AstroNova Inc (ALOT) 2017 Q4 法說會逐字稿

Good day, and welcome to AstroNova's Q4 Fiscal Year 2018 Earnings Conference Call.

Today's conference is being recorded.

At this time, I would like to turn the call over to David Calusdian from the company's Investor Relations firm, Sharon Merrill Associates.

Please go ahead, sir.

Thank you.

Good morning, everyone, and thank you for joining us.

Hosting this morning's call are Greg Woods, AstroNova's President and CEO; and David Smith, CFO.

Greg will discuss the company's operating results.

David will take you through the financials.

Greg will make some concluding comments, and then management will be happy to take your questions.

By now you should have received a copy of the earnings release that was issued today.

If you do not have a copy, please go to the Investors section of the AstroNova website, www.astronovainc.com.

Please note that statements made during today's call that are not statements of historical fact are considered forward-looking statements within the Private Securities Litigation Reform Act of 1934.

These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties.

Accordingly, actual results could differ materially, except as required by law.

Any forward-looking statements speak only as of today, March 14, 2018.

The company undertakes no obligation to update these forward-looking statements.

For further information regarding the forward-looking statements and the factors that may cause differences, please see the Risk Factors in AstroNova's Annual Report on Form 10-K and other filings the company makes with the Securities and Exchange Commission.

During this morning's call, management will refer to non-GAAP earnings per share.

This is a non-GAAP financial measure the company believes helps investors gain a meaningful understanding of changes in the company's core operating results and also can help investors who wish to make comparisons between AstroNova and other companies on both a GAAP and non-GAAP basis.

For more information, please see the GAAP to non-GAAP reconciliation tables in this morning's news release.

The tables have more details about the GAAP financial measures that are most directly comparable to the non-GAAP financial measures and related reconciliations between these financial measures.

Now I'll turn the call over to Greg Woods.

Thank you, David.

Good morning, everyone, and thank you for joining us.

We kept a strong year with an outstanding performance in the fourth quarter, generating higher earnings and record revenue and bookings.

Total revenue for the quarter was a record $32.7 million, up more than 27%.

Revenue for the year was also a record, coming in at $113.4 million, more than 15% higher than fiscal 2017.

Our Product Identification business was up 16%, and Test & Measurement was up 59% from the fourth quarter of fiscal 2017.

For the year, Product Identification revenue grew 17% with solid organic growth in the QuickLabel product line, and Test & Measurement grew 11% for fiscal year 2018.

I'm pleased to report that our investments in geographic expansion are paying off quite well.

International revenue was up 72% in the quarter and 60% for the year with broad-based growth.

Our $43.6 million of international revenue for fiscal 2018 was another record for the company.

This was a result of a focused effort over the past several years to invest and grow revenues across the globe.

During the past year, for example, we opened our first office in India, added sales personnel in Latin America and established a wholly owned foreign enterprise in China located in the Shanghai free-trade zone district.

Our presence in China helped us win the Chinese C919 aircraft contract earlier in this year and has given AstroNova a seat at the table with large global manufacturing companies looking for enterprise-wide solutions to meet the needs of their customers.

So in addition to penetrating these local markets, we are building a truly international brand.

We are now winning larger contracts from global organizations because of our greatly expanded worldwide presence.

To further facilitate our worldwide growth, last year, we also began opening a series of Innovation Technology Centers, or ITCs, around the globe to demonstrate the full range of our products, provide technical support and enable customers to buy on-site.

To date, we have opened technology centers in Chicago, West Warwick, Copenhagen, Shanghai and most recently, Frankfurt, Germany.

Our Frankfurt ITC is co-located with our new EMEA hub location, which serves Europe, Middle East and Africa.

This is part of a planned network of hubs that we are setting up to be closer to our customers and improve our marketing, manufacturing and distribution efficiencies on a regional basis.

While establishing these ITCs and moving into a 3-continent hub structure requires a significant financial and time investment in the short term, they position AstroNova well for accelerated growth in the years ahead.

Now let me take you through the developments for the quarter in each of our segments.

Looking first at Product Identification.

The QuickLabel organic business continues to grow, and the new products we introduced last year are beginning to ramp.

We are also making excellent progress with the TrojanLabel product line as we continue to add dealers and increase brand awareness.

