Q3 2022 Ballantyne Strong Inc Earnings Call
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We will open the floor for your questions and comments after the presentation. If you do have a question or a comment you would simply hit star one on your Touchtone phone pressing.
Pressing star to remove you from the queue should your question be answered.
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 32022 on the call today from Ballantyne strong or Mark Roberson, Chief Executive Officer, Todd Major Chief Financial Officer, and Karl Seminara, Chairman 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 view 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 that may cause actual results to differ materially from those.
Described in todays call risks and uncertainties are also described in the company's SEC filings.
Today's presentation discussion also contain certain 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 website are non-GAAP measures may not be comparable to those used in other companies and we encourage you to review.
Can understand all our financial reporting before making any investment decisions at this time I would like to turn the call over to Mark. Please go ahead Marc.
Thanks, John and good afternoon.
Following the Powerpoint will start on slides three and four.
As most of you already know Ballantyne is the holding company and we currently have four primary business holdings.
We're the leading supplier of projection screens in managed services and our entertainment segment.
And we've allocated capital to equity holdings in real estate and currently have three primary equity holdings.
Chief financial Firefly and Green <unk>.
We also had a real estate holding in Georgia with our digital ignition business that we're incubating and you'll start to hear more about that line of business as well soon.
There are a few key themes to keep in mind as we go through today. We are again, the largest producer of premium cinema screens in North America, and we're a leading provider of managed services in our entertainment business.
Business has been growing with Q3 revenues up 68% and.
And we see several exciting growth catalysts in the entertainment segment.
Our equity holdings, each have unique value propositions and growth drivers and the potential for meaningful capital appreciation.
That said, we're currently trading at a discount to book value and the sum of our parts.
Starting first with entertainment operating business.
We are seeing business levels really improving through the year and we expect to finish the year strong as exhibitors are gearing up for the release of Avatar two at the end of the year and are expecting a robust 2023 cockpit schedule.
Also commencing on a major multiyear capital upgrade cycle.
We've been strengthening our industry relationships and positioning the business for accelerated growth post COVID-19.
Yeah.
On slide six the six largest exhibitors in North America, which account for over 70% of the screens in the region are all customers of strong entertainment.
In addition to the six largest exhibitor shown here.
We have literally hundreds of other equally important regional and independent exhibitors and other customers.
Note that we supply AMC cinemark and IMAX with all of their screens on an exclusive basis and.
And we've been strengthening those relationships even more over the past couple of years.
We believe those relationships are important for growth.
Both as the box office in the industry returns to post COVID-19 levels.
And of the upgrades from xenon projection to laser projection begin to accelerate and drive capital spend in the industry.
First with regard to the industry and the box office we.
We saw a very strong recovery this summer and it was really driven by a handful of large blockbusters.
As we close out this year, we see a strong finish ahead with black Panther and Avatar two closing out the year.
And then looking ahead of expectations for next year in the industry are that the box office will be much stronger and the content is much broader and more diverse.
There are some familiar names in blockbuster releases scheduled for the next 12 months.
Some of those include John Wick Captain Marvel The next Indiana Jones sequel, Guardians of the Galaxy do little Mermaid fast and furious 10, there is a hunger games prequel and then Tom cruise is back with the first of two mission impossible sequels.
23 looks to be a very solid year for theatrical.
Now turning to slide eight with regard to the laser upgrade cycle.
Is a really big deal for the industry and it's a big deal for us as well.
Already starting installations this past quarter as AMC began their initial upgrades really focused on the New York and California markets.
Amc's first 3500 planned upgrades will complete around 150 to 200. This year. So there's a long way to go and I expect we'll be deeply entrenched with those projects for the next several years at least.
Cinemark is also underway with their plans to changeover, 100% of their circuit to laser.
And we're starting to see some of the other exhibitors just now gearing up and starting to follow suit.
This is one of the most important catalysts in the industry in the past 20 years, and it's going to drive industry spend over the next five to 10 years on projection audio screens and services.
