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Ballantyne Strong, Inc (NYSEMKT:BTN)

Q1 2013 Earnings Call

May 10, 2013 10:00 am ET

Executives

Robert Rinderman

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

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

Analysts

Eric C. Wold - B. Riley Caris, Research Division

Aaron Syvertsen - Sidoti & Company, LLC

Michael Rindos

Edwin Fowler

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong 2013 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, May 10, 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, Myra. 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, May 10, 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 the call 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 another quarter of profitable results. Mary will provide you more color on our Q1 financials and capital structure following my remarks.

Given the advanced stage of the digital cinema transformation in the Americas and the current position of our business, Ballantyne's financial performance was largely as expected, reflected our candid commentary on recent quarterly conference calls and in other public forums. Following Q4 2012, we noted that the year-end expiration of the virtual print fee programs had prompted a temporary boost in purchasing activity late last year. However, as anticipated, Q1 was lower.

Our cinema screen manufacturing division achieved year-over-year growth, largely due to a healthy replacement screen business. As recently announced, we have entered in a strategic supply arrangement with the cinema technology leader, RealD. Pursuant to this arrangement, we are manufacturing and marketing screens, featuring Precision White technology, which is a dramatic state-of-the-art improvement over previously available cinema screens.

With Precision White technology, improved screen efficiency results in 40% more brightness and reflectivity, a critical factor for 3D and 2D content. As mentioned in the release, initial customer response for the new technology has been very good. In addition to this initiative with RealD, we have been investing in Real -- in R&D with a goal of further enhancing cinema screen technology.

Turning to the cinema service business. Although there was a revenue decline from the prior year Q1 level, this was expected since our service team has finished the digital projection system installation and integration of nearly 7,000 screens across the country on behalf of the nation's leading theater exhibitors. That unprecedented multiyear project was completed during the fourth quarter of 2012.

We continue to focus our sales organization on capturing opportunities to grow our service business within the cinema. In addition, we've hired an individual who will focus exclusively on opportunities outside this segment.

The encouraging news is that we've been transitioning our service business to a more predictable revenue streams, including signing reoccurring annual projection system maintenance contracts and not clients, which we have been monitoring from our cutting-edge facility based at Ballantyne's Omaha headquarters.

Additionally, we believe our 24/7 service represents a compelling value proposition for cinema customers, including a number of the largest exhibitors in the world. The goal is to proactively target them as their initial monitoring contracts, which were included in the original projection purchase agreements, expire and before they go to renew them.

As detailed on past calls, there are also numerous opportunities to generate non-cinema NOC business, and our team is focusing on targeting a number of those opportunities. A portion of our Service business is in theaters but not in the auditoriums. For example, we are monitoring digital flat screens that show coming attractions and other advertising in the lobbies and hallways of the leading theater exhibitors. Our premise is simple. If it has an IP address, our NOC team can monitor and manage it. Our experienced team has the technical expertise to handle a vast array of digital and software and network applications.

I would like to take a minute to, once again, address our corporate return of capital policy, as this was a topic raised during the Q&A session on our last investor call. We understand and appreciate that some of you have different opinions of how our company should deploy its $40 million-plus cash balance. Some have suggested that we reinstate our share buyback, and others believe that paying a dividend would be the best, and still others prefer that we spend our capital on investment in organic and inorganic growth.

Management in our Board of Directors, which has the deciding vote, continue to believe that Ballantyne should direct this cash towards growing our business through accretive transitions -- transactions, as well as certain organic expansion initiatives. As we saw this past quarter, the slowdown in digital projection system sales has had a significant year-over-year and a sequential impact on our top line results. We expect that the overall trend to continue within the theater segment.

As stated in our Q4 call, the strategic plan is to continue maintaining the company's disciplined cash management approach so that we have ample liquidity to acquire the right target. I have focused my time evaluating potential transactions, and I remain confident that we will identify one or more good acquisitions to leverage our core business. As you know, both our cinema screen manufacturing business and Ballantyne cinema services team came to us through M&A in the recent past, and these areas have done very well for us.

With that, let me turn the call over to Mary, who will cover Q1 results and the capital structure in greater detail. Mary?

Mary A. Carstens

Thanks, Gary, and good morning, everyone. I will speak to our 2013 Q1 results and an update with respect to Ballantyne's balance sheet and asset base. As noted in our press release, despite the challenges due to the advanced stage of the digital rollout, we generated a bottom line profit and positive cash flow from operations during the period.

Starting with the income statement. Overall, revenue declined from $44 million in the prior year period to $27.6 million. This was a result of the slowdown in North American theater equipment sales as the majority of domestic exhibitors have already converted from an analog platform to a digital one. We believe the current percentage of screens converted to digital to be somewhere between 85% and 90%.

