Q3 2021 Ballantyne Strong Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Ballantyne Strong Inc. Third quarter 2021 earnings Conference call.
During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
The time during the conference you need to reach an operator, Please press star Zero as a reminder, today's conference is being recorded.
I'd now like to turn the call over to John Nesbit of IMS Investor Relations. Thank you you may begin.
Good afternoon, and welcome to Ballantyne strong earnings conference call for the third quarter ended September 30th 2021 on the call today for Ballantyne strong our Mark Roberson, 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.
Call will be forward looking in nature. These statements are based on management's current view and expectation as of today on the call.
Company is under no obligation and expressly disclaims any obligation to update forward looking statements, except as required by law. These.
These statements are also subject to risks and uncertainties and may cause actual results to differ materially from those described in today's call.
Risks and uncertainties are also described in the company's SEC filings.
Today's presentation and 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 on the Investor Relations section of the company's website.
Our non-GAAP measures.
Not be comparable to those used by other companies and we encourage you to review and understand all of our financial reporting before making any investment decisions.
At this time I would like to turn the call over to Mark go ahead Mark.
Thanks, John Good afternoon, and thank you for joining us today.
I am pleased to report that the entertainment industry and our entertainment operating business continue to make meaningful progress in our equity holdings continue to drive value.
Fox Office results. So far this fall have been encouraging and in some cases record breaking.
This latest da releases coming out over the next 24 months is impressive.
And we believe those trends for tail robust entertainment environment for 2022 and beyond.
Our capital allocation strategies, namely our minority Stakes in Green first <unk>, Chief financial and Firefly are well positioned and we're excited about the potential capital appreciation opportunity in each of those holdings.
This quarter, we began marking our green first investment to market.
Reporting a pretax unrealized gain of $8 4 million based on the current market price as of September 30.
The combination of positive momentum in the entertainment operating business.
Controlled operating expenses and the unrealized depreciation in our equity holdings.
Resulted in significantly improved operating results.
With operating income near breakeven.
Positive net income and positive adjusted EBITDA and EPS coming in at 38 cents per share for the quarter.
On slides five through 11 of the presentation stronger attainment is an established leader in the entertainment business.
We have an industry reputation has been built over the past 80 years.
We have exclusive arrangements with IMAX cinemark, and we provide equipment and services to the majority of the cinema operators in North America.
This business has historically produced solid and stable cash flows for many years.
Obviously COVID-19 had a major impact on the industry and also on our business.
Now starting to see things strengthen and believe we are in the early innings of a robust recovery.
As vaccination rates have continued to climb and government restrictions have continued to subside.
<unk> demand for all forms of entertainment and excitement about returning to the cinema has continued to strengthen.
And the flow of high quality content into theatrical exhibition is expected to accelerate.
IMAX reported their September box office had recovered and actually surpassed their pre Covid September 2019 September results were.
Shang Chi and free Guy leading the way.
IMAX then broke their own all time record in October on the global releases of doing a bond.
Cinemark also recently announced that venom was this best October opening up.
So clearly folks are coming back to the cinema and industry revenues are starting to reflect increasing quality content from the studios.
In addition cinema operators are becoming more creative with new ways to leverage their investment with private showings local language content sporting events and esports among others starting to find their way into the cinemas.
Consumer demand for movie going remains strong.
In the release schedule for the remainder of 2021, and especially 2020 twos impressive.
The internals Ghostbusters.
Latest Spider man and matrix are all on tap to close out the year.
For 2022, the slate is even stronger.
With Doctor Strange Thor and Black Panther for Marvell.
That man Flash and Aquaman from D C.
And your sequels for Jurassic World Mission impossible, Transformers top gun and avatar among others on deck for theatrical release.
In 2023 is starting to take shape as well.
We believe the backdrop is favorable for the industry rebound to accelerate as we look ahead for the next several years.
In addition to our strong legacy in the cinema vertical we also have been increasing the level of diversification in our screen business.
Because we manufacture our own coatings and have in house R&D capabilities, we've been able to expand our product line.
With the eclipse immersive screens for theme parks and simulators.
And our eclipse business has been growing throughout Covid and is on target to double in 2021.
And we've also been able to start selling paints and coatings and other screen products into more non cinema attractions such as the van Gogh exhibits in the luminary them.
These are growth areas and diversify our revenue and provide additional expansion opportunities.
Because of our reputation for innovation service and quality.
