140,000 square feet of gross buildable area. But a couple of points to note here; one, as with all negotiations no assurances can be given that we’ll be able to come to terms with our adjacent owners and proceed with this development. Two, this is a terrific piece of property located across the street from Bloomingdale and today we don’t believe there will be any material benefit to incurring the cost and expenses of in-essence swapping this property for another property in a less attractive location. And lastly, we haven’t been hesitant to sell assets when we believe that the sale can create more value for our stockholders, having sold for example like Taupo in New Zealand, Burwood in Australia and our condo Doheny Drive in Los Angeles.

[Andrzej Matyczynski:]

Thanks Ellen. Next question; can you provide an update on your as standing litigation? One for you again Ellen.

[Ellen Cotter:]

Thanks. Other than what’s already been reported in our public filings it's our Company’s policy not to comment on active or pending litigations. But with that said, on the two outstanding derivative suits against the Company, I’ll note again that most of the legal fees incurred by our directors and officers are now being handled by our D&O insurance carrier. The discovery phase of both lawsuits is underway and we continue to vigorously defend our position. And as we’ve previously shared with you in December last year the arbitrator in the STOMP matter determined that we had not breached our license agreement with respect to the show and issued a permanent injunction prohibiting the producers from transferring the show to any other off-Broadway theater in New York and awarded us, our attorneys’ fees and costs in an amount to be determined by the arbitrator. And recently in April, the arbitrator fixed the amount of such attorneys’ fees and costs at $2.3 million. We’ve filed the arbitrator’s final word with the New York Supreme Court and are in the process of collecting the awards. STOMP continues to play at our Orpheum Theater today and we anticipate that it will continue to play at that theater for the foreseeable future, assuring the ongoing profitability of that property. We are pleased with the outcome of the STOMP matter, but beyond that, I’ve got no further comments on our litigation.

[Andrzej Matyczynski:]

And the fourth question, how will Union Square property be divided between retail and office use? One for you again Ellen.

[Ellen Cotter:]

I would encourage our listeners to visit our Web site, 44unionsquare.com to see how we envision the build being divided between retail and office. Today, we anticipate that one or more retail tenants may occupy the seller ground and second and maybe even the third floors while office users could occupy the fourth, fifth and sixth floors. We're really encouraged with the level of retail tenant interest we've received so far. We'll continue to keep you up to date.

[Andrzej Matyczynski:]

Alright then I think we have time for one for question and I think this is tailor made for Dev. Why was Reading unable to file its 10-K on time?

[Dev Ghose:]

Thanks, Andre. So the delay in filing our 10-K was due to our needs to complete a more thorough review of the accounting treatment for older income tax matters. The net effect actually was an increase to income of 514,000 for 2015, all of which related to prior year income taxes. We filed our 2015's Form 10-K on April 29, 2016. And as a result we regained our compliance with the NASDAQ listing qualifications department. So, with that I'll turn the call back to Andre.

[Andrzej Matyczynski:]

Thank you, Dev and thank you Ellen. With this last question we'll wrap up the call. As always Ellen, Dev and I are available to answer questions you may have going forward. We appreciate your listening to the call today and look forward to keeping you updated on our performance on future earnings calls and through our ongoing communications. Thank you again.

[Ellen Cotter:]

Thank you.