Ballantyne Strong CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 4.10 | About: Ballantyne Strong, (BTN)

Ballantyne Strong, Inc. (NYSEMKT:BTN)

Q3 2010 Earnings Call

November 04, 2010 10:00 am ET

Executives

Robert Rinderman - IR

Gary Cavey - President and CEO

Kevin Herrmann - Secretary Treasurer and CFO

John Wilmers

Analysts

Eric Wold - Merriman Capital

Mike Malouf - Craig Hallum

Marla Backer - Hudson Square

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Ballantyne Strong 2010 third quarter results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session (Operator Instructions). As a reminder this conference is being recorded Thursday, November 4. I would now like to turn the call over to Robert Rinderman of Jaffoni & Collins, Ballantyne Investor Relations. Please go ahead, sir.

Robert Rinderman

Thank you, Sara. Good morning, everyone. Welcome to Ballantyne’s third quarter conference call. This call will contain forward-looking statements related 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, 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 can differ materially because of these or 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 at www.sec.gov or Ballantyne'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 these expectations from prior conversations. I'll remind listeners that this call is being webcast live over the internet and that a replay will be available on Ballantyne's web site for 30 days after the call ends.

Now it's my pleasure to introduce Ballantyne’s new President and CEO, Gary Cavey who has joined this morning by CFO Kevin Herrmann and former CEO John Wilmers. Gary?

Gary Cavey

Thank you very much Rob. I am delighted to be here with all of you this morning especially given the very strong operating performance the company reported today.

The record third quarter is a testament to the strength of Ballantyne's great foundation of which we will continue to grow. I am impressed with the company's outstanding reputation, strategic vision, very impressive team, best of breed products and services and certainly the leadership of John Wilmers who has served as CEO over the past 14 years. I am both honored and excited to take on my new role at a time of such growth and opportunity.

Before I turn it over to Kevin, for a more detailed discussion of our quarterly performance, I thought it would be appropriate to provide a few thoughts on how I intend to extend the success achieved in recent years.

Certainly Asia offers substantial growth opportunities for Ballantyne and I am impressed I can count on John as well as P.L. Wong to continue building our presence there. As many of you know, John has spent a great deal of effort in developing a very productive relationships for Ballantyne and Asia.

I am looking forward to tapping John's experience in counseling my role as a CEO and I plan to rely on both John and Kevin to get me up the speed with investment community as they have done an outstanding job on that front.

On behalf of the board and all the folks here at Ballantyne, I would like to thank John for his three decades of service to the company which fortunately are not ending yet, as John is very energized about his new business development focus on Asia.

It's also worth noting that we expect senior management members Chris Stark and Ray Boegner to be very involved in our Asian initiatives going forward. As you know this is my first week at Ballantyne and I am enjoying meeting our team members here in Omaha and I am very impressed not only with their depth in knowledge but also with their excitement in the air and palatable pride that we can and we'll continue the momentum the company has build.

My most recent role was the COO of Midland Radio Corporation, a leader in wireless communications with a large international footprint. Midland has been particular successful in Europe and Latin America, a region where BTN has also been flourishing. I joined Midland to help orchestrate a turnaround which is often the role of a new COO brought in from the outside.

In this case I have the unique challenge of walking into a company that is clicking on all cylinders and due to its highly successful transformation from a leading manufacturer of analog 35 millimeter projectors into a turnkey provider of the highest quality digital cinema products and services. What is especially exciting to me evidently to many of you on today’s call is there is a great visibility to the next few years regarding the three key areas of recent growth, Digital projection system sales, cinema screen manufacturing, our STS cinema services group.

Looking ahead we are going to be especially focused on achieving continued success in those areas as well as seeking related businesses that we can enter on our own such as our recently launched network operation center. Of course M&A will be critical to Ballantyne's future as we work to find these new complimentary areas of growth. As most of you already know, management and the board have been active in identifying and evaluating potential acquisition candidates over the past few years. With our screen group and our services group as two prime examples of businesses we have successfully entered via acquisition. But you also know we are going to be very prudent and very discerning with our capital and the discipline will remain. Targets must adhere to strict criteria including, being immediately accretive to operating results as well as complimentary to our present cinema related business giving our strength and experience in that sector, where we'll also be exploring ways to expand and further diversifying our company as well.

I am looking forward to playing an active role in the continuation of the company’s organic growth as well. My background includes work at organizations that achieved growth and increased profitability; organically as well as through acquisitions and I firmly believe Ballantyne’s future success will be driven by both.

