Ballantyne Strong, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Ballantyne Strong, Inc. Third Quarter 2022 Earnings Conference Call. We'll open the floor for your questions and comments after the presentation. If you do have a question or a comment, you would simply hit star 1 on your touchtone phone. Pressing star 2 will remove you from the queue should your question be answered. I would now like to turn the call over to John Nesbitt of IMS Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Valentine Strong's earnings conference call for the third quarter ended September 30th, 2022. On the call today from Valentine Strong are Mark Robertson, Chief Executive Officer, Todd Major, Chief Financial Officer, and Kyle Sermonara, Chairman. 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 that differ materially from those described in today's call. Risks and uncertainties are also described in the company's SEC filings. Today's presentation discussion also contained certain 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 Invest Relations section of the website. Our non-GAAP measures may not be comparable to those used in other companies, and we encourage you to review and understand all our financial reporting before making any investment decisions. At this time, I'd like to turn the call over to Mark. Please go ahead, Mark.

Thanks, John, and good afternoon. If you're following the PowerPoint, we'll start on slides three and four. As most of you already know, Ballantyne is a holding company, and we currently have four primary business holdings. We're the leading supplier of projection screens and managed services in our entertainment segment, and we've allocated capital to equity holdings in real estate and currently have three primary equity holdings, FG Financial, Firefly, and Green First. We also have a real estate holding in Georgia with our digital ignition business that we're incubating, And you'll start to hear more about that line of business as well soon. There are a few key themes to keep in mind as we go through today. We are, again, the largest producer of premium cinema screens in North America, and we're a leading provider of managed services in our entertainment business. Business has been growing with Q3 revenues up 68%, and we see several exciting growth catalysts in that entertainment segment. Our equity holdings each have unique value propositions and growth drivers, and the potential for meaningful capital appreciation. That said, we're currently trading at a discount to book value and to the sum of our parts. Starting first with entertainment operating business, we've seen business levels really improving through the year, and we expect to finish the year strong as exhibitors are gearing up for the release of Avatar 2 at the end of the year, and are expecting a robust 2023 content schedule and are also commencing on a major multi-year capital upgrade cycle. We've been strengthening our industry relationships and positioning the business for accelerated growth post-COVID. On slide six, the six largest exhibitors in North America, which account for over 70% of the screens in the region, are all customers of Strong Entertainment. In addition to the six largest exhibitors shown here, we've literally hundreds of other equally important regional and independent exhibitors and other customers. I would note that we supply AMC, Cinemark, and IMAX with all of their screens on an exclusive basis, and we've been strengthening those relationships even more over the past couple of years. We believe those relationships are important for growth, both as the box office and industry returns to post-COVID levels, and as the upgrades from xenon projection to laser projection begin to accelerate and drive capital spin in the industry. First, with regard to the industry and the box office, we saw a very strong recovery this summer, and it was really driven by a handful of large blockbusters. As we close out this year, we see a strong finish ahead with Black Panther and Avatar 2 closing out the year, And then looking ahead, expectations for next year in the industry are that the box office will be much stronger and the content is much broader and more diverse. There are some familiar names and blockbuster releases scheduled for the next 12 months. Some of those include John Wick, Captain Marvel, the next Indiana Jones sequel, Guardians of the Galaxy, Dune, Little Mermaid, Fast and Furious 10. There's a Hunger Games prequel. And then Tom Cruise is back with the first of two Mission Impossible sequels. So 2023 looks to be a very solid year for theatrical. Turning to slide eight with regard to the laser upgrade cycle, this is a really big deal for the industry and it's a big deal for us as well. We're already starting installations this past quarter as AMC began their initial upgrades really focused on the New York and California markets. of AMC's first 3,500 planned upgrades will complete around 150 to 200 this year. So there's a long way to go, and I expect we'll be deeply entrenched with those projects for the next several years at least. Cinemark