Ballantyne Strong, Inc. (NYSE:BTN) Q4 2021 Earnings Conference Call March 24, 2022 5:00 PM ET
Company Participants
Jen Belodeau – Investor Relations-IMS
Mark Roberson – Chief Executive Officer
Todd Major – Chief Financial Officer
Kyle Cerminara – Chairman
Conference Call Participants
Brett Reiss – Janney Montgomery Scott
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Ballantyne Strong, Incorporated Fourth Quarter 2021 Earnings Conference Call.
[Operator Instructions] Please note this conference is being recorded.
I would now like to turn the call over to Jen Belodeau of IMS Investor Relations. Thank you. You may begin.
Jen Belodeau
Good afternoon. And welcome to Ballantyne Strong’s earnings conference call for the fourth quarter ended December 31, 2021.
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 thank you for joining. It’s great to be here today.
So, 2021 actually turned out to be a pretty good year for Ballantyne.
Starting on slides three and four if you happen to be following along with the PowerPoint, some of the key highlights of the performance of the past year include a strong recovery in top line, Q4 revenues increased 68% and full year revenue increased over 25% as demand continued to improve post-COVID.
On a full year basis earnings per share improved a positive $0.99 per share all in with $0.19 per share, coming from continuing operations. And shareholders’ equity nearly doubled from $27 million to $52 million.
The positive financial results were really driven by three primary factors. Number one was the rebound, obviously in our Entertainment business; two, the performance in our equity holdings; and three, the realized gain from the completed sale of Convergent. In addition, we also took some other steps along the way to strengthen our position as the world continues to reopen. We strengthened our industry relationships and partnerships signing new, exclusive deals with AMC, Cinemark, and Marcus Theatres for instance. And we continue to strengthen our longstanding support of IMAX, delivering the world’s largest IMAX screen this fall. And we also formalized our preferred partnership relationship with Cinionic. Cinionic is the premier supplier of laser projection equipment worldwide.
Outside of the cinema, we continue to expand our Eclipse immersive screen business, as well as finding other unique application for our paints, and coatings and other products at venues such as the Van Gogh exhibit and the Illuminarium in Atlanta. Recently, we also expanded into the military sector, delivering immersive flight simulators, using the Eclipse curvilinear of products for the Navy.
In early 2021 we also monetized our investment in the Convergent digital signage business at a meaningful gain. You may recall, several years back, this was a business that was losing a lot of money. We restructured it and we pivoted the business to be a leaner, more profitable recurring revenue model, making the asset marketable and ultimately resulting in a successful transaction.
We increased our equity holdings this year. We allocated additional capital to both FG Financial as well as GreenFirst. And in the first quarter of 2022, we acquired the real estate that houses our Digital Ignition operation in Georgia. And a couple weeks ago, we just announced the launch of Strong Studios. We’re especially excited about the addition of Strong Studios and believe it will prove to be a valuable growth engine for the Strong Entertainment group.
Specifically moving to the Entertainment business on slides 6 through 15, if you are following along, you can see some of our partnerships with the worldwide leaders we just mentioned. And we took the opportunity during COVID to add to our sales teams and to strengthen our customer relationships, to better position the company for success post-COVID. With partners like Cinionic, Cinemark, Marcus, AMC, IMAX, and others, we’re in good company.
We are seeing a strong recovery unfolding in cinema with COVID restrictions continuing to fade and the flow of high-quality content and the theatrical exhibition accelerating. Reported industry box office revenues have been impressive and, in some cases, record-breaking. For instance, IMAX reported that its fourth quarter 2021 was 15% higher than its pre-pandemic fourth quarter 2019. And that Spider-Man: No Way Home was the sixth largest global opening ever. And the release schedule for 2022 is one of the strongest in years. Doctor Strange, Thor and Black Panther coming from Marvel; The Batman, Flash and Aquaman from DC; we have new sequels of Jurassic Park, Mission Impossible, Transformers, and obviously Top Gun on the way. And then we have Avatar on tap to close out the year.
We’ve seen recurring maintenance contracts, largely return to pre-COVID levels, which is an encouraging sign, distribution of projection and audio equipment bounced back really strong in the second half as well.
