FG Group Holdings Inc.
Q4 2016 Earnings Call Transcript

Published: 16 Mar 2017

[Operator:]

Good day and welcome to the Ballantyne Strong Fourth Quarter 2016 Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ms. Elise Stejskal, Investor Relations. Please go ahead.

[Elise Stejskal:]

Good morning, everyone. Welcome to today’s fourth quarter 2016 conference call. We would like to remind everyone that our fourth 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 fourth 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 SEC filings. Actual results may differ materially from management’s expectations. Joining us this morning are Kyle Cerminara, our Chairman and Chief Executive Officer; Ryan Burke, Chief Financial Officer; and Steve Schilling President of Digital Media. At this time, I would like to turn the call over to Ryan.

[Ryan Burke:]

Thanks, Elise, and good morning, everyone. Thank you for joining us for our fourth quarter earnings call. We’ll start the call this morning with a review of some of the key highlights on our financial results for the fourth quarter and then will provide an update on our share repurchase program. Income from operations in the fourth quarter of 2016 were $1.3 million compared with a loss from operations of $0.2 million in the same period of the prior year. Depreciation and amortization expense in the fourth quarter were $0.5 million and we had zero interest expense. Our total net revenues in the fourth quarter of 2016 were $20.4 million compared with $21.3 million in the same period of last year. Our Cinema segment generated revenue of $9.4 million in the fourth quarter of 2016 compared with $13.6 million in the same period of the prior year. The decrease was due to lower projector and digital part sales in the fourth quarter of 2016 as the prior year period included a larger than normal amount of digital projector sales. Revenue from the Digital Media segment was $11.1 million in the fourth quarter of 2016 compared with $8.0 million in the same period of the prior year. The increase was driven by increased project revenue and equipment sales from our digital signage business as well as a large increase in demand from our service business. Consolidated gross profit was $5.9 million in the fourth quarter of 2016 compared with $5.2 million in the prior year. Gross profit as a percentage of revenues was 28.8% in the fourth quarter of 2016 compared with 24.3% in the same period of the prior year. This increase in gross profit and gross profit as a percentage of revenues was driven by a more favorable sales mix and by more effective management of operating costs. Total selling and administrative expenses were $4.4 million in the fourth quarter of 2016 compared to $5.4 million in the same period of the prior year. Our selling expenses in the fourth quarter of 2016 increased to $1.3 million from $1.0 million in the same period of the prior year. The increase in selling expense was driven by the investment we’re making in our Digital Media sales force as we have expanded our team. Our administrative expenses of $3.1 million in the fourth quarter of 2016 decreased in comparison to $4.4 million in the same period of the prior year. This decrease in administrative expenses was driven by a charge in the prior year period of $1.0 million related to bad debt and a reduction in depreciation and amortization expense of $0.2 million in the fourth quarter of 2016 compared with the same period of the prior year. Reductions in several other areas of administrative expenses have enabled us to make investments in several areas that we believe will drive revenue growth and operating efficiencies going forward. Next, I’d like to give an update on the progress of our share repurchase program. As at March 10, 2017, we have repurchased a total of 54,794 shares at an average price of $5.46 per share since the inception of the share repurchase program in August of 2015. There are 645,206 shares remaining on our buyback authorization. We have and will 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. Now, I’ll turn the call over to Kyle to give a business update and talk more about our investment strategy and plan going forward.

[Kyle Cerminara:]