We built strong relationships with industry leaders like synodic, IMAX Cinemark, Marcus AMC and many others.
As part of the focus on innovation.
We've been working to optimize our screens for laser projection.
Laser projection provides meaningful operational efficiencies for the operator.
While also enhancing the premium experience for the viewer.
We see the transition from two laser from xenon driving elite the upgrade cycle in the industry.
That's just one example, cinemark has publicly stated that they plan to upgrade all their screens to laser projection over the next 10 years and they are currently less than 10% into that cycle.
On the services side, we're a leading provider of technical support installation and managed services.
We see demand for services and distribution products, increasing a studio releases in box office revenues accelerate.
Service revenues revenues increased 43% in this quarter as compared to the third quarter of last year.
We're working to increase our market share post COVID-19 and see a favorable landscape for expansion.
We expect to see outsourcing of technical services increased for exhibitors, especially as demand from the heavy slate of upcoming releases begins to put more pressure more operational pressure on the cinemas.
Moving on to our equity holdings, which is slide 12 through 15 of the presentation.
Firefly Green first and <unk> Chief financial continued to execute their strategic plans and were excited about the potential future appreciation in the portfolio.
Starting with Green <unk>.
Which completed its acquisition of the lumber assets of Rayonier advanced materials in August.
Making it one of the 10 largest lumber producers in Canada.
We participated in the rights offering to backstop the acquisition.
Allocating additional capital to increase our position from 7 million shares to $15 3 million shares.
We're bullish on the outlook for Green first and we look forward to participating in their in their long term success.
We also hold 1 million shares of <unk> Chief financial.
FGF recently launched a splash as spec platform.
And has closed its first back transaction with oxide and also announced a merger agreement with Haggerty and its second stack.
After the end of the quarter.
Chief financial completed a $2 $6 million capital raise.
And is commencing a follow on rights offering under the same terms as the public offering.
We intend to fully participate and plan to commit additional capital to the FGF rights offering to increase our stake.
Firefly is also gaining momentum coming out of Covid.
Their revenues have been increasing and they've been successful in raising additional growth capital.
Firefly recently announced the acquisition of curb taxi media, making it the dominant mobility mobility media company in the New York market.
As Firefly continues to scale and eventually looks towards a liquidity event.
We believe this holding could deliver significant upside potential.
Overall, a solid quarter and we believe trends are strengthening as we look ahead.
With that I'll turn the call over to Todd.
Thanks Mark.
With recent quarters today's financial review will cover the operating results of our continuing operations and do not include convergent and strong outdoor now that they have been classified as discontinued operations.
Slide 17 contains a summary comparison of Q3 2021 2021 to the prior year.
Revenue and operating results continue to compare favorably to the prior year as the strong entertainment business recovered from the impact of Covid on the prior year.
Operating results for the third quarter of 2021 also reflect.
$600000 benefit from the recognition of employee retention credits as a reminder, the favorable impact of these credits are excluded from adjusted EBITDA.
Although the operating income line, we realized.
A $1 $7 million gain related to the proceeds received from the sale of a portion of the brain first rights.
We also recorded a pre tax $8 4 million unrealized gain on investments.
Starting with the third quarter of 2021, we are now marketing the value of our Green first investment to market, which resulted in the large unrealized gain.
Similar to the employee retention credits the benefit from both the realized and unrealized gain on investments are excluded from our calculation of adjusted EBITDA, even after excluding the benefits from the ERC and the gains on investments adjusted EBITDA saw an 81% increase over the prior year.
Turning to slide 18, now the year over year increase in strong entertainment revenue was primarily due to higher revenues.
From screen systems field maintenance and monitoring services in our eclipse curvilinear screen projects.
Those increases were partially offset by the timing of a large projection equipment sale in the third quarter of 2020, which skews the quarterly comparison.
Gross margin of 37% during the third quarter include a $400000 benefit from the employee retention credits. Excluding this benefit gross margin during the third quarter would have been approximately 30%.
An improvement over 17% in the prior year.
An additional $100000 benefit from ERC was recorded within strong entertainments SG&A during the third quarter of 2021.
Slide 19 shows a quick historical trend of strong entertainment showing the operating results of the last few years, including pre COVID-19 prior to Covid. The group was generating revenue in the 35% to $45 million range annually with EBITDA margins in excess of 20%.