Select opportunities to sell new system still remains for smaller independently owned theaters, such as art houses and drive-in movie theaters. We shipped a total of 366 digital projection systems worldwide in Q1 versus 479 units in the first quarter of 2012. As expected, the sales of digital products declined from the year ago period, but we continue to focus on transitioning from the installation and integration based business to a more technology-oriented organization that incorporates maintenance and NOC focus services. This will allow us to increase the percentage of recurring and more predictable revenues. We will also continue to capitalize on our strength in core competencies and distribution, as we seek additional new products and services to add to our current array of offering.

Top line growth was challenged by a drop in Strong technical services revenue, which declined to $2.5 million from $3.7 million in the year earlier period. As Gary indicated, Ballantyne service team completed the digital cinema projection system installation and integration deployment work on behalf of a leading domestic exhibition client during Q4 of 2012.

The service revenue decline was partially offset by continued growth in our Network Operations Center businesses, which offers 24/7 monitoring of cinema projection equipment and other digital devices and our contract maintenance services. Cinema and related service is an area that we continue to strategically focus for future revenue growth.

The Cinema screen business increased 6.7% in sales, climbing to $3.2 million, compared to $3 million in the year ago period. Gary also mentioned our new Precision White arrangement with RealD, which we believe will lead to future sales for new theaters, as well as replacement screens. We also saw an increase across our specialty lighting business, where quarterly sales rose to $900,000, up from $700,000 a year ago, with non-follow spotlight seeing an increase in demand.

We continue to realign our efforts toward architectural accent lighting, an area we believe has the greatest potential to provide attractive future returns from our lighting business. The best example of this, of course, is the World Trade Center lighting contract.

Gross profit for the quarter was $3.9 million, leading to a gross margin of 14.2%, comparable to the Q1 2012 level of 14.4%. The gross profit decline reflected the drop in quarterly sales.

SG&A expenses declined 14% from $3.9 million to $3.4 million, as we continue to maintain our disciplined approach to keep spending in line with overall business trends.

Moving down the income statement. Net earnings were $565,000 compared to $2.4 million in the prior year period, leading to earnings per share of $0.04. While we are keenly aware of the impact of our bottom line results due to the decline in revenues, which has been expected as the digital rollout wraps up, we are focused on delivering operational efficiencies, which allowed us to post the quarterly profit.

Regarding the balance sheet, Ballantyne's cash and cash equivalents balance at the quarter end rose to $41.9 million, up from $40.2 million at the 2012 year end. The increase in cash is attributable to collections, partially offset by primarily an increase in inventory. At the end of 2012, our inventory was unusually low levels due to the strong demand to get projectors shipped and installed to meet VPF financing requirements. We continue to enjoy full availability of the company's $20 million credit facility, which is untapped.

With regard to strategic growth initiatives, we continue to devote a significant portion of management's time to acquisitions and organic 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 business. With a stable and strong balance sheet, we are confident there is ample funding available for potential future capital needs, including acquisitions that we expect to have a positive impact on the company's financials and benefit our overall operations over the long term.

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] Our first question comes from Eric Wold with B. Riley & Co.

Eric C. Wold - B. Riley Caris, Research Division

A couple of questions. I guess, first one is a quick question. Of the 366 projectors shipped in the quarter, how many of those were domestic? Or how many were North America versus international? If you have the China breakdown as well, how many were in China?

Mary A. Carstens

Yes, 304, Eric, were in North America. We had 54 in China and, actually, 8 in Hong Kong, so...

Eric C. Wold - B. Riley Caris, Research Division

Okay. And then on the sales side, obviously, [indiscernible] sales -- the service division's obviously declining on the deployment slowdown. How much of the service division revenues were associated with the deployment side of the business? So how much would you kind of put into the more recurring NOC side of the business?

Mary A. Carstens

Yes. When we look at it, the way we split it right now is we look at NOC and service together, but then also demand service and installation together. And right now, in the current period, it's 50-50. Last year, it was about 75% demand and install, and 25% was the NOC service.

Eric C. Wold - B. Riley Caris, Research Division

I apologize. I got cut off for a second. How much was this year? The 75 25 which was the ratio this year?

Mary A. Carstens

Yes, 50% was NOC and service maintenance contracts.

