Premier Exhibitions Inc. (NASDAQ:PRXI)
Q3 2012 Earnings Call
January 12, 2012 9:00 am ET
Samuel Weiser – Chief Executive Officer (interim), President
Michael Little – Chief Financial Officer, Chief Operating Officer
Brian Wainger - Counsel
Tony Basonich (sp) – BGI Capital
Good morning and welcome to the Premier Exhibitions’ Fiscal 2012 Third Quarter Earnings Results conference 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 Form 10-K for the period ending February 28, 2011 and subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may 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, Interim Chief Executive Officer and President of Premier Exhibitions Inc. Please go ahead, sir.
Thank you, Operator. Good morning everyone. About six weeks ago as part of our strategic realignment, I assumed the role of Interim Chief Executive Officer and President, managing Premier’s overall business operations while Michael Little, our Chief Financial Officer, also added to his plate the responsibility of serving as our Chief Operating Officer. Chris Davino is now President of RMS Titanic and focusing his efforts exclusively on strategic transactions involving this content subsidiary and the Titanic artifacts collection.
This new organizational hierarchy is an outgrowth of separating our operations into two divisions: a content subsidiary in RMST and an exhibition management subsidiary in Premier Exhibition Management. In other words, each unit is now acting independently of the other and pursuing the best business opportunities available to it.
With that in mind, I would like to begin today’s discussion with our recent announcement regarding the planned auction of our Titanic artifact collection and related intellectual property and then provide a general update on the overall state of the business.
Those of you who have followed us for some time are certainly aware that we have spent countless hours, dollars and resources to ensure that Titanic is well preserved for future generations, and it is for this reason that we were granted stewardship of the complete collection of more than 5,000 artifacts that had been recovered from the wreck site 2.5 miles below the ocean surface. We are therefore pleased to be working with Guernsey’s auction house to identify worthy stewards of the Titanic artifact collection and are confident that we are going to do so in a manner consistent with our role as steward of the collection and wreck site. We are fully committed to complying with the covenants and conditions imposed by the court and are seeking potential buyers we believe the court will view as acceptable new stewards of the collection and wreck site.
So why have we decided to auction these Titanic artifacts at this time? Because a successful auction process affords us the unique opportunity to preserve the artifacts within the public domain while at the same time meeting our obligations to you, our shareholders, to realize the value of these unique, one-of-a-kind assets. However, in achieving this objective, it is essential that we put these artifacts in capable hands that can care for them in perpetuity without the pressures of asset monetization and continued shareholder expectations.
Back in 2007, the artifact catalogue coupled with the work product, intellectual property, and certain undertakings of the Company including the cost of salvage, lab operations, and exhibition rights were appraised at approximately $189 million; however, this appraised value has not been updated since that time and does not include the intellectual property acquired from the 2010 expedition. In addition, this appraisal does not ascribe any value to our rights as salvor and steward of the wreck site or consider the court’s covenants and conditions.
We expect to identify a buyer capable of serving as a proper steward of the collection and wreck site while continuing to build upon the work that RMST and its partners in the oceanographic and archeological communities have achieved in documenting and preserving the wreck site. Given these relationships with the oceanographic community, the artifacts and our archives of data relating to the recovery, restoration and maintenance of the collection, we are delivering to a potential buyer a real brand around this property that is beloved worldwide.
We intend to announce the auction result on or around April 11, 2012 in New York City. Participants in the auction must be pre-cleared by Guernsey’s and the Company and are required to comply with all covenants and conditions set by the court. In accordance with our longstanding commitment to protect and preserve the Titanic, assuming a suitable buyer is identified, we will direct a portion of the proceeds generated by the sale to the Titanic Preservation Trust, and endowment fund created by the Company for future conservation and maintenance of the artifacts removed from the wreck site.
While we pursue the auction, we continue to pursue various initiatives we have undertaken for Titanic to expand the revenue opportunities and build the brand, taking advantage of the publicity the 100th anniversary will generate. In addition, demand for Titanic exhibitions is accelerating as we approach the anniversary, and pursuit of a new steward for the collection will not impact the way we operate our exhibitions.