is also underway with their plans to change over 100% of their circuit to laser. And we're starting to see some of the other exhibitors just now gearing up and starting to follow suit. This is one of the most important catalysts in the industry in the past 20 years, and it's going to drive industry spin over the next five to 10 years on projection, audio, screens, and services. We spent the past several years optimizing our screens and optical coatings for laser projection, and we've been expanding our services. As a preferred partner for Cineonic, who's the leading manufacturer of laser projection and the exclusive supplier to many of the largest exhibitors, as we mentioned, We believe our screen and services business is very well positioned. Turning to the studios business on slide nine, Strong Studios is a new line of business for Entertainment Group, and it adds content and opens up meaningful new growth opportunities. We acquired a portfolio of projects, and we started production on two of those already, Safe Haven and Inside the Black Box. Safe Haven wrapped principal photography recently, and I would expect the first 10 episodes to be completed and delivered in the first half of 2023. Inside the Black Box also completed and is now in the process of delivering 10 episodes, and those are expected to air on Crackle before the end of this year. So as you can see on slide 10, we've been working on several other projects, both from the acquired portfolio as well as adding additional projects to the pipeline. And the overall business model here and the overall goal of Strong Studios is really to build a content library, creating longer-term royalty revenue streams, while also utilizing co-production, distribution of pre-sales, as well as refundable tax credits to minimize our capital at risk and drive near-term revenue. Over time, this part of the business has the potential to scale immensely and emerge into a very meaningful growth engine for the entertainment group. Turning now to the equity holdings on slides 12 through 14, our equity holdings each have unique value propositions and growth drivers and potential for meaningful capital appreciation. At FG Financial, FG recently announced the launch of its merchant banking platform. Over the past year or so, FG has been busy building its reinsurance team and has already completed seven loss cap reinsurance contracts. On the SPAC side, They've forged four SPAC transactions with OpFi and Hagerty now complete and two SPACs IPO this year. Those are all compelling assets, but more important is really the team and the platform that FG Financial is building as it evolves into an asset management and merchant banking business and scales over time. During the third quarter, we transferred our shares of FGF common stock into an LLC, which collectively will hold over 60% of the outstanding shares of FGF. This LLC is an equity method investment and was structured to be a good asset under the 1940 Act for Ballantyne, and it provides a means to finance future purchases of FGF stock outside of the Ballantyne capital structure to the benefit of shareholders of Ballantyne. Firefly, as you may recall, is a private venture-backed mobile media company, and we're invested there alongside Google Ventures and FX, We merged our digital advertising business into Firefly to attain our position, and we've been really pleased with our growth. Firefly has grown significantly since our deal, and they're now in over 10 major markets. They announced a new program with Hyundai over the summer where Firefly is enrolling professional drivers and fleet operators at the point of purchase at the dealership, so basically drivers can earn advertising revenue to help subsidize their car purchase. In July, Firefly also announced their entry into the European market with the acquisition of the UK's leading taxi advertising company. As Firefly continues to grow and acquire, they're also able to amplify the revenue per top as they convert from non-digital to digital, and this really multiplies the revenue potential as they enter new markets. GreenFirst has been performing exceptionally well. Following the transaction last summer, you know, GreenFirst has evolved from a small shell to one of the leading lumber producers in Canada with a capacity to produce over 9 million board feet. In the second quarter, Green first reported net earnings of almost 30 million and adjusted EBITDA of over 50 million. They also just today announced the sale of their private forest land for 49 million. So they're performing very well. They're generating cash, monetizing non-core assets, and reducing debt at a very nice rate. This is also an industry that has seen quite a bit of M&A recently. so we're watching that closely. Overall, our equity holdings represent meaningful intrinsic value and growth potential. And in our entertainment operating business, we're seeing a rapid rebound in revenue growth, and we believe we're well positioned for strong 2023, with the box office looking strong and the laser upgrade cycle in its infancy. With that, I'll turn it over to Todd.

