NAPCO Security Technologies Inc (NSSC) 2011 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Napco Security Technologies Inc. first-quarter financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you, Shea. 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, 2010.

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, the release.

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. 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 ended September 30, 2010.

While our last conference call was only a few weeks ago, a lot of positive events have occurred during that short period of time, including optimistic feedback on several new product lines introduced earlier this month at the international security trade show in New York City and the announcement of our restructured debt agreement with our lending institutions.

Before I discuss those events, which were subsequent to the first quarter ending September 30, 2010, I'd like to note that I'm encouraged with the financial results. As many of you know, our first quarter is our most challenging due to seasonality reasons.

That being said, we were able to grow revenues by 6% to $15.3 million due to the strength from our door locking division, as well as our domestic intrusion products. This increase, combined with lower SG&A costs, enabled the Company to post a positive adjusted EBITDA for the three months ending September 30, 2010, of $118,000, as compared to a negative EBITDA of $377,000 for the same period a year ago.

Going forward, shareholders should anticipate increased cost savings now that we have entered into an amended credit agreement signed on October 28. This agreement provides for a LIBOR interest-rate option of LIBOR plus 4.5%, in addition to the existing prime option of prime plus 4%, and also contains new financial covenants that better reflect the Company's current financial condition in the new world economy.

We have lowered interest rates available to us, which, based on today's LIBOR rates, should reduce our interest expense by over $500,000 over the next 12 months. As a result of concluding these extended negotiations, we can now focus more aggressively on sales growth, new products, increased operational efficiencies, and continued expense reductions. Towards that end, I'd like to highlight that while the economic recovery has been relatively slow, we continue to lower our operating costs as evidenced in this quarter as our SG&A was lowered by $552,000.

Before I hand the call over to Kevin to discuss the financials further, I'd like to add that we believe the sales increase in the quarter over the same quarter last year coincides with the positive reactions we received at the international security show this month. Of particular note is our new Napco commercial platform, which gives our Company a powerful presence in the high-gross-margin, billion-dollar commercial fire life safety sector of the security industry.

It opens up a whole new avenue of business for Napco into schools, factories, office buildings, hospitals, retail centers, and much more. This control panel product line introduces several innovations to this segment by providing eight to 255 addressable or conventional points of security, both wired and wireless, for the commercial fire, intrusion, or combination fire/intrusion applications.

We received many positive reviews of this new combo panel line, and the interest at the security show was overwhelming. While it may take a few quarters until we see financial traction with this product line, we believe it has lots of potential and could be a solid catalyst for future growth.

Additionally, Napco recently launched the wireless version of our new popular -- of our popular iSee Video product line. iSee Video represents a major strategic initiative for building future profitability as this product provides Napco and its dealers with incremental, service-driven recurring revenue streams.

Another driver of recurring revenue service income is Napco's StarLink wireless radios, which are being used as a primary means of alarm reporting now that traditional hardwire phone lines are becoming less prevalent in the U.S. households.

Lastly, I'm pleased to announce that recently our subsidiary, Alarm Lock, is supplying its top-selling Trilogy DL2700 locks to a major procurement company which supplies Wal-Mart's general contractors nationwide. The Trilogy DL2700s are used in the pharmacy sections of Wal-Mart for access control into this restricted area.

To date, Alarm Lock has supplied hundreds of units to Wal-Mart, an important retail giant for Alarm Lock. Wal-Mart chose Alarm Lock's Trilogy over competing models based on its value, features, and reliability. Ease of programming by Wal-Mart personnel was also a contributing factor. By utilizing the Alarm Lock locking devices, Wal-Mart will save on costly repairs and service issues, and will be installing them in several hundred more remodeled stores in the coming months.

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

Thank you, Dick. Good morning, everybody.

As for our financial performance, Napco reported revenues for the quarter of $15,327,000, a 6% increase from the net sales for the quarter ending September 30, 2009, a year ago, of $14,465,000.

As Dick mentioned, the increase in sales for these three months ended September 30, 2010, was primarily due to increased sales in the Company's door locking products, as well as in our domestic intrusion products.

Gross profit for the three months ended September 30, 2010, increased to $3,423,000, or 22.3% of sales, as compared to $3,339,000, or 23.1% of sales for the same period a year ago. The increase in gross profit in dollars was primarily due to the increase in sales of the Company's products as previously mentioned.

Selling, general, and administrative expenses for the three months ended September 30, 2010, decreased by $552,000 to $4,140,000, or 27% of sales, as compared to $4,692,000, or 32.4% of sales a year ago. The decrease in dollars and as a percentage of net sales for the three months ended September 30, 2010, was due primarily to the consolidation of the Company's Marks operations and European and Middle East warehouses into the Company's headquarters in Amityville, New York.

Operating income for the three months ended September 30, 2010, was negative $717,000, an increase of 47% or $636,000 from the loss of $1,353,000 for the same period a year ago.

Interest expense, net, for the three months ended September 30, 2010, increased by $23,000 to $594,000, as compared to $571,000 for the same period a year ago. This increase resulted from higher interest rate charges by the Company's banks and partially offset by lower outstanding debt in the current period. As a result of the newly-signed amended credit agreement, we can expect lower interest expenses commencing with this present quarter ending December 31, 2010.