We spent the past several years optimizing our screens and optical coatings for laser projection, we've been expanding our services.
As the preferred partner for semiotic, who is a leading manufacturer of laser projection and the exclusive supplier to many of the largest exhibitors as we mentioned.
We believe our screen and services business is very well positioned.
Turning to the studios business on Slide nine strong studios as a new line of business for Entertainment group and it adds content and opens up meaningful new growth opportunities.
We acquired a portfolio a portfolio of projects and we started production on two of those already.
Safe Haven and inside the black box.
Safeway, even wrapped principal photography recently and I would expect the first 10 episodes to be completed and delivered in the first half of 2023.
Inside the Black box also completed and is now in the process of being delivered of delivering 10 episodes.
And those are expected to air on Crackle before the end of this year.
So as you can see on slide 10, we've been working on several other projects.
Both from the acquired portfolio as well as adding additional projects to the pipeline.
And the overall business model here and the overall goal of strong studios is really to build a content library, creating a longer term royalty revenue streams.
I'll also utilizing co production distribution of pre sales as well as refundable tax credits to minimize our capital at risk and drive near term revenue.
Over time this part of the business has the potential to scale immensely in emerge into a very meaningful growth engine for the entertainment group.
Turning now to the equity holdings on slides 12 through 14.
Our equity holdings, each have unique value propositions and growth drivers and potential for meaningful capital appreciation.
At FG financial FG recently announced the launch of its merchant banking platform.
Over the past year or so FTE has been busy building its reinsurance team and has already completed seven loss cap reinsurance contracts on the spec side.
<unk> <unk> four spec transactions without by integrity, now complete and two specs IPO this year.
Those are all compelling assets, but more important is really the team and the platform that <unk> financial is building as it evolves into an asset management and merchant banking business and scales over time.
During the third quarter, we transfer our shares of FGF common stock into an LLC, which collectively will hold over 60% of the outstanding shares of FGF.
This LLC as an equity method investment and was structured to be a good asset under the 1940 Act for Ballantyne.
And it provides a means to finance future purchases of FGF stock outside of the Ballantyne capital structure to the benefit of shareholders of Ballantyne.
Firefly as you May recall is a private venture backed mobile media company.
We are invested there alongside Google ventures and FX.
We merged our digital advertising business in the Firefly to obtain our position and we've been really pleased with our growth.
Firefly has grown significantly since our our deal and they are now in over 10 major markets there.
You announced a new program with Hyundai over the summer, where Firefly is enrolling professional drivers and fleet operators at the point of purchase at the dealership.
So basically drivers can earn advertising revenue to help subsidize our car purchase.
In July Firefly also announced our entry into the European market with the acquisition of the Uk's, leading taxi advertising company.
As Firefly continues to grow and acquire they're also able to amplify the revenue per top as they convert from non digital to digital and this really multiplies the revenue potential as they enter new markets.
Green <unk> has been performing exceptionally well.
Following the transaction last summer Green first as we evolve from a small shell to one.
One of the leading lumber producers in Canada with a capacity to produce over 9 million board feet.
In the second quarter Green first reported net earnings of almost $30 million and adjusted EBITDA of over $50 million.
They also just today announced the sale of their private forest land for $49 million.
So they are performing very well to generating cash monetizing noncore assets and reducing debt at a very nice rate.
This is also an industry that has seen quite a bit of M&A recently, so we're watching that closely.
Overall, our equity holdings represent meaningful intrinsic value and growth potential.
And our entertainment operating business, we're seeing a rapid rebound in revenue growth and we believe we are well positioned for strong 2023 with a box office looking strong emblaze upgrade cycle in its infancy.
With that I'll turn it over to Todd.
Thanks, Mark and good afternoon, everyone I'll start on slide 16 for a quick look at our revenue comparison for the quarter over the prior year as well as the quarterly trend going back to the start of 2020.
As you can see momentum continued during the third quarter and over the last 12 months. We've generated consolidated revenue of just under $40 million. This is a significant achievement as we have now surpassed the pre COVID-19 revenue levels of 2019 on an annual run rate basis.
