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Ballantyne Strong, Inc. (NYSEMKT:BTN)

Q3 2012 Earnings Call

November 9, 2012 10:00 AM ET

Executives

Rob Rinderman – IR

Gary Cavey – President and CEO

Mary Carstens – SVP, Secretary, Treasurer and CFO

Analysts

Eric Wold – B Riley

Ethan Starr – Private Investor

Bernie Harris – BJ Harris

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ballantyne Strong Q3 2012 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, November 9, 2012.

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

Rob Rinderman

Thank you, Frank. Good morning again, everyone, and welcome to Ballantyne Strong’s 2012 third quarter earnings results, conference call and webcast.

Today’s call and webcast may contain forward-looking statements related to the company’s future operating results. Listeners are cautioned that such statements are based upon current expectations and assumptions that involve certain inherent risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and these risks and uncertainties are detailed from time-to-time in the company’s SEC filings.

The company’s actual performance may differ materially because of these or other factors discussed in the management’s Discussion and Analysis section of Ballantyne’s filing, copies of which can be obtained from the SEC or via the company’s website at strong-world.com.

All information discussed on this conference call is as of today, November 9, 2012, and Ballantyne undertakes no obligation to update any statements or expectations from prior conversations. Today’s call is being webcast live over the Internet, and a replay will be available on our website for a minimum of 30 days.

I’ll now like to turn the call over to President and CEO, Gary Cavey, who is joined this morning by CFO Mary Carstens. Gary?

Gary Cavey

Thank you, Rob. Good morning, everybody, and thank you for joining us today. We know some of you were unfortunately in the path of Hurricane Sandy, so on behalf of the entire Ballantyne family we want to extend our sincere best wishes to all who were impacted and wish you all a full and speedy recovery.

Before the market opening, we reported our 2012 third quarter results. Q3 revenues were $39.3 million, and our bottom line was a diluted loss of $0.02 per share. Mary will provide additional color on the quarter and our updated capital structure following my opening remarks.

The challenging net revenue and net income comparisons for the quarter are directly attributable to our record-setting performance in the prior-year period, which included the market theater digital deployment. In addition, there was some impact due to the recent decision of the leading virtual print providers to extend their deadlines originally set for September 2012. This move encouraged a few of our exhibitor customers to sign up for our VPF plan now, but to delay their equipment purchases and subsequent installs for a later date.

Despite the VPF extensions and competitive pricing pressures on our company as a projection system reseller, we are successfully leveraging our unique competitive advantage as a leading turnkey cinema systems and service provider. As a result we have been winning additional business by building lower-margin digital projector sales with the higher margin cinema screen and after-the-sale service, which provides Ballantyne with a higher margin than we generate from standalone equipment sales. As a result of the VPF extensions, we expect some of the delayed business to positively impact future reporting periods, pending the ultimate timing of the financing to fund these installs.

For those of you who have been closely following Ballantyne, our operating results for the most recent period should not be at all surprising, given the recent challenging cinema industry trends, which has led to recent pricing pressures and margin compression on the equipment side, subjects we have openly and candidly discussed on several previous quarterly conference calls and in other investor-related forums.

Ballantyne has enjoyed a recent track record of success, with more than three years of positive financial results. While Q3 performance curbed this long trend due to the maturity of the industry transition to digital systems, we are optimistic about the future long-term performance. Our main focus today is continuing in the most important role of serving a very large global cinema customer base by maintaining and further improving upon our leading position as the provider of the most comprehensive one-stop array of digital projection systems and manufactured screens and unparalleled service.

We are of course keenly aware that in order to move forward as an organization, we must again adapt and modify the company’s focus to meet the needs of our core constituency, the world cinema owners, both large and small. Ballantyne has had a long history of being a leader in the cinema industry as the world’s largest manufacturer of 35-mm projectors, with a global installed base in excess of 50,000 machines. This figure comes from only a few years ago before the industry began its historic digital transformation. But like 8-track tape players, the VCR and soon the CD and DVD, there is frankly no longer much demand for the outdated analog-based entertainment technology.

In order to thrive in years ahead, as we have successfully done so many times throughout our 80-year history, we’re in the process of actively transitioning Ballantyne’s operating model, as the industry we serve has dramatically changed and is rapidly evolving on its new digital platform. Clearly, although challenges lie ahead, our entire senior management team has been and will continue to devote a significant portion of our time to proactively evaluating organic growth opportunities and potential acquisitions that capitalized upon our organization’s unique core competencies.

