FG Group Holdings Inc.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good afternoon. And welcome to the Ballantyne Strong Fourth Quarter 2015 Earnings 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, Investor Relations. Please go ahead.

[Elise Stejskal:]

Good afternoon, everyone. And welcome to today's fourth quarter 2015 conference call. Today's call and webcast may contain forward-looking statements related to the company's future operating results. Except for 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 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. 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 Q4 investor presentation section under the investor’s financial reports and webcast page. Joining us on the call is Kyle Cerminara, Executive Chairman 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 fourth quarter. Our Chairman and Chief Executive Officer, Kyle Cerminara will then provide a business and strategic update. We had a strong fourth quarter and finished the year with our highest level of quarterly revenues. Our financial results are beginning to reflect the results of the changes we began implementing over the past several months. We had a net loss of $1.2 million or $0.08 per share in the fourth quarter of 2015, compared with a net income $318,000 or $0.02 per share in the same period a year ago. It is important to note that the fourth quarter of 2015 included $1.8 million of charges that we expect will be non-recurring in nature. There were no similar charges in the fourth quarter the prior year. I'll discuss those non-recurring charges in more detail shortly. Our total net revenues in the fourth quarter of 2015 were $27.1 million compared with $28.4 million in the same period of last year. The Cinema segment had a very strong quarter generating the highest level of quarterly revenues of the past eight quarters. Revenues from the Cinema segment was $19.4 million in the fourth quarter, compared with $19.3 million in the same period of the prior year. The primarily driver of the increase was an increase in shipments of digital projectors. We shipped a total of 278 projectors in the fourth quarter compared with 147 in the same period last year. The increase that we saw was partially offset by decrease in sales of our library management system as the prior year included a significant sale for our project in Brazil. The Digital Media segment generated revenues of $8 million in the fourth quarter compared with $9.4 million in the same period at the prior year. The decrease was driven by lower project revenues in the digital signage business as the prior year included revenues from large non-recurring projects. This decrease is partially offset by an increase in revenues generated for works performed by our field services group. Gross profit was $5.7 million compared with $5.6 million in prior year. Our gross profit as a percentage of revenue was up 100 basis points in comparison to the prior year. Gross profit as a percentage of revenue was 20.9% in the fourth quarter compared with 19.9% in the same period at the prior year. The margin improvement in comparison to the prior year was driven by improved margins from our Digital Media segment and from cost savings identified and generated across the company. Kyle will be discussing those cost savings in more detail later in the call. Improvement in our gross profit was accompanied by a significant reduction in our adjusted selling and administrative expenses. Adjusted SG&A was down 13.5% in comparison to the same period in the prior year. Adjusted SG&A was $4.5 million compared with $5.2 million in the prior year. This decrease in adjusted SG&A was primarily attributable to reductions and compensation related expenses. These expense reductions were driven by the cost savings efforts that have been underway the past several months. Unadjusted SG&A expenses which included several charges we believe are non-recurring in nature were $5.9 million. Ballantyne’s cash and cash equivalents balance was $22.1 million as of December 31, 2015 compared to $24.7million at the end of the prior quarter. This decrease was driven by investments in marketable securities of $2.1 million and equity method investments of $4 million. Kyle will talk more about our new investment strategies in those investments later in the call. Our business operations continued to be highly cash generative and helped to fund these new investments. We continue to have good liquidity and strong cash flow is providing additional capital resources for our existing businesses as well as to fund new strategic investment. Earlier I mentioned that it was important to note when discussing our financial results for the quarter that we had recorded several charges that we believe are non-recurring in nature. In total, we recorded $1.8 million of charges in the fourth quarter for several items that we expect to be non-recurring. Most of these charges were non cash in nature. We've excluded these charges from our adjusted SG&A measures for comparability purposes. These charges included a $1 million charge related to bad debt expense, $0.4 million of tax expense driven by a change and permanently reinvested earnings, $0.2 million charge for severance expense and other charges of $0.2 million. There were no similar charges for the same quarter in the prior year. We are pleased with the direction of our financial performance is heading but we fully recognize that we still have a lot of work to do. We've several initiatives and processes that help drive top line growth and reduce G&A cost. We look forward to sharing our progress with you over the next several quarters. Kyle will talk more about the work we've done to impact these results as well as the work ahead in his update. With that I'll turn the call over 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 on the call today. It is an exciting time at Ballantyne Strong and we look forward to updating you on our progress this quarter. In November, we had an update on some significant changes to our management team including the appointment of Ray Boegner as President of our Cinema division and Steve Schilling as President of our Digital Media division. The senior management team have been working together to put organizational plan in place to build out best in class teams that will enable us to drive our business going forward. There have been some very positive changes in the leadership of our sales, operations and technology functions over the last few months. And we look forward to our shareholders having the opportunity to meet with these new individuals. In December, we announced the divesture of our lighting business. We determined that the lighting business was no longer a core to our strategy. Lighting is a business that in our opinion required significant focus and scale to achieve profitability. We could not achieve acceptable returns on invested capital in that business