NAPCO Security Technologies Inc (NSSC) 2010 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Napco Security Technologies, Inc. first quarter financial results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Don Weinberger of Wolfe Axelrod Weinberger Associates. Thank you, sir, you may begin.

Thank you, Diego. Good morning and thank you all for joining us for today's conference call to discuss Napco's financial results for the first quarter ended September 30, 2009. By now, all of you should have had the opportunity to review the press release discussing the results, but if you have not, please call my office, Wolfe Axelrod Weinberger Associates, at 212-370-4500 and we will immediately send it to you either by fax or e-mail. On the call with me today is Mr. Richard Soloway, Chairman and Chief Executive Officer of Napco Security Technologies, and Mr. Kevin Buchel, Senior VP of Operations and Finance.

Before I ask our host, Dick Soloway, CEO of Napco, to discuss the particulars of this morning's news, let me take a moment to read the forward-looking statement. This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance, or achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the Company's filings with the Securities and Exchange Commission.

With that out of the way, let me turn the discussion over to Richard Soloway, President and Chief Executive Officer of Napco Security Technologies, Inc. Dick, please proceed.

Thanks, Don. Good morning, everyone. Thank you for joining Napco's quarterly conference call to discuss the financial results for the three months ending September 30, 2009. During the first quarter of fiscal 2010, we completed the majority of the consolidation of Marks USA into Napco's operations. In August 2009, the Company completed the move of all the operations of the Marks subsidiary acquired in August 2008 into Napco's headquarters in Amityville, New York and its production facility in the Dominican Republic. The Company began these initiatives in the quarter ending March 31, 2009, and completed the majority of these by August 2009, with the remainder to be completed by early 2010. Upon completion of the integration of Marks, Napco's cost savings should approximate $2 million per year. We believe that these cost savings positions the Company to take advantage of emerging opportunities when economic conditions begin to improve.

As many of you may know, the first quarter is seasonally our weakest quarter of the fiscal year, which puts a damper on the quarterly results. But we are very upbeat to witness that at the end of the quarter, sales were starting to grow again and this caused a larger than normal backlog, which we expect to shift during this quarter. Specifically speaking, as of September 30, 2009, the Company backlog was $3,270,000, which was 95% higher than last quarter's level of $1,675,000, and 44% higher than the year-ago level of $2,266,000. While we traditionally do not reveal backlog levels, we are hopeful that this is an indication that the effects of the economic recession have possibly bottomed out. In addition, as efficiencies increase from the Marks move, we are cautiously optimistic that sales and profitability will begin to improve during the remainder of this fiscal year.

Looking forward, cost saving measures have been implemented and disclosed during the last couple of quarters and we expect to see the full measure of those savings during fiscal 2010. Furthermore, we intend to continue to examine all operating expenses for additional savings, especially in these difficult times. We are continuing to absorb certain production of the Marks products into our production facility in the Dominican Republic, which will both lower the labor and overhead costs as compared to producing those products in New York.

We believe that the restructuring and cost savings measures we completed this year should become more visible during the remaining quarters of fiscal 2010. This positions Napco to take advantage of emerging opportunities as economic conditions begin to improve. Despite the challenging economic environment, we expect the Company to emerge from the slowdown in a superior competitive position. It is also important to stress that throughout this downturn, we have not sacrificed strategic product development. In each of its markets served, Napco will continue to offer engineered products and offerings which have the highest customer value and the highest caliber of products, including strategic recurring revenue products, such as iSee Video and StarLink. Due to the significant number of new product offerings we recently introduced, many of which were shown at the recent international security conference and trade show in New York City, we believe the Company's strategic outlook remains excellent.

Now I would like to turn the call over to Kevin to briefly review the financial details of the financial results. Kevin?

Thank you, Dick, and good morning, everybody. As for our financial performance, Napco reported revenues for the quarter of $14,465,000, a 17% decrease from the net sales of the quarter ending September 30, 2008 a year ago of $17,483,000. As previously reported, the financial crisis has been having an adverse impact on our distributors and as a result, they have been carrying less inventory than usual. But with the backlog increase at the end of the quarter, as Dick mentioned, perhaps the recovery is truly underway.