We have a tremendous wealth of long-standing global exhibitor relationships in place and a very talented group of hard-working employees who take an immense pride in upholding our reputation for consistency delivering excellent products and service. It is not lost on us that you’ve been hearing members of Ballantyne senior management discuss the M&A topic long before Mary and I arrived on the scene. We sincerely appreciate your patience and want you to understand that first and foremost, we are focused on securing future acquisitions that are both accretive and beneficial for all our stakeholders. Future acquisitions will be made with the organization’s long-term success as our topmost goal.

We have no interest in bulking up for the sake of just increasing revenue in the short-term without a corresponding recurring bottom line profit. In the interim Mary and her finance team will maintain their disciplined cash management approach, so we can continue to have ample dry power available to secure the type of acquisitions and foster organic initiatives that will help us drive future profitable growth. We’ve actually been very close on several occasions to finalize on what we believe were purchases that would have positively moved the needle for us. Unfortunately, for one reason or another, we did not ultimately come to mutually-agreed-upon final terms with the potential sellers as we were steadfast in maintaining financial discipline and not overpaying.

As a result, we are still in the market, actively looking, and we will not stop this process until we find the right target or targets. Mary and I have mentioned that energy management and security are a couple of examples of sectors that appeal to us. These areas would allow us to capitalize on Ballantyne’s unique 80-person service teams strengths and unique capabilities, including the expertise with the installation, cabling, wiring and after-care on demand and annual maintenance, as well as 24/7 digital system monitoring via Ballantyne’s state-of-the-art network operations center, based right here in Omaha.

In addition to seeking acquisitions in the service area, we are also involved in pilot testing and actively discussions with new and existing theater customers as we demonstrate our unique maintenance and NOC value-added that can save them money and improve their operating efficiencies by outsourcing this function to us.

Today’s cinema operations is significantly more high-tech then in the past, and we believe that bodes well for Ballantyne as we continue to actively ramp up our service footprint. Importantly, the NOC business is very scalable, and will bring us more predictable future revenue stream as we continue to ink long-term annual and multiyear service contracts. No other industry competitor even comes close to offering the sheer breadth of cinema-related products and services that Ballantyne does. And you know, we are diligently working to expand this service and technological strength to other industries beyond cinema.

To date, we are very pleased with the financial contributions from our service business. As disclosed in our Q3 results, NOC revenues increased 250% on a year-over-year basis. As mentioned last quarter, the cinema exhibition digital transformation continues to foster a great deal of innovation. And we believe this tends – trend bodes very well for Ballantyne, given our global industry relationships and technological expertise. Some examples include: Texas Instruments has introduced a 0.68 mm chip, paving the way for digital projection equipment manufacturers such as NEC and Barco to develop compact and efficient cinema projectors which are ideal for the smaller and independent theatres, such as art houses, who typically have less available capital for full digital upgrades. We expect to begin marketing these new projectors next year.

Laser Light Engines are in development, with prototypes showing promise in recent demonstrations. The state-of-the-art technology will materially enhance the brightness and clarity of images on big screen, while eliminating the relatively high cost of replacing projector bulbs, which burnout on an average of 1,000 to 1,500 hours or so. It remains to be same how long mainstream laser will become and at what price point, but we will continue to closely monitor its progress.

High-speed frame rates of 48 and more are ready for prime time. This December, The Hobbit becomes the first major motion picture to be released with higher frame rate prints. This title will be shown in select theaters and demonstrating one of the many advantages to operating on a digital platform. Those who have seen this innovative technology in action at recent industry trade shows have been very impressed.

Several new and improved and more immersive sound systems were recently introduced by our projector manufacturing partner Barco and sound pioneer Dolby. Motion-enhanced effects like 4D seating also is catching on as a high-end more-immersive premium experience, allowing cinemagoers to truly feel part of the action.

In addition to the future growth via M&A and the aforementioned technological developments, Ballantyne is also working diligently on several organic growth-oriented initiatives. These include increasing the company’s international cinema screen marketing efforts by selectively expanding our sales team. Foreign markets such as China and India present potential for us, and we’re shipping screens from our manufacturing facility in Quebec to these countries and others.

The screen business continues to perform well, with all the products seeing an increase in sales over the same period last year. This is particularly true for the Giant and Silver screen product lines, as we’ve had significant deliveries to markets in India, Mexico, and China in Q3. We are also exploring the viability of adding international sites in our NOC and supplementing these monitoring efforts with additional on-the-ground maintenance teams, or perhaps partnering with another organization that we could subcontract these businesses to.

