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Executives

Robert Rinderman – Investor Relations, Jaffoni & Collins Incorporated

Gary L. Cavey – President and Chief Executive Officer

Kevin S. Herrmann – Secretary Treasurer and Chief Financial Officer

Analysts

Greg Scott – Merriman Capital

Robert Routh – Phoenix Partners Group

Michael Rindos – Rodman & Renshaw

Ballantyne Strong, Inc. (BTN) Q4 2010 Earnings Call March 16, 2011 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ballantyne Strong 2010 Fourth Quarter Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, March 16, 2011.

And I would now like to turn the conference over to Mr. Robert Rinderman, Ballantyne Strong Investor Relations. Please go ahead, Mr. Rinderman.

Robert Rinderman

Thank you very much, Chantal. Good morning, everyone. Welcome to Ballantyne Strong’s 2010 fourth quarter and year-end results conference call.

This call may 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 U.S. Private Securities Litigation Reform Act of 1995.

Listeners should note that these statements are only predictions. They are subject to inherent risks and uncertainties that are detailed from time-to-time in the company’s Securities & Exchange Commission filings.

The company’s actual performance can differ materially because of these or other factors discussed in the management 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 sec.gov or Ballantyne Strong’s website at 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 website for 30 days after the call.

I’m now going to turn the call over to Ballantyne’s President and CEO, Gary Cavey who is joined this morning by CFO, Kevin Herrmann. Gary?

Gary L. Cavey

Thank you, Rob. Good morning everybody. We appreciate you joining us today and are delighted report a third straight record quarter, as well as the company’s best follow year of financial results in nearly 80-year history.

The strong Q4 and full-year performance is due to a great team effort here at Ballantyne Strong. We’ve been achieving across the board success in digital products, cinema screens, and cinema services, albeit by the ongoing transformation of the movie industry to digital technology both domestically and internationally.

While many of the larger U.S. theatre circuits have been rapidly adding digital projectors in recent quarters, the smaller independent chains and many of the mom and pops have continued to struggle with securing the requisite financing needed to purchase digital systems. Some have been adding real deep compatible 3D projectors and silver screens on a screen by screen basis, many of which have been supplied by Ballantyne.

However, most of the smaller exhibitors have shut short of digitizing their entire circuits due to lack of funding. The largest domestic exhibitors are capitalizing on their DCIP Consortium funding to finance their role outs, but many of the remaining players are facing challenges.

The tough year-over-year movie box office comparisons and modest relative performances in Q4, 2010 and to date in Q1, 2011 is also exasperating the difficulty many are having as their cash flow is down year-over-year since Q3 of last year. Fortunately, some domestic chains have successfully secured funding for digital. One such example is our recent partnering with Cinedigm and Cinemaworld of Florida.

In conjunction with Cinedigm, Ballantyne is providing turnkey digital cinema solution for Cinemaworld, including NEC projectors, installation services, and silver screens for their 43 auditoriums at three locations in Florida and Rhode Island.

The bright side of the picture is that because of the funding challenges impacting the smaller players is likely that the U.S. digital transformation will continue for more years than originally expected. We believe Ballantyne is well positioned to serve these customers as a leading turnkey one-stop cinema solution provider.

In our view cinema technology will continue to evolve very rapidly. As recently seen with NEC’s introduction of the new higher resolution projectors based on a new Texas Instrument 4K chip and there are timeless cutting edge developments yet to come, many of which we can’t even foresee as we sit here today.

Given our diversified business model, touching distribution, screens, services and parts and combined with our unrivaled cinema industry expertise puts us in an ideal position to be a trusted partner in delivering such state-of-the-art developments to our customers.

The international markets, especially China and Latin America, where our company is the master reseller of complete digital projection systems in offering lots of runway for future growth. Latin America, Americans World Hollywood tales, especially family oriented animated features, but the digital rollout there has been slower to develop due to the absence of virtual print fees or VPS funding model. Even more exciting for BTN is the tremendous cinema growth being experienced in China.

