Q4 2021 Ballantyne Strong Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to Ballantyne strong Incorporated's fourth quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation.

That anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note. This conference is being recorded I would now like to turn the call over to Jenn Peladeau of I am as Investor Relations. Thank you you may begin good afternoon, and welcome to Ballantyne strong earnings conference call for the fourth quarter ended December 31, 2021 on the call today from Ballantyne strong Mark Roberson.

<unk>, Chief Executive Officer, and Todd Major Chief Financial Officer. There's also a slide presentation that management will be referencing that is available on the investor Relations section of the Ballantyne strong website 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 and the company is under no.

Obligation and expressly disclaims any obligation to update forward looking statements, except as required by law. These statements are also subject to risks and uncertainties and 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 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 Companys website are non-GAAP measures may 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'd like to turn the call over to <unk>.

Roberson go ahead Mark.

Thanks, Jim and.

Good afternoon, everyone and thank you for joining it's great to be here today, So 2021 actually turned out to be a pretty good year for ballantyne.

Starting on slide three and four if you happen to be following along with the Powerpoint.

Some of the key highlights of the performance over the past year include a strong recovery in topline.

Q4 revenues increased 68% and full year revenue increased over 25% as demand continued to improve post COVID-19 .

On a full year basis earnings per share improved to positive 99 cents per share all in with.

With 19 per share coming from continuing operations.

And shareholders' equity nearly doubled from 27 million to $52 million.

The positive financial results were really driven by three primary factors.

Number one was the rebound obviously in our entertainment business.

To the performance in our equity holdings.

And three the realized gain from the completed sale of converging.

In addition, we also took some other steps along the way to strengthen our position as the world continues to reopen.

We strengthened our industry relationships and partnerships signing new exclusive deals with AMC Cinemark and Marcus theatres for instance.

And we continue to strengthen our longstanding support of IMAX delivering the world's largest IMAX screen. This fall.

And we also formalized our preferred partnership relationship with Cindy on it.

<unk> is the premier supplier of laser projection equipment worldwide.

Outside of the cinema, we continued to expand our eclipse immersive screen business.

As well as finding other unique application for our paints and coatings and other products in venues such as the van Gogh exhibit any luminary them in Atlanta.

Recently, we also expanded into the military sector delivering immersive flight stimulators, using the eclipse kerbal linear products for the Navy.

In early 2021, we also monetize our investment in the convergent digital signage business at a meaningful gain.

You may recall several years back this was a business that was losing a lot of money.

We restructured it and we pivoted the business to be a leaner more profitable recurring revenue model, making the asset marketable and ultimately resulting in a successful transaction.

We increased our equity holdings. This year, we allocated additional capital to both F Chief financial as well as Green first.

And in the first quarter of 2022, we acquired the real estate that houses our digital ignition operation in Georgia.

And a couple of weeks ago, we just announced the launch of strong studios.

We're especially excited about the additional strong studios and believe it will prove to be a valuable growth engine for the strong Entertainment group.

Specifically moving to the entertainment business on slides six through 15, if you're following along.

You can see some of our partnerships with the worldwide leaders, we just mentioned.

We took the opportunity during COVID-19 to add to our sales teams.

And to strengthen our customer relationships to better position the company for success post Covid.

With partners like Cine Ionic Cinemark Markus <unk>.

The IMAX and others, we're in good company.

We're seeing a strong recovery unfolding in cinema.

With COVID-19 restrictions continuing to fade and the flow of high quality content and a theatrical exhibition accelerating.

Reported industry box office revenues have been impressive and in some cases record breaking for.

For instance, IMAX reported that its fourth quarter 2021 was 15% higher than its pre pandemic fourth quarter 2019.

And the Spiderman the way home was the sixth largest global opening ever.

And the release schedule for 2022 is one of the strongest in years.

Doctor Strange store in Black Panther coming from Marvel The Batman Flash and Ive command from D C.

New sequels of Jurassic Park mission impossible, Transformers, and obviously top gun on the way and then we had have avatar on tap to close out the year.

We've seen recurring maintenance contracts largely returned to pre COVID-19 levels, which is an encouraging sign.

Distribution of projection and audio equipment bounce back really strong in the second half as well.

