NAPCO Security Technologies Inc (NSSC) 2011 Q2 法說會逐字稿

Greetings ladies and gentlemen. Welcome to the NAPCO Security Technologies Incorporated second-quarter financial results conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 begin.

Good morning and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the second quarter ended December 31, 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.

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, and achievements could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including those set forth in the Company's filings with the Securities and Exchange Commission.

Before I turn the call over to Mr. Soloway, I would like to inform you that NAPCO will be presenting at four upcoming conferences. They are Hudson Securities in Chicago on March 1, the Roth conference in mid March in Southern California, the Noble conference in Florida on May 17, and the B. Riley conference in late May in California as well. We hope to see you at some of these conferences and would welcome any one-on-one meetings if you so desire. Please advise me.

With that out of the way, let me turn the discussion over to Mr. Soloway for further details and discussion of today's release.

Good morning everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the three and six months ending December 31, 2010.

I'm very encouraged with the financial results that we reported. We saw strong increases in operating income, EBITDA, and net income as compared to the same period a year ago. As many of you know, our quarter is billed sequentially into the fourth quarter each year due to seasonality. That being said, we were able to grow revenues in the second quarter by 6% to $17.6 million, due to the strength from our Intrusion Products division as well as our access control products. This increase, combined with lower SG&A and interest expenses, enable the Company to post a positive adjusted EBITDA for the three months ending December 31, 2010 of $1.147 million as compared to $467,000 for the same period a year ago.

In addition, we were also able to report net income for the second quarter of $157,000, or $0.01 per share, compared to a net loss of $912,000, or minus $0.05 per share for the same period a year ago.

During the earlier part of the second quarter, we were able to successfully conclude the extended negotiations on our restructured debt agreement. Since then, we have turned our full focus and attention on sales growth, new products and continued expense reductions. As a result, the second quarter saw an increase in sales, gross profit and net income as compared to the second quarter a year ago. In addition, selling, G&A, and interest expenses in the second quarter were reduced by $429,000 as compared to the same three months a year ago.

On the new product front, our second quarter saw the introduction of Marks USA of the BHMA certified grade 1 door closers and grade 1 and 2 exit devices. These critical product areas, combined with Marks' legendary grade 1 and grade 2 Mortise locksets provide the Company with a formidable triple play of products when specifying new construction projects or selling to contract hardware dealers. This triad of key product areas positions Marks powerfully in providing its customers with a one supplier marketing approach.

Initial orders for our new NAPCO Commercial product line have also been very promising. The product line provides intrusion and fire alarm dealers with the most advanced integrated line of 8 to 255 point addressable analog commercial wired or wireless fire intrusion or combination fire/intrusion control panels in its category. The national rollout is providing incremental interest and applications to NAPCO in the form of banks, hospitals, office buildings, retail outlets, and other commercial venues. NAPCO Commercial has provided the Company with a strong entry in the robust higher-margin commercial fire intrusion life safety market segment.

NAPCO's line of service-driven reoccurring revenue generating products continues to grow nicely in sales volume. The introduction of our wireless iSee Video product line has made it easier than ever for security dealers to install video capabilities in residential and business applications, and reap service revenues generated by providing an interactive viewing service from their cell phones, iTablets, personal computers, to their business and residential customers.

Looking forward, two major product initiatives will be launched this upcoming early summer. First, our two-way uploading and downloading next generation of StarLink wireless GSM communicators will provide our dealers with the ability to do away with the need for traditional phone lines to communicate alarms to central stations.

Second, NAPCO will launch its new iBridge online remote services suite of products. This product line will provide customers with the ability to view video cameras and recordings, control thermostats and appliances, operate lightning as interact with their alarm systems remotely from any cell phone, iTablet, personal computer, or any other product that provides online Internet communications. The product will use an advanced 7-inch wireless iTablet to interact locally with the system. Both of these product introductions will be oriented toward delivering more reoccurring revenue income streams for the Company.

To summarize, we are pleased that our recent efforts have begun to generate both higher sales and higher profitability. As we continue these efforts, we are hopeful they will result in further improvements in all areas.

I would like now to turn the call over to Kevin to briefly discuss financial details and financial results. Kevin?

Thank you Dick, and good morning, everybody.

Sales for the three months ended December 31, 2010 increased by approximately 6% to $17.608 million as compared to $16.641 million for the same period a year ago. Sales for the six months ended December 31, 2010 increased by approximately 6% to $32.935 million as compared to $31.106 million for the same period a year ago. The increase in sales for the three months was primarily due to increased sales in the Company's intrusion products and access control products. The increase in sales for the six months was primarily due to increased sales in the Company's door-locking products, intrusion products, and access control products.

