FG Group Holdings Inc.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the 2013 Second Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, August 8h, 2013. I would now like to turn the conference over to Robert Rinderman, Ballantyne Strong Investor Relations. Please go ahead, sir.

[Robert Rinderman:]

Thank you, Sheryl, and good morning everyone. Today's call and webcast may contain forward-looking statements related to the company's future operating results. Listeners are cautioned that such statements are based upon current expectations and assumptions that involve certain inherent risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These risks and uncertainties are detailed from time to time in the company's SEC filings. The company's actual performance may differ materially because of these or other factors as discussed in the Management's Discussion and Analysis section of Ballantyne's filings. Copies of which can be obtained from the SEC or via the company's website at strong-world.com. All information discussed on this conference call is as of today, August 8, 2013, and Ballantyne undertakes no obligation to update any statements or expectations from prior conversations. Today's call is being webcast live over the Internet, and a replay will be available on our website for a minimum of 30 days. I will now turn it over to President and CEO, Gary Cavey, who's joined by CFO, Mary Carstens. Gary?

[Gary L. Cavey:]

Thank you, Rob. Good morning everybody. Thanks for joining us. Earlier today, Ballantyne reported profitable results for the 2013 second quarter. Perhaps the key takeaway is that things have unfolded as we expected. Although top line revenue is coming down, we achieved a significant increase in gross margin percentage primarily resulting from a mix shift in revenue to higher margin screen, managed service and specialty lighting business. Mary will provide more color on our financials and capital structure following my remarks. With the worldwide digital rollout in full force over the last years, the majority of our company’s net revenue has been driven by digital projection system sales in the Americas and Asia, including China. These transactions have generally been at a high average selling prices that is comparably low margin ranging from the low-teens to in some cases high-single digits. In recent quarters, due to competitive pricing pressures, we sacrificed additional gross margin percentage on certain sales in order to secure bungled agreements that contributed to re-occurring revenue from a long time service and not contracts. In some cases, we also sold cinema screens and related equipment contributing towards the overall equipment package margins. During Q2, our screen manufacturing division again achieved year-over-year growth largely due to replacement screen business and some incremental revenue from the sale of the high white screens related to the relationship we have with Real D. Managed service businesses were down modestly compared to the year earlier period. During Q4 of 2012, our service team completed a very large multiyear digital integration and insulation project for the nations leading theatrical exhibitor. This includes the conversion from analog to digital of approximately 7,000 screens at hundreds of locations across the country. Looking ahead, year-over-year service revenues resulted in Q3 and Q4 of this year will also being impacted by the comparisons, including non-reoccurring revenue derived from the final two quarters of our integration and installation work. But as evidenced, in our results this quarter we have been successful in replacing a good portion of the installation revenues associated with the digital rollout with our managed service business. To reiterate, what I stated last quarter, we believe our 24x7x365 turnkey managed services offering is unique and unmatched within the cinema industry, not to mention in other verticals that we are also targeting. This includes retail where we recently won an installation agreement with a leading specialty jeweler [reseller]. Our service team will complete this initial pilot roll out for this retailer this year. And we will follow-up with other locations across the U.S., in 2014, if the performance metrics of the promotion meet the retailers’ expectations. Our sales team is actively targeting additional clients in the retail space. As well as other verticals were strong technical service technicians can leverage their skills, if it is digital equipment and it has an IP address, Ballantyne can integrate, install, maintain, and monitor it. In the Cinema space, we have a stellar reputation for providing turnkey products and services over more than eight decades, and our client base includes hundreds of large and small exhibiters throughout the world. After-sale maintenance via on demand in annual contracts, as well as contracted NOC service monitoring service continues to be key areas for future expansion for us. We are continuing to provide demand and other services to the movie theater owners, and we believe we are in good position to win additional services when the current monitoring contracts to expire. These contracts typically less add-ons at the time of the initial purchase. We’ve addressed the topic of M&A and return on capital in recent quarters and of all we don’t have any specific to report or discuss with you at this time, we are progressing our efforts. We appreciate your patience and we’ll provide an update as soon as we have material events to announce. With that, let me turn the call over to Mary, for additional color on the Company’s Q2 results and our capital structure. Mary?