This summer we formally released our HGA ReAct screen, which has been optimized for laser projection. The upgrade cycle from Xenon projection to laser projection is a meaningful catalyst as exhibitors looked to upgrade their projection equipment. We expect most domestic exhibitors to upgrade the majority of their projection equipment over the next five to ten years, which also drives screen sales and, in many cases, additional demand for installation and de-installation services.
Outside of the traditional cinema on Slide 9, the Eclipse immersive screens have been a great addition to the screen business and opens the door to new markets that we’re just starting to leverage, flying theaters, aviation training, flight simulators are just a few areas where we’re seeing demand and served increased our addressable market as well as to diversify and grow our revenue opportunities. This is an area where I feel we’re just starting to scratch the surface and evaluate the growth potential of that line of business.
Moving on to Slides 11 through 13, with the announcement of the launch of Strong Studios earlier this month, I’m excited to welcome David Ozer and his team to the company, and also to start what we expect to be a long and mutually beneficial relationship with the team over at Chicken Soup for the Soul’s and Screen Media. The addition of content into our Entertainment business opens up an entirely new avenue of growth.
With the launch of studios, we acquired a portfolio of 12 projects from Chicken Soup. We plan to start production on two of those right away, as they’re already green lit and ready to go, which allows us to hit the ground with a head start. Safehaven is a supernatural thriller and Flagrant is a comedy series starring Michael Rapaport. For those two projects, we’ve licensed the distribution rights to Screen Media in return for a $9 million minimum revenue guarantee.
With demand for content and the explosion of streaming we believe there is a tremendous growth potential, both organically and potentially through M&A. We plan to take things one step at a time in this area, employing a financially disciplined and conservative approach to new projects. We’ll be utilizing co-production in pre-sales to fund production while building out our content library, creating both near term as well as longer term revenue participation.
As we evaluate new projects, we plan to pre-sell projects before we start production, thereby allowing us to operate in a capital light fashion. We have more to share with you on these and other projects soon.
And as I’m sure you’re aware and probably waiting for an update, we’ve been working on the IPO of the Strong Entertainment Group for the past few months. We’re now completing the separate audits of the Entertainment Group on a standalone basis that will be used to update and finalize the registration statement. For today, that’s really all I will be able to say about the Strong Entertainment IPO process and appreciate your patience on that front for just a little bit longer.
Moving on to our equity holdings on Slide 17 through 22, we remain bullish on the outlook for GreenFirst, FGF and Firefly. They all continue to execute. GreenFirst completed its acquisition of the lumber assets of Rayonier Advanced Materials in August, making it a world class forest products company, and one of the Top 10 lumber producers in Canada. We allocated capital to GreenFirst to the rights offering, increasing our position from 7 million shares to 15.3 million shares, which now represents approximately 9% of their common shares outstanding. GreenFirst is now a leading producer of lumber in Canada with the capacity to produce over 900 million board feet annually and we’re bullish for a number of reasons.
The management team there is top notch, bringing decades of industry experience to the management and optimization of the acquired assets. The price of lumber continues to hold historically high levels. And are expected to remain elevated, while GreenFirst has publicly said that they don’t require lumber prices to remain at historically high levels for their acquisition to be successful, higher lumber prices certainly don’t hurt, especially if they’re also able to execute on their objectives to reduce expenses, to support free cash flow generation. More recently, GreenFirst also announced they’ve been uplifted and now recognized as a TSX Fast-50 company.
FG Financial is expanding its reinsurance and SPAC platforms. We allocated additional capital to that investment in late 2021, increasing our holdings from 1 million shares to 1.6 million common shares. FGF recently launched its SPAC platform and closed its first SPAC transactions with OppFi and Hagerty. The team at FGF has proven they can get high quality deals done, and we expect them to continue to grow their business and create additional value.
Firefly is a private company and we acquired our holdings in Firefly as part of merging our Strong Outdoor taxi top advertising business into their digital ride share advertising platform. Their revenues have been accelerating and they’ve been successful in raising additional capital over the past year. Firefly acquired Curb Taxi Media, making it the dominant mobility media company in the New York market. As Firefly continues to scale and eventually looks towards a liquidity event. We believe this holding could deliver significant upside potential.
On Slide 23, we provide a brief sum of the parts view of Ballantyne to help frame out the business in a simple one page fashion. I’m not going to go through the details, but what we want to highlight here is simply that there are multiple assets, valuable assets that Ballantyne has in attractive growth markets. At our current enterprise value, we’re confident that we have the opportunity to build durable long-term sustained shareholder value.