Slide 17 summarizes the consolidated operating results for the quarter touched on total revenue in the previous slides, but to add a bit more commentary on the 68% year over year increase revenue from the sale of both products and services were higher than the prior year up 88% and 27% respectively.
The flow through of the increase in revenue resulted in higher gross profit even before factoring in the employee retention credits recognized in the prior year after adjusting for the $400000 pick up in the prior year gross profit increased 35% year over year.
As a percentage of revenue gross margin was 27% compared to 40% in the prior year.
After adjusting for the ERC gross margin as a percentage of revenue was 33% in the prior year compared to 27% in the current year.
The decrease in gross profit percentage resulted primarily from product mix as revenue from projection and audio equipment grew at a faster rate than our higher margin screen products and services.
Employee retention credits recognized in the prior year also had an impact on the year over year comparison of SG&A higher marketing and travel and entertainment expenses related to the increased revenue and business activity and the launch of strong studios accounted for the other major components of the year over year increase.
Excluding the total 600000 of employee retention credits recorded in the prior year operating loss improved over 60%.
As a reminder, in the third quarter of 2021, <unk> completed its acquisition of a portfolio for us and paper product assets. The transaction included the issuance of additional common shares which reduced our ownership percentage from approximately 20% to just under 10%.
This change in our ownership resulted in a change of accounting for our Green <unk> equity holding from equity method to fair value method.
Under the fair value method, we marked our <unk> holdings to market each quarter, resulting in unrealized gains and losses.
Strong entertainment, our primary operating business generated a six consecutive quarter of positive operating income.
The year over year improvement in the operating results, even after including cost incurred in connection with the launch of strong studios is a testament to the strong operating teams, we have in our screens and services businesses.
Shifting over to the balance sheet on slide 18, now as we've discussed on prior calls our capital structure is not overly complex and our balance sheet only has a small amount of debt.
Which is primarily comprised of the mortgages on the MDI manufacturing facility in Canada, and the digital admission building in Alpharetta as.
As Mark mentioned earlier, we are deploying capital in real estate and our equity holdings, which we believe have the potential for meaningful capital appreciation.
From an operating perspective, working capital decreases experienced during the first half of the year saw some improvement during the third quarter.
Slide 19 presents a break down of the value of the significant assets on our balance sheet as of 930.
As you can see the total value of our cash and equity holdings approximate $40 million.
Given our current enterprise value today, we believe there is little value being ascribed to our strong entertainment and digital ignition business operations.
That wraps up the financial review I'll now turn the call over to our Chairman Powell Seminara for some remarks before we take some questions.
Thanks Todd.
It's clear to many that we have a very undervalued company does a number of diverse businesses that are currently trading at a discount to the sum of the parts.
Why is our stock so inexpensive and what are we going to do about it.
I think about these questions every day and every night.
Our holding company strategy of Ballantyne strong has shown great resilience through some very challenging market conditions over the last few years.
This makes us really happy and I'm glad that we have a number of businesses in diverse areas in various stages of growth.
We've done some very creative transactions over the last few years that has helped create shareholder value and our stock price has not responded the way. We've we would've hoped I continue to be interested in increasing our ownership position in the company and figuring out ways to not only grow our intrinsic value, but also the strength of this kind of the market price to its intrinsic value.
We will be having our second annual Investor day in shareholder meeting on December six in Charlotte North Carolina, We had an amazing group last year and I hope to see an even larger group this year.
With that I'm going to ask the operator to open it up for questions and we'll answer as many questions as you have.
Also welcome your questions at the annual shareholder meeting in December .
<unk>. Please open it up for questions.
Thank you ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please press star one on your Touchtone phone at this time.
Pricing starts you will remove you from the queue should your question to be answered and lastly, we're posing your question. Please pickup your handset or pushing on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Once again Thats star one if you have questions or comments on the first question is coming from.
Adam O'brien with <unk> partners. Your line is live.
Hey, guys. Thanks for taking my question can.
Can you give us a.
Good.