Thanks, Mark, and good afternoon, everyone. I'll start on slide 16 for a quick look at a revenue comparison for the quarter over the prior year, as well as the quarterly trend going back to the start of 2020. As you can see, momentum continued during the third quarter, and over the last 12 months, we have generated consolidated revenue of just under $40 million. This is a significant achievement, as we have now surpassed the pre-COVID revenue levels of 2019 on an annual run rate basis. Slide 17 summarizes the consolidated operating results for the quarter. We touched on total revenue on the previous slide, but to add a bit more commentary on the 68% year-over-year increase, revenue from the sale of both products and services were higher than the prior year, up 88% and 27% respectively. The flow through of the increase in revenue resulted in higher gross profit, even before factoring in the employee retention credits recognized in the prior year. After adjusting for the $400,000 pickup in the prior year, gross profit increased 35% year over year. As a percentage of revenue, gross margin was 27% compared to 40% in the prior year. After adjusting for the ERC, gross margin as a percentage of revenue was 33% in the prior year compared to 27% in the current year. The decrease in gross profit percentage resulted primarily from product mix, as revenue from projection and audio equipment grew at a faster rate than our higher margin screen products and services. Employee retention credits recognized in the prior year also had an impact on the year-over-year comparison of SG&A. Higher marketing and travel and entertainment expenses related to the increased revenue and business activity and the launch of strong studios accounted for the other major components of the year-over-year increase. Excluding the total 600,000 of employee retention credits recorded in the prior year, operating loss improved over 60%. As a reminder, in the third quarter of 2021, Green First completed its acquisition of a portfolio of forest and paper product assets. The transaction included the issuance of additional common shares, which reduced our ownership percentage from approximately 20% to just under 10%. This change in our ownership resulted in a change in accounting for our Green First equity holding, from equity method to fair value method. Under the fair value method, we marked our green first holdings to market each quarter, resulting in unrealized gains and losses. Strong Entertainment, our primary operating business, generated its sixth consecutive quarter of positive operating income. The year-over-year improvement in the operating results, even after including costs incurred in connection with the launch of Strong Studios, is a testament to the strong operating teams we have in our screens and services businesses. Shifting over to the balance sheet on slide 18 now, as we have discussed on prior calls, our capital structure is not overly complex and our balance sheet only has a small amount of debt, which is primarily comprised of the mortgages on the MDI manufacturing facility in Canada and the digital ignition building in Alpharetta. As Mark mentioned earlier, we're deploying capital to real estate and our equity holdings, which we believe have the potential for meaningful capital appreciation. From an operating perspective, working capital decreases experienced during the first half of the year saw some improvement during the third quarter. Slide 19 presents a breakdown of the value of the significant assets on our balance sheet as of 9-30. As you can see, the total value of our cash and equity holdings approximates $40 million. Given our current enterprise value today, we believe there is little value being ascribed to our strong entertainment and digital ignition business operations. That wraps up the financial review. I'll now turn the call over to our chairman, Kyle Sermonara, for some remarks before we take some questions.

Thanks, Todd. I think it's clear to many that we have a very undervalued company. There's a number of diverse businesses that are currently trading at a discount to the sum of the parts. So why is our stock so inexpensive and what are we going to do about it? I think about these questions every day and every night. Our holding company strategy at Ballantyne Strong has shown great resilience through some very challenging market conditions over the last few years. This makes us really happy, and I'm glad that we have a number of businesses in diverse areas in various stages of growth. We've done some very creative transactions over the last few years that have helped create shareholder value, but our stock price has not responded the way we would have hoped. I continue to be interested in increasing our ownership position in the company, and figuring out ways to not only grow our intrinsic value, but also to shrink the discount of the market price to its intrinsic value. We'll be having our second annual Investor Day in Shareholder Meeting on December 6th in Charlotte, North Carolina. We had an amazing group last year, and I hope to see an even larger group this year. With that, I'm going to ask the operator to open it up for questions, and we'll answer as many questions as you have. We also welcome your questions at the annual Shareholder Meeting in December. Operator, please open it up for questions.

Thank you, ladies and gentlemen. The floor is now open for questions. If you have any questions or comments, please press star 1 on your touchtone phone at this time. Pressing star 2 will remove you from the queue should your question be answered. And lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.

Once again, that's star 1 if you have a question or a comment. And the first question is coming from Adam O'Brien with Darson Partners. Your line is live.