Net income increased by 38%, or $684,000, to a net loss of $1,134,000 or negative $0.06 per diluted share for the three months ended September 30, 2010, as compared to a net loss of $1,818,000, or negative $0.10 per diluted share, for the same period a year ago.

With a lot of non-cash 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, as Dick mentioned earlier, $118,000, as compared to negative $377,000 for the same period a year ago.

Napco's balance sheet continues to show improvement. Cash at the end of the quarter amounted to $4.7 million.

Accounts receivable at September 30, 2010, decreased $3,083,000 to $14,657,000, as compared to $17,740,000 at June 30, 2010. While this decrease is due in part to the typically lower sales volume that occurs during the quarter ended September 30, 2010, as compared to the quarter ended June 30, 2010, this decrease is also the result of improved accounts receivable collections.

Inventories at September 30, 2010, increased by $1,078,000 to $25,160,000, as compared to $24,082,000 at June 30, 2010. This increase was primarily the result of the Company building safety stock of certain of its core products in order to decrease its fulfillment time to customer orders, as well as the level loading of our production plan, which allows for improved efficiency and quality.

Cash generated from operating activities was approximately $0.2 million for the quarter ended September 30, 2010. As a result of the cash flow, debt net of cash has been reduced by $11.7 million from $35.9 million to $24.2 million since acquiring Marks USA in August of 2008, and $0.1 million of this reduction occurred in the three months ended September 30, 2010.

That concludes my formal remarks, and I would now like to return the call back to Dick.

Thanks, Kevin. Operator, we'd like to open the floor for questions.

(Operator Instructions). Gregg Hillman, First Wilshire Securities.

Kevin, what would be the contribution margin on incremental revenue at this point?

Our revenue, once we get over, let's call it, $18 million, $19 million of revenue, then money starts to drop at a more dramatic pace.

So, this was our Q1. Q1 is our slowest quarter, but the quarters get progressively better as the year goes on. And you'll see that as the volume goes up, our margins will go up -- our gross margins will go up, and then (multiple speakers)

Okay. And Kevin, what do the gross margins go up to? Does it go north of 30%?

It can go north of 30%. If you go back a couple of years ago, we were in the mid-30%s.

So now, we're working our way back to that level. So it can go to that point. It depends on the sales volume. Hopefully as the year progresses, the revenue gets stronger and the gross margin starts to push its way into the 30% range.

Okay. You mean, the overall gross margin. But the contribution margin on incremental revenue would be higher than 30%. In other words, adding a dollar of revenue (multiple speakers)

Right, because our overhead is fairly fixed. We have our facility in the Dominican Republic and we have it all set up. We have our direct labor. Really, direct labor is the only piece that is a variable. The rest of the overhead is fairly fixed.

So once you cover that fixed area, yes, the incremental, it's much more rapid.

(Operator Instructions). Rick Fetterman, Fetterman Investments.

Kevin, with the new bank agreement, does that mean your debt, as we are speaking now after the end of the first quarter, is lower by about $1.8 million, and as a result, the cash is probably lower by about that much also?

Actually, it's even more because what we've done is we made those two advance payments --

Yes.

-- which is the $1.8 million. But we also paid down the revolver by another $1 million. So we actually reduced the debt by $2.8 million because we had excess cash, and now that the deal is (multiple speakers)

The conference is no longer being recorded.

Rick, are you there?

Yes.

I don't know what that was. So we've reduced the debt by $2.8 million since the end of the quarter, which will help reduce our interest expense, plus it will be at the new lower interest rates.

Okay. Should we expect the decline in SG&A to be permanent, excluding, hopefully, increases in commissions?

Yes, it's increases in commissions. It's also -- there's a freight component that's in SG&A.

Other than those two, I think the rest of it is fairly [if] you can expect it. Every now and then, a tradeshow bumps from one quarter to the other, so you have that, too, but over the course of a year, that's stable. So I would say a lot of it has to do with things we've cut, and we're still looking to cut more expense, and so there will be further reductions in the future.

Okay. Can you tell us what the European, or I guess, more importantly -- the European revenue was in the quarter?

The European revenue was about $400,000, and it was about 27% lower than it was a year ago Q1.

Can you comment on that? It's just business is soft or (multiple speakers)

First quarter is always the worst for -- it's lower for the Company as a whole, but in Europe, it's even more dramatic because if you think about our first quarter, it's July, August, and September. We all know Europe kind of shuts down for the summer.

So, it was even more dramatic than it was a year ago. But it's a very slow time.

We're trying to introduce more and more of our products into Europe. Europe used to be really just intrusion products for us, but now we have a whole group of products, including access control and locking products, and there's no reason why those products can't be very exciting to the European market, and we're working on doing that.

What -- Dick, can you comment at all on the -- is there anything to be said about the marketing effort there? I mean, $400,000 in a quarter is -- it's sort of a disappointing number.

The market in Europe is a competitive market. We make very, very high-end equipment, and it takes time to build up our sales results on our equipment over there because it is a very, very competitive market with a lot of manufacturers manufacturing products in their own country.

