Ballantyne Strong, Inc. (NYSEMKT:BTN)
Q2 2016 Earnings Conference Call
August 4, 2016 17:00 ET
Elise Stejskal - Investor Relations
Kyle Cerminara - Chairman and Chief Executive Officer
Nate Legband - Chief Financial Officer
Steve Schnipper - Stourbridge Investments
Good afternoon and welcome to the Ballantyne Strong Second Quarter 2016 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Elise Stejskal. Please go ahead.
Good afternoon, everyone and welcome to today’s second quarter 2016 conference call. We would like to remind everyone that our second quarter investor presentation has been made available for you to follow along during today’s call. For those of you joining from our webcast, you are able to download the presentation through the webcast by clicking on the Downloads tab. For those joining on the phone, you can find our second quarter investor presentation on the Investors page of our website under the Financial Reports & Webcasts page.
Today’s call and webcast may contain forward-looking statements related to the company’s future operating results. Except for the historical information, it may include forward-looking statements that involve risks and uncertainties, including, but not limited to, quarterly fluctuations in results, customer demand for the company’s products, the development of new technology for the markets the company serves, domestic and international economic conditions, the management of growth and other risks detailed from time-to-time in the company’s SEC Commission filings. Actual results may differ materially from management’s expectations.
On today’s call, management’s discussion will include non-GAAP measures. Reconciliations to GAAP are available on our website and can be found on our second quarter investor presentation under the Investors, Financial Reports & Webcasts page. Joining us on the call is Kyle Cerminara, Chairman and Chief Executive Officer and Nate Legband, Chief Financial Officer.
At this time, I would like to turn the call over to Nate.
Good afternoon and thanks for joining us. I will start the call with a review of our financial results for the second quarter. We had another very strong quarter. In the second quarter, we had the highest net operating income we have recorded in 13 quarters and our gross profit dollars were the highest we have recorded since 2011. To begin this quarter, our financial results continued to improve. This improvement is driven by the many changes we have been implementing over the past year.
We had net earnings from continuing operations of $1.8 million or $0.12 per share compared to a net loss from continuing operations of $2.8 million or $0.20 per share in the same period a year ago. Our core pre-tax earnings were $2.1 million in the second quarter compared with core pre-tax earnings of $0.4 million in the same period of the prior year. The second quarter of 2016 included approximately $0.4 million of income net of charges, which we expect will be nonrecurring in nature. The same period in the prior year included approximately $2.4 million of charges that we expect to be nonrecurring in nature. I will discuss those charges in more detail shortly.
Our total net revenues in the second quarter of 2016 were $20.6 million compared to $17.8 million in the same period of last year. Revenue from the Cinema segment was $11.3 million in the second quarter of 2016 compared with $10.3 million in the same period of the prior year. The primary drivers of the increase were an increase in screen sales and in shipments of digital projectors. We shipped a total of 44 projectors in the second quarter compared with 31 in the same period last year. The Digital Media segment generated revenues of $9.8 million in the second quarter compared with $7.8 million in the same period of the prior year. The increase was primarily driven by revenues from our Digital Signage business, driven by two large projects that took place during the second quarter. The increase is also driven by revenues generated from work performed by our field service group.
During the second quarter, we announced that we are pursuing the sale of our Strong Westrex operations. Kyle will discuss this more as part of his business update. The financial results for the Strong Westrex operations are now reflected in discontinued operations. The assets and liabilities of those operations are classified as current assets held-for-sale and current liabilities held-for-sale.
Gross profit was $6.1 million compared with $3.5 million in the prior year. Gross profit as a percentage of revenues was 29.9% in the second quarter compared with 19.6% in the same period of the prior year. The prior year included a non-recurring charge of $1 million related to the valuation of inventory. Excluding this charge, adjusted gross profit was $4.5 million in the second quarter of the prior year and adjusted gross margin percentage was 25%. This represents an increase of 495 basis points year-over-year. The margin improvement in comparison to the prior year was driven by improved margins from both our Cinema and Digital Media businesses. This was partially driven by a more favorable sales mix as more of our sales came from higher-margin products. Improvement in our gross profit was accompanied by continued reductions in our selling and administrative expenses.
