Earnings Call Transcript - RDI Q4 2022

Andre Matyczynski, Executive Vice President of Global Operations

Thank you for joining Reading International Earnings Call to discuss our 2022 Year-end and Fourth Quarter Results. My name is Andre 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 will 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, and our remarks today are qualified in their entirety by the more detailed disclosures in our recently filed annual report on SEC Form 10-K. 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 fourth 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 operations. Such costs include legal expenses relating to extraordinary litigation and any other items that we can consider to be nonrecurring in accordance with the 2-year SEC requirement for determining when 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. ATP (average ticket price) is also used as an accepted industry acronym. We also use a measure referred to as 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-K 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 full year and fourth quarter results and discuss our strategy for continuing to navigate Reading International through the lingering effects of the COVID-19 pandemic and into the post-COVID era, followed by Gilbert, who will provide a more detailed financial review. Ellen?

Ellen Cotter, President and Chief Executive Officer

Thank you for joining our call today. 2022 was another year of recovery from the pandemic for us. Our total consolidated revenue for 2022 was $203.1 million, reflecting a 46% increase from 2021 and reaching 73% of our 2019 total revenue of $276.8 million. Although we reported an operating loss of $28.5 million, this was a 32% improvement compared to 2021, but it still fell short of the $9.1 million operating income we had in 2019. Our Global Cinema revenue for 2022 rose to $191.3 million, a 50% increase from 2021 and 73% of the revenues from 2019, which were $262.2 million. We are encouraged by these results, especially considering the various challenges we faced, including inflation, rising interest rates, supply chain disruptions, labor shortages, and currency fluctuations. Throughout 2022, cinema audiences expressed their enthusiasm for returning to theaters when the content appealed to them. Films like Top Gun: Maverick and Avatar: The Way of Water achieved record box office numbers. Major studios have resumed a focus on theatrical releases, catering to diverse audiences. Family-friendly films such as Minions: The Rise of Gru and Puss in Boots attracted younger viewers, while titles like Elvis and Where the Crawdads Sing appealed to older demographics. However, overall, the year lacked a consistent flow of movies compared to previous years. In 2022, we also renovated two theaters, Reading Cinemas in Invercargill, New Zealand, and our theaters in Kapolei, Oahu. Additionally, we took over the operation of a 6-screen theater in Armadale, Western Australia. Our Real Estate division saw strong growth, with revenues increasing by 32% compared to 2021 and operating income doubling, thanks to reintroducing intercompany rent to our cinemas in Australia and New Zealand. We also held public performances in our live theaters throughout 2022. We signed a significant lease with Petco for our 44 Union Square location, anticipating the opening of a flagship store in mid-2023. Our Australian real estate portfolio maintained a 96% occupancy rate. By December 31, 2022, we had cash and cash equivalents of nearly $30 million and reduced our global debt by almost 10% to $215.6 million. Despite these positive developments, we still have challenges ahead. Like other exhibitors, our Q4 2022 results fell short compared to Q4 2021. Our consolidated total revenue for Q4 2022 was $47.2 million, representing a 5% decline from the previous year. We faced an operating loss of $8.4 million, an increase from the $4.3 million loss in Q4 2021. The negative EBITDA of $4.6 million in Q4 2022 was down from a positive EBITDA of $2.9 million in Q4 2021. These results were influenced by a weaker film slate in Q4 2022, with fewer wide releases, and the quality of films did not compare with those of Q4 2021. However, our real estate operations remained strong and supported the company during this period. Real estate revenue rose by $1.7 million in Q4 2022, mainly due to increased rental income across all three countries. During the pandemic, we did not receive any federal funding from programs like the Shuttered Venue Operator Grant or the Payroll Protection program, which meant we relied on our resources and took necessary steps to protect our stakeholders. We strategically monetized certain assets during 2021 to navigate through the downturn. Given the ongoing rise in interest rates and operational costs, we are evaluating underperforming cinema assets and other real estate for potential monetization as part of our recovery plan. Looking at our global cinema business, which has historically supported our growth, we saw no pandemic-related closures in 2022. In Q4 2022, our global cinema revenue decreased by $3.4 million, or 7%, compared to Q4 2021. For the full year, revenue rose by 51% to $191.3 million. Despite significant box office successes like Black Panther: Wakanda Forever and Avatar: The Way of Water, we still noted fewer wide releases in Q4. For the full year, films such as Top Gun: Maverick and Jurassic World Dominion showed that audiences are eager to return to cinemas. Moving into Q1 2023, we expect revenues to surpass Q1 2022, driven by successful films like Megan and Ant-Man Quantumania. We anticipate a strong 2023 with upcoming blockbusters like The Super Mario Bros. Movie, Guardians of the Galaxy Volume 3, and more. We are also encouraged by major streaming platforms committing to theatrical releases. To counter inflation, we adjusted our ticket prices, achieving record average ticket prices in each country during Q4 2022. Our food and beverage results also showed impressive growth, setting record highs in all regions. Our U.S. cinemas saw revenue decrease slightly in Q4, yet overall for 2022, revenue increased significantly. Specialty cinemas like the Angelika in New York City bounced back with strong box office numbers and attendance. We also launched the Angelika membership program to engage audiences further. In 2023, we will continue renovations to improve the experience in our theaters, including upgrading the Angelika Film Center in Dallas. In Australia and New Zealand, we had slight revenue declines in Q4 but saw significant yearly improvements in total revenue and operating income. Technological advancements and the launch of our Reading app enhanced our service offerings and positioned us for a successful 2023. Overall, our dual strategy allowed us to maintain stability during the pandemic, and we are optimistic about our real estate portfolio's potential moving forward. That concludes my overview of our performance for the year and Q4 2022 results. Now I will pass this to Gilbert.

