FG Group Holdings Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good afternoon and welcome to the Ballantyne Strong First Quarter 2016 Conference Call. All participants will be in listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Elise Stejskal. Please go ahead.

[Elise Stejskal:]

Good afternoon, everyone. And welcome to today's first quarter 2016 conference call. We like to remind everyone that our first quarter investor presentation has been made available for you follow along during today’s call. For those of you joining from our webcast you’re able to download the presentation through the webcast. For those of you joining on the phone you can find our presentation on the investor page of our website under the financial reports and webcast page. Today's call and webcast may contain forward-looking statements related to the company's future operating results. Except for the historical information, it may include forward-looking statements that involve risks and uncertainties, including but not limited to, quarterly fluctuations and results, customer demand for company's products, the development of new technology for the market the company serves, domestic and international economic condition, the management of growth and other risks detailed from time-to-time in the company's Securities and Exchange Commission filings. Actual results may differ materially from management's expectations. On today's call, management's discussion will include non-GAAP measures. Reconciliations to GAAP are available on our website and can be found in our first quarter investor presentation under the investor’s financial reports and webcast page. Joining us on the call is Kyle Cerminara, Chairman and Chief Executive Officer, and Nate Legband, Chief Financial Officer. At this time, I would like to turn the call over to Nate.

[Nate Legband:]

Good afternoon. Thanks for joining us. I will start our call with the review of our financial results for the quarter. We had a very strong first quarter, in the quarter we had the highest net operating income we reported in 11 quarters and our gross margin percentage was the highest we reported since the third quarter of 2005. Improving financial results reflect the changes we’ve been implementing over the past year. We had a net loss of 0.6 million or $0.04 per share compared to a net loss of $10.2 million or $0.72 per share in the same period a year ago. Our core pre-tax earnings were $1.5 million in the first quarter compared with a core pre-tax loss of $1 million in the same period of the prior year. First quarter of 2015 and 2016 included approximately 0.2 million in charges that we expect will be non-recurring in nature. I’ll discuss those charges in more detail shortly. Our total net revenues in the first quarter of 2016 were $20.5 million compared with $22.5 million in the same period of last year. Revenue from the Cinema segment was $13.2 million in the first quarter of 2016 compared with $15.7 million in the same period of the prior year. The primarily driver of the decrease was the decrease in shipments of digital projectors. We shipped a total of 91 projectors in the first quarter compared with 140 in the same period last year. We also had a decrease in sales of our library management system as the prior year included a significant sale for our large project in Brazil. Lastly the prior year also included the revenue for businesses that we have since exited including our lighting business which we devastated in the fourth quarter 2015 and our security business which we exited last year. Digital media segment generated $7.7 million in the first quarter compared with $7 million in the same period of prior year. The increase was driven by an increase in revenues from our digital signage business as well as increase in revenues generated from work performed by our field service group. Gross profit was $5.8 million compared with $4.3 million in the prior year. Gross profit as percentage of revenue was 28.1% in the first quarter compared with 19% in the same period of the prior year for an increase of 910 basis points year-over-year. The margin improvement in comparison to the prior year was driven by improved margins from both our Cinema and Digital Media businesses; this is partially driven by more favorable sale mix as more of our sales came from higher margin businesses. Improvement in our gross profit was accompanied by a significant reduction in our adjusted selling and administrative expenses. Adjusted selling and administrative expenses were down 19.3% in comparison to the same period in the prior year. Adjusted SG&A was $4.3 million compared with $5.3 million in the prior year. The decrease in SG&A when compared to the same quarter of the prior year was primarily attributable to reductions and compensation related expenses. These expense reductions were driven by the cost savings efforts that have been underway throughout this last year. Unadjusted SG&A expenses which included several charges we believe will be non-recurring in nature were $4.5 million in the first quarter and $5.5 million in the same quarter of prior year. During the quarter we recorded a non-recurring charge of $0.2 million for accelerated depreciation on leasehold improvements in our Omaha facility. The first quarter to prior year we recorded a non-recurring charge of $0.2 million for proxy contest related expenses. We have excluded these charges from our adjusted SG&A measures for comparability purposes. Other expense was $1.3 million in the first quarter compared with other income of $0.8 million in the same period of prior year. This change in comparison to the same period of the prior year was driven primarily by a change in foreign exchange rates. We recorded foreign currency transaction loses of $0.8 million in the first quarter compared to a gain of $0.6 million in the same period of the prior year. We also recorded the loss of $0.5 million for change in value of marketable securities and equity method investment income of $41,000. I will talk more about our positions in these investments later in the call. Our cash and cash equivalence balance was $20.8 million as of March 31, 2016 compared to $22.1million at the end of the prior quarter. This decrease was driven at the timing of income tax payments and due to cash being utilized during the quarter for investments in marketable securities and equity investments. We continue to have good liquidity and strong cash flows providing additional capital resources for existing businesses as well as to fund the strategic investments. Overall, we are pleased with the direction that our financial performance is heading. Our quarterly results continue to show that we are taking steps forward. We have been telling you about in each of our calls for the past four quarter is taking hold and showing the effect on our financial. I would like to turn over the call now to Kyle to give a business update and talk more about the progress we've made.

