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Ballantyne Strong, Inc. (NYSEMKT:BTN)

Q1 2010 Earnings Call Transcript

May 3, 2010 11:00 am ET

Executives

Rob Rinderman – IR, Jaffoni & Collins

John Wilmers – President and CEO

Kevin Herrmann – Secretary Treasurer and CFO

Analysts

Eric Wold – Merriman

Marla Backer – Hudson Square

Thomas Duffy – Private Investor

Lars Munson - Manatuck Hill Partners, LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong 2010 first quarter results conference call. (Operator Instructions).

As a reminder, this conference is being recorded Monday, May 3 2010. I would now like to turn the conference over to Robert Rinderman. Please go ahead sir.

Robert Rinderman

Thank you, Selma. Good morning everyone. Welcome to the Ballantyne Strong 2010 first quarter results conference call.

This call will contain forward-looking statements relating to the future financial results of Ballantyne Strong. Listeners are cautioned that such statements are based upon current expectations and assumptions and involve certain risks and uncertainties within the meaning of the US Private Securities Litigation Reform Act of 1995. Listeners should note that these statements are only predictions.

They are subject to inherent risks and uncertainties and may be impacted by several factors, including but not limited to customer demand for the company's products, the development of new technology for alternative means of motion picture presentation, domestic and international economic conditions, the achievement of lower costs and expenses, credit concerns in the theater exhibition industry and other risks detailed from time-to-time in the company's other Securities & Exchange Commission filings.

The company's actual performance and results could differ materially because of these factors and other factors discussed in the management's discussion and analysis of results of operations and financial conditions section of the company's SEC filings, copies of which can be obtained from the SEC website www.sec.gov or Ballantyne Strong's website www.ballantyne-strong.com.

All information in this conference call is as of today and the company undertakes no obligation to update these statements or to update expectations from prior conversations. I also would like to remind listeners that this call is being webcast live over the Internet that a replay of the call will be available on Ballantyne's corporate website for 30 days after the call ends.

And now I'd like to turn the call over to Ballantyne's President and Chief Executive Officer, John Wilmers. John?

John Wilmers

Thanks Rob, and thanks to all of you for joining today's conference call. Joining me today is Kevin Herrmann, our CFO. I will overview Q1 developments, discuss our outlook for the balance of 2010, let Kevin review our operating results and financial position. We will turn the call over to the floor, and take your questions.

Q1 sales performance follows a strong performance in 2009. Digital equipment sales grew 137% to $13.9 million versus last year. Included in these sales were 86 machines sold in China as we move to complete our second tender with the China film boot. We have eight machines left that shipped in April

Demand continues in Mexico, Latin America, Asia and with U.S. independents both large and small. The independents and moderate size circuits are self financing and taking advantage of programs such as our Digital Link joint venture with RealD utilizing financing provided by any key financial and other sources.

Sales of our screen subsidiary MDI rose to $3.5 million versus $3.4 million in '09. With the funding of DCIP and the heightened interest in 3-D with the performance of Avatar, demand for our silver screens has continued and increased as independents ad digital and our major customers plays add-on orders.

Although production is our number one concern, we continue to go forward on our R&D efforts to improve both the 3-D presentation at MDI. Results at our Digital Services Division, SDS were flat as we continued to build the infrastructure to address the needs that are now becoming a reality.

In the quarter, we benefited from the revenue growth and a modest decrease in SG&A to retrieve earnings of $0.07 per share. Now let's look to the balance of 2010. The benefit of DCIP funding is manifesting in itself. Even though we are not the primary provider of digital machines to the three partners, we are benefiting as we do integration and installation and importantly in the area of sales, we feel the movement of the non-DCIP members approximately 18,000 screens as they move forward quickly to stay in contention.

This movement continues to be driven by the desire to get on the 3-D bandwagon with a list of 22 3-D events plan for 2010, and also a growing number of alternative content, 2-D and 3-D performances schedule.

Let's look at our individual segments per minute. STS remains the largest and one of the largest in most capable digital cinema organizations in the industry, and as we continue to grow I'll soon be saying we are the number one group in the industry. As we've discussed in the past, our group is focused on all manufacturers' machines, but it doesn't stop there.