With only about 6,500 screens today for a population of more than 1.3 billion people supported by a fast-growing economy and expanding middle class, China is clearly one of the most significant growth markets for our products and services. This compares to the United States market, which has approximately 39,000 cinema screens serving a population of slightly more than 300 million.

IMAX, our long-time customer for our cinema screens, clearly shares our view of China. They have publicly stated plans to expand their footprint from approximately 100 auditoriums to over 300 in China over the next five years.

Speaking of screens, the 35% manufacturing capacity upgrade at our Canadian facility was successfully completed last month and we have immediately put our expanded space to work as the global demand for 3D compatible silver large format as well as high-gain and standard MAX screens continued to be strong. Kevin and I recently visited the Quebec-based operation and we’re impressed with the expanded state-of-the-art facility and its dedicated team of professionals.

In addition to Digital Projection Systems and BTN’s screen business, the critical piece of today and our future success continues to be our service business. Presently, we are primarily focusing on digital projector installations and integrations. Keep in mind that our service business is equipment-agnostic and our talented team of technicians are fully trained on all major digital cinema platforms. And as a result they have been in great demand.

When you visit any movie theatre and look behind you up at a projection booth, that is our domain and Ballantynes’s tech team is capable of both installing and maintaining everything that you would find in that booth. I mentioned our tech team several times earlier and I’m proud to say that we believe ours is the best, the largest and most talented service group in the U.S. and possibly worldwide too.

I’d like to give you a brief update on Ballantyne’s state-of-the-art Network Operations Center or NOC, which we opened last October. The NOC is a 24/7 facility manned by experienced hardware, network and engineering professionals.

Our team provides remote monitoring of digital projection systems in addition to audio, flat panels and the associated networks and system security in theatres around the globe. In addition to remote monitoring for our clients, our technical issues and often fixing equipment from our Omaha headquarters, we can also perform usual task such as tracking, advertising billing based on screen time. Our sales force is working to package NOC services as a component of new digital systems sales.

Ballantyne has a team of engineers and technicians out in the field performing digital projection installation work for a number of exhibitors including Regal Cinemas, which are responsible for their digital cinema installation program. We also have a team here in Omaha working on systems integration for them too.

Integration is essentially pre-assembly in order to facilitate actual installation once we get on-site at their theatres. The key work is that our people are in and out of their complexes as fast as possible after completing the installation, which typically takes place early in the week and during non-peak hours. Over time, we expect a mix of our services business to shift from an installation and integration focus during the next few years to a greater emphasis on maintenance, upgrade and services.

In summary, we have an extremely strong team of seasoned cinema industry professionals who are delivering the products and services our customers need. While technologies used in the cinema industry continue to evolve, our customers’ need for cutting edge products and their best around the clock service is not going away. And we are committed to remaining an important value added partner to exhibitors around the globe. This dedication is a product quality and service helps them to better opt our company for nearly 80 years and should continue to differentiate Ballantyne Strong for years to come.

That concludes my prepared remarks. Kevin will take us through our Q4 and full-year end results now.

Kevin S. Herrmann

Thanks, Gary. Good morning everyone. As Gary just mentioned, Ballantyne’s fourth quarter was our third consecutive record quarter and our yearly results are one of our best ever. The results reflect the ongoing industry transformation to digital cinema creating opportunity to sell our digital projecting equipments, screen, and also generates revenues from our service group.

Fourth quarter net revenues increased 140% to $45.3 million, led again by digital cinema equipment sales, which amounted to $33.3 million versus $6.4 million in the year ago period.

The Americas and China were particularly very strong regions for us during the recent three-month period as they have been in recent quarters. During the fourth quarter, we sold 575 Digital Projection Systems worldwide compared to 134 a year ago and we sold 1,506 systems during the full-year compared to 489 a year ago. 611 of the systems were sold into China, with the balance being sold to the Americas including Latin America and Caribbean, as well as Asia excluding China.

