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Edited Transcript of EIL.V earnings conference call or presentation 28-Aug-18 2:30pm GMT

Q2 2018 Empire Industries Ltd Earnings Call

WINNIPEG Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Empire Industries Ltd earnings conference call or presentation Tuesday, August 28, 2018 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allan Francis

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

* Kenneth Guy Nelson

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

* Michael Martin

Empire Industries Ltd. - CFO

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Empire Industries Second Quarter Results Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Allan Francis, Vice President of Corporate Affairs and Administration for Empire Industries. Please go ahead.

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

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Hello, and welcome again to Empire Industries second quarter investors conference call. Today, we will hear from Mr. Guy Nelson, Executive Chairman and CEO of Empire Industries; and Mr. Michael Martin, Chief Financial Officer. On the first part of the call, we will provide insights into the company's performance from the second quarter of 2018, and after that, we will be available to answer your questions.

First, here are a few housekeeping notices. Empire's Annual Shareholders' Meeting will occur on October 17 at 10 a.m. at the Ivey Tangerine Centre in Toronto. The formal notice will be going out later in September. If you'd like more information about Empire or to receive regular update bulletins and receive an invitation to the Annual General Meeting, please let me know. You can find my e-mail address on any of our press releases. It is afrancis@empind.com.

Today's call is being recorded. The recording will be available on our website tomorrow. And 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 our MD&A. It is on our website and on SEDAR. The company's actual performance could materially differ from these statements.

As most of you probably know, Empire designs and builds technologically advanced specialized products, most notably theme park ride systems. Our customers are international theme park operators, and our rides are among the most popular attractions in the world. We are the secret name behind many rides and have created 50 around the globe. We have also been working towards entering the co-venture market through Dynamic Entertainment Group where we would partner with tourist venues to co-own and operate our attractions.

We'll begin the call with a review of the numbers. I will hand the call over to Michael Martin, Empire's CFO.

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Michael Martin, Empire Industries Ltd. - CFO [3]

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Thanks, Allan. Obviously, the key point in the quarter is a change to certain aspects of the company's revenue recognition policy, driven by the adoption of IFRS 15 on January 1, 2018.

As we had a closer look at the new standard, it became clear that certain of our first article contracts with a high degree of technical risk required a different, more conservative revenue recognition policy in accordance with this new standard. This adoption and subsequent change in accounting policy require that we also have to do a restatement of our first quarter filings to accurately reflect it.

In the first quarter, the first article contracts affected by this policy are the 3 contracts we discussed in the 2017 year-end filings. The first quarter restatement didn't have a material effect on the operating results, rather impacting the opening balance sheet.

The adoption of this new policy limits the amount of revenue to be recognized up to the cost incurred, which defers any projected profit until the risks or uncertainties of these particular contracts have been addressed.

The retroactive application of this adoption results in a reduction of $3.5 million of shareholders' equity as of December 31, 2017, when compared to the previous presentation.

The second quarter itself was relatively straightforward. At June 30, contract backlog was $280 million, well up from last quarter. That's a clear sign that there is strong demand for the company's products and services. Revenues are up 4% over the same period last year, driven primarily by the number of -- increasing number of projects that we currently have underway.

Adjusted EBITDA was 0 in the quarter. Not a great result, of course, but not significantly off plan as there was -- there's always been quarterly variation to revenue recognition side, which drives its way down to the EBITDA and net income levels. We are expecting to make this up as timing is a bit of an issue on revenue recognition.

You may have questions about this. I'll be on the line to answer questions at the end of the call, but first, I'll hand the call over to Guy Nelson for his remarks. Guy?

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Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [4]

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Thank you, Mike. Hello, everyone. As Mike noted, Empire's strategy is on track, and underlying operating performance continues to improve and gather momentum, with the second half of 2018's mix of business expected to return us solidly to profitability. I'll highlight that by discussing our backlog, balance sheet, action plan, co-venture and our core value as a company.

Let's begin by talking -- first taking a look at our impressive backlog of contracts. It consists primarily of second-generation products or customized ride systems where the client shares the risk with the company. Of 2 of these -- 2 of the 3 first-generation rides in 2018, we'll finish off the third in 2019. These 3 ride systems are progressively having a smaller and smaller portion of our quarterly revenue and cost results, and with the implementation of IFRS 15, contribute no margin to our business until completed. Pretty much everything else in our backlog and in our fabrication plants are products we've built before.