With that, I’ll now turn the call back over to Todd.
Todd Major
Thanks Mark. Slide 25 contains a summary comparison of Q4 2021 results to the prior year. The almost 70% year-over-year increase in consolidated revenue was primarily due to higher revenues from projection and audio equipment, field maintenance and monitoring services and our Eclipse curvilinear screens projects. Those increases were partially offset by the timing of a large screen system sale in late 2020.
As our audio and projection equipment orders generally result in lower margins compared to our screen projects. Our gross margins saw a decline compared to the prior year. Also the marking of the value of our GreenFirst equity holdings to fair value resulted in a $2.2 million unrealized gain during the fourth quarter of 2021. And as a reminder, the benefit from unrealized gains on our equity holdings are excluded from our calculation of adjusted EBITDA.
Slide 26, lays out historical trend, Strong Entertainment showing the operating results over the last four years, including pre-COVID. Prior to COVID, the operating segment was generating in the $35 million to $45 million range annually with EBITDA margins in excess of 20%. 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 levels. While Strong Entertainment has now returned to pre-COVID levels, we are pleased how the industry recovery and our cost control efforts positively impacted the business during 2021.
Slide 27 has summarized balance sheet as of the end of 2021 compared to the end of 2020. We are pleased. We were able to generate cash flow from operations during 2021. And as Mark mentioned earlier, we allocated capital to the exercise of GreenFirst and FGF rights during 2021. The sale of Convergent in early 2021 strengthened our balance sheet as the divestiture of the business increased cash and lowered debt and lease liabilities.
That wraps up the financial review. And I’ll now turn the call back over to Mark.
Mark Roberson
Thanks Todd. Looking ahead, we believe the Strong Entertainment business is well positioned, both in the cinema vertical, as well as in other areas, as we grow the Eclipse product and launched the Studios business. We believe the cinema recovery is largely in this early stages and the outlook for studio release and cinema business is favorable.
Our equity holdings contributed meaningfully to our performance in 2021, and we believe they continue to have meaningful long-term upside opportunity. We also believe they’re meaningful organic and potentially non-organic growth opportunities in this entertainment space. And the addition of Strong Studios opens up additional growth opportunities.
We’ll now open up the call to any questions you may have. Thanks.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Frank Jones[ph] with Barlow Capital, please proceed.
Unidentified Analyst
Hey guys. I was just wondering…
Mark Roberson
Hey Frank.
Unidentified Analyst
Could you provide some more into Eclipse revenues, they are double during the year? And I was wondering, what’s really driving this, do you perceive this as a longer term trend?
Mark Roberson
Yeah. Thanks for the question, Frank. The Eclipse is a product that we’ve been pretty excited about for a while. It’s still small but growing double during the year. The nice thing about Eclipse and just to back up for folks who may not be that familiar, what the Eclipse product line is, is a solid curvilinear screen, that’s used not in movie theaters, but in other types of applications where it’s a more immersive experience and that’s opened up a number of verticals that in addition to the cinema business and cinema screen business, it opens up applications primarily in the theme parks, Universal and Disney, for example.
Also in entertainment rides and exhibitions outside of the theme parks, flying over rides, dark rides, which are gaining popularity, then there was a third area that we probably would not have predicted, two years ago that has become a larger piece of that business, which has been military applications. We’re able to utilize that product in simulator activities. And we recently installed a couple of locations for the Navy putting in cinema – putting in flight simulators for the Navy, for their training facilities.
And the interesting thing why I bring that up is that’s really an area for Eclipse that we probably would not have mentioned a year ago or a year and a half ago, wouldn’t have talked about perhaps, probably didn’t even know about it, we aren’t thinking about it. And it’s really opened up new areas. And I think, while it’s doubled, it’s still small. I think it has a lot of room to grow from that base. And I think we’re really just scratching the surface of understanding and following up on all the growth areas that we could have there.
As we look forward, I think we have opportunities to continue to expand that first footprint in the military. The flying rides are gaining in popularity around the world. I think there’s a lot of opportunity in that as well as the theme parks coming out of COVID are starting to ramp back up construction projects and other cap spending that was really delayed or deferred during COVID. We see that cycle ramping back up too. So a really good product, small piece of MDI, couple of million bucks in revenue, but we think it has a lot of potential.
