Ballantyne Strong, Inc (BTN) on Q1 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Ballantyne Strong, Inc. First Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note this event is being recorded. And now I would like to turn the call over to Jennifer Belodeauof IMS Investor Relations. Thank you. You may begin.
Jennifer Belodeau: Good afternoon. And welcome to Ballantyne Strong's earnings conference call for the first quarter, ended March 31st, 2022. On the call today from Ballantyne Strong are Mark Roberson, Chief Executive Officer and Todd Major, Chief Financial Officer. There is also a slide presentation that management will be referencing that is available on the Investor Relations section of the Ballantyne Strong website. Before we begin, I'd 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 and 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. Risks and uncertainties are also described in the company's SEC filings. Today's presentation and discussion also 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 of our financial reporting before making any investment decisions. At this time, I'd like to turn the call over to Mark Roberson. Go ahead Mark.
Mark Roberson: Thanks Jen. Good afternoon, everyone and thanks joining the call today. On our year-end call about a month and a half ago, we discussed the positive momentum we were seeing in our Entertainment business, as well as in our equity holdings. If you are following along with PowerPoint, I'll start on Slides 4 to 5 to go through the quarter. This year is off to a strong start and Q1 revenues are more than double from where they were last year. We're witnessing a robust reopening recovery in Cinema and the current outlook for Entertainment business continues to be strong. Revenues increased 110% for the quarter to just over $10 million, while EBITDA and results from continuing operations improved 83% and 68% on the flow-through from Resurgence in the Cinema space. As we look ahead to the rest of this year and beyond, we expect those industry trends should continue to provide a favorable backdrop. Moving to Slide 7 through 9. Over the past couple of years, we've been working hard to diversify our revenue streams in the Entertainment business. But in addition to the rebound and revenues from our Cinema customers, our Eclipse product line, which is for immersive theme parks and simulators, also continued to generate growth. And most recently, we added content with the addition of Strong Studios, which we expect to be a meaningful contributor going forward. Two weeks ago, all the major exhibitors and studios gathered together in Las Vegas for the annual CinemaCon tradeshow, was a reunion with industry finally back together in large numbers. And there was a tangible level of increased optimism and confidence coming from both the exhibitors as well as from speakers. There were several key referring gains from conference that I thought were useful and would like to share with you. Number 1, people are coming back to the Cinema and thy are coming back in large numbers. Box office results are strong and breaking records. Sony for instance, reiterated that from August of last year, which was the last CinemaCon through this March to this CinemaCon, they generated over $3 billion at the box office. IMAX and Cinemark, have announced record setting box office performances. Spider-Man, No Way Home was the sixth largest global opening ever. This past weekend, Doctor Strange drove large audiences back to cinema and was the second largest opening weekend since COVID started. Yesterday, AMC reported this revenues were up 5X. 2, the major Studios we're all united in voicing their commitment to the theatrical experience. During COVID, there was a lot of well-publicized experimentation with direct to streaming and day and date releases with other models. Without exception, the major studios all expressed their commitment to the theatrical window. And the reality that blockbuster releases generate more revenue profit when they can have multiple bites of the Apple and create a strong opening in the theater. For cinema customers, that's obviously welcome use, and it’s really just part of the continuing evolution as exhibition in streaming coexist, and optimize the revenue opportunities for each projects. Three, the backlog of new blockbuster leases coming this year and future years is enormous. We just had Doctor Strange open up, as we mentioned this past weekend, that really strong numbers. We have Top Gun coming out the end of this month. And as you look out this latest content to the doesn't show any signs of slowing down. We got Thor, Black Panther, Flash, another Venom, Aquaman, there are sequels to Jurassic Park, a couple of Mission Impossibles, Transformers, a new Buzz Lightyear continuing to Toy Story lineage. And there are many more that I won't try to name. And then we also have the rerelease of Avatar in September, which will be followed by the new Avatar, Way of Water, which will close out the year in December. And word is that James Cameron has already completed production or working on production of three additional Avatar sequels that will follow. And if you recall, the original Avatar drove the meaningful upgrades 10 years ago when it first came out. And as the industry confidence is returning, we'll also seeing exhibitors starting to reinvest in our