Ballantyne Strong, Inc (BTN) CEO Larry Page on Q2 2021 Results - Earnings Call Transcript

Aug. 10, 2021 11:35 PM ETBallantyne Strong, Inc (BTN)
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Ballantyne Strong, Inc (NYSE:BTN) Q2 2021 Results Earnings Conference Call August 10, 2021 5:00 PM ET

Company Participants

John Nesbett - Investor Relations, Founder and President at IMS Investor Relations

Mark Roberson - Chief Executive Officer

Todd Major - Chief Financial Officer, Treasurer, Secretary

Conference Call Participants

Jim Merit - Private Investor

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ballantyne Strong, Inc.'s second quarter 2021 earnings conference call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to as questions. [Operator Instructions]. Please not, this event is being recorded.

I would now like to turn the call over to John Nesbett of IMS Investor Relations. You may go ahead.

John Nesbett

Good afternoon and welcome to Ballantyne Strong earnings conference call for the second quarter ended June 30, 2021. On the call today from Ballantyne Strong are Mark Roberson, Chief Executive Officer and Todd Major, Chief Financial Officer.

Before we begin, I would like to remind everyone that some statements made on this call will be forward looking in nature. These statements are based on management's current view and expectations as of today and the company is under no obligation or expressly disclaims any obligation to update forward-looking statements, except as required by law. These statements are also subject to risks and uncertainties and may cause actual results to differ materially from those described on today's call. The risks and uncertainties are also described in the company's SEC filings.

Today's presentation and discussions also will contain references to non-GAAP financial measures. The definition of non GAAP terms and reconciliations to GAAP measures are available in the earnings release posted on the Investor Relations section of the company's website. Our non-GAAP measures may not be comparable to those used by other companies and we encourage you to review and understand all our financial reporting before making any investment decisions.

At this time, I would like to turn the call over to Mark. Okay, go ahead, Mark.

Mark Roberson

Thanks John. Good afternoon and thank you all for joining the call today. Let's jump right in and we will discuss our Strong Entertainment operating business first and then we can provide an update on the holdings on our balance sheet.

It's certainly been a busy few months. Starting on page three, if you are following the PowerPoint, we have seen a robust recovery in our entertainment business with revenues more than doubling from the low point last year. On a sequential basis, we saw revenues increase 28% from Q1 to Q2 of this year. The primary drivers have been increased demand for managed services as a result of theaters reopening and our Eclipse immersive screen division has shown good signs of growth through the past year.

Post close of Q2, we also announced a couple of very significant initiatives. We announced our intention to pursue an IPO for the Strong Entertainment division. We also announced that we would increase our holdings in GreenFirst through their rights offering. We will talk about both of those in more detail in just a few moments.

Referring to pages four through seven. As you may know or do know, Strong Entertainment is our primary operating business, following the divestiture of Convergent and Strong Outdoor. Through our STS and MDI subsidiaries, we are the industry leader in projection screens and managed services. With multiple blockbusters already released and many more to come in the second half of 2021 and in to 2022, movie doors are returned with the theaters and proving that at-home streaming is really not a replacement for the premium experience of a theater.

As we look forward, we are obviously watching the Delta variant, but we are optimistic and continue to see signs that the favorable tailwinds in the industry are strengthening. A good indicator is if you listen to the conference calls of our major customers and hear what they are saying. IMAX, Cinemark and AMC all posted solid quarters with almost all their domestic locations open and operating and expectations were really busy second half of the year as the reschedule intensifies.

One thing that the largest and the most success exhibitors all have in common is a focus on innovation and creating a premium guest experience. Our products and services are focused on creating that premium viewing experience and we are well-positioned as those trends continue.

As a market leader, we believe we are well- positioned to capitalize on the recovery demand. Over the past year, we strengthened our market leadership position with multiyear exclusive agreements with Cinemark on the screen side and with Marcus Theatres on the managed services side. And we supply all of IMAX's screens worldwide on an exclusive basis, leveraging our best-in-class premium large format screens.