so we made the decision to exit. This transaction aligns with our commitment to invest our time and resources in those businesses that will help us maximize shareholder value. Our focus on expense reductions, new business opportunities and reviews of our current businesses continued during the fourth quarter. I spoke about zero based budgeting on our quarterly conference call. Zero based budgeting is now core to our company. It's not an easy process but it's certainly starting to show its results. We've identified substantial savings utilizing zero based budgeting over the last few months. Gross annual savings are over $7 million and our net annual savings are tracking at approximately $3.3 million. We are continuing to identify further savings and expect to see that number continue to increase. I'll talk more about the details of the savings later. Our insider and closely hold ownership is increased to approximately 24.7% of our shares outstanding. We expect this number to continue to increase. Lastly, during the fourth quarter we announced the appointment of Ndamukong Suh to our Board of Directors. We are excited to have Ndamukong on the Board. He has a strong reputation for his leadership ability and I know he will provide a unique perspective to our company. Now that we've covered a general update on the business and some notable events of the last quarter, I wanted to provide an update on the progress we've made since the appointment of the new Board back in May 2015 and the strategy going forward. We made several value enhancing changes to the business. We spent time initially working to understand the businesses, layout our new strategy and put new leadership in place. We are starting to see the fruits of that labor. Since May we've identified $3.3 million net annual savings. This number is comprised of $7.2 million of cost savings and $3.9 million of capital reinvested back into the business. The $7.2 million of cost saving has been generated largely through strategic headcount reductions. We've made several changes to reorganize and streamline our organization to more effectively utilize our resources. These changes are driving approximately $6.1 million annual savings related to compensation. $224,000 of savings are being realized through facility consolidation project that we've been working on our Omaha office. And additional annualized cost savings of $858,000 were identified largely to our zero based budgeting process as we've completed exhaustive review of our expenses and alternatives. The capital reinvestment of $3.9 million was primarily driven by strategic headcount additions in areas of enrolls tha will enable us to drive revenue profit growth going forward. The Board continues to work closely with the management team to build culture committed and focused on continuous evaluation of our costs and investments so that we can be confident we are doing what's best to create value for our shareholders. I mentioned earlier that our closely hold ownership is 24.7% of our shares outstanding. 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 spoke creating shareholder value over the long term. I am excited about the unprecedented level of commitment and energy I am seeing within the organization. On our call last quarter I talked about our value proposition and I want to spend some time updating you on that. We believe that our value proposition is strong and continues to grow. At the end of 2015, we had approximately $22.1 million of cash and equivalent on our balance sheet and approximately $6 million in investments. We still have no debt on our balance sheet and our real estate is owned and -- clear. The building and land we owned in Georgia, operated at Georgia is valued between $4.3 million and $6.8 million. We also have cash value on our inventory and net receivables. The Cinema business continues to be highly cash flow generative and we've a strong market position within this business, driven by multiple decade long relationships with our customers. Our Digital Media division has room for growth and we are actively working on new product and sales strategies. Our corporate overhead expenses are still way too high and we are working diligently to further identify ways to reduce those expenses. We also have operating loss carry forward that could have value of the company returns to profitability in the United States. Our return on invested capital has improved significantly in comparison to the prior year. The fourth quarter return on invested capital was 25.6% in comparison to 4.8% for the same period of the prior year. For the full year, return on invested capital was 7.6% in 2015 compared to a negative 5.4% in the prior year. We believe this is key indicator to the progress we've made over the past several months and the direction we are moving as with the company going forward. It's also strong indicator that value we are beginning to generate for our shareholders. Next, I'd like to share some updates on our strategy. The Board and I've reworked to reshape -- have worked to reshape and redefine the strategy that we believe --and we believe the changes we are making would generate significant value for our shareholders over the long term. To be clear when we speak about the long term, we are talking in terms of many years rather than a few months or quarters. The Board has implemented strategy that is focused on making optimal capital allocation decisions across the company's businesses and investments. Within this strategy, we expect to continue to invest in both our Cinema and Digital Media businesses. In addition, we are evaluating investment in other industries where we see opportunities to generate high returns on invested capital while minimizing risk. The investment landscape will be anything that we believe make sense for our shareholders. In the last few months we made investments in two public companies, RELM Wireless and 1347 Properties Insurance Holdings. RELM Wireless designs and manufactures wireless communication 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 first hand the growth potential of RELM with the addition of the TSA contract. 1347 PIH is a homeowner insurance company that writes business 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. We are excited about these investments and we look forward to updating you on our future cap allocation decisions. Before closing I'd 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 we 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 work continue to maintain culture of zero complacencies on our shipping and accountability in all aspects of the business. And lastly, we will continue to hiring and retain the best people and continue pushing our team to incorporate long-term thinking in to all these decisions made in the business. In closing, we 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 fourth quarter. At this point, I'd like to open the lines for questions.