Unidentified Analyst
All right, great thank you. That’s helpful. Thanks guys.
Mark Roberson
Sure.
Operator
[Operator Instructions] Our next question is from Brett Reiss with Janney Montgomery Scott. Please proceed.
Brett Reiss
Hi gentlemen. Congrats on a great quarter.
Mark Roberson
Thanks, Brett. Thanks for calling.
Brett Reiss
Yeah. If the stock doesn’t get out of this $2.80 to $3.20 trading range, do we have a share buyback authorization in place? And do you have the appetite to buy back stock at these levels, because you’ve got so many good things going on here?
Mark Roberson
Yes. Yes. We definitely have a lot of things going on. There is a share buyback that was authorized quite a few years ago that still remains in place and is available to the company. If we decide to pursue it and move forward with it, it is something that we discuss and think about in the board, looks at from time-to-time and it is something that we would continue to evaluate as we look ahead.
Brett Reiss
Okay. And do you think once you do the IPO on strong entertainment that that might bring in some research coverage from like the B. Riley and Craig-Hallum of the world, because nobody really follows us right now?
Mark Roberson
Yes. I mean, I can’t really speak to whether it specifically will or will not and predict that, but I would certainly expect that it will give us a lot more exposure both at the Strong Entertainment level, as well as the Ballantyne level, introduce a lot of new shareholders to the name and to both companies. And as we grow that business, I would expect to scale up and hopefully we would have more interest in research coverage at that point.
Brett Reiss
Great. All right. Thank you for taking my questions and good show.
Mark Roberson
All right. Thanks Brett. Appreciate it.
Operator
Our next question is from Chuck Dixon [ph] with a Private Investor. Please proceed.
Mark Roberson
Good afternoon.
Unidentified Analyst
Sure. Thanks for taking my call. When would you expect on a quarterly basis that the entertainment business could return to positive operating income and positive EBITDA? And why not hold off on the IPO until you reach that kind of profitability?
Mark Roberson
Yes. In our current quarter, the entertainment business did on a segment basis return to profitability. It’s still scaling back up from COVID, but it did actually report positive operating income and positive adjusted EBITDA for the quarter ended December.
Kyle Cerminara
Hey, Hey Mark. This is Kyle Cerminara. I can add to that.
Mark Roberson
Hey, Kyle.
Kyle Cerminara
Yes…
Unidentified Analyst
Excuse me. I’m reading from the release here on the fourth quarter financial review and it says the loss from operations was $1.3 million versus $0.9 million. So there must be something in there additional to, that’s not just the strong business alone. The entertainment business itself you’re saying was indeed profitable for the quarter. So I must have misread that, I was looking at the company as a whole. Is that correct?
Mark Roberson
Yes. Let me clarify and then – and we have Kyle Cerminara with us here as well, so he can chime in as well. But yes, I thought you were speaking to the entertainment business in and of itself as a segment and it did report a return to profitability on a segment basis – on a consolidated basis, which includes corporate overhead, public company costs, and other parts of the business. It was as you said negative $700,000 for the quarter. We’re still scaling back-up and that includes the corporate overhead, public company costs, et cetera that are not part of the Strong Entertainment segment. So I just wanted to clarify those numbers for you.
Unidentified Analyst
Okay. Thank you. And why not wait? And I understand there’s an issue of a mixed ship there, and that can occur depending on timing and types of products that you sell. So that can be variable from quarter to quarter and perhaps it’s not terribly illustrative to look at it on a quarterly basis when the longer term outlook looks pretty positive. But it just seems that, and maybe by the time you get ready to launch the IPO, if on a consolidated basis you have something that’s profitable that you can show or maybe when you separate it out and it’s no longer consolidated, and you probably can’t speak obviously to those numbers yet. But I would just, I guess, offer that once you do roll this thing out, it sure would be nice to sort of have a feeling of when profitability would arrive on a sustain basis?
Todd Major
And we can’t speak specifically at the timing, but our – as we’ve stated before, right now, we’re preparing all the filings and documents and we’ll have Strong Entertainment ready to go. So that at the right time it can go, and we believe that the IPO and separation of Strong Entertainment is an exercise that will allow us to grow strong entertainment in a much faster fashion going forward as a separate company. So one of the reasons we want to get it done is to be able to have it separated and we see a lot of growth opportunity through both acquisition as well as otherwise in that line of business. And in order to do that, we need to go ahead and get that separated in the near-term.