[Mary A. Carstens:]

Thanks, Gary, and good morning, everyone. As noted in this morning second quarter news announcement, despite the ongoing challenges we continue to face given the cinema industry is in the final innings of the digital cinema transformation. Ballantyne has generated a profit on significantly improved gross margins and posted a positive cash flow from the operations during the three months period. Taking a closer look at our income statement, net revenues were $24.4 million. The expected decline in North America theater equipment sales was partially offset by the year-over-year increases in screen and specialty lighting. We shipped a total of 250 digital projection systems worldwide in the second quarter versus 556 units in the 2012 second quarter. We generated net revenues of $46.7 million back in the second quarter of 2012. [Select] opportunities to sell new production systems to smaller independently owned theaters, including art houses and drive-in movie complexes still remained. However industry source have indicate that approximately 90% of the domestics screens are digitalized. Some of the remaining theaters still use 35 millimeter film which likely will continue to do so, but others will purchase or eventually go out of business when sources of analog films are no longer available from the studios. Ballantyne’s cinema screen business generated an 18% increase to $3.9 million in sales, up from $3.3 million a year ago. A number of North America exhibitors are in the process of further enhancing their facilities, and replacement screens were the key driver of the increase along with an increase in sales associated with the precision white screens utilizing RealD technology that is only available through strong MDI. Turning to our managed service business, second quarter 2013 revenue came in at $3.1million versus $3.3 million in the second quarter of 2012. A rise in demand services, reoccurring annual maintenance and NOC service contracts partially offset a drop in non-reoccurring revenue from the year-ago period, which included digital projection, system installation and integration revenue from the large digital deployment project that Gary referenced earlier. In Q2, our specialty lighting business had a very strong performance, generating net revenue of $2.9 million. The World Trade Center LED Beacon and Uplights Project has now been completed, positively impacting our lighting segment results as well as the company’s overall financial performance. We are awaiting official word regarding when our unique lighting systems will officially be turned on. Gross profit was$4.7 million, leading to a significant gross margin increase accounting for 19.2% of net revenues. This was well above the 13.6% margin we recorded in the prior year. An increase in the relative contribution from our higher margin screen, lighting and managed service businesses together with the makeshift of declining sales from lower margin digital theater equipment combined to boost Ballantyne’s gross margin percentage in Q2. Given the present make up of our business, we expect this general trend of year-over-year margin improvement to continue, although we are not providing specific guidance on this metric. Selling and administrative expenses fell 24% to $3.3 million as we continued our disciplined spending habits, which reflect the overall business trends. Year-over-year declines in Q2 line items included compensation, trade show, legal and bad debt expense. Net earnings in Q2 were $1.3 million or $0.09 per diluted share versus $1.8 million or $0.13 per diluted share in the year-ago quarter. Ballantyne’s cash and cash equivalents balance at quarter end was $45.1 million, $5 million above our December 31 level. We generated $5.7 million in positive cash flow from operations during the first half of 2013. In addition, the company has untapped $20 million credit facility providing additional capital resource for potential transactions and internal growth. We have effectively right sized our business and have put in place a cost structure that makes sense given the present net revenue run rate. We demonstrated this by posting profitable operating results for the first two quarters of 2013. At this point, Gary and I are ready to answer your questions. Sheryl, please open the lines.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Eric Wold with B. Riley & Company. Please proceed with your question.

[Eric Wold:]

Thank you, and good morning.

[Gary L. Cavey:]

Good morning.

[Eric Wold:]

Couple of questions, I guess. One, just first on a thought on Mary’s comments around the operating expenses, the SG&A. You’ve been now kind of at this 3, 3-ish level past two quarters. Is this a good level to assume going forward? I think you’ve got some room to bring that even lower from here.

[Mary A. Carstens:]

I actually think we’re in – that’s kind of the stable level that we think we’re going to continue at, at this point.

[Eric Wold:]

Okay. And then of the 250 projectors shifted in the quarter, how many of those were to China or Asia and any update Gary on your thoughts of ramping back your involvement in that region?

[Mary A. Carstens:]

The total units of 250 were about 75 were in Asia which is kind of consistent with last year’s. Gary, I don’t know if you want to take the second part of that?

[Gary L. Cavey:]

Yeah, Eric we haven’t seen a real uptick in that. We feel we are in good position to capture some of the growth here one that seems to start rebounding, but it’s been a slower pace with the investment communities there in the theaters.

