FG Group Holdings Inc.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to Ballantyne Strong, Inc. Third Quarter 2020 Earnings Conference Call. I would now like to turn the call over to John Nesbett of IMS Investor Relations. Please go ahead.

[John Nesbett:]

Good afternoon. And welcome to Ballantyne Strong's earnings conference call for the third quarter ended September 30, 2020. On the call today from Ballantyne Strong are 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 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 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.

[Mark Roberson:]

Thanks. Good afternoon and thanks for joining us today. It was a busy quarter. So let's get started with Slide 2 for an overview of the key highlights. Overall, while revenues currently remain below historical levels, underlying trends are moving in a positive direction with Strong Entertainment doubling from Q2 and Convergent recurring revenue continuing to grow, despite the challenges in the retail landscape. We continue to grow recurring revenue at Convergent. And with that revenue growth, we also saw the expansion of segment gross margins, segment profitability and cash flow. In Strong Entertainment, the majority of our cinema customers, began reopening midway through the quarter and we were busy helping them with that process. We also settled the business interruption insurance claim from a 2019 roof issue at our screen manufacturing facility. This resulted in a P&L gain and receipt of initial $2 million in cash during the quarter. Again in August we completed the sale of Strong Outdoor. With the combination of underlying improvements in the business, the settlement of the insurance gain, the sale of Strong Outdoor and many other actions taken to manage expenditures and working capital, we reported positive quarterly net income and cash from operations increased to over $8 million on a year-to-date basis. The strong year-to-date cash performance does include some significant one-time items like the insurance proceeds, as well as COVID-related subsidies and deferrals that may not continue. As our operations continue to ramp up, you should also expect to see working capital increasing during Q4 and into next year to support the growth in the business. I imagine that many of your interest is in more color on the current trends and the outlook of Strong Entertainment as this clearly been a difficult year for everyone in the cinema and theme park industry. We saw cinemas across the globe closing in April and May, and we took measures, including furloughs, salary reductions, and other actions to weather the worst of the shutdowns.

[Todd Major:]

Thanks, Mark, and good afternoon, everyone. Before I get too deep into the numbers, I wanted to point out that as a result of the sale of Strong Outdoor business to Firefly, we have reclassified Strong Outdoor financial results to discontinued operations. The next few slides will include reference to only our continuing operations. Slide 8 includes the summary comparison of Q3 2020 and the nine months ended September 30, 2020 to the same periods in the prior year. Consolidated revenue and gross profit decreased 36% and 38% respectively, during the third quarter of 2020. The COVID-19 pandemic continues to have a significant impact on the operating results of Strong Entertainment. Although, revenue was also down at convergence due to some non-recurring installation revenue and equipment sales in the prior year, services revenues continued to grow. Despite the significant decline in revenue, gross margin during the second quarter of 2020 was relatively flat year-over-year at 33%. While our SG&A expenses, as a percentage of revenue increased a year-over-year cost savings measures and cost management initiatives reduced overall SG&A expenses by 28% compared to Q3 2019, which helped offset some of the reductions in gross profit. Slide 9 summarizes our consolidated operating results for the previous five quarters. As we've previously discussed, our results began to decline towards the end of Q1 2020. As we started feeling the impacts of the pandemic while we continue to face some headwinds, we are pleased that consolidated revenue, gross profit, operating loss, and adjusted EBITDA, all improved sequentially from Q2 2020. On Slide 10, Strong Entertainment revenues and profitability rebounded nicely during Q3 2020 as compared to Q2 2020. As Mark mentioned earlier, many of our cinema customers began reopening their theaters during the quarter, which had a positive impact on revenue. Each of our major categories of revenue is Strong Entertainment, which are screen, systems, digital equipment and field services attributed to the revenue more than doubling from Q2 2020 levels. Moving to Slide 11, Convergent continues to perform well in the current environment with gross profit, gross margin and overall profitability improving during Q3 2020, when compared to both Q2 2020, and the prior year. Convergent’s gross margin continues to improve as the mix of higher margin recurring revenue continues to increase. We did see a slight decline in Convergent revenue during the third quarter of 2020 compared to the prior year. Again, that decrease was primarily due to some non-recurring revenue items in the prior year, which was partially offset by an increase in service revenues.