Our latest Trojan products, the T4 and T2-C, began shipping at the end of Q4.

So we look for those products to begin contributing to our results as we move through the fiscal year.

In Test & Measurement, we began to see revenue contribution from the Honeywell Aerospace printer agreement in the fourth quarter.

We believe these products are a real game changer for our aerospace unit.

A key reason is that the narrow format flight deck printer will be producing the standard equipment on the Airbus A320 family and frequently selected for the Boeing 737.

These are the 2 highest-volume commercial planes on the market.

To give you some context, there are over 14,000 B737s and A320s currently in service.

And 10,000 new aircraft are expected to be entered into service in the next 10 years, a very strong 7- to 10-year backlog for both manufacturers.

Together with the 737 and the A320, they account for about 60% of all commercial deliveries with about 1,200 planes expected to go into production this year, ramping to 1,400 next year.

It should be noted that our Q4 results included costs related to the integration of the Honeywell product line.

And we believe those costs will continue for the next couple of quarters as we migrate the manufacturing of the narrow format printers from Asia into West Warwick.

This integration process should be completed by the end of the first half of this fiscal year.

During the quarter, we also expanded our data acquisition product line with the introduction of a new upgraded TMX data acquisition system.

The benefits of this new system include the enhanced security of a Windows 10 operating system and much higher sampling rates, 60 times faster than previous TMX models.

These new capabilities allow the new TMX to tackle a far broader range of applications.

We also enhanced our corporate governance during the quarter with the appointment of Dick Warzala, Chairman and CEO of Allied Motion Technologies, to the Board of Directors.

Dick's background and leadership experience in industrial, aerospace and commercial markets spans more than 4 decades.

Before joining Allied Motion, he was President of Danaher's Motion Control Components Group.

He also served in senior positions at American Precision Industries.

Dick's corporate governance expertise, business insights and deep understanding of lean manufacturing principles will be valuable in formulating and guiding our strategy.

In January, we welcomed David Smith as our new Chief Financial Officer, and I'm delighted to have him on board.

David will oversight the financial and information systems functions, which will play a key role in helping the company improve overall performance.

He brings more than 2 decades of financial leadership experience at public companies, including 2 large multinational organizations and a NASDAQ-listed global high-tech company.

David's a proven leader whose financial experience with diverse global businesses, strong operations background and M&A experience are a great fit with our long-term strategy.

Let me now turn it over to David to take you through the Q4 results; then I'll come back briefly to provide a summary.

And after that, we'll be happy to take your questions.

David?

Thank you, Greg.

Good morning, everyone.

I am delighted to have the opportunity to communicate with you for the first time as AstroNova's Chief Financial Officer, and I look forward to meeting many of you in person over the next weeks and months.

Greg mentioned my background as CFO at global companies, such as a Crane Co., Dover Corporation and Standard Microsystems.

At each of these companies -- each of them are global manufacturing organizations with diverse product lines and complicated business structures.

I've been focused on linking the company's strategy to results.

I'm passionate about collaboration, continuous improvement and raising the level of financial acumen of the entire management team so that we can together focus on the most important activities.

I've been very excited by the quality of the team here at AstroNova, and I am truly enjoying working closely with them as we work on delivering results to our shareholders.

One of the things that attracted me to AstroNova was the company's strong focus on operational excellence, particularly the work that Greg has done in fostering collaboration and commitment across the globe -- global business.

In that regard, I've been extremely impressed with the application of the AstroNova Operating System, which is as sophisticated as any I have seen.

And while I'm less than 8 weeks into my tenure as Chief Financial Officer, I've been reviewing AstroNova's strategic initiatives with all of our business leadership team.

And I can see that the growth and profit improvement opportunities throughout our business are even greater than I envisioned when I signed on.

So with all that intro, I'd like to quickly provide some context on a few areas from our income statement and balance sheet.

Bookings in the fourth quarter were $34.8 million, up 32% from the prior year.

For the full year, bookings were up 22% to $119.6 million.

As Greg noted, these are all record numbers.

Hardware revenue was $12.2 million in the quarter, up 44%.

And for the full year, hardware sales were $37.9 million, up 11%.

Supplies were up 17% to $75.9 million for the year and up 19% to $20.5 million in the quarter.

Turning to profitability.

