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Ballantyne Strong, Inc. (NYSEMKT:BTN)

Q3 2011 Earnings Call

November 3, 2011 10:00 am ET

Executives

Robert Rinderman, Investor Relations

Gary L. Cavey – President and Chief Executive Officer

Mary A. Carstens – Chief Financial Officer

Analysts

Robert Routh – Phoenix Partners Group

James Fronda – Sidoti & Co

Kris Tuttle – Research 2.0

Deforest Hinman – Walthausen & Co

Wayne Cadwallader – Elkhorn Partners LP

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong 2011 Third 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 Thursday, November 3, 2011.

I would now like to turn the conference over to Robert Rinderman, Ballantyne Strong, Investor Relations. You made proceed, sir.

Robert Rinderman

Thank you, [Frank]. Good morning, everyone. Welcome to Ballantyne Strong’s 2011 third quarter results conference call.

This call may contain forward-looking statements related to Ballantyne’s future financial results. Listeners are cautioned that such statements are based upon current expectations and assumptions and involve 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 and 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 result of operations and financial condition section of the company’s SEC filings, copies of which can be obtained from the SEC or Ballantyne’s website at 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 expectations from prior conversations. Today’s call is also being webcast live over the Internet and a replay will be available on our website for 30 days.

I’m now going to turn the call over to President and CEO, Gary Cavey, who is joined by CFO, Mary Carstens; and Vice President, Kevin Herrmann. Gary?

Gary L. Cavey

Thank you, Rob good morning everybody. We appreciate you joining us. Earlier today, Ballantyne Strong reported our all time most profitable quarter on a significant net revenues increase year-over-year.

Projection Equipment in cinema services achieved very strong quarterly growth comparisons. Ballantyne’s Digital Products business led the way with a very large increase in net revenues and digital cinema services sales doubled year-over-year.

The cinema screen business posted lower net revenues versus 2010 Q3, but the strong projection system and service business sales more than made up for the short fall. Mary will fill you in with more specifics and color on our financials following the conclusion of my opening remarks.

One of the keys to BTNs record Q3 performance was our participation in the Marcus Theatres, digital cinema retrofit. As a long time cinema supplier of theirs, we were pleased to have once again been selected to a system.

Our cinema service team helped orchestrate the rollout and among other things provided them with top of the line in using digital projectors. We are very proud that our crew completed more than 550 installs in just 45 days on their behalf. It is our firm belief that Ballantyne is the only organization they could have accomplished such a big project in such a short timeframe.

Our service team is also providing Marcus with our after-care program, featuring annual maintenance and 24/7 NOC Monitoring by our technicians who are based in the state-of-the art facility located in our corporate headquarters here in Omaha.

Another important recent development subsequent to the third quarter was Ballantyne’s appointment as a reseller of Barco’s full line of digital cinema equipment. We are truly delighted to joint their team. In our view, this further enhances Ballantyne’s reputation as the leading provider of one-stop turnkey cinema solutions backed by 80 years of experience catering to worldwide exhibition community.

Taking an updated look at the domestic cinema industry, Q3 was another solid Box Office period with receives up 5.5% compared to the year earlier quarter. Transformers 3 and Harry Potter 7 Part 2 led the way and were currently – they are the two top performing titles thus far in 2011. With the Thanksgiving through year and holiday period is set to kickoff in just a few short weeks.

Many industry follows are forecasting Q4, Box Office results especially when compared to last year somewhat disappointing results. Part 1 of Twilight Saga final (inaudible) including the traditional midnight and early AM showings. Other coming attractions include sequels of popular movie franchises such as Alvin and the Chipmunks, Sherlock Holmes and Machine Impossible. Also opening prior to year-end is The Girl with the Dragon Tattoo based on the best selling novel, and two from Spielberg, The Adventures of Tintin, which is a three-day debut and War Horse.

We just returned from ShowEast the cinema industry’s tradeshow in Florida and we are very encouraged with the customer response to our new agreement with the digital cinema manufacture Bacro. We are also seeing some positive momentum on the financing front as Hollywood studios and distributors are actively pushing movie exhibitors towards the late 2012 deadline for going digital, in order to benefit from the virtual [franchise].

There are other advantages to converting to digital such as programing flexibility pre-show advertising revenues superior visual and sound experience for the patrons and perhaps most importantly, over the long run, the ability to play alternative content. We believe alternative content is gaining popularity while more and more screens around the globe are converting to digital.

Alternative content takes a number of different forms. Some of the most popular example to date includes Opera, live sports and concerts. There are really countless possibilities for the theatre owners to have this opportunity to increase their capacity utilization especially on week days and week nights when as much as 80% of their seats typically go unfilled.

That concludes my opening remarks. I’m going to turn it over to Mary now for a discussion of our record financial results in more detail and update you on BTN’s capital position.

