FG Group Holdings Inc.
Q1 2020 Earnings Call Transcript

Published: 13 May 2020

[Operator:]

Ladies and gentlemen thank you for standing by and welcome to the Ballantyne Strong Inc. First Quarter 2020 Earnings Conference Call. On the call today from Ballantyne Strong are; Kyle Cerminara, Non-Executive Chairman of the Board; Mark Roberson, Chief Executive Officer; and Todd Major, Chief Financial Officer. I would now like to hand the conference over to Todd Major for some opening remarks. Please go ahead, Todd.

[Todd Major:]

Good afternoon and welcome to Ballantyne Strong's earnings conference call for the first quarter ended March 31, 2020. 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 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 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 in the Investor Relations section of our website.Our 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 would like to turn the call over to Kyle.

[Kyle Cerminara:]

Good afternoon and thank you for joining us on our call today. One of our priorities over the past couple of years has been to assemble the right management team for Ballantyne Strong and our subsidiary operations. As you are aware, we recently announced executive management changes as part of our succession planning initiatives. Mark Roberson has taken over as CEO and Todd Major has stepped up as CFO. I will continue to be actively involved on key strategic and M&A initiatives in my role as Non-Executive Chairman.Bringing Mark and Todd into the organization over the past two years was a key element of our plan to strengthen our management team, as well as allowing us to improve our governance structure by separating the roles of CEO and Chairman. Over the past 18 months, we've made significant improvements in our operations and those improvements are clearly visible in our recent financial trends.While we did not foresee that we would be in the midst of a pandemic as we were first contemplating these news, we are certainly better positioned as a result of these investments to react and emerge from our current situation in a position of strength.Turning to our overall strategic plans going forward, M&A remains a key strategic focus of the company and we continue to evaluate both acquisitions and opportunities to monetize each of our businesses. We've thoroughly analyzed several potential transactions with our internal team. In addition, we've engaged with investment banks and strategic consultants to help us further evaluate transactions and to better define our strategy.As the business operations have continued to improve, we're seeing increased inbound interest and potential for strategic M&A transactions even during the current pandemic. From strategic tuck-in acquisitions in our digital signage and managed services businesses to opportunities to sell stakes and operations are combined with other providers, we intend to selectively pursue these opportunities where we believe we can increase shareholder value.When you look at the combined adjusted EBITDA of Strong Entertainment and Convergent for example, one only needs to assume a modest multiple of adjusted EBITDA to understand the potential upside from an M&A transaction. Of course M&A transactions come with risk and uncertainty and are difficult to execute, but we believe we've assembled a team that is up to the challenge and will work to do what we believe is in the best interest of shareholders.Obviously the current environment with COVID-19 has presented an unexpected challenge for our Strong Entertainment Strong Outdoor advertising businesses. As Mark will discuss in a moment we're taking actions to adjust to the current environment.Challenging times often also bring new opportunities and serve to accelerate industry consolidation which we are closely evaluating as well. We're being proactive in creating products and solutions for the cinema entertainment and retail industries to address the COVID-19 pandemic and help these businesses reopen and operate safely on an ongoing basis in the future. We expect to have a lot of these products in the near future.I will now hand the call over to Mark.

[Mark Roberson:]