Eric C. Wold - B. Riley Caris, Research Division

Okay, okay. And then last question kind of a -- I know, Gary, you talked about the goals for using the capital and focused on M&A and all that. My question is, obviously, the board and senior management were buying back stock during the quarter. My interpretation is, if you guys are buying stock, that's probably a pretty clear indication there's not an M&A or an acquisition transaction near-term or you wouldn't be able to be in the market buying back stock. If that's the case, if you see the company as -- if you and the board see the company's valuable at these levels and you want to put your money into the company, just curious why the board wouldn't be willing to put the company's cash through a buyback, yet obviously there's not an M&A transaction near-term, and you've got ample ability to borrow in the market through your credit facility? Or as a lot of companies are doing there's very cheap capital out there, why not buy back some stock now with the capital you have, if there's ample ability to use the [indiscernible] later when a transaction does arrive?

Gary L. Cavey

I'm not sure I can do [indiscernible] the question, Eric. The reason why board members and also senior management have been buying stock is exactly what you said, they have a lot of confidence about the company going forward. The company culture and view of our opportunities going forward look very bright, so we feel very good about that. And we just think we need to keep our powder dry on our -- on the amount of cash we have. We need to -- we're very diligent on what we're looking at. But when we do need the money, we need to do it at a very fast pace, and we feel very good about where we are right now. And we just had a Board of Directors meeting, and we feel very good about the direction the company's going and the opportunities that lay out there for us right now. We feel good about our vision and direction that we're heading and what we're looking at.

Operator

The next question comes from Aaron Syvertsen with Sidoti & Company.

Aaron Syvertsen - Sidoti & Company, LLC

A quick question first for you, Mary. How should we view the SG&A expenses through the rest of the year? Should we expect to see a decline year-over-year from 2012, or will it be tied to a percentage of revenue?

Mary A. Carstens

No, actually, I mean, if you look at the quarter, we might be a little higher than this current quarter, but it should be consistent kind of where we're at right now. So it'll be significantly lower than last year.

Aaron Syvertsen - Sidoti & Company, LLC

Okay. And then I guess, Gary, can you just kind of give maybe an update on just what the international opportunity is? Whether that's something that is 22% revenue in the first quarter? Whether that would grow over time? Or just kind of maybe add some color to what the opportunity is as a whole.

Gary L. Cavey

Sure. Well, international for most companies comes kind of in lumps at times because a lot has to do with financing and available to be able to companies overseas kind of the terms and conditions. But we're spending -- we think there's a great opportunity for our screens internationally. We've been starting to get those things merchandised, as we've talked in the past in India; we supplied the largest screen in the world down to Sydney, Australia; we have things going down to South America and Mexico. And so we see some real opportunities, particularly for our screen business of international growth.

Aaron Syvertsen - Sidoti & Company, LLC

So it'll be more on the screen side rather than the equipment or service segment?

Gary L. Cavey

That's true, yes.

Aaron Syvertsen - Sidoti & Company, LLC

Okay. And then, I mean, is there any more -- maybe you won't be able to, but any more kind of just direction you can give on M&A, other than, obviously, you guys are looking pretty seriously at it. Just kind of what directions or what kind of companies that are out there that -- what kind of industries you're looking at to even taking a serious look at?

Gary L. Cavey

We really can't say too much more about it than what I've said in the past, Aaron. But they're basically North American-based opportunities for us. We -- they have -- can have extensions internationally, of course, but they'll be North -- they're going to be grounded in North America. And it's both in the service and -- side of the business that ties into our NOC in our service teams, and that can also tie in with products as well.

Operator

[Operator Instructions] Our next question comes from Steve Thomson [ph] with Dowgate Capital.

Unknown Analyst

Yes, I guess I'm -- just a question more for Gary and for Mary. I'm just calling about your willingness to participate in a going private transaction. You talked about M&A activity looking at external targets, but what about you as the target? Since I sent my letter in December, I've spoken with some private equity firms, and there seems to be considerable interest, but there's a reservation given the size, the relatively small size. There's sort of execution risk that is troubling the potential acquirers. There's a concern that they'll spend the money on the diligence and whatnot, and that management will, I guess, torpedo the opportunity or won't participate. So I just want to get out for your consideration the possibility of going private transaction and a list of your initial thoughts on such a transaction.

Gary L. Cavey

Well, thank you for your question, Steve. I'm not prepared to answer that question here on the phone.

Unknown Analyst

Okay. So you'll address it privately with me afterwards? Or what's the best way to proceed?

Gary L. Cavey

We'll let you know if we're interested.

Unknown Analyst

Well, it's really not so much me. I mean, it's a potential acquirer, some of whom I've -- I presume I've sent along to. I don't know whether you can comment on whether you've spoken to them or not, but I'm just wondering how you...

Gary L. Cavey

I'm not prepared to answer any more questions about this [ph], Steve.

Operator

Our next question comes from Mike Rindos with Midtown Partners.

Michael Rindos

Can you talk a little bit about the screen facility with regard to its capacity utilization at this point? And whether or not that facility can be adapted for any other uses or products?

