Daktronics Inc (DAKT) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fourth-quarter fiscal 2009 earnings conference call. As a reminder, today's call is being recorded, Tuesday, June 2, 2009, and is available on the Company's website at www.Daktronics.com.

I'd now like to turn the call over to Mr. Bill Retterath, Chief Financial Officer for Daktronics for opening remarks and introductions. Please go ahead, sir.

Thank you, good morning, everyone.

We appreciate your participation in our year-end conference call.

We intend to make some comments about the year, the quarter, and the future, after which we'll open it up for a limited timeframe for questions. I'd like to first offer our disclosure cautioning investors and participants that in addition to statements of historical facts, this call and our year-end news release contain forward-looking statements reflecting our expectations and beliefs concerning future events which could materially affect our performance in the future.

We caution you that these and similar statements involve risks and uncertainties including changes in economic and market conditions, management of growth, timing and magnitude of future orders, and other risks noted in our SEC filings, which may cause actual results to differ materially. Forward-looking statements are made in the context of information available to us as of the date of this call. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

With that I'd like to turn it over to Jim Morgan, our Chief Executive Officer, for some highlights on the quarter.

Thanks, Bill, good morning, everyone. First of all, just a few comments on fiscal 2009, which we just completed. This was the year that consisted of two halves that were quite different from each other. The first two quarters combined we did $330 million top line, which put us at a $660 million run-rate, annual run-rate. The second two quarters we did $251 million combined, which is about a $500 million run-rate. So our bottom line for the year ended up slightly higher than last year. And obviously the excess capacity we had going into the last half of the year was somewhat problematic for us.

So as we look back, it was an okay year with a great start and a tough finish as the economic situation made its effects known toward the end of the year. And I want to thank all the employees for their efforts this past year. We certainly can point to many accomplishments in fiscal 2009.

The sports theme for us for the fourth quarter is baseball. It's always exciting when a new ballpark opens, and Daktronics was an integral part of opening both of the new ballparks in major leagues here in April; the New York Yankees and the New York Mets, namely. The Cincinnati Reds also opened their season with the new Daktronics integrated scoring and video system. And these will all be great showcases for Daktronics products.

Daktronics also has displays front and center at the opening of the new travelling "Star Wars" show which debuted in London in April and will start a world tour in September. This is the second order of our PST-10 product, which is a new product we've introduced here in the last six months. And this order came from Screenworks, the video screen rental company that is providing displays for the show. And this order followed a successful use of the same product by Screenworks with AC/DC tour in the past six months. We're really excited about the great reception this product has had and the progress we're making in that mobile modular area.

Again, this PST-10 is a 10-millimeter surface mount technology. It is a very high resolution, indoor/outdoor transportable display system designed for transportability and ease of setup and teardown. And this product provides unsurpassed, accurate color representation of, in this case, the film content which is being displayed, the "Star Wars" film content.

And we are able to not only provide this accurate color representation when the product is new upon delivery, but we can maintain that through calibration over time. For this show the PST-10 is configured to a 27-foot by 60-foot screen. That's a truly awesome video display. Again, another great showcase for our products and for this mobile and modular display system capability.

During the fourth quarter, we continued our focus on cost reduction. We consider this an ongoing work in progress as we work to match our cost structure to our evolving order and sales outlook. Our general approach to management through the downturn remains very straightforward, and basically unchanged, continued to first and foremost aggressively pursue orders, and simultaneously pursue cost reduction. We'll continue to provide a product at a competitive price. We're continuing with strategic product developments that are essential to our future.

Looking forward, our orders were down this quarter. Both on a sequential and a year-over-year basis. However, it is noteworthy that the drop in orders is not across the board in all of our business units. The Commercial and International business Units were down significantly, while our other business units were up for the quarter. And as we've discussed before, much of the drop in Commercial is due to the decline in our digital billboard business.

Internationally, it is always -- always a very lumpy business and the most difficult to predict because it depends on a wide variety of large projects and the variability with the geographies. But we do have nice opportunities in the pipeline for International that we're working on.

Notably, our Transportation market orders were up significantly in the fourth quarter, as we see our Transportation business headed for a very strong 2010. Transportation revenues account for about 10% of our business, just to put that in perspective.

During the quarter, we reduced backlog by $8 million from $128 million to $120 million, with revenues of almost [$122 million]. Given the current rate of order bookings and the fact that some of the backlog isn't workable in the quarter, we estimate it may be difficult to achieve $120 million top line in Q1.

