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Premier Exhibitions, Inc. (NASDAQ:PRXI)

F3Q13 Earnings Call

January 9, 2013 5:30 PM ET

Executives

Sam Weiser – President and CEO

Mike Little – CFO and COO

Analysts

Mark Busher – Private Investor

Sam Kidston – North & Webster LLC

David Daggett – Private Investor

Operator

Good evening, ladies and gentlemen, and welcome to the Premier Exhibitions Third Quarter Fiscal Year 2013 Earnings Call. Today’s conference is being recorded. I would like to remind everyone that the company will be making forward-looking statements on today’s call. These forward-looking statements are based on current expectations and are subject to a number of risks and uncertainties and are not guarantees of future performance.

Undue reliance should not be placed upon them as actual results may differ materially. Please refer to the risk factors identified in the company’s filings with the Securities and Exchange Commission for a more detailed discussion of the risks that have a direct bearing on the company’s operating results, performance and financial condition.

And now, I’d like to turn the conference over to Mr. Sam Weiser, Chief Executive Officer and President of Premier Exhibitions Incorporated. Please go ahead, sir.

Sam Weiser

Thank you, operator, and good afternoon, everyone. As the operator stated, we remind everyone that today’s conference call may contain forward-looking statements, which are based on our current expectations and are subject to risks and uncertainties. In addition, today we will discuss adjusted EBITDA, a non-GAAP financial measure, which our company uses as a key metric for evaluating performance internally, which also provides investors additional information to facilitate the comparison of past and present performance. A detailed explanation of this non-GAAP measure can be found in our earnings release in Form 8-K filed today with the SEC.

I’m going to start things off with an overall discussion of our business and ongoing initiatives and then Mike Little, our Chief Financial Officer and Chief Operating Officer, will review our financial performance for the recent quarter in greater detail.

In terms of the Titanic sale, we do not have an update from our previous call, but rather continued working towards monetizing the assets as we’ve already described. As you know, a consortium of individuals has signed a non-binding letter of intent to purchase the stock of RMS Titanic, Inc. for educational, regional, development and cultural purposes. Completing the transaction is subject to the parties negotiating binding purchase agreements, obtaining requisite financing commitments and other approvals and, therefore, the execution of the LOI does not guarantee that a purchase will be consummated. As this process is ongoing and confidential, we will provide additional information as material developments warrant, but we’ll not be taking questions on this subject during the Q&A portion of today’s call.

Now, in terms of the third quarter itself, we’re pleased with our performance from both the top line and bottom line perspective despite the impact from Hurricane Sandy, which has affected our operations in New York as described in our earnings release. Michael will discuss this in more detail, but our Bodies and Dialog exhibitions have been unable to reopen since the storm hit the Seaport.

As we discussed on our October call, the third quarter is generally our seasonally slowest period of the year and we usually take down, move and set up touring exhibitions for presenting in the fourth quarter and the first quarter of the new fiscal year. This obviously has implications from both the revenue and cost perspective as our top line revenue is generally the weakest of the four quarterly periods and we’re unable to leverage our expense structure as much as we can at other points in the year.

Given this background as well as our previously discussed expectations heading into the third quarter of being net income neutral hopefully you can appreciate our actual results given our reported losses associated with the interruption of our New York operations.

As you can see, we generated strong growth on our top-line, sharp increases in our gross profit and gross margin, and a $1.8 million improvement in adjusted EBITDA compared to the year ago period. In addition, our more modest net loss of $600,000 will make it easier for us to realize our goal of full year profitability for the first time in many years.

Through the first three quarters of fiscal 2013, our adjusted EBITDA of $7.6 million compares very favorably to $1.5 million for the same nine-month period of fiscal 2012, while our year-to-date net income of $3.3 million reflects a $6.2 million positive swing from the comparable timeframe in fiscal 2012. In other words, through a lot of hard work and the strength of our personnel and overall organization, we have been able to change our business trajectory and position ourselves for more consistent profitability as we move forward.