[Kyle Cerminara:]

Thank you, Nate. Good afternoon and thank you for joining us today. We always look forward to updating our shareholders on the significant progress we are making each quarter. We are very pleased with the progress we have made over the last few quarters as Nate mentioned Ballantyne is beginning to show in our quarterly results. At the same time we believe the best days for Ballantyne Strong in the future we anticipate continued improvement in the quarters and years to come. During the first quarter we continued our focus on the expense reductions new business opportunities, and reviews of our current businesses. Year based budgeting is now poor to our company; this is not an easy process but is certainly starting to show results. We have identified substantial savings utilizing zero base budgeting over the last several quarters. Our gross annual savings are over $8 million and our net NO savings are tracking at approximately $3.3 million. We are continuing to identify further savings and expect to see that number increase. I will talk more about these details in few minutes. You will note that this is something we continue to discuss in all of our shareholder communications and that's because it's extremely important to how we are driving the business forward. As our culture and discipline around regular business reviews and active expense management has been ingrained in every aspect of the existing businesses, we are shifting our time and resources to focusing on new business opportunities. We are currently evaluating several new business opportunities and we hope to share more with you about these exciting opportunities in the coming months. Our insider and closely held ownership has increased to approximately 29.3% of our shares outstanding. We expect this number to continue to increase. It's been almost a year now since the appointment of the new board in May. This May we have identified $3.3 million in net annualized savings. This number is comprised of $8 million of cost savings and $4.7 million of capital invested back into the business. The $8 million of cost saving has been generated largely through strategic headcount reductions. We have made several changes to reorganize and streamline our organization to more effectively utilize our resources. These changes are driving approximately $6.6 million in annualized savings related to compensation. Additional annualized cost savings of $1.4 million were identified largely through our zero base budgeting process. Again we expect to see additional expense reductions in the near future and we are excited to tell you about those in the coming quarters. These expense reductions take time and energy and we are working very diligently to get every unnecessary expense out of the financials of the company. I am highly confident we will be successful with this initiative. The capital reinvestment of $4.7 million was primarily driven by strategic headcount additions in areas and roles that will enable us to drive revenue and profit growth going forward. This is great progress but I know we can and will do more. We are creating a culture committed and focused on continuous evaluation of our cost and investments so that we can be confident we are doing what’s best to create value for our shareholders. For those of you who are able to download a copy of our investor presentation from our website you can see we have some slides showing our progress by quarter over the last five quarters. For those of you who haven't had a chance to download our presentation, I would encourage you to do so. Those materials which are going to be available on the company's website really clarify visually the progress we have made. Our adjusted gross profit has shown a steady and consistent improvement quarter for each of the last four quarters since the new board was appointed. Our gross margin percentages also reflect improvement. Nate mentioned earlier that we recorded the highest quarterly gross margin percentage this quarter since the third quarter of 2005. Our quarterly SG&A show the significant decrease since the first quarter of the prior year. Nate mentioned earlier those expenses were down every 19 % in comparison to the same period of the prior year. Our core per-tax earnings also reflect the momentum of the changes we have been telling you about. From the loss of $1.1 million in the first quarter of last year to earnings of $0.3 million in the second quarter of 2015, 0.7 million of the third quarter of 2015, 1.1 million in the fourth quarter of 2015, and to 1.5 million in this quarter. It's easy to see the momentum we are talking about is real. Our return on invested capital is another metrics that show significant and consistent improvement. The first quarter return on invested capital was 24.7% in comparison to a negative return of 14.4% for the same period of the prior year. We believe these metrics and the trends we are showing of the past five quarters is the key indicator of the progress we made in the direction we are moving as a company, it's also a strong indicator the value we are beginning to generate for our shareholders. As I mentioned earlier, our closely held ownership has increased to 29.3% of our shares outstanding. The ownership by this group has continued to grow