Ballantyne of Omaha's Presentation at the Southwestern Showcase Investor Conference

| About: Ballantyne Strong, (BTN)

Ballantyne of Omaha (NYSEMKT:BTN) President and CEO John Wilmers presented at the Beacon Street Group's Southwestern Showcase Investor Conference yesterday. The following is a transcript of his remarks and the Q&A session that followed:


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Ballantyne of Omaha (BTN)

Presentation to Southwestern Showcase Investor Conference

November 15, 2006 10:15 am ET


Ken Pieper - Beacon Street Group

John Wilmers - President and CEO, Ballantyne

Kevin Herrmann - CFO appointee, Ballantyne

Brad French - CFO, Ballantyne

Ken Pieper

Good morning. My name is Ken Pieper, I am with Beacon Street Group and I want to thank you all for coming out to the Southwestern Showcase Investor Conference. We are very pleased with our line-up of companies, and we are very pleased that all of you could make it today. Up next in the 9:15 session is Ballantyne of Omaha. The symbol on the company is BTN, it trades American Stock Exchange.

To tell the story, I would now like to turn the presentation over to John Wilmers of Ballantyne. Thank you very much.


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John Wilmers

Thank you. I will add my thanks to you for coming to the Southwestern Showcase presentation. I am John Wilmers, President and CEO of Ballantyne. I am joined today by Kevin Herrmann, our CFO appointee; and Brad French, our CFO. Brad had announced his retirement in January of this year, and Kevin is going to be taking his job. As a matter of fact, as of today, there is the hand-off. Brad will be staying on going forward and working on special projects.

Let me get through the necessary Safe Harbor statement, and then I will tell you a little bit about our company. The management team, we think this is a very important part of the company and I think after the presentation you will understand, because of the key role relationships and experience play in our position in the industry and our direction going forward.

I have been in the industry for 35 years, 25 at Ballantyne. Brad has been around for 16 years. Kevin, nine-and-a-half as the controller, working very closely with Brad. Ray Boegner, SVP of Sales, has been in the industry for 34 years; 21 at Ballantyne. Pat Moore, Cinema Products, 32 years in the industry; 22 at Ballantyne. John Wolski, VP Digital Systems with 33 years in the business, who just joined our company this year to head up not only the digital effort but also our service and maintenance initiative that we will talk about a little later.

We are a leading provider of projection and specialty lighting products and services. We are a value-added reseller for NEC, which is a very important part of our strategy going forward. We have approximately 65% of the U.S. analog, traditional market. Our customer base includes many leading exhibitors on a worldwide basis. We have a strong balance sheet; at the end of the second quarter $20.7 million in cash, and no debt.

There are three business units. The Strong Cinema Group, that includes the cinema products, digital systems, technical services, and our operation in Hong Kong, Strong Westrex; Strong Entertainment Lighting; and, Ballantyne Food Service Products.

In the area of cinema products, we manufacture 35 mm projectors. We have two of the widest installed projectors in the business. We make light sources, what we call our console, that provides the light for the projection of this equipment, and we make a film transport system which we use to move the film the old way, if you will. We make everything that is necessary to equip a modern-day projection booth. Again, 65% North America, 40% worldwide.

Another very important item, 50,000 plus systems installed on a worldwide basis. We’ve got a great reputation for quality and reliability, service. Some of the largest exhibitors in the world use our products exclusively. I will give you a little idea of who those customers are. If you are familiar at all with the business, you will see Regal Cinemas at the top, the largest circuit in the world. AMC Entertainment, Cinemark Theaters. The list goes on. International customers: Ramirez in Mexico, Cine UK in the UK; Malaysia. Of course China is not there but our office in Hong Kong, basically in the Asian region we have great distributors in Korea, Thailand and throughout the world. We are definitely a worldwide operation.

In the cinema products business there is a transition to digital projection that is underway. Traditional sales are continuing, albeit at a lower rate than they were, but the rate is not alarming to us and as a matter of fact, we are happy with where the business is at today as far as the analog, with the transition going on. We haven’t had any real pricing pressures and all of those kinds of things that one might expect. Replacement parts and service should continue on our analog machines into the next few years, because obviously of that installed base that I talked about before.

The goals in the cinema industry or our cinema business is to actively manage the businesses. We think this is very, very important in terms of our success going forward. One of the things we said from the beginning was that we weren’t going to take our eye off the ball in terms of the analog business, the film projector business that has been so important to us over the years. That is the most important thing as we move into digital, is to maintain the support of and the feel for the equipment we have sold.

