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Executives

Robert Rinderman

Gary L. Cavey - Chief Executive Officer, President and Director

Mary A. Carstens - Chief Financial Officer, Senior Vice President, Treasurer and Secretary

Analysts

Aaron Syvertsen - Sidoti & Company, LLC

Eric Wold - B. Riley & Co., LLC, Research Division

Christopher Owens

Ballantyne Strong, Inc (BTN) Q4 2012 Earnings Call March 11, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong 2012 Q4 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Monday, March 11, 2013. I would now like to turn the conference over to Rob Rinderman, Ballantyne Strong Investor Relations. Please go ahead, sir.

Robert Rinderman

Thank you very much, Sharlene. Good morning, everyone. Welcome to Ballantyne Strong 2012 Fourth Quarter Results Conference Call and Webcast. 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. And 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 call is as of today, March 11, 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'll now turn it over to President and CEO, Gary Cavey, who's joined this morning by CFO, Mary Carstens. Gary?

Gary L. Cavey

Thank you, Rob. Good morning, everybody. We appreciate you joining us. Earlier today, Ballantyne reported a sequential return to profitability with our 2012 fourth quarter results. Revenues amounted to $39.1 million, and we achieved net income of $1.6 million or diluted earnings per share of $0.11. Mary will provide additional financial color on the quarter, full year and an update on our capital structure.

Importantly, we achieved year-over-year improvement in our corporate gross margin percentage in Q4, as well as significant sequential gross margin percentage increase compared to the Q3 level. This was particularly welcome news following the competitive pricing pressures as well as the service business transitional costs, which also weighed on our results for that period.

On our last quarter's investor call, we indicated that an extension of the Cinema industry's virtual print fee deadline, originally set for September, had delayed some exhibitor decision-making and ultimately some purchases and installs to convert to digital from analog. Subsequent to our comments, we learned that one of the most important VPF programs was set to be terminated at year end, and this helped generate a flurry of purchasing activity in late 2012, which ultimately benefited our Q4 results.

We continue to successfully leverage our long-standing reputation as the Cinema industry's leading provider of one-stop product and services. Capitalizing on our wide range of offerings, we've been bundling digital projector sales with our higher-margin Cinema Screens, which we generate manufacture-level margins.

We also are combining Ballantyne's post-sale maintenance service, both on demand and annual servicing contracts, with our round-the-clock proactive monitoring operates, which is done by our skilled technical service team based in Omaha at the company's state-of-the-art Network Operations Center.

Since its foundings more than 8 decades ago, our company has been a trusted partner and supplier to thousands of theater, theatrical exhibitors that are -- the world over. As we've been discussing in recent quarters, our main focus at this juncture is remaining on the path we are on, as a one-stop leader of turnkey solutions to cinema owners.

But given where we are at the advanced stage of the digital projection conversion cycle, especially domestically, we must also continue to innovate internally in order to meet the evolving product and service needs of our valued exhibition industry customers in today's digital world.

Ballantyne also needs to remain focused on growing our business in a disciplined manner via M&A opportunities, which could provide growth for the company. The senior management team and I continue to spend a considerable portion of our time seeking and evaluating attractive acquisition opportunities that tie our core strengths as an organization that will ultimately be financially accretive for the benefit of the company's stakeholders.

To briefly reiterate that we've been discussing following Q3, we greatly appreciate the patience and loyalty that our valued shareholders have shown as our Senior Management Team and Board of Directors continue to explore future acquisitions that will be made with our organization's long-term success as our main goal. As you know, we are not seeking to add low-margin revenues simply for the sake of potentially making up for any top line shortfall due to the industry being in the later stages of the digital rollout.

Reflecting our year-end balance sheet, Mary and the finance team have done an excellent job in maintaining the company's history of disciplined cash management. We will strive to continue this approach so we have ample resources in the form of cash plus credit facility available when we ultimately find the right target or targets. Keep in mind our proven M&A capabilities have been exemplified by our successful Canadian-based Cinema Screen manufacturing business and the company's leading cinema services team of skilled technicians and engineers, both aimed to Ballantyne through acquisitions in the recent past.

We continue to engage in active discussions with numerous new and existing customers as we demonstrate the benefits of trusting their equipment maintenance and NOC businesses through the experienced service team here at Ballantyne. It is a compelling value proposition when you show clients that they can both save money and improve their operating efficiency by outsourcing this critical function to us.

