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Ballantyne Strong, Inc (NYSEMKT:BTN)

Q4 2011 Earnings Call

March 13, 2012 10:00 am ET

Executives

Robert Rinderman - Jaffoni & Collins

Gary Cavey - President & CEO

Mary Carstens - CFO

Analysts

James Fronda - Sidoti & Co

Deforest Hinman - Walthausen & Co

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong 2011 fourth 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 Tuesday, March 13, 2012.

I would now like to turn the conference over to Robert Rinderman, of Jaffoni & Collins Ballantyne Strong, Investor Relations. You may proceed, sir.

Robert Rinderman

Thank you very much France. Good morning, everyone. Welcome to Ballantyne Strong’s 2011 fourth 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 US 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 results 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 and today's call is 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. Gary?

Gary Cavey

Good morning and thank you for joining us. Earlier today, Ballantyne Strong reported profitable Q4 results and making this our 12th consecutive profitable quarter. We also achieved record top and bottom line financial performance for the full-year 2011. Similar to Q3, Ballantyne’s digital projection equipment sales and cinema services revenue helped us achieve another solid quarter of operating results.

Unlike Q3, we didn’t have a large digital deployment like Marcus to account for the revenue increase. Rather it was many mid-sized and smaller exhibitors converting to digital cinema. Our year-end cash balance increased to $40 million as we collected on receivables associated with Marcus installation which included more than 550 auditoriums that Ballantyne completed in just 45 days towards the end of Q3.

Our solid cash generation performance was one of the reasons Ballantyne’s Board felt comfortable authorizing the $8 million share repurchase late last December. The first purchases commenced during Q1, 2012. One of our key competitive advantages is that as a true turnkey cinema products and services provider, our organization provides a full complement of digital projection systems, screens, installations and 24x7 support from our state-of-the-art network operation center.

To our knowledge there is no other competitor in the world that can offer an exhibitor a one-stop solution that matches ours. Ballantyne has been an industry leader across the globe for decades building strong long-term relationships and our customer-centric reputation for working with the exhibitors over the past 80 years.

As we stated in the corporate refocus announcement in January, Ballantyne cinema service business is one of the key areas where we foresee achieving our best future growth. We expect to generate service, gross profit margins in the mid-20s, which is double while we typically make on digital projection system sale where we act as a master reseller of NEC or Barco equipment.

We recorded over a 100% increase in digital service revenues in the fourth quarter. Ballantyne has the largest and most talented service team in the industry today and we will continue to focus on diversifying into related areas where we can leverage the talent and reach of our 80 technicians in the company’s NOC.

For example, security, our energy management are a couple of the sectors we’re exploring. Some of our exhibitor customers aren’t related, but different businesses such as hotels and we’ve been in engaged in active, recent discussions about additional ways we can help them on the service front. Our service group is well versed in integrating, installing and servicing equipment built by all of the major cinema projector manufacturers as well as all the related digital equipment such as servers and network systems.

Their unique skill sets are generally transferable to other areas such as security and energy management as I mentioned earlier. The ultimate goal is to grow the company’s recurring revenue base by bringing on additional annual maintenance accounts and utilizing the tremendous scalability of our network operation center. We can monitor any digital equipment if it has had an IP address which includes numerous non-cinema related possibilities.

In addition to targeting customers where we previously sold cinema equipment, we are also focusing on wining service business from exhibitors who previously purchased projectors from one of our competitors. Recent experience tells us there is a significant opportunity for Ballantyne to bring in additional contracts from the theatre owners who originally opted to have their equipment serviced by the company who sold it to them or in some instances from their own in-house service teams.

Our cinema screen business posted lower net revenue against a very difficult comp in Q4. Last year’s fourth quarter was our best reporting period ever for the screen sales, as many of larger circuits took advantage of our expanded capacity to move their orders forward. Screen revenues may have leveled off somewhat in the second half of 2011, but we believe this remains a solidly profitable and attractive business for Ballantyne, despite occasionally quarter lumpiness.

