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Executives

Robert Rinderman – IR

Gary Cavey – President and CEO

Kevin Herrmann – Secretary, Treasurer and CFO

Analysts

Tom Wilmers (ph) – Private Investor

Greg Scott – Merriman Capital

Robert Routh – Phoenix Partners Group

Brandon Taylor (ph) – Private Investor

Gregg Hillman – First Wilshire Securities Management

Wayne Cadwallader – Elkhorn Partners limited

Mike Rindos – Rodman & Renshaw

James Fronda – Sidoti

Jim Gentrup – Discovery Investment Research

Steve Schnipper – Private Investor

Bob Schwartz (ph) – Private Investor

Ballantyne Strong, Inc. (BTN) Q1 2011 Earnings Call May 6, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ballantyne Strong 2011 First Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Friday, May 6, 2011.

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

Robert Rinderman

Thank you, Frank. Good morning, everyone. Welcome to Ballantyne Strong’s 2011 first quarter 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 may 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 or Ballantyne’s new website www.strong-world.com.

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

Now going to turn the call over to President and CEO, Gary Cavey, who is joined this morning by CFO, Kevin Herrmann. Gary?

Gary Cavey

Thank you, Rob. Good morning everybody. We appreciate you joining us today. Earlier today we reported the 2011 first quarter earnings per share of $0.11 up from $0.07 the prior year on a 26% increase in net revenues to $31.9 million.

All three of our core digital cinema components, Ballantyne businesses projection equipment, screens and services achieved solid year-over-year increases compared to the 2010 period. Kevin will give you more color and specifics on our performance following my remarks.

We demonstrated strong year-over-year sales increases in these three key digital areas. However, the timing of certain digital equipment sales was impacted principally due to delays in certain customer closing their financing arrangements with third-party lenders. These three ways impacted our Q1 top and bottom line performance.

As we discussed on our last conference call, many of these independent chains have stopped short of digitizing their entire circuits due to lack of available funding. Many exhibitors, customers have partnered with Ballantyne for decades, giving the company nearly 80 years’ presence in the cinema industry and we of course will continue to assist the independent theatres with the processes of locating potential funding sources with the goal of ultimately supplying them with their turnkey projection systems, screens and aftercare maintenance and monitoring services.

With the recently improved domestic box offices numbers here in Q2 an optimism surrounding the upcoming 2011 movie slate as well as the 2012 pipeline, we also remain very confident that the recent funding bottlenecks is in the process of being alleviated. Our business is also seeing very positive signs in Q2. We believe Ballantyne continues to be uniquely well-positioned as the leading one-stop cinema solutions provider. Our organization has unrivaled wealth of exhibitor relationships around the globe that we expect will continue to benefit us in the near and long term.

Now that we entered the digital age of cinema, we expect movie theatre technology to evolve at a considerably faster pace. And given BTN’s diversified turnkey business model, we expect to be at the nexus on the ongoing rapid pace of industry change. International markets especially China and Latin America should continue to offer many more growth opportunities for Ballantyne. The Chinese government is backing the financing of their cinema sector’s growth and that early stage uptrend is expected to last for years into the future. They are focused on adding brand new and cutting edge digital complexes to satisfy the huge demand for cinema.

As I also mentioned on our recent Q4 call China presently has only about 6500 movie screens to keep a population of more than 1.3 billion people entertained. We have seen a wide range of predictions for projected Chinese screen growth with the most conservative estimates estimating at a 100% growth over the next five year period.

The United States in contrast has approximately 39,000 movie screens for a population of about 310 million. You can do them quick math and see why we are excited about the tremendous growth opportunity that China presents.

Ballantyne in particular is uniquely positioned for success in the region as our partner NEC is manufacturing digital projectors domestically in China. We also continue to gain traction with our cinema screen business in that country. Our company is shipping uncut rolls of cinema screens to Ballantyne’s China based partner who completes the process of making them both theatre-worthy and ready for installation.

Amongst other potential NOC business opportunities we are aggressively targeting the flat panel digital advertising signage business with our monitoring expertise. We also provide these clients with a – with a range of additional value added services to help them manage this business. One recent client was looking for us to manage the full range of cutting edge electronic systems at their theatre and we worked this out allowing them to manage much of their theatre operations remotely.

It’s been a little more than six months since the Network Operations Center made its debut here in Omaha and so far the results are encouraging. Through third quarter of this year, we have signed agreements to monitor several thousand digital units from projectors to digital signage. The network operations services are also another quiver in the bow of our sales force and they are delighted to be able to include it as part of the many equipment transactions.

Please note that some of the signed Network Operations Center business is pending the completion of digital equipment financing, which I addressed earlier in my comments. As I mentioned earlier BTN is truly a full service digital cinema product and service provider and our ability to remain hardware agnostic including network operations services for a wide range of digital equipment and networks in other key differentiator for us.

Now I’d like to turn it over to Kevin Herrmann, Ballantyne Strong’s CFO. Kevin?

Kevin Herrmann

Good morning everyone. Ballantyne’s Q1 net revenues rose 26% to 31.9 million. Our results reflect the company’s continuing participation in the digital cinema marketplace.

As Gary mentioned our quarterly results would have been even better had not the timing of certain projection equipment sales and related service businesses including installations been delayed as a result of third party funding issues which impacted certain of our exhibition clients.

Taking a closer look at the Q1 performance, our three core digital cinema areas, sales of digital products increased 34% to $18.6 million, the cinema screen business grew at a 93% rate to 6.8 million and our cinema services group revenues rose 177% year-over-year to $2.5 million.

Our cinema screen subsidiary achieved another strong period as the global demand for 3D-compatible silver and large format screens continued. As mentioned on our previous investor call, Ballantyne screen manufacturing facility upgrade was completed on schedule during the quarter.

Ballantyne cinema service group posted a solid year-over-year increase in Q1 net revenue as our digital cinema installation business continues to be robust. As Gary mentioned we are also beginning to aggressively market our network operating center 24/7 monitoring services. And our team will also be promoting our turnkey after care maintenance service for digital equipment.

During the quarter, consolidated gross profit increased 41% to $6.1 million which equates to a 19% gross margin on net revenues. This compares to a year ago gross profit of $4.3 million or 17% gross margin as we benefited from the overall greater contribution of the higher margin cinema screen and service businesses.