Gross profit for the three months ended December 31, 2010 increased 17% to $4.690 million, or 26.6% of sales, as compared to $3.992 million or 24% of sales are the same period a year ago. Gross profit for the six months ended December 31, 2010 increased 11% to $8.113 million, or 24.6% of sales, as compared to $7.331 million or 23.6% of sales for the same period a year ago. The increase in gross profit in dollars and as a percentage of sales for the three and six months was primarily due to the increase in sales as well as the Company keeping overhead costs relatively constant.

Selling, general and administrative expenses for the three months ended December 31, 2010 decreased by 6%, or $243,000, to $4.159 million, or 23.6% of sales, as compared to $4.402 million, or 26.5% of sales a year ago. Selling, general and administrative expenses for the six months ended December 31, 2010 decreased by 9% or $795,000 to $8.299 million, or 25.2% of sales, as compared to $9.094 million, or 29.2%, of sales a year ago. The decrease in selling, general, and administrative expenses in dollars and as a percentage of net sales 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, as well as lower stock option expense as existing grants became fully amortized and the reduction of bank fees relating to amendments and waivers.

Interest expense net for the three months ended December 31, 2010 decreased by $186,000 to $411,000 as compared to $597,000 for the same period a year ago. Interest expense net for the six months ended December 31, 2007 decreased by $163,000 to $1.005 million as compared to $1.168 million for the same period a year ago. The decrease in interest expense for the three and six months ended December 31, 2010 resulted from lower interest rates charged by the Company's banks which came about from our restructured bank deal as well as lower outstanding debt in the current period. Since the restructured bank deal occurred at the end of October, the full benefit of the lower interest rate was not felt in the December quarter but will be felt in its entirety during the present quarter, our third fiscal quarter ending March 31, 2011.

Net income increased by $1.069 million, or 117.2%, to $157,000, or $0.01 per diluted share, for the three months ended December 31, 2010, as compared to a net loss of $912,000, or negative $0.05 per diluted share, for the same period a year ago. Net income increased by $1.753 million, or 64%, to negative $977,000, or negative $0.05 per diluted share, for the six months ended December 31, 2010, as compared to negative $2.730 million or negative $0.14 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, increased in the second quarter by 146% to $1.147 million, as compared to $467,000 for the same period a year ago. For the six months ended December 31, 2010, adjusted EBITDA increased 1306% to $1.265 million from $90,000 for the same period a year ago.

NAPCO's balance sheet continues to show improvement. Cash at the end of the quarter amounted to $2.8 million. Accounts receivable at December 31, 2010 decreased $921,000 to $13.736 million as compared to $14.657 million at September 30, 2010. This decrease occurred even though sales were $2.3 million higher in this quarter compared to last quarter, and is due in part to continued improved Accounts Receivable collection procedures.

Inventories at December 31, 2010 decreased by $647,000 to $24.513 million, as compared to $25.160 million at September 30, 2010. This decrease occurred despite the fact that the Company is level-loading its production facility in anticipation of the Company's historical sales cycle, where more sales occur in the latter quarters relative to the earlier quarters.

Cash generated by operating activities was approximately $1 million for the three months ended December 31, 2010, and $1.2 million for the six months ended December 31, 2010. Debt, net of cash, has been reduced by $12.5 million from $35.9 million to $23.4 million since acquiring Marks USA in August of 2008. $0.8 million of this reduction occurred in the second quarter of fiscal 2011.

That concludes my formal remarks. I'd now like to return the call back to Dick.

Thanks Kevin. As we look ahead, we remain confident in our ability to building NAPCO into a company that develops the most technologically advanced security solutions for the vast security marketplace. We continue to believe strongly in our business model and believe the integration of Marks USA into the NAPCO family of companies, along with our new, innovative products, have positioned us area well for future growth. We believe that our exciting new product offerings that I reviewed earlier, several that incorporate more recurring revenue opportunities, along with 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 will constantly examine areas to improve operational efficiencies, inventory utilization, and return on investment of our expenses. We remain vigilant on reducing our costs and pursuing new sales opportunities along with issuing new product offerings.

We remain cautiously optimistic based upon the first half of fiscal 2011. Historically, our quarters get stronger as the fiscal year progresses. With the completion of a debt restructuring and 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 professional security dealers who install our extensive and technologically advanced line of products, puts us in a much healthier position as economic conditions improve and market demand increases.

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

(Operator Instructions). Our first question is coming from Richard Molinsky, Max Communications.

Hi guys. Congratulations on the hell of a turnaround you guys had for that quarter.

Thank you Richard.

One thing I might have missed is could you tell us how much recurring revenue you've been now receiving quarterly and what your goals are over the next year, what percentage of the sales will be that recurring revenue from some of the new products that you've had over the last year or two?