We are one of the two acknowledged leaders in the cinema screen manufacturing space with an industry reputation for quality, service and on-time delivery. We expect to continue generated solid manufacturing margins at our ISO certified operations.

In fact we recently helped IMAX set a Guinness record with construction of the world’s largest movie screen ever. You can see it today down under at the Panasonic theatre located in Sydney Australia. The record-setting screen measures 35.7 meters by 29.6 meters and we are very proud to have been a part of this unique achievement. We are selling and successfully shipping screens around the world today. Screens can be very sensitive products to environmental changes and we have formulated our coatings and processes to serve the unique environmental characteristics of cinemas worldwide.

Taking an updated look at the domestic cinema industry, Q4 was somewhat a disappointing box office period after usually reliable holiday slate did not generate as much in box receipts as many had anticipated prior to the quarter. But Q1 2012 has bounced back nicely with very solid results.

In fact US box office receipts has increased on a year-over-year basis for each of the first nine weekends or even 10 weekends this year. Before I turn it over to Mary for an update on our financials, I want to reiterate one of the key points I previously raised on our Q3 call. The forthcoming virtual print fee program deadline that the Hollywood studies and distributors have set for the late 2012 is coming soon.

This is pushing smaller theater circuits and individual owners to make a decision on whether to convert their screens to a digital format. If the VPF program is ultimately ended this year, theater operators run the risk of being unable to receive any celluloid movie prints after that date. We are unsure at how this situation will ultimately pan out, however many of the smaller independent domestic exhibitors have an incentive to digitize as soon as possible.

And we are actively in touch with many of them through our vast network of cinema contacts across the US. If they are unable to secure a VPF agreement and required financing, they could become an acquisition target for the larger chains or be forced out of business due to the inability to compete in the digital world.

I will wrap it up to up here and turn it over to Mary for a recap of our Q4 performance, record full year results and also our capital position. Mary?

Mary Carstens

Thanks Gary. Good morning everyone, Ballantyne’s fourth quarter net revenues grew 13.7% to $51.5 million. For the year we recorded a 35.3% increase in net revenues to an all-time company record of a $184.4 million compared to a $136.3 million in 2010.

Net income for the fourth quarter was $1.6 million or $0.11 per diluted share. For the full year, we achieved net income of $10.3 million or $0.71 per diluted share, up from $8.4 million or $0.59 per diluted share in 2010.

As we mentioned in our quarterly release, our Q4 and full year earnings were negatively impacted by an after-tax severance charge of $0.04 per diluted share related to a strategic corporate refocus that was announced in early January.

During the fourth quarter we more doubled Ballantyne’s digital service revenue to $3.9 million versus $1.9 million last year. For the full year the increase was even larger, a rise of a 134% to $13.1 million from $5.6 million in 2010.

Digital equipment sales grew 17% in Q4 to $39 million. The growth was achieved through an increase in total system sales, which includes projectors, servers and library management systems. The full year increase in digital equipment sales was 59.5%.

Screen sales were $3.3 million during the three-month period compared to $6 million in that earlier year quarter. For a full-year basis, screen sales declined 8.2% to $17.4 million.

Our lighting segment achieved a 46.3% Q4 revenue rise to $800,000 and recorded $3.3 million of revenue over the 12-month period versus $3.4 million a year ago. We’re refocusing our effort in growing our lighting business especially in the areas of LED solutions, which are our green solution that is better for the environment.

During Q4, Ballantyne’s consolidated gross profits was $7.3 million, a 14.2% gross margin on net revenue compared to $8 million or 17.7% gross margin. The gross profit margin decline was largely a reflection of the product mix during the period, which included both arise in lower margin digital product sale and a reduction in higher margin screen revenue.

Selling expenses declined to $1 million or 2% of net revenues versus 1.5 million or 3.4% of Q4 2010 net revenues.

G&A expense, once we exclude the fourth quarter charge for severance, was flat year-over-year at $2.7 million or 5.2% of net revenue, down from 6% a year ago.