Gary L. Cavey

Mike, all I can say is on our screening facility, we have additional capacity to meet additional demands at the present time. We feel very comfortable with the ability to get more sales out of it. And regarding additional products that are other than screens, we continually look at those types of things, and I don't have anything to report on that.

Operator

I'm showing no further questions at this time. [Operator Instructions] Our next question comes from Edwin Fowler with The SmallCap Report.

Edwin Fowler

I'm interested more in what you see in the relationship with RealD's Precision White. I assume this is moving along. You've indicated it's very encouraging. What's the long-term outlook on this as far as revenue and profit margins and things like that?

Gary L. Cavey

Well, there's been a very good response on the screens that have been put up in various locations. There's been about 7 locations that put the screen up, and results have been very highly accepted. And since we just demonstrated this product, the response has been excellent as far as what people think about it, we'll have to see how the sales comes about. We have gotten some orders, but it's very early in the game here to really make any predictions on that. But we're very pleased at the response, as well as we're very pleased with what we can do with this technology.

Edwin Fowler

And you say you've done how many screens so far in...

Gary L. Cavey

Oh, there's about been 7 or more that have been put up around the country.

Edwin Fowler

And in the lighting business, is this getting more and more competitive for you?

Gary L. Cavey

The lighting business being more competitive? I -- the lighting business is -- let me state this, that the business we do, we do 2 types of business: one is in stage, stage lighting and event lighting, which we've been in for a long time, and it's been a fairly consistent business. The -- we call the rest of the business architectural specialty façade. Those are more project-oriented projects, like the World Trade Center and some other ones that we've done, and those tend to be more of engineering performance and not based as much on, what I call, price. We have a very good track record and success of these kind of specialty projects, and we think we have an opportunity to particularly grow in that area.

Edwin Fowler

You sound optimistic on the World Trade Center. They just put the top on it last week. So what are you actually doing for that project?

Gary L. Cavey

We are doing 2 things. We're lighting up the top façade of the building from the spire on up with LED lighting that also is computer-controlled with color and on how it operates, as well as we will be sending a beam of light rotating like a lighthouse, that's all LED, which is putting out about 300,000 lumens. And I view it as probably -- my personal opinion is probably one of the most important lighting projects being done in the United States this year. And hopefully...

Edwin Fowler

And when will it be done, Gary?

Gary L. Cavey

Well, I don't know when it will be turned on. It will be with an event probably when the city decides to schedule the opening event of that, so...

Edwin Fowler

Well, I'll be in New York in another month, so maybe I'll look for it. Just one last question. I know there was a question on a buyback or going private and all that stuff. Has the board ever considered a small dividend?

Gary L. Cavey

Those things are always considered, yes. We look at those things.

Edwin Fowler

But in your opinion, holding on to the cash is a better way to go?

Gary L. Cavey

Right now, we believe that's the best strategy, and use of capital is keeping our powder dry and available for some combination of M&A and reinvestment in our core businesses.

Edwin Fowler

Well, you should remember there's -- shareholders are out here, too.

Gary L. Cavey

Absolutely. I'm a shareholder myself.

Edwin Fowler

And return on capital is always a good thing.

Gary L. Cavey

I agree.

Operator

The next question comes from Howard Steinberg, a private investor.

Unknown Attendee

A question on capital. What in the merger and acquisition arena, what are we looking for in terms of the return of the newly invested capital?

Gary L. Cavey

I'm really not prepared to give you a specific answer on that, Howard.

Unknown Attendee

Okay. And as far as our borrowing facilities, what do we have available?

Mary A. Carstens

It's all [ph] $20 million right now. We haven't -- our facility is [indiscernible]...

Unknown Attendee

When will that expire?

Mary A. Carstens

Not until 2014.

Gary L. Cavey

Right.

Unknown Attendee

And what -- at the end of the year or midyear?

Mary A. Carstens

It's midyear.

Unknown Attendee

Okay, okay. Well, speaking for this shareholder. We're not looking for return of our capital or a dividend. We want to see you put that money to work. Like to get a little more color on what the perception is of returns on the newly invested capital but time will tell.

Gary L. Cavey

Thank you, Howard, for the call.

Operator

There are no further questions at this time.

Gary L. Cavey

Thank you, operator. In closing, our focus remains on the future and on reaching our full potential. Ballantyne has the right products, financial resources, infrastructure and people to make that happen. So I'm confident about what we're doing and our focus on further expanding our services and improving the customer experience.

Thank you for joining us on our call today. We look forward to speaking with you again after reporting our Q2 2013 results. Have a great day.

Operator

Thank you, ladies and gentlemen. That concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.

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