Mary A. Carstens

Thanks, Gary. Good morning, everyone. Ballantyne's third quarter net revenues grew 94%, $63.4 million and we earned $0.33 per diluted share, which is more than double the $0.16 per diluted share we reported in the third quarter 2010. As Gary mentioned, this all time best quarterly performance for Ballantyne Strong was due to strong growth in our domestic digital cinema products sales and digital cinema services. Our screen business slowed a bit compared to a year ago period.

Numerous exhibitors have informed us that they are closely monitoring the supply of future 3D titles as an alternative entertainment in this format as well as their consumer demands for premium showing. We believe that these factors will influence whether theatre owners opt to increase their numbers of silver screen. We also continue to receive a steady stream of overseas screen orders, but have seen shipment aways due to cinema construction schedules being pushed out in certain markets. As for now, there are approximately three-dozen 3D movies in the pipeline for 2012 and as a similar number our levels as 2011.

So let’s take a closer look at the company’s third quarter top line performance. Digital product with net revenues increased to 167% primarily driven by a significant rise in projection equipment sales, including the revenue from the market theaters as they rollout, which represented over 50% of Q3 revenues.

Given the one-time nature of the markets deployment, we caution investors to factor that into both future, top and bottom line expectations for Ballantyne. As you know, our policy is not to get formal management guidance, however we felt that it was important to inform investors that the third quarter was an unusually strong period for us given the market’s contribution and that annualizing these very strong quarterly results would not be appropriate.

Our cinema services group posted a 110% year-over-year growth in revenues of $4.6 million during the recent period, largely a result of the digital services including projection system installations for market theaters, which our team completed for Marcus’s request in only one and a half month. We also continued to perform similar install work on behalf of other cinema customers. We are building a growing base of annual maintenance and not monitoring service contracts that will provide Ballantyne with reoccurring revenues in the future. As a reminder, the service business especially our NOC are very scalable.

With more than 50% a US based exhibitors already digitized, we are looking to deploy our talented hardware-agnostic group of technicians and more after-care servicing roles.

Screen sales were $2.4 million during the three-month period compared to $5 million in the year earlier quarter. For the first nine months of this year, our screen business was ahead more than 15% to $15 million. As you may recall, we had an especially strong first quarter performance as our projection team in the manufacturing facility in Quebec worked extra shifts to satisfy all of the 3D compatible silver and large format screen demand during the spring as many exhibitors were in a rush to upgrade their auditoriums in anticipation of the strong summer (inaudible), which as Gary indicated included Harry Potter and Transformers among other 3D formats.

Our legacy analog film related business continued to flow in the third quarter, not unexpectedly as the global cinema community continues to focus on digital upgrades. Net revenues during the three-month period from 35-millimeter projectors, spare parts and analog film services amounted to $1.9 million versus $4.6 million in the year earlier quarter.

Company’s lighting segment contributed $800,000 in net revenues during the period. This business continues to be effected by slower economic growth, which have impacted new arena in stadium construction. During the third quarter, we sold 832 NEC digital projection systems globally, up significantly from 321 in the prior year. 666 of these systems were sold to domestic based theatrical exhibitors including 554 to market theaters. A 153 were sold to cinema operators in China and the balance went to theaters in the Americas, including Latin America and in Caribbean. We also sold eight systems in Asia excluding China.

During the quarter, our consolidated gross profit rose 55% to $10 million or a 15.8% gross margin on net revenues. This gross profit was up significantly from a year ago level of $6.5 million, which was at 19.6% gross margin. The product mix shift reflecting a significant increase in projection system sales, which are at higher price points and lower gross margins where the primary driver of the year-over-year gross margin decline.

Selling expenses rose from $700,000 to $900,000, which is consistent with the higher revenue in the quarter and hiring of additional sales and international personal that amounted to 1.5% of net revenues versus 2.2% in the year-ago period Q3.

G&A expenditures were $2.5 million up from $2.2 million, G&A as a percent of net revenues dropped to 4% of net revenues versus 6.7% a year ago.

Q3 net earnings increased 104% to $4.7 million or $0.33 per diluted share up from net earnings of $2.3 million or $0.16 per diluted share in the year earlier period. Weighted average diluted [shares outstanding] was $14.5 million versus $14.4 million in Q3, 2010.

Ballantyne’s balance sheet in September 30 included cash and cash equivalents balance of $22.4 million. In the third quarter, we generated $2.5 million in cash from operations and spent only $400,000 in CapEx.

Our $20 million credit facility with Wells Fargo remains available and are intact. In summary, we were very pleased with Ballantyne’s all time record third quarter results, which reflects significantly strong Digital Products and Services revenues from the Marcus Theatres digital deployment.

It was a solid Q3 performance from all of our core operations. We are very excited about the news, reseller relationship with Barco and have just returned from a cinema industry, Semi-Annual Trade Show where there was a lot of positive buzz surrounding our team with Barco.