As the pace of new releases picks up, we also expect exhibitors to increase focus on uptime for projection equipment and to rely more heavily outsourcing. We have been ramping back up our nationwide field service team as demand increases and we are expanding our capabilities with NOC services starting to gain traction internationally as well as in the U. S.

We have also been diversifying our entertainment revenue base, building on our core strengths and expertise in premium projections, screens and coatings. One example is our immersive Eclipse screen for theme parks and simulators and other non-cinema applications. In addition, our proprietary paints and coatings are also been used in venues like the Illuminarium in Atlanta and the Van Gogh exhibit in major cities around the U. S. Our Eclipse immersive screen division is a smaller but rapidly growing segment of the business and revenues there remain on target to double this year.

On page eight, as we mentioned earlier, we announced the intent to pursue a separate listing and IPO for the Strong Entertainment group. Under securities law, we are extremely limited in what we are able to say about the planned IPO at this time. So we will apologize in advance if we are not able to fully respond to your questions on the topic at this time. The proposed offering is expected to occur later this year, subject to satisfactory market and other conditions. The timing, class and number of securities to be offered and their price has not yet been determined. Ballantyne Strong doesn't intend remains the majority shareholder of the subsidiary post-offering.

Moving on to our holdings. There was a lot of activity there as well over the past few months. Starting with GreenFirst on page ten of the PowerPoint. As I am sure most of you are aware, GreenFirst announced the planned acquisition of a lumber asset from Rayonier and recently completed a rights offering as part of that financing transaction. GreenFirst expects to complete the acquisition in Q3 which will make them a top-ten lumber producer in Canada. Prior to this transaction, Ballantyne owned seven million shares of GreenFirst common stock. We were issued 21 million rights to acquire additional shares of GreenFirst at CAD1.50. During July, we exercised 8.3 million rights, which will bring our ownership up to 15.3 million shares upon the closing of the transaction. Based on the information that's been publicly disclosed on GreenFirst, we expect that 15 million share position represent approximately 10% of GreenFirst post-deal. We allocated approximately $10 million of capital to increasing our position at GreenFirst and continue to maintain a strong liquidity position with just under $10 million of consolidated cash in the balance sheet following this investment. We are bullish on GreenFirst and look forward to participating in their success as they complete the transactions and become a major player in the Canadian lumber industry. Based on recent market prices, the value of our 15.3 million shares would be approximately $35 million compared with a book value of approximately $12 million.

On page twelve, moving on to FG Financial, we own one million common shares or approximately 21% ownership interest as June 30. FGF is a reinsurance and investment management holding company focused on opportunistic, collateralized and loss cap reinsurance while allocating capital to SPAC spots related businesses. FGF wrote its second reinsurance contract recently and has launched its SPC platform to provide strategic, administrative and regulatory support service to newly formed SPAC. On April 12, that he completed an IPO of its first SPAC back platform investment, Aldel Financial. FGF's potential beneficial ownership in Aldel is approximately 533,000 Aldel founder shares and 321,000 warrants. FGF also recently announced that FG New America has closed on the acquisition of OppFi, a leading infect platform and FG New America now operates as OppFi effective July 21. FG Financial holds 861,000 shares of Class A common shares of OppFi and 358,000 Class A warrants.

On page thirteen, Firefly, which is a venture-backed private company focused on innovative street level digital media advertising, is a company we invested in through the merger with our outdoor advertising business last year. Firefly is growing aggressively and recently announced the acquisition of Curb Taxi Media, making Firefly the dominant mobility media company in its market. Clearly, there's been a lot of activity and momentum over the past few months and we are excited about the positive trends and our holdings as well as in our operating business.

With that, I will now turn the call over Todd.

Todd Major

Thanks Mark. Consistent with recent quarters, today's financial review will cover the operating results of our continuing operations and do not include Convergent and Strong Outdoor, now that they have been classified as discontinued operations.