Gross profit for the three months ended September 30, 2009 decreased to $3,339,000, or 23.1% of sales, as compared to $5,606,000, or 32.1% of sales for the same period a year ago. The decrease in gross profit in dollars and as a percentage of sales for the three months was primarily due to the decrease in sales of the Company's products as described above and the resulting reduction in overhead absorption in the production of these products. Also, by aggressively utilizing existing inventories, we continue to be able to keep production levels below the present sales level in order to generate large reductions in inventory. And effectively reducing production levels significantly below the sales level is a further reduction in absorption of fixed overhead expenses which, while extremely beneficial to our cash flow, further impacts our gross profit. Gross margin, however, did improve sequentially to 23.1%, up from the seasonally stronger fourth quarter when it was 18.3%.

Selling, general and administrative expenses for the three months ended September 30, 2009 decreased by $84,000 to $4,692,000, or 32.4% of sales as compared to $4,776,000, or 27.3% of sales a year ago. The decrease in dollars for the three months ended September 30, 2009 was due primarily to the Company's cost cutting and restructuring measures initiated in the quarter ended June 30, 2009 as partially offset by having a full three months of Marks expenses in the quarter ended September 30, 2009, and only six weeks of these expenses in the same quarter a year ago due to the acquisition occurring mid quarter.

Interest expense net for the three months ended September 30, 2009 increased by $256,000 to $571,000, as compared to $315,000 for the same period a year ago. The increase in interest expense for the three months resulted primarily from the $25 million acquisition loan dated August 18, 2008 being outstanding for the entire three months in the quarter ended September 30, 2009, as compared to only six weeks in the quarter ended September 30, 2008, and higher interest rates on the outstanding debt in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. This was partially offset by a reduction of $5,679,000 in the total amount outstanding under the revolving line of credit and acquisition loan for the quarter ended September 30, 2009 as compared to the same period a year ago.

Operating loss for the quarter ended September 30, 2009 was negative $1,353,000, a decrease of $2,183,000 from the $830,000 profit for the quarter ended September 30, 2008. Net income decreased by $2,140,000 to a net loss of $1,818,000, or $0.10 per diluted share for the three months ended September 30, 2009, as compared to net income of $322,000, or $0.02 per diluted share for the same period a year ago. With a lot of noncash and one-time expenses, as well as our interest expense, it's important to point out that our adjusted EBITDA, as per the schedule included in this morning's release, was negative $377,000 compared to $1,415,000 last year.

Napco's balance sheet continues to show further improvement. Inventory reduction in the three months ended September 30, 2009 was approximately $2.4 million as a result of the continued aggressive utilization of existing inventories. Coupled with the previously reported inventory reduction of approximately $6 million for the three months ended June 30, 2009, inventory has now been reduced by $8.4 million during the last six months. Cash generated from operations was approximately $3.1 million for the quarter ended September 30, 2009. As a result of the cash flow, debt, net of cash was reduced by $9.6 million from $35.9 million to $26.3 million since acquiring Marks USA in August of 2008, and $3 million of this reduction occurred in the last three months, in the three months ended September 30, 2009.

That concludes my formal remarks. I would now like to turn the call back over to Dick.

Thank you, Kevin. As we look ahead, we remain confident in our ability to build Napco into a company that develops the most technologically advanced, intuitively designed securities solutions for the vast security marketplace. We continue to believe strongly in our business model and believe that the acquisition of Marks USA has helped us expand our reach and round out our product portfolio. We believe that our exciting new product offerings, including those with recurring revenue opportunities, along with the latter phases of the integration of Marks, will add value to our Company's position in the marketplace and build Napco into a premier provider of unique, top notch, cutting edge security technology products.

Specifically speaking, the iSee Video surveillance product and StarLink, our new backup radio device, continues to be installed by our dealers and contains monthly recurring revenues, most of which will drop to the bottom line and improve the overall margins as they continue to build out. The markets for these products is quite large. With more than 25 million alarms installed in the US alone, many security companies .nd telecoms are seeking ways to tap into businesses and homes with new services.

