Q3 2020 Ballantyne Strong Inc Earnings Call

Thank you for standing by this is the conference operator.

I'll then find strong third quarter 2020 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.

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I would now like turn the conference over to John Nesbett I.N.S. Investor Relations. Please go ahead.

Good afternoon, and welcome to Valentines Troms earnings Conference call for the third quarter ended September Thirtyth 2020, <unk> on the call today.

A day from Bell times fraud.

Mark Roberson, <unk>, Chief Executive Officer, and Todd Major Chief Financial Officer, before we begin I'd like to remind everyone that some statements made on this call will be forward looking in nature. These statements are based on management's current views and expectations as of today. The company is under no obligation and expressly disclaims any obligation.

In addition to update forward looking statements, except as required by law. These statements are also subject to risks and uncertainties that may cause actual results to differ materially from those described on today's call risks and uncertainties are also described in the company's SEC 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 in the earnings release posted in the Investor Relations section of the website are non-GAAP measures may not be comparable to those used by other companies and we encourage you to review and understand all our financial reporting before making any investment decisions at this.

Todd I'd now like to turn the call over to Mark. Okay go ahead Mark.

Thank you good afternoon, and thanks for joining us today.

It was a busy quarter. So let's get started with slide two for an overview of the key highlight.

Overall, while revenues currently remain below historical levels underlying trends.

Moving in a positive direction, the strong entertainment doubling from Q2 and convergent recurring revenue continuing to grow despite the challenges in the retail landscape.

We continue to grow recurring revenue convergent.

And with that revenue growth. We also saw the expansion of segment gross margins.

Segment profitability and cash flow.

In strong entertainment the majority of our cinema customers began reopening midway through the quarter and we were busy helping them with that process.

We also settled the business interruption insurance claim from a 2019 roof issue at our screen.

The manufacturing facility.

This resulted in a gain and receipt of an additional 2 million in cash during the quarter.

And in August we completed the sales strong outdoor.

With the combination of underlying improvements in the business.

The settlement of the insurance gain the sale of strong outdoor in many.

Our actions taken to manage expenditures and working capital.

We reported positive quarterly net income and cash from operations increased over 8 million on a year to date basis.

The strong year to date cash performance does include some significant onetime items like the insurance proceeds as.

Well as cobot related subsidies and deferrals that may not continue.

As our operations continue to ramp up you should also expect to see working capital increasing during Q4 and into next year to support the growth in the business.

I imagine that many of you are interested in more color on the current trends and the outlook is strong.

Strong entertainment as it has clearly been a difficult year for.

Everyone in the cinema and theme park industry.

We saw cinemas across the globe closing in April and May and we took measures, including furloughs salary reductions and other actions to whether the worst of the shutdown.

We're beginning to see things recover but.

Different pace in different parts of the world.

In the us in Europe, we saw most cinemas reopened over the summer and early fall, they're currently operating with capacity restrictions and very limited inventory of new releases.

Both of those negatively impacts in them economics, but most exhibitors have done the math and determine.

That is better to be opened than to be dark while waiting for new releases to resume early next year.

In China, and other parts of Asia, where virus containment and confidence is a little bit better shape then.

Cinemas have reopened and are demonstrating positive results, which perhaps gives us. The group's ahead to what we might expect in the U.S.

In Europe.

According to Imax's recent public information.

Scientists box office is back to about 70% of prior year. Despite also still dealing with capacity restrictions and limited Hollywood releases.

Well that market is probably not totally analogous to the U.S. and other markets around.

In the world.

They're rebound is certainly encouraging and I believe is a good indication of the resilience of the cinema industry.

This progress also bodes well for domestic and worldwide markets in 2021.

As the new releases originally slated for 2020 start coming out in early 21.

In the 2022, leading pent up demand for movie patrons.

In North America with the majority of our customers reopening.

We've seen demand for technical services recovering and nearly all of our technicians and employees have returned from furlough and or salary reductions. So.

And meet increasing customer needs.

We also continue to see the pendulum swing towards a higher degree of outsourcing.

Which allows exhibitors to keep their overhead levels low and increases our ability to leverage our service techs across more screens.

We recently announced an exclusive multi year agreement.

We have Marcus theaters, and we're also expanding our contractual as well as non contractual service relationships with other large exhibitors.

Some operators look to remain lean.

And increased efficiency and effectiveness on their side, we will be well positioned to gain share and leverage our operation.

On the screen side.

We signed a new exclusive supply agreement was sent a mark in Q3, which we expect to be a positive catalyst for years to come soon.

