Q2 2020 Ballantyne Strong Inc Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to balance <unk> incorporated second quarter 2020 earnings Conference call.

All investors aren't in listen only mode.

After the prepared remarks, we will be conducted a question answer session.

Now, let's turn the call over to John Nesbett I must Investor relations. Thank you you may begin.

Good afternoon, and welcome to Bell Times Trust earnings Conference call for the second quarter ended June Thirtyth 2020.

On the call today for Bell attach wrong, or Mark Robertson, Chief Executive Officer, and Todd Major Chief Financial Officer before we begin I'd like to remind everyone. Some statements made on this call will be for looking at nature. These statements are based on management's current views and expectations as of today and the company is under no obligation and except.

Lastly, disclaims any obligation to update forward looking statements, except as required by law.

These statements are also subject to risks uncertainties and may cause actual results to differ materially from this is described in today's call risks and uncertainties are also describing the company's FCC filings. Today's presentation discussion also contain references to non-GAAP financial measures. The definition of non-GAAP terms and reconciliations to GAAP measures are available.

The earnings release pose any investor relations section of the website.

Our non-GAAP measures I.

I may not be comparable to those used by other companies are encouraged you to review went understand all of our financial reporting before making any investment decisions. At this time I would like to turn the call live remark. Okay go ahead Mark.

Thanks, John.

Good afternoon, everyone and thanks for joining us today.

Well get started on slide he wasn't agenda for todays call.

I'll provide a brief overview and Todd will review the financial performance. After the financials will take a deeper dive into the current business drivers and discuss how ballantine is positioning to be a stronger company going forward.

After our prepared remarks, well open the call for any questions.

So first.

Let's review the Q2 highlights and where we are today turning to slide four.

I don't think anyone will be surprised at our Q2 revenue.

What's significantly impacted by the Kobin pandemic, especially in our entertainment and advertising business lines.

Hospitality and entertainment, where the most impacted segments of the global economy.

And as you might imagine selling to send them as it's been a bit of a challenge for the past couple of much.

However.

What was incredibly reassuring is that in spite of the pandemic and its impact on our business.

Our adjusted EBITDA for the quarter was relatively stable.

And we were able to effectively manage cash flow through what we hope was the worst of the storm.

This is a testament to the flexibility of our operating model.

End of the commitment of our entire organization in reacting to the crisis and taking the appropriate actions and in many cases personal sacrifices to ensure that the company would come through in a strong position.

I can't expressed how proud we are about team for all the reference during this time and we're excited about the path ahead as our customers begin that reopening initiatives.

It also clearly demonstrates the resilience in our convergent digital signage business.

That convergent.

We did see some disruptions related to co bid, but overall the business levels and collections remain strong and contributed significantly to our second quarter operating results.

And cash flow.

This is a business that has been a turn around for the past few years and those investments are now paying off of high margins recurring revenue and increasing customer demand.

Well look entertainment revenues were down substantially for the quarter as expected.

Cinemas are now in the process of reopening.

We believe we likely seem the trough with respect to entertainment revenue in Q2.

And as cinemas reopened they're increasingly looking to outsource more of their technical support.

This plays into our expertise and strengths.

We see opportunities to grow the services business in the near term.

Finally, we've also been helping our customers adapted this challenging environment with innovative solutions such as the temporary driving cinemas had another strong entertainment.

And our same store touches technology a conversion.

Overall.

Oh, I'm certainly happy to have Q2 in the rear view mirror.

I believe the experience a strengthened just in many ways and we're excited about the opportunities ahead.

Well address those in more detail after Todd runs through the numbers Todd.

Thanks Mark.

Slide five includes the summary comparison Q2 2026 months ended June 32020 Hussein periods of the prior year.

As we expected to slow down lets started Germany ended the first quarter persisted throughout the second quarter.

I'll, let any to revenue and gross profit both decreased 54.8% during the second quarter 2020.

Oh that 19 pandemic had a significant impact on operating result of both strong entertainment and strong out there.

Well revenue was also down a convergent due to some nonrecurring installation revenue and equipment sales in the prior year.

Services revenue continued to grow.

Despite the significant declines in revenue gross margin during the second quarter of 2020 was flat year over year.

In addition in response to cold it.

We implemented a series of cost saving measures that combined with our other cost management initiative.

Reduce overall asked you to expenses by 35.3% compared to Q2 2019.

Well I sick summarizes our condensed operating results for the previous five quarters Grieco that our operating performance improved sequentially during 2019 and dipped a bit in Q1 2020, as we started feeling the impacts of the pad.