During the significant negative impacts of Covid. During 2020, we were able to implement a series of cost management measures and strong entertainment finished the year at or near breakeven level.
Strong entertainment has not returned to the pre COVID-19 levels. We're pleased how the industry recovery and our cost control efforts have positively impacted the business over the trailing 12 months.
Slide 20 is a snapshot.
Of the balance sheet as of the end of September compared to the end of 2020, the most significant change relates to our investment in <unk>.
Previously mentioned during the third quarter, we allocated capital to exercise the <unk> rights to acquire $8 3 million additional shares approximately $8 3 million use of cash came from our balance sheet and an additional $1 7 billion came from the sale of a portion of the rights.
Following green first acquisition and issuance of additional common shares our percentage ownership of <unk> is approximately 9%.
As a result, we've discontinued accounting for the green burst using the equity method of accounting and on a go forward basis, we'll use the fair value approach and will account for our Green first investment on a mark to market basis.
Even after the additional investment in Green <unk> cash balances remained strong our debt and lease obligations have been reduced and shareholders' equity has nearly doubled since the end of 2020.
That concludes the financial review, let me turn the call back to Mark.
Thanks Todd.
To wrap up before we conclude strong entertainment has rebounded nicely since last spring mirroring the recovery in the cinema and entertainment industry.
As well as benefiting from diversification of the business.
We believe the cinema recovery is in its early stages and the outlook for studio releases incentive business is favorable.
Our equity holdings are executing on their plans and we believe they continue to have meaningful long long term upside opportunity.
Our balance sheet is in solid shape, which allowed us to increase our equity stake in Greenfield.
And we plan to use our balance sheet increase our holdings in FGF as well this quarter.
Also before we move on to Q&A I wanted to touch on the planned name change from Ballantyne strong to FTE Group Holdings.
We have our shareholders meeting in early December and assuming that the proposal has passed by our shareholders.
We plan to proceed with the name change and also changed our ticker symbol to F. G H.
With the IPO and the planned separate listing for the Entertainment group. We believe this is a good time to effect the change of the name at the Ballantyne level.
Ballantyne strong name has historically been closely associated with the cinema business.
And we believe the name changed FG Group Holdings better reflects the future business plans to the holding company.
We will now open up the call if theres any questions.
Thank you to register a question you May press. The one followed by the four on your telephone keypad, you will hear a three ton prompt to acknowledge to request it.
If your question has been answered and you would like to withdraw your registration you can press the one followed by the three.
And our first question comes from the line of Dan Bellinger with Mayflower Capital. Please go ahead.
Hey, guys. Thanks for taking my question, so a really exciting about the aluminum product is it a pretty good growth over the past few years.
Could you maybe give a little more insight into the non cinema applications you have you're seeing for this product.
Yeah.
Sure sure thing Dan I appreciate the question.
The luminary in.
It's not a product the luminary M is actually a customer where we sold product into from from our screen Division. So just just to backup non cinema.
As we mentioned in the calls become it's small, but it's become a much more important part of the business.
Dan.
It's probably about less than 10% of the business today, but it's grown to that from virtually zero to two to three years ago. So our diversification of the business model and expansion and the ability to leverage the capabilities and the R&D and the product line that we've developed in the cinema business to application.
Outside of cinema, it's something we're pretty excited about and the luminary of is really one example of that and it was a pretty Big example, young in Q3 or Q2.
There are other examples which include the eclipse product itself.
Where we're selling curve linear screens in the theme parks and for simulators and military applications.
The luminary and project was a.
Situation, where we weren't selling eclipse screens that we were selling paints and coatings and products that we would use in the cinema applications into non cinema ventures. The same with the van Gogh exhibits that you've seen going around this summer. So the nonsense of vertical is a small and growing part of the business and we're pretty excited about.
It.
Great that's helpful.
Yeah. That's it for me thanks, Good luck going forward.
Thanks, Dan.
And as a reminder, ladies and gentlemen, he can pass the one followed by the four if you have any questions and our next question is from the line of Brett Reiss with Janney Montgomery Scott. Please go ahead.
Good afternoon, Brad How're you doing.
I'm pretty good.
Uh huh.
The.
Timeline on the I P O you know.
Can you give us any.
Guidance on that.
Yes.
Really good question, Brett Unfortunately, I cant give zero guidance on that according to our attorneys.
We're at a period of time, where I'm really not allowed to talk about the strong entertainment I feel at all so really I would tell you to stay tuned and we will communicate something.