Our goal is to design as many products as we can which afford the Company recurring revenue. We have been doing this with iSee Video, and we have been doing this with StarLink in its first form.

Now what we're doing is we're going to be introducing StarLink in another form which is much more economical and sophisticated for the industry. That's going to generate a lot of additional recurring revenue. We have said that in the past that, when we have 10% of our profitability coming from our recurring revenue, we would let people and our shareholders know about this. So that's our future.

We are going to be doing additional products with recurring revenue, and it's going to become a major and important factor for us over the next couple of years. There is a need for these type of products in the industry because of the fact that phone lines are going away, which report the security signals to the central station. Also, you have more sophisticated criminals that break into buildings and cut the wires that connect to the central stations. So a lot of our products are going to be having this wireless format into it. I expect it to be a huge amount of business for us going forward over the next couple of years, and we will start to break it out.

Is this the first-of-its-kind wireless product that you have for the security?

Yes, it's an uploading and downloading radio system, which allows the dealers who like to be able to change the characteristic of a security system remotely without having to drive over to the protected premise and change it manually. So this system will do all of that, all remotely. It's going to be priced at a point where it becomes a competitive substitute for hardlines, because hardlines are disappearing. Especially when you talk about the next Echo generation and the fact that a lot of them don't even have phone lines in their homes, so that type of thing. So it's really going to be a very important situation for us, because it's like in the early days of the alarm business, there were telephone dialers which were tape recorders on the phone lines. Then you had central station dial-up through telephone lines, called pots, and now you have this radio. We've developed an amazing radio system which is going to be very well received, we believe, by the industry.

You're the first in the marketplace, correct?

We are the first one with this type of system, with the price points value and technology built into it. We have been selling StarLink now for a couple of years. Now, it's really starting to take off in a big way. So we reinvested back into developing it from the beginning circuitry all the way through the antenna, and it is going to be very cost-effective. So when you blend all of the ingredients together, plus the fact that the industry has to go this way, we think we have the most unique products out there.

I appreciate it guys. Great job.

(Operator Instructions). John Granahan, Granahan Investment Management.

How are you doing? I'm wondering if the December quarter had any of the duplication in Dominican Republic, or is that pretty much behind you that quarter?

As of the end of the quarter, we pretty much are all finished moving the Marks operation to the DR. So there was a little duplication. We've actually finished the last stage in December, now we're pretty much done. So I would say there was a little bit of duplication. The last of the duplication I think is over, and it's on this quarter, January, February, March; it's going to be just in the DR only.

Could you say how many employees you have down there now?

That are working on the Marks piece?

Yes.

Approximately 50. When we took over the company, we probably had 60, 65 people production types here, and so the 60 to 65, 50 are down there, and there's maybe 10, 12 here in Amityville. And that piece will stay. We have to keep a certain amount here, but the other 50 are down there.

Could I ask a second one?

Sure.

I think Dick mentioned that the new product flow should stand you in good stead as the end markets show improvement. I'm just wondering, Dick, if you could give a little color on the commercial end market and the residential end market, compared to where it was at its peak. Are you seeing any of a rebound here, or is it really insignificant, relative to what recovery you're talking about?

What we see is we believe that we can pick up share of the existing market with the new products that we are talking about, because they are very much in need by the security industry. So it is true that all industries and all businesses have gone down, but NAPCO's share we believe we can pick up a lot, because we had these unique products, like the commercial combo panel which are rolling out right now, which we are getting a lot of successful focus on this from very large integrators. It's unique due to the fact that there's nothing else in the market which is integration of all of these commercial fire and burglary aspects. There is still a market out there, and we could pick up a lot of share. It's all new, incremental business for us. Plus, we get 10 times the dollar sale that we would get selling only the systems we were selling before, because it is bigger, it's all commercial. So that is going to be very, very exciting for us.

The radio aspect of things with our radio set up is also -- that's the trend today -- more radio, less hardwire, and integration with system control remotely where any Internet device can now control your alarm system, have the radios reporting, and that's very, very exciting. We've done it in a way which average consumers don't have to be technologists to operate it. It's very, very intuitive, and we spent a lot of time on that. So we're excited about that.

Then we are very excited about our locking divisions, Alarm Lock, where we have taken these radios and put them into locks so that, if you are in a college, you don't have to go to the security department and have them send the mechanic up to the doors to rekey the doors and change the codes. Now, you can do everything over radio from the security department or from the administration department. All the schools, colleges, hospitals are very excited about that because it's a new innovation in the locking industry. Rather than just mechanical people rolling a cart with all kinds of tools over to a door, now you do everything remotely. So, we are now taking that radio product, we are now incorporating it into one of our other sister divisions, which is Continental Access, so that division will be access control, enterprise class, with radio-control locking. That's very exciting to our large integrators.