Slide fifteen contains summary comparison of Q2 2021 to the prior year. Revenue and operating results during the second quarter of 2020 were severely impacted by widespread closures of cinemas and other entertainment venues as well as our manufacturing facility in Canada. Now that the industry is in recovery mode, our revenue and profitability returns are improving with revenues more than doubling from prior year and also increasing sequentially. Operating results for the second quarter of 2021 reflects $1.3 million benefit from the recognition of employee retention credits. The favorable impact of those credits are excluded from adjusted EBITDA.

Turning to slide sixteen now. Revenue and profitability as Strong Entertainment during the second quarter of 2021 benefited from overall industry recovery as well as growth in revenue generated from our Eclipse screens. Gross margin of 41% during in the second quarter includes an $850,000 benefit from the employee of retention credits. Excluding this benefit, gross margin during the second quarter would have been approximately 27%, well ahead of the 2% in the prior year. The remaining $200,000 of Strong Entertainment employee tax credit benefit during the second quarter of 2021 was recorded within SG&A

Slide seventeen shows a quick historical trend of Strong Entertainment showing the pre-COVID operating results. During the significant negative impacts of COVID during 2020 we were able to implement a series of cost management measures and Strong Entertainment finished the year at near breakeven level. Prior to COVID, the group was generating revenue in the $35 million to $45 million range annually with EBITDA margins in excess of 20%.

Slide eighteen is a snapshot of the balance sheet as of the end of June compared to the end of 2020. Cash balances have increased. Debt and lease obligations have been reduced and shareholders' equity increased 65% from year-end. And market value of our publicly traded holdings continues to be well above our carrying value on the balance sheet. As Mark mentioned earlier, following the end of the quarter, we allocated capital through the exercise of the GreenFirst rights to acquire 8.3 additional shares. Approximately 8.3 cash came for the balance sheet and an additional $1.7 million came from sale of a portion of the rights. Following the completion of the GreenFirst acquisition and beginning in the third quarter, we expect our percentage ownership of GreenFirst will be below 20%. As a result, we expect to begin accounting for GreenFirst on a mark-to-market basis in the third quarter, which is a change from the current equity method. We are evaluating the impacts of the change in the accounting and expect that we would reflect the mark-to-market gain on the P&L when we report the third quarter results.

Now let me turn the call back to Mark.

Mark Roberson

Thanks Todd. Just to wrap up before we take any questions, we are certainly in a much better position today than we were one year ago at this time. Strong Entertainment is positioned for the continued recovery in the cinema and entertainment industry. Our holdings are performing well and have additional upside opportunity. Our balance sheet has improved, which provided liquidity to be able to increase our stake in GreenFirst and we continue to evaluate opportunities to increase long term shareholder value.

With that, we will now open the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Jim Merit, a Private Investor. Please go ahead.

Jim Merit

Yes. Mark, I wondering what's the book value of the stock at this time?

Mark Roberson

The book value of Ballantyne's shares or book value of our holdings?

Jim Merit

Well, the whole thing, the Ballantyne and all the holdings.

Mark Roberson

Yes. Our shareholders equity is $44 million on the balance sheet. So if you can take $44 million divided by the share count, that's roughly $2.40 per share. It's probably worthy to note that the balance sheet, as it's reported under GAAP, Jim, does not reflect the fair value of the investment holdings because we report it on the equity method or the cost method. So the book value, if it was increased to market value for those holdings, would be considerably higher than the $2.40 ? Is that what you are looking for?

Jim Merit

Yes. I guess I was kind of looking at both of them with all the holdings things too. Could you calculate that real quick?

Mark Roberson

You were looking for that calculation with the fair value of the investments?

Jim Merit

Yes. Or the current value, yes.

Mark Roberson

Hold on. We can do that pretty quickly on the slide, if you could give us a couple of seconds here. Basically, the two elements that we would add to the book value that's reported on the balance sheet would be increasing for the unrealized appreciation inherent in the GreenFirst position as well as the unrealized gain inherent in the FG Financial position, which at this point are unrecognized on the balance sheet. So if you take the $44 million reported or $45 million of shareholders equity reported on the balance sheet, add that unrealized value, which -- where does that get you, Todd.

Todd Major

Just under $58 million.