businesses again. AMC just announced the major upgrades, the laser projection. As you may recall, we are the exclusive supplier screens to AMC and we're excited to support them as they invest in bringing the best premium experience to their audiences. We would expect this first round of upgrades in the middle of the back half of the year. And believe this represents the first phase of a longer cycle. Cinemark, where we also give supply on exclusive basis, has also committed upgrading all of their cinemas to laser as well. So coming out of COVID and with Industry beginning to reinvest and with our leadership position, we feel that we're well-positioned. Moving over to Slide 10, our Eclipse immersive screen business has continued to perform well, and we continue to explore additional unique application for our paints and coatings in that product line. The Navy simulator projects have been a nice addition. We've completed two projects recently, and that's several more coming over the next couple of years. And again, the Eclipse line is a smaller but potentially faster-growing part of screen business and is one rapidly we're really just getting started on marketing and creating awareness in the market for the Eclipse slot. On Slide 11, with our services business, we're also seeing demand pick up. Our recurring monthly revenue maintenance contracts are back to pre-Covid levels now, and project and installation work are starting to pick up as well. We're also seeing increased demand for sales of projection and audio equipment as exhibitors are upgrading to improve the consumer experience and starting to prepare for the upcoming releases. We're also striving to become a broader one-stop shop and increase our share of business with our existing customers. With the laser upgrades for example, we're working to capture a broader array of project management and installation activities that we really haven't done in the past. Which should provide a complementary boost for our Service revenues as well as Screen as we support the laser upgrade projects. Moving over to Slides 12 to 13. With the announcement of the launch of Strong Studios this quarter, we're excited to add content to the new line of business in the Entertainment group. This opens up a brand new growth driver for the business. As you may recall from our last year-end discussion, we acquired a portfolio of twelve projects from Chicken Soup as part of the deal. We plan to start production on two of those projects in the coming months. They're already greenlit and ready to go. For those two projects, we've licensed the distribution rights to screen media in return for a $9 million minimum revenue guarantee upon delivery. Our overall business model and the goal is to build -- with Strong Studios is to build our content library over time and to do so in a financially disciplined manner. We'll be utilizing co-production and pre -sales to secure production funding while we're building out the content library, creating both near-term revenue as well as longer term dissipation and value. Moving over to slides 15 and 20, we'll talk about equity holdings. In addition to the entertainment business, we hold equity stakes in three operating companies. GreenFirst Forest Products, FG Financial and Firefly. GreenFirst reported its first quarter, which was profitable I might add since completing their acquisition. We own 15.3 million shares in GreenFirst, as a leading lumber producer in Canada, with the capacity to produce over 900 million We believe central Canada is a great place from a lumber supply standpoint and believe GreenFirst is well positioned, both in the current cycle, as well as in the longer-term. GreenFirst recently uplisted at the TSX. And just last week, Interfor, which is one of the largest lumber producers in North America, announced that they had acquired at 16% stake in GreenFirst. We view Interfor's investment as a positive long-term indicator for a holding in GreenFirst. FG Financial continued to expand its reinsurance SPAC platforms. Again, we hold 1.6 million common shares of FGF. During the quarter, FGF completed two SPAC IPOs. Those are the third and fourth IPOs supporting FG's SPAC strategy. If you recall, Aldel completed its business combination with Hagerty in December and FG New America completed its combination with OppFi back in July. Additionally, FG's reinsurance business to patiently deploying capital and they entered into two new contracts as well. We also hold shares of Firefly, which is a private VC -backed company. Firefly continues to grow post-COVID and continues to be innovative. They recently announced the new program where they're partnering with Hyundai as Firefly's in-car, as well as their on-screens screens installed, generating advertising revenue to subsidize for fleets and drivers. Firefly will enroll professional drivers and fleet operators when they purchase new Hyundai vehicles in the program so that the drivers can earn advertising revenues to subsidize the costs of the purchase of the car. Just another way that Firefly's intending to build their relationships and strengthen their position as well as driving scale. As they continue to grow and eventually looks towards a formal event, we believe the Firefly holding can deliver significant upside and potential for us down the road. Todd, why don't you walk us through the quarter.