Soon as we're able to in that regard.
Let me ask you just generically what do you have to do too.
Yeah, let's pretend it wasn't ballantyne strong what do you have to do too.
Move forward on an I P O.
So the basic steps and this would apply to any company performing or going through an IPO process step one is preparing the.
The carve out financials and a separate carve out audits of the entertainment group, which has been ordered as part of.
As part of Ballantyne in our case, but they are separate procedures required for the carve out financials in the carve out audits that leads to the filing of an S. One with the SEC, So any company going public.
Really the first.
Step beyond preparation is the filing of the initial S. One.
And this one goes in and then there's a minimum of 30 day review period by the SEC. After that there is a back and forth comment period.
At which time what sets concluded and that can take 30 days or several months.
Usually it can be any range of that.
After the comment period is concluded then an IPO could proceed.
Okay can I assume that the SG&A is going to be higher this quarter, because you're laying out money for.
Financial professionals to <unk>.
To put together the S. One.
We definitely have additional professional firms engaged.
In the process and performing work related to the legal and accounting and audit work in preparation for.
For the separation of the IPO.
Those costs under GAAP.
Deferred into the cost of the offering so you may not see those necessarily hit our SG&A.
But we will be incurring additional costs that will be reflected as part of the transaction when the IPO curse.
In the second quarter Conference call, you mentioned or somebody asked about a IPO of a comparable company and the transcript just just.
Couldnt make out what it is it was M. I T. Do you know the name of that company and what the stock symbol is so I can just.
Start to do my own kicking the tires of what.
<unk> strong might be valued at.
Sure absolutely breath at that company or the name is moving image technologies.
And Theyre ticker symbol is <unk>.
In Q.
Okay.
Yes.
Went public back in the summer, so I'm, assuming that you're referring to.
Yeah.
Okay. So I see that's trading at about a $30 million market cap.
How do we compare to them.
Yes, I mean again I think within boundaries of what I'm allowed to talk about I can't really talk about valuation of the entertainment business.
I look forward to talk you about it soon.
Hey.
Cool.
Now before Covid hit Ballantyne strong was doing $35 million to $45 million in revenues, we're back up to <unk>.
$6 million, a quarter, which is an annualized run rate of $24 million.
Do you think.
Within the next year or two we can get back up to that $35 $45 million or maybe even exceed it had some of our.
Lesser capitalized competitors falling out so we pick up market share.
Yes, I mean, certainly without giving specific guidance certainly we certainly are bullish on.
Our ability to gain share post COVID-19 because it has.
Some folks haven't survived.
We believe that the exhibitors will rely more heavily on outsourcing, particularly in servicing the outsourcing of services to folks like our STS group on service side. So we think the backdrop is favorable.
As as.
As our customers continue to recover that we will participate in that and we will see growth from current as you said 'twenty four 'twenty 5 million annualized run rate.
Back up closer to the certainly closer to those pre COVID-19 levels and hopeful.
Right right now you have about $10 million cash after the outlays for the exercise of the Green first.
Right.
You talk about.
You're going to be participating in the FTF rights offering.
Yes.
Is there a ballpark number of how much of your cash youre going to use for that and then what's left and then what's left.
Sufficient working capital for what you guys have on the drawing board. The next six months to a year.
Yes, we feel good about the capital position, yet we intend as we said.
<unk>.
In the earnings release, and the announced in the call we intend to fully participate in the <unk>.
FGF rights offering we don't know precisely.
How many shares will be able to secure in the rights offering it depends on the level of participation by other folks.
But if.
Based on the Formula in in the rights offering itself, we're entitled to I think it's.
Five.
105 shares per share. So if you do the math on that on our 1 billion shares that we hold that's how many shares would be able to buy if everyone else fully participates.
Right, we assume that it's never 100% participation than we planned oversubscribed.
Right right.
Do you see.
Speak to and get.
Any kind of daily or monthly input on on how the operations at Firefly or actually going.
Firefly as a private company so.
They are not required to share.
Confidential private information with US, we certainly do get indications from them about how the business is going and what we understand their businesses.
It has grown and is continuing to grow quite nicely post COVID-19.
Right right.
That's all for me. Thank you very much for answering my questions.
No problem Brett. Thank you very much I appreciate the question.
Okay.
And at this time, we have no further questions on the phone line.
Yeah.
And that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
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Hum.
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