On top of our existing Titanic and Bodies properties, our accretive acquisitions of AEI and Exhibit Merchandising earlier this year have strengthened and helped diversify our revenue base and become important contributors to our overall business. Unfortunately, the King Tut, and Cleopatra artifacts are returning to Egypt this month as both of these exhibitions, which were part of the AEI transaction, have completed their U.S. tours. These closings have no impact on our financial results as revenues from Tut and Cleopatra are not included in our financial statements. That being said, we are looking at the feasibility of organizing another Egyptian focused exhibition for the U.S. market that can be introduced in the next fiscal year.

Further capitalizing on our AEI acquisition, we are in the process of adding another touring exhibition under the Pirates brand, which will provide a smaller, more flexible exhibition floor plan for museums unable to house our larger 14,000 square foot original Pirates exhibition. We expect the new Pirates exhibition to begin touring in March with revenues recognized for the full fiscal year of 2014.

Finally, as it relates to the AEI acquisition, I do want to remind you that our annualized management fee related to the acquired AEI properties will decrease to $750,000 for the 2013 calendar year.

Consistent with our stated objectives, we continue to explore other accretive acquisitions along with jointly developing content with third parties that would expand our portfolio of educational and entertaining exhibits and experiences. Of course we also continue to explore opportunities for fee-for-service arrangements with content owners looking to develop, construct and tour exhibitions built around their proprietary content.

In all of these cases, we’re bringing exhibitions to market as our primary objective, but we also view these potential exhibition properties as merchandise opportunities as well. The ability to realize ancillary revenue streams from exhibitions is critical to generating stronger returns on any invested capital that we will deploy. Also, while we do not have specifics to discuss at this time please be assured that our efforts and work with other parties to secure redistribution outlets for our existing and potential new content are on track. These initiatives are designed to round out our current portfolio and will be structured in a manner that limits our capital risk and affords us profit-sharing rights if they succeed.

Turning to our existing exhibitions themselves, our booking calendar is strong and provides great visibility into the business heading into next year. With respect to our semi-permanent installations, they’re already significant contributors to our gross margin, but we are looking to expand in this segment and have already begun evaluating other high traffic tourist markets where we believe profit opportunities exist that far outweigh the CapEx required to enter them.

You might have also read that we launched Jewels of Titanic, which just completed its run in Atlanta and is scheduled to open later this month in Orlando with Las Vegas to follow. This special collection consist of 15 of the most prestigious artifacts recovered from the wreck site, including diamond, sapphires, pearls and gold jewelry that once belonged to some of the Titanic’s wealthiest passengers.

This traveling collection shares the story of the jewelry’s discovery, underwater recovery, mysterious lineage and the influence these artifacts have in today’s pop culture. We believe limited run, special collection tours enhance the appeal of our existing semi-permanent venues and such programming will help cultivate renew the awareness of these properties and attract repeat visitors. To that end, we have other special collection tours planned and we’ll update you on these as they are launched.

In the third quarter, we continued to see solid performance from our partner venues. Most of our touring exhibitions begin with a fixed fee and move to a profit share as the attendance for the exhibit reaches specified levels. While we can’t be certain of future performance, we remain hopeful that some of these touring exhibitions will generate profit shares in the upcoming quarter based on the attendance we have seen at the venues over the past month. Our pipeline for our current portfolio of new content remains strong. As always, bookings for our existing portfolio and new content opportunities will be dependent on the projected revenue opportunity, our assessment of risk and the commitment of our partners.

Beyond the four walls of the exhibition hall, we also think that Premier is uniquely positioned to extend the exhibition experience into the digital realm. We are pursuing this strategy and are assessing ways to deliver our content to multiple constituencies of consumers and thereby monetize our content through different platforms. We continue to make progress on this initiative.

Before Michael reviews the financials, I would like to reiterate how pleased we are with our performance in the third quarter while also acknowledging that there is more work to be done. Still we take satisfaction in knowing that we continue to move toward sustained profitability quarter-to-quarter and year-to-year. As we move forward, we will build on what we have already accomplished by finding new revenue streams, new distribution outlets, new merchandising opportunities and new digital opportunities.