Our cinema screen subsidiary achieved a 203% increase in net revenues to $5.9 million as the demand for digital 3D-compatible screens continued, as Gary mentioned earlier. Keep in mind that this was prior to the completion of our facilities upgrade in February 2011, which could add approximately 35% more capacity when everything is clicking on all cylinders up in Canada. And we’d like to thank the management of this business up there for all the hard work they did to accomplish this substantially.

Ballantyne Cinema Service Group also achieved a significant year-over-year increase in net revenue to $2.6 million during the fourth quarter as we continued to install digital cinema projectors for various customers.

During the quarter, consolidated gross profit increased 126% to $8 million, which equates to a 17.7% gross margin for the quarter. This compares to a year ago gross profit of $3.5 million adding 18.8% gross margin. As we’ve been saying for some time now, Ballantyne’s gross margin declined than anticipated due to the product mix shift to higher growth point, lower margin digital projection systems, which now represents a higher percentage of our overall net revenues compared to other parts of our business that are typically at a higher margin that account for a lower percentage of revenues. However, I would point out that as far as gross margin dollars, it is comparable.

SG&A expenditures increased to approximately $4.3 million, but represented only 9.4% of net revenue, down significantly from 17.2% of our fourth quarter net revenues a year ago. We expect to continue to maintain a low SG&A growth rate, excluding seasonal factors which is expected to enable us to achieve solid operating leverage.

Given the aforementioned top line results for the quarter, Q4 net earnings were $2.3 million or $0.16 per diluted share versus a breakeven fourth quarter a year ago. Weighted average diluted shares outstanding were 14.4 million compared to 14.2 million in the year ago quarter.

Our balance sheet continues to be strong. At December 31, we had $22.3 million in cash and cash equivalents compared to $23.6 million at the 2009 year end. We generated $3.6 million from operations during the year and spent $6.8 million on CapEx, which includes $5.8 million towards our investment in the cinema screen facility purchase and subsequent capacity expansion I discussed earlier. And we also spent approximately $500,000 for the opening of our network operating center in mid-October.

We also ended the year with an untapped $20 million credit facility from Wells Fargo Bank. We remained well positioned to continue our growth and we believe we have the financial flexibility for both fund future working capital requirements, other digital cinema opportunities and also to explore M&A opportunities.

That concludes our prepared remarks. Chantal, please open the lines for questions.

Question-and-Answer Session

Operator

Absolutely, thank you. (Operator Instructions) And our first question comes from the line of Alan Cohen, who is a private investor. Please go ahead.

Unidentified Analyst

Hi. I was wondering if you could give us some insight as to sales projections for the New Year and profit projections with the China facilities opened and the Canadian?

Gary L. Cavey

Well, we don’t give out specific revenue and earnings guidance as a company policy. As we’ve been talking about, we expect the digital cinema conversion to expand both in the Americas and China in 2011 and beyond. And that obviously we expect to have earnings growth and revenue growth as we move forward.

Unidentified Analyst

Okay, you don’t give any projections as to your expected…

Gary L. Cavey

We don’t give phenomenal projections of our revenue and earnings.

Unidentified Analyst

Okay, thank you.

Operator

And our next question is from the line of Greg Scott with Merriman Capital. Please go ahead.

Greg Scott – Merriman Capital

Hi, good morning guys. I know you talked about the SG&A line, SG&A cost a little bit, but (inaudible) pretty big sequential uptick and I was wondering if you could just add a little more color on those and why it was up so much and maybe if we should expect just same kind of cost going forward? Thanks.

Kevin S. Herrmann

Well, obviously the selling expenses rose, but it fell dramatically really as part of our revenue. We did in the fourth quarter have, what I would call, some lumpiness in our selling expense and that we had some specific sales and had commissions attached to it. And generally our commissions are relatively low, but I think it was around $180,000 worth of commissions that we generally don’t have. And you could add some quarters where you’re going to have that. So you really need to discount that.

