Ballantyne Strong, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Ballantyne Strong Inc. second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the call over to John Nesbitt of IMF Investor Relations. You may go ahead.

Good afternoon and welcome to Ballantyne Strong's Earnings Conference Call for the second quarter ended June 30th, 2021. On the call today from Ballantyne Strong are Mark Robertson, Chief Executive Officer, and Todd Major, Chief Financial Officer. 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 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. Risk and uncertainties are also described in the company's SEC filings. Today's presentation and discussions 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 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.

Thanks, John. Good afternoon, and thank you all for joining the call today. Let's jump right in, and we'll 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're following the PowerPoint, we've 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'd increased our holdings in Green First through their rights offering. We'll 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're the industry leader in projection screens and managed services. With multiple blockbusters already released and many more to come in the second half of 21 and into 2022, moviegoers are returning to 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're obviously watching the Delta variant, but we're 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're saying. IMAX, Cinemark, and AMC all posted solid quarters with almost all their domestic locations open and operating and expectations for a really busy second half of the year as the release schedule intensifies. One thing that the largest and the most successful exhibitors all have in common is the focus on innovation and creating a premium guest experience. Our products and services are focused on creating that premium viewing experience, and we're well positioned as those trends continue. As a market leader, we believe we're well positioned to capitalize on the recovery demand. Over the past year, we've strengthened our market leadership position with multi-year exclusive agreements with Cinemark on the screen side and with Marcus Theatres on the managed services side. And we supply all of IMAX 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 up times for projection equipment and to rely more heavily on outsourcing. We've been ramping back up our nationwide field service team as demand increases. And we're expanding our capabilities with mock services starting to gain traction internationally as well as in the U.S. We've also been diversifying our entertainment revenue base, building on our core strengths and expertise in cinema 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 being 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 our 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 in IPO for the Strong Entertainment Group. Under securities law, we're extremely limited in what we're able to say about the planned IPO at this time. So we'll apologize in advance if we're 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 have not yet been determined. Valentine Strong does intend to remain 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 Green First on page 10 of the PowerPoint, as I'm sure most of you are aware, Green First announced the planned acquisition of the lumber assets of Rainier and recently completed a rights offering as part of that financing transaction. Green First expects to complete the acquisition in Q3, which will make them a top 10 lumber producer in Canada. Prior to this transaction, Ballantyne owned 7 million shares of Green First common stock. We issued 21 million rights to acquire additional shares of Green First at $1.50 Canadian. 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 by Green First, we expect that $15 million share position to represent approximately 10% of Green First post-deal. We allocated approximately $10 million of capital to increasing our position of Green First and continue to maintain a strong liquidity position with just under $10 million of consolidated cash in the balance sheet following this investment. We're bullish on Green First 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 12, moving on to FG Financial, we hold 1 million common shares, or approximately a 21% ownership interest as of June 30th. FGF is a reinsurance and investment management holding company focused on opportunistic, collateralized, and lost cap reinsurance while allocating capital to SPAC and SPAC sponsor-related businesses. FGF wrote its second reinsurance contract recently and has launched its SPAC platform to provide strategic, administrative, and regulatory support services to newly formed SPACs. On April 12th, FG completed an IPO of its first back-platform investment, Aldell Financial. FGF's potential beneficial ownership in Aldell is approximately 533,000 Aldell founder shares and 321,000 warrants. FGF also recently announced that FG New America has closed on the acquisition of OpFi, a leading fintech platform. And FG New America now operates as OPFI effective July 21st. FG Financial holds 861,000 shares of Class A common shares of OPFI and 358,000 Class A warrants. On page 13, 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, it's been a lot of activity and momentum over the past few months, and we're excited about the positive trends in our holdings as well as in our operating business. With that, I'll now turn the call over to Todd.