I will now turn the call over to Michael. After Michael concludes his remarks, we will be happy to take questions on our operating results. Mike?

Mike Little

Thank you, Sam. Good afternoon, everyone. I will now review our financials for the third quarter. For the quarter ended November 30, total revenues grew by $1.7 million, or 27%, to $7.9 million from the $6.2 million last year. The increase in overall revenue was due to mostly to the greater contribution from the merchandise sales segment, which offset the estimated $400,000 revenue impact from the Hurricane Sandy at our South Street Seaport location.

As we stated in our press release today, we have been informed by the landlord that this particular venue will be closed indefinitely because of the storm damage to the facility. However, our exhibition assets located at the Seaport were not actually damaged and we are exploring moving the exhibition to another location within New York City. We have submitted claims for the property damage and business interruption, and we are in active discussions with our insurance carrier, but there is no guarantee that we’ll be reimbursed for any of these losses to the Seaport’s closure.

Gross profits in the third quarter dramatically outpaced the revenue gain and increased $1.2 million, or 54%, to $3.5 million compared to $2.3 million for the same period last year. The higher gross profit was driven by the increased merchandise and management fee revenue as I’ll explain momentarily and will enable us to improve our gross margin to 44% from the 36% in the prior year.

Adjusted EBITDA for the quarter was $700,000 and rose $1.8 million over the prior year marking the third consecutive quarter of positive adjusted EBITDA. Net loss was $600,000 or a negative $0.01 per diluted share on a share basis of 48 million, which compared to a net loss of $2.2 million or a negative $0.05 per diluted share in the third quarter of 2012 on a share basis of 47.4 million.

And now let’s delve into the performance in a little bit more detail. Exhibition revenue fell by $100,000 to $5.5 million and was driven mainly by Hurricane Sandy, which closed our Bodies exhibition and Dialog in the Dark exhibitions at the Seaport in the New York City for the month of November. We presented 26 exhibits in the third quarter, which was up from 18 from the point last year and this result in a corresponding increase in attendance of 497,000 from the 373,000 from previous year. We attribute this increase in large part to better venue selection having one additional Bodies and one additional stationary Titanic exhibit and to a lesser extent to the Titanic 100 year anniversary.

It’s interesting to note that revenue from the self-run exhibitions was less than 60% of total revenue in the third quarter of fiscal 2013 while in the comparable last year quarter it was more than 90% of revenue.

As a reminder, we do not recognize exhibition revenue from the AEI properties, but rather receive a fee for managing these properties in the amount of $0.25 million in the third quarter although going forward this amount, as Sam mentioned, will be $750,000 annually. On average, our ticket price fell 3% versus the prior year to $16 from the $16.48. This average ticket price decline was unrelated to any discounting activities to drive attendance, but rather the mix of current touring exhibitions as they were more heavily weighted in museums compared to last year. These museums generate less revenue than our semi-permanent venues, but they also have less cost than the semi-permanent facilities resulting in lower average ticket price with less expense.

Gross profits from the exhibitions held mostly steady at $1.9 million compared to from last year and this is inclusive of the estimated $300,000 loss from the impact from Hurricane Sandy. We originally believed in the third quarter our net income would be neutral and our gross margin expectation from the Seaport location was projected at $200,000 for November. In actuality, at the gross margin level, we lost $300,000 at the Seaport in November, which resulted in a $500,000 variance from the original plan from that period.

Merchandise revenue for the quarter increased $1.6 million, or 243%, to $2.2 million from $600,000 in the year-ago period. The year-to-date increase was the result of higher merchandise sales from higher attendance levels, a 19.6% increase on merchandise sales per ticket sold and the acquisition of assets from Exhibit Merchandising. The cost of merchandise as a percent of merchandise revenue decreased 270 basis points to 39% from 42% primarily due to the lower merchandise cost.