Ballantyne’s balance sheet at year end included a cash and cash equivalence balance of $39.9 million, up substantially from the $22.3 million balance at December 31, 2010.

For the full-year, we generated cash flow from operations of approximately $20.1 million, including $17.7 million during the fourth quarter. The increase in cash flow for the fourth quarter reflects improved working capital spending, primarily from reduced receivables due to significant digital production sales generated in Q3 and subsequent collected in Q4.

The company’s $20 million credit facility with Wells Fargo remained available and untapped at quarter and year end.

In summary coming of record-setting 2011, Ballantyne remains well-positioned to continue to capitalize on the cinema industry transformation and garner opportunities to sell digital projection equipment, services and screens./

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question from the line of James Fronda with Sidoti & Co. You my proceed.

James Fronda - Sidoti & Co

So, in the press release you said you were doing business in India. I guess if you could just give a little more color big an opportunity India is and you mentioned it is not big as China but I am sure it is pretty decent.

Gary Cavey

Hi James, this is Gary. What we are doing with India right now is basically shipping screens in and that’s what we have and we look at some of the other products but right now it is primarily screens and it appears that they really want to improve the overall quality of the cinema experience there and they certainly are looking at screens and so we've been shipping some screens in there and it has met with very good high satisfaction from them.

James Fronda - Sidoti & Co

And cap spending for ’12 and ’1,3 I would imagine it would be similar to 2011?

Mary Carstens

Yeah, that's right, not much spending.

James Fronda - Sidoti & Co

Okay, and in terms of the screens in China, do you have any idea how many maybe digital as of today. I know recent numbers were around the 7000 range. So I was just curious if that has been updated?

Gary Cavey

You know, that's kind of a continually rolling one, James. I would get back to you. I think its closer to probably 8500.

James Fronda - Sidoti & Co

Okay, that's fine. And yeah the $40 million in SG&A expenses for 2011, would you say this is the good run rate going forward for ’12 and ’13?

Mary Carstens

Yeah. And you are talking about after the severance charge right?

James Fronda - Sidoti & Co

Yes, correct.

Mary Carstens

Yes, that's right, it should be consistent with that.

James Fronda - Sidoti & Co

Okay. And one last question, in terms of the lighting business, can you give us some color on what kind of margins those are like?

Gary Cavey

Those are more like pretty standard manufacturing margins, James.

Operator

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

Deforest Hinman - Walthausen & Co

Hi. Can you tell us how many digital projector shipments were made in the fourth quarter and I don't know if you already disclosed it or not I may have missed it?

Mary Carstens

Actually the fourth quarter we shift about 640 projectors. That’s total, for a digital, it was 536.

Deforest Hinman - Walthausen & Co

And how many were Asia shipments?

Mary Carstens

So Asia, total Asia was around 50 digital. So it is down from last year, but last year we had a fairly significant increase because of the delivery issues with our competitors.

Deforest Hinman - Walthausen & Co

Okay. And can you talk a little bit about China with the credit situation in the country. And from the way we look at it is, credit seems to be driving a lot of demand in China and over the year we saw some pullback in credit and now we are seeing some improvement in credit. So can you kind of speak to that and what you are seeing in that market and if you..?

Gary Cavey

This is Gary, talking with various bankers over there, there was a strong direction by the government to reduce the amount of lending on construction and a lot of other projects. This started last year. They wanted, as you all know, control some inflation and particularly some speculation on building condos and those types of properties and some retail.

We too are hearing that it’s loosening up and it seems like the inflation has gotten a little more under control. And all these things that they seem to do with government, they have five-year plans and it certainly seems like the build plan for, the cinema industry is continuing to march along.

Deforest Hinman - Walthausen & Co

Okay. Do you anticipate you would do more digital shipments to Asia in 2012 than you did in 2011 based on what you are seeing right now?

Gary Cavey

What I would say that we really don’t give any forward thinking, but we’ve been repositioning ourselves to be more effective and putting in more sales people and we certainly are planning to be more successful going forward.