[Operator:]

[Operator Instructions] And first question will come from John Mcgavigan. Please go ahead sir.

[John Mcgavigan:]

Hi. I was wondering if you could give an update on the share repurchase program and where that stands?

[Kyle Cerminara:]

So thank you for the question. The Board has authorized 700,000 shares. We are using algorithm to repurchase those shares which is set at various targets of the purchase price. So as the stock price falls the algorithm is buying more shares. I believe today we only bought a few thousand shares at about $4.51 per share. But with the stock price at the current level, I'd expect those levels to increase significantly.

[Operator:]

[Operator Instructions] And we do have another question. It will come from Steve Tipper of Ferro Bridge Investments [ph]

[Steve Tipper:]

Hi. How are doing? A little more color on these investments you are making in 1347 PIH and RELM Wireless, I mean these both companies seemed to be companies that fundamental has taken a position in if there is this much excess cash in Ballantyne why aren't we dramatically more aggressive in buyback, dividends, what's being done by the conflicts here, just doesn't seem totally unrelated businesses that we really wanted to be Ballantyne investors that we are just following effectively your hedge fund to invest in outside company. I really don't just understand it and why it's going down that road and how are you dealing with the conflict and why this is better than rewarding shareholders directly in Ballantyne?

[Kyle Cerminara:]