Turning to G&A expense. Our corporate expense fell $200,000 to $3.3 million compared to the third quarter of 2012. The decrease was due to lower professional fees and office expenses that were partially offset by an increase in compensation related expenses. Depreciation and amortization expenses held steady at $900,000 in both periods as we placed our 3D and 2D film assets in service during the third quarter of 2013. However, this increase in amortization expense was offset by lower depreciation expense on many fixed assets that are now fully depreciated or were impaired as part of the impairment charges in the fourth quarter of 2012.

Finally, our loss from operations in the third quarter improved to a loss of $700,000 from operations of $2.2 million – compared to $2.2 million in the third quarter of 2012. Our interest expense for the quarter was $112,000 and mainly relates to the note relating to the AEI transaction, which compares to $4,000 in the same last-year period. We recorded income tax expense of $49,000, which compares to zero for the same period in the prior year. As you may recall, we had operating losses that have been carry forward and mostly offset current taxable income. The current income tax expense relates primarily due to the federal alternative minimum tax.

Finally, as I stated earlier, we realized a net loss of $600,000, or a negative $0.01 per diluted share, compared to a net loss of $2.2 million, or a negative $0.05 per diluted share, in last year’s third fiscal quarter.

In terms of the balance sheet, cash and marketable securities were $6.6 million on November 30. This is approximately $550,000 above our second quarter level and significantly higher than the $2.7 million balance we had as we started the year.

Our operating cash flows remain strong with a $4.4 million positive swing in the same nine-month period from last year, and stood at $5 million through the first nine months of this year compared to $600,000 in fiscal 2012.

To conclude, we are proud of what we’ve accomplished so far this year, and we are executing against our stated objectives. We are confident as ever that we’ll be able to diversify our revenue streams through new content and merchandise opportunities while limiting our own investment capital. Our financials have been consistently strong this year and we look forward to end the fiscal 2013 on a high note, and begin fiscal 2014 in an ever stronger position with greater visibility in our exhibit and new pipeline.

Please note we will also be presenting at the 15th Annual ICR XChange Investor Conference next week in Miami, Florida. The specifics are in the press release and we hope you will listen into our webcast and review the investor presentation.

Operator, with that, I am happy to open the lines for questions about our operating results although we will not be able to provide additional information on the Titanic sale at this time. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).We’ll take our first question from Mark Busher, private investor.

Mark Busher – Private Investor

Yes, hi, this is Mark. Thank you very much for the report, you guys are doing a great job. I wanted to find out you’ve given us the impact of the hurricane in the South Street Seaport on the gross income, do you have any figures on how it impacted net profit?

Sam Weiser

You know, I think I am not sure what you mean, I think we had no revenue from the venue in the month of November and we had expenses that were unavoidable of roughly $300,000. So the net impact since the closure of the Seaport was approximately $300,000 on net income.

Mike Little

Yes. So the net income impact on that, the only thing that you also have to take into consideration is the – any taxes associated with any of the federal tax associated with it, but most of the gross margin goes to – hits the bottom line to net income too.

Mark Busher – Private Investor

Okay. And then related to that on the insurance, I know you said you can’t give any guarantee that you may be recovering anything I imagine. But is that the amount of the claim or is there a limit on the insurance or I guess a better way to put it, what’s the best case scenario in the insurance recovery?

Sam Weiser

It’s unknown at this point. Obviously, the insurance companies that provided insurance are being overrun with claims at this point. We have two separate claims, one is a property insurance claim and one is a business interruption claim. We are currently in discussions with both of our insurance providers, actually it’s the same insurance provider on both policies, but we’re in discussions with them for claims under both policies.

At this point, we don’t really know exactly what, if any, amount we’ll be able to recover. We have, in terms of the coverage amounts, we’re adequately covered, the question really is whether or not there are exclusions under the policies that will prevent us from making the claims or sustaining the claims. But it goes both ways and so we’re in the middle of that negotiation now and I rather not go any further, it’s just that I don’t want to comprise our ability to discuss these issues with our insurance underwriters.