in the past year since the board took leadership of the company. This is evidence of the very strong alignment between the interest of the leadership of the company and our shareholders. We strive to maintain a culture that is focused on creating shareholder value over the long term. I am excited about the unprecedented level of commitment and energy I am seeing within the organization. Each quarter I have taken some time to talk about our value proposition. I want to continue to update you on where we are today. We believe that our value proposition is strong and it continues to grow. As of the end of the first quarter we had approximately $20.8 million of cash and equivalents and approximately $6.9 million of investments. We still have no debt on our balance sheet and our real estate is owned free and clear. The building and land we own in Georgia is valued between $4.3 million and $6.8 million. We also have cash value in our inventory and net receivables. The cinema business continues to be highly cash flow generated business and we have a strong market position within this business driven by multiple decade long relationship with customers. Our digital media division has room for growth and we are actively working on new products and sales strategies and we are excited about its future. Our corporate overhead expenses are still too high and we are working diligently to further adapt ways to reduce those expenses. We also have operating loss carry forwards that could have value if the company returns to profitability in the United States. Lastly, we have demonstrated that we are improving our returns on invested capital, we believe that improving these return should result in more value for our shareholders. Last quarter I shared some updates on our new strategy, I would like to spend some time talking about that again. We have worked to reshape and redefine our strategy and we believe that the changes we are making will generate significant value for our shareholders over the long term. To be clear when we speak about the long term, we are talking about in terms of many years rather than a few months or quarters. This strategy is focusing on making optimal capital allocations decisions across the company's businesses investments. We told you last quarter that within the strategy we expect to continue to invest in both the cinema and digital media divisions and we continue to do that. Additionally, we told you that we are evaluating investments in other industries where we see opportunities to generate high returns on invested capital while minimizing risk. We have continued to do that in the past quarter and we hope to share more with you about this in the coming quarters. During the fourth quarter we made investments in two public companies and have continued to grow our investment position in those companies during the first quarter. Those companies are RELM Wireless and 1347 Properties Insurance Holdings. As a reminder RELM Wireless designed and manufactured wireless communications products sold to the government, public safety and commercial markets. I joined the Board of RELM in the summer of 2015 and I've seen firsthand growth potential of RELM with the addition of the Transportation Security Administration or TSA contract. 1347 Properties Insurance Holdings is a homeowner insurance company that writes business in Louisiana, Texas. We believe the company is poised to earn much higher returns on capital compared to the average insurance company and we are attracted by the large cash position and negative enterprise value of the company. As of March 31, our investment in 1347 Properties Insurance Holdings has a market value and book value of $1.7 million. Our cost basis in that investment is $2.1 million, so our financial results reflect an unrealized loss of $0.4 million. At the same time our investment in RELM Wireless Corporation had a market value of $5.2 million. Our cost basis for the investment is $4.3 million and the book value is $4.4 million reflecting the earnings of this quarter. Our investment in the RELM is treated as equity method investment, so unrealized gain of $0.8 million has not been reported in our financials in accordance with GAAP. Before closing I would like to share more with you around our plans and areas of focus for the coming months. First, we will continue to evaluate cost savings and investment opportunities within our existing businesses. We've made progress here already, but will continue to driving this forward. Second, we will continue to look for new investment opportunities outside of our existing businesses. We've resources dedicated specifically to this effort. Next, we'll continue to work to maintain a culture of zero complacency, ownership and accountability in all aspects of the business. And lastly, we will continue to hire and retain the best people and continue pushing the team to incorporate long-term thinking into all of the decisions made in the business. In closing, we've made significant progress. We believe we have the right team and strategies in place to drive continue progress and create long-term shareholder value. This concludes our presentation for the first quarter and we would like to open up the lines now to answer your questions. Operator please open the lines.

