FG Group Holdings Inc. (NYSE:FGH) Q2 2023 Earnings Call Transcript

FG Group Holdings Inc. (NYSE:FGH) Q2 2023 Earnings Call Transcript August 11, 2023

Operator: Good morning, and welcome to the FG Group Holdings Earnings Conference Call for the Second Quarter 2023. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. John, you may begin.

John Nesbett: Thank you. Good morning, and welcome to FG Group Holdings earnings conference call for the quarter ended June 30, 2023. On the call, today are Mark Roberson, Chief Executive Officer; Todd Major, Chief Financial Officer; and Kyle Cerminara, Chairman of the Board of Directors. As a reminder, there’s a slide presentation accompanying today’s call, which can be accessed at the FG Group Holdings website. Before we begin, I would 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, when 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 in 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 Roberson. Go ahead, Mark.

Mark Roberson: Thanks, John. Good morning, and thank you for joining the call today. Overall, this is a very good quarter for FGH, A major accomplishment was the closing of the separation and IPO with strong local entertainment, which is now operating as a stand-alone entity and its common shares are now trading under the symbol SGE. Following that transaction, our core holdings at FGH now include a controlling stake in strong as well as noncontrolled stakes in GreenFirst forest products, FG Financial and Firefly Media. We also have commercial real estate holdings in Georgia through our digital ignition operation, and we retained the screen manufacturing facility in Quebec. Following the IPO, FGH continues to hold approximately 84% ownership in strong global, and we will continue to report SGE on a consolidated basis in our financial results.

Overall, on a consolidated basis, the financial results for the quarter reflect the strong performance at Strong and consolidated revenues doubled, and adjusted EBITDA increased from a loss of $370,000 last year to $2.4 million in the current quarter. Starting with an overview of Strong Entertainment on Slide 5 to Slide 7, we provided quite a bit of detail on Strong’s performance yesterday after the market closed and I’d encourage you to review their results separately and listen to the call. But to recap, revenues grew as we continued to see increased demand from cinema exhibitors for screens and services. We’re also continuing to add new customer counts and new services, increasing our market share. And as a result, screen systems were up 24%, while technical service revenues grew over 40%.

And we had our first initial sale of IP in our Strong Studios group this quarter, which contributed over $6 million to consolidated revenue. There are a few key drivers to growth. One, the continued resurgence in the cinema industry and the rebound in the box office. Cinemark, IMAX and AMC all reported strong only profits over the past week or so. AMC recorded its first quarterly profit in several years. IMAX reported a 30% increase in revenue and recently had its fourth-best box office weekend ever and Cinemark delivered the second-highest EBITDA quarter in its history. Two, there are increasing investments by exhibitors and premium auditoriums, which include the laser upgrades, which are just starting to roll out through the industry. Auditoriums of premium large-format screens and premium audio, such as IMAX, for example, are driving an increasingly large share of the box office.

AMC, Cinemark, Cineplex — Synopolis [ph] are among the larger exhibitors who have all publicly announced their plans to upgrade the laser. And we saw upgrades really just getting started in the second half of 2022 with just a few exhibitors, and we believe those activities will increase in the second half of this year and continue on into next year. Several exhibitors, including Cinemark and IMAX, for example, noted in the earnings calls this week that they expect capital spending and upgrades to be back-end loaded this year. which is consistent with our expectation for the second half demand, and we’re staffing up to meet that demand. Three, our position in the industry, our strong exclusive relationships, and our increasing market share and geographic reach.

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We have a leading position in North America in the cinema industry. And over the past couple of years, we further strengthened and formalized those relationships, and we’ve increased our sales efforts. We supply all of IMAX screens on a worldwide basis and we’re the exclusive screen supplier for AMC, Cinemark, and Marcus, and we’re the preferred supplier to many other exhibitors. We also announced our first major European customer win this quarter. And as the rollout of laser and other upgrades accelerate, we believe we’re well positioned. Fourth, the expansion and diversification of our revenue base, which includes the addition of strong studios, theme parks, and immersive we’ve expanded our revenue base expanding into theme parks and immersive attractions.

