FG Group Holdings Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good afternoon and welcome to the Ballantyne Strong Q3 2016 Conference Call. [Operator Instructions] 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 third quarter 2016 conference call. We would like to remind everyone that our third quarter investor presentation has been made available for you to follow along during today’s call. For those of you joining from our webcast, you are able to download the presentation through the webcast by clicking on the Downloads tab on the webcast page. For those joining on the phone, you can find our third quarter investor presentation on the Investors page of our website under the Financial Reports & Webcasts section of that 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 in results, customer demand for the company’s products, the development of new technology for the markets the company serves, domestic and international economic conditions, 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. Joining us on the call is Kyle Cerminara, Chairman and Chief Executive Officer and Ryan Burke, Chief Financial Officer. Also joining us today are Ray Boegnar, President of Cinema and Steve Schilling President of Digital Media. At this time, I would like to turn the call over to Ryan.

[Ryan Burke:]

Hello, everyone and thanks for joining us this afternoon. I will start our call with a review of some of the key highlights around our financial results for the third quarter, then I will give a brief update on our share repurchase program before handing the call over to Kyle. Income from operations in the third quarter of 2016 was $0.3 million compared with a loss from operations of $1 million in the same period of the prior year. There are number of items that had a disproportionately negative impact on our third quarter of 2016 results. These items include a charge of $0.4 million related to an adjustment to our inventory reserve, a charge of $0.3 million related to inventory evaluation and a charge of a $0.8 million related to a volume rebates. Our total net revenues in the third quarter of 2016 were $18.7 million compared to $19.7 million in the same period of the prior year. Our Cinema segment generated revenue of $11.1 million in the third quarter of 2016 compared to $11 million in the same period of the prior year. This increase was driven by higher screen sales and was partially offset by a decrease in sales of distributed product from our exit from the lighting business in 2015. Revenue from the Digital Media segment was $7.9 million in the third quarter of 2016 compared with $9 million in the same period of the prior year. The decrease was due to revenue generated by few larger installation projects and equipment sales in the third quarter of 2015. Gross profit was $4.4 million in the third quarter of 2016 compared to $3.8 million in the prior year. Gross profit as a percentage of revenues was 23.4% in the third quarter of 2016 compared to 19.1% in the same period of the prior year. Gross profit in the third quarter of 2016 was also disproportionately impacted by the charges I mentioned earlier. Charge of $0.4 million related to the warranty reserve adjustment reduced our gross margin by 1.9%. The charge of $0.3 million related to the inventory valuation adjustment reduced our gross margin by 1.4% and the charge of $0.8 million related to the volume rebate reduced our gross margin by 4.1%. Total selling and administrative expenses were $4.1 million in the third quarter of 2016 compared to $4.8 million in the same period of the prior year. Our selling expenses in the third quarter of 2016 increased to $1.1 million from $1 million in the same period of the prior year. Our administrative expenses of $3 million in the third quarter of 2016 decreased in comparison to $3.7 million in the same period of the prior year. This decrease in administrative expenses was driven by reductions in several areas and has enabled us to make investments in areas that we believe will drive revenue growth and operating efficiencies going forward. The prior year also included an amortization charge of $0.6 million related to the impairment of software intangibles. Next, I would like to give an update on the progress of our share buyback program we announced last year. As of November 1, 2016, we have repurchased a total of 42,219 shares at an average price of $5.01 per share. There are 657,781 shares remaining on our buyback authorization. We continue to repurchase shares regularly using an algorithm that repurchases considerably more shares per day at lower prices and fewer shares per day at higher prices. Finally, I would like to highlight that our closely held ownership continues to grow. Our insider and closely held ownership as of the third quarter of 2016 has increased to 33.5% of outstanding shares, an increase from 22.5% as of the third quarter of 2015. I will turn the call over to Kyle now to give a business update and talk more about our strategy and some of the investments we have been making.