This summer, we formally released our HCA react screen, which has been optimized for laser projection.

The upgrade cycle from xenon projection to laser projection is.

Is it meaningful catalyst as exhibitors looked upgrade their projection equipment.

We expect most domestic exhibitors to upgrade the majority of their projection equipment over the next five to 10 years.

Which also drive screen sales and in many cases additional demand for installation in the installation services.

Outside of the traditional seminar on slide nine.

Eclipse immersive screens had been a great addition to the screen business and opens the door to new markets that we're just starting to leverage.

Flying theaters aviation training flight simulators are just a few areas, where we're seeing demand and serve to increase our addressable market.

As well as to diversify and grow our revenue opportunities.

This is an area where I feel we're just starting to scratch the surface and evaluate the growth potential of that line of business.

Moving on to slides 11 through 13.

With the announcement of the launch of strong studios really the earlier this month I'm excited to welcome David Oeser and his team to the company.

Also to start what we expect to be a long and mutually beneficial relationship with the team over at chicken sold of the chicken soup for the soul and screen media.

The addition of content into our entertainment business opens up an entirely new Avenue of growth.

With the launch of studios, we acquired a portfolio of 12 projects from chicken soup.

We plan to start production on two of those right away is there already green lit and ready to go which allows us to hit the ground with a head start.

Safe Haven, as a supernatural thriller in flagrant as a comedy series starring Michael Rappaport.

For those two projects we've licensed the distribution rights to screen media in return for a $9 million minimum revenue guarantee.

With demand for content, an explosion of streaming we believe there is a tremendous growth potential both organically and potentially through M&A.

We plan to take things one step at a time in this area and pulling it in a financially disciplined and conservative approach to new projects.

We'll be utilizing co production in pre sales to fund production, while building out our content library, creating both near term as well as longer term revenue participation.

As we evaluate new projects, we plan to pre sell projects before we start production, thereby allowing us to operate in a capital light fashion.

I'll have more to share with you on these and other projects soon.

And as I'm sure, you're aware and probably waiting for an update we've been working on the IPO of the stronger team a group for the past few months.

We're now completing the separate audits of the entertainment group on a standalone basis that will be used to update and finalized the registration statement for.

For today, that's really all I'll be able to say about the strong entertainment IPO process and appreciate your patience on that front, just a little bit longer.

Moving onto our equity holdings on slides 17 through 22.

We remain bullish on the outlook for Green first F. G F. A firefly they all continue to execute.

Green first completed its acquisition of the lumber assets of Rayonier advanced materials in August .

Making it a world class Forest products company and one of the top 10 lumber producers in Canada.

We allocated capital to Green first to the rights offering increasing our position from 7 million shares to $15 3 million shares.

Which now represents approximately 9% of their common shares outstanding.

Green first is now a leading producer of lumber in Canada with a capacity to produce over 900 million board feet annually and we're bullish for a number of reasons.

The management team there is top notch, bringing decades of industry experience to the management and optimization of the acquired assets.

The price of lumber continues to hold a historically high levels and are expected to remain elevated.

Walgreen first has publicly said that they they don't require a lumber prices to remain at historically high levels for their acquisition to be successful.

Higher lumber prices, certainly don't hurt, especially if they're also able to execute on their objectives to reduce expenses to support free cash flow generation.

More recently, a green first also announced they've been uplifted and now recognizes the T. S X fast 50 company.

F G financial was expanding its reinsurance back platforms.

We allocated additional capital to that investment in late 2021, increasing our holdings from one day in shares to one 6 million common shares.

FGF recently launched as well as spec platform and.

And closed its first back transactions without Phi and with Hagerty.

The team at F. G. F has proven they can get high quality deals done and we expect them to continue to grow their business and create additional value.

He is a private company and we acquired our holdings in Firefly as part of merging our strong outdoor taxi top advertising business into their digital rideshare advertising platform.

Their revenues have been accelerating and they've been successful in raising additional capital over the past year.

Firefly acquired curb taxi media, making it the dominant mobility media company in the New York market.

As Firefly continues to scale and eventually looks towards the liquidity of that we believe this holding can deliver significant upside potential.

On slide 23, we provide a brief sum of the parts view of Valentines help frame out the business in a simple one page fashion.