On the digital platform today, cinema operations is much more high-tech than it was in the past 35-millimeter world. Many exhibitors do not have the necessary training or resources to handle or repair these digital projectors, which cost tens of thousands of dollars and are more like a high-end computers than the analog equipment they've replaced.

There are a number of technological innovations impacting the cinema industry and Ballantyne is uniquely positioned to benefit from these changes, given our wealth of worldwide exhibitor relationships, many lasting multiple decades and generations.

Some of the most recent tech developments include TI's new chip that is being utilized by our partners Barco and NEC, in smaller and less expensive digital projectors being purchased by art houses and independent theaters, which previously had difficulty affording top-of-the-line models at a higher price tag. Our exhibition industry further develops to keep an eye on including laser light engines, which will materially enhance the brightness and clarity of images on the big screen and also help theater owners reduce the cost of projector bulb replacements, which require replacement on an average of every 1,000 to 1,500 hours.

Last December, The Hobbit was the first major motion picture to be released at 48 frame per second rate, double the traditional 24-frame rate. As you would expect, Ballantyne was involved in the software and hardware upgrades that allowed our customers to project this movie at a higher rate. This coming December, the next Hobbit sequel will also be available in 48 frames per second.

A few additional innovations, including Barco's and Dolby's enhanced more immersive sound systems, as well as our more immersive motion-sensitive seating effects, like 4D, will further diversify the -- diversifying the out-of-home experience for cinema goers, in contrast to watching a given title or an alternative content at home on a small screen, such as a tablet or smartphone.

As I mentioned, Ballantyne is also working on a number of organic initiatives. We've enhanced our international Cinema Screen marketing efforts by strategically expanding personnel and targeting a number of foreign markets that have significant potential for us. We are also continuing to explore the viability of adding international nodes into our NOC and also are having an on-the-ground maintenance team similar to what we have here domestically. There is also the possibility of forging a service partnership with one or more organizations that we could subcontract, on-demand, our annual maintenance work to do.

I want to also update you on our Lighting group, which continues to focus on the architectural and outdoor LED-based lighting niche, where our proprietary products are an excellent fit. We are also working on value-added resell -- as a value-added reseller for small manufacturers, which are taking advantage of our distribution expertise.

Last quarter, we announced that our Strong Lighting team had been awarded a one-of-a-kind World Trade Center lighting contract, and Ballantyne has produced the world's first high-powered LED beacon light that will sit proudly atop One World Trade Center when the tower construction is complete. Our lighting technology is also being deployed for the tower's antenna façade. Similar to the Empire State Building, LED lights will regularly change colors to commemorate various holidays and special occasions.

Mary will now discuss our Q4 and 2012 full year results and provide a brief overview of Ballantyne's capital structure. Mary?

Mary A. Carstens

Thanks, Gary. Good morning, everyone. I will provide you with additional color on our Q4 and full year results and an update with respect to Ballantyne's balance sheet and asset base. Gary provided the quarterly financial highlights at the top of his commentary. And as he noted, we had very solid fourth quarter, capping off another strong full year period for Ballantyne.

For the 12 months ended December 31, we reported top line net revenues of $169.1 million, gross profit of $22.6 million and net earnings of $5.5 million or $0.39 on a diluted per share basis.

Q4 net revenue from the Theater sector was $38.5 million, with Lighting making up the remainder of the $39.1 million top line. The prior quarterly revenue total was $51.5 million and the year-over-year decline was largely a function of lower revenues generated from digital cinema projection sales, with over 85% of the domestic exhibitors having converted from an analog platform onto a digital one.

Within the Theater segment, Cinema Screen revenue rose 13% to $3.7 million, while the service revenue decreased to $3.4 million or 19%. The increase in screens was due to replacement screen sales and our continued success with the company's international screen business, including recent shipments to China, Mexico and Latin America.

The decline in service revenues is related to the completion of major installation and integration work in North America as the digital rollout nears completion. The decrease was partially offset by the increasing level of business we are now generating in our contract and on-demand maintenance service, as well as our Network Operations Center, which offers 24/7 monitoring of cinema projection equipment.