On the competitive front, we are seeing some extremely competitive pricing from some competitors. Some of which we believe is not sustainable. At the same time, we are launching a renewed effort at reducing the both the product cost reduction and streamlining some of our project processes to continue to be aggressive in our cost reduction. We will be working with our entire supply chain to achieve cost reductions in that regard. We expect the price pressures will continue for at least the near term, and this could have an adverse impact on gross profit margins.

On the longer term outlook, we expect all of fiscal 2010 to be challenging, and we're planning accordingly. As we've discussed before, based on comments from some of the major players in the outdoor billboard industry, we see the digital billboard business as remaining very slow through calendar 2010 and possibly into 2011.

Other areas of our Commercial business are also down somewhat, but on a positive note, we were just selected as a supplier for a new corporate signage program for a regional convenience store firm. That will be in the $2 million to $3 million range initially and could grow from there. So there's some good things happening out there.

Our Live Events business has a nice pipeline of projects. Our year will be defined by how we book orders in the next two to three months. Second quarter's typically our big quarter for sales in our Live Events business. And this business, again, the competitive environment is probably now as much of a factor as the economy.

Notably, we're in a strong cash position as we look toward 2010 and to the future. We'll be certainly working to minimize our CapEx spending and overall work hard to conserve cash going forward. And based on our cash position and our cash flow outlook, our Board of Directors has declared a $0.095 dividend for fiscal 2009.

With that, I'll turn it over to Bill for more color on the numbers.

Thanks, Jim.

I'll start with a few comments on gross profit, which was less than what we'd expected for the quarter. As Jim mentioned, we began to see adverse effects on a competitive front, which is hurting our gross margins.

For large contract orders booked during the quarter, we saw a noticeable decline in gross profit estimates compared to the order bookings in the third quarter of fiscal '09, so we expect that to impact gross margins in fiscal 2010.

The orders booked during this quarter, as most of you understand, do not have a significant impact on margin in the current quarter, but there is some impact. In addition and more importantly, we did not perform overall as well as expected on the large contract orders where we recognized revenue for the quarter and saw the base growth profit turn out a lot less than the original estimate we had going into the quarter. We continue to see higher warranty costs, but we continually are headed in the right direction with our initiatives on quality manufacturing and design for this decline.

As a followup to the finishing issue that arose in the third quarter, we took an additional hit of just under $1 million in the fourth quarter and could see a little more into fiscal 2010. But based on information available to us at this point, we believe we have the problem generally contained.

To put the foregoing in better perspective, the largest change in gross profit margins sequentially was the lower overall margin on contracts which cost us a few margin points. And we think that the warranty cost was an additional margin point or so on top of that than we expected. Now just keep in mind that gross margins in our business are estimates. It's not like a standard manufacturing environment where you know with greater certainty what your costs will be. With large projects, costs can fluctuate.

Given everything that's going on especially with the competitive environment, it's difficult to forecast gross margins going forward. We continue to focus on areas we can control like our manufacturing and services overhead processes, our labor utilization and other factors. For example, we've reduced our manufacturing staff by approximately 8% over the last two quarters. And the total cost of manufacturing for the fourth quarter, which excludes raw materials, have reduced approximately $1 million from the third quarter and $2.5 million from the second quarter of fiscal '09. So the cost base now of approximately $16 million per quarter, which includes a little more than $3 million of non-payroll-related fixed costs, we feel we've made a lot of progress but still have much more to do. Keep in mind that labor over the long term is a variable expense, but a short-term it tends to be more a fix.

Within operating expenses in addition to working at reduced and payroll costs, we're also working on many other items in that area. The product development, you'll note, for the quarter was a little lower than expected. That was primarily due to some adjustments of accrual. So it doesn't really reflect the current run-rate. Current run-rate was probably $0.5 million or so higher. But we're really focused on overall future declines and operating expenses as a whole.

We generated solid cash flow for the quarter, and we believe we can continue on this path as we move forward. For the quarter or cash grew almost $20 million. Generating free cash flow is and always has been our top priority.

Capital expenditures this next year are focused on maintenance only with a few minor exceptions, one being the purchase of the building next to our main facilities in Brookings this month for $3 million. This purchase was committed to a couple of years ago. We've been able to put off closing for as long as possible. For fiscal 2010, we're targeting capital expenditures, including this building to decline marginally year over year.