Mark Roberson

%58 million and then just divide it by the shares. So on a common share basis, that will put you little over $3 share, about $3.15 a share. Again, recognize that fair valuing in the investments, not necessarily fair value in the other assets on the books in the operations, which are reported at appreciated costs and would not reflect the fair value of the entertainment business, for instance.

Jim Merit

Okay. So you guys issue this tracking stock. I guess, first of all, as the current shareholders are we going to get a piece of that?

Mark Roberson

So I think you are referring to the announcement regarding the plan to pursue an IPO of the Strong Entertainment group, right.

Jim Merit

Correct. Yes.

Mark Roberson

Yes. So I am very limited on what I can say about that under securities law. I can really refer back to the press release and have to stay within the four corners of press release at this time. But basically what we have announced is an IPO, a planned IPO of the Strong Entertainment group. It's not planned to be a spin-out or spin-off of the group, So Ballantyne shareholders under a true IPO would not receive additional shares. Strong Entertainment would issue shares at the subsidiary level to raise capital and Ballantyne as shareholders would participate in that through their ownership of Ballantyne.

Jim Merit

I mean, doesn't that just make a lot more extra accounting and stuff like that? Why now just issue more shares of Ballantyne stock?

Mark Roberson

Yes. We have looked at a number of alternatives and our Board has looked at this closely, really, for quite some time at multiple ways to unlock the value in hearing in the business and we believe unrecognized to some degree in the Ballantyne Strong holding company structure. And we believe that the best way to potentially unlock value would be through a separate listing. That's really about all I can say with regards to the IPO plans themselves, staying within the balance of the securities laws at this time. At the time that we have receive further and file our S-1, we will be able to speak lot more clearly about that in a lot more detail.

Jim Merit

Yes. I know we went through a really tough time with the COVID and everything. But I was kind of looking back before Fundamental Global took over the Board and it really doesn't look like, as a shareholder we have gone backwards. And so what would you say to reassure me that we are headed in the right direction? I know it's kind of a tough question. I don't mean to come off that way. But I may have been better off burying my money in the backyard. So you are on, I am sorry?.

Mark Roberson

Sure Jim. It's a fair question. I appreciate the spirit with which you are asking it. And I would say certainly as with any company, there's been ups and downs. I don't think any of us predicted COVID or lots of other things that have occurred over the past few years. But I do think, we have over the past two to three years, if you look at what we have been able to do in the business, certainly not all have been perfect. But we have been able to significantly reduce the operating overhead of the business.

We have been able to take Convergent and turn it from a perennial loser to an EBITDA profitable business and get it sold and monetized. We have been able to take our Strong Outdoor and turned it into Firefly. The holdings are now beginning to perform at GreenFirst and FGF in a significant way. And our Strong Entertainment business has certainly underperformed for the past year or better. But I think the team there has done a really good job of navigating COVID.

We have been able to flex the business down during the worst of COVID a year ago and last summer, keep business stable. Avoid burning excess amounts of cash and we see things recovering in the business. They are not back to where they were pre-COVID when the business was doing $35 million to $40 million in revenue and 20% EBITDA margins, but we see positive trends in the business.

AMC, REGAL, Cinemark, IMAX, they not back where they were pre-COVID either, but they have all announced pretty good quarters with trends moving in the right direction and have pretty bullish outlooks for the back half 2021 as well as into 2022. So we think the business is positioned to take advantage to capitalize on that. Then as we look forward again, we are looking at ways that we can improve shareholder value, both through our holdings and through the operating business. And we believe a potential IPO of that business is one way to do that.

Jim Merit

On GreenFirst, when they announced all this, the commodity price for lumber was three times as high. Is Ballantyne going to be able to navigate through these lower prices and be profitable?

Mark Roberson

Yes. So GreenFirst, so really not Ballantyne, but I think you are asking about GreenFirst's ability to navigate the volatility in the lumber price. And I would recommend that obviously listen to and look at the GreenFirst or filing separately from Ballantyne as well. So what they are saying themselves about the lumber prices in their outlook on the business at the current lumber prices.