Selling and administrative expenses rose to approximately $3.8 million in Q1 or approximately 12% of net sales during the period compared to 2.7 or approximately 11% a year ago. We hired new sales personnel compared to a year ago, expanded the company’s presence in Asia and also experienced higher professional fees, which in aggregate caused our SG&A expenditures to rise.

However, as our digital sales increased we expect our SG&A expenses to decrease as a percentage of revenues. Our Q1 net earnings amounted to $1.5 million or $0.11 per diluted share versus net earnings of $1 million or $0.07 on a diluted share a year ago.

Turning now to our balance sheet, at quarter-end we had cash and cash equivalents of $11.6 million down from $22.3 million at December 31. Once again the timing impact related to certain customers experiencing a delay in closing financing arrangements temporarily leaving the inventory on our books. Elsewhere on our balance sheet you can see the working capital related impact.

Our accounts payable declined more than $12 million since the 12/31 year end as we paid for a significant amount of this inventory. Once we sell this inventory, it will turn into cash and cash balances will rise. Also during Q1, we spent a $1.8 million on CapEx primarily pertaining to the final work performed on our cinema screen facility expansion discussed earlier.

In the aggregate, we have spent approximately $6 million of cash on this project from start to finish without needing to take out any debt at all. Ballantyne also ended the quarter with its untapped $20 million credit facility with Wells Fargo bank. That along with our cash balances and our inventory levels ready to be shipped leaves us well-positioned to continue on our growth path.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Tom Wilmers, Private Investor. Please proceed.

Tom Wilmers – Private Investor

Hello, hi Kevin, how are you?

Kevin Herrmann

Good. How are you doing?

Tom Wilmers – Private Investor

Good. I think the numbers look good. I had a couple of questions. With regard to the digital signage that is very encouraging to me because there is a lot of that out there in the theatres. Are you using NEC product for that or are you using another vendor. And also when it comes to the financing which you’ve mentioned several different times, it sounds like in the press release that those things have been resolved at the end of this quarter. Do you feel that those financing issues are going to bring in higher revenue and better profit in future quarters?

Kevin Herrmann

Well I guess to answer your first question on the digital signage right now a lot of the times we’re monitoring existing signage that’s in place and as far as reselling the actual items, there isn’t one particular source that we could – that we could use. And so we would just be a reseller for that and then do the installation, cabling, and then obviously monitoring it as well.

As far as the financing, obviously as we move forward with digital cinema and we get these projects going obviously we expect profits to increase, so the bottleneck as Gary mentioned has been right now they have to close their financing before we can ship the product. That’s going to be closed we believe in the future and everything will take care of itself.

Tom Wilmers – Private Investor

Okay. Again I think you guys did a great thing this quarter. It looks good, 26% increase is wonderful I guess it will (inaudible)?

Gary Cavey

Yeah. And Tom, as we mentioned on the call here on the prepared remarks, we are seeing improvements in this financing coming around. So, I think that bodes well for the future.

Tom Wilmers – Private Investor

Good, that’s encouraging. Thank you both very much.

Operator

Our next question comes from the line of Greg Scott from Merriman Capital. Please proceed.

Greg Scott – Merriman Capital

Hi, good morning guys. Thanks for taking my questions. Back to the delayed orders, just basically I’m just wondering you guys – how close you guys are with those orders, is it basically just in terms of just get the money and then it’s ready to go or is it something, something else?

Gary Cavey

Yeah I mean – there is a number of things, but in many cases yeah like I mentioned we have the inventory sitting in stock. The customer wants the product, but obviously we can’t ship it until the finance company has all the documents in place. So generally what happens is that once the financing is closed, the next call is to our service team or to the company here saying when can you get us the product.

Greg Scott – Merriman Capital

Okay, all right. So it’s just basically just the terms of money, so if everything is pretty much signed and ready to go?

Gary Cavey

Right. I mean – and for the particular items yeah that were referring to, yes.

Greg Scott – Merriman Capital

Okay. And then it seems like there has been a big ramp in the digital upgrades, I believe Cinedigm said they had one of their strongest quarters in March in terms of signing agreements. I’m just wondering what kind of – what’s your visibility outlook now and what are you seeing in terms of the digital trends.

Kevin Herrmann

Well, we’ve seen obviously some of the deals that are subject to financing, a lot of times I have to enter into the VPF agreement and if, that could be with Cinedigm. So just because there is an announcement that they’ve signed an agreement with Cinedigm doesn’t mean that everything else is kind of following on that.

So I think that’s another positive sign for not only Ballantyne, but for the industry that when you see these announcements from Cinedigm that there is a VPF model in place, then the next step is the financing, the next step is the equipment provider, providing the equipment and service and obviously that’s good for us.

Greg Scott – Merriman Capital

Okay. And then moving over to China, I was wondering if you could tell me how many projectors you sold in the quarter?

Kevin Herrmann

In the quarter, we sold in Asia in general, which the majority of our business right now in Asia does come through China at the present time we sold around 131 projectors.

Greg Scott – Merriman Capital

Okay. And how many have you signed for 2011?

Kevin Herrmann

We haven’t, that’s not something that we publicly announce our backlog in any of our – in any of our regions.

Greg Scott – Merriman Capital

Okay, okay. And now but that 131 that was from the announcement from a few months ago?

Kevin Herrmann

It...

Greg Scott – Merriman Capital

Believe that was like a 250?

Kevin Herrmann

It’s a number of customers, there is not just...

Greg Scott – Merriman Capital

Okay.

Kevin Herrmann

...One customer that we’re shipping on.

Greg Scott – Merriman Capital

And what’s the visibility like there?

Kevin Herrmann

Well I think what I’d refer back to what Gary said on his prepared remarks, is that the Chinese government is pushing forward. We’re seeing tender offers come up where you bid on a tender that’s continuing over there. So we are very excited about that market.

Greg Scott – Merriman Capital

All right, great thank you very much.

Operator

Our next question comes from the line of Robert Routh from Phoenix Partners Group. Please proceed.

