Canada Markets closed

Edited Transcript of EIL.V earnings conference call or presentation 31-May-19 2:00pm GMT

Q1 2019 Empire Industries Ltd Earnings Call

WINNIPEG Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Empire Industries Ltd earnings conference call or presentation Friday, May 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Allan Francis

Empire Industries Ltd. - VP of Corporate Affairs & Administration and Corporate Secretary

* Kenneth Guy Nelson

Empire Industries Ltd. - Executive Chairman, CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Ben Elliott

RBC Dominion Securities - Associate Investment Advisor

* Hugh Cooper

- Private Investor

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by. This is the conference operator. Welcome to the Empire Industries First Quarter 2019 Results Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)I will now hand the call over to Mr. Allan Francis, Vice President of Corporate Affairs and Administration for Empire Industries. Please go ahead, sir.

--------------------------------------------------------------------------------

Allan Francis, Empire Industries Ltd. - VP of Corporate Affairs & Administration and Corporate Secretary [2]

--------------------------------------------------------------------------------

Hello, and welcome to Empire Industries' First Quarter Investors Conference Call. Today, we will have information presented by Guy Nelson, Executive Chairman and CEO of Empire Industries. Furthermore Michael Martin, Empire's CFO; and Hao Wang, Dynamic Attractions' Chief Operating Officer, will join our presenter to answer your questions at the end of the session.

On the first part of the call, we will provide insights into the company's performance from the first quarter of 2019. After that, we will be available to respond to questions.

But first, here are a couple of housekeeping notices. If you'd like more information about Empire or to receive regular update bulletins, please let me know. You can find my e-mail address on any of our press releases. It is afrancis@empind.com.

Our annual report will be posted online in June. You've already seen the numbers, of course, but the report gives a good description of the company, our products and our strategy going forward. If you would like a copy mailed to you, please let me know.

For those of you who will be in Toronto this fall, you may want to attend our Annual General Meeting, which will be held in October. We'll send an announcement closer to the date.

Today's call is being recorded. The recording will be available on our website tomorrow.

We remind you that our remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of our results news release as well as in our MD&A. You can find these on our website and on SEDAR. The company's actual performance could differ materially from these statements.

Empire is in the themed entertainment industry, which is experiencing significant growth in the U.S., Asia and elsewhere. Our specialty is designing and building iconic centerpiece rides in theme parks. In fact, you may have ridden our rides without knowing it. That's because we work confidentially with global theme park operators to create many of the world's most beloved and popular attractions. In addition to Orlando and California, our rides are also located in theme parks in Japan, Korea, China, Macau, France, Russia and the Middle East.

We've also been working towards entering the co-venture market through our Dynamic Entertainment Group. Co-ventures are partnerships where we partner with tourist venues to co-own and operate our attractions with the corresponding recurring revenue stream.

I'll now hand the call over to Guy Nelson, Empire's Executive Chairman and CEO. Guy?

--------------------------------------------------------------------------------

Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [3]

--------------------------------------------------------------------------------

Thanks, Allan. Hello, everyone. Our first quarter was a breakeven quarter, in line with our expectations. With the refinancing that occurred at the end of April just after quarter end, plus the preferred share offering that is just winding up, Empire is well positioned in a growth market with a solid strategy and an intense focus on executing its $233 million of backlog. I'm confident in our ability to deliver this backlog and strong -- and deliver strong financial results throughout this year and into the future.

We've talked extensively over the past 2 years about the challenges and financial burden we absorbed from designing, manufacturing and installing 3 first-generation projects simultaneously. These challenging jobs created a big financial hole that stretched our suppliers and negatively impacted our financial results. We've already booked the losses and expected losses at completion for all 3 jobs in 2017 and 2018, and we're structured to handle our near-term needs.