When that GreenFirst transaction was announced in April, lumber prices obviously were considerably higher. They went on to be much higher by May. And they have obviously come back down. They are still above historic levels. And when they looked at that transaction and put it together, the team at GreenFirst, based on what was discussed in their conference call and their filings, put together a pretty conservative view of lumber prices and where lumber prices need to be for that business to be profitable and thrive. So they weren't banking on lumber prices remaining at those elevated levels in order for that business to be successful.

Jim Merit

With Ballantyne, did you guys ever have thought that there's a lot of opportunities there to go ahead and participate in that rights offering and convert that into stock? And so you got a fair assessment?

Mark Roberson

Yes. We looked at it and we did convert 8.3 million of the rights that we received into GreenFirst stock and we are very confident in the management team there and believe that good things that yet to come for GreenFirst and that we now have 15.3 million shares that we will have at the close of their transaction, which will represent about 10% of the common equity of GreenFirst. So we feel pretty good about GreenFirst and it's quite a turnaround from where GreenFirst formally at task was a couple of years ago and shares were a $2 million on a balance sheet and now at a market value, they would be certainly much, much higher than that.

Jim Merit

Okay. Thank you for taking my questions.

Mark Roberson

Yes. Jim, I appreciate it. Thank you for following.

Operator

[Operator Instructions]. Our next question comes from Walter Belinger with Lawntown Capital [ph]. Please go ahead.

Unidentified Analyst

Hi guys. Thanks for taking my question. So for Strong, could you remind us what your market share is domestically for both screens and services? And then also how we should be thinking about your market share internationally?

Mark Roberson

Yes. I appreciate the call, Walter. So when we think about our market share, our Strong Entertainment division has traditionally had a large market share, particularly in North America where we believe we have traditionally had about a 65% market share in the screen business and a close one or two in the managed services business for cinema. So, we believe we are the market leader in North America on both screens and services and have a strong position. And we see that position continuing to be strong and getting even stronger.

Internationally, we have had certainly much less market share. Our core markets have been Canada and the U. S. We have had decent sales into China, Mexico and other markets. But from a market share standpoint, we have not participated anticipated in those markets as much as we like, given the opportunity for the growth that's continuing in China as well as in the Middle East. And we believe that's an opportunity for us to continue to gain market shares as we look forward.

Unidentified Analyst

Great. Thanks. That's really helpful. That's it for me. So good luck.

Mark Roberson

Okay. Thank you Walter.

Operator

Our next question comes from Sean Krowanski [ph], a private and investor. Please go ahead.

Unidentified Analyst

Hello everyone. I just had a few questions. What percentage of the business does Strong consider Strong Entertainment?

Mark Roberson

At this point, from an operating company standpoint, Strong Entertainment is the overwhelming majority of the business. It's predominantly all of the operating business at this point. After the sale of Convergent and Strong Outdoor in the past year, Strong Entertainment is well over 95% of the revenue of the business.

Unidentified Analyst

Also on a separate large supply and service cinema company has launched their IPO recently. How does Strong Entertainment intend to stand out from the crowd?

Mark Roberson

Yes. I think you must be referring to MiT, which recently launched their IPO? Or is there someone else you are referring to?

Unidentified Analyst

No, that's who I am referring to, yes.

Mark Roberson

Okay. Just want to make sure. Yes. I don't think we have much trouble standing out in the crowd. I think if you look at Strong Entertainment, our group is a market leader in the space. MiT is a great company. They are a good group. We know them well, I think a lot of them. I think they have done a lot of good stuff. We obviously think we are better, just like everybody would say. From a size standpoint, we are probably about double their size, given that we have both the screen business and a service business. So we feel very good about being able to stand out in terms of the opportunity within the entertainment business, both when you look at our business levels from a historic standpoint as well as going forward,

Unidentified Analyst

All right. Thank you very much.

Mark Roberson

All right. Thank you.

Operator

This concludes the question and answer session. I would like to turn the conference back over to the management for any closing remarks.

Mark Roberson

Okay. Thank you all for joining the call. We really appreciate your time and appreciate the questions. Look forward to talking to you again soon.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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