Robert Routh – Phoenix Partners Group

Hi, yeah good quarter guys. I just a few quick questions. Clearly the quarter was good, but because of the way things look, I mean it looks like in the back half of the year and going forward in 2012 could be materially better than that you would gather from this release.

And if you could you comment a little bit on the visibility looking out longer term and then if you could also give where your stock is and your cash balance and everything else, whether the company would consider repurchasing shares because it seems like that would be a very good use of in your cash given the expected growth in the future. And then finally if you could give us any update on potential acquisitions that may make some sense?

Gary Cavey

Well, I guess we believe and people they have been following the industry believe that digital cinema is going to do nothing, but it’s continued to accelerate, the studios want this done, they’re talking to all the exhibitors to get their plans in place in 2011 and 2012. And I think that bodes well for all the equipment providers, all the service providers such as Ballantyne. So I think that bodes well for everybody. What was your second question I’m sorry?

Robert Routh – Phoenix Partners Group

Second question is about given where the stock is, I was wondering whether buybacks would make some sense given the projected growth that you should have going forward in the earnings and the equity leverage you could create by doing such.

Gary Cavey

Yeah, that’s always a topic of conversation. It’s at a Board level, but we believe both management I think and the Board I believe that right now we want to grow the company, we want to take advantage of every digital cinema opportunity and any other opportunity out there. And at the current time that’s the best place for the cash. Now that’s an ongoing discussion, events in the future can change that, but right now I think the company is focused on growing the company.

Robert Routh – Phoenix Partners Group

Okay great. And then any update I may have missed it on the acquisition front that you had mentioned on previous calls that you were looking to buy things that would be strategic in complementary to what you already have – I’m just curious you found anything, close anything?

Gary Cavey

We have not close to anything yet. We have – this is Gary. We do have an M&A firm working with us I worked with for many years. And we’ve had great experiences with them. And we’re teed up and we’re looking at things right now, but nothing to report yet.

Robert Routh – Phoenix Partners Group

Okay great. Thank you very much.

Gary Cavey

You bet, thank you.

Operator

Our next question comes from Brandon Taylor, Private Investor. Please proceed.

Brandon Taylor – Private Investor

Hey, good morning guys.

Gary Cavey

Good morning.

Brandon Taylor – Private Investor

I had actually a handful of questions if you don’t mind. First one is – could you give me the total account of projectors you shift worldwide or sold worldwide during 1Q. And you said you did 131 in Asia, but I was wondering about the entire quarter?

Gary Cavey

Yeah, I believe we did Brandon, approximately 279 digital projectors.

Brandon Taylor – Private Investor

Okay, got it.

Gary Cavey

Worldwide.

Brandon Taylor – Private Investor

And – I don’t know – I know as you guys broke out in the 10-K about your cinema server business, it’s the first time I’m seeing that. Could you give us a count on that maybe on the quarter as well?

Kevin Herrmann

I don’t have a particular count on that at the top of my head right now something that – I can certainly give you and we’ll be putting something in our 10-Q.

Brandon Taylor – Private Investor

Okay, okay. And there has been a couple of questions about this before, but could you in any way – I understand if you don’t want to give revenue type numbers, but could you quantify like maybe a rough projector count or maybe a range that slipped into 2Q because of the financing issues?

Kevin Herrmann

That’s again that kind of gets into giving guidance and that’s not something the company has done so in the past, it wouldn’t be appropriate at this time.

Brandon Taylor – Private Investor

Okay, okay I understand. And another question if you could maybe comment on your ASPs on the projectors, I know that that NEC introduced the new 4-K earlier this year, do you think that could be a tailwind for your ASPs going into the back half of the year. Is there a fundamental pricing difference between the 2-K and the 4-K at all?

Kevin Herrmann

Well yeah I mean the pricing is in this industry really is set by the market depending on what projector there are, the smaller the projector obviously you’re going to get a less of a price, but at the end of the day everything kind of pushes to what the market will bear for selling a bigger projector our ASP will be higher. But again we’re not – we don’t have the exact number breakout that we’re going to be selling in the second half of the year, so that’s a difficult number for me to say off the top of my head here.

Brandon Taylor – Private Investor

Okay. And another question about the shipments in terms of like was there any estimates is there any excess SG&A like a sales commission maybe that sold during 1Q related to those orders or is that all going to be like in 2Q, ‘09...

Kevin Herrmann

No, no, there wouldn’t be anything like that everything will be matched up with the revenue.

Brandon Taylor – Private Investor

Okay.

Kevin Herrmann

The one thing that we did this year that was different than the previous years is that our annual meeting was just recently held and we moved the annual meeting up almost a month and so a lot of the legal expenses, the cost of preparing a proxy and an annual report, all of that fell into Q1 this year.

Brandon Taylor – Private Investor

Okay.

Kevin Herrmann

And in the past that’s been a Q2 expense. And if that’s going to...

Brandon Taylor – Private Investor

Okay.

Kevin Herrmann

This is our professional fees were a little bit higher in Q1 due to that. We do have some seasonality with our SG&A typically first quarter we have an audit going on, so your professional fees are higher in the Q1 probably than in Q2. And then in Q4, generally we have usually some fairly major trade shows in that quarter, it depends again on the timing of when the trade show takes place some years are in Q3, some years are in Q4. So we do have some fluctuation like that with our SG&A.

Brandon Taylor – Private Investor

Okay. And then last two, I promise, I know I’m hogging line here. For 2010 you’ve talked about China and kind of like long-term potential there. Do you guys have anything rough in terms of what your thought your market share was in 2010 in terms of the Chinese market maybe like and all with the numbers all, but screens went from 1000 to 3000 or something like did you get, do you think you got maybe 10% of the market 20% of the market.

Because I think a lot of people maybe and me personally we have a problem kind of quantifying what the potential compete is, obviously it’s a very large country, lot of people terribly under screened kind of hard – it’s hard to kind of get a handle on what the potential could be for Ballantyne?

Gary Cavey

Well, I would want to speculate on that right now. Because it would be speculation because the information that seems to be coming out of China with regards to who is doing what how many customers are doing what, is not information right now that we would want to publicly state and hang our hat on.

Brandon Taylor – Private Investor

Okay.

Gary Cavey

Actually...