Thank you, Ryan, and good morning, everyone. We appreciate you taking the time to join us this morning for our fourth quarter call. This morning, I’ll begin with a brief update on our business and then speak about the investments we have been focused on the last few quarters. Our exhaustive business review continues, and this ongoing process is now very much engrained in our management culture. As I’ve mentioned in the past, we will continue our ongoing diligence in analyzing each of the businesses we’re in, small and large, to ensure that they’re generating returns that are aligned with our strategy. We continue to utilize zero-based budgeting and are still committed to eliminating all unnecessary costs in the Company. While cost management will always be a priority, our focus has shifted in recent quarters towards reinvesting our cost savings to grow the business. We’ve identified and focused our investments in a few core areas. Under our Cinema segment, those areas include expanding our Cinema screen manufacturing facility in Canada, and research and development, specifically in developing world-class laser screen technologies. Under our Digital Media segment, our core areas of investment include sales and marketing, and software and infrastructure in support of our new DSaaS sales model. We’re also investing in our corporate technology infrastructure to improve operating efficiencies and the scalability of the company. As previously announced, we’ve completed the sales Strong Westrex Beijing, after determining that did not align with our commitment of focusing on high return on invested capital businesses. We expect that this sale will have a positive impact on our future earnings and that it will ultimately free up additional capital for investment in areas that would generate greater returns for our shareholders. The investments we’re making in both are Cinema and Digital Media businesses are vital to our growth and have been a large area of focus for our team over the last few quarters. So, I’d like to spend some more time highlighting these core areas of investment. One of our large investments in our Cinema segment was the expansion of our Strong/MDI facility in Canada. This expansion has increased our structure and specialty screen fabrication capabilities, enabling us to need the demand of the product line. The expansion has also enabled us to realize new operating efficiencies as we were previously limited by the constraints of the space we had. In addition to our factory expansion, we’re continuing to invest heavily in research and development, including the purchase of additional equipment and hiring of additional resources. Our investments in R&D are important to our success and developing world-class laser screen capabilities. I continue to see a great deal of potential in our Cinema business and expect that we’ll continue to look in unique ways to generate higher return investments in this business. In the Digital Media segment, we’ve made quite a few strategic investments over the past several quarters. First, we’ve added six new sales positions. We’ve made necessary investments in product development and technology. We restructured our marketing spend and are continuously evaluating its impact to ensure we are getting the highest returns for our investments. Our investments in sales and marketing are beginning to enable our sales team to build a strong sales pipeline. We’re already seeing evidence of the meaningful and solid recurring revenue base despite [indiscernible]. The other area of investment we’ve made within our Digital Media segment is in the development of our new proprietary software platform. I mentioned this time last quarter, the development work of this proprietary software called Fusion DX is ongoing and 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 operating margins, scalability and allows to innovatively differentiate our offering. Lastly, we are also making important investments in our corporate infrastructure. We are in the process of implementing a new cloud-based CRM, ERP and CPM. The majority of our U.S. businesses has completed this implementation in the fourth quarter of 2016 and our remaining businesses transition to the platforms later in the year. These new systems should give us the tools we need to improve our forecasting capabilities and enable us to significantly improve our operating efficiencies. Consistent implementation of this magnitude is a huge undertaking for our organization. Our operations, technology, finance and accounting teams have worked diligently to get us to where we are in the systems. I’d like to thank all of our employees involved. We truly appreciate the many hours you’ve dedicated. We’re certain in our investment and these systems will improve our operating efficiencies and position Ballantyne Strong for significant growth in the future. Next, I’d like to speak about our Digital Signage as a Service. I highlighted this product offering last quarter, and I want to take some time to discuss it again, given it’s one of our key areas of growth in 2017 and years beyond. Digital Signage as a Service or DSaaS is a new and exciting concept that was recently introduced under our Digital Media segment. It’s the industry’s first fully managed Digital Signage as a Service offering. It allows our customers to skip the traditional capital outlay associated with the digital signage implementation and shift those costs into their operating budget. It also simplifies what traditionally has been expensive decisions on complex technology. Our customers don’t have to