So there is a lot going on here with intuitive consumer operation and great software designs and hardware designs that we are doing. And we're very excited about the future. This will unroll for years and years and years because these are the trends of electronic security, and we are a leader in this.

So would it be fair to say this is really company-specific as opposed to any help from the macro so far?

I would say that we are seeing some uptick in the residential. Some of our residential bellwether accounts are coming back on. In the commercial, we are seeing a little uptick on that. So I would say that we are seeing share development and as a major part -- and also a little bit of development in residential and commercial.

Thank you. Okay.

Rick Fetterman, Fetterman Investments.

Thank you. Good morning everyone. Kevin, is it fair to say that you have seen, for the last, let's say, 18 months or so and continue to see, quarter-to-quarter growth in the recurring revenue segment?

Absolutely fair to say. I wish we could disclose it; I know we get that question all of the time. We're getting closer to be able to, but absolutely we could say it's more than in the previous. I may have mentioned this at one of the previous calls. The recurring revenue has become such a big part of our business here that we can't do it manually any more. We had to hire a computer specialist to come in and write a program, like the rest of the world does who does a lot of recurring revenue, so we can handle this thing in an automated fashion. So it's a big part of our business.

Okay. Can you break out the G&A from SG&A and kind of give us an idea -- I know you've done a heckuva job in cutting G&A and controlling it. Hopefully, the S part goes up a lot because it will mean you're paying a lot of commissions.

right, I don't have that breakout with me here. We can talk about it off-line; I could give that to you.

I would appreciate that.

Yes but yes, we've done, I think, a very good job, and there is more to do of controlling our costs. We are trying to do that while our sales grow. It's a perfect world, and we've done a good job with it but there's more to do.

The real variable part of the selling expense is, when sales go up, we will pay more commissions, we will pay more freight. Other than that, even the selling part is fairly fixed. In G&A, we've done a good job keeping a cap on that as well.

What's a good target, let's say, for beginning next fiscal year, July 1, '11? What kind of number would be a good one to use for, on an annual basis, for G&A? Have you developed that?

I think of it in SG&A terms (multiple speakers) and we are getting -- I want to be below 20%. We were as high as 27%, 28%. We are pushing our way closer to 20%. When we crack 20%, we're like 18%, 19%, then you will know the sales part has arrived, and we've continued to keep the costs under control. In our successful days, we will get it down below 20%.

All right. Thank you very much. I look forward to hearing from you on that other number whenever you get a chance.

I will Rick.

Rick Doucet, Doucet Asset Management.

Good afternoon gentlemen. This is actually David with Doucet Asset Management. But on your -- you had very nice improvement in your gross margins, not only year-over-year but even better sequentially. Is that something that -- you said, you talked about your SG&A being fairly fixed. Is that something that is going to continue to improve, or are you forecasting to continue to improve, or is that a good run rate?

We want to improve. Those of you who know the Company for years know that our gross margins should really be in the 30s%. That's where we want to head back to. Our overhead is fairly fixed, and as the top line grows, the gross profit margin is going to go up. That's what we expect to happen.

Also, another element of the gross margin, as we get more products with recurring revenue, the margins are greater on those products. That too helps the GP. So, for us, we hope to be heading north, heading into the 30s%. How fast we get there I don't know, but we made some nice strides this quarter.

Right, over 400 basis points from sequentially.

Also, on your debt -- in your press release back in October, you gave some indication where you were going to make a payment of I believe it's $893,000 in both December and March. Do you have a target date on carrying a certain amount on that credit facility, or is that something you have further scheduled pay-downs you can provide?

When we restructured the bank debt at the end of October, part of the provision was to make some payments in advance. We pay $893,000 per quarter, and we didn't have to make a payment in December. I don't think we have to make one in March. I think the next one is due in June. We will continue to make quarterly payments of $893,000 until we get to the end of the deal. The deal was a five-year deal. This is the term loan part of the deal, bank deal for the Marks acquisition. When we get to the very end of that deal in August of 2013, then there is a balloon payment due.

If cash generation is stronger, then it permits us to pay faster. We consider that. There's no point having all this debt on the books. The faster we can get rid of it, the better. We'll save money on interest costs. We will be able to then pursue our next acquisition. That's what we want; that's the goal. We've done it before. We will do it again.

Excellent. I appreciate the color and congratulations on a fantastic quarter.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, 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. We thank you all for your interest and support and look forward to meeting all of you again in a few months to discuss NAPCO's third-quarter results. Take care and have a great day today.

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