NAPCO Security Technologies Inc (NSSC) 2011 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Napco Security Technologies Inc third-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.

Thank you, Christine. Good morning and thank you all for joining us for today's conference call to discuss Napco's financial results for the third quarter ended March 31, 2011. 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, to discuss the particulars of this morning's news, we 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 and nine months ending March 31, 2011. I'm pleased with the financial results that we reported. We saw excellent increases across our income statement, especially starting with the top-line growing 11%. The increases didn't stop there, but continued to flow through our operating income EBITDA and net income, which all saw drastic improvements as compared to the same period a year ago.

As many of you know, our quarters build sequentially into the fourth quarter each year, due to the seasonality, and this year was no different, as we were able to grow revenues in the third quarter to $17.8 million, due to strength from the door locking division and intrusion products division. The revenue increase, combined with tight expense control and much lower interest expense, enabled the Company to post a positive adjusted EBITDA for the three months ending March 31, 2011 of $1.246 million, as compared to a negative adjusted EBITDA of $901,000 for the same period a year ago. In addition, we were also able to report net income for the third quarter of $695,000 or $0.04 per share, compared to a net loss of $1.864 million, or minus $0.10 per share for the same period, a year ago.

The Company has solidly positioned itself for continued future growth, by launching new innovative products in a variety of promising security-driven market segments, and categories. This was quite evident at our showing a few months ago, a few weeks ago, at the security industry's largest trade show gathering, ISC West, where we launched the most new products our Company has ever debuted. Specifically speaking, we're particularly proud to have on the Best of Show award for our new breakthrough Napco Commercial Product Platform.

This product uniquely integrates intrusion and fire detection capabilities into one high-performance control panel line. The product provides Napco dealers with the ability to flexibly install the most advanced integrated line of eight to 255-point addressable analog fire intrusion and combination fire intrusion control panels available today. As our successful launch progresses, we are in the process of establishing a powerful presence in this high-margin commercial sector of the security business.

Moving on to another new product line we have established here at Napco, the launch of our new iBridge, online remote services suite of products, which enable us to continue to expand our strong position in the burgeoning re-occurring revenue generating remote services sector of the business. Well received at the show, iBridge gives our dealer base and the Company the ability to generate substantial incremental income streams by providing end-users with the capability of remotely viewing video cameras and recordings, interacting remotely with their security systems, controlling energy consumption, thermostats, and operate lighting at their home or business, and this service can be accessed from iPhones, Blackberries, Droid operating system phones, iPads or other tablet computers, or any personal computer from anywhere in the world.

Another product launch focused on providing our Company with future recurring income streams, which will be this summer's introduction of our new StarLink wireless GSM communicator, which delivers two-way uploading and downloading and full channel alarm reporting without the need for traditional HardWire telephone lines. Today's alarm installation professionals vitally need a wireless link to security systems in the field, as traditional phone lines are disappearing. Our locking division also had some new technologies that will act as growth catalysts for Napco.

Our wholly-owned subsidiary, Alarm Lock's trilogy network wireless networking, locking system has become the most successful new product introduction in Alarm Lock's history. This product line enables our standalone locking devices to communicate wirelessly over any size network, eliminating labor intensive door-to-door operations and expensive wiring runs. The system uniquely features emergency global, lockdown, and unlock, which can be deployed in seconds from any network lock to defend against intruders.

Additionally, Marks USA has developed ANSI Grade 1 and Institutional Life Safety locksets to address managed liability, accident prevention, life safety, and security and behavioral healthcare institutions, as well as lock-up and detention areas. The new SS50 series locksets are designed to provide protection and restrict the attachment of lines, lasers, wires, and other potentially harmful peripherals to the doorknob and innovative and innovative anti-ligature leader will be introduced this summer, providing sales growth opportunities in the growing mental health vertical care markets.

To summarize, we're pleased that our recent efforts have begun to generate both higher sales and higher profitability. As we continue these efforts, we are hopeful that they will result in further improvements in all areas. I'd now 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. Sales for the three months ended March 31, 2011 increased by 11% to $17.760 million, as compared to $16.015 million for the same period a year ago. Sales for the nine months ended March 31, 2011 increased by 8% to $50.695 million, as compared to $47.121 million for the same period, a year ago. The increase in sales for both the three and nine months was primarily due to increased sales in the Company's door-locking products and intrusion products. Sales for the three and nine months of the Company's access control products remain constant, as compared to the same period a year ago.