We have been hiring just due to the growth of the company, we’ve had hired some sales staff. Obviously going forward we expect that to increase our top line and to keep our percent of revenue fairly stable.

As far as G&A, again, it’s just the general growth, travel expenses, legal expenses to grow the company, to negotiate contracts and things like that. I think we’ll see going forward that our SG&A going to rise from a dollar standpoint a few hundred thousand dollars, maybe $400,000 in 2011, but it should as far as a percent of revenue continue to be low.

Unidentified Analyst

Okay, that’s very helpful. Thank you. And then secondly just on the M&A front, what kind of companies are you guys looking at and do you have any color there or updates there that’d be very helpful?

Gary L. Cavey

Well, this is Gary. We have been developing a strategic plan and we’re focusing on leveraging our core strengths and businesses that we have good knowledge of how to operate in the future. So it’ll be things that we definitely know what we’re dealing with.

Unidentified Analyst

Okay. Thank you very much. That’s all I have.

Gary L. Cavey

Thank you.

Operator

(Operator Instructions) Our next question is from the line of Robert Routh with Phoenix Partners Group. Please go ahead.

Robert Routh – Phoenix Partners Group

Yeah, good morning, guys. I have a few quick questions. First, can you give us a little bit more of an update on your joint venture, I think you have a balance sheet with $2 million in change in terms of your – as your carrying value to Digital Ink LLC a little over 44%, if I’m correct don’t you at some point to get that money back in the form of some type of a distribution and could you talk a little bit about any future commitments you may have to fund that going forward, I think a lot of people don’t understand how to value that interest or what that refers to you within BTN equity?

Kevin S. Herrmann

Well, I would first look at it on, yes, the adjustments that we have on the books, we expect that to come back in the return of capital. It’s actually going to be a little bit more than that because there is a depreciation and things like that that are reducing that investment.

And as far as actual cash back, I expect between $2.5 million and $3 million actually cash coming back to us in the future. It depends on the timing of certain virtual print fees being received and such. So from a return on capital, that’s the number.

We also have an impact of getting, what we call, depreciation recapture when the equipment is sold to the exhibitor. And in the future that should be another probably around $1.5 million of impact to our earnings somewhere in the future, 2011, 2012, 2013.

(inaudible) we have projectors that are sitting at an exhibitor and at some point in time whether when they go digital or contractually whether obligation takes us out Digital Ink too will sell the equipment to the exhibitor and then that’s when (inaudible) Ballantyne will get our return of investments and also we’ll get the depreciation recapture that I just mentioned.

Unidentified Analyst

And would it be safe to assume when you get that capital back, there would be return of capital, so there will be no tax impact on that?

Kevin S. Herrmann

Well, yeah, right now, in our tax provision, yes, it’s all put up as deferred taxes right now. So, yes, yes, that is a fair assessment. And as far as commitments going forward, the only commitment that we have right now is, if you look at our Ks and Qs, we have guaranteed our share of the debt that Digital Ink too has. And at 12/31, that was around $1.3 million that we’ve guaranteed. Now, we don’t expect to have to inject capital because right now the joint venture has sufficient cash to pay the principle interest on that debt and then obviously when the exhibitor takes out the equipment, pays Digital Ink the money, we use that fund to first pay the debt off before we get a capital intuition to the partnership.

Unidentified Analyst

Okay, good. So for evaluation, fairly to look at that would be to look at your core businesses of theatre and lighting kind of not only backing up your cash, but also to back up the value for that joint venture at least (inaudible) to get your fair adjusted enterprise value?

Kevin S. Herrmann

Absolutely, absolutely, we have definitely value there.

Unidentified Analyst

Yeah, it seems that the market is coming. And one of the quick question, can you give us the break down as far as in terms of your percentage of revenue and your operating income, just big picture theatre and lighting, for 2010 and how you see that going forward?