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 15 contains a 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 are improving with revenues more than doubling from prior year and also increasing sequentially. Operating results for the second quarter of 2021 reflect a $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 16 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 the second quarter includes an $850,000 benefit from the employee 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 17 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 break-even level. Prior to COVID, The group was generating revenue in the $35 to $45 million range annually, with EBITDA margins in excess of 20%. Slide 18 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. The 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 to the exercise of the Green First rights to acquire 8.3 million additional shares. Approximately 8.3 million U.S. dollars cash came from the balance sheet, and an additional 1.7 million came from sale of the portion of the rights. Following the completion of the Green First acquisition and beginning of the third quarter, we expect our percentage ownership of Green First will be below 20%. As a result, we expect to begin accounting for green first on a mark-to-market basis in the third quarter, which is a change from the current equity method. We're evaluating the impact of the change in accounting and expect that we would reflect a mark-to-market gain on the P&L when we report the third quarter results. Now, let me turn the call back to Mark.

Thanks, Todd. Just to wrap up before we take any questions, we're 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 the liquidity to be able to increase our stake in Green First. And we continue to evaluate opportunities to increase long-term shareholder value.

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

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jim Merrick with a private investor. Please go ahead.

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

The book value of Valentine shares?

Yes. Or the book value of our holdings?

Well, the whole thing. The Valentine and all the holdings.

Yeah. Yeah, our current shareholder's equity is $44 million on the balance sheet. So if you 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 those are reported on the equity method or the cost method. So, you know, the bulk value, if it was increased to market value for those holdings, would be considerably higher than the $2.44. Is that what you're looking for?

Yeah, I guess I was kind of looking at both of them, you know, with all the holdings too.

Could you calculate that real quick? You were looking for that calculation with the fair value of the investments?

Yes, yes, or the current value, yeah.

Hold on. We can do that pretty quickly on the slide. Just 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 green first position, as well as the unrealized gain inherent in the FG financial position, which at this point are unrecognized on the balance sheet. So you take the $44 million reported, or $45 million of shareholders' equity report on the balance sheet, add that unrealized value, which, what did that get you to, Todd?

Just under $58 million. $58 million. Yeah. And then to divide it by the shares, which...

So on a common share basis, that will put you a little over $3 a share, about $3.15 a share. Again, recognize that's fair valuing the investments, not necessarily fair valuing the other assets on the books and the operations, which are reported at appreciated costs and would not reflect the fair value of the entertainment business, for instance.

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

So I think you're referring to the announcement regarding the plan to pursue an IPO of the Strong Entertainment Group, right? Correct.

Yes.

Okay. So I'm 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 the press release at this time. But basically what we've announced is an IPO, a planned IPO, the Straw Entertainment Group. It's not planned to be a spin out or a spin off of the group. So no, Ballantyne shareholders under a true IPO would not receive additional shares Strong Entertainment would issue shares at the subsidiary level to raise capital, and Valentine would participate in that through their ownership of Valentine.

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

Yeah, you know, we've looked at a number of alternatives. Our board has looked at this closely, you know, really for quite some time at, you know, multiple ways to unlock the value inherent in the business that we believe is, you know, unrecognized to some degree in the Ballantyne strongholding company structure. And, you know, we believe that, you know, 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 bounds of the securities law at this time. At the time that we proceed further and file our S-1, we'll be able to speak a lot more clearly about that in a lot more detail.

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've gone backwards. And so what would you say to reassure me that we're headed in the right direction? I know that's kind of a tough question. I don't mean to come off that way, but I've been better off burying my money in the backyard. I'm sorry.