John and I will be happy to address any questions you have later in the call but at this point I am going to turn it over to Kevin for some additional color on our record results. Kevin?

Kevin Herrmann

Thank you Gary. Good morning everyone, Ballantyne’s third quarter net revenues increased 99% to a second straight quarterly record of $32.9 million, driven by a 291% rise in digital cinema equipment sale to $20.2 million in the period. The Americas and China were particularly strong regions for us again during the quarter. Also during the quarter we sold 321 digital projection systems, raising our total to 931 year-to-date.

This compares to selling 58 systems in the third quarter a year ago and 340 through the comparable nine month period a year ago.

Our MDI screen subsidiary continues to achieve strong results achieving a 77% year-over-year increase to net revenues of 5 million as well we saw a continuation of the strong trend for 3-D compatible silver screens.

The STS Cinema Service group achieved a 148% increase in net revenue to $2.2 million during the quarter, as we continue to expand our digital cinema projector installations around the country for several key customers.

Consolidated gross profit increased to 6.5 million or 19.6% of Q3 net revenues due to increased revenues from our high margin screen business. Not only were screen sales higher but we experienced a favorable customer and product mix during the quarter. This compares to a year ago gross profit of $3.6 million at a gross margin of 41.5%.

As mentioned on last quarter's call, our gross profit margin declined as a result of an expected product mix shift to higher cost lower margin digital projection system sales which represent a higher percentage of our overall net revenues compared to our other segments. We do expect this can trend to continue for the foreseeable future.

SG&A expenditures increased 20.5% to approximately 2.9 million but represented only 8.9% of net revenues down significantly from 14.7% a year ago. We expect SG&A to continue to decrease as a percent of revenue which should enable us to achieve operating leverage as future gross profit dollar improvements continue to enhance our bottom line.

Reflecting a continuation of the recent success we have achieved with sales and digital projection on system sales, cinema screen sales and installation and integration services, Ballantyne's Q3 net earnings more than quadrupled to 2.3 million or $0.16 per diluted share versus net earnings of 500,000 or $0.04 per diluted share in the year ago period.

Weighted average diluted shares outstanding were 14.4 million compared to $14.2 million a year ago. Ballantyne continues to have a strong balance sheet and availability under our untapped 20 million credit facility with Wells Fargo. At quarter end we had 19.2 million in cash and cash equivalents compared to 23.6 million at the end of 2009. As a result, we are well positioned to continue our growth and have the financial flexibility to fund future working capital needs and also to explore attractive acquisition candidates that need our disciplined criteria as Gary indicated.

We spent 1.5 million during Q3 on operating activities and an additional $500,000 on the ongoing expansion at our strong MDI Cinema Screen manufacturing facility in Canada. As previously mentioned, we expect the work at the screen facility to be completed during the first quarter of 2011 and as a result, screen manufacturing capacity at MDI should be increased by approximately 35%.

That concludes our prepared remarks. Operator please open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Eric Wold with Merriman Capital. Please proceed.

Eric Wold - Merriman Capital

A question on kind of what you're seeing in terms of the digital adoption rates from exhibitors. I know that we're seeing a lot of the larger guys like the Regals and what not kind of doing more of a bell curve upgrade cycle that going in to some of the theatres, upgrading only the 3-D screens. They want to be 3-D capable and kind of plan to come back next year in 2012 to do the remaining digital upgrades. Are you hearing that from a lot of the smaller regional guys as well or they basically kind of doing a 100% digital upgrades all at once.

Kevin Herrmann

Well, I think a lot of our sales have been for 3-D and that’s continued to be so. A lot of the mid-market guys are still working on getting their entire VdF financing plan in place to do the entire retrofitting. So, I think that’s a fair statement to say that a lot of the regional people maybe buy a matter of not having the complete financing in place yet, that’s been the case.

Eric Wold - Merriman Capital

So it's safe to say that we're still seeing just to highlight the early stages in the digital upgrade. We still should see the remaining parts of those sitters being done next year in 2012 until there is a greater number of screens?

Kevin Herrmann

I think in 2011 it's fair to say that once these funding plans are completely in place, that they'll begin the complete retrofitting of the projectors above the theater complexes.

John Wilmers

I think you're right on. It is continuing to drive the expansion and working on several deals now that the people will want to attack the 3-D screens immediately upon putting all of the VPF and financing together and then we'll come back later and that’s happening with our larger customers also.