Lastly, we have recently begun beefing up our lighting segment team with the intent of further expanding architectural and outdoor LED-based lighting sales of our proprietary products, and also acting as a value-added reseller for other lighting manufacturers using our distribution expertise.

To that end, we’ve announced today that Strong Lighting was officially awarded the prestigious World Trade Center lighting contract, for which we will produce the world’s first high-powered LED beacon light. We are also manufacturing and providing the lighting technology for the tower’s antenna which will change colors to commemorate various holidays and special occasions once the World Trade Center construction is completed.

The financial benefit of this agreement, as well as the Caribbean Cinemas chain digital deployment that we’ve just announced today, will also be realized through mid- to early-2013. Mary will now discuss our Q3 results in more depth and provide a brief overview of Ballantyne’s capital structure. Mary?

Mary Carstens

Thanks, Gary and good morning, everyone. Today I’ll provide additional analysis of our third quarter results and an update with respect to our balance sheet and assets. As Gary indicated, Ballantyne’s net revenue in the third quarter was $39.3 million. Last year at this same time, net revenues were $63.4 million. This was a challenging year-over-year comparison as the third quarter of 2011 was a record-setting period, primarily due to our work on the Marcus Theatres installation, which by itself accounted for approximately $35 million of our quarterly top line, or roughly 55%.

On a business by business basis, Q3 revenue from digital cinema products led the way, with $30.6 million. We generated $54 million from digital cinema project – products in Q3 2011. In addition to having no comparable theatre installation project to compare to the market’s deployment, which amounted to over 550 systems, the year-over-year difference also reflects the impact of the virtual print fee extensions that Gary mentioned. With respect to our cinema service business, revenues came in at $4.3 million for the third quarter of 2012 versus $4.6 million in Q3 2011.

The shortfall once again reflects the substantial installation revenue recognized in the prior year, which was partially offset by the significant success we are generating in our maintenance service and network operations center 24/7 monitoring business.

Sales growth in these segments increased approximately 25% and 250%, respectively, when compared to the year-ago quarter, and represents 41% of the total revenue this year, compared to 28% of the Q3 2011.

Moving to our Strong Lighting business, in the recent period we generated quarterly sales of $800,000, up from $700,000 a year ago as a result of our ongoing efforts to support and grow this business with an array of LED-focused products. The best example of this being our recent win of the World Trade Center lighting contract to produce the world’s first high-powered LED beacon light, as well as the structure’s antenna, both based on our proprietary LED solutions technology. The positive financial contribution from this landmark agreement will not be recognized by us until sometime in 2013 when building construction is expected to be completed.

Moving down the income statement gross profit was $3.7 million. In Q3 2011 gross profit was $10.1 million. The lower top line impact gross profit by almost $4 million and another $2.5 million is primarily due to the competitive pressures within the digital market and some transitional costs incurred within our service business during Q3, driving gross margins down to 9.5%, it was 15.8% in a year-ago quarter.

We have discussed the competitive pricing pressures within the equipment business on the last call, so I won’t expand on this. But within our service area, we are also in the process of transitioning from an installation- and integration-based business to a more maintenance- and NOC-focused service business. Notably, this will allow us to generate an increasing percentage of long-term recurring revenue for Ballantyne.

Given this shift, we want to ensure that our technicians have the requisite skillset to continue to maintain the high quality of service that Ballantyne is known for, and therefore we have recently invested in additional training for this group. We do not anticipate these costs continuing, and as a result, we should get back to our normal margins in the next quarter.

SG&A expenses were relatively flat at $3.7 million versus $3.5 million in the prior-year period. The increase is within selling expense as we continue to proactively invest in our sales team, partially offset by reduced spending on general and administrative expense. We continue to focus on more efficiently managing our business and exercising operating discipline to best ensure that outflows are in line with current business trends in their near-term and medium-term outlook.

Driven by the decrease in sales, the competitive environment and some transitional costs, we reported a net loss for the quarter of $300,000, or $0.02 per diluted share. In the year-earlier three-month period, we achieved net income of $4.7 million, or $0.33 per diluted share. Although we do not provide guidance, we are concentrating our efforts on returning to profitability in the near future.