Good how are you.
Can you give us more color on the laser upgrade cycle.
But in terms of where you guys stand on the cycle and how does it impact product for services revenue.
Yes. Thanks for the question Adam It's a really good question the laser upgrade cycle is.
It's a really big.
For the industry, it's probably the biggest technology upgrade and refresh at the industry has had and.
In the past decade, or so the last big technology cycle occurred.
We the industry upgraded from from analog to digital and the upgrade from.
Xenon projection to laser projection is an equally large.
Event for the industry is probably going to be spread out over quite a few years, probably the next five plus years really has all the exhibitors begin to upgrade we're seeing the largest exhibitors like AMC and cinemark, primarily starting the upgrades.
Now AMC started there is publicly announced their intent to do about half their circuit in the first wave, which will take over the next couple of years out of their eight.
<unk> 8000 screens, we've probably worked with them to upgrade a couple of hundred so far by the end of this year. So it's really early stage.
Going with the World series analogy I would say is that the first inning, it's probably really the first few pitches of the first inning. So it's a pretty big event, that's going to drive a lot of capital spend in the industry is going to drive for us both screens and services that we're exclusive with a lot of the largest providers.
So it's going to be a big deal.
Clearly drive our revenue potential not only for this year next year for the next several years.
Great that's awesome blue what's optimal.
Good Thanks Pat.
Okay next we have.
Okay.
Okay.
And would Riley with Jeff Hutton.
Your line is live.
Hey, guys. Thanks for taking my question just wanted to piggyback on Adam's question.
I'm wondering what you attribute the large increase in digital equipment sales too.
And maybe how that might relate.
The upgrade cycle.
Yes, we're seeing quite a bit of demand starting to come through for not only screening services, but for other types of digital equipment, we sell projection, we sell audio equipment. We sell servers. So we're seeing some of that is just normal normal upgrade replacement cycle.
That's also starting to be driven by demand for laser laser projection and laser upgrades. So it's really a mix, but we're starting to see it skew a little more towards towards laser, especially as the bigger guys start to rollout laser.
We will see the smaller regional and independent players follow suit.
Okay Gotcha.
And then on a European.
The revenue.
So a pretty big jump there.
What's the.
Revenue category source, that's really driving the sales there and I'm curious as to how long the Belgium facility was opened during the quarter.
Yes.
The Belgium facility is really just getting started it got up and running really this summer towards the end of towards the end of.
The third quarter excuse me in August September so, we're starting to see some product flow through there, but it really isn't driving the majority of the impact now really we're just seeing the European market starting.
It's a little the European market has been a little bit slower to recover from COVID-19 than the U S market. So we're starting to see the European market demand picking up.
Picking up just naturally so I wouldn't attribute a lot of that to the facility itself I think theres more upside certainly in that market due to the Belgium facility and our ability to be closer to the market and closer to the regional exhibitors, there and as they build up the sales team.
Okay got you and then I'm curious what the production pipeline Kyle It seems like the tank job is very much on brand for you.
Just wondering how much of the names become landmark versus original titles and how are you going about sourcing original ideas.
Yes the thing.
Specifically you mentioned as the original we were actually.
Kyle.
And we were working on that with Ron and sign up before we brought.
The strong studios group over and is something we had been looking at and working on for for a while and there are a few other internally developed projects that are in the works as well there's really no shortage.
The pipeline coming through of potential projects part of we have to do is prioritize.
The ones, we want to work on and select the appropriate ones.
But yes, we're really excited specifically about the tank job, we think thats going to be a really really interesting project next year.
Yes.
We with all the.
<unk> finished.
A pretty big.
Project with Safe Haven.
It was pretty interesting experience going through it because safe havens going to be one of our first really big projects.
Im really excited about it I think it's going to be.
An enormous revenue opportunity so it'll be fun.
We'll watch how it sells over the next few months.
Yes, Safe Haven was.
Yes.
Pretty indicative of the type of project that we'd like to do not necessarily in terms of.
The.
The genre, but more of in terms of like the way, we'd like to do so it was.