I'm not going to go through the details, but what we want to highlight here is simply that there are multiple assets valuable assets that Valentine has in attractive growth markets.

And our current enterprise value, we're confident that we have the opportunity to build durable long term sustained shareholder value.

With that I'll now turn the call back over to Todd.

Thanks Mark.

Slide 25 contains a summary comparison of Q4 2021 results to the prior year, the almost 70% year over year increase in consolidated revenue was primarily due to higher revenues from projection and audio equipment.

Maintenance and monitoring services in our eclipse curb linear screen projects those.

Those increases were partially offset by the timing of a large screen system sale in late 2020.

As our audio and projection equipment orders generally results in lower margins compared to our screen projects. Our gross margins saw a decline compared to the prior year.

Also the marking of the value of our Green first equity holdings to fair value resulted in a $2 $2 million unrealized gains during the fourth quarter of 2021.

And as a reminder, the benefit from unrealized gains on our equity holdings are excluded from our calculation of adjusted EBITDA.

Slide 26 lays out our historical trend strong entertainment showing the operating results over the last four years, including pre COVID-19 prior to Covid. The operating segment was generating in the $35 million to $45 million range annually with EBITDA margins in excess of 20%.

During the significant 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 near breakeven level.

While strong entertainment has not returned to pre COVID-19 levels. We're pleased how the industry recovery and our cost control efforts positively impacted the business during 2021.

Slide 27, as summarized balance sheet as of the end of 2021 compared to the end of 2020.

We're pleased we were able to generate cash flow from operations during 2021, and as Mark mentioned earlier, we allocated capital to the exercise of Green <unk> and F. G. F. Rice during 2021, the sale of convergent in early 2021 strengthened our balance sheet as the divestiture of the business increase cash and lower debt and lease liability.

<unk>.

That wraps up the financial review and now I'll turn the call back over to Mark.

Thanks Todd.

Looking ahead, we believe the strong entertainment business is well positioned.

In the cinema vertical as well as in other areas as we grow the eclipse product and launch the studios business.

We believe the cinema recoveries largely in its early stages and the outlook for studio release and cinema business is favorable.

Our equity holdings contributed meaningfully to our performance in 2021 and we believe they continue to have meaningful long term upside opportunity.

We also believe there are meaningful organic and potentially nonorganic growth opportunities in the entertainment space.

And the addition of strong studios opens up additional growth opportunities.

We'll now open up the call to any questions you may have thanks.

Thank you.

To ask a question. Please press star 100 telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question is from Frank Jones with <unk> capital. Please proceed.

Hey, guys.

I was just wondering hey, Frank Budson, Brian Hey.

Provide some more insight into our eclipse revenues, they're double during the year and I was wondering you know what's really driving this do you perceive this as a longer term trend.

Yeah. Thanks for the question Frank Yeah. The Eclipse is a is a product that we've been pretty excited about for a while it's still small but growing at double during the year.

The nice thing about eclipse and just just to backup for folks who may not be that familiar with what the eclipse product line is.

Is a.

Solid curve linear screen, that's used not in movie theaters, but in other types of applications.

Where it's a more immersive experience and that's opened up.

A number of verticals that in addition to the cinema business in cinema screen business. It opens up scale applications, primarily in theme parks Universal and Disney for example, also in <unk>.

Entertainment rides and exhibitions outside of the theme parks flying overrides dark rides, which are gaining in popularity.

There was a third area that we probably would not have predicted two years ago that.

That has become a larger piece of that business, which has been military applications, where we're able to utilize that product in simulator activities and then we recently.

Installed a couple of locations for the Navy, putting in cinema or putting in flight simulators for the Navy for their training facilities and the interesting thing why I bring that up is that's really an area for eclipse that we probably would not have mentioned a year ago or a year and a half ago wouldn't have talked about perhaps probably.

Even know about it we're thinking about it.

And it's really opened up a new area and I think you know why.

It's doubled it's still small I think it has a lot of room to grow from that base and I think we're really just scratching the surface of understanding and following up on all the growth areas that we could have there as we look forward I think we have opportunities to continue to expand that first footprint in the military.