SG&A expenses were $4.2 million in the second quarter compared to $5.2 million in the same quarter of the prior year. During the quarter, we recorded non-recurring charge of $0.1 million for accelerated depreciation on leasehold improvements in our Omaha facility. In the second quarter of the prior year, we recorded non-recurring charges of $0.3 million for proxy contest related expenses, $0.7 million for severance related to the reorganization that took place last year and $0.1 million related to facility consolidation costs. Excluding these items, adjusted SG&A was $4.1 million compared with $4.2 million in the prior year or down 2.8% in comparison to the same period in the prior year.
Other income was $0.4 million in the second quarter compared with other income of $0.1 million in the same period of prior year. This change in comparison to the same period of the prior year was driven primarily by income of $0.5 million related to an excess distribution from an equity investment. The income from net equity investment is non-recurring in nature. We also recorded income of $0.1 million for a change in value of marketable securities. Kyle will talk more about our positions in these investments later in the call.
Excluding assets held-for-sale, our cash and cash equivalents balance was $12.8 million as of June 30, 2016 compared to $17.1 million at the end of the prior year. This decrease was driven by a $3.4 million of cash that has been utilized during the quarter for the purchase of equity investments. Kyle will share more around this investment as part of his business update. The cash balance of the Strong Westrex operations which as classified as assets held-for-sale was $1.4 million as of June 30, 2016.
We continue to have good liquidity and strong cash flows providing additional capital resources for our existing businesses as well as to fund new strategic investments. We are very pleased with the direction that our financial performance is heading. Again this quarter, our results are a reflection of the changes we are making and all the work that we have been telling you about in each of our quarterly calls for the past several quarters.
I would like to turn the call over now to Kyle to give the business update and talk more about the progress we have made.
Thank you, Nate. Hello, everyone and thanks for joining us today. I think we had another great quarter. Our results and actions from the second quarter reflect the significant progress we are making. This progress continues to show in our quarterly financial results. During the second quarter, we announced our intention to sell or close our Strong Westrex operations located in Beijing and Hong Kong. This decision is in direct alignment with the new strategy we have shared with you in recent quarters and our commitment to invest in businesses that offer high returns on invested capital. The Strong Westrex business has had negative earnings for several years and after thoughtful review and strategic discussions, we have decided that this business is not core to our new strategy. We will continue to update you as we make progress in the pursuit of the sale or wind down of our Strong Westrex operation. We expect the sale or wind down to have a positive impact on our future earnings and that the sale will ultimately free up additional capital for investment in areas that will generate better returns for our shareholders.
Turning to second quarter, we also made a significant investment in Itasca Capital, which is formerly known as Kobex Capital. I will talk more about this investment later when I get to our strategy update. Our focus on expense reductions identifying new business opportunities and reviews of our current businesses continued in the second quarter. As you have heard from me many times over the last few quarters, we have identified substantial savings utilizing zero-based budgeting.
Our gross annual savings are now nearly $10 million, and our net annual savings are tracking at approximately $3.3 million. As I said in the past, this will continue to be a priority for us and we will continue identifying further savings. We continue to focus on identifying and betting out new business opportunities that align with our strategy. We have been evaluating several new business opportunities over the past quarter. I am excited about these opportunities we are working on now and the pipeline of opportunities I see going forward. This is one of our most important areas of focus right now and we hope to share more with you about these exciting opportunities in the coming months.
Our insider and closely held ownership has increased to approximately 31.4% of our shares outstanding. We expect this number to continue to increase in the quarters and years ahead. It’s been just over a year now since the appointment of the new board in May of 2015. It’s exciting to look back at the appointment of the new Board last May and recap all of our accomplishments. We have made significant changes in this company, and I am proud of what we have done so far, but I am even more excited about the vision we have for Ballantyne and the potential we see for this company going forward as we continue to execute and deliver against our new strategy.
Since May of 2015, we have identified $3.3 million in net annualized savings. These numbers comprise of $9.8 million of cost savings and $6.5 million of capital that we have reinvested back into the businesses. The $9.8 million of cost savings has been generated largely through strategic headcount reductions. We have made several changes over the past year to streamline our organization to more effectively utilize our resources. These changes are driving approximately $8 million in annualized savings related to compensation. We have identified additional annualized cost savings of $1.8 million. Many of these savings were identified through our zero based budgeting process.
We are constantly looking for ways to eliminate unnecessary expenses or to find more cost effective solutions for expenses that we must have. These expense reductions take time and energy and haven’t happened and will not happen overnight. We will continue working diligently through this process and I have no doubt that we will continue our success with this initiative. All the savings we have identified have enabled us to make strategic, thoughtful and higher return investments back into the businesses. The capital reinvestment of $6.5 million was primarily driven by strategic headcount additions in areas and rolls that will enable us to drive revenue and profit growth going forward.