We do have a new VP of sales, international sales, that's going out and marketing to a lot of the contacts that he knows. But there is a gestation period with this because it's high technology. It's not spontaneous type of sales. And it takes time to work with all the levels within these companies.

While we're optimistic on European and export sales, we believe that the domestic market here is -- will grow in the foreseeable future quicker than the European market. And (multiple speakers)

Is this -- is the VP of International Sales based in Europe?

He's based in Amityville. But he's -- he has multiple passports and he's been in the security industry for a number of years.

He's Canadian by birth. So -- and he's been selling over there. So, he has contacts at a lot of the companies, the blue-chip companies and things like -- customers like that.

And he's also taken care of our distribution -- distributors that we have throughout Europe, that type of thing. And we would expect that over time, he will bring in a lot of additional business.

We are watching our expenses very carefully over there because we're trying to create more profitability at this lower sales level, and then we'll ratchet it up as the sales comes on.

Rick, I do want to point out that all international sales, not just Europe, was greater than that $400,000. It was actually $1,062,000. It was down from a year ago by about 13%. But the international sales is more than just Europe.

Is there sort of a timeline in your own mind that you would say that Europe is a great market, but it's just not working out for us? Where we're losing money there and it's just not worth it anymore, we're going to focus on the United States only.

It does contribute -- the big markets for us are in the underdeveloped European countries and South America. Those are the big markets. Those are the numbers that Kevin just told you about.

The European market, the German market, is a more sophisticated market, and we believe our products -- German, French, British -- we believe our products can be sold there. We have a lot of new products which are perfect for them. But it takes time.

So, as I said, we are feathering down our expenses in the European aspect of things and we're ramping up in other parts of our market, other East Bloc countries, South American countries, where we think we can get a greater return.

My last question is, Kevin, how did -- what was the change in the video monitoring systems percentage in -- versus Q4 with ADT, and as well as with other customers? Or other distributors?

I don't have that available now for you. I could tell you versus a year ago, it was up about -- on the ADT part, about 62%. I don't have the rest of it.

But versus a quarter -- a year ago, Q1 versus Q1 --

Yes.

-- it was up 62%. That's just ADT. There are other guys.

I can tell you that from the point of view of putting on additional subscribers, it's ramping up both on the ADT side and the individual alarm companies also. So, you have the marketplace, which is made up of the ADT installation company, installers and salespeople, and then you have all the other alarm companies that you see if you look up in the Yellow Pages, you will see there are hundreds of them in every major city.

Everybody is looking at, trying -- I wouldn't say everybody, but a large percentage are looking at, trying, and investigating iSee Video because of the recurring revenue that they want to get in addition to their burglar alarm revenue and fire alarm reoccurring revenue. They see this as a new generator of recurring revenue for them, and that's how they run their business.

And these companies all are -- they're selling these to the end-user consumer, both business and residential, and putting these subscribers onto our servers, and I'm seeing a ratcheting up in both areas. So, I would expect that this should continue because it is the first new offering the security industry has really had as a recurring revenue generator in 15, 20 years.

And we're the leader in this area. We have the best system, and as I said, we just introduced the wireless version of it, which allows you to get in and out of facilities, businesses, and homes without doing any wiring, and it works very, very well. So, they can come in, within an hour be out, and now reoccurring revenue can be generated and the consumer can watch the video remotely on his cell phone. And we're -- all the industry is excited about it, and we are also.

Are you seeing the same kind of growth -- percentage growth with -- I'm going to call them independent installers versus ADT, but other distributors besides ADT?

We have -- we sell our products to the ADT company directly because they are a large user and we sell our products to the independent alarm companies also.

A lot of those people buy through distributors. So, they get the things right in their locale. And both of those groups, all those groups, we're seeing a nice incremental increase of business and would expect it to continue. We're creating a new market here, and when you create a new market, it takes time, but it's going really, really well, in the right direction.

(Operator Instructions).

Okay.

We appear to have no further questions. I would like to turn the call back over to Mr. Soloway for any closing comments.

Thank you. As we look ahead, we remain confident in our ability into building Napco into a company that develops the most technologically advanced and design security solutions for the vast security marketplace.

We continue to believe strongly in our business model and believe the acquisition of Marks USA, along with our new innovative products, have positioned us very well for future growth. We believe that our exciting new product offerings, including those with the recurring revenue opportunities that we discussed, along with the cost savings from the integration of Marks and our new debt agreement, will yield value to our shareholders in the coming years.

As we continue into fiscal 2011, we constantly examine areas to improve operational efficiency, inventory utilization, and return on investment of our expenses. We remain vigilant on reducing our costs and pursuing new sales opportunities.

So, to reiterate, we are cautiously optimistic with how fiscal 2011 has begun. Historically, our quarters get stronger as the fiscal year progresses. With the completion of the debt restructuring and the positive signs in our sales and expense levels, we can focus on further improvements in all areas. We believe this, combined with our large network of security dealers who install our advanced line of products, puts us in a much healthier position as economic conditions improve and the market demand increases.

I want to thank everyone 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. So we thank you for your interest and support. I 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 does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.