[Kyle Cerminara:]

Thank you, Ryan. Good afternoon, everyone. We appreciate you joining us for our third quarter call. We continue to make good progress this quarter against the plan and strategy we have been sharing with you over the last few quarters. As Ryan mentioned, our results from the third quarter of 2016 were negatively impacted by a few items, while the timing of these items had a disproportionate impact on our results. We continue to make a great deal of progress during the quarter with a turnaround of the company. I will share more about that progress shortly. Before I get to our business update, I would like to note that in the quarter we made the decision to eliminate all non-GAAP measures from our financial reporting. Our view is that in order for non-GAAP measures to be useful to shareholders they need to reflect management’s view of the core earnings of the company. The SEC has recently given guidance to publicly traded companies that essentially places restrictions on what is an appropriate non-GAAP measure. Given this guidance, I believe that non-GAAP measures one that being more confusing to shareholders. I made the decision that we will highlight all of the relevant GAAP metrics and let shareholders decide how they would like to calculate their own view of earnings. I would like to start my portion of the update today with a brief update on the business and then an overview of the progress we have been making. First, our exhausted business reviews have continued in the third quarter. We have continued our diligence in analyzing each of the businesses we are in, small and large, to understand the returns they are generating their growth potential and to evaluate their fit in our overall strategy. We have also continued to work on driving unnecessary cost out of the company. Our gross annual savings are now $10.6 million and our net annual savings are tracking at approximately $3.1 million. We have identified substantial savings to-date utilizing zero-based budgeting and expect that process to lead to further reductions in 2017. We also expect that we will continue to reinvest savings identified through their process to grow the business. Expense management continues to be a priority for us. We are also equally prioritizing efforts around new business and investment opportunities. We have made investments for both our Cinema and Digital Media segments as well as making investments in our corporate IT infrastructure. Investments in our Cinema segment include those to increase capacity in our Cinema, screen manufacturing facility in Canada and in research and development that will enable us to develop world-class laser screen capabilities. Investments in our Digital Media segment have been made in sales, marketing and the development of proprietary software to support our new DSaaS business model. I will talk in more detail about these investments shortly. We also recently announced that we have completed the sale of our Strong Westrex operations located in Beijing. This operation had a history of negative earnings. The sale of this operation is in direct alignment with our commitment to focus our efforts on high return on invested capital businesses. We expect that the sale will have a positive impact in our future earnings and then it will ultimately free up additional capital for our investment in areas that will generate better returns to our shareholders. I will give an update next on the progress we have made since the appointment of the new board in May of 2015. We are nearing a 1.5 years since the new board was appointed in May. We have made significant changes in this company and I am proud of the transformation we have been – we have seen, so far. But as I have said before, I am even more excited about the vision we have for Ballantyne and the potential we see for the company going forward as we continue to execute delivering against our new strategy. Since May of 2015, we have identified $3.1 million in net annualized savings. This number is compromised of $10.6 million of cost savings and $7.4 million of capital invested back into the business. The $10.6 million of cost savings has been generated largely through strategic headcount reductions. These changes are driving approximately $8.4 million in annualized savings related to compensation. We have identified additional annualized cost savings of $2.2 million. Many of these savings were identified through our zero based budgeting process. We have continued to work to eliminate unnecessary expenses or to find more cost effective solutions for expenses we must have. The savings we have identified have enabled us to make new strategic, thoughtful and higher return on investments back into the business. The capital reinvestment of $7.4 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 a great progress, but I know we can and will do more in the future. Continuous evaluation of our costs and investments is a process and mindset that is now ingrained in our culture. Our team is very committed to continuous evaluation of our costs and investments and I understand that our focus in this area is imperative to our success. I mentioned earlier that one of our focus is now is on new investments. We are making investments in both the Cinema and Digital Media segment that we expect will drive future growth. One of the larger investments that we are making in our Cinema segment is for the expansion of our factory at Strong/MDI Canada. This expansion will increase our structure and specialty screen fabrication capabilities. The expansion will immediately enable us to realize new operating efficiencies as we have previously been limited by the constraints of the space we have. In addition to the factory expansion, we begun investing more heavily in research and development and will continue to do so over the next few quarters. This investment includes the purchase of additional equipment and hiring additional resources. These investments in R&D are critical to our abilities to develop world class laser screen capabilities and therefore turn out to our growth strategy for this business. In the Digital Media segment, we made sizable investments particularly over the past few quarters. We are investing in several strategic areas within this business. First, we have added six new sales positions, over the last 12 months, many of which were added over the last six months. We have