[Eric Wold:]

Okay. And then, just two more questions I may, on the privatization on the World Trade Center, your installation and your net revenue recognized. Can you talk maybe about how the visibility around that has maybe opened the doors to other opportunities in the lighting space for you and how meaningful could lighting be organically for Ballantyne, is that something that you as well may look to have any opportunities?

[Gary L. Cavey:]

It’s an excellent question, Eric. One, we’ve had a lot of significant recognition about the projects and our capabilities of specialty writing and specialty applications through architectural lighting projects. And we do a number of inquiries in the pipeline right now of doing other very creative architectural projects. So, at the present time, the activity is very positive and we are looking forward to some really good things happenings, it’s pretty early on to make any long-term prediction for that. I think we’ve got some really great product here and we are also coming out with some modified products of this core LED picture that look likes it has some promise as well.

[Eric Wold:]

Okay. And then just final question. Mary, I know you don’t give guidance, but any reason to believe that Ballantyne would not stay cash flow positive going forward?

[Mary A. Carstens:]

No, I think we’re in a pretty good position right now. I think we’ll continue to kind of be at the level. Certainly the cash flow that we generated in the first half is, I’m sure everybody understands this, we’re collecting the receivables. We believe that we’re in good shape on our overall cost structure. So I think at least we’ll remain in kind of that same position.

[Eric Wold:]

Perfect. Thank you, guys.

[Gary L. Cavey:]

Thank you.

[Mary A. Carstens:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from line of Tristan Thomas with Sidoti & Company. Please proceed.

[Tristan M. Thomas-Martin:]

Hi, guys. How are you?

[Mary A. Carstens:]

Fine.

[Gary L. Cavey:]

Fine. Thank you.

[Tristan M. Thomas-Martin:]

All right. Two quick questions. The first question is regarding the screen growth we saw. You referenced the precision of high weight screens. Is there enough demand in the market for that growth to be sustainable?

[Gary L. Cavey:]

Well, it’s growing on. So far there is a number of them being installed not only around this country but around the world and there seems to be a pretty good interest for it. We’ll have to wait and see.

[Tristan M. Thomas-Martin:]

Okay. Got you. And then also I may have just misheard, but when you mentioned the retail opportunity that was regarding your service business, correct?

[Gary L. Cavey:]

That’s correct.

[Tristan M. Thomas-Martin:]

Okay. And is there any color you can give us on that? Is that using the NOC or the…?

[Gary L. Cavey:]

That’s using our demand services and installation services.

[Tristan M. Thomas-Martin:]

Okay.

[Gary L. Cavey:]

And has a potential in the future of using our NOC services as well. We’re leveraging what we presently are doing in the entertainment and theatrical industry and moving into some other verticals, which have some pretty good commerce for us.

[Tristan M. Thomas-Martin:]

Okay, great. Thank you so much.

[Operator:]

(Operator Instructions) And we have a question from the line of Sheldon Grodsky with Grodsky Associates. Please proceed.

[Sheldon Grodsky:]

Hi, good morning everybody.

[Gary L. Cavey:]

Good morning.

[Mary A. Carstens:]

Good morning.

[Sheldon Grodsky:]

You’re looking for acquisitions, are you willing to make an acquisition that will put debt on the balance sheet or is it make an acquisition from your cash balances and if you’re willing to take on debt, how much would you be come forward?

[Gary L. Cavey:]

Well we have to cross that bridge when we get to it, but we don’t feel that we will have to putting debt on the balance sheets.

[Sheldon Grodsky:]

Okay, thank you.

[Operator:]

And there no further questions at this time, I will turn the call back over to you.

[Gary L. Cavey:]

Thank you operator. In closing, I would like to reiterate that we are pleased with the profitable operating results for the first two quarters of the year, especially our rising gross profit margins. For those who you’ve been following Ballantyne’s investment story and tuning into our recent quarterly calls, the challenging top line results comparison should not be surprising. A mixed shift to our higher margin businesses, screens, service and specialty lighting is enhancing overall profitability as expected. In the interim, we are actively pursuing attractive acquisition opportunities and internal initiatives that can boost our top line and also expand the bottom line. Thank you again for joining us today. And we are looking forward to speaking with you again following BTNs Q3 results. Have a great day.

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.