Gilbert Avanes, Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Ellen. Consolidated revenues for the quarter ended December 31, 2022, decreased by $2.7 million to $47.2 million when compared to the same period in the prior year. For the year ended December 31, 2022, revenues increased by $64.1 million to $203.1 million for the year ended December 31, 2021. These increases were primarily driven by no mandated closure in 2022 compared to 2021 and the release of several major films in 2022, which led to an increase in attendance compared to 2021. Net income attributable to Reading International for the quarter ended December 31, 2022, decreased by $13.6 million to a net loss of $13.2 million when compared to the same period in the prior year. Basic earnings per share decreased by $0.62 to a basic loss per share of $0.60 for the quarter ended December 31, 2022, compared to the quarter ended December 31, 2021. These results are due in large part to the increase in cinema expenses in Q4 2022 compared to Q4 2021. While cinema operations for Q4 2022 were weaker than Q4 2021 as a result of Spider-Man: No Way Home being released in December 2021, which was the highest performing title of the year in 2021. For the year ended December 31, 2022, net income attributable to Reading decreased by $68.1 million to a net loss of $36.2 million compared to the same period in the prior year. Basic earnings per share for the year ended December 31, '22, decreased by $3.10 per basic loss per share of $1.64 compared to the year ended December 31, 2021. Decreases were largely due to the one-time gain on sale of assets, which accounted for a $92.2 million gain on sale of assets that occurred in 2021 and were not repeated in 2022. Non-segment G&A expense for the quarter ended December 31, 2022, and the year ended December 31, 2021, decreased by $1.7 million and $0.4 million to $3 million and $16.2 million, respectively, compared to the same period in the prior year. For the quarter of 2022, income tax expense decreased by $5.8 million to $0.7 million compared to the equivalent prior year period. We experienced an income tax expense of $0.8 million for the year ended December 31, 2022, a decrease of $5.1 million when compared to the same period in the prior year. The change between '21 and '22 was mainly related to the increased income tax expense in 2021 as a result of monetization of our 5 assets. For the fourth quarter of 2022, our adjusted EBITDA decreased by $7.4 million compared to the same prior year period to a loss of $4.6 million. For the year ended December 31, 2022, our adjusted EBITDA decreased by $74.3 million to a loss of $55,000 compared to the year ended December 31, 2021. This decrease was primarily the result of our gain on the sale of assets, which occurred in 2021 and was not repeated in 2022. Shifting to cash flows. For the year ended December 31, 2022, net cash used in operating activities increased by $12.9 million to net cash used of $26.4 million when compared to the same prior year period. This was primarily driven by a $26.1 million increase in net changes in operating assets and liabilities, primarily resulting from taxes payable, accounts payable, and film rents payable, offset by a $13.2 million decrease mainly attributed to an improved cinema operating performance compared to the prior year period. Cash used in investing activities during the 12 months ended December 31, 2022, was $9.5 million compared to the cash provided by investing activities of $129.6 million for the 