Moving to the balance sheet, we are actively focused on preserving the health of our balance sheet as reflected in our solid cash position in the $20 million credit facility that affords us ample funding for potential future capital needs. As stated, the top goal right now is identifying and acquiring profitable businesses at a reasonable valuation that will positively impact the company’s financials and also benefit our operations over the long-term. When reviewing potential purchases, we’re focused on how the acquired business would leverage Ballantyne’s core competencies.

The quarter-end cash and cash equivalents balance of $36.8 million is slightly above our Q2 ending balance. We ended 2011 with a cash balance of $39.9 million. As mentioned last quarter, the modest decrease in cash since December 31, 2011 is largely attributable to our stock repurchase plan, payment of the company’s 2011 tax liability along with quarterly estimates, and a reduction of accounts payable. This was partially offset by collections of accounts receivable, proceeds received from the sale of the company’s legacy film assets and the distribution from the Digital Link II joint venture, which continues to wind down.

With regard to our stock buyback program, as announced back in August, the Board of Directors elected to discontinue share repurchases. Prior to that date, we had already repurchased 575,877 shares at an aggregate cost of approximately $2.8 million. Our Board’s decision to terminate the buyback was motivated toward deploying our capital for future strategic accretive acquisitions.

In closing, Ballantyne’s focus remains on our long-term success. Our entire organization is proactively working to strategically deploy our assets in the most prudent manner possible as the exhibition industry rapidly evolves and transforms itself on the new digital cinema platform and within new markets. We have the requisite financial resources, infrastructure and the right team to successfully make this transition and are confident that we are heading in the right direction. In addition to devoting a significant portion of our management time on M&A opportunities, we know that sitting on our hands and doing nothing at this critical juncture would be a tragic mistake with negative long-term implications.

Ballantyne must leverage the strength of our service team, our state-of-the-art NOC, high-quality screen manufacturing operation and the company’s reinvigorated lighting segment. Of course none of this will be possible without everyone at Ballantyne coming together, and I would like to take this opportunity to thank the entire team for their continued dedication and commitment.

We look forward to being more active in our investor outreach over the coming months and hope to see and speak to many of you in the coming quarters. Thank you for your continued interest in Ballantyne and your participation today.

With that, I’d like to turn the call back to Frank and take this opportunity to answer questions

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Eric Wold of B Riley, please proceed.

Eric Wold – B Riley

Thank you and good morning. A few questions. Just first of all following up on Mary’s last comments on the Board’s decision to withdraw the buyback, I guess two questions on that; one, even if you wanted to hold off on buying back shares, why not just keep that in place, why actually withdraw it? And two, how large – I know that you have talked about a couple of acquisitions you have been close to the goal line on and pulled back on, how large were those in terms of dollar amount? So we can get a sense of how much of your cash balance would they have used and still have left you a fair amount you could have used for buybacks?

Gary Cavey

Thank you for the question, Eric. I’ll answer the question on the acquisitions are in the revenue range of $20 million to $40 million range. And we have a number of active things happening right now that we’re looking at. And that’s pretty much the range we’ve been looking at.

Eric Wold – B Riley

Do you – can you give us a sense of (inaudible) valuations?

Gary Cavey

And once again, those are domestic businesses that have global reach but are domestic-based. And the other part of your question was on the stock buyback and, Mary, can you answer that? I think there was – there is some SEC rules, what we had to adhere to.

Mary Carstens

Yes, it was based on the type of plan that we filed, Eric. It was a, what a 13-B, and so you can’t just hold that off, you have to discontinue it or continue it, it was really the type of plan that we put in place.

Eric Wold – B Riley

Okay. And then on the service side assuming, let’s say you don’t find something attractive to buy or can’t come to terms with any future M&A, how fast do you think you can grow your service division, both sides, NOC and non-NOC, organically on its own?

Gary Cavey

Well, we were able to grow it substantially in this last 12 months, and we think that it’s only going to continue to accelerate, Eric. And we’ve had nothing but exceptionally positive responses from the customers who are using us, and positive results.

Eric Wold – B Riley

Okay, and then final question is on the equipment side. One, how many projectors did you ship this past quarter? Two, can you give us a sense of the dollar amount of the delayed equipment sales that you referenced and when you think they’ll flow? And then lastly, talk about what kind of demand you’re seeing down in Latin America and China, or Latin America is close to getting the VPF agreement finalized, any thoughts on where you could be down there and id China, are you getting any better traction recently from there?