You'll notice that income taxes increased as a percentage of pre-tax income for the quarter. This resulted primarily from the impact of losses in foreign jurisdictions and the resulting smaller tax benefit being created by those losses. The effective rate for the fiscal year remains a reasonable rate to assume going forward.

Finally, concluding on a few forward-looking items, we find it difficult to estimate what the future holds completely. On one hand, we continue to feel out a lot of opportunities and live events as Jim mentioned. But the competitive situation is difficult to forecast. Some competitors seem to be unusually aggressive, creating an environment of uncertain order bookings and gross margin expectations.

In Transportation, on the other hand, we remain very optimistic. Commercial and International do not seem to have leveled off, and although there are some real opportunities on the International side as Jim mentioned, the competitive issues there are impacting margins if we do earn the order.

Finally, schools and theaters were more focused on right sizing the sales organization as we believe we can stay ahead of things with slightly increasing sales and gross margins.

With that we'll turn it over to the operator and open it up for questions. Operator?

Yes, I'm sorry. Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions). We will take as many questions as time permits. (Operator Instructions). And our first question comes from Steve Altebrando from Sidoti and Company.

You talked a little bit about cost reductions and cost of revenue line. Have-- are you seeing the benefits of that yet, or is that something we should see going forward?

Well, the -- we've realized some cost reductions. The challenge has been that our top line is coming down, has come down, as well. So we're realizing the benefits, but we have more on this to do in that regard, Steven.

I guess -- was it year-end loaded given the reductions that you spoke of?

Steve, this is Bill. One of the things I tried to clarify is it's been a consistent reduction in the -- our manufacturing costs. We reduced from Q2, we reduced it about $1.5 million. In Q3, an additional $1million, in Q4.

So it's been a continuous effort that we'll keep focusing on. And there's a whole slew of things that we're doing in that regard. One thing that we're going to maintain our facilities. So the fixed cost doesn't go away, which is one of the reasons I emphasized that in my comment.

Overall, I think we're making good progress in reducing our costs every quarter. And we'll continue to do that. Okay.

And I know it's difficult to predict, but going forward into fiscal '10 here, do you think that the gross margins are going to look, sort of what they look like in this previous quarter for the full year?

It depends on how things turn out, and that was my comment on the competitive front, making it a tough comparison. But overall, we're committed to seeing it rise certainly over Q4. Where it turns out is really a difficult thing to predict because of the competitive environment. But from things within our control, you'll see definite improvements in it.

Okay. Then the last one -- the competitive pressure you mentioned -- is it one manufacturer in particular, or it's just sort of the environment that -- the excess capacity that everybody has out there?

Well, it's not limited to one. We're seeing it in the live events, sports area. We're also seeing it in the commercial area to some degree. So it's not just one or two competitors.

Okay. All right. Thanks, guys.

Thanks.

Thanks, Stephen.

Our next question comes from Steve Dyer from Craig-Hallum.

Thanks. Good morning. You talked a little bit about CapEx and trying to keep it to maintenance CapEx plus the new building. What do you think maintenance CapEx looks like in the next fiscal year?

Well, we said marginally decline. It was just over $22 million.

Close to $20 million--

Yes. I mean, if you factor out that building, you're going to be under 20, and our approach to CapEx -- and we -- it's the way we handle it this last fiscal year. We take an item by item.

And at this point we're saying that marginally -- it will marginally decline in total. I'm optimistic that our employees are pretty darn good at -- at keeping that in check. So I'm optimistic that there's opportunities to make it less. But, I think for planning purposes now, it will be under the $22.8 million we had this year.

Overall or just -- excluding the building, right?

That includes the building. So including it will be $19 million or so. And that is 80% maintenance or so. We committed -- it also includes $1 million for this building in Shanghai that we had committed to about a year and a half ago. So in the first half we've got $1 million of costs there, that's not maintenance. That was an obligation we had committed to at least a year and a half ago.

Okay. Thanks, Bill. Next question -- can you give us any color into sort of your Live Events pipeline? In other words, how much for example of the Meadowlands and the Twin Stadiums have been booked and have yet to be booked? And then in terms of new deals on the horizon, is it primarily upgrades at this point in time and what have you seen on the HD front? Have you seen any of those pushed out because of the economy or are those hanging in there pretty well?