Hey, guys. Thanks for taking my question. Hey, Adam. How are you?

Good. How are you? Can you give us a bit more color on the laser upgrade cycle? How should we think about it in terms of where you guys stand in this cycle, and how does it impact product versus revenue?

Yeah, thanks for the question, Adam. It's a really good question. The laser upgrade cycle is It's a really big event for the industry. It's probably the biggest technology upgrade and refresh that the industry has had in the past decade or so. The last big technology cycle occurred when the industry upgraded from analog to digital. And the upgrade from xenon projection to laser projection is an equally large event for the industry. It's probably going to be spread out over quite a few years probably the next five plus years really as all the exhibitors begin to upgrade we're seeing the largest exhibitors like amc in cinemark primarily starting the upgrades uh now amc started theirs and publicly announced their intent to do about half their circuit in the first wave which will take you know the next couple of years out of their you know, 8,000 screens. You know, we've probably worked with them to upgrade a couple hundred so far by the end of this year. So it's really early stage, you know, going with the World Series analogy, I'd say it's the first inning. It's probably really the first few pitches of the first inning. So it's a pretty big event. It's going to drive a lot of capital spin in the industry. It's going to drive for us both screens and services. We're exclusive with a lot of the largest providers. So it's going to be a big deal. It'll squarely drive our revenue potential, you know, not only for this year, next year, for the next several years.

Great. That's awesome.

That's awesome. Good. Thanks, Ben.

Okay. Up next, we have Edward Riley with EF Hutton. Your line is live.

Hey guys, thanks for taking my question. I just wanted to piggyback on Adam's question. I'm wondering what you attribute the large increase in digital equipment sales to, and maybe how that might relate to the upgrade cycle?

Yeah, we're seeing quite a bit of demand starting to come through for not only screens and services, but for other types of digital equipment. You know, we sell projection, we sell audio equipment, we sell servers. So we're seeing some of that as just normal upgrade replacement cycle, but a lot of that's also starting to be driven by demand for laser projection and laser upgrades. So it's really a mix. We're starting to see it skew a little more towards laser, especially as the bigger guys start to roll out laser. We'll see the smaller regional and independent players follow suit.

Okay, gotcha. And then on European revenue, notice a pretty big jump there. What's the main revenue category source that's really driving the sales there? And I'm curious as to how long the Belgium facility was open for during the quarter.

Yeah, the Belgium facility is really just getting started. It got up and running really this summer towards the end of towards the end of the third quarter, excuse me, in August, September. So we're starting to see some product flow through there, but it really isn't driving the majority of the impact now. Really, we're just seeing the European market starting. It's a little, the European market has been a little bit slower to recover from COVID than the U.S. market. So we're starting to see the European market demand picking up, picking up just naturally. So I wouldn't attribute a lot of that to the facility itself. I think there's more upside certainly in that market due to the Belgium facility and our ability to be closer to the market and closer to the regional exhibitors there as we build up the sales team.

Okay, gotcha. And then I'm curious about the production pipeline. Kyle, it seems like the tank job is very much on brand for you. Just wondering how much of the names are from landmark versus original titles, and how are you going about sourcing original ideas?

Yeah, the tank job specifically that you mentioned is original. We were actually, you know, Kyle, you know, and we were working on that with Ron and Sana before we brought the Strong Studios group over. And it's something we had been looking at and working on for, for a while, and there are a few other internally developed projects that are in the works as well. There's really no shortage of pipeline coming through of potential projects. You know, part of what we have to do is prioritize the ones we want to work on and select the appropriate ones. But yeah, we're really excited specifically about the tank job. We think that's going to be a really, really interesting project next year.