Minimize our P&L impact by trimming our assets, redeploying our assets. It is on a daily basis. We look at our two locations -- one in Omaha, one in Fisher, Illinois -- manufacturing operations that we are constantly analyzing and redeploying assets, as I said, and getting the most efficiency out of these locations.

Support existing equipment in the field, this is basically again what we talked about in the first bullet. We’ve got to take care of our customers. Our relationship with our customers is the most important item here as we transition to digital.

And, selectively participate in selling used equipment. We don’t look at this as being a true business; we look at it, as I said, selectively. We will do it for our larger customers on a one-off basis. Currently there isn’t a real threat from used equipment in the business. Most of what has been displaced has found its way to South America. But in the future, when there is a large roll out, we will take whatever steps are necessary to meet that challenge.

To give you a little idea of what the digital cinema landscape looks like, there are three OEMs: NEC, our partner; Barco; and Christie. They all use the Texas Instruments DLP technology. We also have Sony. Now Sony has a 4K as opposed to a 2K, but Sony has not been on the front edge, I guess I should say. They have been out there with demonstrations, but we firmly believe that the Texas Instruments technology, the way it has been accepted, will be the survivor in terms of technology going forward. It will be the premier technology. There may be a place for Sony, we don’t know at this point, but we know that DLP technology is well ahead of anything Sony has.

There are funding plans out there, and that is something we will go into a little bit more in detail going forward, but there is access integrated technologies you probably are familiar with, some of you. Digital Cinema Network services, British Telecom, a group with a business plan. Digital Link LLC is a small business plan set up by Reel D to facilitate the roll out of their 3D Monster House and in fact, Chicken Little was done. That situation is one we sold into here in July of this year. Basically, it is a small business plan just for the 3D, so I would say it is a limited plan. Our intent is not to continue funding these. That was definitely a step on our part to get our foot in the door, get some equipment out there and get the experience for our service and installation teams.

Dolby Laboratories. Dolby has basically, to sell their server -- they have a server and a theater management system for digital. What they have done is they have made the decision to go out and buy projectors and servers – of course, their own servers – and install them that way. They have a target of around 500 units and again, it is a limited type of plan because of the 500 number. They have about 200 to 250, I believe, installed at this point. We expect to see some more out of them pretty soon.

National Cinemedia. This is the 800lb gorilla that is out there, basically. This is a consortium of Regal, AMC, Cinemark, Lowe’s – having been acquired by AMC – and Century Theaters, having been acquired by Cinemark. This is the 16,000 screen consortium out there who are developing their own business plan. They announced they were going to JP Morgan to raise $1 billion to facilitate this. Basically what we are doing with them is staying very close, demonstrating, doing those kinds of things. But that gives you an idea of the business plans. There is Technicolor, the final one on the list there, they have about 20 to 30 units out there in a beta test sort of situation.

Here is the important slide. I think it is important because when we were in New York doing this presentation a couple of months ago, one of the things we found was a lot of questions about how are these things funded? Because it is a unique situation. It isn’t a situation where I am the theater owner and I want to buy a new digital projector because it will do me some good here, and I am a guy that sells the digital projector, so I am going to sell it to you. That’s not the way it works.

The situation is basically the distributor of the movie is the one who is going to gain the benefit here; the premier benefit, the most benefit. That being the savings of dollars for making celluloid prints. It is as simple as that. They are basically $1,000 a print – I am using round figures here – and for a typical release of a movie it is 2,000 to 4,000 a release, so you can imagine the cost that goes into making these celluloid prints.

The theater owner, basically he is not real concerned. He is sitting there saying, I will show the movie, it doesn’t make a difference how I show it. I mean, there are certain pluses to digital and minuses, but in the end it is basically this large savings that the distributor has that is driving this whole process.

So there we have the studio saying, well we don’t really want to fund it. We have the exhibitors saying, we don’t really want to buy it or fund it. So then you have these business plans, such as the Access IT, that come into play here. Basically the plan raises the money; the plan buys the equipment; the equipment then is supplied by people like us to the exhibitors. The funding plans have an agreement with the studios that basically says, when we send you a file to a specific location that we know is a part of your plan, and we don’t send a celluloid print, we will send you what is known as a VPF, or a virtual print fee. That amount is similar to the amount of the cost of a film print.

So what the distributor is saying is, I will continue to pay you or spend essentially the same amount of money, giving you a virtual print fee; that way then you can pay for these machines that are out there and ultimately, once the changeover has taken place, then the distributor is going to save the maximum amount of money. That is the real driver behind digital cinema. It is the savings that the distributor can make.