Sure, Jim. It's a fair question. I appreciate the spirit with which you're asking it. 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, and But I do think we've, over the past two to three years, if you look at what we've been able to do in the business, it's certainly not all been perfect, but we've been able to significantly reduce the operating overhead of the business. We've been able to take convergent and turn it from a perennial loser to an EBITDA profitable business and get it sold and monetized. We've been able to take our strong outdoor and turn it into Firefly. The holdings are now beginning to perform at Green First and FGF in a significant way. And, you know, our strong entertainment business has certainly underperformed for the past year or better. But, you know, I think the team there has done a really good job of navigating COVID. You know, we've been able to flex the business down during the worst of COVID a year ago and last summer to keep the business stable, you know, avoid, you know, burning excess amounts of cash and We see things recovering in the business. They're not back to where they were pre-COVID when the business was doing 35 to 40 million in revenue and 20% EBITDA margins, but we see positive trends in the business. AMC, Regal, Cinemark, IMAX, they're not back where they were pre-COVID either, but they've all announced pretty good quarters with trends moving in the right direction and have pretty bullish outlooks for the back half of 2021, as well as into 2022. So, you know, we think the business is positioned to take advantage, to capitalize on that. And, you know, as we look forward, you know, we're looking at ways that we can improve shareholder value, you know, both through our holdings and through the operating business. And we believe, you know, a potential IPO of that business is one way to do that.

On the green first, you know, 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?

Yeah, so green first. So really not Ballantyne, but I think you're asking about green first ability to navigate the volatility in the lumber price. And I would recommend that you obviously listen to and look at the Green First filing separately from Ballantyne as well for what they're saying themselves about the lumber prices and their outlook on the business at the current lumber prices. When that Green First transaction was announced in April, lumber prices were obviously considerably higher. They went on to be much higher by May, and they've obviously come back down. They're still above historic levels. And when they looked at that transaction and put it together, the team at Green First, based on what was discussed in their conference call and in 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.

With Ballantyne, you guys are both outside thought that there was a lot of opportunity there to go ahead and participate in that rights offering and convert that into stock. Is that a fair assessment?

Yes. We looked at it and we did convert $8.3 million of the rights that we received into green for stock. We're very confident in the management team there and believe that good things are yet to come for green first and that our We now have 15.3 million shares and we'll have at the close of their transaction, which represents, will represent about 10% of the common equity of Green First. So we feel pretty good about Green First. And, you know, it's quite a turnaround from, you know, where Green First, you know, formerly Itasca was, you know, a couple of years ago when, you know, the shares were, you know, a couple million dollars on our balance sheet and, Now, at a market value, they would be certainly much, much higher than that.

Okay. Thank you for taking my questions.

Yes, Jim. Appreciate it. Thank you for calling.

As a reminder, if you have a question, please press star, then want to be joined into the queue. Our next question comes from Walter Bellinger with Lone Town Capital. Please go ahead.

Hey 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?

Yeah, appreciate the call, Walter. So, you know, when we think about our market share, you know, our Strong Entertainment division, you know, has traditionally had a a large market share, particularly in North America, where we believe, you know, we've traditionally had about a 65% market share in the screen business and are either, you know, a close one or two in the managed services business for cinema. So we believe, you know, we're the market leader in North America on both screens and services and have a strong position. And we see that position, you know, continuing to be strong and get even stronger. Internationally, we've had certainly much less market share. Our core markets have been Canada and the US. We've had decent sales into China, Mexico, and other markets. But from a market share standpoint, we've not participated in those markets as much as we'd 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 share as we look forward

Great, thanks, that's really helpful. That's it for me, so good luck.

Okay, thank you all. Thanks. Our next question comes from Sean Prolonchi, a private investor.

Please go ahead.

Hello, everyone. I just had a few questions.

What percentage of the business does Strong consider Strong Entertainment? 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 Convergence and in Strong Outdoor in the past year. Strong Entertainment is, you know, well over 95% of the revenue of the business. 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? Yeah, I think, you know, You must be referring to MIT, which recently launched their IPO, or is there someone else you're referring to? No, that's who I'm referring to, yeah. OK, just wanted to make sure. Yeah, I mean, I don't think we'll 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're a good group. We know them well. I think a lot of them think they've done a lot of good stuff. We obviously think we're better, just like everybody would say. From a size standpoint, we're probably about double their size, given that we have both a screen business and a service business. 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.

All right. Thank you very much. All right. Thank you. This concludes our question and answer session.

I would like to turn the conference back over to the management for any closing remarks.

Okay, thank you all for joining the call. Really appreciate your time and appreciate the questions.

Look forward to talking to you again soon. The conference is now concluded. Thank you for attending today's presentation.