Strong Global Entertainment, Inc. Class A Common Voting Shares

Good afternoon and welcome to the Strong Global Entertainment Earnings Conference call for the second quarter 2023. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. If you have any questions or comments during the presentation, you may press star 1 on your phone to enter the question queue at any time. Please note this conference is being recorded. I'll now turn the conference over to your host, John Nesbitt. John, you may begin.

Thank you. Good afternoon, and welcome to Strong Global Entertainment's first earnings conference call for the quarter ended June 30th, 2023. On the call today are Mark Roberson, 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 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 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'll turn the call over to Mark Robertson. Go ahead, Mark.

Thanks, John. Good afternoon, and thank you for joining the call. We're pleased to host our first quarterly earnings call since the completion of the IPO for Strong Globe Entertainment in mid-May. Overall, this is a really good quarter. As you'll see on slide four, our revenues doubled, operating income increased to a profit, and adjusted EBITDA increased from $130,000 last year to just over $3.5 million in the current quarter. We're seeing increased demand from cinema exhibitors for both screens and services. We're also continuing to add new customer accounts and add new services, increasing our overall market share. As a result, we saw screen sales up 24%, while technical services grew over 40%. And we had our first initial sale of IP in our Strong Studios group, which contributed over $6 million to consolidate the revenues. As we look ahead, there are several key drivers to growth. One is the continued resurgence in the cinema industry and the rebound we're seeing in the box office. Two is the increasing investments we're seeing by exhibitors in premium auditoriums, including the laser upgrades that are just starting to roll out in the industry. Three, our leadership position in the industry, our exclusive customer relationships, and our increasing market share and geographic reach. And finally, the expansion and diversification of our revenue base beyond traditional cinema to now include the addition of studios, theme parks, and immersive. If you flip over to slide six and seven, the industry backdrop continues to strengthen. Customers like Cinemark, IMAX, and AMC all reported strong quarterly profits over the past week or so. AMC reported its first quarterly profit in several years. IMAX reported a 30% increase in revenue and just recently had its fourth best weekend box office ever. Cinemark delivered the second highest quarterly EBITDA level in its history. Year to date, the box office is up over 20% versus last year. And the number in the cadence of studio releases is trending back towards pre-pandemic levels. Barbie and Oppenheimer continue to drive the summer box office And after that, the outlook is really bullish with a solid slate of releases for the back half of this year and into 2024. The common theme we heard in the recent announcements from our customers was a combination of bullishness around the overall resurgence in the box office and what they're seeing in terms of attendance levels, as well as the outsized contributions they're seeing from the premium auditoriums. Flipping over to slide eight, We're seeing operators, they're investing in upgrading the consumer experience, specifically with laser projection. Auditoriums with premium large format screens and premium audio, such as IMAX, for example, are driving an increasing share of the box office. AMC, Cinemark, Cineplex, and Opelous, among others, are among the larger exhibitors who've made public announcements with their plans to upgrade the lasers. We've seen upgrades getting started in the second half of last year and continuing into this year, and we believe those activities will increase through the balance of this year and on into 2024. Several, including Cinemark and IMAX, for example, noted in their earnings calls last week that they expect capital spending and upgrades to be back-end loaded this year, which is consistent with our expectations for the second half demand, and we're staffing up to meet that demand. Looking further out, we expect the pace of upgrades to premium laser through the industry to continue to drive demand for screens and services for at least the next several years. On slide nine, we have a leading position in North American cinema industry, and we've served as the trusted partner to the largest names in the industry for many years. Over the past two years, we've further strengthened and formalized those relationships, and we've increased our sales efforts. Strong supplies all of IMAX's screens worldwide. We're the exclusive supplier of screens to AMC, Cinemark, and Marcus, and we're the preferred supplier to many other exhibitors. As the rollout of Laser and the premium upgrades accelerate, we're well positioned, and also want to welcome a new name on the customer list here this quarter. Canopolis is an important new European customer, and we're very excited to be their preferred global screen provider. Moving on to slides 10 through 13, we've been expanding and diversifying our revenue base, adding our Eclipse product line for theme parks and immersive attractions, expanding our service offerings to be more of a one-stop shop, expanding internationally, and of course, launching Strong Studios' vision last year. In the immersive business, we closed an order in the second quarter that will be the first to utilize our new seismos optical flooring tiles, This is at an immersive attraction based in Asia. This is an exciting seven-figure-sized project, and we expect it to deliver and install during the second half of this year. On the service side, as another example, we've been expanding our team and adding services to meet customer demand. One notable area is the addition of our new installation services offering, which is growing rapidly and contributing to the overall growth in our technical services business. Internationally, We mentioned our new European customer earlier, and this relationship is a direct result of our increased presence and efforts in the market. Another example of our progress in getting closer to our customers in Europe is our expanded ability to expedite screen shipments and import-export through our local warehousing and finishing programs. In the studios business, we have several projects under development. We realized our first meaningful revenue transaction this quarter with 6.4 million for a portion of the IP of Safe Haven. This represents the minimum guarantee for the Safe Haven series, and it's just one, an initial step, but an important one in the ultimate marketing and monetization of the series. We're also continuing to work and develop on other projects, and we're working on a new international project we hope to be able to announce soon. Overall, a solid quarter. Todd will now walk us through the results for the quarter.