Yeah, this is Kyle. You know, we With all these, we just finished a pretty big project with Safe Haven, and it was a pretty interesting experience going through it because Safe Haven is going to be one of our first really big projects. I'm really excited about it. I think it's going to be an enormous revenue opportunity, so it'll be fun to watch how it sells over the next few months But, you know, Safe Haven was, you know, pretty indicative of the type of project we'd like to do, not necessarily in terms of the genre, but more of in terms of like the way we'd like to do it. So it was, you know, already pre-sold. We used tax credits. Um, and, uh, you know, the, the risk to our investors was pretty minimal. So I know, you know, some people have asked me and asked the company about, um, you know, are you speculating, you know, on, on movies and, and that's not the, that's not the case. So we're, you know, we have a, a big pipeline of projects that we're working on. We have a great team that we've, um, you know, acquired from. Chicken Soup from the Soul, and we are working on these projects to see what's possible and what's not possible. Safe Haven was obviously possible thanks to the deal that we did with Chicken Soup from the Soul and Screen Media, but when we look at the other deals that we're working on or the other movies that we're working on, you know, to your question about the genre of tank job, I think that we can have a really neat library of original content that we create. And I'd like to see some that are within that, you know, that are based upon, you know, financial, you know, scandals or financial things that have happened that are, you know, interesting tank jobs, particularly interesting because it's near and dear to Warren Buffett. We are going to have some original content from Warren Buffett. Uh, we'll have, I don't want to give away too much, but we're going to have some really, really cool stuff coming out that has, uh, um, that's, that's going to very much help sell the style, the production of it. So the, uh, um, you know, sell it around the anniversary of it. So, uh, It's going to be a really interesting movie, but also I think some of the stuff that we'll do around the movie with, you'll note that Warren Buffett was quoted in the press release around it, that we have some, we'll have some original content around that. And outside of that, we have some things that we're going to do that are very similar to that, that are, you know, we're working, Mark mentioned that we're working with Ron and Sana on some this will be the first of hopefully many that we do with them. So.

Gotcha. Yeah. Looking forward to watching it. And then just lastly, any update on the timeline for the SPIN IPO?

Yeah. As you know, I'm limited to what I can all say about the transaction, but I can tell you that, you know, we have filed our S1 with SEC or monitoring market conditions. You know, the last the last month or so has not been ideal for deal-making and particularly small micro-cap IPOs. We see that potentially changing, but at this point, we're continuing to file, keep our filings up to date. We'll be ready to go at the time that the market conditions say it's time to go, which we think will be soon.

The other point I'd make on that is that, you know, We're not just subject to market conditions. We have plan A, we have plan B, and plan C. And there will be something that occurs with this business. So, you know, stay tuned on it. But to Mark's point, we can't say too much.

Okay. Thanks for taking my questions.

Thanks, Eddie. Thanks, Eddie. Up next, we have Brett Rice with Jenny Montgomery Scott. Your line is live.

Good afternoon, gentlemen. Good afternoon, Brett. Hi. The Inside the Black Box, which is going to start airing on Crackle, like this coming quarter, is the way we're compensated, we get some percentage of the ad revenues that are generated from the show on Crackle.

Inside the Black, there's a few different models that we'll employ in the studio's business, most of which will have participation in the back end, residuals, et cetera. Inside the Black Box is really a smaller production. It's a smaller kind of 30-minute talk show format. It doesn't lend itself to a whole lot of production. back-end revenue. So the way that we've structured Inside the Black Box is more a production services type deal. We're getting paid for producing it. We'll get a fee off of that. We'll generate some revenue. But it'll be more of a fee for service model. We'll do some of that as we go because it's a nice way to cover overhead, but it's not the primary business model of Strong Studios.

Okay. Now, on the laser upgrades, which looks like that's going to be good business for us, the contract of service that you have with your customer, are we protected if there's supply chain disruptions or any kind of inflationary cost pressures so that the customer has to bear some of the burden?

Yeah, I mean, in the service side of the business, you know, for sure, I mean, and there are supply chain delays and, you know, delays timing potentially if operators can't get projection equipment on time, that delays our screen installation, delays some of our labor work, but generally doesn't create a lot of cost pressure with us. It's more of a timing issue in terms of the timing when some of these things happen, and that's why some of the installations that were scheduled for this year will push out of the next year simply because the projector manufacturers have been delayed in delivering projection equipment. So it pushes out of this year into next year. To your question on inflationary pressures, you know, we see some inflationary pressure in a couple of areas, you know, primarily freight, you know, shipping, packaging materials, that kind of thing, you know, PVC and petroleum products. It hasn't had a huge impact, but we do see some of that. To the extent we had a material impact, we would be able to deal with that and pass those costs along.