Brandon Taylor – Private Investor

Thank you guys. I appreciate that.

Gary Cavey

No problem.

Operator

Our next question comes from Gregg Hillman from First Wilshire Securities Management. Please proceed.

Gregg Hillman – First Wilshire Securities Management

Yeah, good morning gentlemen.

Gary Cavey

Good morning.

Gregg Hillman – First Wilshire Securities Management

Hi. I am a little bit new to the story, but I guess my first question would be about the Sony projectors versus the Texas Instrument projectors, in terms of blind taste test visitors or viewers looking at one screen versus the other screen. What do they prefer in terms of disinterested test?

Gary Cavey

You are asking us what our opinion is?

Gregg Hillman – First Wilshire Securities Management

No, no, no – what an objective test has shown if you take 100 viewers and then divide it by 50/50 between a Sony screen and a TI – a Sony projector and a TI projector. What do they prefer, what’s, from the consumer standpoint like a blind taste test for a new consumer edible?

Kevin Herrmann

Yeah, to be honest with you, I’m not sure if we’ve really seen any data at the customer level that would probably be something you’d want to talk to one of the publicly traded exhibitors that are out there. Our feeling is, we install all of our not only the NEC equipment, we install our competitors’ equipment as well because our service team is completely agnostic.

One of the things that we know for good or bad is that all of this equipment works, it shows the movies. Customers seem to be happy when they go see a 3D movie or a digital movie. To the extent where they’re saying its Sony versus NEC versus Barco, most of the customers probably don’t know the difference, unless they look up in the back and look up in the back and see what projector is showing a movie.

Gregg Hillman – First Wilshire Securities Management

And Barco.

Kevin Herrmann

And this is my opinion.

Gregg Hillman – First Wilshire Securities Management

Okay and Barco is a variety of TI right?

Kevin Herrmann

Right, Barco, Christie and NEC all use the TI technology. Sony has their own technology.

Gregg Hillman – First Wilshire Securities Management

Okay, okay. And then in terms of total cost of ownership over the life time of the projector, is there any difference between Sony, or TI or NEC.

Gary Cavey

Well, I think it’s so new out, I think it hasn’t been proven one way or the other yet.

Kevin Herrmann

That sounds like a fair statement. I mean I think we’re going to need to run these projectors for a while and then go back and talk with the exhibitors and see just what the costs are.

Gregg Hillman – First Wilshire Securities Management

Okay. And on the human resource front at the company, since you have been CEO, what have you done to improve hiring, retention, management training, management development, and overall motivation of the people there.

Gary Cavey

First off I inherited a very highly motivated team that has a tremendous amount of pride in what they have been doing for many years. This company has been here for 80 years, its reputation with our customers globally is excellent. I’ve been at and surveyed and been out and visited a number of customers and clients including trade shows in Asia and the U.S. and I have found nothing but positive comments about our products, our service, our follow-up after the sale and the knowledge base that we have here at Ballantyne Strong.

And even our competitors recognize the strength we have on the install base and monitoring equipment afterwards. We have a great team. We’ll be adding to the strength, we’re also making sure that our people are healthy, but we introduced a wellness program. We’re very concerned always about retaining our people and bringing on new highly motivated people to join this great team. So I feel real good where we are at today. And we’re adding sales offices and organizational strength in our China operation. And I’ll be over there leaving next Monday for another trip to China.

Gregg Hillman – First Wilshire Securities Management

Oh. Okay. And Gary just by the way do Christie and Barco have sales offices in China, are they trying to go out to the same market as you?

Gary Cavey

Yes they do. Absolutely.

Gregg Hillman – First Wilshire Securities Management

So it’s just you and them and Sony coming out – so it’s like four parties you’re going to get (inaudible)

Gary Cavey

There’s four of us all together.

Gregg Hillman – First Wilshire Securities Management

And there’s no more...

Gary Cavey

Anybody doesn’t want to participate in the Asian market.

Gregg Hillman – First Wilshire Securities Management

Is there more than that going after the market, or is it just those four?

Gary Cavey

Just those four.

Gregg Hillman – First Wilshire Securities Management

Okay fine. I’ll get back in queue, thanks for comments.

Gary Cavey

You bet. Thanks for asking.

Operator

Our next question comes from Wayne Cadwallader from Elkhorn Partners limited. Please proceed.

Wayne Cadwallader – Elkhorn Partners limited

Hi there, great job gentlemen. Just a quick question everybody is focusing on the new revenues coming in from sold products, but there is the recurring revenue side of the equation because you get through a product life cycle and now what becomes the situation. How are you looking to build your maintenance and service side of the business and what do you think that will look like and what were the margins potentially look like down the road?

Gary Cavey

Well one way we’re building it is by doing installs to begin with and doing a great job there and customers depending on us for a service after sale and to keep their operations running. And Kevin you want to address the rest of it there.

Kevin Herrmann

Well yeah, I mean right now a lot of the customers are focused on getting the installation done. What’s going to happen is – is that this equipment as it gets more and more of an installed base, there is going be something that goes wrong with it, or there is going to be maintenance, even changing a bulb is different in an old film projector, where you need somebody to know how to handle that. So I think what you’ll see is that part of the business where more customers will want to enter into maintenance contracts, where we they – we charge them as an X amount of dollars per month.

And then we’ll be obligated to go therefore one or two times. And so that is just going to continually go up with the installed base. And since we’re agnostic, once all the projectors, let’s say that all the projectors in North America are turned to digital and a majority of them, that whole marketplace is open to our service our NOC in our after sale maintenance contracts or what we call demand service when they call us up and they just need something fixed right away and we charge them time and expense.

So there really is to quantify that is difficult at this time just because the customers aren’t focused as much on that right now. They’re more focused on getting their projector installed.

Wayne Cadwallader – Elkhorn Partners limited

Have you had customers that are starting to focus on and whether they entered into agreements with you on support?

Kevin Herrmann

Yes, I mean I think Gary even mentioned something in the prepared remarks, where we had customers out there where we’re monitoring a lot of their stuff. We’ve had some – I don’t want to mention customer names necessarily, but we’ve had wins where we’ve saved the customer from having to send a tech out because we’ve called them up and say, “Boy, it looks like there is something that is going to go out of your projector here, do you have a spare bulb, do you have a spare lamp house, do you have something.” And we’ve really had some success stories already on that. And that will, obviously that helps from a marketing standpoint to sell the business – sell the service.