While we have made a great deal of progress, I continue to believe we can do and will do much more. Continuous evaluation of our costs and investments is a process and a mindset that is now ingrained in our culture. Our team knows that our commitment in the set area is imperative to the continued improvement in our financial performance. If you haven’t had a chance to download our investor presentation, I would encourage you to do so now. Those materials, which are available on the company’s website, really clarify visually the progress we have made. Our adjusted gross profit has shown steady and consistent improvement quarterly for each of the last five quarters since the new Board was appointed.
Our second quarter adjusted gross profit of $6.1 million was the highest level of quarterly gross profit that we have recorded in several years. Our gross margin percentages also reflect continued improvement. That trend is a reflection of our efforts to eliminate unnecessary costs and focus our investments in more profitable businesses. Our quarterly adjusted SG&A has decreased significantly over the past five quarters. While we have made significant progress in reducing our SG&A footprint, we will continue to work to make reductions in this area as we work to right size that expense.
Our core pre-tax earnings also reflect the momentum and impact of the changes we have been telling you about. There is no question when looking at the trend of our core pre-tax earnings that we are consistently moving this company forward each quarter and creating more value for our shareholders. From the loss of $0.7 million in the first quarter of last year to earnings of $0.4 million in the second quarter of 2015 to $0.7 million in the third quarter of 2015, $1 million in the fourth quarter, $1.4 million in the first quarter of 2016 and now to $2.1 million in the second quarter of 2016, it’s very clear that the momentum we have been talking about is real.
Return on invested capital is another metric that we track closely, given our strategic focus on driving this metric up. This trend also shows significant improvement. The second quarter return on invested capital was 26.2% in comparison to a return of only 4.6% for the same period in the prior year. These metrics in the trend that we are showing over the past six quarters is a key indicator of the progress we have made and the direction we are moving as a company. We also believe these trends were strong indicators of the value we are beginning to generate for our shareholders.
Our closely held ownership has increased to 31.4% of our shares outstanding. The ownership by this group continues to grow since the new Board took leadership of the company. I hope for that trend to continue in the coming quarters and years. This ownership culture is evidence of the very strong alignment between the interest of the leadership of the company and our shareholders. I truly value that culture in this company and we continue to strive to maintain a culture that’s focused on creating shareholder value over the long-term.
Every quarter, I spend some time during this call talking about our value proposition. I would like to continue to update you on where we are today. Our value proposition is strong and it continues to grow. As of the end of second quarter, excluding class – cash classified as assets held for sale, we had approximately $12.8 million of cash and equivalents and approximately $11.1 million of investments. In addition to that $12.8 million of cash that was classified – that was excluded the cash classified as assets held for sale we had another $1.4 million of cash classified for our Strong Westrex operations. We still have no debt on our balance sheet and our real estate is free and clear. The building and land we own in Georgia is valued between $4.3 million and $6.8 million. We also of course have cash value in our inventory and net receivables.
Our cinema business continues to be highly cash flow generative. We have a very strong market position within this business, driven by multiple decade long relationships with our customers. Our digital media division is starting to again – is starting to grow again and has a great deal of potential. We have made recent investments in that business that we believe will have strong returns over the next few years. We are making great progress on our new product and sales strategies within the digital media business. Our corporate overhead expenses are still too high and we are working diligently to further identify ways to reduce these expenses. We also have operating loss carryforwards that could have value if the company returns to profitability in the United States. Finally, as we continue to demonstrate quarter-after-quarter, we are improving our returns on invested capital. Improving these returns should result in more value for our shareholders.
Next I would like to take some time to share some updates on our strategy and some of the new things we have done during the second quarter in alignment with this strategy. As many of you know, we have significantly reshaped and redefined the strategy of our company over the past year. Our strategy is centered on making the most optimal capital allocation decisions across our portfolio of businesses, investments and new opportunities. This new strategy is paramount to our vision for this company in the future success. We believe that centering ourselves in every decision we make on this strategy will enable us to generate significant value for our shareholders over the long-term.