Cinemark is the third largest exhibitor in the us and a previously announced plans to upgrade all of their screens from digital projection to laser.

Which will also drive screener.

At least Smith as projection projection equipment is replaced over the next 10 years.

Following the temporary closure of our screen manufacturing plant in Q2 groups.

We've seen screen orders and production slowly build back to currently around 60% or normal volume.

With orders from China, and the middle East, helping offset slower demand in.

Yes markets currently.

As Weve mentioned in prior calls one of our strategic objectives, which increased our market share and presence in Asian, and European markets and we're currently seeing a higher proportion of sales outside of the U.S.

We also continued to see solid interest in activity around our clip screen for theme parks and for military.

Terry Stimulator applications.

Which helps to balance our revenues and provides a nice growth addition to the screen business.

Convergent continues to post solid performance.

During the second and third quarter, while most retailers and digital signage companies were struggling convergent continued to expand.

And and improve its financial performance.

We are fortunate that our largest customers were in areas of retail that continue to operate and thrive and we were able to increase our installed base.

If there is any negative is probably that we have not.

Had the same opportunity to scale that business with new customer growth as we would have in the absent.

Sales of coated.

Those marketing and growth initiatives have largely pushed out into 2021.

As we continue to expand the number of players by expanding penetration in our existing customers as well as adding new logos.

We expect the added scale to drive increased margins and profitability as we further leverage the platform.

Yeah.

Moving on to our investment portfolio we.

We completed the sale of strong outdoor to Firefly in August.

This transaction resulted in a $5 million largely noncash gain that was recognized in Q3 and increased our investment Firefly equity to approximately 30.

$10 million.

The existing this business eliminated the expected future operating losses and capital expenditures necessary to grow the outdoor advertising business.

And allows btn to participate in fireflies future growth and potential liquidity events as they expand their model.

We also continue to.

Investments in that task the capital and 13 47 property insurance holdings.

13, 47 is proceeding with its business strategy to operate as a diversified holding company of reinsurance and investment management businesses.

Itasca recently announced several transactions and the appointment of Paul Rivette and.

Domain to its team as it begins execute its growth strategy.

I will now turn the call over to Todd our CFO to walk through the financials.

Thanks, Mark and good afternoon, everyone before.

Before I get too deep into the numbers I wanted to point out, but as a result of the sales a strong outdoor business to Firefly.

Well, we have reclassified strong outdoor financial results to discontinued operations. The next few slides will include reference to only our continuing operations.

Slide eight includes a summary comparison of Q3 2020.

And the nine months ended September 32020 to the same periods in the prior year.

And solid.

Consolidated revenue and gross profit decreased 36, and 38% respectively. During the third quarter of 2020. The COVID-19 pandemic continues to have a significant impact on the operating results of strong entertainment.

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

Services revenues continued to grow.

Despite the significant declines in revenue gross margin during the second quarter of 2020 was relatively flat year over year at 33%.

While our SGN a expenses as a percentage of revenue increased year over year and cost savings measures and cost management initiatives.

Has reduced overall SGN expenses by 28% compared to Q3, 2019, which helped offset some of the reductions in gross profit.

Slide nine summarizes our consolidated operating results for the previous five quarters as we have previously discussed our results began to decline.

Towards the end of Q1 2020, as we started feeling the impacts of the pandemic.

While we continue to face some headwinds we are pleased that consolidated revenue gross profit operating loss and adjusted EBITDA All improved sequentially from Q2 2020.

On slide 10 strong entertainment revenue.

Revenues and profitability rebounded nicely during Q3 2020 as compared to Q2 2020.

As Mark mentioned earlier, many of our cinema customers began reopening their theaters during the quarter, which had a positive impact on revenue each of our major categories of revenue its strong entertainment, which are screen systems digital equipment and field service.

And has contributed to the revenue more than doubling from Q2 2020 levels.

Moving to slide 11, converging continues to perform well in the current environment with gross profit gross margin and overall profitability improving during Q3 2020, when compared to both Q2 2020 and the prior year.

This convergence gross margin continues to improve as the mix of higher margin recurring revenue continues to increase.

We did see a slight decline in converged revenue during the third quarter of 2014 compared to the prior year again that decrease was primarily due to some nonrecurring revenue items in the prior year, which was partially offset by an increase in service.

Revenues.

Slide 12 summarizes our balance sheet as of September compared to the end of 2019 the benefits of the proceeds received from the settlement of the business interruption claim as well as strong cash collections on our accounts receivable strengthened our cash cash position and liquidity at the end of the third.

