AstroNova Inc (ALOT) 2021 Q1 法說會逐字稿

Good morning, and welcome to the AstroNova First Quarter Fiscal 2021 Financial Results Conference Call.

I'll now turn the call over to David Calusdian, President of the company's Investor Relations firm, Sharon Merrill.

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, the company's Chief Financial Officer. Greg will discuss the company's operating results. David will make a few comments on the financials. Greg will make 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 facts are considered forward-looking statements within the meaning of 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, June 11, 2020. 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 the other filings the company makes with the Securities and Exchange Commission.

I'll now turn the call over to Greg.

Thank you, David. Good morning, everyone, and thank you for joining us today. These are unprecedented and difficult times, particularly for those on the front lines of the COVID-19 crisis. But before we get into the details of the quarter, let me publicly acknowledge the doctors, nurses and other health care first responders in our home state of Rhode Island and around the world for their heroism and personal sacrifice in battling the pandemic.

At AstroNova, the health and well-being of our employees is a top priority. I'm pleased to report that the early actions we took to shift a significant number of our global team to offsite working, while enhancing our cleaning and protection procedures, in line with government and health agency requirements at our production facilities, has proven to be successful. For other facilities around the world, we have maintained production while keeping the health and safety of our employees, customers, suppliers and communities at the forefront of our attention.

I want to recognize the entire AstroNova team for their unyielding commitment during this unique period. They've done an outstanding job supporting our customers and one another. Their dedication makes it possible for us to continue providing our customers with the highest quality products and services every day.

Not surprisingly, our first quarter results reflected the widespread economic disruption caused by COVID-19, which has touched virtually every industry in nearly every geographic region. In terms of our business, the impact was most pronounced in the Aerospace unit of our Test & Measurement segment. Test & Measurement revenue was down about $4 million or 30% from the same period a year earlier. The effect of the virus on Test & Measurement in Q1 has only compounded the disruption created last year by the extended grounding of the Boeing 737 MAX aircraft.

In the wake of the pandemic, aerospace OEMs have cut their production forecasts, and airlines have dramatically scaled back their flight schedules, which, of course, means fewer planes in service. I know that everyone is interested in when we expect this downtrend -- downtrends to stabilize and industry momentum to pick up, obviously it's a fluid situation with a lot of variables.

Based on the current environment, we expect results in the second quarter to be weaker than the first quarter. That said, we are seeing encouraging signs for a gradual improvement beginning in the second half of the fiscal year. Airlines are beginning to restore flights in response to improving demand for summer air travel. And Boeing restarted the 737 MAX production line at the end of May and is planning for the return to service of the MAX with deliveries scheduled to resume in their September quarter.

And while in general, production rates have been revised downwards in response to the new market environment, I think it's important to keep 2 things in mind. First, the recovery of the commercial aerospace industry from this downtrend will be paced by narrow-body airplanes like the 737 MAX and the Airbus A320. These aircraft are very fuel-efficient and provide more mission flexibility to address the evolving needs of the global market than their wide-body counterparts.

As a world leader in flight deck printers, we serve both segments, but narrow-body aircraft sales make up the majority of the market, and they are growing at a faster rate. That trend was a major driver in our decision to acquire Honeywell's narrow format printer business in 2017. The second point is that while it will not really take time for the industry to return to pre-COVID levels, the fundamentals of the business are strong, which will drive air travel rebounds, and we are well positioned to capitalize on the upturn.

Turning to Product Identification segment. Revenue was down about $1.2 million or 5% from the second -- from the record-setting first quarter of fiscal 2020. PI segment relies heavily on trade show participation, in-person sales calls and product demos to generate demand. The stay-at-home mandate, social distancing measures and bans on large gatherings severely restrict those marketing opportunities. While we have just recently started to make sales calls again, trade shows and other key marketing events that have either been canceled, delayed until late in the year or changed to a virtual format, these market realities have negatively impacted our new printer sales.

On the other hand, we were very pleased with the performance of our supplies business in the quarter. Company-wide, supply has accounted for approximately 62% of revenue, up from approximately 55% in the prior year quarter. This increase speaks in part to the ramp-up of our new higher throughput printers that we introduced last fall. In addition, we're seeing a strong uptake of labels and other consumable media for both new and existing customers in specific end markets, such as cleaning and sanitation, medical supplies and pharmaceuticals where demand is especially robust.

Product Identification segment operating profit improved to $3.1 million or 14.1% of revenue versus $2.9 million or 12.2% in last year's first quarter. Expanding our recurring revenue stream is a key element of our overall growth strategy. To maximize that growth, we need to remain agile and continue to anticipate the needs of customers amid rapidly evolving market conditions. Our team has continued to perform well in that regard. In recent months, we've enhanced our e-commerce initiatives with the creation of our GetLabels business unit and strengthened our digital engagement marketing with the just-launched new Product Identification website, astronovaproductid.com.

While we are working aggressively on these and many other top line improvement initiatives, we also continue to implement additional cost mitigation measures such as the reduction in executive compensation and other resource allocation adjustments to lessen the financial impact of COVID-19 on our business and enhanced cash flow.

David will take you through more of the details. And then I'll be back with some closing comments. So let me now turn the call over to David for his financial review.