[Mark Roberson:]

Thanks, Todd. Overall, while it has been a challenging year, we feel good about the performance and accomplishments to-date, including completing the sale of Strong Outdoor, continuing to grow Convergent, navigating COVID in our entertainment business and managing working capital to drag cash flow. When we step back 30,000 feet and take a look at the business, we have the Convergent business that we've turned around after years of losses and is now growing, returning revenue and is generating approximately 5 million of annual EBITDA and around 3 million of cash flow after debt service. We have opportunities to continue to grow and cash flow this business, where at some point we now have a more valuable business that we could monetize. We have an Entertainment business that is currently navigating at this scope macro environment in the cinema and theme park business, but is quietly strengthening its competitive position. We're building our market position, signing new contracts and strengthening the relationships and we'll emerge stronger as COVID restrictions subside and as the backlog of studio blockbusters start to hit next year. It may take some time to see the recovery in 2021 and even into 2022 to fully get back to the 2018 and 2019 levels when entertainment was generating 40 million in revenue and 8 million of EBITDA. So we believe the outlook from here is positive and we continue to gain share in the service business and expand our international market share in screens, while also gaining the momentum with the clips. The current environment has delayed investment by exhibitors in laser projection. So we see that continuing to be a catalyst in the years to come for both service and screen replacement cycles. We also have a portfolio of investments that provide potential for both liquidity and for capital appreciation. Looking at longer term, we're focused on capturing international market share in our screen business and converting the near-term momentum in our services business to sustain market share growth. We expect to continue to grow convergence of small base organically, and we can also consider M&A to accelerate growth where to monetize that investment.

[Operator:]

The first question is from Jennifer Wolford from Comstock Partner. Please go ahead.

[Jennifer Wolford:]

Thank you. It looks like you guys had a pretty busy quarter on the entertainment side of the business, with some significant deals, I think, you saw with both Marcus and Cinemark. I know you touched briefly on using your remarks, but could you give us a little more color on each of these deals? I'm just trying to get a better sense of their significance to the overall business?

[Mark Roberson:]

Yes. Thanks, Jen. Appreciate the question. We can't get too specific into the actual economics of each individual deal and deal terms. But we can tell you that those are both we consider very significant deals for both our screen business, as well as our services business in the entertainment side. First of all, we consider ourselves very fortunate to have the type of relationship and personal – type of reputation I should say and personal relationships in the industry, such that operators like Cinemark and Marcus who unquestionably are two of the best in the business and some of the best drawn and best capitalized companies in our sector, would choose strong technical services and strong MDI to be their exclusive partner. Specifically, the expansion of those relationships is certainly helping now as we rescale the business, coming out of COVID and it will be even more meaningful moving forward. It allows us to leverage our nationwide service tech coverage over a larger base of business. If you think about it, it's a pretty big deal to those folks as they're placing a lot of personal trust in our organization and our people, when they select us for those type of contractual relationships on an exclusive basis, that goes for both outsourcing tech services to make sure their cinemas are up and running. And also for MDI’s reputation for screens, with the highest game, best viewing angles, et cetera, to provide an optimal viewing experience in the premium category. So it's about having a quality product, but even more so those wins are about relationships and really trust it's been built over many years. And I think that same trust in relationships carries over not only with Marcus and Cinemark, but also through the other exhibitors in the industry who recognize that. And that's really what drives our business and bodes well for the future.

[Jennifer Wolford:]

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

[Mark Roberson:]

Right. Thanks, Jen.

[Operator:]

It looks like there are no further questions. I will turn the conference back over to Mark for any closing remarks.

[Mark Roberson:]

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

[Operator:]

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