Third quarter. In addition, we were able to pay down the balance on Mdrs revolving credit facility during the quarter.

We continue to have our eyes on our operating expenses in an effort to reduce our overall overhead and other operating costs where possible.

With that let me turn the call back to Mark.

Thanks Todd.

Overall, while it has been challenging year, we feel good about the performance and accomplished to date.

Including completing the sales strong outdoor continuing to grow convergent naveen.

Navigating cobot inherent in our entertainment business.

In managing working capital drag on cash flow.

When we step back.

Back 30000 feet and take a look at the business.

We have a convergent business that we've turned around after years of losses and is now growing recurring revenue and is generating approximately $5 million of annual EBITDA and around 3 million of cash flow after debt service.

We have opportunities to continue to grow in cash flow.

This business we're at some point, we now have a more valuable business that we could monetize.

We haven't entertainment business that is currently navigating a difficult macro environment in the cinema and theme Park business.

But as quietly strengthening its competitive position.

We're building our market position, signing new contracts and strengthening.

On the relationships and will emerge stronger as cobot restrictions side.

And is the backlog of studio blockbuster start to hit next year.

It may take some time through the recovery in 2021, and even into 2022 to fully get back to the 2018 and 2019 levels when entertain.

Payment was generating 40 million in revenue and 8 million of EBITDA.

So we believe the outlook from here is positive and we continue to gain share in the service business and expand our international market share in screens.

While also gaining the momentum with eclipse.

The current environment has delayed investment by exhibitors in laser projection.

So we see that continuing to be a catalyst in the years to come for both service and screen replacement cycles.

We also have a portfolio of investments that provide potential for both liquidity and for capital appreciation.

Looking out longer term, we're focused on capturing international market share in our screen business.

And converting the near term momentum in our services business to sustain market share growth.

We expect to continue to grow convergence of small based organically.

We could also consider M&A to accelerate growth or to monetize that investment.

Finally, there is a considerable longer term opportunity in our investment portfolio, we have rail.

Relatively liquid positions with a task mph and longer term upside prospects with Firefly.

That was a lot to cover and we appreciate your time, we'll now open up the cold any questions you may have.

We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone.

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Yes.

The first question is from Jennifer.

We'll start from Comstock partners. Please go ahead.

Thank you and it looks like you guys had it had a pretty busy quarter on the entertainment side of the business you would does some significant deals I think you said with both markets and.

Thanks Mark.

I know you touched briefly on the using your remarks, there could you give us a little more color on each of these deals I'm just trying to get a better sense of their significance to that to the overall business.

Hi, yes, thanks, Jen I appreciate the question.

We can't get too specific into the into the actual economics of each individual deal.

Cynical and deal terms, but we can tell you know that those are both we consider very significant deals.

For both our screen business as well as our services business and entertainment side first of all we consider ourselves very fortunate to have the type of relationship and personal related.

Type of reputation I should say and personal relationships in the industry such that operators like Synta, Mark and Mark Marcon, Marcus who unquestionably are two of the best in the business and some of the best Struan and best capitalized companies in our sector would choose strong technical services and strong India.

You have to be their exclusive partner.

Specifically the expansion of those relationships is certainly helping now as we scale the business coming out of covert.

It will be even more meaningful moving forward is allows us to leverage our Nash nationwide service debt coverage over a larger base of business.

If you take.

Got it that's a pretty big deal to those folks as they are placing a lot of personal trust in our organization and our people when they selected us for those type of contractual relationships on an exclusive basis.

That goes for both outsourcing tech services to make sure the cinemas are up and running.

And also for India's reputation for screens yet with.

The highest gain best viewing angles et cetera to provide an optimal viewing experience and the premium category. So it's about having a quality product, but even more so it's those wins are about relationships.

And really trust, it's been built over many years and I think that.

Same trusting relationships.

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It varies over not only with Marcus and send a mark but also to the other exhibitors in the industry, who recognize that and that's.

That's really what drives our business and bodes well for the future.

Yes, that's great color. Thank you Ana good to see that business start to come back. Thank you.

Right.

Thanks Jen.

As a reminder, it is star one to ask a question.

So there are no further questions I will turn the conference back over to Mark.

For any closing remarks.

Okay. Thank you very much I appreciate everyone, who dialed in to listen to the call. If you have any other follow up questions feel free to reach out my contact information is contained on our website as well as in the earnings release, and we look forward to speaking to you again soon thank you.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

Okay.

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