To reiterate we remain a master reseller of NEC’s complete line of digital cinema products and with these two product lines continue to demonstrate our status of the industry’s leading one-stop turnkey digital cinema provider of both products and services.

We believe the new relationship with Barco with help our business, our screen business expanding the number of receptive customers who we will be marketing to and also helping us grow our maintenance and non-service revenues years to come.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Robert Routh from Phoenix Partners Group. You may proceed.

Robert Routh – Phoenix Partners Group

Good morning guys. Good results here. A couple of quick questions. Given the deal that you just signed with Barco and the deal that you’ve already had with NEC is there any not conflict there as Barco deal that have put in jeopardy and the relationship that you develop with NEC over the years or is that totally fine and there are no issues there just expands that you offer to your client base?

Gary L. Cavey

Good question. We were nowhere exclusive and we have a very good relationship today as we did in the past with NEC and we see no issues going forward.

Robert Routh – Phoenix Partners Group

Okay. Great and second question is as far as your JV with digital joint venture, when do we expect that to come to an end, diluted supposed to be at the end of this year sometime and can we still expect the company to get some kind of a cash payment back is kind of a return of cash, when that dissolves or has anything changed on that front?

Gary L. Cavey

Well there was never an end date of this year, these projectors were deployed overtime and they were being taken out over time, what we have said is that we expect by the end of 2012 that the majority of them would be taken out and potentially a few carrying over into 2013.

So it’s winding down, there is only a few systems left there, we do expect to receive cash over the next 12 months and that’s going to range from probably $2 to $2.3 million worth of cash back from that joint venture and then on top of that there are build in gains into these projectors because they are being depreciated overtime, we get to recapture a portion of that depreciation and that the estimated range it gets fluctuates depending on what time you are looking at $450,000 to $500,000 were the profits that Ballantyne will record over this I guess you would call a 12, 18 month timeframe where we expect the venture to close out.

Robert Routh – Phoenix Partners Group

Okay, great. And just two more quick ones, you don’t mind. In the release, you mentioned you had $22.4 million in cash on the balance sheet at the end of the quarter. But then subsequent to the end of the quarter, you collected the bulk of the receivable. What is your cash balance now?

Gary L. Cavey

Well, that’s not something that historically we give out future guidance, the cash flux. The cash and the working capital fluctuate from period to period and obviously we expect our cash over a period of time to grow here as our profits obviously are being generated.

Robert Routh – Phoenix Partners Group

Great. And I’m seeing from a modelling purposes can you do, it’s in your release, (inaudible) the funds are being collected subsequent to September 30. I mean, what number would be a good number for cash to use, is there any or at this day of $22.4 million you have as of quarter end that’s a modelling question.

Gary L. Cavey

I think what we have to look at is what the cash is at the end of this period in your modeling you know, look at how much EBITDA you’re generating and you know kind of our historical working capital range and that’s where you’re going to end up.

Robert Routh – Phoenix Partners Group

All right great. And just, one last question. I mean, given all these different things you’ve done in the screen business, a lot of your business now you’ve got Barco deal and Marcus Theatre deal, the Regal deal, and you still have the balance sheet that’s obviously debt free with a lot of cash borrowings, cheap and a lot of I mean arguably you’re over capitalized, right. But the question is do you see any thing on the horizon that makes a lot of sense, are you still considering or would you consider your own stock as it use up some of that cash or is it kind of a wait and see?

Gary L. Cavey

It’s yes and yes.

Robert Routh – Phoenix Partners Group

Okay. Fair answer.

Operator

Our next question from the line of James Fronda from Sidoti & Co. You may proceed.

James Fronda – Sidoti & Co

Hi, guys how are you.

Gary L. Cavey

Great. Thank you.

Mary A. Carstens

Great.

James Fronda – Sidoti & Co

Pretty good quarter. I guess, just the one question I had was I guess, a little more color on China. It’s about the sales force, is everything [setting stone] over there? I mean, you’re still looking to add people or is that a setting stone?

Gary L. Cavey

It is not setting stone, James.

James Fronda – Sidoti & Co

Okay.

Gary L. Cavey

We’re going to be adding some additional sales talent over there. We’re in the process of adding that right now.

James Fronda – Sidoti & Co

Okay.

Gary L. Cavey

And we’ve added some other talents. So we are increasing our presence over there and we feel very good about how we’re positioning ourselves.

James Fronda – Sidoti & Co

Okay. All right, I don’t think I have anything else. Thanks guys. Great quarter.

Gary L. Cavey

Thank you.

Mary A. Carstens

Great.

Operator

(Operator Instructions) Our next question is from the line of Kris Tuttle from Research 2.0. You may proceed.