12 months ended December 31, 2021. This change was primarily due to the asset monetization of certain assets that occurred during 2021 and was not repeated in 2022. Cash used in financing activities during the 12 months ended December 31, 2022, was $16.6 million, which was a decrease of $33.7 million. This decrease was primarily due to the large debt repayment that occurred in the prior year. Turning now to our financial position. Our total assets on December 31, 2022, were $587.1 million compared to $687.7 million on December 31, 2021. This decrease was partly driven by a $53.3 million decrease in cash and cash equivalents by which we funded our ongoing business operation and paid down debt, asset depreciation and amortization of leases. The increase in cash in 2021 was primarily related to a one-time monetization of 5 of our real estate assets during 2021. As of December 31, 2022, our total outstanding borrowings were $215.6 million compared to $236.9 million on December 31, 2021. Our cash and cash equivalents as of December 31, 2022, were $29.9 million, which includes approximately $24 million in the U.S., $4.9 million in Australia and $1.1 million in New Zealand. Further to address the impact of COVID-19 on our business, we sought and obtained certain modifications to our loan agreement with the Bank of America, NAB and Westpac. These loan modifications include changes to some of our covenant compliance terms and waivers of certain covenant testing periods. We are currently in compliance with our loan covenants as so modified. To date, it has not been necessary for us to seek modification or waivers with respect to our other loan agreements as we continue to be in compliance with the terms of such loan agreements with the need for any modifications or waivers. During the full year and the fourth quarter of 2022 and in the first quarter of 2023, we exercised the first of two 6-month options to extend the Cinemas 123 Term Loan on March 3, 2022, and then exercised the second extension option on September 1, 2022, taking the maturity to April 1, 2023. On March 15, 2023, the maturity was further extended by 90 days to July 3, 2023, and we are currently working with our existing lender to complete a longer-term refinancing of the Cinemas 123 Loan. We repaid and retired $12.7 million of our line of credit with Bank of America throughout 2022. On November 29, 2022, we further modified our credit agreement with Bank of America, which extended the term by 1 year to March 1, 2024, and amended the scheduled repayment. On March 30, 2023, we further modified this facility, which extended the maturity date to September 4, 2024, and created a modified repayment schedule. We repaid and retired AUD 1 million of our revolving corporate material loan facility with the National Australia Bank throughout 2022, and on December 15, 2022, we extended the term of our NAB facility to June 30, 2024. Westpac has waived the requirement to test certain covenants for each quarter since the third quarter of 2022, including the fourth quarter of 2022. Our waiver also removes the requirement to test certain covenants up to and including the first quarter of 2023, with testing resuming for the second quarter of 2023. Certain covenant ratios were also adjusted. As we continue to focus on preserving our liquidity, no shares were purchased during the year ended December 31, 2022, and our stock repurchase program has and will likely continue to take lower capital allocation priority for the foreseeable future.