The upcoming calendar for Titanic exhibitions includes Dallas-Fort Worth, Kansas City, Detroit, San Diego, Houston, and a number of other cities whose contracts are now being finalized, to complement our permanent installations in Las Vegas and Orlando. We just recently completed the installation of a number of artifacts recovered from the sea floor into our Orlando exhibition, including a piece of the hull that we refer to as the Little Big Piece. The installation of the Little Big Piece was accompanied by a series of press events that covered its installation and formally announced the changes we have made to the exhibition. We are just beginning to exploit the opportunities inherent in this prime tourist destination market and we anticipate that this exhibition will become a cornerstone of our exhibition portfolio.
Our changes in Orlando include the installation of 100 artifacts from our collection to enrich the experience for millions of potential visitors who vacation in the greater Orlando area on a yearly basis. These enhancements we believe will over time generate greater attendance revenue and strengthen our retail opportunities by creating another outlook for our Titanic-related merchandise.
While our 100th anniversary plans have come together nicely, we’re not in a position to speculate how new ownership of the collection will continue the public display of these one-of-a-kind artifacts; therefore, the upcoming exhibitions may represent the final opportunities to experience Titanic – the Artifact Exhibition in these markets.
As we approach the 100th anniversary, we have targeted new distribution channels for our merchandise and our intellectual property. We have partnered with several notable media and entertainment companies to deliver our intellectual property and new Titanic merchandise inventory to the Titanic fan base. We also recently launched our new e-commerce website, www.thetitanicstore.com, offering Titanic-themed merchandise through the Company’s website. Another merchandise-related opportunity involves direct response marketing through various vendors and outlets selling licensed Titanic-themed merchandise. These initiatives center on the upcoming 100th anniversary and are low-risk endeavors that represent significant royalty revenue opportunities.
Turning to the financial results for the quarter, notwithstanding fewer exhibitions presenting during the three-month period, our top line results are clearly indicative of the revenue generation challenges we face across our current exhibition portfolio. We have rationalized costs and seen an improvement overall on cash flow year-to-date, but we could do more and we know that. Our goal is still to reach a level of profitability that reflects a reasonable return on equity.
First, our decline in revenue relates to our withdrawal from self-run exhibitions in unbranded exhibition facilities. When comparing results from last year’s third quarter to this year’s third quarter, last year self-runs generated a loss of $2.4 million at the gross margin level. In comparison, the gross margin contribution from our stationary or permanent exhibition venues was $1.4 million in this year’s fiscal third quarter versus $1.3 million in last year’s fiscal third quarter. We continue to focus on these stationary venues as they represent the most consistent and stable revenue source for the Company. The addition of the Orlando Titanic venue will only improve these results as the marketing, public relations, and operating improvements we initiated begin to result in additional ticket sales. We are just beginning to see the numbers in Orlando increase and we anticipate that that momentum will continue to grow as we get closer to April.
Titanic continues to be the main contributor to gross margin, contributing $1.6 million in the quarter versus $1.4 million a year earlier. Overall year-to-date, Titanic has contributed $6.8 million to gross margin, which is a run rate of approximately $9 million on an annual basis. With the 100th anniversary approaching and the excitement of our museum partners hosting these exhibitions in the coming months, we are confident that our margins on Titanic exhibition will expand accordingly.
Still, having only been in my current capacity for a few weeks, I think we can do more to improve results and consistently deliver positive adjusted EBITDA and not merely minimize losses. While further cost-cutting will certainly play a role here, I think given our current situation, broadening our revenue base is even more critical. Mike will talk about the cost side and the improvements we continue to pursue, but revenue poses the most significant means to deliver profitable results.
In our eagerness to extract costs from the business, I believe we compromised our revenue opportunities by reducing our marketing expenditures in the short run and that additional incremental spending would have yielded stronger attendance levels. To reverse this trend, we are redirecting personnel and re-tasking several individuals to focus exclusively on generating higher ticket sales and judiciously expanding our marketing spend where opportunities to increase revenue are greatest. In the past, we have been more focused on simply booking venues and filling the calendar without a coordinated effort to drive ticket sales. Going forward, new bookings will be dependent on the expected revenue opportunity, the risk retained by the company, and the commitment of our partner. More importantly, our professionals will now be accountable for delivering on these projections.
Finally, consistent with our previously stated objectives, we have reduced G&A to approximately $1 million per month and continue to examine ways to cut these expenses further. Embedded within G&A expense are fixed public company costs of approximately $2.5 million annually. While these costs are significant and we continue to pursue cost-cutting opportunities such as those achieved when we consolidated our warehouse space and reduced the cost of our corporate offices, which yielded an annual savings in excess of $200,000 annually, we cannot simply cut our way to sustainable profitability. To achieve consistent profitability, we need a combination of top line revenue growth and further rationalization of operations, which I believe is attainable. I can assure you that while we are pursuing the asset sale, we will also be pursuing these operational initiatives.