Our group with its roots in the industry also excel in sound, automation and service of all the server products that are out there today. Currently, we have 50 technicians with a target of 65 to 70 at the peak of our work. Keep in mind; we also have subcontractors online that we will fill in when needed. We have great visibility for our ramp in the area of service as most of you know we're doing all the integration and installation for Regal, the largest circuit in the world.

For the balance of 2010, we are scheduled for 900 plus installs and in addition to the installs we are preparing the equipment in our facility via integration process to ensure the equipment arrives complete as our installed team's takeover. We also have an agreement to do installation in service work for Barco.

This provides additional opportunities with companies like Cinemark and other Barco customers. With this activity, our service group that has struggled over the last couple of years as we grew it will now become much more efficient, which translates the better margins. We are targeting margins in the mid-20s in that area.

In Digital equipment, we are focused in Asia particularly China and on the independence in the Americas. China with only 6,000 to 7,000 screens is moving quickly to change their screen to population ratio. They want to get the 12,000 to 15,000 screens over the next three years to five years presenting a terrific opportunity. We will open an office in Shanghai by the end of the third quarter possibly sooner, and then open in Taiwan by the end of the year.

Domestically, we are focused on the sales opportunities within independent operators, large and small. Examples of these are recent sales to markets and national amusements via Digital Link vehicle. In the balance of the Americas, we continue to see steady demand from Mexico to Latin and South America.

Keep in mind that when we talk about our projector sale domestically, it probably includes a screen and installation from our group and other products from other vendors like servers, lenses, xenon lamps as we move to become the complete supplier to all our customers. Our partner, NEC has delivered two of their next generation Series 2 projectors in the NC2000 and NC3200 with the final member of the group, the NC1200 delivered this month.

The projectors have been well received with the modular design facilitating ease of maintenance and service, which enhances their reliability. On the 4K front, NEC is expecting 4K DLP chips from Texas Instruments mid-summer with prototype machines in the fourth quarter and production first quarter of 2011.

The 4K platform will allow us to combat the marketing issues that have worked for Sony. We firmly believe that the DLP solution is the best of the technology and has a superb track record proving its reliability. Our screen subsidiary, strong MDI continues outperforming as the demand for 3-D silver screens continue as well as demand for the large-format screens from IMAX.

With the growing list of 3-D events, both feature films and alternative content, our customers large and small continue with new and add-on orders. Most of our customers thought that two to three silver screens in a complex was enough. Now the number is four to six and growing.

As a result of this activity, we are looking at ways of increasing capacity and have a plan and place to get that done. With the increase in capacity, we are looking to increase our penetration in Asia primarily China. On the M&A front, we continue to believe that acquisitions are the best potentially use of our $22.8 million in cash. Anything related to the exhibition community can make sense.

Components like servers, lenses, lamps, sound could also compliment our portfolio. As a reminder our STS and MDI acquisitions were the result of our disciplined acquisition approach, and keep in mind we also need to maintain a reasonable reserve for working capital.

We have a couple of things in our slides, and hopefully I'll have some news concerning them soon. Now let me turn the call over to Kevin to walk you through our Q1financials. Kevin?

Kevin Herrmann

Thanks John. As we discussed in the release, first quarter revenues increased 48% to $25.3 million largely due to higher sales of digital cinema equipment which rose 137% to $13.8 million, compared to $5.9 million in the first quarter a year ago.

Sales outside the U.S. rose to $11 million or $7.2 million a year ago primarily due to $3.6 million increase in business in China. Ballantyne's gross profit rose 27% to $4.3 million in the current quarter, compared to $3.4 million in Q1, 2009, principally as a result of growth and lower margin digital cinema projector sales on a gross profit margin decline to 17% of revenues, compared at 19.7% in Q1, 2009.

Selling, general and administrative expenses were consistent to a year ago at $2.7 million, but fell sharply as a percentage of revenues to 10.7%, compared to 16% in the year ago period. Going forward, w are working to maintain a lower SG&A growth rate excluding seasonal factors like trade show expenses enabling us to achieve operating leverage and bring the bulk of gross profit improvements to our bottom line.

Q1 results also included a reduced loss from our equity and our Digital Link II joint venture with RealD to approximately $159,000, compared to a loss of $185,000 a year ago. For those new to our company, the joint venture was formed in 2007 to fund 3-D digital cinema deployments for key customers.