Despite the significant headwinds encountered during the second quarter 2020.

Leap that are operating loss and adjusted EBITDA actually improved compared to the prior year.

On slide seven strong entertainment revenues and profitability retracted significantly in Q2 2020 compared to both Q1 2020 and Q2 over the prior year.

Our screen manufacturing facility in Quebec was closed for approximately six weeks during Q2 and once we open Salt limited demand I said, it doesnt really close during the quarter.

Closure of cinemas. During Q2 also had a significant negative impact on the field services and parts distribution revenue.

We're able to see the benefit of our expense rationalization initiatives that commenced in early April as operating loss in adjusted EBITDA. During Q2 2020, we're only slightly below Q1 of 2020.

Moving to slide eight.

While we did see an overall declining convergent revenue during the second quarter 2020 compared to the prior year.

That decrease was primarily due to the nonrecurring revenue items I previously mentioned.

In addition, the impact of Cobot 90 on conversion was somewhat muted as the overwhelming majority of our recurring revenue customer base continued to operate.

Convergence gross margin continues to improve the mix of higher margin recurring revenue.

Continues to increase.

Moving to slide nine as a result at the August 2020 transaction with Firefly Q2, 2020 will be the last full quarter, we report for strong outdoor.

The New York City advertising market was shut down during the second quarter 2020, and as you would expect that had a significant impacts on strong outdoors operating results.

Oh management activity implement that its strong outdoor in early April helped to somewhat offset the loss revenue.

Slide 10 summarizes our balance sheet as of June compared to the end of 2019.

As you can see we've been able to maintain adequate levels of cash during 2020, why only modestly raising our debt levels.

We continue to look at ways to reduce operating costs, while at the same time managed working capital and maintain liquidity.

We expect the sale of our strong outdoor business to have a positive impact on our future operating cash flows and continue to believe our customers meet our services and support more than ever as they reopen their doors with that let me turn the call back tomorrow.

Thanks Todd.

Now, let's review, how we're thinking about the business and building for the future you turn to slide 12.

As Todd just mentioned and as many of you are probably already aware anyway, we completed the sale of strong outdoor last week.

If you recall, we did a transaction with Firefly in may of last year to transition our digital AD business to them in exchange for an equity position.

The current transaction.

Completes the sale of all of strong outdoors remaining advertising business in exchange for an increase equity stake in Firefly.

In short this transaction is a win win.

First it should improve our consolidated financial performance going forward.

And second.

We're combining this business, where the perfect partner, which has the platform to grow and drive value as part of their nationwide network.

Just want to fireflies largest shareholders and co investing with Google ventures in FX.

We will participate in fireflies future performance and upside.

When combined with our current investments in PIH in a task.

Which are both liquid investments in marketable securities with carrying values totaling approximately 9 million.

The strengthens imbalances our investment portfolio considerably.

So let's take a look now at our to go forward operating businesses turning to slide 13.

Convergent there's been a pool has proven to be us very strong contributor over the past couple of years generating high margin recurring revenue.

Yeah at a macro level, there's been a sustained increase in the use of digital signage and retail banking and many other areas.

Divergent do they cost effective solution that is proven attracted to larger enterprise retailers banks and other organizations, especially those with large geographically dispersed geographically dispersed signage assets to manage.

We have a stable base of large brand name customers in the telecom home improvement retail and banking sectors with over 45000 points now and installed base.

Our customers in general were excellent credits, which is also a strong point in uncertain economic times such as these.

Turning to slide 14.

Convergence financial profile has been steadily improving as we reposition the business to focus on recurring services would I be SaaS model.

We're continuing to grow the installed base.

And with as we're growing this installed base you know two things are happening.

We see higher recurring revenues as our Dcs offering becomes a higher percentage of our overall sales.

We're also seeing gross margins and overall profitability improved significantly.

As we think about where we go from here, we built a solid foundation.

And we can now at scale and higher incremental margins.

New media players.

We add on top of the current installed base carry higher incremental margins than the average.

You installs benefit from the current infrastructure investments they carry much lower incremental variable costs.

Much higher margins as a result.

This is a highly scalable business.

Now if you turn to slide 15.

Our strong entertainment business, obviously had a tough quarter is would be expected.

The three things to point out here.

First exhibitors are in the process of reopening.

AMC for example announced they expect essentially all theaters in Europe in the middle East to be opened in the next few weeks.

When you go AMC Ciena, Mark Marcus and other large exhibitors have also announced that they plan to be opening in most U.S. cities in the becoming much most by the end of August.