Our $280 million backlog powerfully indicates that our strategy to focus on the attraction industry is working. Market is excited by our expertise in unique products. Last year, we announced a USD 120 million multi-park contract, considered to be the largest deal of its kind in the industry. We followed that up this year with a series of contracts with another multi-park operator valued at $73 million.

Our growing backlog is concrete evidence of the rapid growth of the market. The themed entertainment industry continues to soar, with no end in sight. Disney and Universal are investing heavily in expansion in all their parks around the world, raising the bar for all other theme park operators in the industry.

The big story, however, is in Asia, where growth is being fueled by the growing middle class. Within the next 2 years, Asia is expected to eclipse North America to become the largest markets for theme park attendance. Our experience in China, Japan, South Korea, Malaysia and Indonesia is serving us well in that region.

Our record backlog has illuminated a manufacturing capacity issue. Demand is expected to be -- remain very high in the industry, so we're actively looking at innovative ways to increase our production capacity concurrent with lowering our production costs to stay globally competitive.

The 3 first-generation jobs have technically challenged our engineering and manufacturing teams, and financially, they did not contribute any margin on just over USD 70 million of contract revenue. So this necessitated that we restrengthen our balance sheet.

In the late June, we closed a $5 million unit private placement offering. That private placement includes warrants that can be exercised in the first 18 months for $5.6 million or $8.3 million in the subsequent 18 months. Also, in late June, Empire raised an additional $1.7 million of equity through outstanding warrants being exercised.

Strengthening our working capital is expected to improve our profitability in Q3 and afterwards because it enables the company to procure in a more timely manner, and it allows us to negotiate more favorable terms with our suppliers.

Throughout 2017, my management team reflected long and hard on both the opportunities and the challenges facing our company. One of the key opportunities was how rapidly the growth -- the market was growing, but with this growth came an increasingly apparent need to improve our cost competitiveness to capitalize on this growth. As a result, Empire has undertaken an aggressive action plan to reduce its cost structure, as described in detail on previous calls by Hao Wang, President and Chief Operating Officer of Dynamic Attractions, a wholly owned subsidiary and a primary business unit for Empire.

The organization-wide cost-reduction initiative is well underway. We're reducing our headcount and fixed costs. Furthermore, we've identified and implemented design, procurement and production efficiencies that can improve our execution capabilities and our financial results.

Management continues to be laser-focused in its efforts to boost margins and expand capacity in a cost-effective manner. We cannot rely solely on making the industry's most futuristic, iconic rides. As we have stated in the past, margin expansion is a top priority, and all options are under consideration to achieve this to the benefit of all stakeholders.

We've made significant progress on our co-venture initiative. By partnering with existing major tourism destination operators, we can leverage our iconic attraction intellectual property and address an untapped new part of the market.

Our award-winning attractions will operate under a co-ownership agreement with Empire. This is designed to provide a long-term stream of recurring, predictable revenue and profit.

Before the end of the year, we expect to announce our first co-venture location. We expect to have an opening sometime in 2019. The $31 million co-venture financing announced over a year ago has proceeded according to plan. The equity funding commitments are in place, including that from our co-venture strategic partner. The partner has invested significant time and money over the previous 4 years in developing the core product line, improving its facilities and building a world-class engineering group. This has been important foundational work, and it has made us the global leader of media-based attractions market niche. I believe we are arriving at a point where these efforts will pay off as we move to second-generation, higher-margin products and leverage the ride IP with the co-venture initiative.

Empire's intrinsic value has never been higher. We have strategically pivoted our company's focus, and we are in the right industry at the right time. The officers, directors and insiders own over 50% of the company, so our goals are completely aligned with shareholders'. Our intrinsic value should continue rising as we execute our plan successfully.

In summary, our strategy of designing and selling our state-of-the-art iconic ride systems is working. Our very strong backlog, improved balance sheet, cost-cutting action plan, progress on our co-venture initiative demonstrates that the company is moving forward and gathering momentum on all facets of its presence. These combined actions will drive a return to profitability.

Allan Francis, Mike Martin and I are here to answer your questions. Operator, would you please facilitate the question-and-answer part of this call?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We currently have no questioners in the queue. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Nelson for any closing remarks.

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Kenneth Guy Nelson, Empire Industries Ltd. - Executive Chairman, CEO, President & Director [2]

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On behalf of us all at Empire, we appreciate your interest in our company. As Allan Francis mentioned earlier, you can reach us by e-mailing him. Allan's e-mail is on the website, which is afrancis@empind.com. And tomorrow, you'll find a recording of this conference call on our website as well. Again, thank you for participating.

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Operator [3]

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