Thank you, Greg, and good morning, everybody. Rather than repeating all of the numbers in this morning's earnings release, let me highlight some of the cost-control initiatives that Greg alluded to in his remarks.

As noted on our Q4 call, in response to lower volume -- lower sales volume related to the 737 MAX grounding, we began implementing a 5% headcount reduction and other measures, expected to generate savings of approximately $1.5 million to $2 million on an annualized basis from the run rate towards the end of last year.

This quarter, once the COVID-19 situation became clear, we announced additional cost reductions that included an across-the-board freezing of executive employee compensation at 2019 levels. We also applied for and received a $4.4 million loan from the Small Business Administration's Paycheck Protection Program, which has put us in a significantly better liquidity position, and we expect to be able to comply with all the terms of that program.

With the aircraft OEMs now bringing down their build forecasts, we are, as Greg said, evaluating additional cost reductions given that the industry will take some time to recover once the pandemic is behind us. From an expense perspective, it's worth noting that due to the decline in aerospace printer volume in the quarter, the royalty payments to Honeywell on our asset purchase and license agreement were lower than last year's first quarter by $600,000.

In addition, by pushing out some projects, we've been able to reduce outside service and consulting arrangements. The impact of COVID on trade shows, some related advertising expenses and lower company travel, along with lower incentive compensation, all reduced variable expense spending. All of this, combined with the impact of the more permanent changes I referenced a minute ago, resulted in an overall operating profit reduction of $1.6 million in the current quarter compared to last -- the quarter last year.

It's always important to note when reviewing our results the heavy noncash amortization related to acquisitions, which was $1.058 million in the quarter. Other noncash charges were depreciation of $511,000 and stock-based compensation expense of $495,000. While reported EPS and operating margins have obviously taken a negative trend in the current difficult environment, I would like to point out that our EBITDA margin was still 6.7%.

As we will disclose an update in more detail in our (inaudible) filed, we're in the process of renegotiating our credit facility with our existing lender and believe that we'll reach satisfactory arrangement. Regarding our 10-Q, due to the disruption caused by COVID-19, we are taking advantage of the SEC's filing deadline extension and expect to file our 10-Q sometime probably on the 19th or 22nd, but certainly no later than the 26th as we said in the 8-K we filed this morning.

On the IT front, we continue to make good progress on our ERP conversion to the cloud-based NetSuite software, albeit at a slower pace due to some of the remote working inefficiencies. We're working diligently to complete this project domestically as soon as we can.

With that, I'll turn the call back to Greg.

Thanks, David. In summary, we continue to take steps to mitigate the financial impact of COVID-19 on our business while preserving and improving liquidity. We have accelerated some of those cost-reduction measures in recent weeks to align with adjustments in certain customer forecasts. At the same time, we remain committed to supporting our key strategic objectives so that we are well positioned to take advantage of future growth opportunities post-COVID.

Based on the current environment, we expect results in the second quarter of FY 2021 to be weaker than the first quarter. We anticipate gradually improving results beginning in the second half of the year, contingent on the resumption of business investment and economic recovery in our end markets.

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

(Operator Instructions) We'll take our first question from Dick Ryan of Dougherty & Company.

So Greg, on the outlook for Q2, sequentially weaker. Is that for both segments? Or is one going to perform a little better than the other?

It's again, particularly driven by the aerospace cut -- reduction there. Dick, it's -- as you know, Boeing just announced May 27, the restart of the MAX. So that's pretty late in the game, and it's a slow ramp-up. So it's primarily driven by the aerospace drop-off.

Okay. Will -- how will product ID look sequentially?

Again, it's a little bit hard to tell on the hardware side. And on the supplies, as I mentioned in my comments, that seems to be holding up fairly well. I mean, again, in these kind of times, it's hard to predict everything exactly. Right now, it's a little -- if you look at our variability band about our forecast, it's wider than I've seen it since I've been at AstroNova.

But we're encouraged by the results so far and that continued into May. We have no reason to think it's going to make a dramatic turn one way or another, we think it should continue on the trend that it's on.

Okay. How is the -- can you tell what the inventory is like for the flight deck printers from Boeing's perspective? I mean when they increase their production, will you see it immediately? Or is there printers in inventory that may hit you a little bit later?

As far as we know, Boeing has a fairly low inventory, especially with the MAX, with regard to our printers, mainly because they are purchased by the airlines themselves when their planes are coming down the production line. So we actually get the order from the airline itself because it's buyer-furnished equipment. So ABC airlines would say, we need 5 printers, they would place the order on us and we would ship to Boeing. So they're all -- everyone's well aware at this point of what the production rate is at Boeing. So all of those forecasts have been adjusted as far as we know, there shouldn't be much inventory buildup.

Okay. Dave, I missed your comment on the credit facility. Are you working on a new one? And how are you sitting with your covenants?

Dick, my comment on the script was that we're in the process of working through that, and we expect to do so successfully. It's still in process, and we'll have more to disclose when we file the 10-Q shortly. I don't want to get into the details of where we stand, but I do think it will be resolved successfully?

At this time, I would like to turn the call over to Gregory Woods for closing remarks.

Okay. Thank you all for joining us here this morning. We look forward to keeping you updated on our progress and stay well. Bye now.

Thank you. This concludes today's conference. You may now disconnect.