Wayne Cadwallader – Elkhorn Partners limited

That’s terrific. Thank you, guys.

Gary Cavey

Thank you.

Operator

Our next question comes from Brandon Taylor, Private Investor. Please proceed.

Brandon Taylor – Private Investor

Hey guys, got a couple of follow-ups. In terms of the – you obviously have sort of a potential to selling the digital lamps once you put a projector in for someone. Could you give us like – the gross margin for that product, I would assume is sort of an accessory or a replacement part, is probably higher than the digital projector sale itself, is that right or wrong?

Kevin Herrmann

No, I wouldn’t – I don’t think that’s – it depends on the size of the bulb, but we’re not manufacturing the bulb. It’s a distributor, it’s a kind of a razor blade item. There isn’t that kind of cost, which is the great thing for us. A lot of – some of it – we don’t even touch the bulbs a lot of times. We’re getting the order and we are providing some service for that, but we – in the customer support – and things like that. But it’s really a – it’s a good razor blade product for us.

Brandon Taylor – Private Investor

Okay. And then actually moving to the next part, is it – do you have any idea of – I guess like the penetration with the new digital customers that you’re getting with that. Is it – is the situation where if I bought a projector then I could just go to anyone else and buy that bulb or would I have to buy it through you only?

Kevin Herrmann

No, there is no obligation for any customer to buy the bulb through us. However bulbs can be fickle items, when they burn out, they can explode and so they want somebody that’s going to be there for them and that’s where we come into play because of our film relationships and when we sold bulbs into the film world, they know that we’re going to be there. They know we’re going to get on the call and if we have to drive the bulb to them they know we’ll do that.

Gary Cavey

And we’re open 24/7 on this stuff and we have a parts depot that can ship any day at any time.

Kevin Herrmann

Yes.

Brandon Taylor – Private Investor

Okay. So, I guess do you have any idea of your penetration rate at all. Or I guess I know you had the same kind of business with your analog projectors?

Kevin Herrmann

Yeah, yeah.

Brandon Taylor – Private Investor

So do you have any kind of historical number of that, maybe like I don’t know 20% of your customer’s bought bulbs from you are not or did you ever gather any data like that?

Kevin Herrmann

I don’t know if we have specific data that I can give you. We may have datas at our – at the more service oriented. But I think it’s fair if we get a NEC projector sale we’ve got a very good opportunity to sell them the bulb.

Brandon Taylor – Private Investor

Okay. And one last one, are you guys seeing any kind of competitive threat at all in Asia from screens from a company called Spectro in Korea?

Kevin Herrmann

Well, nothing more than any other competition that’s out there for any of our products. We have to compete. We have competitors in every, for every product and every region of the country.

Brandon Taylor – Private Investor

Okay. And your main other screen competitor is Harkness right.

Kevin Herrmann

Yes.

Brandon Taylor – Private Investor

Okay, cool. Thank you, guys.

Operator

Ladies and gentlemen. (Operator Instruction).

Our next question comes from the line of Mike Rindos from Rodman & Renshaw. Please proceed.

Mike Rindos – Rodman & Renshaw

Hey guys how are you?

Gary Cavey

Good thanks, Mike.

Mike Rindos – Rodman & Renshaw

Hey with regard to the slippage in orders did this relate to just one client or multiple clients involved here?

Gary Cavey

Multiple clients.

Mike Rindos – Rodman & Renshaw

Okay. And how many financing entities are we discussing here?

Kevin Herrmann

I know again it’s – that’s probably something that it’s more a better question for the – our customer, I don’t know if it would be appropriate for to talk about specifics of – specific financing company.

Mike Rindos – Rodman & Renshaw

Okay. Can you help us understand how many screens are left to be converted in the U.S. by your assessment?

Gary Cavey

Yeah, the number keeps changing what we usually go off of what NATO I believe is talking about where there is around 39,000 to 40,000 screens in the United States and around in between 16 – 16.5 to 17,000 have likely been converted to digital cinema.

Mike Rindos – Rodman & Renshaw

Okay.

Gary Cavey

But again that number is changing and a lot of these smaller exhibition chains aren’t public. And so I think they do surveys to get that information. So, we look at a bunch of information and we just – we don’t necessarily pub – that’s why we don’t publish a lot of information like that unless we see the source.

Mike Rindos – Rodman & Renshaw

Okay. And how many larger or can you discuss or discuss how many larger circuits are left out there to be converted, I understand that Marcus is one of them, which are the larger circuits of say more than 250 screens are now in the contract at this point.

Gary Cavey

There is not a lot of companies, a lot of the ones that haven’t converted their number of screens aren’t that much, it’s very spread out all over the place. Seeing companies like Marcus, and like Southern Theatres, we’ve announced Wehrenberg in a press release that we’ve picked up that entire circuit. So there is still a number of these smaller ones out there, but once you get past the big three and then you get past National Amusements, the number of the exhibitors expands rapidly, but the amount of screens per theatre aren’t necessarily in the thousands or hundreds; most of them are below the 400 or 500 level.

Mike Rindos – Rodman & Renshaw

So then can you comment on the current sales cycle, in terms of days to close and should we expect that to increase that you deal with these smaller and smaller exhibitor chains?

Gary Cavey

I guess I’m not quite sure, if I’m following 100% of that question Mike?

Mike Rindos – Rodman & Renshaw

Yeah well if you’re looking at a an exhibitor with maybe 500 screens and they’re eager to get a transaction done and upgrade their facilities say that process might take 60 to 90 days to close the transaction and I’m guessing as you start dealing with more of these smaller exhibitors that the sales process might take longer to get done. And so I’m wondering if the sales cycle will extend over time as you start dealing with more and more of these smaller companies?

Kevin Herrmann

It would be – it’s tough for us to I guess say that on a call like this. But – it really depends on the exhibitor, how old that theatre is, it has a lot to do with it. Is it wired correctly or not, have we done a site survey or not? Are we going to do the installation versus somebody else? It’s really difficult to say – the one thing that we can say because this is history – and even with some of the big guys at their beginning is that the big push has always been to do the 3D first.

