Daktronics Inc (DAKT) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics fiscal year 2012 third-quarter earnings results conference call. As a reminder, this conference is being recorded today, Tuesday, February 21, 2012 and is available on the Company's website at www.daktronics.com. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions) I would now like to turn the call over to our host, Mr. Bill Retterath, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, sir.

Thank you. We appreciate everyone's participation this morning in our third-quarter conference call. I'd like to first offer our disclosure cautioning investors and participants that, in addition to statements of historical facts, this call and our news release contain forward-looking statements reflecting expectations and beliefs on future events which could materially affect our performance in the future. Cautioning you that these and similar statements involve risks and uncertainties, including changes in the economic and market conditions, management and growth, timing and magnitude of future orders and other risks as mentioned during this call and in our press release and our SEC filings. Forward-looking statements are made in the context 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'll turn it over to Jim Morgan, our Chief Executive Officer, for some comments, after which, I'll follow, and then we'll open it up for questions.

Good morning, everyone. Thanks for joining us this morning. We entered the quarter with a nice backlog, and we delivered a relatively strong top line. The bottom line, however, was disappointing for us. We had a number of cost hits that added up to a couple percent reduction in margin from what we were expecting. We are also in a bit of a valley in terms of professional sports opportunities which is compounding our situation at the moment by holding orders at a lower level than we would like to see. However, overall, the pipe-line for fall sports is strong, especially in the college area.

The next three months will set the stage for sales for this sports season for our first and second quarter. While we are typically positioned very strongly on these projects, we are seeing new competitors intent on buying some projects which we have found in the past is not something competitors want to do or can afford to do on an ongoing basis. However, in the meantime, It can sometimes win a project them with a customer deciding to take the risk given the price.

There are a number of large projects, i.e. that is in the $10 million range, both in Live Events and in the Transportation that are currently in the bid stage, and we feel we're in a good position on at least a couple of these. We've gotten a positive verbal indications on a couple of them, but they're not yet in our backlog. They are not yet firmed up. If we can close on a few of those, it will get our order and sales picture heading back in the right direction. Our major customers in the digital billboard business are still announcing intentions to continue rollouts of digital, and reporting good returns on those rollouts. We believe we are well positioned to continue to participate in that business in serving those customers.

Orders first part of the calendar have been a bit light, but this is not unusual, and we are anticipating an uptick in the coming months. We are also entering the replacement phase of some of our national -- displays for some of our national account customers. These are displays that were installed approximately 10 years ago and have reached end of life. In some cases, these are competitor's displays. So we are excited about that and are actually expecting to see a couple million dollars worth of replacement business here in the end of the Q4 and early Q1.

So that's something that we expect, again, that's just the beginning of a replacement phase, and that's also -- we expect that in the digital billboard area, we'll start seeing some replacements here within the next couple of years. So that's -- we -- hopefully add it to the business for us. Low level orders have caused us to give increased emphasis on cost containment. We are curtailing head count growth and addressing other discretionary spending through this quarter.

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

Thanks, Jim. As Jim mentioned, our sales were strong for the quarter and exceeded the consensus estimate of $117 million. As mentioned last quarter, this increase was driven by the order bookings in the second quarter, which was higher than expected. I want to give some updates again on our major league baseball business, because that is a big factor this quarter. Last fiscal year-to-date through the third quarter, we had booked approximately $20 million in major league baseball orders. In this year to date, we've booked approximately $10 million.

Because of this and the generally flat orders for the third quarter compared to last year, we'll be challenged to prevent sales from declining on a sequential basis in the fourth quarter from the third quarter. However, as Jim mentioned, there's some opportunities out there for some quick turn business that could help drive Q4 revenue, if we could book those orders over the next couple of weeks. So our range of outcome for this fourth quarter is somewhat wide at the top line. I want to focus on gross profit next because as that's a disappointment for the quarter and the one thing that continues to be a challenge and, more importantly, one of our largest concerns is we increase the top line long term.