The key here, again, is that you have people who benefit from it who, in the traditional sense, aren’t the ones who buy the equipment and that is why there had to be this sort of a situation put forward. This is the business plan. We are going to have a little time for questions after, so we will try to answer it even further for you if you are confused. I find this is the item that people are most curious about in how it works.

In the Strong Digital Systems area, we are a value-added master reseller for NEC and this is what we have talked about several times, it is very important to us. We are currently performing the demonstrations and things with several of our customers; not only our end users, the Regals and the AMCs and these people of the world, but also with the business plans where they request it, primarily the NCM group. We are actively involved in the SMPTE standardization process. John Wolski, who came to work with us this year, has been very active in the DCI initiatives and those kinds of things that have set the standards for digital going forward. And we continually look to expand our international markets such as having just signed the agreement for Hong Kong with NEC for our office in Hong Kong.

We are a bit behind in the numbers as far as Christie and Barco is concerned, but one of the reasons is we just really got the production models of the NEC Starus line in January/February of this year, so we are a little behind the eight ball that way, but it was worth waiting for because the machine is performing very well and is looked at as a superior in brightness to the other competitors. We have sold 16 of the NEC machines to date; Monster House and then some other one-offs. We also manufactured and designed a pedestal for these, albeit it is a small part of the digital system, it is still something that we do make in Omaha and we look then hopefully going forward to integrate that part of it with the machine and ship fully tested machines to the end locations as the large roll out begins.

Basically the strategy there is to leverage that relationship and market share. Again, as I said early on, that is very important. Our three manufacturers have a similar technology out there, so we think that the relationships become even more important here because you don’t have a real edge on either one. They are all the DLP technology that we are selling.

Continue to strengthen that NEC relationship, I certainly don’t need to stress how important that is to us. We have a great relationship with them, we are communicating with them very regularly and meeting with them regularly, so that is one of our real goals is to keep that relationship 100%. And, to pursue other acquisitions that have to do with the digital cinema market. There are other small companies out there that make pieces that maybe are sold into the digital cinema roll out, so we are looking at companies that fall into that category.

Our technical services company, this is something in the beginning of the year we looked at this and said the installation and service component would be very good. I mean, this is really where there is a lot of opportunity going forward.

We then had the decision, do we want to start from scratch or buy an existing analog company? Well, the National Cinema Service Corp was there, it had the infrastructure, we made that decision and did that in June. I might say that the first thing they did is we bought them and they were out installing digital machines for the Monster House thing, and I have to say they performed very well.

They provide that installation and service for digital and film. Important, because they do the film work now; they have 2,900 existing analog customers under contract in 32 states and so it is a natural sort of move for them to, with those same customers, move into digital. I think it is working and it is working out very well.

Our focus there is to enhance the quality of the individuals working for us, add people and do all of the things necessary to turn that thing into a first-class film and digital service and installation company.

I regress a bit – they installed those 24 digital systems in 10 days, which was pretty spectacular being a new technology and all of that, but they did very well. They did the work in Atlanta at the Fox and the other thing that we did is we initiated our training in Omaha of our customers and our digital people. We think that product knowledge is very important. People may ask, well why do you want to train someone when you want to service it yourself? Well, we’ve done this for years with our mechanical machines and we think the product knowledge on the part of the people out in the field is a real key to the success and we don’t see where that would change any just because we have gone to a digital product.

The strategy there is to expand coverage in North America. We have some soft spots, but what we are doing is as the demand in an area presents itself, we are adding people, moving people around to cover those areas. We are not going out today and hiring 200 people; we are, as the demand – and we have that luxury, because this roll out is kind of slow. So we are able to address the areas as they come on the radar.

Importantly, develop that recurring revenue stream, and that is the real key. I mean, we can go out and sell a projector and that is about the end of it for a while, but if we have this recurring revenue stream from the service and maintenance, we think that is really where our focus is at in getting this thing growing and meeting that digital transition.

Provide service to all brands. This is the other thing that we found on the Monster House roll out. We had 24 systems that we installed, but only 12 of them were NEC’s. The other 12 were Barco. So it is very important for us, it is important for our service and maintenance group to be agnostic in terms of the equipment. We want them to be capable on all types of digital equipment out there, we think that is a real plus. Certainly Christie has a service organization, but Barco doesn’t. We are even finding now we are crossing paths with the Christie people on the installation at the Carmike Cinemas because obviously it has to do with resources and how many people you have to do these things. We think that strategy of being blind to the type of equipment, but able to deal with all of them is really going to be a plus for us going forward.