Notwithstanding the challenges and cost of these 3 first-generation jobs to the company, the profitability of our backlog and the strength of our team allowed us to refinance our balance sheet successfully. We expect revenues to increase from $31 million in Q1 to an average in excess of $40 million per quarter in the final 3 quarters of the year. As we process our profitable backlog and our balance sheet, this is structured to handle this work.

Our contract backlog is and has been very healthy, but we were challenged because we did not have the working capital to produce it. The good news is that we have now secured the financing to process the backlog. The $38.5 million debt refinancing brought $19.5 million of incremental liquidity. We've also successfully closed on $6 million of the preferred share offering, which is further improving our liquidity and helping to strengthen our balance sheet to complete the work, including the commissioning of 2 of the 3 first-generation jobs before year-end. These financings have added the financial resources to process the contracts we have in backlog and expect to continue to receive from this robust theme park industry that we compete in.

Hao Wang, our Chief Operating Officer, continues to improve the efficiency and effectiveness of our operations and has focused on rightsizing our engineering and design departments given that we have really shifted heavily into a manufacturing mode past the design mode. Using his experience from the specialty automotive sector, he and his team have had a very positive impact on how we bring our products to market faster and in an acceptable margin. But for now, we're singularly focused on commissioning 2 of the 3 first-generation jobs this year and a good percentage of the other 90% of the backlog that is second-generation work.

Hao has found efficiencies and has begun to implement a plan to strengthen our in-house capabilities while realizing a 15% net cost reduction in our overhead structure. These steps are designed to increase our value add and control the IP that we embed in our products. Our team has a clear understanding of what is needed to improve our efficiency and to control our costs and to execute our backlog successfully. Empire's plan moving forward includes consolidating its facilities and strengthening our manufacturing systems. I'm impressed with the direction our operations and productions are moving under Hao's leadership.

Marketing-wise, converting our pipeline into additional backlog is a constant undertaking. Our next major initiative is our annual participation at Asia's largest Attractions Expo. The event is in June in Shanghai and is conducted by the International Attractions and Amusement Parks Association. It will be attended by 8,500 industry buyers and sellers. We leverage the fact that we have strong experience in the continent and have installed or in the process of installing 20 of the most iconic rides in Asia. We'll use the expo as an opportunity to meet with prospective clients and reinforce our prominence as the experienced go-to supplier for cutting-edge rides.

There's a lot of interest in our co-ventures initiative, so I would like to take a minute to clarify how it works and explain where we are today with what some are calling the most exciting part of Empire. For 2 decades, we have been working closely with major attraction operators. We build their rides and receive a check for it, and then we watch as guests line up year after year and pay for their tickets, continually pouring revenue in our customers' pockets. Empire's sophisticated ride systems are very desirable by tourist destination operators, and that puts us in a great position. One of Empire's very valuable IPs is our patented Dynamic Flying Theater IP that's ideally suited for major tourist venues.

We announced our co-venture initiative about 2 years ago. The concept is simple. We leverage our ability to supply world-class proprietary rides in order to co-own the attraction with a local tourist operator. By doing this, we trade off receiving one check for an ongoing stream of revenue that will occur year after year. We use what we do best, making the world's best rides for a piece of the action.

Empire is currently finalizing our first co-venture project. As announced last November, a memorandum of understanding is in place for it to be located at one of the United States' top 10 theme parks, The Island in Pigeon Forge. It is in the heart of the Smoky Mountains in Tennessee. The region attracts 11 million tourists a year. The parties expect to have the lease signed soon, with the attraction opening to guests in early '21. It has taken a little longer to advance our first co-venture to close, but we wanted to make sure we get it right.

Negotiations are also proceeding with several other co-venture operations with negotiations underway at various stages of completion. Our co-venture business is on the launchpad. The pipeline of opportunities we're looking at in high-traffic tourist areas is very exciting. Empire owns 74% of our co-venture business, which is called Dynamic Entertainment.