Sure. Well, thanks for the question, Steve. So we've had conflicting opinions on your question in terms of returning capital to shareholders versus utilizing the cash on our balance sheet to grow the company. The Board has evaluated the significant cash balance on our balance sheet and also taking into consideration the significant concentration of ownership across Fundamental Global, CWS and Management group and few other investors that own 5% to 10% of the company or more. And that some of the feedback we've received from our shareholders is that their opinion is that we should use the cash to grow, at the same time we have authorized to 700,000 share buyback and with the stock that trades between 10,000 and 20,000 shares a day, buying back shares based on 10b5-1 plan has proven to be challenging. At the same time, I did mention from the previous question that we will be using -- if the stock remains at these levels we will be using a lot more of our cash to buyback shares. In terms of a dividend, we've evaluated paying a dividend whether that means potential being a special dividend or recurring dividend and the feedback I received from some of the largest shareholders is that they don't -- they are not in the opinion that we should be paying a large dividend, they prefer a buyback or reinvestment in current businesses or future businesses. As it relates to our current businesses, we are investing several million dollars a year back into the Cinema and Digital Media businesses. At the same time, on a go forward basis the evaluation was made that there is only so much capital we can reinvest in Cinema and Digital Media. And that capital was perhaps better used either returning it to shareholders or making strategic investments. With that in mind there were two investments that came across via the plate of the Board RELM Wireless and 1347 and we decided that they provided significant returns. We evaluated those -- the returns of the opportunity of buying back our own shares versus making an investment in those two companies knowing that perhaps we have more information on Ballantyne than we might have on those two companies. And we decided that the extraordinary opportunity in those two companies that was presented in front of us was better than or as good as buying back shares. Again we do have a significant amount of cash to do both. And then finally as it relates to evaluating the conflicts, and a very good point and it's something that we spent a lot of time on. At the same time, I'd say that the interest of Ballantyne Strong and Fundamental Global are directly aligned given we are both our shareholders of the two investments that we just discussed. And if there was ever a situation where there was a conflict that needed to be addressed we would assemble a special committee to address those conflicts that would obviously exclude me or anyone affiliated with Fundamental Global from that process. So hopefully that answers your questions. But if you have a follow up I'd be happy to hear it.

[Steve Tipper:]

Yes. I mean if you are going to get more aggressive on the stock buyback, great. I mean obviously allocating capital some internal some external, great. But it's just seems on the stock buyback there has been negligible progress. I agree special dividend is generally a waste of capital for most companies but I think paying even a very tiny $0.01 a quarter dividend it doesn't mean much but it potentially opens up other funds or institutions that can only buy dividend paying stock. There is still significant shareholder base that can't touch you. So if there was an interest there. As far as diversifying it to other companies, every company I've ever seen has done this, the holding company structure or unaffiliated businesses; even if these investments go up, you never get credit for them. They always trade at a significant discount to book value; it's just never really works out. That's why I am just very skeptical, even if it is great, look I own PIH personally, it is not working last couple of weeks, after their news announcement but it's just doesn't generally translate back to the shareholder base on the small kind of investment and to just kind of scatter around the funds. It just doesn't seem like the best use of capital but hopefully like I said if we are reinvesting in the business and buying back stock and returning some to shareholders while going on these expeditions, it's little easier to stop make feel, see what the next quarter brings. I appreciate all the color.

[Kyle Cerminara:]

Yes. Let me address what you just said. The idea of potentially paying a dividend whether it be a $0.01 or more just to pass on the radar screen of various institutional investors, that's the first time we've heard that but it's certainly something that we will take into considerations and perhaps a small dividend is warranted. As it relates to the buyback, I agree -- I couldn't agree with you more in terms of we should be more aggressive with our buyback. And I think that shows -- stands to show you how independent our Board is in terms of I'd really like to see a larger buyback, we will see if that translates over the next couple of quarters, we will get you updates on that as time goes by. As it relates to the other comment you made, we do believe that we have significant excess cash. We agree with you that paying a special dividend is probably not in the best interest of our shareholders. It will just drain the resources of the company. Its tax inefficient, it doesn't make a lot of sense. But we do think that there are opportunities to invest in our current businesses or where there is just too much capital on our balance sheet to be able to do that. So our plans to make some strategic investments. Now that could mean owning a minority piece of business and majority of business or whole businesses, we are on the lookout for a significant acquisition but the shareholders that we are talking too have said that they like what we are doing thus far so. Thanks, Steve.

[Operator:]

[Operator Instructions] And showing no further questions. I'd 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 your time and look forward to speaking with you next quarter. If you have any questions in between please free to reach out to Nate Legband or Elise. Talk you soon.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.