We are going to continue to do the digital system consulting and the maintenance training, and really the Strong Technical Services, we feel, can support Strong Digital Systems sales. Because all of a sudden we have a number more salesmen, if you will, out there. So the Strong Technical people, there are some that can be salesmen and some that can’t, but we are looking and identifying the ones that can and encouraging them to become more in the sales area also.

Strong Westrex Asia, I mentioned it a couple of times. They have been around for 40 plus years over in Hong Kong. They are well-respected, they do most of the analog work in the Hong Kong area. The Hong Kong area is only 200 screens. They service most of them. They have serviced, they have sent into China over the last five years 100 systems. That is the real plus here. They are now the reseller for NEC in Hong Kong. That is the first step in what we hope to be steps as we increase their position all over Asia. It has been a great jumping off point for us into Asia. They have got terrific relations in Beijing with a China film company and we also have a service center in Beijing which is working out well for us.

So as you know, if you have done any business in China, it is very important to be with the government-run – which everything is there – China film company. We feel very strong about Westrex, we think it is a real plus and will be going forward.

Strong Entertainment Lighting, it is a flat business over the last number of years. Has a great Strong brand name which we are trying to capitalize on. I mean, if you go over to the American Airlines Arena you will see some of these spotlights that you see here on the screen up there illuminating the skaters, the basketball players or whatever, that is the prime product that we have and have sold for many years. The Super Trooper spotlight has been around for many years and has been spec’d in any of these large arenas. That is also the problem with the unit, it depends on the building of these large venues and that. They go up and down over the course of the world; where they are built. But you will find our Strong spotlights in the majority of them.

In the middle you see the Luxor, the light coming out of the top of the Luxor in Las Vegas. I don’t know if you have seen that. Roughly 47 7K lights up there. They only burn about 40 at a time though, because of expense, but that is supposedly the only thing that you can see from space, or the only beam of light. It is a lot of light going out of that thing and it is high profile, so we put that in.

On the right – I think it is your right up there – we have lights that we have made for NASA. We actually made it for a company called Gateway Support that supports NASA down at Cape Canaveral. They illuminate the space shuttle take offs and landings. If you look closely, there are two 10,000 watt illuminators with a generator in the middle of it on a trailer. We are always waiting for them to order some more because those are the items you can do very well on in terms of margin and things like that.

It is a slow growth business, but we are trying to really maximize the use of the Strong brand name. So we will be looking at different locations, looking at different brands that we can bring in and use the name. It is a business that provides a reasonable margin, somewhere in the area of 30% so we are always interested in that. Again, looking for some additional lines that we can not only bring in to our location to manufacture, but also to use the Strong brand, which we think is very important.

The digital cinema opportunity, something I am sure you are all very interested in here. I would venture to say that 100% of you are interested in the digital cinema opportunity in here. There are 125,000 screens worldwide, 37,000 in the U.S. The current total conversion cost per screen, we’ve got $80,000 up here. That continues to go down. I think if we have to zero in on it, it is roughly $65,000 to $75,000 today. One thing you have to remember is that is a projector, a server, and a lens. It is not just a projector, so that is something to keep in mind if you are looking at this in terms of numbers of what it takes for a booth or an installation.

The potential for the long-term maintenance and service contracts are really the things that we think, as I said earlier, that can be helpful going forward with that recurring revenue stream. If you do the math, you can obviously see that it is a multi-billion dollar opportunity out there.

We’ve got a unique position. We are looking at sales of the equipment via SDS, the digital systems. We are looking at service and maintenance with STS, the technical services; and we are looking at the training and consulting via both of those entities together. Again, that market share which we think is very important, 65 to 40 and that reputation and relationships. I can’t emphasis that as much or more – it is very, very important for us. We have the trust of our customers and we think that is going to be pivotal going forward in securing the business.

With that, I think it is time to give Kevin his first shot at coming up here and giving you a little look at the financials. Then I will come up and we will summarize. If we have time, we will take questions. But after that, we have a break out session too if you have any further questions. Let me bring Kevin up here.

Kevin Herrmann

Thanks, John. Let’s first look at some revenues by business segment. First, keep in mind that 90% plus of our business is cinema so I am not going to spend a lot of time on the lighting comparisons. As shown, revenues rose from $37.4 million in fiscal 2003 to $54 million in fiscal 2005. Revenues have decreased to $37 million this year from $39.8 million a year ago. In large part, that is due to the decrease in demand for cinema projectors, as the digital roll out starts happening and the transition.

Some profitability information, our net income rose from $0.6 million, or $0.04 per share in fiscal 2003 to $4.3 million, or $0.31 per share in 2005. One thing that we should note is that 2004 includes an income tax benefit of $1.2 million, or $0.09 per diluted share for the reversal of certain deferred tax valuation allowances that year.