And that obviously extends out their whole retrofit, because they want to go in and get the digital 3D in not necessarily one location, but spread out through all their complexes – get two or three of the 3D screens in there. And so we’re obviously seeing a lot of that at the outset; that’s been the big push historically.

Mike Rindos – Rodman & Renshaw

Is there a catalyst here where some of these smaller exhibitors need to convert maybe by the end of this year or next year for fear of getting shut out of the VPF model?

Gary Cavey

September 2012, you’re supposed to be signed up, if you’re going to get the opportunity to use the VPF model.

Kevin Herrmann

That’s what the studios have been saying, yes.

Mike Rindos – Rodman & Renshaw

Yes.

Kevin Herrmann

That doesn’t mean that they have to be converted – that means that they need to have a plan in place. Earlier on the call somebody mentioned Cinedigm, they would need to be signed up to a Cinedigm program or somebody else’s VPF program.

Mike Rindos – Rodman & Renshaw

What percentage of your product sales are financed by NEC versus other third-party financiers?

Kevin Herrmann

A lot of our sales right now are historic and have not been financed by NEC Finance. I mean we did have – the items last year that we shipped into Digital Link II were financed by NEC Finance. NEC Finance does a great job with us on some of the smaller circuits where we’re selling one or two into the program, but some of the deals that are being worked on in the future, NEC Finance is out there working with the exhibitors to find a financing solution to them. So, NEC Finance is definitely out there right now aggressively and it helped us in the past, but a lot of the sale because they did for 3D, they’ve been for China, they been for South America and then things like that, there hasn’t been it’s not a majority by the any stretch.

Mike Rindos – Rodman & Renshaw

Is there an opportunity here for you to expand your relationship with perhaps Cinedigm to accelerate the closing of these sales.

Gary Cavey

We work with them every day, Mike. And I also think the smaller theatres there is a possibility that we can – we have seen as they close faster and they do traditional finances.

Kevin Herrmann

Yeah, yep, and we that’s why we love NEC Finance because on some of these smaller guys we’re actually done under a leasing situation we sell actually the product to NEC Finance or another leasing company, if that customer wants to go that well, that’s always good for us because we know that when we ship the product, that it’s all paid, there is no financing risk to the company and so it’s always a good thing for us.

Mike Rindos – Rodman & Renshaw

Shifting gears a little bit, could we talk a little bit more about the screen business how far out are you, what’s the backlog there, how far are you on deliveries?

Kevin Herrmann

Well, we’ve increased the capacity up there. So last year, kind of the theme was – is that we were hitting capacity. They did a tremendous job last year up in Canada – eking out screens every quarter for us. Capacity right now, I think it’s fair to say is not an issue. We can deliver when the customer needs a product, there still is a cycle that you have to go through obviously from a quality control standpoint and such, but...

Mike Rindos – Rodman & Renshaw

Well I remember...

Gary Cavey

Yes Mike. Mike, the issue was we didn’t seek a lot of business outside our traditional customers because we wanted to be able to supply them with a reasonable delivery times. Now it opens this up to go after other parts of the world with our screen business because customers really recognize the quality of our screens, it’s a big difference.

Mike Rindos – Rodman & Renshaw

A big difference in quality relative to Harkness?

Gary Cavey

I didn’t say anybody – I just said they recognize a difference from other people.

Mike Rindos – Rodman & Renshaw

Okay. Beyond Harkness are there many other producers of screen?

Gary Cavey

There is people in China, Asia, I think somebody mentioned somebody in Korea, I’m not familiar with them. But there is a distinct difference in quality and performance.

Mike Rindos – Rodman & Renshaw

Okay. Back to the delivery times, it seemed like a few quarters back it was 14 weeks out, are you significantly below that, now that you have the new capacity?

Gary Cavey

Well, we are below – yes, we are faster on those big quantities. But we always kept a slot open for short lead times to satisfy customer absolute needs that something happened, if they needed 2 or 3 screens. That was one of the secrets of our long-term success with that business, is constant great service and flexibility.

Mike Rindos – Rodman & Renshaw

Okay. Can you discuss for a moment, your sales presence in the Latin America market. I know there has been a lot of attention paid to the China market, which is fantastic. But, what’s the opportunity, what’s the sales presence for Latin America?

Gary Cavey

Well, that’s a slower pace, because there is not a VPF model down there. But we get a flow of business from our dealers and our relationships, long-term relationships with our customers down there, we get orders every week from them. They’re normally smaller quantities, but they are digital, and many of them are – have 3D requirements.

Kevin Herrmann

And we also sell, we’re still selling film equipment in that part of the world as well, that’s one of the areas where there are still film projectors is being purchased.

Operator

Our next question comes from James Fronda from Sidoti. Please proceed.

James Fronda – Sidoti

Hey guys. How are you?

Gary Cavey

Fine.

James Fronda – Sidoti

My question was, in terms of the sales people you said you did some hiring, would you be able to tell me how many sales people you had and how many you hired during the quarter, and what you are thinking of doing going forward, you are going to keep hiring?

Kevin Herrmann

Yeah, I guess, but I can speak for the rest of the company, I don’t know if that’s a great number that we want to throw out there how many sales people we have just from a competitive standpoint.

James Fronda – Sidoti

Okay.

Gary Cavey

We’d tell you that we have offices and we are expanding our presence in China all over.

James Fronda – Sidoti

Okay.

Gary Cavey

Both not only sales, but technical support.

James Fronda – Sidoti

Right, right, okay. In terms of the...

Kevin Herrmann

We opt for the service.

James Fronda – Sidoti

Right, okay. But, in terms of the business, and then stock pricing and everything with revenues and earnings seems great, but stock pricing not. Do you have any reason why you are thinking investors are lackluster to the name right now I mean is it just the question with the financing in China?

Gary Cavey

We can’t, we don’t know.

James Fronda – Sidoti

Okay.

Gary Cavey

We need time.

James Fronda – Sidoti

All right. Okay, thank you.

Gary Cavey

Yes, you bet. Thank you.

Operator

Our next question comes from Jim Gentrup from Discovery Investment Research. Please proceed.