Eric Wold - Merriman Capital

Okay, then moving on to the screen business, with the $5 million of sales in the quarter, give a sense of, not exact numbers but kind of sense of the mix of business. Think about it as you move into 2011 and is this $5 million run-rate or kind of like a $20 million annual run rate that run now, is that a good base number to think about applying a 35% capacity increase to or could there be some mix shift possibly away from silver screens down to regular white and green screens?

Kevin Herrmann

Well, we believe that going into 2011 that the screen business is going to be pretty steady next year; just giving what our customers are saying going into next year. As far as white (inaudible) screen, that’s a mix of probably new constructions taking place and we really don’t expect a lot of that so I think the growth will be in the silver screens next year again and as far as the customer mix, we think the big guys are going to continue and the little guys as they continue with their digital upgrades there is going to be more demand from them as well next year, which plays into the whole expansion of the facility up there. We're expanding the facility to get another 35% run rate up there some of which depends on their level of IMAX. IMAX has been very much in demand. We expect that to continue into 2011 as well. So I am all science point to a successful continuation of the silver screen.

Eric Wold - Merriman Capital

Okay, now final two questions. On the screen business were you right now in terms of how many weeks out are you on visibility?

Kevin Herrmann

I think it's fairly consistent from what we've talked about, I think it's been 10 to 13 weeks something like that. I don’t know if it's really changed. I think most of the customers along with us and our competitor kind of have an idea of where we're at, where the competition is at about. When they can expect [strange] right now.

Eric Wold - Merriman Capital

Okay and then final question on CapEx, what's the view on total CapEx for this year and then any kind of initial read on where next year can shape out?

Kevin Herrmann

Yes, well through Q3 we're at 4.4 million, the expansion up in Canada is going to be the majority of our Q4 expenditures and that’s going to carry in to 2011. If I would estimate right now kind of where they are sitting with the construction maybe another 2 million or so 2.5 million could be expanded in Q4 of actual cash of paying the bills to do the expansion with the rest falling into 2011.

As far as other capital expenditures, as we've talked about previously the business model for digital cinema doesn’t require a lot of capital expenditures. We’ve got service, maybe some tech equipment, maybe some computer. We're in the process of looking at upgrading our computer system in general. There could be 300,000 400,000 500,000 there with computers and everything there next year. And then you have kind of some general CapEx of maybe 200,000 or 300,000 that’s kind of where I would look at for next year.

Operator

Our next question comes from the line of Mike Malouf with Craig Hallum. Please proceed.

Mike Malouf - Craig Hallum

One to just get a little bit of perspective on the digital side, on digital product side what kind of gross margins you are experiencing because little surprise by the strength in your gross margins and whether that was driven by that side being a little bit higher than it had been last quarter which I think was just a little bit under 11 and then perhaps maybe it was in the screen division that I just…

Kevin Herrmann

I don’t know if you're talking about gross margin percent, that’s really not coming from the digital projector side. That’s really coming from the screen business and in the screen business in particular revenue is obviously at $5 million at the very high margin business. There is a lot of specialty screens going on in that business. So that’s a primary driver of our gross margin right now.

And secondly the service business is doing well again and obviously going back to a year ago, we were losing money in that business and margins were, to be honest with you, terrible. Now we're getting up to where we think they are going to starting any way to get to where they are going to be. So, as far as the digital sales, I think the margins you know are tight and steady but the rest is due to the screens in the service.

Operator

(Operator Instructions). And our next question comes from the line of James (inaudible) with Sidoti. Please proceed.

Unidentified Analyst

I just had a quick question. Can you give a little more color in regards to China and what the pipeline might look like? I mean any future contracts and the works or anything like that?

John Wilmers

As you know my new assignment with the company is business development over there. Since their last week we've got the pipeline is filling. It's continuing. As I have talked to you guys in the past, we have news theater circuits showing up almost on a daily basis and requiring that letting tenders go for quantities of digital projectors. It's really exciting to be involved over there along with the fact that it is really happening and I have always said that I was going to be happy with 500 machines over there this year. Well we're on the edge of me bumping that up a little bit. So anyway the performance continues in China and the opportunity is growing day by day.

Unidentified Analyst

Okay. And in terms of acquisitions can you also give a little climb in what you guys might be thinking to get into?

Kevin Herrmann

Well we've looked at a number of things that both within the cinema segment and also that are related may be to the cinema segment. I mean there are a lot of products and services out there that either we distribute or that may be we're not even involved in what the cinema change that we can get into sound systems. There is automations, there are servers, there is a number of products and services that we look at from time-to-time and also we're looking at how to strengthen our service business, how to strengthen our integration service, how to build on that and so we've got a lot of new things going on in Ballantyne right now and its just, okay what's the best way to grow that. As Gary mentioned earlier, we can either to do that organically or may be we can have some tuck-in acquisitions here and there or large acquisitions to grow.