Net income for the first nine months of 2006 has decreased to $2 million from $3.2 million a year ago. The resulting earnings per share decreased to $0.14 from $0.23 a year ago. The reason for the decline is really due to revenues decreasing, the company not covering certain fixed manufacturing costs and in as a sufficient manner as we were last year. Then, in the third quarter, we had to expense certain digital projectors without really recording any of the revenue. As we go forward with that on a positive note, the entire -- any revenue generated from the sale would be a 100% profit.

Let’s quickly go through some year-to-date comparisons. As discussed earlier, revenues decreased 6% to $37.4 million. Our gross profit has decreased 25% to $8.3 million. SG&A has decreased 6.5% to $5.8 million, most of which is due to lower bonus expenses, as we are not meeting financial targets set by the board.

All of this has really resulted in earnings before interest and taxes decreasing to $2.4 million from $5.0 million last year, and our diluted earnings per share decreasing to $0.14 from $0.23 a year ago.

Finally, let’s look at a few financial statistics. As you guys probably know better than me right now, our stock price is trading at about $4.25. We have diluted outstanding shares of 14 million. We have a market capital of approximately $60 million. We have cash on hand of $20.7 million, which equates to about $1.50 a share. We have no long-term debt, and a multiple of 19 trailing twelve month price earnings.

With that, I will turn it back to John for some closing comments.

John Wilmers

Thanks, Kevin, very good. In summary, we are the leading manufacturer of specialty lighting and projection equipment. We have a significant opportunity out there with the digital rollout.

In the beginning, people said guys, you are in a business that is going away because of the digital thing. What we did is we turned it into an opportunity. Establishing our relationships with NEC, working closely with them and with our customers to turn what could have been the -- when we went public in ’95, people talked about us being in a buggy whip business. Basically, we turned that into a real opportunity for this company going forward.

Strong balance sheet that Kevin talked about, we continue to -- I do not want to say print cash. That is Brad’s term for it, but we continue to generate cash. We have that experienced management team with an excellent relationships, again the importance of it, and we are really below Wall Street’s radar screen.

With that, I will open -- it looks like we are getting down in time, but I will answer any questions that you have, or the guys will, until we run out of time. Yes, sir.

Question-and-Answer Session

Unidentified Audience Member

When would you expect the digital opportunity to overtake the decline in the traditional projection opportunity? Kind of a return to growth. Do you have a timeline for that?

John Wilmers

The $64,000 question. No, all we can go on -- we are not in a position to facilitate the rollout, so what we have to go on is what our customers tell us. NCM, that large group I talked about, they are talking about a beta test the middle of next year, into the end of the year, and rollout starting in ’08. AIX is continuing where they are going.

It all depends on what happens to those business plans, and again, we are not in a position to facilitate it. What we have as our charge is to be ready when it happens, so to give you a date is kind of, I am really getting iffy on that. Anything else? Yes, sir.

Unidentified Audience Member


John Wilmers

Yes, well, I think Christie is somewhere north of right around 2,000, I believe. 1,000 to Carmike, but other ones, they are probably in the mid, between 1,200 to 1,500. Barco is probably in the a few hundred, up to about 500 or so. They have had more success in Asia and in Europe, obviously, being from Belgium. They have been very lucky in Belgium to do the business. I would say it is about like that.

We are definitely behind NEC. NEC and us probably only have about 50 units installed altogether.

Unidentified Audience Member

How do they distribute their products, as well as Barco?

John Wilmers

Barco distributes directly. Christie does the same. They basically do the same thing we do. The difference with us is we are kind of an agent in between NEC, and what we do for NEC is we give them the same advantages that Christie has, because NEC looks at Christie as their true competitor. Christie has a lot of the same relationships, not as good as we have, but they have relationships in the cinema industry because they have been around for a long time. What we are able to do is counteract that with NEC. Anything else? Yes, sir.

Unidentified Audience Member


John Wilmers

Well, I think what we always used to say is that if we sold a projector, we were not going to sell a replacement for that. They lasted forever, and that was the other thing we used to say, is we make them too good because they never broke and we never get to replace them. Many, many years. There are machines out there that probably were developed in 1950, or built in ’50 that are still running, because the technologies remain the same.

The thing is flashing stop, too, so I better stop. Thank you again.

Unknown Speaker


John Wilmers

Yes, if we did not emphasize it enough, shame on us because that is a big -- you can look at it and see the $7 million or $8 million a year and know that it is 40% to 50% margin on that product. Thanks very much for coming, guys.


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