As we continue into fiscal 2010, we will continue to examine areas in which to improve operational efficiencies, inventory utilization, and return of investment of our expenses. Especially in these difficult times we are vigilant on reducing our costs and pursuing every sales opportunity. That being said, we remain cautiously optimistic that sales and profitability will begin to improve during the remainder of the fiscal year, as efficiencies increase from the Marks integration, as well as the late sales surge seen in the latter part of the quarter, which caused a larger than normal backlog, which is anticipated to ship during the current quarter.

That concludes our formal remarks. Kevin and I would like to open the call for any questions. Operator, please proceed.

(Operator Instructions) Our first question comes from Rick Fetterman with Fetterman Investments. Please state your question.

Good morning, Bob and Kevin. With regard to inventory, do you expect any further reduction, or are you down to playing weight at this point?

How are you doing, Rick? We expect inventory to continue to reduce. We probably have another quarter of nice reduction left in us, so I would say the quarter we're in, I'm still expecting reduction. As we get into the January, February, March quarter, it's hard to say what's going to happen then. If sales pick up, which we said we're feeling, then inventory might have to go a little bit the other way. But I think one more quarter of reduction could definitely be in the cards.

Okay. Kevin, with regards to the, the bank covenants, was that resolved or restructured? And is the term of the loan, the number of years, still the same?

Right, as we told you guys probably last time, we agreed to an amendment and waiver. It's probably going to be attached to the filing, when we file the Q later today. And the terms and conditions of that waiver and amendment you will see. The number of years to the deal have not changed.

Okay. Now that Q2 is half over, would you comment on how sales are progressing relative to Q2 of '09 or this past quarter that just ended? Better, weaker?

Rick, as you know, a lot of the sales do come at the end of the quarter for us, so it's hard to say where it's going to end up. We are encouraged that we saw a lot of activity at the end of last quarter that we couldn't keep up with. We lowered our levels based on the situation that we were in, and then towards the end of the quarter, we were overwhelmed, which is a good thing, I guess, because now we wind up with a big backlog that we're not used to. It forced us to work a lot harder this quarter and if that pace continues where we get hit at the end, again, with big sales orders that would be a good thing. We get a head start this quarter by having that backlog. If things go nicely at the end again, it could be a nice quarter. We can't tell, though, because again, it happened at the end. But we do have that benefit of finishing with a big backlog.

I agree. It certainly is nice to get that kick at the end of the quarter. I assume and hope that the inability to have the equipment on hand didn't result in losing any orders, did it?

No, because we worked hard to recover quickly and we're in the process of shipping a lot of that backlog. A lot of it probably has shipped already by now. And, for us, the first quarter, just to remind everybody, the first quarter is our weakest quarter, so we expect the sales in this quarter to be better just by definition. For years, those who followed us know that the July, August, September quarter is the weakest one. So now as we're in this quarter, it's always better than the July, August, September quarter.

Okay. I've just got one more question. Can you quantify, if not in actual dollars, perhaps percentages, how the growth in revenue for the recurring revenue products is progressing. Realizing it's starting from a very low base, well, from zero initially, but still, is it growing at 10% a quarter or every six months, or 20% or 3%? What kind of growth are you seeing?

Rick, we usually don't give out that information, but I can tell you that it's sequential growth quarter after quarter and there are a lot of initiatives and it's on the radar screen of many companies right now. And it's building a nice market share for us. So we expect it to continue and we have many, many dealers and other people are using it right now. So we showed it at the New York securities show, which was a couple of weeks ago, and there was a press release that we put out about it and other products, and there is a lot of excitement about it because the dealers are looking for new ways to get recurring revenue above and beyond just monitoring burglar alarms and fire alarms. And this gives them that ability. And also the radio gives them the ability to get back up to the alarm systems so that if wires are cut or there's no phone line available on a premise, because a lot of households don't have phone lines installed now, people use cell phones, there's a way for the security signal to get back to the central station. So it's a natural that these products are going to continue to grow and become more important to the security community and we have very good feedback and comments about our product line.