Good afternoon. It's hard to believe it's only been two months since our last call and how much has changed for everyone in such a short period of time. Let me start by giving a high-level view of the operational progress through Q1 and I will also cover more detail around the impact of COVID-19 and the actions we're taking to stabilize our financials and the outlook as we prepare to support our customers post-COVID.If you've been following our progress, I'm sure you've seen that our financial and operational performance has been improving consistently quarter-to-quarter for over the past year. The first quarter of 2020 reflected a continuation of that strengthening trend before the impact of COVID became more evident.Gross margins, operating results, adjusted EBITDA and operating cash flow demonstrated a trend of steady improvement over the past 1.5 years. In the first quarter of 2020, gross profit increased by 60% with gross margins increasing to 31% from 19%. Adjusted EBITDA improved by over 50% and net loss per share was $0.03 as compared to $0.29 in the prior year. Those improvements were the result of action plans we implemented starting in late 2018 and continuing throughout 2019.The repositioning of Convergent for example from a hardware-focused digital signage business to a higher value-add recurring revenue service model has had a significant positive impact. Today, over 60% of our revenue is now from recurring revenue service contracts and we expect that trend will continue in 2020, as we see our existing customers requesting additional services and we're winning new customer business with our DSaaS model.Additionally, our Convergent business has been the least impacted by COVID. As the majority of our DSaaS customers are providers of essential services, they're able to continue operating through the pandemic.At Strong Outdoor, we restructured the operating cost model for our static taxi-top advertising business in mid-2019, at the same time that we sold our digital advertising business to Firefly. As a result of the repositioning of that business, we were able to dramatically improve the overall financial performance with Q4 being our first quarter positive adjusted EBITDA.In Q1, we began to see the impact of COVID on the New York advertising market and results trended down from Q4 on a sequential basis. However, even with the impact of COVID operating results were quite favorable as compared to prior year due to the lower operating cost model now in place.As you might imagine, the demand for taxi-top advertising in New York is not very high at the moment. We have taken additional steps to further reduce the operating expenses. Fortunately, our reduced operating cost structure, as well as these additional temporary cost reduction actions have dramatically reduced the cash needs of that business.At Strong Entertainment, we had a fantastic second half of 2019 and we entered 2020 with higher-than-normal demand in our screen business in the month of January. However, as the coronavirus began to impact China, and then made its way to the U.S. and Canada by March, we saw that positive momentum swing back.As a result of government mandates in Quebec, as well as concern for the health of our employees we closed our facility there in mid-March. We will begin a staged reopening with a limited number of employees this week and we expect demand and utilization to start to slowly recover over the next couple of months, before gradually returning to normalized levels.We also saw demand for distribution and technical service start off strong, and then drop in advance of the cinema closures. We significantly reduced hours and wages starting in early April, and those continued through the second quarter, while our cinema customers remain closed. While it's a trying time for all of our Strong Entertainment customers, and for our employees, we're committed to flexing our operations to ensure that, we're ready to support our customers as they now start planning how to reopen their venues. We're already proactively working with those customers to begin the planning work that will be needed to calibrate projection systems, ensure safety and otherwise get cinemas ready to show movies again after being idle for this unprecedented period of time.Overall, 2020 started off strong continuing the trend for 2019 before our customers and operations were impacted by the stay-at-home orders. We applied for a Paycheck Protection loan from the SBA, along with many other small and larger customers – companies. Ultimately, the ground rules as to both the intensive loan program and the certification criteria changed, as treasury moved the goalpost with regards to qualification and enforcement.In our view those changes made the PPP loans potentially inappropriate for public companies, with access to any other source of operating liquidity. We elected to return the funds that they might be used by other companies without access to alternatives. Fortunately, we do have existing bank facilities and lines of credit, we hold assets that can be monetized and there are many other actions we can take to manage liquidity through the storm and as we prepare to ramp back up operations on the other side.We've significantly reduced our monthly operating expenses and are closely managing working capital and liquidity. Some of those expense reductions are temporary, as we ramp down variable costs and implemented temporary austerity measures. Others will be more permanent and will be better positioned the company to operate more profitably on the other side of the crisis.We're in unprecedented times. I'm proud of the manner in which our teams have rapidly adjusted to the circumstances. I'm confident that, we've taken the appropriate measures to weather the storm for the next few months and are beginning to see opportunities on the other side that we're uniquely positioned for.We're starting discussions with customers already to help them plan with the new normal post-COVID and how to open their doors again safely and profitably. I believe that, our service organizations are uniquely equipped for that work that will be required to get the cinemas and other venues ready to reopen.We're also working on COVID-related safety measures and we are developing new product offerings targeted at improving safety in retail and entertainment venues, as they reopen. Those new products and services are in development and we look forward to sharing more on that topic soon.I'll now turn the call over to Todd to review the financials.

[Todd Major:]

Thanks, Mark. Total revenue decreased 5.1% to $13.6 million for the first quarter of 2020. Gross margins improved to 31.3% for the first quarter of 2020 from 18.5% in the first quarter of 2019. Operating loss improved 25.4% to $1.9 million for the first quarter of 2020 from $2.6 million in the prior year, while adjusted EBITDA improved 54.1% to negative $0.7 million for the first quarter of 2020 compared to negative $1.4 million in the prior year. These improvements were primarily driven by Strong Outdoor and Convergent, which were partially offset by reductions in profitability at Strong Entertainment.Slide 8 summarizes our consolidated operating results for the previous five quarters. Gross profit, gross margin percentage, income from operations and adjusted EBITDA all increased sequentially throughout 2019 before dipping in Q1 2020. The results from the first quarter of 2020 declined from Q4 2019, primarily due to the headwinds in Strong Entertainment in the latter part of the quarter.Notably, despite our Q1 2020 results decreasing on a sequential basis due to the current environment, they were still significantly improved as compared to Q1 of 2019 due to improvements in Convergent and Strong Outdoor.On Slide 9, Strong Entertainment revenues and profitability retracted significantly in Q1 2020 as compared to both Q4 2019 and Q1 of the prior year. As Mark previously noted, we temporarily closed our screen manufacturing facility in Quebec, in March and saw a significant and speedy decline in field services and parts distribution as cinemas began closing in China and North America during the quarter.We commenced our expense rationalization initiatives in early April, shortly after the end of our first quarter, so we expect to see the benefit of those activities in our second quarter results.Moving to Slide 10. Convergent's operating results continued to trend in an upward direction. Gross margins, income from operations and adjusted EBITDA all continued to improve. We did not see any meaningful impact of COVID-19 on Convergent's financials during the first quarter of 2020. Some of our retail customers temporarily paused operations during the second quarter but the overwhelming majority of our recurring revenue customer base is providing essential services and continue to operate.On Slide 11, Strong Outdoor's financial results improved in the second half of 2019 and continued to hover around breakeven in the first quarter of 2020 on an adjusted EBITDA basis. The results of Strong Outdoor were positively impacted by an increase in our experiential marketing campaign business in January but began to see the impact of COVID-19 on the New York City market mid-quarter and demand for taxi-top advertising declined significantly as New York City entered its lockdown. We implemented additional steps in early April to temporarily reduce operating expenses while we wait for the market to reopen.In closing, the first quarter started off with strong positive momentum before the stay-at-home orders and other disruptions related to COVID-19. We have taken decisive actions to reduce operating costs, manage working capital and maintain liquidity through the current phase.We believe our customers will need our services and support more than ever as they start preparing to reopen their doors in the coming months. While we cannot predict the trajectory of the economic recovery with much certainty, we will continue to closely monitor expenses and pace our activities to ensure that we are positioned to withstand this disruption.With that let me turn the call back to Mark.

[Mark Roberson:]

Thanks, Todd. Thank you for listening in today. Please stay safe and have a good evening.

[End of Q&A:]

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.