Todd Major: Thanks, Mark and good afternoon everyone. Slide 22 contains a summary comparison of consolidated Q1 2022 results to the prior year. Strong Entertainment operating results saw meaningful increases in revenue and profitability as the industry-wide recovery from COVID continues. Revenues from the sale of products and services were each up over a 110% compared to the prior year. While gross margin dollars also more than doubled year-over-year gross margin as a percentage of sales was roughly flat with shifts and product mix, including higher sales of projection and audio equipment being the primary driver. As you would expect, we're also seeing an uptake in some of our sales and marketing efforts as the industry continues to open up. The marking of the value of our GreenFirst equity holdings to fair value resulted in a $1.7 million unrealized gain during Q1, as we've mentioned in the past, the benefit from unrealized gain on our equity Holdings are excluded from our calculation of adjusted EBITDA, which also increased significantly from Q1. Moving to slide 23, which is a quarterly trend of Strong Entertainment for the five most recent quarters. Not only did Q1 of 2022 outperformed the prior year, we're pleased to see the strong Entertainment business deliver improvements sequentially over Q4 of last year as well. Gross profit and operating income during the second and third quarter of 2021 benefited from the recognition of employee retention credits. Overall, we're encouraged by the recent trends and operating results of the business. Slide 24 is a summarized balance sheet as of the end of Q1 2022 and also December 2021 and 2020. Cash flows used in operations and decreases in working capital during the first quarter, which were primarily related to deferred revenue combined with the cash payment and connection with the Strong Studios acquisition of projects from Chicken Soup and the down payment for the purchase of the Digital Ignition building were partially offset by the receipt of a $2.3 million prepayment on the note receivable. The purchase of the Digital Ignition building and Alpharetta, which we previously leased, resulted in the removal of the right-of-use asset and lease liability with an offsetting increased the PP &E and long-term debt. The increase in other liabilities since the end of 2020 is primarily due to an increase in deferred taxes as a result of the appreciation of our GreenFirst equity holding. That wraps up the financial review, and I'll now turn the call back to Mark.
Mark Roberson: Thanks, Todd. Our entertainment business has been accelerating as industries emerging from COVID, the momentum appears to be sustainable and increasing. Supported by the enthusiasm we're hearing from major customers that has released as accelerate. With addition of Strong Studios, we now have an additional growth engines with projects starting to kick off this summer. And our holdings in Firefly, SB Financial, and GreenFirst adds additional upside to overall long-term value of this. With that, we'll now turn -- open up the line for any question.
Operator: We will now begin the question and answer session. We will pause momentarily to assemble our roster. And our first question comes from Brett Reiss with Janney. Please go ahead.
Brett Reiss: Hi, Mark. Hi, Todd. Good quarter.
Mark Roberson: Hi, Brett.
Todd Major: Hi there.
Brett Reiss: Yes, hi.
Mark Roberson: Thanks for calling in.
Brett Reiss: Yes, sure. Can I ask you, on Firefly you read a lot that the Uber and Lyft drivers have to make more money. Is that a tailwind because the advertising device on the top of the car is incremental revenue for the Lyft and Uber drivers? So is that a tailwind for enhanced sales with Firefly?
Mark Roberson: Yes. I mean, I certainly think so and I believe that's an important part of the thesis is these drivers, just like everything else, they get squeezed by increasing gas prices and other things as well. And they've got to make more money. And one of the ways that they can do that is by utilizing their vehicles for more than just the fare coming through the Uber app by utilizing it for advertising and Firefly is a great example of how they can do that, and they've got a great program. This deal that they're setting up with Hyundai is just another way that they're expanding their ability to reach those drivers and partnering with -- on the front end of the purchase of the fleet vehicles. So, yeah, we think that's an important part of the Firefly thesis.
Brett Reiss: Great. On the $10 million revenue run rate, did we generate positive cash flow this quarter?
Todd Major: Cash flow from operations was a bit of a use. We have some deferred revenue that we had recorded at the end of the year. We've received a cash prior to the end of 2021 that we recognized in revenue during the quarter. So there was a little bit of a use from an operation standpoint during the quarter. Then we also purchased the Digital Ignition buildings we had about $500,000 down payment on that purchase. And then we also had the Strong Studios acquisition where we paid about $300,000 as our upfront payment from that. So all of those combined netted against the $2.5 million to $2.3 million we received from sage net. There was about $700,000 or $800,000 actually use overall during the quarter. But not all of that was operations.
Brett Reiss: Okay. And we expect soon to see incremental revenue from the initiative with the Belgium company in Europe. Is that something that's thoughts up pretty soon, or is that often in the horizon?
Mark Roberson: It will start fairly soon, Brett. It's a -- it may start slowly because Europe is a little bit slower to reopen and to accelerate and start their upgrade cycles than we're seeing in the U.S. So we don't expect it start like or rocket, but we do expect it to start very soon and we're working with them now on the logistics and other aspects so that we can actually be able to start shipping from that facility as soon as in the fall, late summer, fall. So that will allow us to really establish a quick ship beachhead in Europe where we can service those customers much faster and much more economically and give us a good position to start increasing market share in Europe as that market starts to accelerate their post-COVID recovery as well.