During this quarter, we had much higher health insurance and Worker's Comp claims than expected. We're self-insured on both of those items. We think some of this could linger a little bit into the fourth quarter this year that could put some pressure on gross profit, but it's hard to tell this early in the quarter. These employee benefit costs were approximately $1 million higher in Q3 than in Q2 and are actually higher than they were one year ago, which was unexpected as we had made some structural changes in our health plans. Also factored into this equation, and this is an issue that's tough to quantify, some issues with manufacturability of some of our newer products which are costing us on the labor side of things and are being worked on. And we have a long history of being successful on overcoming challenges like that, and so we'll take care of that.

Also during the quarter, we lost approximately a percentage point on gross profit compared to our expectations due to our services infrastructure, which occurred not only due to higher spending but compounded with lower utilization of our field service force. Working hard to turn that impact around, and we should be able to turn that around in the fourth quarter as we gear up with baseball season starting again -- preseason checks and things like that addressed. Finally, less material work front -- some infrastructure projects that we took on in the quarter that had a smaller impact on gross margin, less than half a percentage point.

As we look forward to the fourth quarter on gross profit on the positive side, again, the utilization of our services infrastructure should improve. We've kept, for the most part, any significant head count growth. And we start to build limited amounts of inventory for the summer selling season primarily in our Schools and Theaters business. And, as I mentioned, we have some opportunity for some quick turn business in the quarter that's not booked yet or factored into our outlook. All of those things should help gross profit.

On the other hand, we have to address the sequential -- expected sequential decline in sales and the fact that our margin on our large project backlog has declined due to some large projects booked during the third quarter at lower margin levels. Putting all this together suggests that gross profit could be more or less flat to up for the fourth quarter, and there's a range here that's important to note. It's tough to narrow in due to these -- some of these large contracts on natural volatility we have in our business model.

On the operating expense side of things, we came up where we thought we would for the quarter. We're expecting these costs to be generally flat into the fourth quarter as we put some cost controls in place that Jim and I both previously mentioned. We had a surprising negative on cash from operations, which, for the most part, is based on the mix of our business and how our cash can get tied up in large contracts. We did a lot of work, for example, to digress for a little bit, on a large contract in Mexico, for example, this quarter that can tie up, and that did tie up a bunch of cash just based on the timing of deliveries versus the timing of billing.

So nothing unusual, but something we think will turn around again in the fourth quarter. Our cash balances are down, primarily for the quarter, due to those items I just mentioned, but also the $20 million plus we paid in dividends during the quarter in the form of a regular and a special dividend.

With that, I'll open up the call for questions and answers.

Thank you.

(Operator Instructions) Jim Ricchiuti, Needham & Company

The question I had relates to the pipeline. You talked about potentially some larger orders, $10 million or so in Live Events. I wonder if you could just give us a sense of how many of those projects you see out there and when you might see bookings. Because you also talked about some Quick Turns business, and I wonder if you could just elaborate on that portion of the business, perhaps even sizing that. Does some of that relate to these larger projects you alluded to?

Just in terms of the overall pipeline, there's several $10 million size projects out there in the Live Events, sports world. Some -- I'm just trying to think here -- one in professional that comes to mind and a couple in the college, university side that come to mind. And in terms of whether that would be work for fourth quarter, I would say there wouldn't be much work for fourth quarter, if that was your question, Jim.

That was it.

But certainly it's important we book orders now for first quarter and second quarter as well, of course. And then the other one I mentioned was in Transportation. And again, given the booking time for that one, it probably wouldn't be much in the fourth quarter -- probably more starting in the first quarter.

This Quick Turn business that you talk about, can you maybe expand on that, Jim.

In the National Accounts side?

Yes, I don't know. This is business that you see possibly coming in in Q4, and maybe you could just elaborate. It's National Accounts business?

Yes, the one thing that looks like could start to turn around in Q4 here is this replacement project that or one phase of a replacement project for one of our national accounts. And, in fact, one the reasons they're giving us the business is we've got the capacity to do the turn for them and to meet their delivery expectations.

And, again, how much of that will be in fourth quarter versus early Q1, that is maybe a little hard to know for sure. Overall, it's a couple million dollars opportunity, if we got that split half in half in the quarters, that might be a good guess at this time.