Operator

Thank you and our next question comes from the line of Marla Backer with Hudson Square. Please proceed.

Marla Backer - Hudson Square

You guys have been doing a great job now leveraging in a total digital upgrade and I think that before those real digital momentum began, you thought it would be a potentially three at a five year process. Is there any change in your thinking now especially since some of the larger, the DCIP guys are sort of accelerating the deployment.

Kevin Herrmann

Obviously, the larger guys have may be an accelerated somewhat but its still going to take them several years here to get that completed. At least that’s our understanding. And a lot of the middle guys are still were selling a few projectors here and for 3-D so they are not really even started their digital roll out yet. And then obviously we have China, we have the rest of the world like Latin America that is not nearly as accelerated as the United States. So I think when you're looking at the whole global picture I think we're still comfortable with that range.

Marla Backer - Hudson Square

But potentially could any of the opportunities on the M&A front that you might evaluate. Could any of those get you to a more steady state in terms of your revenue growth after we get pass this digital bubble?

Kevin Herrmann

Obviously that’s what we look at constantly. I mean that’s one of the reasons that we did the screen acquisition and the service acquisition and we did that actually three to four years before digital cinema happened. So that’s what the company is constantly looking at is not waiting for this rollout to end but doing something proactively now.

Marla Backer - Hudson Square

And two other questions, have you seen a demo of the TI 4K, and if so what’s your thinking about it. And do you think it will be competitively priced?

John Wilmers

I have seen it run, Marla this is John again, I have seen it run down at show east it was on a small screen. And I didn’t see it in a comparative mode. I understand TI has done that in their facility in Texas and the NEC folks have seen it. Everyone is excited about it. They think it’s performing just fine. It’s a matter of argument over and it has been from the beginning, it’s very difficult to see the differences in these things. I think where the 4k will come into play in a big way are for the large screens that are out there, that are starving for a light. As you know the big guys are using DLP projectors for their 3-D when they are using Sony projectors for their regular roll-out. So what’s happening is this DLP machine 2k that’s being used now to make up for the shortages of the other machine is just going to be that much better. So you are going to see the 4K DLP, the lengths of the large venues as a rule. As a matter of fact we just had a large customer talking to us about changing the mix on how they are going to go forward when they get their VPF financing all of that together by changing to 4K but specifically to just the large auditoriums, that sort of thing. So I think answer the question, the 4K is living up to its expectations and we're looking forward to having that available in the first quarter of next year.

Marla Backer - Hudson Square

Last question is, we're somewhat already into the whole cycle now with 3-D and in that point I think Technicolor was optimistic that they had a film based 3-D solution for some of the specifically targeted smaller circuits and maybe international markets. So you think at this point that film based 3-D is a non-starter?

Kevin Herrmann

Yes I guess as far as I am concerned, I haven’t heard a lot of buzz about film based 3-D. I'd be very surprised if we saw it gained any more of a foothold than it has so far. There are locations I understand but they've been minimal, we also know of a few other processes that we've heard about but then they've now started to diminish. We don’t hear about them anymore. So our service group has worked with the Technicolor people and we have installed some, but certainly not an amount that would give me any comfort in saying yes, this thing is going to continue to grow. They thought it would an interim solution I believe and I don’t know that it's working out as well as they thought.

Operator

And Mr. Kevin, there are no further questions at this time. I'll now turn the conference back to you, to continue with the presentation or closing remarks.

Kevin Herrmann

Well thanks once again for joining us today. We greatly appreciate your on going interest in Ballantyne. To reiterate, I am very excited to join Ballantyne at an exciting time of opportunity. I believe our keys to future success will continue to be driven by maintaining the higher levels of service, quality and performance for which we've been known for over 75 years.

In my experience, these are the hallmarks of a well managed successful organizations. We will remain focused on building upon our excellent foundation which includes a top notch team marketing of products and services that are in high demand. We will strive to deliver shareholder value by consistently achieving strong top and bottom line results. Lastly, we will actively seek accretive M&A opportunities to further expand Ballantyne's turnkey digital cinema products and services portfolio. We look forward to speaking with you again following BTN’s year end results. In the interim, if you can make it to the Merriman Capital conference during the middle of November, I hope to meet you there. Thanks again and have a great day.

Operator

Thank you and ladies and gentlemen that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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