Brett Reiss: Are the margins higher on your net product sales or on your net service revenue? Because I see your net service revenue doubled quarter-to-quarter, which was very nice to see.
Mark Roberson: Yes. It really, there's not a straight answer to your question because there's a lot of difference -- is a lot of product mix difference potentially in the product lines. They also -- it depends on the products. Our services generally carry nice margins, our screens carry very nice margins. We have other products we distribute that we distribute third-party products that are lower margins. So it really depends on the mix within the product sales line item. If we're heavy on screens, you'll see the product margins tick up. If we're heavy on distributions, you may see that percentage drop, but obviously is contributing margin dollars and our service revenues are generally fairly consistent.
Brett Reiss: All right. One more if I may, and it's something you may not be able to answer, but I'll give it ago. With respect the IPO, are you holding off going forward with it to await potentially better pricing because of market conditions, and how do you weigh that versus perhaps lower prices for what you want to do and use the money for?
Mark Roberson: Yeah, we're evaluating that week-by-week. Obviously, the -- and there are limits to what I can say specifically with regard to the IPO. But what I can say is that we have filed publicly the S1. We will be updating that S1 with Q1 financials here shortly because those numbers will go stale at the end of this week or first of next week. So once we get the S1 updated with Q1, carve out financials, and obviously the SEC has to clear it at that point, we'll be in a position to where we could launch the IPO at such time as market conditions are appropriate. That's really all I can say about in terms of timing of it at this point is, we're going to be ready to go. We have certain objectives we want to achieve and when it's right, we'll start moving forward.
Brett Reiss: All right. Thank you for answering all my questions and I'm going to step back. But thank you. Good quarter.
Mark Roberson: Thanks as always, Brett. Appreciate the call.
Todd Major: Thank you.
Operator: And the next question comes from Frank Jones with Barlow Capital. Please go ahead.
Frank Jones: Hey guys. Thanks for taking my question. So I was wondering, could you provide a little more insight into the $9 million. Do you expect the Strong Studios, specifically how -- a little -- maybe a little more color on how you expect to realize there revenue and over like what kind of a rough time frame that would be?
Mark Roberson: Sure. Yes. Thanks for the question, Frank. I'm not going to get into too much detail specifics on precise timing, but what I will tell you is that the $9 million -- maybe I should just back up and explain what it represents and how the model works, would be helpful first as well. Because it's -- when we acquired these projects from Chicken Soup, we acquired 12 projects. Two of those projects, we're proceeding with quickly and plan to be in production as early as mid-summer on one of them and late summer to fall on the second one, and then there are other projects beyond that. But on these first two projects, we have a minimum revenue guarantee from Screen Media, which is the distribution arm under Chicken Soup, where they'll distribute that, they'll license that for distribution on the Crackle network. So at the time that we deliver the -- each of those series to them so that it's available for their exploitation, that's when we would receive the minimum revenue guarantees for each of those projects, and that's when we would anticipate recognizing revenue. So we anticipate that both of those could likely occur in this year. It's certainly possible that they could slip out into early next year. But within the next 9 to 12 months, we would expect to deliver those episodes and be able to recognize the revenue from those projects. And then obviously we have -- we're excited about the business. We're not just doing it for those two projects. Those are a nice start in the launch to the business, gives us a head start we can hit the ground running with revenue producing projects right out of gate as opposed to waiting and building the business for a year before we get to that stage. And we're working on building the pipeline of other projects and we plan to employ a fairly similar model, with a lot of or other projects to where we utilize revenue guarantees from distributors prior to starting production to be able to generate revenue and generate near-term revenue, as well as longer term participation. But do it in a very capital light, financially disciplined fashion so that we're not taking a lot of risk on these projects. So I don't know if that answered your question, but hopefully that's some background is helpful.
Frank Jones: Yeah, that's very helpful. Thank you very much, yeah, that's it for me. Thank you.
Mark Roberson: All right. Thanks.
Operator: We have no further questions. So this concludes our question-and-answer session, and I will turn the conference back over to management for any closing remarks.
Mark Roberson: Thanks, everyone for dialing in and listening to the call. If you do have any other questions that come up after the call, feel free to reach out to either myself or Todd, and look forward to talking to you again shortly when we report Q2 in August. Thanks.
Operator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