And then just with respect to the orders in Commercial and International, you continue to show pretty good year-over-year growth in this area. In the past, you've talked about architectural lighting. Are you seeing traction there -- continued traction there? And just in general, what's the pipeline like in the International side of the Business?

So, it's architectural lighting that's a new product and really a new market for us. I'd say the adaptation in the US here, it is probably going to take a while for that to really pick up. And Internationally, again, you might say it's ramping up rather slowly for us at this point as we -- again if identify where the potential applications and there are different form factors that are required for different applications, and as we try to understand more of that. But certainly, there are opportunities there.

In general, the International pipeline still is -- there's a lot of activity out there. You know, you hear about the European economic, or economy issues on the news regularly. But it isn't necessarily the governments that are spending the money for our products so there are still opportunities over there.

We're seeing -- we mentioned in our news release, we've gotten our first order from Brazil. That's an area we're really just starting to be more proactive in. There are opportunities there. So we do see ongoing opportunities internationally.

And just one question for you, Bill. On looking at the selling expense -- up quite a bit sequentially, even though your revenues were down, can you talk a little bit about the factors driving that. I don't know if there is some of that healthcare expense that you talked about being in there. Just in general, what could be impacting that line?

Well, on selling expense, I actually think, Jim, overall, we're doing somewhat well in selling expense to the extent that there is growth in that area. It results from investments on the International side, some increases in our Commercial business. Areas where we're seeing order growth ramp up. So, you know, I don't know, I think on selling expense on a net basis, we're doing the right things there. But there are some investments being made there, no question about it, in places like Singapore, Spain, and Brazil, where we've mentioned perked up along the International side.

Got it. Okay. Thank you.

Stephen Altebrando, Sidoti & Company.

Just kind of a big picture on the gross margins. What's the main obstacle, I guess, getting back to previous levels in the mid-to high 20%s? And particularly comparing to fiscal 2008 where revenue was pretty similar to what you are likely to do this year. Isn't pricing the main story?

Well, clearly pricing is a significant factor, but internally, there's a number of areas that we're working on that we think we can control. It doesn't happen overnight. But we think we can improve gross profit internally for a lot of reasons. Pricing isn't always within your control.

But the stuffs that, for example, in our Manufacturing side of our Business, we've done over the last couple of years, an excellent job at lowering our total conversion costs as a percent of our total cost of goods sold. And we're having to put more product through as a result of pricing declines. So, we've done some great things on manufacturing. We've got some challenges in our Services business, as I mentioned before. There's some efforts there that we have to put in place.

We've also talked about this a lot in the past, and to some degree this is within our control for the long term, and that's our warranty expenses last quarter. We did fairly well on warranty. We had one project that some problems that was a few hundred thousand dollars plus, but we had a pretty good quarter for warranty exposure. Could be better. So, in terms of getting up to the upper 20%s, we need help in the marketplace. To get above 25%, I think a lot of that is internal if pricing stays the same, but it doesn't happen overnight.

Okay. That's helpful. And then just last two quick ones. Do you have billboard revenue for the quarter and the year earlier period, and if you're seeing any change on the regulatory side on digital? I know there is some debate around where you guys are located.

I'll start on regulation. The first part on the revenue side. Year-to-date on billboard products only, not the service part of the billboard, which is actually turning into a big component. We're just about at $40 million for total billboard revenue. And orders are a little bit less than that.

I will point out that this Billboard orders for the third quarter -- I think Jim alluded to this -- we are a little bit light, but that's not unusual for the third quarter. They were just under $10 million, and there was some orders that came in already this month on Billboard to kind of catch us up a little bit there. So, Billboard at just under $40 million year-to-date, compares to about $15 million year-to-date a year ago. $15 million to $17 million I think it was.

Okay.

As far as the regulation, is there anything really changed there? I'd say nothing has really fundamentally changed. It's an ongoing thing that there are municipal and state regulations, and there are, of course, those who would prefer to see no billboards anywhere. So, finding the balance there I guess is a challenge.