Andre Matyczynski, Executive Vice President of Global Operations

Thanks, Gilbert. Firstly, I'd like to thank those stockholders for forwarding questions to our Investor Relations email. As usual, in addition to addressing many of your questions in the prepared remarks from Ellen and Gilbert, we've selected a few additional questions to offer further insights from management. The first question: Now that the proposed grocery tenancy obligation has been completely removed, what is the timing and/or milestones toward finalizing a larger redevelopment plan for Courtenay Central in New Zealand? Ellen?

Ellen Cotter, President and Chief Executive Officer

In the first instance, we continue to work with various stakeholders on the reactivation of Courtenay Central. Reactivating our Reading Cinemas is our priority goal. However, we're also evaluating the future feasibility of developing the wider Courtenay Central precinct, which encompasses all of our Wellington real estate assets and development must be economically feasible for our company. Our goal is to create a dynamic addition to Wellington's vibrant Te Aro district that now offers both domestic and international travelers a cultural destination that includes the renovated St. James Theatre, the newly completed Takina Convention and Exhibition Center, New Zealand's National Te Papa Museum and the beautiful Wellington Harbor. As of today, we don't have a concrete schedule of redevelopment start or finish dates to report, and I'll note that we make no assurances that such a strategy will be completed.

Andre Matyczynski, Executive Vice President of Global Operations

Thanks, Ellen. And perhaps you could handle the next question, which revolves around the 10-K mentioning a fee interest in a 23-acre industrial site with rail access in Williamsport, Pennsylvania. Please provide some more information on the property. As an industrial site, how or why is this property not presently at near optimal value that it shouldn't be monetized for higher return generating capital deployments like debt pay down, stock buyback, et cetera? Ellen?

Ellen Cotter, President and Chief Executive Officer

This industrial site in Williamsport is a Reading railroad legacy asset, which has been in our portfolio for decades. Currently, this space is occupied by Transco, a company in repair business and a subsidiary of Marmon Rail & Leasing, which is part of Marmon Holdings, the global industrial organization with diverse business lines. This particular area in Williamsport is industrial as our property abuts the Chance Aluminum production facility. We are currently reviewing this category of assets for potential monetization opportunities.

Andre Matyczynski, Executive Vice President of Global Operations

Thanks, Ellen. Gilbert, perhaps you can handle this next one. Has the March $5 million principal payment on the costly 10% BofA U.S. cinema term loan been made? And what is the loan's present outstanding balance specified as of what date versus the $26.7 million year-end '22 balance sheet date? Is the plan to retire this loan via its updated principal paydown schedule or refinance some remaining balance into longer-term U.S. cinema financing? Given the current variable rate on this loan, do you feel refinancing will be at similar, higher or lower interest rate spreads?

Gilbert Avanes, Executive Vice President, Chief Financial Officer and Treasurer

In accordance with the new loan amendment signed on March 30, 2023, that was disclosed in our recently filed 10-K, our principal payment schedule has been modified and the $5 million payment originally due in March was no longer required. As of end of March 2023, our new loan balance has been reduced to $26 million. As we have mentioned, we continue to closely manage our liquidity. As a result of that, we focus on the paydowns for our amendments. Regarding refinancing, while we cannot predict the future as we get closer to the maturity of our loan, we'll be evaluating our cash balances and interest rates, and we'll make a decision that's in the best interest of our company and our stockholders.

Andre Matyczynski, Executive Vice President of Global Operations

Thanks, Gilbert. And our last question here regarding the $9.4 million deferred rent obligation mentioned in our 10-K outstanding as of March 30. What is the timing for payoff? Are these extra amounts a drag on EBITDA, or were they already expensed when deferred? The whole of the potential $9.4 million deferred rent obligation mentioned in the 10-K, an outstanding actually on December 31, 2022, have been accrued through the income statement, and therefore, will not be a drag on future EBITDA. Most of the $9.4 million is payable within the next 12 months with the remaining amounts payable based on existing documentation over future periods. However, we continue to work with most of our landlords in the U.S. to seek further occupancy relief to alleviate the severe hardships caused by the COVID pandemic and its impact on our U.S. cinema cash flow. That marks the conclusion of our question-and-answer session and the conclusion of the call. We appreciate you listening to the call today. Thank you for your attention, and we wish everyone good health and safety.