Kyle Cerminara
Let me add to that for a second. This is Kyle. So, if you think about the last two or three years – the last two years of the entertainment industry, it’s been a very difficult two years for the entertainment industry with the pandemic. And we have – we’ve come through that last two years, okay, where some of our competitors and some of our – some of the industry participants haven’t fair as well as we have. So we think that there’s a great opportunity to raise capital right now and pursue some pretty attractive acquisition opportunities and we need capital to do that. So we think that if you look at what we did with GreenFirst, we put some capital to work at very attractive valuations. And I think we’ve proven to be pretty thoughtful allocators with GreenFirst.
We were pretty thoughtful capital allocators with Firefly. We’ve been pretty thoughtful capital allocators elsewhere. And it’s our – as experts in this industry – in the entertainment industry, it is our professional judgment that now is the time for us to be raising money in the entertainment industry to be putting the money to work. And I think it’s hard for anyone to argue that it’s not the time, we’re coming out of a pandemic almost every industry participant other than us is wounded. I’d love to sort of pose the question back to you. Why not raise money right now and pursue acquisitions. It gets it’s – to me, it’s the perfect time to be doing so.
Unidentified Analyst
Yes. It’s not so much the strategy. I think the strategy makes sense to me. It’s more a question of timing and I understand that’s hard to pinpoint exactly. The only point I would make would be, it would be nicer if you’re a little bit further up the growth curve, you’ll get a little bit better valuation and a little more capital to do what you want to do, and I’m sure your response is going to be well to get a little bit further up the growth curve. We need to capital to do that and make the acquisitions. So I guess it’s – maybe it’s a moot point, debatable point one that revolves around the tradeoff between when do you actually get or need the capital to establish that growth versus are you going to be able to do that without an offering and then try to get a little bit better valuation? You seem to be indicating that given the relative success versus some others in the industry, the perception out there is going to be pretty favorable. It’s a good time to go get the money now, do the acquisition, grow the business rather than wait and it might not be possible to term profitability that much more without doing acquisitions, is that correct?
Mark Roberson
And I think some of these acquisitions may not be available in a year or two if we – if we don’t strike while the iron is hot.
Unidentified Analyst
Okay. Thank you.
Operator
Our next question is from [indiscernible] with River Oaks Capital. Please proceed.
Unidentified Analyst
Alright. Thanks so much for the call. I was just wondering – can you hear me?
Mark Roberson
Yes.
Unidentified Analyst
Okay. Yes. I was just wondering if, I noticed the gross margins for strong entertainment went down to about 21% for the quarter, I know it was probably a weird quarter where the second half of the quarter was better than the first half. I was just wondering post COVID are these like 20% to 25% range margins more normal? Or can we see us getting back to 30 plus percent margins while also holding $35 million to $40 million in sales? Thanks.
Todd Major
Yes. That’s a really good question. And it was a little bit of a weird quarter in that declining gross margin percentage you see is really – it’s a function of product mix. This quarter was really weighted towards sale – the sale of, we have a lot of demand and a lot of revenue from sales of distribution equipment. So when we distribute projection, audio, other equipment that’s manufactured by other parties we capture distribution margin on that, and it’s good business, but it’s much lower margin than for instance our screen business revenues, where we remanufacture the screens, which run 30% to 40% plus up to 50% or more in some cases, and in our service business, which is again much higher margin than distribution business.
So what you’re seeing is really a function of timing of shipments and product mix, in quarters where it’s much heavier on the screen side and the service side, you’ll see margins much higher in quarters where it’s really heavy on distribution. You’ll see a little bit lower percentage, but you’ll see the dollars flow through as well. So it’s not a straight line and I wouldn’t – I would not look at Q4 of 2021 as indicative of our margin expectations going forward.
Unidentified Analyst
Thanks. That makes sense.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to manage for closing comments.
Mark Roberson
Okay. Thanks a lot. Thanks everyone for joining. Appreciate the questions. If you have any other questions I don’t hesitate to reach out directly. Thanks again. Bye-bye
Operator
Thank you. This does conclude today’s conference. You may disconnect your lives at this time and thank you for your participation.
Be the first to comment