Moving on to our Strong Lighting business, in the most recent period, we generated quarterly sales of $600,000, down slightly from $800,000 one year ago. The decrease is primarily due to a slowdown in sales of follow spotlights, along with the decrease in part sales. Looking ahead, while we are seeing soft demand for lighting in the venue and entertainment space, we refocused our efforts towards architectural accent lighting. This is an area we feel has the greatest potential to provide attractive future returns from our Lighting business.

The best example of this, of course, is our recent World Trade Center lighting contract. As Gary mentioned, we are providing the world's first high-powered LED beacon light as well as the structure's antenna, both based on our proprietary LED solutions technology.

Moving down the income statement, gross profit was $6.2 million or a decrease of 15.1% when compared to gross profit of $7.3 million in the year ago period, as the sales decline negatively were impacted by gross profit dollars. However, we are pleased to report that we achieved 160 basis point increase in gross profit margin. We shifted our product and service sales mix, to include a greater focus on screens and service, which generate higher margins. This resulted in an increase in combined sales of these segments to 18% of the company's total sales compared to 14.5% of the total in the prior year quarter.

As expected, our sales of digital products have declined from the prior year, and we continue to focus on transitioning from an installation and integration-based business to a more maintenance- and NOC-focused service organization. This will allow us to generate an increasing percentage of long-term reoccurring revenues.

We also will continue to capitalize on our strengths and core competencies in distribution as we seek additional new products and services to add to our offerings.

SG&A expenses decreased to $4 million versus $4.6 million in the prior year period. In the year ago period, we recognized $1 million severance charge related to our January 2012 corporate refocus. We reported fourth quarter net earnings of $1.6 million or $0.11 per diluted share, in line with net earnings of $1.6 million or $0.11 per diluted share in the 2011 fourth quarter, after accounting for severance charges.

Moving to the balance sheet. We are actively focused on preserving the health and strength of our balance sheet, as reflected in our solid cash position and the availability of the company's $20 million credit facility. With a stable balance sheet, we are confident there will be ample funding available for the potential future capital needs, including acquisitions that we expect will have a positive impact on the company's financials and benefit our operations over the long term.

Our quarter-end cash and cash equivalents balance was $40.2 million, up sequentially from $36.8 million at the end of the third quarter, reflecting Ballantyne's generation of $4.9 million in cash flow from the operations in Q4.

With regard to our strategic growth initiatives, we remain focused on achieving long-term success. Our entire organization is proactively working to strategically deploy our assets, including our cash, in the most prudent manner possible as the exhibition industry rapidly evolves and transforms itself on the new digital cinema platform and within new markets.

We are devoting a significant portion of the management's time to M&A opportunities, working to be as proactive as we can on this front, while making sure that we keep both eyes on the day-to-day running and growth of the business. We know how important it is for Ballantyne to leverage the strength of our service team for state-of-the-art NOC, high-quality screen manufacturing operation and the company's reinvigorated Lighting segment.

In summary, our focus and goal is to make available to our customers the most extensive product and services lineup. We will prudently manage our balance sheet, the company's investments around important growth prospects, and we will also seek to balance our long-term growth and near-term execution to create the best possible outcome for our stakeholders.

Of course, none of this is possible without everyone at Ballantyne coming together, and I'd like to take this opportunity to thank the entire team for their continued dedication and commitment. Thank you for your continued interest in Ballantyne and your participation today.

With that, I'd like to turn the call back to the operator and take this opportunity to answer questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Aaron Svyertsen with Sidoti & Company.

Aaron Syvertsen - Sidoti & Company, LLC

Just had a couple of quick questions. Would you be able to quantify or add a little bit of color on the domestic opportunity left on the digital upgrades? I know you mentioned that you'll be kind of targeting small to mid-sized exhibitors. If you can just kind of add some color as to kind of what opportunity is left there?

Gary L. Cavey

Well, there is some published numbers out. I think there's about 33,000 screens that have been completed so far to digital, that there's about 39,000 that are in this country. So that's about what could be left. It depends if all of them will convert or not.

Aaron Syvertsen - Sidoti & Company, LLC

Okay. Is there any kind of different strategy that you'll have kind of going after small and mid-sized exhibitors? Or is that something that you guys have already been kind of actively doing?