focus on choosing the right vendors and the complicated integration efforts usually associated with digital signage platform. Our DSaaS offering is an end-to-end approach that includes everything our customers need for a fixed monthly price. Our SMB DSaaS offering was announced at InfoComm and was created for small and midsized businesses. This product is utilized by customers with ten 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 segmenting capabilities, and will support an array of media player technologies and capabilities. Lastly, DSaaS enterprise solutions provide advanced reporting and analytics. We’re receiving great interest from customers about the concept of DSaaS. We started to build out a strong pipeline and are bringing on new customers already. We’ll continue to share more with you in the coming quarters on our progress with our new DSaaS sales model. If you have a chance to download our investor presentation, you’ll reckon as we’ve included charts again this quarter, showing our progress in financial performance over the last several quarters on income from operations, depreciation and amortization, and selling and administration expenses. Our income from operations has trended positively since we began our efforts in 2015. We reported a loss from operations of $900,000 in the first quarter of 2015, just before the appointment of the new Board of Directors. Our performance has improved to a loss in the fourth quarter of 2015 and continued to improve over the next few quarters to our current income from operations of $1.3 million in the most recent fourth quarter of 2016. Our depreciation and amortization expenses remained fairly stable over the past few quarters, totaling about $0.5 million in the fourth quarter of 2016. Our selling and administrative expenses have shown a steady decline since the beginning of 2015 but have recently begun increasing in the fourth quarter of 2016. These increases are intentional as we have begun to thoughtfully reinvest our savings to grow our business. As I discussed earlier, these investments are being made in areas critical to our long-term profit growth. Our expenses initially declined from an average of $5.1 million per quarter in 2015 to an average of $4.1 million per quarter in the first three quarters of 2016. SG&A expenses in the fourth quarter of 2016 increased slightly to $4.4 million. Our closely held ownership continues to increase the 34.1 million of our outstanding shares as of March, which represents a significant increase from March of the prior quarter. Our closely held ownership as of March of 2015 was 29.3% of shares. We expect this trend will continue in coming quarters and years as our team understands and invests in the value of this Company. The strong ownership culture we’ve created is something I’m very proud of and I believe this is indicative of the strong alignment between the interest of our shareholders and the leadership of our Company. Next, I’d like to give you an update on our valued proposition, as I do each quarter. Our value proposition continues to strengthen. At the end of the fourth quarter, we had approximately $7.8 million of cash and equivalents and approximately $14.8 million of investments at market value. We have no debt on our balance sheet and our real estate is owned free and clear. Our building and land in Georgia is valued between 4.3 and $6.8 million, and we have cash value in our inventory and net receivables. Importantly, our Cinema business continues to be highly cash flow generative. We continue to have a very strong market position within this business, driven by multiple decade long relationships with our customers. The investments I highlighted earlier should drive additional profit growth in this segment. Our Digital Media division is growing and has tremendous potential. We expect the investments from making this business to generate high returns over the long-term. We also continue to look for ways to reduce unnecessarily corporate overheads so that we can reinvest the savings in areas that would generate better returns for our shareholders. We still have operating loss carry forwards that could prove valuable as the Company returns to profitability in the United States. And lastly, we’re improving our returns on invested capital which we will believe will result in more value for our shareholders. As I do each quarter, I’d like to spend more time reiterating our growth and investment strategy. A year ago, we made a decision to significantly reshape the strategy of the Company. The core of our strategy is to execute optimal capital allocation decisions across our portfolio of businesses, investments and new opportunities. Our Company has changed significantly since implementing this new strategy a year ago, and I feel strongly that this strategy is paramount to the future success of our Company. I am confident that this is the strategy that will enable us to generate significant value for our shareholders over the coming years. Our strategy to invest both, in our Cinema and Digital Media segments has and will continue to be a priority. We have also continued to invest beyond our existing businesses in other industries and companies where we see strong opportunities to generate high returns. Under our strategy, investments made in other companies may include acquisition of public companies or complete acquisitions of other companies. We will seek out unique investment opportunities where we believe we will be able to generate high returns on invested capital while minimizing risk. We currently have investments in three public companies. These companies are RELM Wireless which recently renamed itself BK Technologies; 1347 Property Insurance Holdings and Itasca Capital Ltd. During the fourth quarter, we increased our investment positions in 1347 Property Insurance Holdings. I’d like to give you a brief overview of each of those investments as a reminder and to provide a little more background of those companies. 