We’ve been expanding our service offerings to be more of a one-stop shop for the exhibitors. We’ve been expanding internationally as well as we launched Strong Studios last year which also realized its first meaningful revenue transaction this quarter with a portion of the IP for Safehaven. Moving on to our nonconsolidated holdings on Slide 9 through Slide 11. Again, we have three equity positions in three other operating companies, GreenFirst, FG Financial, and Firefly. And we also have commercial real estate holdings, which include a 44,000-square-foot building and 11 acres in Atlanta which, if you recall, we retained from the sales conversion a couple of years ago. And as part of the Strong entertainment spin-out, we retained ownership of the 80,000 square foot screen facility in Quebec, which is being leased SGE on a long-term operating lease.

GreenFirst recently announced several transactions to monetize our non-core assets with the sale of private forest land for $49 million and then that transaction was followed by the sale of two sawmills in Quebec for $90 million. Those deals further strengthen GreenFirst balance sheet, bringing down average cost per board foot of operations, and allowing our team to focus their attention and resources on more valuable and more efficient Ontario mill operations. FG Financial continues to grow its reinsurance and asset management business. FGF had a really nice first quarter with its growing reinsurance business reporting over $1 million in underwriting profits. And on the merchant banking side, FG recently launched Craveworthy and FG communities.

Craveworthy is a fast-growing restaurant brand platform led by the former CEO, Jimmy John, and FG Communities is a self-managed real estate company that’s acquiring manufactured housing communities. Also, on the merchant banking side, their SPAC, FG merger announced a merger agreement with iCoreConnect, which is a cloud-based SaaS company focused on the medical and dental industries. And FG Acquisition Corp recently announced this combination with ThinkMarkets, which is an online brokerage with established global partnerships and a scalable business model. Turning to Firefly. Firefly continues to grow their business as a leading provider of mobility-based digital out-of-home media solutions. Digital out-of-home Media is an attractive market.

It’s projected to continue to grow at about 11% over the next 10 years. And Firefly continues to execute on its plans. It’s growing, and it’s been expanding its international reach recently into markets like the U.K., Canada, and Abu Dhabi. So overall, we’re really pleased to see the accelerating progress in both our stronger payment segment, which is now operating as a stand-alone public company as well as our equity holdings as they execute on their strategic plans. Todd, you’d like to walk us through the financials.

Todd Major: Sure. Thanks, Mark, and good morning, everyone. I’ll start on Slide 13, and we’ll run through a quick overview of the financial results for the quarter. As Mark mentioned, as a result of our majority ownership in Strong global entertainment, we are consolidating SGE’s results into our financials. Since SGE is by far the largest part of our operating business, my prepared remarks today will include a good amount of discussion on the SGE results that were released yesterday afternoon. Consolidated revenue was up nearly 100% from the prior year with several key drivers. The first is the revenue recognition resulting from the sale of a portion of the IP and Safehaven. Second, there were meaningful increases in revenue across nearly all of our product and service offerings with spring 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%. Most recent quarter turned into the sixth consecutive quarter with year-over-year increases in installation revenue. That is due in large 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 offerings, we’re also expecting margins on these services to improve as we move away from outsourcing the work. Consolidated operating income improved even after the recognition of some nonrecurring transaction-related expenses. Excluding these one-time costs, operating for the quarter would have been approximately $350,000, a significant improvement from last year’s operating loss of $900,000.

Flipping over to the balance sheet. We ended the quarter with just under $5 million in cash and continue to maintain adequate liquidity. Now that the entity that owns and controls the Safehaven production is consolidated as part of SGE’s results, those assets and liabilities are also now part of our consolidated balance sheet. We have recorded an intangible asset that represents the net cost of production of Safehaven that will be amortized as the series is monetized. In addition, the production was financed, so we have some additional nonrecourse debt to the balance sheet. However, subsequent to June 30, the debt balance was fully repaid via receipt of the minimum guarantee and the tax credits received for shooting the series in Canada. That concludes the financial overview for the quarter.

I’ll now turn the call over to Kyle Cerminara. Go ahead, Kyle.