For the fourth quarter compared to last year, gross profit was up 26% to $12.6 million.

And operating income was up 85% to $12.1 million on the higher revenue.

Fourth quarter margin -- gross margin was 38.7%, down 60 points, primarily -- 60 basis points, primarily due to costs related to the Honeywell Aerospace printer acquisition-related costs.

As Greg suggested, those startup costs, including those under a transition services agreement, will abate as we move through the year.

For the full year, gross margins were down 1.3% due to an unfavorable mix of lower-margin QuickLabel product earlier in the year.

Operating margin in the fourth quarter improved from the prior year by 200 basis points, coming in at 6.5% for the quarter.

This is the third consecutive quarter of sequential improvement and operating profit.

The amortization of the customer relationship intangibles we acquired with the aerospace printer product line runs through the selling and marketing expense line, and we also incurred higher people costs in commissions as we invested in our global distribution channel.

For the full year, operating margins were down as we continue to invest in the AstroNova growth engine.

A substantial portion of the increase was due to the TrojanLabel and Honeywell printer product line acquisition-related costs.

However, it was also due to investment in people, processes and product development to drive growth and establish critical mass.

Except for some additional investments we expect to make this year in information technology to drive improvements and efficiency, we expect the overall rate of spending increases to abate.

In terms of other income expense, we had interest income in 2017 and interest on net debt in 2018, which accounts for the bulk of the swing of about $700,000 -- $600,000, excuse me.

Earnings were down about $0.01 per diluted share on a GAAP basis in the quarter due to a $1.1 million or $0.16 per diluted share expense related to the Tax Cut and Jobs Act; but was up 250% or $0.15 per diluted share on a non-GAAP basis for the quarter, excluding the effect of the Tax Cut and Jobs Act.

This is detailed in the press release tables.

Earnings were down $0.09 per diluted share for the full year to $0.47 per diluted share; but up $0.07 per diluted share on a non-GAAP basis, excluding the tax law changes.

The GAAP to non-GAAP reconciliation is included with the press release.

The bulk of the tax law change impact was due to the revaluation of the deferred tax assets at the new lower tax rate, and a small portion related to the total tax on foreign assets.

Turning to the balance sheet.

AstroNova started the year debt-free and over the course of the year, bought stock back from the estate of the founder and completed 2 acquisitions.

We exited the year with just over $23 million in debt and $11 million in cash.

So our net debt is $11.7 million and our year-end equity is about $63.7 million.

Our leverage is not high.

Net debt-to-capital is about 15%.

And so our ability -- and our ability to service the debt is very solid.

We spent $2.2 million on CapEx this past year.

We have the capacity to do appropriately sized and structured acquisitions when the timing and pricing is right.

Let me close now by saying I'm delighted to be here.

I look forward to speaking with many of you in the weeks ahead.

Also, Greg and I will be presenting later this month at the Sidoti Spring Convention in New York and in May at the East Coast IDEAS Conference in Boston.

Now I'd like to turn the call back to Greg.

Thank you, David.

As many of you are aware, in fiscal '17, we put into motion our 5-year strategic plan designed to dramatically grow our business.

We have just completed the first phase of that plan, having significantly grown and upgraded our revenue, infrastructure, talent pool and geographic footprint.

Over the next 3 years, in Phase 2 of our plan, while we will continue to focus on those areas, we will be leveraging the progress we've made thus far to capitalize on our product and business development initiatives to leverage our top line growth into improved profitability.

We continue to see excellent growth opportunities from our TrojanLabel acquisition last year and our asset purchase and licensing agreement with Honeywell's international aerospace division that we closed at the end of fiscal 2018's third quarter.

And we see numerous operational excellence opportunities across the company through the addition of automated technology and other ongoing improvements that will enable us to further enhance our economies of scale.

In summary, the investments we have been making and our growth initiatives have positioned us well for a stronger AstroNova and even greater financial performance.

With that, David and I will be happy to take your questions.

Operator?

(Operator Instructions) We'll take your first question from Tom Spiro from Spiro Capital.

Tom Spiro, Spiro Capital.

First, David, welcome aboard.

Glad to have you aboard, David, and we're expecting big things from you, David.

All eyes are on you at this moment, so good luck.

I appreciate the good wishes.

Let me just focus on Product Identification for a moment.