Want me to -- I can make a --

On the Meadowlands, we've got roughly $18 million to $20 million to recognize those revenues over the first half of this fiscal year. And we've still got another $3 million to $5 million change order that's included in that that we'll book as anticipated to book this quarter. And I think that's in that number. We've still got work to do on the Chiefs transaction. That will be primarily in the first quarter. We've got a nice project at the University of Florida that's coming in. The University of Missouri, which I believe we announced that earlier in the quarter, that will be completed in the first half. A nice order that we booked during the quarter was some displays for the Cowboys' new facility on the exterior of the facility. That will be in the first half. That was about $4 million. So we've got a number of nice projects. With that I'll turn it over to Jim to answer the rest.

Yes. Just in terms of the general mix of what we're seeing, we look at the contracts booked in Q4, some that Bill mentioned, actually the two largest contracts were University contracts, Florida and Missouri. Then we had the Cowboys and the project with the St. Louis Rams. There's some professional activity there. We just announced here just yesterday, today, the Oklahoma Thunder, City Thunder. Daktronics has been awarded that new scoreboard system, video system. And that's the new team that's moving down to Oklahoma City. So those are the kind of things that are going on. I'd say the mix of things hasn't really changed that much historically. We're seeing a milk of professional and college and things happening at all levels yet. So the pipeline is still active. Still there.

Just by that -- at the beginning of last quarter's conference call, we were worried about the economic pressures and live events and how we'd see that shake out. Our pipeline, as Jim mentioned, looks pretty good. It's the competitive environment that's become more of a factor as opposed to the economic environment. The economic factors on our customers that's turned out to be more of a factor of what it's causing our competitors to do in the marketplace.

Okay. So the only real difference is there seems to be a lack of these big, mega projects that you've seen in the last couple of years.

Yes. Probably the $20 million on up projects, we don't see those on the horizon right now. We had a few of those this past year. So that level of mega project we don't have in the pipeline at this point.

Okay. And then you had indicated that there's some nice opportunity internationally in the pipeline. Can you elaborate on that at all? Is it billboard or something else?

Well, there is some billboard opportunity, product actually that we have been given a verbal on. It's in the $2 million to $3 million range, and there's some other projects. There's a project related in the Transportation side of things that's a nice-sized project that's little further out. The Billboard project, that should -- we actually expect that to book here this quarter. The other one is a little further out. There's some things out there. There's some Transportation projects in China also. The railway station-type projects that we have had success in that area in the past and so we believe we're well positioned there. Again, the challenge there will be the competitive environment and how that continues to evolve.

Okay. Finally, on the operating expense line, Bill, what are your thoughts as sort of the ability to -- you've been bringing it down by, call it $700,000 a quarter is that something you can continue to do? Can you do it faster than that? How much more can you wring out?

Oh, there's more things we can do, definitely. In term of setting the bar to say, okay, at the end of Q1 we're going to be down another $700,000, on one hand I don't like to lay that out. I just want to challenge our people to do as much as much as they possibly can do. We're still basing our staff reductions on an attrition approach. And that can slow and speed up and we'll see how that goes, so it's hard to say what the absolute quarterly reductions will be. But we've got more to do.

Okay. That's all from me. Thanks, guys.

Thank you.

Thanks.

And our next question comes from Dick Ryan from Daugherty and company.

Yes. Back on the competitive landscape, can you give an order of magnitude what you're seeing as far as the price impact. I mean, is it preventing you from going after some jobs out there based on what the competitors are doing at this point?

Well, it ranges, there's a wide range there. On extreme cases, there's been jobs where the competitors have offered prices that are actually below our costs. Obviously we just, we walk away from those. That's not a common situation. But it has happened. And there's kind of every situation from in between there I guess. So, our approach is we have generally in the industry, we have very good relationships, and we have good rapport. We have a large customer base to start with so often we're working with existing customers on these projects. And so, we believe in many cases we have a favored position. But there's, of course, a limit to how much the customer can value that if a competitor wants to get extremely aggressive, they can buy jobs. And so that's kind of what we've seen in some cases. And we just have to, even if we have the last look and we'll decide that it's not something we want to do at that level. So it's a wide range of things.

Okay. Okay. Bill, I didn't catch your comment on the taxes for the quarter or what to anticipate for this year.

We can anticipate that our annual rate for the year is a good planning rate on a go-forward basis.

Okay.