Ballantyne made a 44.4% ownership interest in the JV with RealD owning the balance. Our reported loss primarily reflects depreciation and interest expense related to past deployments under this program. The improvement in the loss came from recording gains in the sale of equipment previously deployed into Digital Link II program principally from the recapture of depreciation expense previously recorded.

As customers who have utilized Digital Link too begin to ramp their digital theater conversion activity to a certain threshold they would be required to pay for the equipment at purchase prices generally in the excess of the depreciated value. This should generate gains from recapturing depreciation previously expense from the flow through our equity and income or loss of the joint venture line item in our income statement.

Also at that point, Ballantyne will see which share of this proceed has a returning capital, which clearly mark to as much as $3.5 million to $3.8 million in aggregate after all the equipment is purchased by these exhibitors. Reflecting the strength of our Q1 sales and our ongoing discipline on the cost side, first quarter net income rose 84% to $1 million or $0.07 per diluted share, compared to net income of $542,000 or $0.04 per diluted share in Q1 last year.

First quarter results reflect an increase in the weighted average of the number of diluted shares outstanding to $14.3 million, compared to 14.1 million in the year ago quarter. Ballantyne ended the first quarter with $22.8 million in cash, compared to $23.6 million at year-end 2009. The modest decrease in cash from year-end 2009 was principally due to the funding of short-term working capital required to fund the ramp in receivables and other working capital items.

As we have previously stated that the rollout of digital cinema accelerates as anticipated as we progressed through 2010 in increasing level of sales and service business could temporarily draw down a portion of our cash position from time-to-time, as more capital is temporarily tied up in the company short-term working capital needs. With our strong balance sheet, we believe Ballantyne remains in a good financial position to grow its business, to fund working capital needs, and to explore attractive acquisition opportunities that meet our disciplined criteria.

With that, John and I would like to open the call to your questions. Operator, please proceed with the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Eric Wold from Merriman. Please proceed with your question.

Eric Wold – Merriman

Hi good morning.

John Wilmers

Good morning.

Eric Wold – Merriman

Quick question on the Regal rollout. I know you talked about more than 900 to be installed this year, could you give us a better sense of how that schedule will ramp through the year? I know that Regal had said that they expect kind of get to 200 a month in the few months to take the time to ramp-up to that, so what is your schedules that kind of by quarter and then can you give any kind of sense is to how that could increase in 2001?

John Wilmers

Well, I think the first of all the 900 is a conservative number. We think it will be north of the 1000 actually for the balance of this year, and then going forward we can do approximately 300 to 400 a month, but there are so many variables in that. I hate to get [ph] zeroing in on all the other areas that come into play like deliveries and everything else, so I think if you – couple of hundred a month certainly is no problem whatsoever for us to do, so we are going to be able to do everything that Regal asks us to.

Eric Wold – Merriman

Okay and then the comment you made of getting to your mid-20s service margins, is that kind of by the end of this year, kind of like quarterly basis, is that more of a 2011 situation?

John Wilmers

I think we are going to see a dramatic change in the second quarter as opposed to first quarter. Remember, we just started on April 12th, the actual integration installation for Regal. So, when you look at the first quarter we were busy there, but certainly nowhere like we are today here. So, we are going to see – I think at the end of the second quarter, we are going to be able to really get a view for what the margins are going to be.

Kevin Herrmann

Yes Eric, just by the end of the year I think that's the target. Now if you look at the annualized 12 months there from January to December, it could be a little bit lower just because of the first quarter we were still – the service was still kind of in the old mode, which it wasn't generating profits and the margins were very low. So, as we get into second, third and fourth quarter that's when we are talking about the mid-20s happening during that timeframe.

John Wilmers

I think a good indicator will be the end of the second quarter because even though we started on the 12, the service group is moving very steadily and quickly right now. So we are going to be able to evaluate it really well at the end of the second quarter.

Eric Wold – Merriman

Okay and then just a quick follow-up, so where the gross margins were serviced, were they actually negative in Q1 or it was just the operating margin was negative?

Kevin Herrmann

Yes. They were a little bit under water on the gross margin.

Eric Wold – Merriman

On the gross margin, okay. And then last question, do you ship eight units to China, that's the remainder of that the original 160, I guess second 160 unit order that you are doing kind of Q3, Q4; give us a sense where you are now with China Film, or what else could we see out of there?