The flying rides are gaining in popularity around the world I think there's a lot of opportunity in that as well as is the theme parks coming out of Covid are starting to ramp back up construction projects and other cap spending that was really delayed or deferred during COVID-19 .

See that cycle of ramping back up to so a really good product.

A small piece of MTI, a couple million Bucks in revenue, but we think has a lot of potential.

Alright, great. Thank you that's helpful. Thanks, guys.

Sure.

As a reminder, it is star one on your telephone keypad, if he would like to ask a question.

Our next question is from Brett Reiss with Janney Montgomery Scott. Please proceed.

Hi, gentlemen, congrats on a great quarter.

Thanks, Brett Thanks for calling yeah yeah.

You know if.

The stock doesn't.

Get out of this you know $2 80 to 320 trading range.

Do we have a share buyback authorization in place and do you have the appetite to buy back stock at these levels because you know you've got so many good things going on here.

Yeah, Yeah, we definitely have a lot of things going on there is a share buyback that was authorized quite a few years ago that still remains in place and is available to the company. If we decide to pursue it and move forward with it. It is something that we discuss and think about in the board.

Looks at you know from time to time and it is something that we would continue to evaluate as we look ahead.

Okay and do you think.

Once you do the I P O on strong entertainment.

That might bring in some research coverage you know from like the B Riley's and Craig Hallums of the world.

Nobody really follows us right now.

Yeah, I mean, I can't really speak to whether it's specifically will or will not.

And predict that but I would certainly expect that it will give us a lot more exposure both.

At the strong entertainment level as well as the ballantyne level introduce a lot of new shareholders to the name and to both companies and as as we grow that business I would expect it to scale up and hopefully we would have more interest in research coverage at that point.

Great Alright, Thank you for taking my questions and you know could show.

Alright, Thanks, Brett I appreciate it.

Our next question is from Chad Dickerson with.

Private Investor. Please proceed.

Oh, Hey, good afternoon.

Sure. Thanks for taking my call when would you expect on a quarterly basis that the entertainment business could return to positive operating income and positive EBITDA and why not hold off on the IPO until you reach that kind of profitability.

All right.

Yeah, Yeah and our.

Current quarter the entertainment business did on a segment basis returned to profitability, it's still scaling back up from Covid, but it did actually.

Report positive operating income and positive adjusted EBITDA for the quarter ended in December .

Hey, Mark this is Kyle.

Add to that.

Yes.

Excuse me excuse me I'm I'm I'm reading from the released here in the fourth quarter Financial review and it says the loss from operations was $1 3 million versus 0.9, so there must be something in there additional too that's not just the <unk>.

Strong business, along entertainment business itself, you're saying was indeed profitable for the quarter. So I must have misread that I was looking at the company overall is that correct.

Yes, let me clarify and then we have costume and are aligned with us here as well. So he can chime in as well, but yes, yes, I thought you were speaking to the entertainment business in and of itself.

At the segment and it did report a return to profitability on a segment basis on a consolidated basis, which includes corporate overhead public company costs and other parts of the business. It was.

As you said negative.

100000 for the quarter.

Yeah, we're still scaling back up and that includes the corporate overhead public company costs et cetera that are not part of the stronger attainment segment. So I just wanted to clarify those numbers for you.

Okay. Thank you and why not wait and I understand there was an issue of mix shift there and that can occur depending on timing and types of products that you sell.

So that can be variable from quarter to quarter, and perhaps it's not terribly illustrative to look at it on a quarterly basis, when you're out the longer term outlook looks pretty positive, but it just seems that and maybe by the time you get ready to launch the IPO.

On a consolidated basis, you have something that's profitable that you can share or or maybe when you separate it out and it's no longer consolidated.

And you probably can't speak obviously to those numbers yet.

But I would just I guess offer that once you do roll this thing out it's sure be nice too.

Have a feeling of when profitability would arrive on a sustained basis.

And we can't speak specifically to the timing that you know are yeah.

As we stated before right now we are preparing all the file.

<unk> filings and documents and we will have stronger attainment ready to go so that at the right time. It can go and we believe that.

The IPO and separation of strong entertainment as you know.

Yeah, and exercise that will allow us to to grow strong entertainment.

And a much faster fashion going forward as a separate company.