And what happened during the quarter is unfortunately earnings were brought down Internationally, which the US is still our highest tax rate jurisdiction. And so the benefit we get for lose is not as great in those foreign jurisdictions.

Yes.

We work on planning and trying to maximize that. In addition I'll just say there's some opportunity. We ended up doing a lot of work this last fiscal year in some high tax-rate states too that caused our state rate to go up maybe .5%. So there might be a slight chance that we can improve on the rate going forward. But I think you should assume our annual rate on a go-forward for now.

Great. Thank you.

Thank you.

Our next question comes from Jim Ricchiuti with Needham.

Hi, good afternoon. Just with respect to the -- Bill, with respect to the comments that you guys made about the price competition not being sustainable, to what extent -- how confident are you that some of your competition just hasn't put in place just a lower cost manufacturing operation where it is going to be more challenging for you guys to compete? Well, first of all, our product is very material intensive. A big part of our cost is on the material side. It's possible that our competitors that have a product that has some lower cost but not -- I guess that it's truly an apple-to-apples product capability that we're delivering. We're competitive. I think we're at least within range of all competitors if it's an apples-to-apples thing. So with their quoting something that we see as below our cost, we don't believe that's truly a sustainable thing. And Jim, as for the pricing it sounded like it intensified as you went through the quarter. What are you seeing of late? Are you seeing any sign of it easing, or does it look like it's going to remain this way for the next one to two quarters?

At this point, we don't have any reason to think it's going to ease up in the near term.

Okay. And just separately on the Transportation business, it looks like you guys have a decent pipeline of business. You talked Internationally. Can you talk a little bit about the Transportation business here in the US, and to what extent you might see some benefit from stimulus spending.

Yes. We believe that the stimulus bill has freed up maybe some funds that were already there or maybe they were -- the states were holding up maybe releasing some of those, just maybe due to some uncertainties.

And so we believe that has been a positive factor in the Transportation business. But, yes, we've had -- our orders for the year were up significantly in Transportation. And we have about a six-month backlog in our Transportation business, so nice work. We're well positioned there. We're pleased about that. And this -- as I mentioned, Transportation an opportunity that's International, that would end up getting classified in our International business even though it's a joint effort with our transportation group helping to win that business -- sort of a side note.

Okay. Thank you.

Looks like we've got one question left here. So we'll take that and then let Jim make some conclusions on the call.

Great. The next question comes from Steve Altebrando with Sidoti and Company.

Hi, just a real quick followup. Could you give a little more color on -- you spoke about contract costs impacting, I think a couple of percentage point on the gross margins, into what that is. Is it referring to rework on some projects, or the cost estimates being off? And is that a separate from the warrantee issue?

Yes. It is separate from the warrantee issue. And essentially what -- the biggest part of it is that we got into the tail end of the -- primarily the Mets and Yankees.

There was a lot more of what I'll call fine-tuning and things that we had to work out at the end. And in New York, when you do that kind of stuff, you end up with a lot of higher cost from subcontractors. The labor markets with your subcontracting is not inexpensive in New York. And so it was focused for the most part on some of these big projects, just some issues that arise, it's the nature of our business. And those were exceptionally large projects and had a greater impact.

Okay.

Offsetting that, too, though we didn't see -- typically in our business, we can book a contract let's say at a 30% margin, and as we get through it we're recognizing a higher margin. And during the quarter, we just didn't see that upside overall on the contracts as a whole. And so maybe there's still some upside to come yet on those existing contracts. But the biggest part was those big contracts.

I might add to that in terms of, I mentioned, our cost reduction initiative that we have a real focus on that. And one of the areas that is -- we're looking at the product side of it, and the actual product cost. But a big area that is a big focus is the fight process, the installation and commissioning process of our product. That's also going to get a lot of attention there because on big projects that's where the biggest variables are actually.

Okay. That's very helpful, thanks.

Okay. Well, thanks, everyone, for your questions this morning. Thanks for your time.

And again, we're all very focused here at Daktronics, and we're well positioned from a financial balance sheet perspective. We're in a solid position. We're still going to continue our focus on product development, keep bringing new products to the marketplace. So that's one of our forte and our keys to success. So we're remaining focused here, and and we'll move forward.

Thank you again for being with us this morning.

Operator, you can close down the call now.

Thanks.

Great. Thank you.

This concludes today's conference. Thank you for your participation.