Kris Tuttle – Research 2.0

Hi. Thanks a lot guys for taking my question. Two things, one of them is, could you elaborate a little bit on how much of the business in the quarter was as you kind of described it as a little bit of a one-off, what’s the nature of that and how should that be thought of from people in terms of growth going forward?

Mary A. Carstens

I guess, you know I think in the press release and in the comments what we’re saying is that, if you look at the quarterly results in excess of 50% and I guess, you know what we don’t want to do is to give enough information out so, people can kind of understand the competitive issues we have. But if you look at it, think about 50% and that’s how much of the revenues we’re probably related to this market transition.

Kris Tuttle – Research 2.0

Okay.

Gary L. Cavey

I might also add to this. This is, Gary that we’ve added some sales talent, because the market here is changing from very large exhibitor buys to a lot of the smaller exhibitors buying, and we think we’re in a very excellent position to capture a good portion of that business with our sales talent that we’ve recently added and the position we have with our distribution system.

Kris Tuttle – Research 2.0

Okay. And can you, in terms of the gross margin, I understand that Barco’s and other great partner to have and at the same time, it sounds like you’ve got the growth in the business that involves the systems is a little bit lower gross margin. And I’m wondering how you kind of, are there businesses in the mix that are going to start to grow faster and start to bring the gross margin back up or is more of the systems business going to either keep gross margins were they or potentially bring them a little bit lower.

Mary A. Carstens

You know, I guess, what we’ve looked at is, it seems like the third quarter is probably

consistent with what we see going forward. It might be a little lower, it might be a little higher, but it’s in within the range.

Kris Tuttle – Research 2.0

Okay. And then your latest sort of inputs from the exhibitors, it looks like a great quarter overall, the digital cinema seems to be moving forward. You did mention that they were closely monitoring, I guess their theater going behavior, do you have any recent inputs in the last 30 days on what there not is, the holiday has come, there is a slow down or that there is any reason to believe that people are going to be less in to the aspects about spending money in this channel?

Gary Cavey

Good question. I think it’s true almost in every industry if their cash flow is good, much more in the buyers of capital equipment are much more interested in purchasing capital equipment. And we saw a strong third quarter for the theater industry and they are looking very positively with what the releases are, and so we’re trying to get across for the fourth quarter. So we think that they are in the buying mood.

Kris Tuttle – Research 2.0

Okay. All right thanks a lot guys.

Operator

Our next question is from the line of Deforest Hinman with Walthausen & Co. You may proceed, sir.

Deforest Hinman – Walthausen & Co

Hi. Can you kind of just give us an update in terms of the commentary you’ve done the industry participants in terms of the 2012 deadline on the digital conversion, is there a thought permeating that this is kind of a hard and fast number which would conceivably pull for a live digital conversions, or is there you know the belief that that will get potentially pushed out, that’s my first question.

Gary Cavey

We really don’t have any more insights in any – on that. I wish we can give you a better answer, but no. Their plan – their card is close to divest on that.

Deforest Hinman - Walthausen & Co

Okay. And then a few questions on the Barco transaction. Does that give us a revenue stream related to any type of backlog of orders they already have or is it just a go forward from the date of the agreement on potentially easy to what they sell.

Gary Cavey

They go forward on a day-to-day agreement. It’s a go forward, yes sir.

Deforest Hinman - Walthausen & Co

Okay. And is there any type of financial commitment on Ballantyne’s and in terms of a certain number of units purchased or parts commitments in terms of the maintenance end of things.

Gary Cavey

That’s half financial basis but its not significant one way or the other.

Deforest Hinman - Walthausen & Co

Okay. Thank you.

Operator

Our next question is from the line of Wayne Cadwallader from Elkhorn Partners. You may proceed.

Wayne Cadwallader – Elkhorn Partners LP

Hi. By the way, great quarter guys.

Gary Cavey

Thank you.

Wayne Cadwallader – Elkhorn Partners LP

Just a quick one on the NOC services as with the Marcus Theater and so on. If you can provide some more color in terms of how that’s progressing that particular part of the business and so that’s how you think it’s going to continue to unfold going forward?

Gary Cavey

Well, we’re very optimistic about going forward and whether it is today whereas the clients that we have has been very pleased with our performance of monitoring and servicing their business. And as of today, we have all the Marcus screens online and we see our business continuing to grow. And with our reputation of the quality and service that we are having with both our technical staff as well as our NOC Center, we see a very bright future.

Wayne Cadwallader – Elkhorn Partners LP

That’s great. Thank you.

Operator

(Operator Instructions) Speakers, it appears we have no further questions at this time. I’ll turn it you for your presentation or closing remarks.

Gary Cavey

Well, thank you very much for joining us today. We appreciate your ongoing interest in Ballantyne. Mary and I are looking forward to speaking with you again following the release of our Q4 in year-end results. Have a great day.

Operator

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

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