And our approach as a company, we work with both state governments and municipalities and helping them update the language in their ordinances so that it is applicable to today's technology. But a lot of the ordinances were written -- if they haven't been updated in the last few years, they're back from the neon sign days, and that's really what they're applicable to.

So we're supportive of regulation. Governmental entities have the language and the tools to be able to regulate it in a balanced way. And so it's an ongoing thing. There's nothing really new. Those discussions continue.

Okay. Thank you.

Steve Dyer, Craig-Hallum.

Just wondering if you're seeing any pent up demand in the NFL or the NBA given that essentially neither one had a season at least as it relates to any new signage. You see any kind of burst this year now that they all seem to be back and going?

I don't know if I'd say there's a burst. I think there were certainly some things were put off and will come back around. I wouldn't want to overstate that as being a burst of any kind. Certainly, there's an ongoing interest in venues not becoming outdated in their appearance and in their technology. So, that underlying driver remains, and, to the extent they put something off, I think there'll be some pickup there.

And what, I guess to stick with the sports analogy, what inning are we do you think on the move over to HD? I know that was thought to be a big driver a couple years ago for sure everything new that was put in but also out of the retrofits. Has that largely been done? Or are we in process? Or what are the thoughts there?

All a good question.

There's a lot of HD opportunities still out there.

I guess to me the challenge with an inning approach means there's a game over in nine innings, and there's an ongoing upgrade and opportunity to get more, even those who have HD to add more to the facility. So, I don't know if that analogy is 100% applicable here.

Certainly, there's been a lot of facilities that have been upgraded. No doubt about that. But technology continues to advance, and the expectations continue to increase. So it's been ongoing for-- and upgrades for many years, and HD is the latest catalyst, but we see there's an ongoing opportunity.

And then, just sort of touching on a previous caller's questions about gross margin. It seems to me that with all the focus on new manufacturing, and, really, modularizing your production, and you're still bumping around in the low to mid-20%s. How much room is there to get that back even into the 25%, 26% range like you had it about a year ago.

Wow, Steve, I'm not following the question completely. We need some -- we've got capacity. Don't have these numbers right in front of me. But our manufacturing conversion costs overall, we've done a remarkable job with lean

. When you think about the amount of product that we're putting out and what our total conversion costs that are in the plant, and then the ability of our plant to take on the higher revenue level, at slightly higher costs, there is, you know, as time goes on, we just -- I see more and more leverage coming out of that area. But to really see it show up in gross profit, we need the top line up there. And so there's still a capacity drain, I'll say, that we're filling in, and, at lower revenues in the fourth quarter, that's tough.

Yes. Okay. And then operating expenses have sort of crept back up into the $26 million range. Is that a good number to think about on a go-forward basis? Or does that go up, down? How do you think about that as we get into next fiscal year?

I think we're instituting some things to keep all of our cost infrastructure in line. You know, it's hard to say it will be flat. But, you know, just to give you some examples on G&A for example that's ramped up. We invested especially over the last two quarters a lot on international type development. That's a one time thing. Starting up a Business in Brazil is not cheap. Much of those costs now are behind us.

And so, our goal is to -- first of all what drives those is head count, for the most part. And the head count growth in those areas is not going to ramp up at the same pace it did this last year. I think we're committed to that. So, there should be some flattening out of those costs.

Okay. Thanks.

Dick Ryan, Dougherty & Company.

Thank you. Say, Jim, your mentioned competition. Can you talk a little bit further whether you're seeing any new players come into the market. And is there any shift in specific segments that's really kind of competitive? Any change there?

The only -- I think through our different markets, probably the only market that we've seen a change is our domestic Live Events business. There's been some -- a number of competitors over the last few years that weren't in the market and maybe have been 10 plus years ago that have come back and taken a run at it. So, we're seeing some of that. And the way to get back is come in and buy some jobs.

They've had some success with coming in with real low pricing. Again, how long that's sustainable, [our experience is that those things don't last. But they happen. It's not the first time it's happened in our history.

Sure. In the press release you were talking about some imminent orders, a couple orders on the international side totaling $5 million. Have they come in in this quarter yet?