So we're in uncharted territory here.

I don't want to get ahead of myself, but we are cautiously encouraged that the second half should look much different from the second quarter.

With Reopenings underway.

Currently seeing increased demand for our services.

Another interesting industry dynamic that we're watching closely the appetite for exhibitors to outsource versus in source their technical support.

We believe that an increasing amount of the service work in the U.S.

Well, we outsource post coded as exhibitors keep seek to keep their fixed operating costs low.

We can mobilize quickly we have the expertise and offer an attractive economic option for them.

In addition, as a sector begins to return to normal we expect the trend of upgrading digital projection to laser to continue.

These type of upgrade cycles create additional service and other opportunities.

Turning over to slide 16.

We just want to take a minute to talk about the international opportunities well, which is important to understand as we step back from the current quarter and refocused our aperture on the longer term growth opportunities for this particularly for the screen business.

We have approximately 65% market share in the U.S. North America, and obviously firmly established here.

In China, we have less than a 5% market share.

We have are finishing plant ready to go as soon as travel in other jurisdictions allow which will be a beachhead to help us better penetrate that market.

In Europe.

We also have a relatively small market share and have already started increasing our sales presence there.

In the Middle East, Saudi Arabia recently repealed a 35 year commercial cinema band.

We've already started selling screens into that market.

So we have a great entertainment business North America, with both screens and services.

We expect to grow our service you're in the U.S. and our screen sheer internationally.

If you look at the two operating businesses going forward.

You'll see on slide 17 that they had a combined EBITDA of 12 million in 2019, which was obviously pre cobot.

We've done a good job maximizing our financial performance through this difficult period.

Cinemas will come back and they'll need support and this is already starting.

Convergence business has proven to be resilient and has long term growth opportunities.

So while our company valuation has been impacted.

Along with most other small public companies over the past several months that operate in impacted industries.

We believe we're well positioned us well reopens.

Our focus is squarely on operational execution and driving growth post cobot to create long term value.

On slide 18, sitting here today, we have well established brands.

Tight expense controls and a solid balance sheet.

That provides a solid foundation for difficult times such as these.

Our near term outlook is improving every day as we're seeing signs of recovery in our entertainment business the cinemas reopened.

Customers are reengaging with our services and screen orders are increasing from Q2 levels.

We expect to open our finishing plant in China soon and our convergent DSS model should continue to drive recurring revenue and strong margins.

We also remain focused on managing operating expenses in cash flow through the turn.

Looking out a bit longer term.

We're focused on capturing international market share in our screen business.

And converting the near term momentum in our services business into sustained long term market share growth in the U.S. entertainment sector.

We can we expect to continue to grow convergence installed base organically.

And we could also consider targeted acquisitions to load the network and achieve greater economies of scale and EBITDA growth faster.

Finally, there's a considerable longer term opportunity in our in our investment portfolio.

We have relatively liquid positions in a task M P H and longer term upside prospects for Firefly.

With that we'll now open up the call for questions.

At this time, we will be conducting a question and answer session. If you look that's question. Please press star one I'm your telephone keypad a confirmation so indicate your line is and the question Q.

You mean for start to feel MCCSR move your question from the Q.

For participants using speaker women and maybe netsuite, if they could be a heads up before person start keys. One moment. Please as we pull for questions.

Our first question comes on line of PEM stem with quarter management pretty sued the question.

Hi, Thank you and good afternoon, so convergent platform.

Convergent has performed well.

How should we think about this business going forward and your ability to continue to drive destock growth and then after that I do have one follow up question.

Okay. Thanks, Pam as Mark I'll pick stab at that Ah. Thanks for your question. It's a good one you know convergent has been a real.

Successful turnaround story over the past couple of years I mean, we've converted the convergent model.

From a lower margin hardware sale model and project base installation model.

To this de SaaS model over the past you know really two to three years.

And accompanying that you know that change in strategy and that repositioning you know we've seen tremendous improvement and you know in both the financial performance of convergent.

In terms of its gross margin expansion with EBITDA contribution in cash flow.

As well as you know from our customers you know we've seen.

Our anchor customers really coming back to us and asking for more services in expanding their use of our services.

Which really gives us great confidence in the model and the quality of service that we're offering it's really up it's really a testament to the team at convergent you know who has deep experience in the signage business. It really led this.

Repositioning to the Dcs model and that's taking good care of our customers no. So as we look ahead, you know what that platform in place we've made lots of investments in convergent.

We have endured the turnaround period, we're now seeing the benefits of that turned around with the current.