So one of the reasons, we want to get it done as to be able to.

Have it separated and we see a lot of growth opportunity through both acquisition as well as otherwise in that line of business and in order to do that we need to go ahead and get that separate it in the near term.

Okay.

Let me add let me add to that for a second this is Kyle.

If you think about the last two or three years in the last two years of the entertainment industry.

Been a very difficult two years for the 10 minutes right with the pandemic.

And we you know we have a we've.

We've come through that last two years okay.

Where some of our competitors in some of our some of the industry participants haven't paragon as well as we have.

So we.

We think that there's a great opportunity to raise capital right now.

And and pursue some pretty attractive acquisition opportunities.

And we need capital to do that so we.

We think that if you look at what we did with Green first are we you know we put some capital to work at very attractive valuations and I think.

Yeah, we've we've proven to be pretty pretty thoughtful capital allocators with green first.

We were pretty thoughtful capital allocators with Firefly, a we've been pretty thoughtful capital allocators elsewhere.

And it's our.

As experts in this industry and the entertainment industry. It is our professional judgment that now is the time for us to be raising.

Raising money in the entertainment in Australia to be to be.

Putting the money to work and I think it's hard for anyone to argue that it's not the time you know we're coming out of the pandemic.

Almost every industry participants other than us is wounded.

I'd love to sort of pose the question back to you why not why not raise money right now and pursue acquisitions like it gets it's to me, it's the perfect time to be doing so.

Yeah, it's not so much the strategy I think the strategy makes sense.

To me, it's more a question of timing and I understand that is hard to pinpoint exactly are the only.

Point I would make would be it would be nicer, if youre a little bit further up the growth curve, you'll get a little bit better valuation a little more capital would do what you want to do and I'm sure. Your response is gonna be well to get a little bit further up the growth curve, we need the capital to do that and make the acquisitions.

So I guess, it's maybe it's a moot point debatable 0.1 that revolves around.

The tradeoff between when do you actually get or need the capital to establish that growth versus.

Are you going to be able to do that.

Without a without an offering in and tried to get a little bit better valuation youre, you seem to be indicating that given the relative success versus some others in the industry. The perception out there is going to be pretty favorable. It's a good time to go get the money now do the acquisition grow the business.

Rather than wait and it might not be possible to turn profitability that much.

More without doing acquisitions is that correct.

And I think some of these acquisitions may not be available in a year or two if we if we don't.

You don't strike, while the iron is hot.

Okay. Thank.

Thank you.

Our next question is from with.

With River Oaks capital. Please proceed.

Alright, Thank you very much for the call.

Paul.

No wonder.

I Wonder can you hear me.

Yes.

Okay.

Just wondering.

I noticed the gross margins for strong entertainment went down to about 21% for the call.

<unk> I know, it's probably a weird quarter, where the second half of the quarter was better than the first half I was just.

Wondering post COVID-19 .

It's like 20 to.

25% range margin more normal or can we see us getting back to 30 plus percent margins while also.

35 to 40 million in sales right.

Great.

Yes, that's a really good question and it was a little bit of a weird quarter in that decline in gross margin percentage that you see is really it's a function of product mix. This quarter was really heavily weighted towards.

Seal the sale, if we have a lot of demand and a lot of revenue from sales of distribution equipment when we distribute.

Projection audio other equipment, that's manufactured by other parties, we capture distribution margin on that and it's good business, but it's much lower margin than for instance, our screen business revenues when we read manufacturer the screens.

Which Ron your 30% to 40% plus up to 50% or more in some cases and in our service business, which is again much higher margin distribution business.

What youre seeing is really a function of timing of shipments and product mix.

In quarters, where it's much heavier on the screen side on the service side, you'll see margins much higher in quarters, where it's really heavy on distribution, you'll see a little bit lower percentage, but you'll see the dollar strength flow through as well. So it's not a straight line and I wouldn't I would not look at.

Q4 of 2021 is indicative of our of our margin expectations going forward.

Right that makes sense.

We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.

Okay. Thanks, a lot thanks to everyone for joining appreciate the questions. If you have any other questions don't hesitate to reach out directly.

Thanks again goodbye.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Yes.

[music].

Okay.

Yes.

Sure.