John Wilmers

Well, we shift the eight, and of course we've bid on the tender. We haven't got all the Is dotted and the Ts crossed yet. We will have that by the end of this week, and then we will be able to talk about the quantities we receive from that switch to our order.

Eric Wold – Merriman

Okay, and then it's a final question and I'll go back in the queue. After this 500 unit order obviously, there is 1000s of additional tenders in orders the capacity going to China, what is your capacity there and then kind of your thoughts on how much you guys can participate versus other competition over there?

John Wilmers

I feel very confident over there. We've had the discussion you and I, but there are many other tenders that are going on as we speak now not to diminish the one from the China Film Group, but we've many other ones from different parts of the world, but primarily in China that are out there. So, I feel very confident in what we are doing in China and what we don't get out o the 500 and this particular one. We are going to make up very quickly with other tenders in China.

Eric Wold – Merriman

Perfect. Thank you, guys.

Operator

Our next question comes from the line of Marla Backer with Hudson Square. Please proceed with your question.

Marla Backer – Hudson Square

Thank you. I have a few questions. First of all to slowing up on something Eric asked about with China. So, it sounds like the opportunity there could be long-term and significant. Should we expect most of this – most of the bidding though will be for incremental 500 lots, or how should we think about in terms of modeling going forward? Will it ramp-up in terms of magnitude on the order side, or will it stay at these levels?

John Wilmers

I think they will vary. The larger groups in China will be probably the 300 to 500 range type quote or tender request, but the – when you look at the China Film Group, of course they just went through that but we do expect another tender from them before the end of the year, so whether that's a 500 or 400 or whatever it is, I really can't tell you for sure, but the other groups out there, the 300 that's been asked for from this different other companies within China, I think probably if you look at it as a range probably 200 to 300 is a more reasonable way to look at it. These 500 are pretty unusual, but they are moving very quickly there and that's why the numbers are so big.

Marla Backer – Hudson Square

I don't know whether you had your word this to IMAX is trying to develop what they are calling a portable theater. It sounds like it's a cup of theater in there thinking of it for China and potentially other market. Is that something where you could also supply screens if it turns out that there is another growth vehicle?

John Wilmers

I'm sure it is Marla. I'm not sure whether it has to do with any kind of dome type situation if it's a straight type IMAX screens that we sell to them now. We certainly would love to have the opportunity to be a part of it.

Marla Backer – Hudson Square

And then I had two last questions. On the 4K, have you seen a demo yet of TI 4K or it hasn't in demos yet?

John Wilmers

I don't think it's been demoed. I certainly haven't seen it. As I said the June, July supposedly this is what I've been told by NEC and what TI has told them that they will have the 4k in that timeframe, and then we will see some prototypes probably near the end of the year in production first the next year, but I haven't seen it yet. I generally assume that because the 2K is so good, this is just going to be an improvement.

Marla Backer – Hudson Square

A lot much better, and then last question is with the independents that you are targeting here in the domestic market, have you – last how we talked about Digital Link, I think your feeling was that it had been a very good vehicle to get the market moving in the right direction, but you didn't really want to rely on it to help finance sales going forward. In terms of independent, are you thinking that primarily your future sale too is independent? Exhibitors will be those who are operating through a different financing vehicle or are you still think thinking that possible you will continue to use a Digital Link?

John Wilmers

I would eventually say here now don't hold me to what is the last Digital Link is the last Digital Link. We are working now very closely with NEC financial services and they are being very cooperative on couple of projects out there. So, we expect to be going forward with those kinds of financings in place as oppose to using Digital Link.

Marla Backer – Hudson Square

Okay. Thank you.

John Wilmers

Thank you.

Operator

(Operator Instructions). The next question comes from the line of Thomas Duffy, private investor. Please proceed with your question.

Thomas Duffy - Private Investor

Thank you for taking the call, and congratulations on the quarter. Can you talk about the tax rate, where do you see that headed for the remainder of the year?

John Wilmers

I think our tax rate will be in the probably around 30% to 33% range between foreign and domestic.

Thomas Duffy - Private Investor

Okay and then also on the other analyst touchdown the Digital Link arrangement you have the timing of that when might we start to see that turn positive with contribution to the bottom line?

John Wilmers

It's really depended on when these theaters go digital. Now there are some big customers in there that we anticipate going digital this year. It's just a matter of when they actually pull the projectors out, and are required to buy the projector. We expect that to happen this year a significant amount of it, but we have to wait until all the ducks are in a row.