Your comment stimulated one more question. Kevin, do you expect, or, Bob, one of you, that at some point hopefully the growth in this will cause the revenue side of it to become a line item in your filings?

I hope so, that that's going to happen sooner rather than later. Once it hits that point, it definitely will. We're not there yet, but optimistic that it's going to get to that point.

Guys, thank you much for your time. Keep up the good work.

Our next question comes from David Radcliffe with Doucet Asset Management. Please state your question.

Good morning, gentlemen. Following up on the last caller's question on the recurring revenue, did you give that number, what your recurring revenue was this quarter?

No, we have not given it and it's not large enough for us to need to disclose it. It's getting better, but not large enough to have to actually put it down.

Are you seeing, coming up from a small number, are you seeing triple-digit quarter over quarter increases?

We're seeing nice increases quarter after quarter. Both from private label versions of it, as well as versions which are sold under the iSee Video brand. And both of those areas are continuing to grow. So we would expect that more and more dealers, as they want more source of recurring revenue for themselves, are going to join into this and that's what we're seeing. Because it's the first really new recurring revenue product line that's been introduced in the alarm industry for more than 20 years because alarm people do fire monitoring and burglar monitoring. So this gives video monitoring to the consumer. And it's really quite something.

The new version of it has has tandem tilt which allows you as a consumer to dial up your cameras and then scan around and look at things in your business or home, and you get very crystal clear video. So a lot of people are very excited about it and the dealers want to give that service to consumers because if you have summer home, vacation home, want to see what's going on with the kids, want to watch your pets, there's great applications for all of this with these products. And the backup radio is very important today because as the crime goes up, unemployment increases, it's over 10% published now, there's cutting of phone lines when they break into premises, the burglars. So this gives a way for the communications to happen. So we think that this is solid products and we can see the growth solidly every single quarter.

Okay. Well, that's great color. Appreciate it. Anther question, actually the only other question I have, I'm not as familiar with the story as I would like to be, so I apologize if this is too basic. But obviously your sales are down and the gross margins have suffered. You're shifting your production to the Dominican Republic, so you have a lot of moving parts. But you had a sizable decrease year-over-year in gross margin. The question is getting the gross margins back up, is it basically because of the lower level of sales, or is it the transition of production? Once you're complete with that transition, are we going to see margins rebound, or is it that some level of sales has to be achieved before we see those kind of rebounds in gross margin?

Most of our production is in the Dominican Republic now. The biggest piece that's not there is Marks. For our gross margins to go up to where they used to be and for those who have been with us for a while, they know that we've been in the mid-30s and pushing towards 40, we need sales volume. And when our volume is restored, our margins will shoot up, because our overhead is fairly fixed.

Right. I can see that just from the comparison with last year.

Right. So if we keep our overhead under control, keep our SG&A under control, which I think we do a good job of, all you need is the volume. You get the volume, and with the low cost labor that we have, you get high gross margins. So what we're doing now is we're in this economic troubled time. We're trying to keep it together, not tear the whole place apart, make money at lower levels. This quarter is the low quarter, so it's not a good quarter to use as the basis for what's going to happen, but we'll make a living at these lower sales levels. And then when the volume returns, which we hope is soon, then you start to see the gross margins go into the mid-30s, pushing towards 40. We were there before we bought Marks. You add Marks to the equation, we'll definitely get there. It's just that we hit this economic time that we're in and when we get out of it, things will be much better.

Fantastic. I appreciate you answering my questions, and have a great next quarter.

Thank you. (Operator Instructions) Ladies and gentlemen, there are no further requests for questions at this time. I will turn the conference back over to management for closing remarks. Thank you.

Thank you all for participating in today's conference call. As always, should you have any additional questions, please feel free to call Don Weinberger, Kevin or myself. We thank you all for your interest and support and look forward to speaking with all of you again in a few months to discuss Napco's second quarter results. Take care. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.