made investments in product development and technology and we restructured our marketing spend to ensure we are getting the highest return for investments. We expect that together all of these will enable our sales team to build a strong sales pipeline. The team is in the beginning stages of building the sales pipeline which in over time we are confident will provide a meaningful and solid recurring revenue base. Another very exciting area we have been investing in is the development of a new proprietary software platform for our digital media business. This proprietary software platform called Fusion VX once developed will create an efficient, highly scalable and standardized platform to service our customers and deliver measurable value. We expect that it will enable us to improve our margins, provide improved scalability, allows to innovatively differentiate our offering. We are also investing in our corporate infrastructure. We are currently in the process of implementing a new cloud-based CRM, ERP and CPM. The majority of our U.S. businesses will complete that implementation in the fourth quarter with our remaining businesses moving to the new platforms in 2017. These new systems will give us the tools we need to improve our forecasting capabilities and will enable us to make significant improvements in our operating efficiencies and the scalability of our operations. This investment also enables us to reduce the need for future CapEx requirements and reduces our exposure to traditional system obsolescence. Next I would like talk about a new and exciting concept that was recently introduced under our Digital Media segment. Digital Software as a Service, or DSaaS, is the industry’s first fully managed digital signage service offering. Now as our customers to skip the traditional capital outlay associated with the digital signage implementation and shifts those costs into their operating budget. It also simplifies what has traditionally been complex technology choices, our customers don’t have to worry about choosing the right vendors and complicated integration, efforts usually associated with digital signage programs. Our DSaaS offering is an end-to-end approach that includes everything our customers need, offer simple monthly price. We will provide services to customers large and small through our DSaaS offerings. Our SMB DSaaS offerings announced earlier this year at InfoComm was created for small and midsized businesses. This product is focused on customers with 10 or fewer locations and is currently focused on corporate communications applications. We also provide services to larger customers through our Enterprise DSaaS offerings. These products are intended to serve large complex networks. The products include support for content design and workflow, advanced tagging and market segmentation capabilities and will support an array of media player technologies and capabilities. Lastly, DSaaS Enterprise Solutions provide advanced reporting and analytics. We are getting great responses from customers on DSaaS and we are beginning to build our pipeline now. We will share more with you in the coming quarters on our progress. For those of you who had a chance to download our investor presentation, you will see that we have included a few charts showing our progress in financial trends over the last several quarters on income from operations, depreciation and amortization, and selling and administration expenses. Our income from operations has shown a strong positive trend since the beginning of 2015. We reported a loss from operations of $0.9 million in Q1 2015, a loss of negative $2 million in Q2 2015, a loss of $1 million in Q3 2015, a loss of $0.2 million in Q4 2015, income of $1.1 million in Q1 2016, income of $2 million in Q2 2016 and income of $0.3 million in Q3 2016. As mentioned earlier, it’s important to note again that there were a few items in third quarter of 2016 that had disproportionally negative impact on our results. Our depreciation and amortization expenses remain fairly stable over the past few quarters totaling $0.5 million in the third quarter of 2016. Our selling and administrative, expenses have shown a steady decline since the beginning of 2015. As I mentioned earlier, we have made significant reductions in our administrative spend and we are now reinvesting in sales and other areas where we believe will drive profit growth. Our closely held ownership has increased to 33.5% of our outstanding shares as of October. In September of last year, our closely held ownership was 22.5% of shares, so you can see has increasing midpoint just as the year has gone. I expect that this trend will continue in the quarters and years to come. As I said in the past, I truly value the ownership culture that we are creating in this company and I believe this culture is evidence of the very strong alignment between the interest of our leadership and our shareholders. Each quarter I will gave an update on our value proposition. Our value proposition continues to strengthen. As of the end of the third quarter, excluding cash classified and assets held for sale at that time, we had approximately $13.8 million of cash and equivalents, approximately $12.5 million of investments at market value. We still have no debt on our balance sheet and our real estate is pretty clear. The building and land we own in Georgia is valued between $4.3 million and $6.8 million. We also have cash value of inventory and net receivables. Our Cinema business continues to be highly cash flow generator. We continue to have a very strong market position within this business, driven by multiple decade long relationships with our customers. The investments I discussed earlier should drive additional profit growth in this segment. Our Digital Media segment is starting to grow again. It has a great deal of potential. We expect the investments we are making in this business to generate high returns over the long-term. We know that our corporate overhead expenses are still too high. We are continuing to work diligently to further reduce these expenses so that we can reinvest those savings in areas that would generate better returns for our shareholders. We also still have operating loss carry-forwards that could have valued the company returns to profitability in the United States. Finally, we are improving our returns on invested capital, improving those returns to result in