[Operator:]

Certainly. [Operator Instructions] First question comes today from Jim Marret [ph], a private investor. Please go ahead.

[Unidentified Analyst:]

Hi Kyle. I am local here and in the Omaha area. Next year is it possible you could bring back the shareholder meeting to Omaha and how many shares did you purchase in the last quarter?

[Kyle Cerminara:]

You are talking about in the share repurchase?

[Unidentified Analyst:]

Yes.

[Kyle Cerminara:]

Yes, let me answer that first. So as of yesterday the total number of shares we’ve repurchased under the buyback program which was a 700,000 shares buyback program, we have repurchased 23,750 shares as of May 3 at an average cost of $4.59. Thank you for asking that. As I have mentioned in past quarterly calls we are using algorithm to repurchase the shares and the lower the stock price goes, the more shares we purchase in the given day we are subject to rule 10B 51 so we are following all the rules related to that and there is only so many shares that we can buy in any particular day, at the same time the lower the share price the more shares we buy the higher the share price, the less shares we buy. And we would anticipate again as I mentioned on the last quarterly conference call the price as of the close today, we will buying lot of shares at that price at higher prices not as many shares per day, but we will continue to be buying every day. Related to your question around the shareholder meeting, I really appreciate that and I appreciate you being local here in Nebraska. We made a decision to try and attract more people to our investor day and shareholder meeting this year and we asked a number of investors and there was a feeling that if we had it in a place that was more geographically located relative to our shareholder base that perhaps we have a much bigger attendance because I think last year when we had it in Georgia I think we might have had three or four shareholders attend and we would like to lot more shareholders attend. So I would encourage you, everyone on this call to attend if possible down at Fort Lauderdale at Westin on May 23 and we will see how the success of this goes this year, but certainly we will consider bringing it back to Nebraska in the future. So thank you for the question.

[Unidentified Analyst:]

Thank you. Operator [Operator Instructions] We have a question from Steven Schnipper [ph] with Tower Bridge Investment. Please go ahead.

[Unidentified Analyst:]

Hey Kyle, how are you doing? Just a follow-up on the question on the buyback, so if you bought back a couple of shares during the quarter whether option exercise is stock rental look like your outstanding went up some amount what was that differential from?

[Nate Legband:]

There were some options exercised which was the primary driver of that increase.

[Kyle Cerminara:]

There were some, apparently there were some former employees of ours, former executives of the company that exercised options when they left the company.

[Unidentified Analyst:]

Got you, okay. Thank you.

[Operator:]

[Operator Instructions] I am showing no further questions, so I would like to turn the conference back over to Kyle Cerminara for any closing remarks.

[Kyle Cerminara:]

Thank you again for joining us this afternoon. We appreciate all the support of our shareholders to the work we are doing to move this company forward and generate a real value for our shareholders. It hasn't happened over the course of a new months and we knew one, but we certainly feel that the results we released today and over the past few quarters are beginning to show. We are serious about working hard to generate more value for our shareholders. We appreciate your time and look forward to speaking with you next quarter, at the same time we would love to see you May 23 in Fort Lauderdale at Westin, so if you are able to able to attend we would love to see in person. So thank you and see you May 23 around the next quarterly conference call. Operator Thank you, sir. The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect.