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Edited Transcript of EIL.V earnings conference call or presentation 3-Dec-18 3:00pm GMT

Q3 2018 Empire Industries Ltd Earnings Call

WINNIPEG Jan 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Empire Industries Ltd earnings conference call or presentation Monday, December 3, 2018 at 3:00:00pm 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 Third Quarter 2018 Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Allan Francis, Vice President of Corporate Affairs and Administration. 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 Third Quarter Investors Conference Call. Today, we will hear from Mr. Guy Nelson, Executive Chairman and CEO of Empire Industries; and Mr. Michael Martin, our Chief Financial Officer.

On the first part of the call, we will provide insights into the company's performance from the third quarter of 2018, and after that, we will be available to answer your questions. But first, here are a couple of housekeeping notices. Empire's Annual and Special Shareholder Meeting was held on October 17 in Toronto. The annual meeting presentation is available on our website and can be found in the Investor Relations tab under Presentations.

If you'd like to know 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.

Today's call is being recorded and a recording of this call 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 press release as well as our MD&A, which you can find on our website and on SEDAR. Company's actual performance could differ materially from these statements.

Empire (inaudible) within the industry which experienced (inaudible) especially in the U.S. and Asia. Our specialty is designing and building cutting-edge rides for major theme parks. You have probably heard off or ridden at least one of our rides. We are the secret name behind some of the most popular attractions in the world.

In addition to Orlando and California, our rides are the centerpiece attractions in theme park resorts in China, Japan, Macau, Dubai, France and many other locations.

We've 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.

Let's begin the call with a review of the numbers. I'll 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. Our revenues are stronger in the third quarter as we were beginning to move into the production phases of our increased backlog with more profitable work. Here are the details. The third quarter revenues were $53.8 million, which is up nearly 25% from a year ago. This figure represents the fact that Empire secured several large projects in 2017 that are out of engineering and hitting the production line in 2018.

At the end of the third quarter, our contract backlog was $248 million, this is up 6% from a year ago. The backlog is strong and represents almost 2 years of work at our current production levels.

The adjusted EBITDA for the third quarter was $1.3 million compared to $4.3 million during the third quarter of 2017. This decrease of $3 million is driven by an increased volume on first-generation project revenues advanced in Q3 2018, which the group has elected to differ the recognition of any profits on this first-generation work until the high degree of technical risk has been mitigated. This lack of margin on this portion of the revenue in Q3 is in accordance with the new IFRS 15 revenue recognition standard that suppresses the overall margins in the third quarter as a direct consequence.

We have improved our manufacturing processes and efficiencies, and we are progressing through transitional issues from design engineering to production and have ramped up to higher output levels, so we can deliver our products faster and in a sustainable manner. The bottom line benefits to these improvements will start to show throughout 2019.

The third quarter net income was $0.2 million compared to $2.1 million for the same period -- quarter last year. This decrease is largely driven by the fact as I have already discussed. Our liquidity remains very tight and because of the amount of profitable backlog available to process, the company has undertaken several initiatives to strengthen its working capital. We expect out something finalized early in 2019. You may have questions about our financial performance, I'll be on the line to answer questions at the end of the call, but first, let's hear from Guy Nelson. 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. Empire's strategy is to improve its operating performance and continue to be the leader in delivering innovative ride systems in the attractions industry. I will highlight those areas by sharing with you news and insights about our co-ventures, manufacturing capacity, industry positioning, ride openings and improving EBITDA for 2019.

The big news today is the announcement of our first co-venture. Empire intends to create and co-own an attraction at an amusement park in Pigeon Forge, Tennessee. We have executed a memorandum of understanding with McManus family, who are an experienced local partner, lead developer and operator of a very popular and highly specialized amusement park called The Island in Pigeon Forge.

The Island in Pigeon Forge is one of America's most popular amusement parks outside of Florida and California according to TripAdvisor. The theme park is adjacent to the Great Smoky Mountains National Park, which regularly draws over 11 million visitors per year.

The MOU calls for the creation of a 50-50 owned entity to lease the space at The Island in Pigeon Forge to build a facility and install one of our Dynamic Flying Theater attractions. The name of the attraction, the theme of the movie and so on will be announced at a later date. We expect to have the agreement signed in early 2019 with a co-venture attraction opening to guests in early 2020. This is the first of several co-venture opportunities that Empire has been negotiating in North America and in China.

We see co-ventures as a natural extension of our business for manufacturer like iconic ride systems for major theme parks to be a co-owner of our own world-class attractions in primely tourist locations.

Empire's co-venture strategy is designed to generate a recurring predictable revenue and profitable stream, and a nice adjustment -- enhancement to our business model.