more value for our shareholders. Next I would like to take some time to ground everyone again on the strategy we are working against and then I will talk about some of the investments we have made in other public companies under the strategy. Many of you know that over the course of the last several quarters, we have significantly reshaped and redefined the strategy of this company, the roots of strategies that are making the most optimal capital allocation decisions across our portfolio business, investments in new opportunities. As I have said before, this new strategy is paramount to our vision for this company and future success and we believe that centering ourselves in every decision we make on this strategy will enable us to generate significant value for our shareholders over the long-term. I have said this in the past when we talk about our strategy update and it’s important to reiterate again. When we speak about our strategy, in the long-term we are talking in terms of many years rather than a few months or few quarters. We have continued to invest in both our Cinema and Digital Media divisions over the past quarter as I mentioned earlier. And we also continued to make investments beyond our existing businesses in other industries where we see opportunities to generate high returns. These investments may include equity positions in public or private companies or complete acquisitions of other companies. The key to these investments is that we are able to generate high returns on invested capital while minimizing risk. We currently have investments in three public companies. These companies are RELM Wireless, 1347 Property Insurance Holdings and Itasca Capital. During the third quarter, we increased our investment positions in both 1347 Property Insurance Holdings and Itasca Capital. Many of you by now are familiar with these investments as we have discussed them in previous quarters, but for those of you who are not or as a reminder for others, I will give you an overview of each of these investments. Itasca was formerly known as Kobex Capital. Our first investment in Itasca was made during the second quarter of 2016. I joined the Board of Itasca in June of 2016. Itasca trades on the TSX-Venture exchange under the ticker ICL. Subsequent to our investment in Itasca, Itasca invested in its cash on hand in preference units of 1347 Investors, LLC, which now owns a controlling stake in Limbach Holdings. Limbach Holdings trades under the symbol LMBH. Limbach is an industry leading specialty contractor in the areas of heating, ventilation, air conditioning, plumbing, electrical and building controls. We are absolutely thrilled with this investment in Limbach and we believe it was significant value for BTN shareholders over the next few years and beyond. RELM Wireless designs and manufacturers 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 have seen firsthand the growth potential of RELM with the addition of the Transportation Security Agency administration contract. 1347 Property Insurance Holdings is a homeowners’ insurance company that runs business in Louisiana and Texas. We believe the company is poised to earn much higher returns on capital compared to your average insurance company and we are attracted by the large cash position and negative enterprise value. As of September 30, our investment in 1347 Property Insurance Holdings has a market value and book value of $2 million. Our cost basis in that investment is $2.5 million. So, our financial results reflect an unrealized loss of $0.5 million. Our investment in RELM Wireless Corporation had a market value of $6.1 million as of September 30. Our cost basis for that investment is $4.1 million and book value is $4.3 million. Our investment in RELM is treated as an equity method investment. So, our unrecognized gain of $2 million has not been recorded in our financials in accordance with GAAP. During the second quarter, RELM started quarterly dividend program. We have received dividends today totaling $0.2 million and expect to see a cash return of approximately $0.1 million on a quarterly basis going forward into that program. Our investment in Itasca Capital had a market value of $4.4 million and a book value of $3.5 million as of September 30. Our comp basis for that investment is $3.5 million. Our investment in Itasca is also traded as an equity method investment. So, our unrealized gain of $0.9 million has to be recorded in our financials in accordance with GAAP. Our investment in Itasca represents 32.3% of the outstanding shares of the company. Before we close today, I want to highlight again for you as I do each quarter some critical pieces to our planning going forward. First, we will continue to evaluate cost savings and investment opportunities within our existing businesses. We have made great progress in this area and we expect to do a lot more in the future. We will continue to update you on our savings and investments in our existing businesses over the coming quarters. Next, we will continue to seeking up new and interesting investment opportunities beyond our existing businesses. We hope to share more with you on developments in this area in the coming quarters. We will also continue to drive our new culture of zero complacency unrestricted accountability in all aspects of the business. And lastly, we will continue hiring and pushing to retain the best people and driving our team to incorporate long-term thinking into each and every one of the decisions we make. In closing, we have continued to make a great deal of progress over the last quarter. I am proud of the work our team has done, but even more excited about the opportunities we have ahead. I know we have the right team and strategies in place to continue the momentum we have had over the last year. I am highly confident that we will drive continued progress and create long-term shareholder value. I wanted to correct something I said earlier. I believe I said that our unrecognized gain of $0.9 million had to be recorded in our financials in accordance with GAAP. I meant to say it should not have been – it is not recorded in our financials in accordance with GAAP. So that concludes our presentation for our third quarter. We will open the lines now to answer your questions. Operator, please open the lines.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Jim Merrick, a Private Investor. Please go ahead.