And now, I will turn the call over to Michael who will discuss our third quarter results. Michael?
Hello everyone. Thank you for joining us today. For the three month period ending November 30, 2011, total revenue decreased by 39% to $6.2 million from $10.2 million last year due to fewer exhibits (inaudible) which in turn resulted in lower overall attendance and a corresponding decline in merchandise sales. The reduction in exhibitions from 31 in the third quarter of 2011 to 18 in the third quarter of 2012 was due to the decision to exit certain self-run Body shows.
Gross profit increased to $2.3 million compared to a gross loss of $400,000 in the prior year, and this can be attributed to the $6.7 million decline in cost of revenue. Adjusted EBITDA came in at a loss of $1.1 million for the quarter, which is a substantial increase from the $4.9 million loss we generated in last year’s third fiscal quarter. With these quarterly results, our year-to-date EBITDA is positive in the amount of $1.5 million compared to our previous year year-to-date adjusted EBITDA loss of $3.8 million. That is a $5.3 million year-over-year improvement.
Our GAAP net loss narrowed to $2.2 million loss or $0.05 loss per diluted share compared to a net loss of 5.7 or $0.12 per diluted share in the third fiscal quarter of 2011 which represents a decline of the net loss of $3.5 million.
Delving into our performance a little deeper, exhibition revenue decreased 37% to $5.6 million from $8.9 million in the year-ago quarter with 369 fewer operating days, a 23% decrease, nearly 300 person drop in average attendance, a 50% decrease, in addition to experiencing a decrease in average ticket price. Once again, fewer operating days were due mostly to exiting the self-run Body touring segments while the reduction in average attendance was due in part to macroeconomic headwinds affecting discretionary spending, although as Sam acknowledged, the year-over-year reduction in marketing expenditure surely impacted attendance (inaudible) as well.
We had a total of 18 exhibitions presented during the quarter which comprised of seven stationary and 11 touring exhibitions, compared to 31 exhibitions in the prior year period of which five were stationary and 26 were touring exhibitions. Of the 15 fewer touring exhibitions, 13 were in the Body segment.
Merchandise and other revenue decreased 52% to $600,000 during the third quarter of fiscal 2012 from $1.4 million in the year-ago period, which is a reflection of both the reduction in exhibitions presenting as well as lower attendance compared to the same quarter of last year. Cost of exhibition revenue fell 64% to $3.7 million compared to $10.3 million in the third quarter of 2011. Once again, we benefited from exiting the self-operated Body touring segments of our business, and as these exhibitions were closed the costs that we incurred for production, marketing, and operating expenses were significantly reduced or eliminated. Beyond that, we have been extremely aggressive in containing costs at our remaining exhibitions.
Cost of merchandise revenue increased 42% from 27% in the third quarter of fiscal 2011 primarily due to the $700,000 decline in merchandise sales which was driven by fewer exhibits and therefore lower attendance.
Gross profit decreased $2.7 million. As the number suggests, we more than offset the 37% decline in exhibition revenue by reducing exhibition costs by 64%. This was accomplished by winding down most of the self-run exhibitions late last year coupled with implementing aggressive cost containment efforts for our remaining self-run exhibitions. The merchandise profit decline was a consequence of lower merchandise sales.
Gross profit for the quarter on the Titanic brand, as Sam stated, accounted for 69% or $1.6 million of the $2.3 million total gross profit. The remaining $700,000 was generated by the Body and Dialog brands. On a year-to-date basis, the Titanic brand has generated $6.8 million or 60% of our $11.3 million total year-to-date gross profits with the remaining $4.5 million being generated from the Body and Dialog brands.
Turning to G&A expense, it decreased by 24% to $3.5 million compared to $4.6 million in the third quarter of fiscal 2011. The decline was due to a $400,000 reduction in compensation and benefits expense as we had fewer admin personnel supporting fewer exhibits and a $500,000 reduction in accounting and professional fees. Our status as reporting smaller company has reduced certain accounting requirements while we have also reduced our need for external consultants and other professionals.
Depreciation and amortization expense in the third quarter decreased $300,000 to $0.9 million, which is attributed to assets that had been fully depreciated or amortized.