Our products are in high demand and we have an impressive backlog to prove it. As a result, we need to increase our manufacturing capacity. As part of that action plan we are finding and executing strategic ways to increase our efficiency and reduce our delivery time and cost. For these reasons Empire has entered into a strategic alliance with Chance Rides. Chance is one of the world's most prolific and respected ride manufacturing companies and has delivered over 5,000 rides. Their 300,000 square foot modern facility in Wichita, Kansas is cost efficient and has excess capacity.

The relationship with Chance has been a year in the making, Dick Chance, the CEO and owner of Chance Rides. And I realize that our 2 companies' values were completely aligned when we first started exploring the strategic alliance. We both are committed to making the best, highest quality, most popular rides in the world. Compared to Dynamic Attractions, Chance Rides is focused more on the smaller amusement parks, family entertainment centers, museums and zoos, and selling the higher volume of rides to these end markets.

As our -- as part of our alliance, Chance will support -- get support from our 100-plus engineers for their product line.

When we shared the news of the alliance with the industry last month at the trade show, the reaction was very strong and positive.

Chance's reputation as a long-standing, reliable ride maker is seen as a brilliant complement to our position as the industry's leading innovator of prime premium rides.

Together, we are viewed as the largest source for rides in North America. We undertake a number of different market initiatives throughout the year but none is more significant than having a booth at the trade show in the International Attractions Expo hosted by IAAPA, the global attractions industry association.

The trade show was attended by 30,000 people. More important to us is that virtually all of the major theme park owners and top entertainment operators at major tourist destinations attend the trade show as well. As I mentioned, it was the ideal forum to announce our strategic alliance with Chance Rides, it was very well received. We also unveiled a new ride called The Dual Power Coaster. It uses a number of new roller coaster technologies including Dual Propulsion Systems and a suspension system that simulates a variety of racing sensations such as rapid acceleration, air time, drifting and spinouts. At the show The Dual Power Coaster was awarded the industry's top honor for a prospective new product. This is our 4th consecutive Best New Product Concept Brass Ring Award, an unmatched industry record that confirms one of our core values as a company. Innovation is alive and well and manifesting its way in every aspect of our business.

In short, the trade show in Orlando was packed with back-to-back meetings with clients and prospective clients. We seem to be the most talked about premium ride manufacture in the industry. And for all the right reasons, our dominant presence at the global trade show has increased our pipeline of prospective leads.

We're aggressively working on that list to convert the right projects into revenue generating sales. I would be remiss if I didn't mention that we also, last week, were awarded the Advancing Technology and Innovation Award for the British Columbia manufacturers and exporters. This is just another sign that our strategy is getting traction.

A number of our first-generation products are in the final stages of becoming centerpiece attractions of major theme parks. In fact, the first intermittent dispatch robotic arm Dark Ride opened 3 weeks ago. It is the centerpiece attraction that one of the newest theme parks Warner Bros World, Abu Dhabi.

2 more first-generation rides are scheduled to open in the first half of the New Year. Our special effects coaster is a roller coaster with highly advanced track components that move the guests into a vehicle in a unique and several exhilarating ways such as the sideways drop and a frontal tilt & drop. This installation is also in Abu Dhabi.

Secondly, our newly announced Dual Power Coaster is currently being installed in Asia for opening into mid-2019. On completion of the commission of these first 2 -- first-generation products, our backlog will be almost entirely made up of second-generation products, which carry much more profitable mix of work. We expect this to manifest itself into stronger margins throughout 2019.

Our strategy is to leverage the attractions industry growth and to improve our margins and cash flow on ride sales. This will continue to gain momentum throughout 2019. The fact we entered into this year with a solid backlog comprised mostly of higher-margin second generation work is also very encouraging.

Today's announcement of our first co-venture was delivered this year as promised. There will be more to announce in the future because our co-venture value proposition is globally very attractive and highly unique.

As witnessed at the recent IAAPA trade show, we are the top go-to premium ride supplier for major global theme park owners. We have earned an integral reputation. Our strategic alliance with Chance Rides is a strong example of how our action plan is taking shape.

In summary, I believe that our intrinsic value has never been higher. Insiders own both halves of the company, so our goals are tightly in line with shareholders. I expect our intrinsic value will continue to rise as we continue to execute our plan successfully and improve our bottom line performance.

Allan Francis, Michael 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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Operator [5]

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(Operator Instructions) This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Guy Nelson for any closing remarks.

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

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On behalf of all of us, thank you for your interest in Empire. As Allan mentioned earlier, you can reach us by e-mailing him. Allan's e-mail address is on the website, which is empind.com. And tomorrow, you will find a recording of the conference call there as well.

I'd like to wish everyone happy holiday and a very prosperous new year. Thank you very much.

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Operator [7]

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