The TrojanLabel division, have we completed the integration now?

Are we all set to move forward with the good figure in the new fiscal year?

Yes.

We're pretty far along on that now, Tom.

And we -- the mid -- the only thing we have left at this point are some dealer networks in some parts of the world need to be further rationalized.

But other than that, we're in good shape there.

Manufacturing and the back-office operations are done, the product developments, integrated with engineering.

So we're in pretty good shape now for this year and obviously the future.

And as you look at the portfolio of the TrojanLabel products, we've come out with 2 new ones recently, and we have the T3 and the T1 and such were there when we acquired the company.

Which of those products do you think is really going to drive growth forward in the new fiscal year?

Where's the excitement?

Well, yes, the full range looks pretty good.

But the big movement and the excitement we've seen at the trade shows and from customer feedback are actually in the higher production units.

So the T2-C, which is -- we just started shipping at the end of Q4 -- we're actually back-ordered on that one right now, it's so popular.

So we're kind of making those as fast as we can.

And the T4, which is new to the market, it's our highest-end product.

It sells for a bit over $100,000.

So it's a little bit of a longer sales cycle on that one.

But that's also got quite a bit of interest, primarily because it's, in many cases, doing the work of equipment that's twice as expensive as that unit.

So quite a bit from the T2-C, the T4 and the T3, which is the -- kind of a new technology product that can do overprinting on boxes, can print on wood, a wide variety of surfaces.

So that's really new to the market as well.

And we're manufacturing all of those in China?

Primarily, yes.

I see.

Well, that's great.

Well, good luck with the TrojanLabel.

And then on the tabletop printers.

I guess, the Kiaro!

line is getting a little long in the tooth, as they say.

I think the first Kiaro!s came out 4, 5 years ago.

Is there some plan to bring out a fresh line of products or update those the in the new fiscal year?

Yes.

I don't want to give too much away.

But as you know, we typically bring out new products in the fall at the bigger packaging shows.

And we have a couple of things in the queue for that for this year, but I don't want to preannounce those.

So the Kiaro!

product is still doing fantastic.

There's really else nothing like it in the marketplace.

So that continues to be a very strong seller.

But we do have some follow-on products that are in the works.

But I want to kind of keep that under wraps until we're close to release date.

And how's the QL-800 faring?

Very good.

We had kind of a slow start last year with that.

And to give kudos to the engineering team, both in West Warwick and also with a lot of help from the new guys in the TrojanLabel organization.

They're able to finalize in the -- kind of quirks we had in that initial launch.

I'm happy to say that, that product is shipping and doing very well in the market now.

I see.

And David, just a question or two for you.

I may have missed these.

But the segment, the sales; I think you did give them.

But I didn't hear the segment operating income numbers for Product Identification and Test & Measurement.

Could you give us those, please?

Yes.

And just as a piece of -- to be aware of as we move forward, we're going to try to focus on the press release, the public disclosure.

But in the fourth quarter, the segment profit at this point for Product ID, Product Identification was $2.8 million.

And for the T&M segment as a whole in the fourth quarter was $1.5 million.

I see.

Okay.

That's very helpful.

And how many employees does the company have at the end of the year?

The employee count at the end of the year is -- my eyes are too -- my eyes...

[At least about --.]

Got the number right in front of me.

Kind of in that ballpark.

I'm sorry.

I didn't hear you, Greg.

Yes.

It's around -- a little over 350: 352 or 355, somewhere or right around there.

352 is the number.

(Operator Instructions) We'll hear next from Samir Patel from Askeladden Capital Management.

David, since you're new around here, I'll send you all the questions to give you a warm welcome.

First off, just on the press release.

Do you have a number -- I'm trying to get to adjusted EBITDA for the year.

Do you have a full year number for both depreciation and amortization and then also integration expenses?

Depreciation and amortization will be in the K when we file it in a couple of weeks.

And we'll think in the future about discussing the integration expenses.

It's not a number that we've historically disclosed.

Okay.

Sure.

On the tax rate side, I didn't see anything in the press release about what tax rate you're expecting going forward, pro forma, for the tax reform.

Any thoughts on that?

Yes.

In the range of 28% or 29%.

Okay.

It should be very tight in that range someplace.

Okay.