<unk> sold we use tax credits.
And.
The risk to our investors was pretty minimal. So I know some people have asked me and ask the company about.
No.
Are you speculating.
On on movies, and that's not that's not the case, so where we have a big pipeline of projects that we're working on we have a great team that we have.
Wired from chicken came from the sold and we are.
Working on these projects to see whats, what's possible and what's not possible safe Haven was obviously possible. Thanks to the deal that we did with chicken soup for the soul.
And.
Between media, but.
Yes, just one.
When we look at the other deals that we're working on are the other movies that were working on.
To your question about the genre of tank job I think that we can have a real.
Really neat library of.
Of of original content that we create.
And I would like to see some that are within that.
Based upon.
Financial.
Scandals or financial things that have happened there.
Better.
Interesting thank jobs, particularly interesting because it's near and Dear to Warren Buffett, we're going to have some original content from Warren Buffett.
I don't want to give away too much but we're going to have some really really cool stuff coming out.
It's going to very.
Very much help solve the style of the production of it.
<unk>.
Sell it around the.
<unk> of it so it's going to be really interesting.
Movie, but also I think some of the.
Stuff that we'll do around the movie with.
Warren Buffett was quoted in the press release around it that we have some we'll have some of the original intent around that.
And outside of that we have some things that we're going to do.
Very similar to that or.
Mark mentioned that we're working with Amazon on some.
This will be the first of hopefully many that we do with them.
Got you, yes, looking forward to watching it.
And then just.
Lastly, any update on the timeline for <unk>.
The spin IPO.
Yes.
I'm limited in what I can say about the transaction, but I can tell you that we have filed our S. One with the SEC, we are monitoring market conditions the last for.
For the last month, or so has not been ideal for deal, making and particularly small microcap ipos.
We see that potentially changing but at this point, we are continuing to file keep our filings up to date, we'll be ready to go at the time that the market conditions say, it's time to go which we think will be soon.
The other point I'd make on that is that.
Yes.
We're not subject to market conditions, we have <unk>, we have plan B and plan.
There will be.
It will be something that occurs with this with this business.
Stay tuned on that but to Mark's point, we can't say too much.
Okay. Thanks for taking my questions.
Thanks, Ed.
Up next we have Brett Reiss with Janney Montgomery Scott Your line is live.
Good afternoon gentlemen.
Good afternoon Bret.
Inside the black box, which is going to start airing on crackle.
This coming quarter.
Is the way we're compensated we get it.
Some percentage of the AD revenues that are generated from the show on crackle.
This inside the black Theres, a few different models that will employ in the studios business.
Most of which will have participation in the backend residuals, etc. Inside the black box is really a smaller production. It's a smaller 30 minute talk show format doesn't give it doesn't lend itself to a whole lot of.
Backend revenue so the way that we've structured inside the black box as more production services type deal, we're getting paid for producing it we will get we will get a feel for that will generate some revenue.
But it'll be more of a fee for that's more of a fee for service model.
Well, we will do we will do some of that as we go because it's a nice way to cover overhead, but it's not the primary business model a strong studios.
Okay.
Now on the laser upgrades, which looks like that's going to be good business for us.
The.
Contracted services that you have with your customer.
We protected if there's supply chain disruptions or any kind of inflationary cost pressures so that.
The customer has to bear some of the burden.
Yes.
In the service side of the business for sure and there are supply chain delays.
Delays timing potentially.
Operators can't get projection equipment on time that delays our screen installation delays some of our labor work that generally doesn't create a lot of and a lot of cost pressure with us it's more of a timing timing issue in terms of the timing some of these things happen and Thats why some.
The installations that were scheduled for this year, we will push out at the next year simply because the projector manufacturers.
Or have been delayed in delivering protection equipment, so that pushes out of this year into next year.
To your question on inflationary pressures, we see some inflationary.
Pressure in a couple of areas primarily freight.
Shipping packaging materials that kind of thing PVC and petroleum products.