Mark Busher – Private Investor

Okay. And then finally, the reduction in legal and professional fees, is that anticipated to remain low? I mean I know there are a lot of legal fees related to some of the previous issues with the assets, those kind of things. So, the question is, was this an extraordinary quarter or is that what we kind of expect going forward?

Sam Weiser

I think that the best way for me to answer that is last year was more of an extraordinary amount of legal fees. Our legal fees are variable, depends on the volume of activity in the calendar. I can’t guarantee that those expenses won’t tick up a bit going forward, but we continue to work very, very hard at keeping those costs under control. So we’re focused on it. Obviously, we don’t avoid legal matters on the basis of cost, but we do evaluate the cost benefit and we are extremely focused on managing those costs and not incurring unnecessary legal fees and other professional fees when they’re not necessary.

Mark Busher – Private Investor

Okay. Thank you.

Operator

We’ll take our next question from Sam Kidston with North & Webster LLC.

Sam Weiser

Hi, Sam.

Sam Kidston – North & Webster LLC

Hi, guys. How are you?

Sam Weiser

Good.

Sam Kidston – North & Webster LLC

New shareholder just getting up to speed. Just wondering if you could give me the quick elevator pitch on the company.

Sam Weiser

Well, I think that primarily we are in the exhibition business, which I think you’re aware of, our real focus here is on expanding our portfolio of exhibition opportunities in a cost-efficient manner as well as expanding our locations in high volume tourist markets where we have the ability to set our content down for extended periods of time, which mitigates a great deal of our cost structure and allows us to truly capitalize on the tourist traffic that migrates to those specific locations.

We’ve undergone over the last three and a half years a significant restructuring where we’ve cut significant costs out of our operating expenses. We’ve made some tactical acquisitions, continue to look at other tactical acquisitions that can be made in order to further diversify our revenue streams and our revenue base while limiting the impact on our CapEx requirements and on our cost structure. I would say that that’s about the best elevator pitch I can give you, Sam.

Sam Kidston – North & Webster LLC

Pretty good. And sounds like you guys got good momentum going here.

Sam Weiser

All right. Well, thanks.

Sam Kidston – North & Webster LLC

Right. Thanks, bye.

Operator

(Operator Instructions). We’ll go next to David Daggett, private investor.

Sam Weiser

Hi, David.

David Daggett – Private Investor

Good evening. Congratulations on another solid quarter. And I guess my question revolves around the – what I think is a lack of regular coverage by financial analysts for Premier, which I think hampers the public awareness of the good progress that you guys are making. And I’ll think attendance at the ICR XChange is a step in the right direction, but whether anything else is being done to raise public awareness among the financial community in terms of what Premier is all about and the progress that you’re making?

Sam Weiser

Well I think that we’ve been through, as I said, when I answered Sam’s question earlier, we’ve been through a fairly substantial restructuring I think this is the first step with ICR. I think that we are exploring other ways to build an institutional shareholder base and demand for our shares with the institutional shareholder base. And the board constantly is looking at opportunities to do that. Unfortunately because of the price of our stock, some institutions are precluded from owning it. But going forward we intend to talk to a number of other potential investor groups who aren’t limited because the stock sells below $5.

David Daggett – Private Investor

Okay. Thank you.

Operator

At this time, we have no further questions. I’d like to turn the conference back to the speakers for any additional or closing remarks.

Sam Weiser

Well, I just want to say thank you everyone who at this later hour of the day joined us for the call. Mike and I are always available. We hope that you’ll listen to the webcast next week, which, hopefully, will give some greater insights for some of you into what it is we’re working towards in terms of continuing to build and solidify the core basis of the business. And thanks again for the call and we’ll speak to you next quarter if we don’t have anything to tell you in the meantime. Thank you.

Operator

Ladies and gentlemen this does concludes today’s discussion. We appreciate your participation.

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