One of them has. In fact, it was a nice order and nice outdoor advertising company in Australia. So, that one is in. The other one has not. The other one actually was dependent on us getting our Singapore operations up and running. And we've got a couple of orders there. But no, that one has not yet.

Okay. And then the baseball season -- I know, obviously, Live, large projects in the baseball season, probably completed or done with. But Is there anything else in the baseball season that could come in at any quick turn there?

Not sure exactly where we are in the minor league at this point. That would be the only thing, would be some minor league. And there's a few of those out there. But they tend to be a little smaller in size. On the positive side, we did -- the team announced this last week. We were fortunate during the quarter to get the Detroit Tigers transaction this last quarter which is a fairly large, north of $5 million.

What will be the timing of that, Bill?

That will be fourth quarter work, a lot of it, to get it geared up and running for baseball season.

Thank you.

James Ricchiuti, Needham & Company.

Shipments for digital billboards? Were they about $15 million in Q3?

Just a hair under, Jim, yes.

And is there a way for you guys to maybe help us understand the size of the replacement market? You know, it sounds like there are displays out there in the field that have been in operation around 10 years or so.

Can you put -- perhaps put some numbers to it, whether it's competitions, product, or your own product? It sounds like this could be more meaningful over the next couple of years. What's the near term opportunity looking out over the next year?

Two different things for me to talk about here. One is the replacement on National accounts which is a smaller on-premise retail-type displays. And they are national customers that we've been working with. They started those rollouts of those programs before the digital billboard really ramped up. They have a couple years head start on the billboards.

And so we see that, as I mentioned, that replaced, and we're seeing some of that starting to happen now, in fairly significant -- you know -- and we think that could ramp up and continue on pretty nicely from this quarter on. Digital billboards, I'd say they start to rollout maybe a couple years later. And there's a little bit of a lag there.

Maybe the question, as much as anything, is how fast will they ramp up? And I don't know if we've got a way to quantify that off the top of our head. But, overall, you'd expect it to more or less track how the digital billboards themselves ramped up. Because there will be kind of a fixed lifetime, there, expectancy on those displays. As they reach a certain lifetime out there, it will be time to replace them.

Just looking at the Commercial business in total, Jim, could that be -- what percent of -- rough terms of your Commercial business could replacement be, perhaps in 2013? Does it move the needle at all?

Digital billboard in our fiscal 2013? And I don't -- there might be some going on there. I think the bigger noticeable amounts will be beyond there. But I think the firsthand information, in terms of timing on that, will come from announcements by the major billboard companies. And I know some of them have begun to talk about the replacement cycle. But I think they've mentioned in the context of beyond our fiscal '13 when it really starts to get noticeable.

And then on the National Accounts side, is that potentially a meaningful source of revenue next year on the Replacement side?

I think it will be a meaningful amount of it, certainly in the millions of dollars we would expect. Whether it gets into the 10s or beyond that, I think time will tell how aggressively they decide to go after it.

Got it. And then just switching gears for a second, on the transportation side, you alluded to a large order out there. Can you elaborate on that at all? Is it a domestic order? I don't know if you can put some dollars to that.

It would be about a $10 million business for us. And it's domestic transportation. That's about all I can say about it at this point, since it's in the preliminary stage for us. But we have gotten some positive feedback on it. And timing on that I think that would start shipping maybe first quarter and would be spread out over a period of time. I think it could span even more than a year in terms of Phase shipments. Don't have the exact schedule, but it wouldn't all happen in one quarter, that's for sure.

Thanks a lot.

This concludes the Q&A portion of the conference. At this time, I'd like to turn the call over to Jim Morgan for closing comments.

Well, thank you everyone for being with us this morning. And thank you, gentlemen, for your questions. Appreciate that. And our focus going forward here, number one, is to get the order level up and get our top line growing at a little faster pace. In the meantime, we're going to have a renewed emphasis on cost reduction here going forward and really focused on the operating margin. So, again, thanks for being with us this morning.

Ladies and Gentlemen, thanks for your participation in the Daktronics fiscal year 2012 third quarter earnings release conference call. This does conclude the program, and you may now disconnect.