Reading International's (RDI) CEO Ellen Cotter on Q1 2016 Results - Earnings Call Transcript

| About: Reading International, (RDI)

Reading International, Inc. (NASDAQ:RDI)

Q1 2016 Earnings Conference Call

May 13, 2016 10:00 AM ET

Executives

Andrzej Matyczynski - EVP Global Operations

Ellen Cotter - Chief Executive Officer

Dev Ghose - Chief Financial Officer

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: Dawn of Justice and Star Wars: The Force Awakens which spilled over from the fourth quarter of 2015 were terrific for our commercial theatres as were Deadpool and Disney Animation Zootopia, each of which outperformed expectations.

In the U.S. our cinemas segment operating income increased by 100%. I also note that in the U.S. at $4.39 we achieved the highest food and beverage per capita we've experienced. Let me walk you through some of the ways that our global cinema strategy supported our quarterly results as well as our future plans. This was a first full quarter of operations of our company’s first ever IMAX. We opened this IMAX at our theatres in Bakersfield, California at the Valley Plaza Mall for Star Wars in December of 2015. Since opening the IMAX auditorium, our theatre today has become the leader in the market in terms of box office, with total revenue increasing 24% over the first quarter in 2015.

As a global circuit we're dedicated to our branded large screen format auditorium, TITAN XC. Today we have eight TITAN screens across our three countries and are looking to add more. However we'll continue to have discussions in the U.S. with IMAX and other premium screen providers about further installations. In October of 2015 we've renovated and rebranded our Carmel Mountain theater in San Diego as an Angelika Film Center & Cafe. Today our guests can watch a film sitting in a luxury recliner seat and enjoy a gourmet burger and craft beer. This theaters total revenue's has increased by $1.2 million or a 170% compared to the same quarter last year.

During the first quarter of 2016 we also executed lease amendments for two of our most important theaters. Our Consolidated Theater at the Ward Village in Honolulu, Hawaii and the Reading Cinemas at the Cal Oaks Plaza in Murrieta, California. These amendments contemplate full renovations that will include luxury recliner seating adding our branded TITAN auditoriums and the further implementation of crafted food and beverage menus.

In fact just at the end of first quarter 2016 we began selling beer and wine in six auditoriums at our Consolidated Theater at the Ward Village and offering all guests there a freshly prepared, locally inspired food menu. In a relatively short period of time we've already seen a positive impact on our food and beverage per caps.

In January 2015 we executed the decision we made in 2015 to surrender the lease at our Gaslamp Theater in San Diego. This theater was a part of a package of cinemas we acquired in 2008, the purchase price of which was adjusted to take into account the potential ongoing losses of the Gaslamp. Since the purchase we have indeed suffered substantial cash losses. Hence our decision to surrender the lease. Our overall U.S. circuit profitability will increase due to this theater's closure.

Now let me turn to our cinema operations in Australia and New Zealand. During the quarter we made progress on our plans to invest in the upgrading of our Australian cinema circuit. Our cinema strategy in Australia is also focused on state-of-the-art presentation through the addition of our TITAN concept, hospitality styled service and comfort through the addition of luxury recliners and expanding our food and beverage menus.

Turning to New Zealand, this was the first full quarter of operation from our new cinema in the Auckland area which opened in November of 2015. This state-of-the-art Reading cinema at the LynnMall Shopping Center features a TITAN XC auditorium and two luxury dine-in licensed premium cinema screens with a full food and beverage menu. In terms of additional revenues since January of 2016 this cinema has added $1 million or NZD$1.6 million. So, through these initiatives you can see our global cinema strategy is well underway resulting in an increased quarterly admissions and concessions revenues, a key driver of our growth.

Now, let me turn to our real-estate business where we’re focused on creating long term value for our stockholders. Let me take this country-by-country. Starting in Australia we own and manage a shopping center in Newmarket which is a suburb of Brisbane anchored by a close supermarket MBWS. We have entertainment themed centers in Auburn, suburb of Sydney and in Belmont a suburb of Perth both anchored by our Reading Cinema. We also have a smaller center on a long term ground lease property in Moonee Ponds, outside of Melbourne which also features a Reading Cinema and some complementary tenants. And we own the property under two of our smaller Reading Cinemas.

Here are a few key updates for the first quarter 2016. During this quarter we progressed the plan to improve our Newmarket shopping center and transform it into an entertainment-themed center. Our plans include creating Brisbane's best-in-class cinema experience by adding a state-of-the-art Reading Cinema for which a development application was approved in June of 2015. To complement the cinema we will add a new dine-in precinct through the construction of 9,600 square feet of new specialty food and beverage tenants. To support the new cinema and incremental retail we'll add a 142 car parking spaces. We also intend to upgrade this center's existing common areas and effectively integrate the new leisure and dine-in precinct.

And finally we're in the process of activating an office building adjacent to our close supermarket that we acquired in November of 2015. We're currently working on a short term office leasing strategy while we create the longer term strategic plan to integrate this space into our re-imagined Newmarket. In terms of timeline we've completed the construction drawing for the cinema and the new retail areas and the construction tender is underway. At the end of December 2015 with the acquisition of two adjoining properties in Townsville, Queensland for $24.3 million or AUD$33.6 million we implemented the synergy portions of our strategic plan by acquiring the real estate underlying one of our cinemas.