Jim Gentrup – Discovery Investment Research

Good morning, gentlemen.

Kevin Herrmann

Good morning.

Gary Cavey

Good morning.

Jim Gentrup – Discovery Investment Research

I didn’t hear on the questions you answered about the screen business, I heard a laugh and I did not hear you answer, are you at full capacity now or the capacity seems to be...

Gary Cavey

No, we’re not at full capacity yet.

Jim Gentrup – Discovery Investment Research

Moving...

Gary Cavey

No.

Jim Gentrup – Discovery Investment Research

All right, so, we still have room to grow there on the revenue side.

Gary Cavey

Yes.

Jim Gentrup – Discovery Investment Research

Okay, very well. And then Regal installs in the quarter do you have that number.

Kevin Herrmann

That’s not a number I think that we published just because it’s customer specific.

Jim Gentrup – Discovery Investment Research

Okay, all right. And then the...

Kevin Herrmann

I think, probably they’re a publicly traded company, I’m sure that whatever they would want published they will have in their filings.

Jim Gentrup – Discovery Investment Research

Okay. And the CapEx for the year, after $1.8 million in the first quarter what do you expect the rest of the year?

Gary Cavey

Right, yes, I mean, our business model for digital cinema does not require a tremendous amount of capital expenditures. You’re going to buy some computer equipment. You could have a computer upgrade, which we’re constantly looking at, but our run rate forgetting about the first quarter is generally in the $300,000 to $400,000 range of items give or take depending on exactly what’s happening. So, pretty insignificant in the whole scheme of things going forward.

Jim Gentrup – Discovery Investment Research

Okay. And then on the NOC offering, how are you packaging that to the market? Are you – is it a modular type offering where we can do this, this and this or are you saying here is the total package – basically launching the I mean assuming it includes maintenance and also just the digital signage part and monitoring. But can you give us a little more idea of how you’re going to the market with this offering?

Gary Cavey

Well, we are offering packages as well as pick and choose what you need out of the package. It might be just on the projector, projector and services, servers and management systems, well management systems, it can be on the sound systems. It can be on their video display boards in the hallways. We have a whole package that they can choose from.

Jim Gentrup – Discovery Investment Research

Okay. So and then follow-up to that then Gary is can you share with us some sort of win rate that you’re getting at this point. Are they just too – I mean is it too early- I’m sure you got to go back to this – people telling you well, yeah we’re interested, but let’s all this stuff shake out first I mean can you give us sort of an idea on that client side?

Gary Cavey

It’s really early to be honest, but what we’ve found is so far the people we have on are very, very pleased with our performance and meeting some people who have just recently converted from some other NOC operations. I think we’re starting to develop the same reputation with that business model that we’ve done with the rest of our businesses. So I feel pretty good that we’re going to see not only people coming on that are new, but I think we’re going to see people leaving some other people.

Jim Gentrup – Discovery Investment Research

All right. So you’ve already got some conversions?

Gary Cavey

Yeah.

Jim Gentrup – Discovery Investment Research

Okay but yet you’re not quite ready to get to tell us the opportunity?

Gary Cavey

No, a quarter is not enough to – have enough trends here.

Jim Gentrup – Discovery Investment Research

Yeah, okay. Of the 20 year or so thousand independents out there when you are doing – I mean I guess the question is how many of those do you currently serve on the film or the digital side, do you understand my question?

Kevin Herrmann

Well, on the film side, we’ve been in this business so long that just about everyone at some point in time has a projector of ours. Some more than others, so most have been our customers at one point-in-time. And even if they have a digital projector that’s not NEC’s projector they probably have a Ballantyne film projector and we’re probably selling them replacement parts right now or even bulbs or something like that for their film projectors.

So it’s a significant installed base that we have. We have obviously significant relationships with these exhibitors – these independent exhibitors.

Operator

Our next question comes from Gregg Hillman from First Wilshire Securities Management. Please proceed.

Gregg Hillman – First Wilshire Securities Management

Yeah Gary. Yeah I wanted to ask you, I guess about the opportunity for Ballantyne to do like nationwide advertising with your partners like or even in China for that – in China or America, in other words like you’re helping to run all these different screens and whether when you get enough placements of your equipment or either your – in your service business to monitor the LED screens in halls, in the movie theatres and the screens and the theatres themselves whether you could put together a nationwide advertising network to do commercials for McDonalds or something like that, if you get the drift of my question?

Gary Cavey

I’m not sure I understand. Do you Kevin?

Kevin Herrmann

I mean if you’re saying that we would go out and actually do the advertising, be the content provider.

Gregg Hillman – First Wilshire Securities Management

No, no just provide the conduit to do it, in other words like if somebody organizing when you go to a movie theatre and the people are sitting there for the movie to come on. Sometimes you watch advertising, sometimes local advertising and what not?

Gary Cavey

Right.

Gregg Hillman – First Wilshire Securities Management

But you generally don’t watch national advertising although maybe you do and as anybody put together like a network they can coordinate a nationwide advertising campaign by geographical reasons for a new product that is being introduced when people go to the movie theatre either in China or America. If you get, do you understand what I’m trying to get at?

Gary Cavey

For those people who put together these advertising programs on these pre shows. And they are national advertisers Coca-Cola people like that doing a lot of that advertising?

Kevin Herrmann

And the exhibitor themselves use different channels right now. But that’s their business like National CineMedia. And so they’re companies that we do work with we’re in the initial stages of everything. But they would be somebody that we would probably be trying to sell our service to. But they would be ones that would probably put together something for their clients which are the exhibitors.

Gregg Hillman – First Wilshire Securities Management

Okay. So that might not be an opportunity for you then?

Gary Cavey

Probably not.

Gregg Hillman – First Wilshire Securities Management

Okay, okay fine, thanks.

Kevin Herrmann

Thank you.

Operator

Our next question comes from Steve Schnipper, Private Investor. Please proceed.

Steve Schnipper – Private Investor

Follow-ups on some prior questions. In talking to your customers do you get the feeling that the financing environment has changed in the past quarter or two or has it remained equally challenging?

Gary Cavey

Equally challenging, Steve.