Thanks, Mark, and good afternoon, everyone. I'll start on slide 15 and spend just a few minutes going over the financial results from the quarter. We're extremely pleased to see how the trends across the industry, as well as executing against our strategy, are translating into improvements on the financials. Overall revenue was up over 100% from the prior year with several key drivers. The first is the revenue recognition resulting from a sale of the portion of the IP in safe havens. Second, we saw meaningful increases in revenue across nearly all of our products and service offerings, with screen sales, digital equipment, and installation services leading the way. Screen sales were up 24% over the prior year, digital equipment was up 32%, and installation revenue increased more than 120%. The most recent quarter turned in the sixth consecutive quarter with year-over-year increases in installation revenue. That is due large in part to the expansion of our nationwide team of technicians to include a dedicated installation team. Not only do we expect the top line revenue number to improve as a result of the additional service offering, we're also expecting margins on these services to improve as we move away from outsourcing the work. Operating income improved even after the recognition of some non-recurring transaction related expenses. Excluding these one-time costs, operating income for the quarter would have been over $1.3 million. a significant improvement from last year's operating loss of $100,000. On the balance sheet, now that we're consolidating the entity that owns and controls the safe haven production, we have a few new items on the balance sheet this quarter. We recorded an intangible asset that represents the net cost of the production of safe haven that will be amortized as the series is monetized. In addition, the production was financed, so we've added some debt to the balance sheet. However, subsequent to June 30th, the debt was fully repaid via receipt of the minimum guarantee and the tax rebates for shooting the series in Canada. Also new to the balance sheet this quarter is a right of use asset and lease liability related to the manufacturing facility in Quebec. The facility and the corresponding debt balance did not transfer upon completion of the spin-out transaction. Having the long-term lease in place will provide our screen manufacturing business continued access to the plant specifically designed for that purpose. That concludes the financial overview for the quarter. I'll now turn the call back over to Mark.

Thanks, Todd. Appreciate it. Thank you all again for joining us today. We'll take questions in just a second. Overall, just to conclude, a great quarter. It's our first quarter as a public company. We're very excited about what the future holds, and we're looking forward to a strong second half. Thank you. We'll now take questions.

Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing a question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while I poll for questions. Your first question is coming from John Siegman from Sycamore Capital. Your line is live.

Hey, guys. Thanks for taking my question. You mentioned some high... Yeah, you mentioned some high-profile exclusive partnerships, IMAX, AMC, et cetera. What's the typical length of exclusivity there?

Thanks, John. Good question. Those exclusively vary, you know, based on the terms of the contract, but they're generally going to run in the anywhere from two- to three-year period for a contractual supply agreement. You know, with an exclusive, those generally renew every two to three years. And what's really more important than the terms of the exclusive contract is really the relationships with the customer. These are all customers we've been serving for many, many years and have great relationships with, and they choose to be exclusive with us because of that, not because of the terms of the contract. So I think it's a real testament to the quality and service they're getting from our team.

Got it, got it. That's great to hear. That's it for me. Thanks, guys.

Thanks, John.

Thank you. That concludes our Q&A session. I'll now hand the conference back to Mark Robertson for closing remarks. Please go ahead.

Thank you, and thanks for joining us today. It's great to be here. Really solid quarter. We look forward to speaking with you in a few months when we report Q2. In the interim, if you have any questions or would like to speak with either Todd or myself, feel free to reach out through the investorrelations.com Contact information, and we'd love to talk to you. Thanks.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.