Gary L. Cavey

We're actively doing that. There is a -- one, is projector companies, both NEC and Barco have done, is they've developed a smaller projector. And so that's much more affordable. And there's the art houses, there's universities, there's a variety of people that are doing conversion, as well as that require larger projectors, there is a VPF program for drive-ins. And there's about 600 drive-ins in the country, and right now, they are actively pursuing conversion.

Aaron Syvertsen - Sidoti & Company, LLC

Okay, great. Secondly, I know obviously you can only kind of talk in general terms, but is there a type of company that would be a candidate for an acquisition or -- whether domestic versus international or kind of what particular segment you guys will be targeting?

Gary L. Cavey

Well, we're looking, as we stated in the past, we're looking at North American businesses and ones that -- companies that were related to our customer base and our knowledge base that we're familiar with.

Aaron Syvertsen - Sidoti & Company, LLC

All right. And last one for me, you mentioned kind of targeting foreign markets within the screen business. Can you add any color on what markets in particular seem to be strong or growing that you guys are targeting in particular?

Gary L. Cavey

Well, I think, Asia in general, and India is another opportunity, and South America.

Operator

Our next question comes from the line of Eric Wold with B. Riley & Co.

Eric Wold - B. Riley & Co., LLC, Research Division

Two quick, just a numbers question and then a longer one. Mary, what were the number of projectors shipped in the quarter, both domestic, North America and internationally?

Mary A. Carstens

Okay. So we had a total of 442 projectors that were shipped in North America and 59 in Asia, for a total of 501 for the quarter.

Eric Wold - B. Riley & Co., LLC, Research Division

And then of the services revenue in the quarter, about how much of that was associated with the digital upgrades versus kind of NOC and the ongoing business?

Mary A. Carstens

In the quarter?

Eric Wold - B. Riley & Co., LLC, Research Division

Yes, please.

Mary A. Carstens

And I think -- let me pull that out. You're probably looking at a little over 1/2, Eric.

Eric Wold - B. Riley & Co., LLC, Research Division

Okay. And then I guess, lastly, kind of a follow-up on the M&A question, the last one, I know the last quarter you mentioned you were close on a couple of possible targets and walked away not agreeing on price. Is that still the major kind of wall in terms of you finding attractive targets -- finding attractive targets and the price is what keeps you away or is there something else there?

Gary L. Cavey

No, I think it's making sure that it's accretive, Eric. And the only thing I will also add is for some reason, I thought that last year would be much more active as far as people looking to sell their businesses. And there were some businesses out there for sale but they really weren't that interested in selling. It appears that this year, there is quite a larger number of activity going on, people who are more interested in selling their business. Now whether that will translate in us closing it or not, I think it does, from the surface, looks much more promising.

Operator

Our next question comes from the line of Christopher Owens with Heights Capital Partners.

Christopher Owens

I'd like to first congratulate you guys on a return to profitability in the fourth quarter and closing on a great year. My first question was there was the decrease in accounts payable, consumed $15.5 million of cash this year. Is that going to start leveling off?

Mary A. Carstens

Yes, actually, what -- Christopher, last year, because of the VPF program, we had some special accounts payable. I mean, our receivables were extended and we also had vendors that were helping us out in managing the kind of the collections of the receivables and payables. AS we collected the receivables, we also paid off the payables, so that will level off.

Christopher Owens

Okay. So that's not going to be a -- or it should not be a significant of a consumer of cash going forward?

Mary A. Carstens

Correct. Correct.

Christopher Owens

Okay. And then I just wanted to drill down a little bit more on a comment that was made in the press release this morning, to quote, "In future periods, we believe our operating leverage will continue to improve, providing the opportunity, I think, to diversify our business." Are you guys saying that you expect operating profit to increase or the percentage of operating profit as a percentage of revenue to increase? Can you just provide some more clarity on that?

Mary A. Carstens

I think what we're trying to state is that we're going to continue to manage our cash in order to look for opportunities to grow the company.

Christopher Owens

Okay, so that's not a margin comment?

Mary A. Carstens

No.

Gary L. Cavey

No.