Kyle Cerminara: Thank you, Todd and Mark. During the first half of the year, there’s been significant progress made across our businesses. As the largest shareholder, I’m confident that we hold some extraordinary businesses that will be much more valuable over time. Strong global entertainment completed its IPO and last evening, reported a very strong quarter. Their business is benefiting from a market-leading position, expansion into new verticals, and also the initial success of the Strong Studios business. As Mark reviewed, the other businesses are generally executing across their plans. GreenFirst is focused on optimizing their core assets in Ontario. They strengthened their balance sheet and the drop-in duty rates should positively impact profitability.

We view GreenFirst as a very valuable asset and are confident that over time, this value will be realized either organically or via consolidation. With FG Financial, this business has come a long way in a short period of time since we essentially restarted the business a few years ago. The reinsurance business is methodically growing, and I’m excited about the business on the merchant banking side. With our specs, we’re innovating with new structures that are more attractive to investors and issuers alike. We also are excited about the Craveworthy business, which has a proven CEO and some attractive scalable restaurant brands. Finally, Firefly continues to grow and build a powerful economic model for the outdoor advertising space. I’m sure at this point, many of you have seen their product on the roof of cabs in major metro areas such as New York.

My focus is not only to build value but to build sustained long-term value for shareholders. We’ll continue to work hard and with urgency for shareholders, and I look forward to taking any questions you may have.

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Q&A Session

Operator: [Operator Instructions]. Your first question is coming from Jack Snyder from Gray Finch Capital. Your line is live.

Unidentified Analyst : Just had a quick question. How should we think about the anticipated length of the laser upgrade cycle?

Mark Roberson : Yes, good question. We think when you look at the laser upgrades, we’re really pretty early in the early innings, maybe in the first inning, if you’re analogizing the timeline here. Really, the current laser installations are being driven by just a couple of large exhibitors who are driving the initial roll-off and upgrades in major markets. The major exhibitors have a long way to go in terms of upgrading their circuits and we’re starting to see the regional exhibitors just now starting to formalize and announce their plans with regards to their laser upgrade plan. So, this is a cycle that’s just starting, it’s going to be a multiyear upgrade cycle through the industry. If you listen to some of the earnings calls from AMC and Cinemark and some of the others, they were pretty explicit about the benefits of premium auditoriums, the premium audio and visual experience, and their desires to continue to invest even more heavily in upgrading their own auditoriums over the next several years.

So, we’re pretty early in the phase right now.

Operator: [Operator Instructions]. Your next question is coming from Brett Reiss from Janney Montgomery Scott. Your line is live.

Brett Reiss: Good morning. Can you guys hear me?

Mark Roberson : Yes, loud and clear.

Brett Reiss: Great. Tom. I’m not in the office. With the market share that Strong Entertainment has — do you have pricing power versus your customer base? Or will you need to be even more of a consolidator to attain pricing power with some of the secular headwinds your customer base is facing longer term?

Mark Roberson : Yes. It’s a good question, Brett. With regards to pricing power, it varies in different markets and obviously, with products and different products and different customers. But overall, within North America, we have a pretty dominant market share, but it’s not that we’re not without competition. So, we certainly don’t have the power to price at whatever levels we’d like. It has to be competitive, it has to make sense, but we do have a premier product. We have a premium product, and I think we’re able to charge for that. In some of the service areas, we have in recent periods, been passing along some cost increases that we’re seeing on the inflationary side, yes, there’s definitely been some adjustments to pricing.

Brett Reiss: Great. And on Firefly assuming in the future, at some point, the IPO markets open up a little bit more. Is there any — not to the calendar date, but is there any on the table on a potential IPO on Firefly that you can share with us?

Mark Roberson : Yes. I mean I don’t think there’s a specific target date or quarterly timetable that I could lay out for you that would be appropriate. It certainly is within their plans or continuing to execute in terms of their growth, they’re continuing to expand. They’ve raised additional capital in a couple of rounds since our investment in Firefly. So, we like what they’re doing, they’re continuing to execute, continuing to grow. And when the time is right, I’m sure that they will be ready to go.

Brett Reiss: Great. That’s all for me and a very nice quarter. So…

Mark Roberson : Thank you, Brett. Really appreciate it.

Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to management for closing remarks. Please go ahead.