Thomas Duffy - Private Investor

Sure.

John Wilmers

But in a particular quarter, I would anticipate and that we will see a profit in one particular quarter just because we will have a fairly large gain running through the equity in the lot.

Kevin Herrmann

Keep in mind that the one of the largest members of the Digital Link program with us is Regal cinemas, and Regal were doing the install of the digital. So, we fully expect that Regal if and that being the largest group to be taken out this year.

Thomas Duffy - Private Investor

Okay. I was thinking about those installations, when you do something like that do you have like a number that you kind of give us like per installation that you receive?

John Wilmers

Yes. I think well if you take a look at what we do for a Regal, you can combine the integration and the installation and talk about somewhere around $4500 per screen is the revenues from that. If you look at it strictly an installation figure, you will probably use about $2250.

Thomas Duffy - Private Investor

Okay, thanks, and then I think you touched on this in your opening remarks. In the headcount, where are you now? Do you feel comfortable where you are at, or you see that going up?

John Wilmers

We are growing as we continue to grow. The guys tell me that their target is sometime end of June to be up in that 65 person range. The way is done is these – then these 65 people that we have that are fully trained can lead up to can lead other teams of other o the subcontractors we may have, so that can just increase the amount of teams that we can put out there to meet the demand of the people.

Doing the Regal is a big part of it, but remember the Barco situation, their situations will be coming to us, NEC customers of course will be coming to us, and it's just that the service group is positioned right at the right time, believe me this thing, these guys are busy. They are going to continue to be busy for the next couple of years without much slowdown. As a matter of fact, our biggest concern is not burning the people out, so that's the big part of our management of that whole situation.

Thomas Duffy - Private Investor

Just going final question here, do you have any interest in entering with the consumer to home like 3-D projection market?

John Wilmers

We would, but it so far remove from what we do. I don't know that we would love to have any number of things the extra that we can add to that portfolio around here, but really that's not our expertise and so we don't really see around there right now. The closest we could come today would be screens that we could provide for projection at home, but it seems that at home now most of the movement is towards the plasmas and large LCDS that to do the 3-Ds. So, we are not really situated to do that.

Thomas Duffy - Private Investor

Okay, all right, thanks for taking the call and answering the questions. Congratulations again.

John Wilmers

Thank you very much.

Operator

Your next question comes from the line of Lars Munson from Manatuck Hill Partners, LLC. Please proceed with your question.

Lars Munson - Manatuck Hill Partners, LLC

Kevin, if he orders ramp this year in the U.S. like you expect what do you think the peak working capital needs will be, and I guess is there any more flavor on how that cash conversion cycle might work across flood the business?

Kevin Herrmann

A lot depends on how much equipment that we build that we need to have in this place, but I wouldn't anticipate this year meeting more than probably a range of $5 million to maybe $9 million worth of capital needs tied up from time-to-time, and then we know we are talking temporarily where its depending on the next ramp-up of projectors and things like that. So, I thought that give you kind of a flavor for that.

John Wilmers

One of the things to keep in mind that struck me is that the equipment seems to come in and go out very quickly, so it may minimize that situation. We are not sitting on 150 machines in the back .we are standing at the back door waiting for the shipments to come in, so we can ship them out again.

Lars Munson - Manatuck Hill Partners, LLC

Okay, thank you.

Operator

Mr. Wilmers, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation and closing remarks.

John Wilmers

Okay well thanks to all of you for participating today. We think the first quarter is just a taste of what we hope and expect to see over coming quarters and the next few years. There is unprecedented opportunity for products and services given the ongoing worldwide transformation to Digital Cinema. We see opportunities to achieve very strong increases in our core digital and screen businesses for the remainder of 2010. We will continue to manage our overall business to streamline cost and maximize bottom line results. Leveraging our balance will, we will work hard on M&A opportunities to further expand our product and service portfolio on possibly BTN's international reach.

We will continue to work on enhancing our visibility before investors as we represent perhaps one of the only publicly traded peer play means to participate in the services that are required for the retooling of the global cinema industries over 100,000 screens, a process which is gaining momentum as we speak. Thank you for your interest and confidence in Ballantyne and for your participation today. Kevin and I look forward to speaking with you again following our second quarter results. Thanks again, and have a great day.

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