And then, Greg, as you -- I think you talked a little bit about being done with Phase 1 of the strategic plan and moving on to Phase 2. As you look out over the next few years, I mean, how do you think about the margin cadence in terms of kind of getting from where you are to where you want to be?

Is that mostly front-end loaded?

Is that mostly back-end loaded?

Is it kind of linear?

Yes.

I would say it's -- obviously, those things are a little bit hard to predict.

But it's more of a steady progress.

It's not the type of business where it -- turns on a dime.

But it's -- we did 2 things.

We're getting operating leverage obviously now that we're well above the $100 million level.

And as David referenced, the operating expenses will not be growing in the same type of ratio in lockstep.

So the only thing we have in the short term, which is a bit of a drag, and David also referenced that, is the TSA/integration charges with Honeywell.

But by the second half of this year, the bulk of those should be behind us, and we start moving ahead of that.

We'll hear next from Steve Busch from Everglades Resources, Inc.

So good number.

I like the way it's going.

We're finally over $100 million.

We've been trying to get there and...

Yes.

Especially promising -- of course, with the bookings, at $120 million.

So we're very pleased with that.

Yes.

And so you kind of said there's 1,200 Boeing Airbus planes slated for this year.

Is that correct?

Yes.

That's the production numbers we have for the A320 and 737 combined.

And do we think we're going to get some percentage of those for our printers?

Yes.

We (multiple speakers)

(inaudible)

Pardon?

I didn't hear that part.

Do you think we're going to be at like the 80% level, 50% level?

The 90 -- like what kind of percentage do we have of that market?

Well, the 2 aircraft manufacturers are kind of neck and neck.

And I think -- and depends, any given month, who produces more.

But they're basically 50-50 on those numbers.

And on the A320, our printer's standard equipment, so every single one gets one of our printers.

On the 737, there's an option for a wide format printer, which we also make.

So as far as AstroNova-manufactured printers, that should also be a very high percentage.

There's very few aircraft that do not get printers.

So we don't know the exact percentage, but 100% of the A320s and much more than 50% of the 737s (inaudible).

Right.

And so -- that's good.

So on the 10,000 or so over the next decade, do you think that (technical difficulty) be weighted more towards the next few years?

Or is it kind of evenly distributed?

Any idea on that kind of road map?

Yes.

You can take a look online; there's a lot of literature about that.

And I was just at a Rockwell conference the last week and then had a talk with the people at the U.S. Commerce Aerospace Summit a couple of weeks before that.

And both those manufacturers are trying to ramp as quickly as they can from -- they're kind of in the 40s and maybe 50 (technical difficulty) right now.

And they're looking for ways to get to 70.

That'll take them -- yes, 70 per month, which will probably take them a couple of years.

You can get -- it's mainly a supply chain issue, but you can -- they're both published information.

It's easy to Google it; you can kind of find out where they're at.

But I would think 60 per month is very doable within less than a 2-year window; and 70, if they can get the supply chain in line.

Right.

So it seems like once we get our integration costs fully completed, we should be able to drop some good earnings down to the bottom line, going forward.

Is that a fair assessment?

Yes.

That's the objective.

All right.

Okay.

And so I guess just more on like a overview of the company and the stock.

I've been in a long time, and I'm happy with you guys.

You do a great job.

But the liquidity is still a bit of an issue.

Any kind of concept of doing a stock dividend or anything like that to get more -- I know I ask this every couple of years.

Okay.

That does get -- it is (inaudible) to get discussion at the board meetings.

And obviously, we can't say anything before anything's changed or updated there.

But at this point, there's nothing to report there.

(inaudible)

It would be helpful to the thought process there if we could get our stock price to a point where after we, say, split it or something that the price would be high enough.

So it's something we'll continue to look.

It's something we'll continue to look at as we move along here.

All right.

Yes.

No, that's right.

Dividends sometimes -- stock dividends are better than a stock split until it gets higher.

But either way, you guys are doing a great job, and I look forward to [next year].

That does conclude the question-and-answer portion of today's conference.

I would like to turn the conference back over to Greg Woods for any additional or closing comments.

Okay.

Thank you.

Well, thanks again, everyone, for joining us here this morning.

And we look forward to updating you on our results for the next quarter.

Bye now and enjoy Pi Day.

And that does conclude today's teleconference.

We thank you all for your participation.