It had a huge impact, but we do see some of that to the extent, we had a material impact that we would be able to we'd be able to deal with that and pass those costs along.
Right now with the revenue run rate, we're enjoying is there line of sight when.
We will be cash flow breakeven.
Yes, I mean as a company we were EBITDA breakeven this quarter. So as you can see where we're marching away towards that that's despite the fact, we're making some investments in some areas that will lead to future growth and we're incubating the studios business, we're doing some things with the digital emission business those.
Things do.
It requires some investment that flow through the P&L. So I think we're moving along nicely post COVID-19, we got through Covid, we recovered.
We're planning a lot of seeds, while those seeds are starting to germinate.
And we're continuing to make some investments and things that are positioning of the company better for the future, including the ones I just mentioned building out our sales force et cetera, because we see this becoming a much larger company down the road.
Right and then last one.
<unk>.
The slide on your presentation when it mentioned digital ignition it said stay tuned.
Is there anything.
Yeah.
What can you share with us anything on whats going to be happening with digital lending ignition.
Yes, I'll add a little bit of context.
And if that's all right.
Yes, yes.
So digital ignition.
It was.
It was a project that started.
Years ago.
We we owned digital signage business done in.
Atlanta, Georgia.
The Georgia called convergence and B.
It was housed in a $40 50000 square foot building.
That was.
We were we were building digital signs and we had some really interesting technologists and other people in there.
And.
It was a huge building and we had.
Alright.
More space than we had needs need for it and we also had some we had hired some really smart people and some really interesting software engineers.
AG portfolio.
With that.
We had a couple we were in the process of cleaning up lots of businesses and it was a huge effort.
Clean up all the time.
And we were trying to have a little bit of fun at the same time.
How does that strong strong outdoor which.
A digital signage business that with a customer.
Effectively a customer of <unk>.
Convergence.
<unk>.
Oh.
<unk> turned into Wisconsin strung out door that we sold to our merged with Firefly and that's how we ended up having firefly.
Equity position and Firefly.
Yeah, we were we were incubating some businesses out of this building.
And we had a.
A few other things that we had had been and continue to be working on that we haven't really talked about that locally because they're small and immaterial, but digital admission is kind of how we've defined it.
And.
With that we.
During the Firefly or strong outdoor build outs like we needed some additional capital. So we did a sale leaseback on the building we ended up eventually buying the building back and now we own the building again.
<unk>.
With that we.
Expanding the idea of incubating more businesses inside of that and perhaps taking that beyond just Atlanta, Georgia. So.
We have.
Plans to make that a bigger business, it's not it's not like a rework or regions or anything like that it's more focused on.
Really building some interesting businesses.
Inside of that raising money for them, helping them grow.
So it sort of takes into account some of the things that we're doing in FTE financial in terms of merchant banking, but it's more on the venture side.
We're not going to be investing lots of ballantyne strong money in it so that I don't worry that we're gonna be Boeing lots of our capital and venture that's not the case.
But we will be.
Hopefully getting some really interesting businesses out of this.
Uh huh.
Hopefully some of them will turn into things like Firefly, but.
You don't have to worry about assai Boeing lots of money.
Alright.
And venture investments that go to zero, because we're not going to be.
Exhausting tons and tons of our capital into that so it's.
Hopefully there'll be lots of upside coming from these things, but there won't be.
Lots of our cash flow of 1 billion to <unk>.
Yeah.
Okay.
Okay.
That's the idea behind it.
<unk> had some really interesting things come through already and.
This will be expanding pretty significantly over the next next year or so as it gets a lot more of my attention.
Somewhere in the venture to me Thats now, helping us build it and it's really getting a lot of full steam right now.
Great that answers your question.
Yes. Thank you all for answering my questions.
Okay.
Okay. We have no further questions in queue I'd like to turn the floor back to management for closing remarks.
Thank you all for joining US today, if you have any other questions. Please feel free to reach out to either of the three of us on the call today.
And just a reminder, we do have our annual shareholders meeting coming up in early December So hope to see some of you there. Thanks.
Yeah.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.