Performance of of the business over the past, a really seven or eight quarters now.

And a lot as we've been going we've been digesting a lot of those customer wins and making sure we're taking care of them.

And now we have dropped to the continued to grow that business and we kind of look at that a couple ways.

So when we look at convergent you know we look at you know the investments we've made in the Dcs model.

And you know our we have a really strong group of anchor customers that were continuing to expand our service offerings within those customers and their key they continued to come back.

And request additional services from us. So that's that's a very nice way to grow the business you know when our customers keep coming back and and wanting to do more things whether it's all of the C. I would probably doing a few things, but he things right. Obviously, we're also you know.

Targeted in terms of adding new customers, we've had a few new wins this year.

We expect that to continue.

And you know we May also as we mentioned look at you know very selective targeted you know a bolt on acquisitions, you know there probably opportunities out there where we could look at adding on you know whether it's a thousand 5000 or 10000 additional player endpoints onto our network.

And really drives some incremental gross margin by leveraging the fixed costs in our business that we've already got.

So you know in order you had kind of put those in the order I just mentioned the meal number one is we're continuing to expand to get more wallet share from our customers our current customers.

We're winning from new accounts.

And your there maybe a obviously some M&A opportunities down the road as well.

Thank you [noise].

Well My and my second question is and you had mentioned that we might increased demand for the services business I'm kind of thought as cinemas start to reopen could.

Go little bit deeper and talk about the dynamics between cinemas keeping their services in house as opposed to outdoor can you and why what could be more inclined to outsource this aspect of their business going forward.

Ah, Yes, yep, so when you look at.

The larger cinema exhibitors in the U.S., they're all names, we're all familiar with you know AMC Regal.

Cinemark Marcus et cetera.

There are sizable organizations and they have.

Technical service capabilities, you know resident in their operations a lot of times. They also utilize organizations like our service group. The supplement those ends up in some cases to do things you know in areas, where they don't have resources.

What we're seeing yeah, we've seen this kind of swing over the past.

Two to three years, where there was organizations were doing a little more in sourcing and a little less outsourcing and adding their own technical staff and building up their own no fixed infrastructure in terms of technical services and we saw that impact our revenues a little bit you know in the service side, you know as compared to.

Where we were probably three years ago, what we're seeing today you know.

You know post cobot in some of this was occurring already and the trend was already swinging back I think cobot has accelerated this and we'll continue to accelerate it.

There's a lot of these organizations are looking at their infrastructure models, and realizing that theres lot of benefits to being lean and mean and.

Technical services is an area, where you know we have.

Coverage really in all major cities across all 50 states.

In the U.S. are all Allstate's, India, and the Oh 48 states in the contiguous United States.

So we can serve you know all of those customers and all those been years pretty effectively and we already have the investment in the network to do so so you know as movie theaters or reopening exhibitors are reopening their operation, where they're coming out of having been idled for an unprecedented period of time.

You know, we're already seeing a lot of those groups come back to us.

And request.

Additional services, both on a demand basis as well as on a contractual basis, you know to help them get reopened and help them get ready to welcome.

Patrons back into their venues.

We're also seeing signs that you know as we go forward there will probably be.

More of an appetite to utilize outsource services into expand the use of that going forward to keep their own fixed costs lower into utilize.

Groups like STS. So we think that's you know a trend that's not only occurring right now.

As things reopened, but we'll continue to be an opportunity for S.T.S. and we're seeing.

Definitive signs that already coming through.

That's great. Thank you very much.

Once again, if you like Kens question. Please press star one on your telephone keypad. Once again, if you like this question Freestor Star one on and telephone keypad, one will increase as we pull for questions.

[noise] just aren't no further questions left in the queue I would like to turn the floor back over them through Robertson for any closing remarks.

Great. Thank you again for your time today in for supportive Ballantine strong I'll leave you day, one last thought we're excited about the future of our operating businesses as well.

As our investment positions you know the past few months had been unprecedented say leased.

We have a great business it convergent and the team they're really picked up the heavy lifting financially well entertainment business was weathering the global shutdown.

Now when entertainment customers ramping back up and we're seeing our business there start to rebound significantly in July and August.

Overall I'm excited about the second half of the year and look forward reporting back to you guys in November on our Q3 results in the meantime, we welcome the opportunity to talk with you personally answer any questions you might have my contact information is on our website and it's also on todays press release.

So please don't hesitate to reach out.

Thank you and look forward to speaking soon.

This concludes todays teleconference. You may now disconnect your lines at this time. Thank you for your participation never one day.

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