Finally on our P&L, loss from operations in the third quarter fell by $4.1 million to $2.2 million in the third quarter of fiscal 2012 as compared to $6.3 million for the third quarter of last year. This is a $4.1 million improvement from previous year.
In terms of the balance sheet, cash and marketable securities combined were $3.9 million on November 30, 2011, a modest $200,000 decline from $4.1 million at the end of the second quarter, while operating cash flows decreased $0.5 million for the third quarter compared to an increase of $1 million for the same period last year. Although operating cash flow declined $1.5 million over the three month period, on a year-to-date basis operating cash flow has increased $1.5 million to $600,000 from a negative $1.9 million from last year.
While we remain disciplined with our capital deployment with a particular focus on minimizing our cash burn, and while we cannot state definitely whether or not we need to tap the equity line, the consensus among the Board of Directors and management team is we must do our utmost to avoid external financing if possible.
With that, Sam and I will be happy to answer any questions that you might have. Operator, please open the line for questions.
Thank you. Before we get into questions, I just want to point out that historically the third quarter for Premier is the slowest quarter of the year, so while the results aren’t great, we are pleased that we’ve made significant improvements from the prior year’s third quarter, and that we’re confident that Mike and I can continue to move forward operationally to keep these improvements coming and that we can continue to help improve the stability of the revenue flows.
So Operator, with that, I’m happy to open it to questions.
Question and Answer Session
If you’d like to ask a question at this time, please signal by pressing the star key followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that’s star, one for questions at this time. We’ll pause for just a moment to assemble our queue.
We’ll go first to Dave Daget (sp), private investor.
I was wondering if you could give us some insights as to what your plans will be for the cash once the Titanic artifacts are sold, and specifically would you consider a special dividend for shareholders?
Dave, thank you for the question. It’s a little premature right now since we don’t know the structure of the transaction to determine exactly what’s going to happen with all the cash, but we do believe that a substantial portion of the net proceeds will be directed to shareholders.
As a reminder, it’s star, one for questions. We’ll go next to Ethan Star (sp), private investor.
Yes, I’m wondering what will happen once you auction off the Titanic assets. What will happen to the exhibitions part of the business? Will you expand that or just try to sell that off, or what’s the plan?
Again, this is all happening simultaneously. We’re clearly pursuing all options and looking at all the various outcomes. I’m not really in a position to say specifically what we’ll do with the exhibition business, assuming that we sell the Titanic assets; but it is our hope that we’ll retain the exhibition rights to Titanic for at least some period of time and continue to operate the business and move forward. Whether we sell it, combine it or do anything else with it, as I said, it’s a little premature at this point.
Okay, thank you.
Again, star, one for questions. We’ll pause for just a moment to see if we have any additional questions.
We’ll go next to Tony Basonich, BGI Capital.
Tony Basonich – BGI Capital
Yes, hello. I was wondering what percentage of the auction proceeds you anticipate donating to that Titanic preservation organization you alluded to.
Again, the Board hasn’t made a determination of the exact amount that that’s going to be. It’s premature to issue an amount. The preservation trust that we’ve set up was one that we set up in accordance with the covenants and conditions when we got the in specie award.
Tony Basonich – BGI Capital
I see. Thank you.
We’ll have a follow-up from David Daget, private investor.
I was wondering if you could tell me if the salvor and possession rights that I believe will be included in the auction in April, if in fact you have the option to retain those rights or if you’re required to bundle them with the rest of the artifacts.
You know what? Let me defer that question to Brian Wainger, who is our counsel on that.
The salvor and possession rights are governed by the Eastern District of Virginia, the United States District Court for the Eastern District of Virginia; and whether and to what extent a future purchaser becomes the steward of the wreck site depends entirely on (a) the commitment of the purchaser, the qualifications of the purchaser, and the perspective of the court with respect to their salvage rights.
We have no further questions in the queue. I’ll turn the conference back over to Mr. Weiser for any additional or closing remarks.
Okay, well thank you everyone for listening in. Stay tuned - as we have developments that we can disclose, we certainly will make them available to you, and if ever you have any questions, Mike and I are always available. Please feel free to call.
Thank you very much for listening and we’ll talk to you soon.
Thank you for your participation in the Premier Exhibitions Inc. earnings call. If you have any further questions or comments, you may contact the Company directly. This concludes today’s call.