Deforest Hinman - Walthausen & Co

Okay. And I maybe misremembering, but I think at one point you were talking about doing some strategic reviews, you know, and also restructuring and then in the past, I believe you talked about looking at acquisitions and now in this press release there is no mention of acquisitions. Can you kind of give us an update on the use of cash and what the environment is for acquisitions?

Gary Cavey

Well, as we stated, we’re doing a stock buyback, one for something use of cash; two, we’re also using, looking at, growing our business organically and geographically. So there is a source of some of the cash needs as well as looking at M&A activity, we’re continuing to do that, so all three areas where we are working on very diligently.

Deforest Hinman - Walthausen & Co

Okay. With the cash balance in its current state, I know you announced the buyback but you know, it doesn’t really use up a large portion of that cash. Is there anything outside of the share repurchase that you or the Board has been considering?

Gary Cavey

Well, we just did this and it was at the time, it was 15% of our stock at that time, so that just happened so we continuously review these types of things.

Deforest Hinman - Walthausen & Co

And is that repurchase plan that is in 10b5-1 is it?

Gary Cavey

Yes.

Operator

Our next question comes from the line of [Travis Goff with Goff Capital]. You may proceed.

Unidentified Analyst

On the buyback strategy, the 10K states that you know nothing was done in 2011, there was only eight or nine days there to do it. So the Investor Presentation says you are purchasing per plant, so we can assume that kind of in year-to-date you guys have been in the market?

Mary Carstens

Yeah, we have been.

Unidentified Analyst

Can you give us any update on how much or is that something we’ll just have to kind of wait for Q1?

Mary Carstens

I can guess somewhere we’ve already would have purchase somewhere around 450,000 shares.

Unidentified Analyst

And then on the not managed notes you referred to in the presentation, is this all domestic pretty much or is this any of this international yet?

Gary Cavey

It’s domestic right now, but we see a great opportunity to do it internationally as well.

Unidentified Analyst

And then finally, is it predominantly smaller chains that you are getting signed up or are you seeing larger chains have interest or larger chains more focused in-house?

Gary Cavey

You mean as far as using network operations and maintenance?

Unidentified Analyst

Yes.

Gary Cavey

I would say all of them, from small to large are looking at outsourcing. Even one or two who are currently as we stated that are presently doing at themselves. They are looking at the opportunities of outsourcing.

Unidentified Analyst

So the larger chains if they sign up for NOC services with you guys; they are kind of slowing lagging into it. It’s not just, hey okay take over our entire theater chain?

Gary Cavey

Some are going (inaudible).

Unidentified Analyst

Okay, great.

Gary Cavey

And I think more of them are more of doing the full scale versus piece part.

Unidentified Analyst

Okay, so, we are going to assume that some of the largest chains have signed up full scale with you guys?

Gary Cavey

Yes. Like Marcus has signed up for us.

Operator

(Operator Instructions) Our next question is from the line of [Bernie Harris with E.J. Harris]. You may proceed.

Unidentified Analyst

Just what percentage do you look forward to growing the repeat business, the management and so forth; right now I recall it’s a very small percentage?

Gary Cavey

I am sorry, Bernie I didn't hear the question.

Unidentified Analyst

The repeat business through the management systems; what percentage, well if I recall in the conference, it’s a small percentage, do you have goals of bringing it up to certain percentage of sales; or what type of growth do you see in that?

Mary Carstens

I think what you are asking is that you know for instance our service business right now is running about $13 million and how far do we think that can go.

Unidentified Analyst

Yes.

Gary Cavey

Yeah. And I think it is going, it really -- of course we don’t give forward looking, but the growth is really going to beyond continuing to add the nodes within the service organization. We are looking at actually building, adding different types of equipment on to the NOC plus actually managing those service contracts. So while we haven’t specifically identified and given information as to what the growth percentage is, that’s where we actually see it.

Operator

Mr. Cavey, there are no further questions at this time sir. I will turn the call back to you.

Gary Cavey

Okay. Well, I want to thank everybody for attending the meeting and asking such good questions and we are looking forward to our next meeting on our Q1 results. Thank you very much.

Operator

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

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