Gary Cavey

Mary and I both will answer these questions. As far as the pace that they’re going to buy projectors here in North America and equipment, I think it’s going to be over the next couple of quarters, Eric. It could extend longer. It really has a lot to do with how well the movies are doing and their cash flow. They tend to – when cash flow is good, they tend to really elect to start spending money, and when it’s a little slower, like the third quarter, as well, it was pretty slow for them, they tend to delay, they’re not as anxious.

Regarding South America, it is getting close, it sounds like, for s VPF program. And down there, we are trying to sell systems, and it appears that there is opportunities but we don’t know exactly the magnitude of it yet. We’re going to have to wait and see.

To answer China, China has had, we’ve all read in the papers about what’s going on in China, they’ve had overbuild in retail space and housing and there has been a slowdown there this year for construction. We’ve been told that the government is going to start easing the credit punch on the building, and we anticipate that the only thing that’s going to open in China is it’s probably not going to be as robust as it has been. It will be probably more consistent for the next several years. And Mary, can you give them the number on the projectors?

Mary Carstens

Yes. The total number of projectors sold in the quarter, Eric, was 490, and that was compared to, I think – well it was compared to 556 in Q2.

Eric Wold – B Riley

Okay. And, sorry what was the dollar amount of – you talked about you guys have signed VPF agreements but have delayed shipments, can you give a sense of the dollar amount of- the aggregate amount of equipment they’ve delayed or number of projectors, either one?

Gary Cavey

I don’t know that we have that number, Eric, right here, we can get back to you on that.

Eric Wold – B Riley

Okay. Thank you.

Gary Cavey

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Ethan Starr, private investor. Please proceed.

Ethan Starr – Private Investor

Good morning. Given the stock price as of today, it is trading around $3.50 a share, I hope you’d consider reinstating a small buyback, given that it’s trading for less than the net current asset value on the balance sheet. Do you have any comments on that?

Gary Cavey

It’s always a subject for the Board to review, Ethan, and I’m sure that will be a point of discussion coming up in our Board meeting this coming week.

Ethan Starr – Private Investor

Okay. I appreciate that.

Gary Cavey

Absolutely.

Ethan Starr – Private Investor

I know you want to focus on M&A, I mean nothing wrong with that, just with the stock price where it is, you might consider a small buyback.

Gary Cavey

I understand.

Ethan Starr – Private Investor

And on the network operation center, to what extent are the – is the growth coming from outside the movie industry, and other non-related industries?

Gary Cavey

That, we are just starting to launch that area, so that’s – we really don’t have any numbers on that yet. That’ll be one of our initiatives that we’re working with and working on. So it’s been – it’s a majority right now within the theater industry.

Ethan Starr – Private Investor

Okay. But it sounds like nothing but upside if you can get additional business.

Gary Cavey

That’s absolutely right.

Ethan Starr – Private Investor

Okay. Well, thank you very much. I look forward to future quarters.

Gary Cavey

Thank you. Thank you very much for asking.

Operator

Our next question comes from the line of Bernie Harris of BJ Harris. Please proceed.

Bernie Harris – BJ Harris

Good morning. Question on the service of the – once you install all the equipment and service the movie theatres, what type of margin or profit flow comes from that type of thing as we continue to grow?

Mary Carstens

What we’ve been talking about, Bernie, is that typically the margins are the mid-25, and certainly they are leveragable as we continue to grow that business, so.

Bernie Harris – BJ Harris

So it becomes a combination of fixed-costs first and then also just with each business has a certain profit for first location. In other words, you can take all that out of the Omaha office.

Mary Carstens

Correct.

Bernie Harris – BJ Harris

And the more you have coming in to Omaha, that will increase the margins?

Mary Carstens

Right, we have our service team and technicians that are actually stationed throughout the U.S. and globally. And so we have our base business here, but we’re actually manned to serve growth within the whole industry.

Bernie Harris – BJ Harris

So the more you grow in different locations that means your start-up costs in each of those locations will increase until everything is in place?

Mary Carstens

No. Actually, we operate out of Omaha and then we just have individuals within regionally to handle cinema theaters and service issues. S, right now we’re manned adequately. As we continue to grow in areas, there might be some increased head count requirements, but nothing significant that would degrade margins.

Bernie Harris – BJ Harris

Okay. Thank you.

Operator

Mr. Cavey. There are no further questions at this time. Please continue with your presentation or closing remarks.

Gary Cavey

Well, thank you again for joining us today. We’re looking forward to speaking with you again after we report our Q4 results. Have a great day. Thank you very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. Have a great day everyone.

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