In summary, Empire makes some of the world's best rides. Our products and services are in demand in a market that is experiencing continued growth. Our strategy is to produce more efficiently and to reduce our cost and to improve our bottom line. Combined with our stronger working capital position, we anticipate good financial results for this year. We expect even better numbers in the years to come as co-venture starts to add to our bottom line. Our current market capitalization will eventually move upwards towards our intrinsic value based upon the existing backlog of profitable contracts and the company's hidden assets being realized.

Empire's executive management team are here to answer any of your questions at this time. Operator, would you please facilitate the question-and-answer part of this call?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Ben Elliott of RBC Dominion Securities.

--------------------------------------------------------------------------------

Ben Elliott, RBC Dominion Securities - Associate Investment Advisor [2]

--------------------------------------------------------------------------------

I just had a question about maybe the Flying Theaters and elaborating on that. Maybe you could give us some color what kind of interest or demand that you've seen from people. Is it going to be -- are you going to do 1 or 2? Or is there lots of interest in that segment?

--------------------------------------------------------------------------------

Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [3]

--------------------------------------------------------------------------------

The -- well, there's 2 parts to the Flying -- to that question, really. One is the fact that we -- Dynamic Attractions sells Flying Theaters in the marketplace, and we have a number of products that are currently being manufactured in that regard in our shop. And we have a number of prospects in -- that are -- we're pursuing and hope to add to our backlog in terms of outright sale of the Flying Theater. In terms of the co-venture element of it, we're really focused on getting the first one closed successfully and going from there. So there is a very big market for that -- for the Flying Theaters around the world. But I'd be sort of going too far ahead of myself to suggest that -- we're taking one step at a time on both fronts.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from [Hugh Cooper], who is a private investor.

--------------------------------------------------------------------------------

Hugh Cooper, - Private Investor [5]

--------------------------------------------------------------------------------

Any -- has there been any update on the -- what's going on with the telescope contract?

--------------------------------------------------------------------------------

Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [6]

--------------------------------------------------------------------------------

Thanks, Hugh. The -- we're continuing to -- as some people may know, we're finishing off the design contract with the Canadian government currently to design the telescope enclosure. The -- there has been no decision made by the Board of TMT as to where the location will be. It did get a positive court hearing in Hawaii, clearing the way to have the construction permit for the location to be in Hawaii. There's still an indigenous resistance to having it in Hawaii. So I think the Board is looking at -- continuing to look at Hawaii versus the Canary Islands, which is the backup site. So to answer your question, there has been no decision made on that other than us continuing to finish the work on the design part of the contract.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

We have a follow-up question from Ben Elliott of RBC Dominion Securities.

--------------------------------------------------------------------------------

Ben Elliott, RBC Dominion Securities - Associate Investment Advisor [8]

--------------------------------------------------------------------------------

Was it correct that you're projecting $40 million of revenues per quarter for the remainder of the year? And is that kind of coming out of the backlog? And what kind of profitability can we expect if you can comment on that for the remaining backlog, EBITDA margins or something along those lines?

--------------------------------------------------------------------------------

Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [9]

--------------------------------------------------------------------------------

Thanks, Ben. I prefer not to get into the bottom line forecast. We normally don't even give guidance on the top line. But in this case, given the strength of the backlog, we wanted to give some guidance on the balance of the year. You'll see that in the Q1, there was $31 million in revenue and that we're forecasting an average of $40 million for the balance of the year per quarter. That's as much as we really want to give at this point in time. But if you analyze our financial statements, you'll see our cost structure and probably be able to answer your own question there, Ben, but I'd prefer not to do that on the call.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Guy Nelson for any closing remarks.

--------------------------------------------------------------------------------

Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [11]

--------------------------------------------------------------------------------

Thank you, operator. On behalf of all of us, we'd like to thank you for your interest in Empire. I want to reiterate and close with that we're seeing improved profitability ahead of us, and we continue to be very bullish on the industry that we operate in. And I want to assure everybody we continue to be focused on executing the work in our backlog as well as we can and as profitably as we can. Thank you very much.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.