I said this last quarter when we talked about our strategy update and it’s important to reiterate this again, when we speak about our strategy in the long-term, we are talking in terms of many years rather than a few months or quarters. We have continued to invest in both our cinema and digital media divisions over the past quarter. We have also continued to make investments beyond our existing businesses in other industries where we see opportunity to generate high returns. These investments may include equity positions in public companies or complete acquisitions of other companies. The key of these investments is that we are able to generate high returns on invested capital while minimizing risk.
Most of you know that we made investments in two public companies late in 2015. Those companies are RELM Wireless and 1347 Property Insurance Holdings. During this second quarter, we made a new $3.5 million investment in Itasca Capital for 31% of the outstanding shares of the company, Itasca was formerly known as Kobex Capital Corporation. Itasca trades on the Toronto Stock Exchange Venture Exchange under the ticker ICL. Itasca subsequently invested their cash on hand in preference units in 1347 Investors LLC, which now under controlling stake in Limbach Holding, which trades on the OTC under the ticker LMBH. Limbach is an industry leading specialty contractor in the areas of heating, ventilation, air conditioning, plumbing, electrical and building controls. I am absolutely thrilled with this investment at Limbach Holdings and we believe that it will result in significant value for BTN shareholders over the next few years and beyond.
As a reminder, RELM Wireless designs and manufacturers wireless communications products sold to the government, public safety and commercial markets. I joined the RELM Board in the summer of 2015 and I have seen firsthand the growth potential round with the addition of the TSA contract. 1347 Property Insurance Holdings is a homeowners’ insurance company that writes business in Louisiana and Texas. We believe that company is poised or in much higher returns on capital compared to your average insurance company who are attracted by the large cash position and negative enterprise value.
As of June 30, our investment in 1347 Property Insurance Holdings has a market value and book value of $1.8 million. Our cost basis in that investment is $2 million, so our financial results reflect an unrealized loss of $0.2 million. On the other hand, our investment in RELM Wireless Corporation has a market value of $5.8 million as of June 30. Our cost basis for that – for the RELM Wireless investment is $4.3 million and the book value is $4.3 million. Our investment in RELM is treated as an equity method investment, so our unrecognized gain of $1.5 million has not been recorded in our financials in accordance with GAAP. During the second quarter, RELM started a quarterly dividend program. We expect to see a cash return of approximately $100,000 on a quarterly basis going forward under that program. The new investment we made in Itasca Capital during the second quarter had a market value and book value of $3.5 million as of the second – as of the end of the second quarter.
Before we close today, I want to highlight again for you, as I do each quarter, the core areas we will be focusing on in the coming months and quarters. As I said earlier, we will continue to evaluate cost savings and investment opportunities within our existing businesses. That effort won’t stop. While we have made some great progress here, we need to keep driving this forward.
Next, we will continue seeking out new and creative investment opportunities beyond our existing businesses. We have resources working diligently towards this effort and this will continue to be a focus for us in the coming quarters and years. We also continue to drive our new culture of zero complacency, ownership and accountability in all aspects of the business. This culture in way of operating is critical to our success and to generate long-term value for our shareholders. Lastly, we will continue hiring and pushing to retain the best people. We will continue to push our team to incorporate long-term thinking into all of the decisions made in the business.
In closing, we have continued to make a great deal of progress over the last quarter. I am proud of the work our team has done, but I am even more excited about the opportunities we have ahead. I know we have the right team and strategies in place to continue the momentum we have had over the last year. I am highly confident that we will drive continued progress and create long-term shareholder value for Ballantyne shareholders. That concludes our presentation for the second quarter. We will open the lines now to answer your questions. Operator, could you please open the lines?
[Operator Instructions] Our first question comes from Steve Schnipper of Stourbridge Investments. Please go ahead.
Hey, Kyle. How are you doing?
Great. How you are doing?
Doing well. Operational results look kind of good. I had some question on the financial engineering side, what was the stock buyback during the quarter, if anything?
We are up to – as of the end of the quarter, we are up to 34,650 shares as of June 30 from the beginning of the program.
Still even though the algorithms were being tweaked still nothing significant really being bought?
Only about 34,000 shares. And as we have said, at lower prices, we buy more and at higher prices, we buy less.
Right. I thought there was a discussion that the algorithm was going to get loosened a little bit to let you do a little bit better at little higher prices, nothing, no progress there?
Yes, that requires Board approval. So, we will need to get Board approval to do so. And once we have that Board approval, we will report back to you on that.