Christopher Owens

Okay. And then just finally, so it looks like you have about $57 million of working capital at the end of the year and the market capitalization of the company is around that level, too. So it appears that the market is describing a negative or 0 valuation to your ongoing business prospects, which seems somewhat draconian view. So as an owner of shares, a substantial portion of shares, it seems to me that a very accretive use of capital would be to repurchase stock. I know you guys are intent on making an acquisition, but you can also acquire your own stock, which would also be very accretive as well. So I just think that you have $40 million in cash, it's almost $3 a share, and your shares are trading just above $4. And you have $57 million of working capital, which I'm assuming is far more than you need to operate your business. So as a shareholder, as an owner of the company, I would just suggest to you that you return some of that capital to your shareholders, preferably by share repurchase but also potentially through dividends as well. Thank you.

Mary A. Carstens

Thank you.

Operator

And our next question comes from the line of Don Whitaker [ph], private investor.

Unknown Attendee

Mr. Cavey and Mr. Carstens, good quarter. Can you hear me?

Gary L. Cavey

Yes. Yes, sir.

Unknown Attendee

Along with what the previous gentleman talked about from Heights Capital, I'd like to touch on that. You have mentioned you're putting a lot of effort on potential acquisitions, and your main criteria seems to be -- to have something where you can put your management talent to work, and have it in North America, have a similar customer base and the knowledge base. I can't think of anything else that gives a tax-free immediate gain by buying your own shares back. You have immediate management talent. You have a great fit and you have -- and you help shareholders, and it's accretive immediately. I know you had a stock purchase program announced in December of 2011 for approximately $8 million, which has been terminated, I can tell. And when the stock got down to 3-something, there wasn't any purchases. It's kind of like, I've been in the securities business for over 50 years, it's kind of like you buy high and when it's down, when the stock is down, when one doesn't want to buy, I know the business conditions were a little different at that time, too, and it's easy to be second-guessed. But being -- I'm somewhat of an activist investor myself, filing 13Ds from time to time under these companies, and I like this company, an 80-year-old company, it just hit every radar screen of mine at the end of the year. And after doing a lot of research on it, I think you're going to have people like that gentleman that sent you the letter in December press you, you have an interesting shareholder base. I know they're not activists at the present time, but their 13G filings, but they could turn to 13Ds at some time. But the thing that scares the investment community is I haven't seen one share purchased by insiders in the last year or so, other than acquisitions by options, and it's a little misleading if one doesn't look at the actual figures, they're not insider purchases, it's just option-oriented. It seems like such a clean little company and you have a gentleman that sits on LIN [ph] board, also in Omaha, and it's pretty obvious that this is how companies, with a Buffett approach in your area, buy owners' stock back or they are thinking just shareholder value. So I really would put a lot of effort into that with Mr. -- the gentleman, the previous caller said. I can just see other activist investors, sure the stock is up a bit today on your great performance. But if it settles back down into the previous ranges, you're going to get large -- it's going to hit every radar screen in the country, and I personally can't see a better acquisition candidate than your own company. I've seen so many acquisitions over the years that have problems at the end, and of course everybody polishes up the Cadillac before they sell it. Sorry to go off on a tangent, but you can see where my thoughts are.

Gary L. Cavey

Thank you, Don.

Operator

[Operator Instructions] Our next question comes from the line of Will Derek [ph], private investor.

Unknown Attendee

Guys, good quarter. I hate to beat this to death, but following up on the last 2 callers, any questions, I guess I'm going to ask more of a question. Is there any reason why -- you have $60 million of liquidity right now, is there any reason why you all don't buy back your stock or initiate a dividend, 1 of the 2?

Gary L. Cavey

It's subject to board -- well, it's subject to board review, and we look at that very diligently on a regular basis.

Unknown Attendee

Okay, I mean, I don't want beat this to death, but it does seem like, at this point, where your stock is right now, that's got to be one of the best uses of capital. And I understand the need to keep liquidity. I think everybody else does for M&A and balance sheet strength, but at the same time, you have $60 million of liquidity and the market is giving almost no value to your continuing business, which you all have proven is worth much more than the value you're getting currently. So as a shareholder, I think a lot of other shareholders will agree that, you all included, you'd like to see that change and see an increase in it somehow. So I can't really think of a better catalyst than either a buyback or some sort of dividend.

Gary L. Cavey

Okay. Thank you, Will.

Operator

And there are no further questions at this time. I'll turn the call back over to you to continue with your presentation or any closing remarks.

Gary L. Cavey

Well, thank you for joining us today on this call. We're looking forward to speaking with you again after reporting our Q1 2013 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 lines.

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