Right. Now, with the revenue run rate we're enjoying, is there a line of sight when we will be cash flow breakeven?

Yeah, I mean, as a company, we were EBITDA breakeven this quarter. So as you can see, we're marching our way towards that. You know, that's despite the fact that We're making some investments in some areas that will lead to future growth. We're incubating the studios business. We're doing some things with the digital ignition business. Those things do require some investment that flow through the P&L. So I think we're moving along nicely post-COVID. We got through COVID. We recovered. We're planting a lot of seeds. A lot of those seeds are starting to germinate. And we're continuing to make some investments in things that are positioning the company better. for the future, including the ones I just mentioned, you know, building out our sales force, et cetera, because we see this becoming a much larger company down the road.

Right. And then last one, the slide on your presentation, when it mentioned digital ignition, it said, you know, stay tuned. Is there anything... Can you share with us anything on what's going to be happening with digital ignition?

I'll add a little bit of context to digital ignition, if that's all right, Mark. Yeah, yeah. So digital ignition was a project that started – Years ago, we owned a digital signs business down in Atlanta, Georgia, Alpharetta, Georgia, called Convergent. And it was housed in a 40, 50,000 square foot building that was, you know, we were building digital signs in it and we had some really interesting technologists and other people in there. and um it was a huge building and we had um more space than we had you know need need for it and we also had some we had hired some really uh smart people and some really interesting software engineers and technology people and with that we had a couple we were we were in the process of cleaning up lots of businesses and it was a huge effort to clean up all these different businesses and we were trying to have a little bit of fun at the same time. Out of that sprung, you know, Strong Outdoor, which, you know, was a digital signage business that was a customer, it was effectively a customer of Convergent that we turned into what was called Strong Outdoor that we sold to or merged with Firefly and that's how we ended up having Firefly, the equity position in Firefly. So we were incubating some businesses out of this building, and we had a few other things that we had been and continue to be working on that we haven't really talked about that vocally because they're small and immaterial, but digital admission is kind of how we've just defined it. You know, with that, we, um, you know, during the fire fly or the strong outdoor build out, like we needed some additional capital. So we did a sale lease back on the building. We ended up eventually buying the building back and now we own the building again. And, um, you know, with that, we, um, been expanding the idea of, uh, incubating more businesses inside of that, and perhaps taking that beyond just Atlanta, Georgia. So. Um, we have, um, you know, plans to make that a bigger business. Uh, it's not, it's not like a, we work or a Regis or anything like that. It's more focused on, um, you know, really building some interesting businesses, um, inside of that, raising money for them, helping them grow. Um, so it sort of takes into account some of the things that we're doing at FG financial in terms of merchant banking. Uh, but it's more on the venture side. We're not going to be investing lots of Valentine Strong's money in it, so don't worry that we're going to be blowing lots of our capital in venture. That's not the case. But we will be hopefully getting some really interesting businesses out of this, and hopefully some of them will turn into things like Firefly. Okay. But you don't have to worry about us blowing lots of money on venture investments that go to zero because we're not going to be exhausting tons of our capital into that. So hopefully there'll be lots of upside coming from these things, but there won't be lots of our cash flow going into things that ultimately go to zero. That's the idea behind it. We've had some really interesting things come through it already, and this will be expanding pretty significantly over the next year or so as it gets a lot more of my attention. We have someone in the venture community that's now helping us build it, and it's really getting a lot of full steam right now. Great.

I hope that answers your question. Yes. Thank you all for answering my questions.

Okay, we have no further questions in queue. I'd like to turn the floor back to management for closing remarks.

Thank you all for joining us today. If you have any other questions, please feel free to reach out to either of the three of us on the call today. And just a reminder, we do have our annual shareholders meeting coming up in early December, so hope to see some of you there. Thanks.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.