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 under the ticker ICL. Subsequent to our investment in Itasca, Itasca invested cash on hand in preference units for 1347 Investors, LLC, which now owns a controlling stake in Limbach Holdings. Limbach Holdings trades on the NASDAQ under the ticker LMB. Limbach is an industry-leading specialty contractor in the areas of heating, ventilation, air conditioning, plumbing, electrical and building controls. We continue to be very excited of our investment in Limbach, and I believe that I’ll result in significant value for Ballantyne shareholders over the next few years and beyond. RELM Wireless designs and manufactures 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 the growth potential at RELM with the addition of the TSA contract. 1347 Property Insurance Holdings is a homeowners’ insurance company that writes business in Louisiana, Texas and was recently added to Florida. I joined the Board of PIH in December of 2016. I continue to believe the Company is poised to earn much higher returns on capital compared to your average insurance company and we’re attracted by the large cash position and negative enterprise value. As of December 31st, our investment in 1347 Property Insurance Holdings had a market value of $5.6 million and book value of $5.3 million. Our cost basis in that investment is $5.3 million. Our investment in PIH is now treated as an equity method investment, so our unrecognized gain of $0.3 million has not been recorded in our financials in accordance with GAAP. Ballantyne owns 12.1% of PIH’s outstanding shares as of December 31st. Our investment in RELM Wireless Corporation had a market value of $5.4 million as of December 31st. Our cost basis is $4 million and book value is $4.4 million; we’ve also received dividends. Our investment in RELM is treated as an equity method investment. So, our unrecognized gain of $1.4 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 to-date totaling $0.3 million and expect to see a cash return of approximately $0.1 million on a quarterly basis going forward under that program. Ballantyne owns 8.3% of RELM’s outstanding shares as of December 31st. Our investment in Itasca Capital had a market value of $3.8 million and book value of $3.4 million, as of December 31st. Our cost basis for that investment is $3.5 million. Our investment in Itasca is also treated as an equity method investment. So, our unrealized gain of $0.3 million has not been recorded in our financials in accordance with GAAP. Our investment in Itasca represents 32.3% of the outstanding shares of the Company. If you haven’t reviewed Itasca’s quarterly earnings, I’d encourage you to do so, as they have fantastic quarter. Before closing today and opening the call for G&A, (sic) [Q&A] I want to highlight again for you, as I do each quarter, our plan going forward. We will continue to evaluate cost savings and investment opportunities within our existing businesses, and we will work urgently and diligently to identify the most meaningful areas to make investments. We will look to make investments that offer asymmetrical risk reward and adequate margin of safety. We will maintain a culture of zero complacency, ownership and accountability in all aspects of the business. And we will work to continue building upon that culture. Finally, we’ll continue hiring and working to retain the best people, and we’ll continue to drive the team to incorporate long-term thinking into each and every one of the decisions we make. To close, I’m very proud of the work our team has done during the last quarter and continue to be extremely optimistic about the future of Ballantyne Strong. We have a great deal of opportunity ahead, and I look forward to continuing to update you on our progress and growth over the coming quarters and years. That concludes our presentation for our fourth quarter and we’ll open the lines now to answer your questions. Operator, please open the lines.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]

[Kyle Cerminara:]

Operator, are there any questions in the queue?

[Operator:]

There are no questions at this time. And this will conclude our question-and-answer session. I would like to turn the conference back over to Kyle Cerminara for any closing remarks.

[Kyle Cerminara:]

Thank you again for joining us on the call this morning. We’re committed to working tirelessly over the coming quarters and years to drive this business forward. I’m very excited about the potential I see and the work that our team has been doing. We remain very committed to working towards generating real value for our shareholders. Looking back to the beginning of 2015, I can see the important progress we’ve made since our -- on our efforts to reshaping this Company. It’s the path forward and the opportunities I see in front of us that I’m most enthusiastic about. We’ll continue to be relentless in our mission to transform Ballantyne into a highly performing holding company. Thank you all again for your support of what we’re doing here at Ballantyne. We appreciate your time today. We look forward to talking to you next quarter.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.