The Cannon Park Centers represent a total of 5.6 acres incorporating a 133,000 square feet of gross leasable area. In the anchor tenant on one of those properties is the Reading Cinema. These sites through a mix of entertainment and food and beverage tenants have added an additional $716,000 or AUD$992,000 of revenue to our real estate segment for the first quarter of 2016. Our plans related to Cannon Park include improving the cinema experience to create Townsville’s best-in-class cinema, upgrading the existing common areas and repositioning the center marketing and evaluating existing tenancies for improved synergies.

Turning now to New Zealand, we own and manage Courtenay Central in Wellington which is an entertainment-themed center anchored by Reading Cinema. We also have the property under four of our Reading Cinemas and finally a 70-acre parcel of undeveloped land next to the Oakland airport.

Here are few key updates for the first quarter of 2016. At Courtney Central, we’ve started plans for adding a daily shopping experience for the center by constructing an approximately 36,000 square foot state of the art Countdown Supermarket, which is a subsidiary of Woolworths. The boards are Woolworths and Reading have approved the final construction budget. We began the demolition of a derelict building we own next to the supermarket site in order to create efficient loading areas for the store. To further improve this daily shopping experience we’re planning to add 4,000 square feet of new specialty convenient retail in front of the Countdown. We expect that the final construction drawings for the supermarket and the new retail will be completed by the end of the second quarter 2016 with a construction commencing in the third quarter of 2016. Our targeted construction completion is during the fourth quarter of 2017.

With the help of the Rockwell Group and Ignite in New Zealand, we’re transitioning our traditional foot court to a foot hall concept to create a more dynamic public space leading to incremental retail space. We’re also improving the parking experience for our guests. By the end of 2016 we’ll have completed the seismic strengthening of the garage to create one of the safest parking garages in Wellington and the additional of a second entrance/exit to improve traffic flow and circulation.

Turning now to our U.S. real estate operations. We own and manage the Union Square and Cinemas 1, 2 and 3 buildings in New York City. The property under two of our off-Broadway Theaters in New York and one in Chicago, we have a 202 acre parcel of undeveloped land in the City of Coachella, we have properties in Pennsylvania related to our historic operation of the Reading Railroad and now we have a small Class B office building in Culver City that will become the home of our Los Angeles office as well as generate some rental income.

Regarding our Union Square project, we’ve accomplished important milestones during the quarter that will help position the project for success. The Board of [indiscernible] has granted requested zoning waivers giving us desired office and retail zoning. With this approval we’ve achieved the last major regulatory hurdle necessary to proceed with the development. We filed the construction drawings for the building with the Department of Buildings in New York and are in the process of obtaining a construction permit.

Through our leasing agent Newmark Grubb Knight & Frank we’ve continued the retail leasing efforts and are so far encouraged by the interest in the retail space from perspective tenants. In April 2016, we purchased 24,000 square foot Class B office building with 72 parking spaces Culver City for $11.15 million. Our plan is to use about 50% leasable area for our corporate headquarters and to lease the remainder to unaffiliated third party tenants. For those unfamiliar with Culver City, it has become a center of entertainment and high-tech activity in Los Angeles. When our move is complete and the excess basis lease we anticipate that we’ll be able to reduce our annual headquarter occupancy cost by about $350,000. We’re now in the process of attaining a mortgage on the building.

In closing, we made progress executing our strategic plan during the first quarter of 2016 and remain well positioned to drive the long-term value for our stockholders. I’ll turn the call now over to Dev for review of our first quarter financial results.

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: The Force Awakens and Batman v Superman: Dawn of Justice. Collectively these films represented approximately 28% of our worldwide cinema box office revenues for the quarter. In comparison the top three grossing films for the first quarter of 2015 in our worldwide cinema circuits were American Sniper, Fifty Shades of Grey and Kingsman: The Secret Service which represented approximately 22% of our cinema box office revenue for that quarter in 2015.

Our operating expenses for the cinema business increased by 6% mainly due to higher film rent and advertising costs and the impact of our new LynnMall cinema complex in New Zealand. Note however that the operating expenses as a percentage of revenue remained fairly consistent year-over-year in the 81.82% range. For our real estate segments, segment operating income for the first quarter of 2016 decreased by 9% or $202,000 compared to 2015 to 2.1 million. The decline was primarily driven by lower revenues and the unfavorable impact of foreign exchange rates.

In the U.S. and New Zealand property rental income decreased due to the closure of the Union Square New York property which is currently in the process of being redeveloped and from the sale of the Taupo property in New Zealand. In Australia higher property rental revenue was due to the purchase of the Cannon Park facility in December 2015. Operating expenses for our real estate segment remained consistent with the prior year despite the Cannon Park acquisition due to the sale of our Burwood property in 2015 and the appreciation of the U.S. dollars against the New Zealand and Australian dollars.

Turning now to our balance sheet and our financial position. Our total assets grew by $7 million or 2% driven primarily by an increase in operating properties mostly due to capital enhancements in our cinema locations during the quarter. Cash and cash equivalents for the Company decreased by $3 million despite an increase in our cash flow from operations due to capital expenditures and loan repayments. There haven’t been any major changes in our assets and liability balances between December 31, 2015 and March 31, 2016. Our liquidity position remained strong with $16 million of cash on our balance sheet and approximately $75 million of additional capacity under our lines borrowing arrangements that is, in the U.S., Australia, New Zealand.

As of March 31, 2016, debt outstanding for the Company was $129 million and our debt to EBITDA ratio was 3.5 times. With that, I will now turn the call back to Andre.

Question-and-Answer Session

A - 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.

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