Okay. Can you guys give me a little bit more color on this last investment, backdooring TFST into Limbach’s – the conflict of interest obviously, you guys owned all the private shares that were in there and when the deals get into the alter o one of these bags and they are not necessarily going through and you need lots of money, you kind of use in the backdoor from Itasca. It wasn’t clear that the valuation that you were kind of getting on that was anything really spectacular and obviously the insiders had a vested interest in having it go that way. Can you give me a little bit more color on the transaction of why that really made financial sense?
Sure. So just to be clear, Ballantyne Strong had no vested interest in 1347 Investors LLC before this transaction was consummated, Kingsway Financial did and that was the conflict of interest you maybe mentioning. The beautiful thing for Ballantyne Strong shareholders is that as a result of significant negotiations, we were able to get the entire promote of 1347 Investors LLC for 1347 Capital contributed to this deal. So, Ballantyne Strong shareholders are actually benefiting significantly from that promote. The structure that you suggested was perhaps not attractive. It was actually extremely attractive for Ballantyne Strong shareholders through Itasca. The way I think about that is that Ballantyne Strong invested $3.5 million of its cash into Itasca Capital for 31% ownership post the recapitalization of Kobex with their tender offer, the 85% tender offer. So, once that tender offer was concluded, we owned approximately 31% of Itasca Capital weaving Ballantyne Strong. Itasca Capital took that capital that was in the company and invested it into 1347 Investors LLC to get the benefit of the promote. So, we are the most senior equity position in 1347 Investors LLC. There is junior tranches below us and they potentially have more upside, but we actually have perhaps better protection to the downside. So, we have a 12% accretion on that investment plus approximately 44% of the upside in the Limbach shares plus included in that 44% is the promote shares that Kingsway was generous enough to contribute to this deal.
With that structure, we were able to buy on a fully diluted basis, as you can see from the Form 4s and 13-D amended that was filed today, over 50% of the shares of Limbach, which we believe is very undervalued based on the projections for revenue and EBITDA that the company gave in its roadshow that basically values the company at about a little over 5x EBITDA and with the public comps of Limbach trading at north of 8x EBITDA to some as highest 12x EBITDA. So we think once that value comes to fruition, our $3.5 million investment that we made on behalf of Ballantyne will be worth multiples of that $3.5 million we invested. So I actually think it’s one of the most interesting and creative investments I have ever made. And I am really proud and I am going to be really proud to update you on that over the next couple of quarters.
Okay. I mean where are we getting confused, was the value that Itasca was getting for putting in $10 million where if I recall going through the filings, they were getting about a third of the holding company, which like okay, so you are getting $10 million value for $10 million, it didn’t seem like there was that huge step-up where – when you are at the altar on these facts sometimes you really can get a better kind of write-up, so it was that incremental value whether there was anything?
Yes. We are actually getting the benefit of the promote in this pack, so when we think of 1347 Investors LLC, as benefiting fully from the promote in this pack. So Ballantyne Strong shareholders who had no power in structuring this pack in the merger came in sort of at the last minute, we are able to structure a very attractive deal for Ballantyne that gives us the promote shares. So I am – I can’t be more excited about this investment. It’s going to be huge in my opinion.
Do you think you get the $10 million – 100% of the $10 million preferred plus you are getting about a third ownership through the LLC, you are getting a third of the upside give or take from all the promote shares and the warrants that were in there as well.
We are getting about 44% as I mentioned earlier of that upside, yes.
Plus the face value of the preferred?
Yes. Plus the 12% accretion, exactly.
Okay, I appreciate it.
It’s a fantastic investment.
Just, you know the 8-Ks go…?
They are hard to understand, yes.
You don’t disclose everything in the same way and try and draw the lines to make it all make sense, it’s a step removed from a step removed is kind of complicated?
I appreciate the time.
Thank you for your question.
[Operator Instructions] And this concludes our question-and-answer session. I would now like to turn the conference back over to Kyle Cerminara for any closing remarks.
So thanks again for joining us on the call this afternoon. We truly appreciate the support of our shareholders for the work we are doing. We are committed to moving Ballantyne Strong forward and generating real value for our shareholders. Achieving our ultimate vision for this company and the growth potential we see will take time and a lot of hard work, but we will be relentless at working towards that objective. The financial results we released today and over the past several quarters are proof of what this company is capable of doing and the value that we are working to generate for you, our shareholders. Thank you again for your excitement and engagement about what we are doing here at Ballantyne. We appreciate your time today and we look forward to talking to you again next quarter.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!