Steve Schnipper – Private Investor

Okay, withstanding your – go ahead.

Kevin Herrmann

No, I think the one thing that’s probably changed is obviously the independence now see that the big three receive their financing, they see that being successful. So, they’re being more aggressive that’s probably the only thing that it has changed that they’ve been more aggressive and trying to get the financing and they probably were a year ago.

Steve Schnipper – Private Investor

Okay. Understanding you reluctance to give specific dollar guidance on the amount of orders that may have slipped. Are you willing to guesstimate or quantify into a percentage of orders that you expected to close in Q1 that have since closed in Q2?

Gary Cavey

No.

Steve Schnipper – Private Investor

Okay. And without any numbers and do you feel that the timing scale of your production up stocking of inventory need some sort of modification due to the financing environment if you can be off by that much, does that.....

Gary Cavey

No we’re not uncomfortable with what we’ve done with our inventory.

Steve Schnipper – Private Investor

Okay, following up on the comment about the Board having considered buybacks and having made a decision as to more appropriate use of the capital as well as the comment you made of hey dude, any idea why the stock hasn’t moved, as the Board considered dividends, which would open up the different class of investor at the same time as a possibility for some capital?

Kevin Herrmann

Well again I guess, I’d just refer back to the capital in general as the thought process right now is to use that capital to grow the business. But that is something that is as Gary knows is something that the Board looks at every quarter.

Steve Schnipper – Private Investor

Okay, okay. Thank you very much.

Kevin Herrmann

Thank you.

Operator

Our next question comes from Bob Schwartz. He is a Private Investor. Please proceed.

Bob Schwartz – Private Investor

Hi, gentlemen. I wanted to follow-up an additional question regarding the stock and having invested many years myself. I’m just I hear very good news and I’ve been holding this stock now for a good couple of years, and it sounds like the company is going in the right direction and things in general sound very positive. I’m trying to get a better understanding why with all this good news the stock just continues to drift down and down. Is it because they don’t believe the future is as bright as what we’re hearing or is it, I don’t know, I’m just throwing it out there for your own thoughts?

Kevin Herrmann

Right. It’s tough. I guess I can only speak from myself. But it’s tough for us to speculate on what’s going on with the stock price. What I know is what we focus on is number one the operations, running the operations efficiently and effectively getting this business is what’s going to ultimately drive the stock price long-term. And that’s generating as much cash flow as we possibly can through this process.

Bob Schwartz – Private Investor

Are you just...

Gary Cavey

Bob, we haven’t had any input from where we’ve traveled and talked with people, give us any indication of reasons for what’s happened.

Bob Schwartz – Private Investor

Just something I’ll throw out and obviously it’s all your decisions to make. But from a personal standpoint do you think the market would view it very positively if the Board members, senior management were buying the stock over great periods of time aggressively as of vote of confidence and their own beliefs.

Kevin Herrmann

Well, there is no denial that obviously insider buying is always seen as a positive item.

Bob Schwartz – Private Investor

That’s why I threw it out I mean certainly people would take notice of the fact that you guys yourselves see the value in the company and are putting your money where your mouth is so to speak.

Gary Cavey

Yes. Right we concur with that Bob.

Kevin Herrmann

Okay. Anything else?

Bob Schwartz – Private Investor

No, no.

Gary Cavey

Okay. Thank you.

Bob Schwartz – Private Investor

Thank you.

Operator

Our last question comes from Tom Wolmers Private Investor. Please proceed.

Tom Wilmers – Private Investor

I retracted my question I’m sorry about that guys.

Gary Cavey

Okay. Thanks Tom.

Kevin Herrmann

All right.

Operator

Our last question comes from Jim Gentrup from Discovery Investment Research. Please proceed.

Jim Gentrup – Discovery Investment Research

Gentlemen, I just wanted to ask you a little more about the NEC relationship, I guess, I’m a little worried some times that they should decide to go at a different route. Just can you tell us a little more about why they should remain with you, why they should keep in their master reseller?

Gary Cavey

The only thing – well very simply they make the box they don’t have the sales distribution or is it the people to install it to, this is not just a single sale of a product; it’s selling systems. They don’t have the organization established in anywhere in the world to do this on a direct basis. And...

Jim Gentrup – Discovery Investment Research

Okay.

Gary Cavey

It doesn’t say that they couldn’t do that, but they are a big corporation, they got other things that they are working on as well. And I don’t see that they’re – we haven’t had an indication that they’re going to do this.

Jim Gentrup – Discovery Investment Research

So you don’t see that as a big threat down the road where they could take their business elsewhere?

Gary Cavey

Well, I think they could do it no matter what our agreement is or agreement with anybody. But we don’t see that happening right now or in the future.

Jim Gentrup – Discovery Investment Research

All right. And then just a quick question on that, Kevin I think you’ve spoken about this before, the digital equipment do you feel that, that will require more maintenance than your film equipment and well just could you comment on that again?

Kevin Herrmann

Well, that would be debatable, but I think the key is – is who is doing that maintenance. In the past with the film projector, you did need to monitor it with a NOC. And in some cases if they are financing this equipment through – like through a Cinedigm or through another financier a lot of times are required to have some sort of monitoring service, sometimes we may require to have some sort of maintenance service. They didn’t need that in the film world.

So there is more demand for the type of service that Ballantyne Strong provides than there was on the film projector. The film projectors broke down, but at many times the local people at the theatre could fix it or they had the guy down the street to fix it. Now that in the digital world that can still happen, but it’s not as nearly as likely especially from a NOC, Network Operations Center standpoint there is not that many options for the exhibitor to go to something like that. So I think that’s where...

Jim Gentrup – Discovery Investment Research

Yeah good , it sounds like you’re well positioned. It sounds like you’re well positioned to take some market share there as well?

Gary Cavey

Yes.

Jim Gentrup – Discovery Investment Research

Thank you.

Kevin Herrmann

Thank you.

Operator

Mr. Herrmann, there are no further question at this time. Please continue with your presentation or closing remarks.

Gary Cavey

Thank you once again for joining us today. We truly appreciate your ongoing interest in Ballantyne. And Kevin and I look forward to seeing you once again following BTN’s second quarter results later this year. Have a great day.

Operator

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

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