[Jim Merrick:]

Hi, Kyle. Could you talk a little about your investment philosophy, are you a value type investor or how you come about making your investment decisions in these outside companies?

[Kyle Cerminara:]

Absolutely. So yes, we are value investors. We look at all these investments based on a margin of safety such that our ideal investment is one that we believe based on the analysis we have done that we are buying the assets of the company at a substantial discount to the liquidation value of the company and/or private market value of the company in the case of the sale of the company. So, we are value investors, at the same time we are looking at investments that ideally will be synergistic with our Cinema and Digital Media businesses or the vision we have for future operating segments in the future. So, we haven’t revealed any future operating segments beyond Cinema and Digital Media, but it would be my expectation that that group of divisions will expand over time.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Kyle Cerminara for any closing remarks.

[Kyle Cerminara:]

Well, it looks like we have another question in the queue, let’s take it.

[Operator:]

Yes. I just saw someone lineup in our queue. So, our next question comes from [indiscernible], a Private Investor. Please go ahead.

[Unidentified Analyst:]

Hey, Kyle. Congratulations on all the good quarter. Hey, I saw the average buyback price of $5 a share. If you can just give color on what you think a low price is, what you think the high price is? And the insider ownership seems to be plateauing, but do you think that’s going to rise, is that going to fall? Finally, there is this volume rebate, is that a one-time charge or do you anticipate that to be ongoing?

[Kyle Cerminara:]

Thanks, [indiscernible] and good questions. I think you would have probably not been our shareholders’ best interest for us to disclose the details of the algorithm that we use for repurchasing shares. I think all we have said thus far is that at lower prices we buy more shares and the higher prices we buy less shares. So, the $5.01 per share that we have paid on average is significantly below the current stock price. At the same time, that algorithm can be evolved and changed over time. As it relates to closely held ownership, the closely held ownership has increased every quarter for the last five quarters, so I am not sure what you are talking about plateauing, it’s gone from 22.5% to 24.7% to 29.3% to 29.7% to 31.4% to 33.5%. And yes, we would expect that to continue to go higher over time if the stock stays at the current price or even goes higher. Your final question was related to the volume rebates and part of that charge was related to multiple quarters and we don’t expect that to be recurring and part of it is a volume rebate for a very extended contract that will be recurring. So, a small portion of it is recurring and a larger portion of it is not recurring.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Kyle Cerminara for any closing remarks.

[Kyle Cerminara:]

Again, thank you all for joining us on the call this afternoon. We appreciate the support of all our shareholders for the work we are doing. We are committed to moving this company forward and generating the real value for our shareholders, achieving our ultimate vision for this company and the growth potential we see will take time and a lot of hard work, but we will be relentless and working towards that. Thank you again for your excitement and engagement about what we are doing here at Ballantyne Strong. We appreciate your time today and we look forward to talking to you again next quarter.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.