Kevin S. Herrmann

Well, the vast majority of our operating profit is in the theatre business. When you look at our segment data, the lighting segment is really, it’s a $3.5 million business. It makes a little bit of money right now. Obviously the economy has impacted the lighting segment, so it’s not as profitable right now than it has been in the past, but it does make us a little bit of money, but the money right now is the cinema industry.

Unidentified Analyst

Sure. And just one last question, looking at your balance sheet, what you guys are doing, you’re able to adjust your enterprise value when you back up the value of the joint venture and your cash, it looks like your inventories were up, which means obviously you’ve got differed revenues, you’ve already gained (inaudible) it seems as though the best use of your cash that came from the acquisition is more on your stock based on the current multiple in your book value. I’m just curious if you could give any update as far as share repurchases are concerned, if you don't find a strategic acquisition or something that make sense, as we’re seeing that right now, would be the best return on your own capital, how the management is thinking about that.

Gary L. Cavey

Well, I think right now, the way the Board looks at this is that we want to grow the business, we want to expand our opportunities in the digital cinema. So I think in the short-term, there aren’t plans to purchase that shares. However, that’s an ongoing discussion moving forward on probably yearly, quarterly basis.

Unidentified Analyst

Okay, great. Thank you very much.

Gary L. Cavey

You bet.

Kevin S. Herrmann

Thank you.

Operator

And our next question is from the line of Mike Rindos with Rodman & Renshaw. Please go ahead.

Michael Rindos – Rodman & Renshaw

Hey, guys, nice quarter. My questions have been answered. Thank you.

Operator

And our next question is from the line of Thomas, who is a private investor. Please go ahead.

Unidentified Analyst

Yes, thank you for taking the call. Congratulations on the quarter. My first question is in regards to situation in Japan, do you expect any adverse implications on your business in particularly with NEC?

Gary L. Cavey

This is Gary. And we’ve been in constant communication with our partners in Japan. And they have no disruption there with their business and further our equipment, the projectors are manufactured in China.

Unidentified Analyst

Okay. They are manufactured in China, but did they use components that restores from Japan?

Gary L. Cavey

Not that we’re aware of.

Unidentified Analyst

Okay. Thank you. The next question is the 4K projector, what is the status of that, is that something that you are already selling or is that coming in later in the year?

Gary L. Cavey

It is available now and we will start selling them this month.

Unidentified Analyst

Okay, great, that’s all.

Gary L. Cavey

Just a few days ago, so they are coming into the States and working very well.

Unidentified Analyst

Okay. Thanks for the update, congratulations again.

Gary L. Cavey

Thank you.

Operator

And gentlemen, we have no more questions on the telephone lines at the moment. I will now turn the call back to you. Please continue with the presentation and closing remarks.

Gary L. Cavey

Well, thanks once again for joining us today. We greatly appreciate your ongoing interest in BTN. Since joining the team last November, I’ve been very pleased with the energy and diligence of our employees here in Omaha and other parts of the world, including Asia. Our record results speak for themselves and we’ve pretty good visibility on achieving continued success in coming years.

I mentioned earlier in the call that BTN is uniquely positioned to continue capitalizing on the exciting industry transformation that given us decades of expertise and relationships. We also expect to see ongoing technical innovation that will further enhance and differentiate the theatres going experience and create new opportunities for products and services.

The management team and Board will maintain our focus on delivering shareholder value and that includes actively seeking and evaluating potential accretive M&A opportunities, both large and small. I believe the company's discipline and track record in M&A has been impressive, particularly given that both our screen business and service businesses are the products of forward thinking acquisitions completed at attractive valuations. We continue to evaluate the potential opportunities, but remain extremely disciplined in the criteria we demand.

Kevin and I are looking forward to speaking with you again after BTN’s 2011 first quarter results are released. We plan to appear at several upcoming investor conferences and we’ll be doing some non-deal road shows in the near feature.

Lastly, if you can make it to the movie industry CinemaCon Trade Show in Las Vegas at the end of the month, please start buying CS at our booths. Thanks again.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone.

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