Gross profit for the three months ended March 31, 2011 increased 33% to $5.513 million, or 31% of sales, as compared to $4.151 million or 25.9% of sales for the same period a year ago. Gross profit for the nine months ended March 31, 2011 increased 19% to $13.626 million or 26.9% of sales, as compared to $11.482 million or 24.4% 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 nine 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 March 31, 2011, decreased by 2%, or $123,000 to $4.856 million or 27.3% of sales, as compared to $4.979 million or 31.1% of sales a year ago. Selling, general and administrative expenses for the nine months ended March 31, 2011 decreased by 7% or $918,000 to $13.155 million, or 25.9% of sales as compared to $14.073 million or 30% of sales a year ago. The decrease in selling, general and administrative expenses in dollars and as a percentage of net sales for the three and nine months was due primarily to reduced wages resulting from the consolidation of the Marks Company into the Company's operations in Amityville, New York. The reduction of bank fees relating to the amendments and waivers, the timing of trade show expenses, and lower stock option expenses as existing grants become fully amortized.

Operating income for the three months ended March 31, 2011, increased by $2.408 million or 138%, to $657,000 as compared to an operating loss of $1.751 million for the same quarter a year ago. Operating income for the nine months ended March 31, 2011 increased by $3.985 million or 113%, to $471,000, as compared to an operating loss of $3.514 million for the same period a year ago. Interest expense, net, for the three months ended March 31 decreased by $263,000 or 45% to $328,000, as compared to $591,000 for the same period a year ago. Interest expense net for the nine months ended March 31, 2011 decreased by $426,000 or 24% to $1.333 million as compared to $1.759 million for the same period a year ago.

The decrease in interest expense for the three and nine months ended March 31, 2011 resulted from lower interest rates charged by the Company's banks, as well as lower outstanding debt in the current period. Net income increased by $2.559 million or 137%, to $695,000 or $0.04 per diluted share for the three months ended March 31, 2011, as compared to a net loss of $1.864 million or negative $0.10 per diluted share for the same period a year ago. Net income increased by $4.312 million or 94%, to a net loss of $282,000 or negative $0.01 per diluted share for the nine months ended March 31, 2011, as compared to a net loss of $4.594 million or negative $0.24 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 $2.147 million or 238% to $1.246 million as compared to a negative adjusted EBITDA of $901,000 for the same period a year ago. For the nine months ended March 31, 2011, adjusted EBITDA increased by $3.321 million or 410% to $2.511 million, from a negative $810,000 for the same period a year ago.

Napco's balance sheet continues to show improvement. Cash at the end of the quarter amounted to $3.6 million. Inventories at March 31, 2011 remained relatively constant at $23.987 million, as compared to $24.082 million at June 30, 2010. Now, this is very encouraging because the current quarter, the fourth quarter ending June 30, our strongest sales quarter, usually results in a large reduction of inventory.

Cash generated by operating activities was approximately $1 million for the three months ended March 31, 2011, and $2.3 million for the nine months ended March 31, 2011. Debt, net of cash, has been reduced by $13.4 million from $35.9 million to $22.5 million since acquiring Marks USA in August of 2008. Subsequent to the third quarter's end the Company used a portion of its cash on hand to pay down an additional $1 million in debt, which will be reflected in the fourth-quarter results.

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

Thanks Kevin. As we look ahead, we remain confident in our ability to keep 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 integration of Marks USA into the Napco family of products, along with our new innovative products, have positioned us very well for future growth. We are pleased that our streamlining and consolidation efforts over the past two years have returned us to profitability in the third quarter.

By adding exciting new products to our standard-setting existing products, and keeping our focus on continued expense management, we are optimistic that we can continue the trend of improving profitability and shareholder value. This concludes our formal remarks. Kevin and I will like to open the call for questions. Operator, please proceed.

(Operator Instructions). Mr. Soloway, it appears we have no question at this time. I would now like to turn the floor -- I'm sorry, it looks like we did just get a question. Our question is from [Fred Hart with EKN Financial]. Please proceed with your question.

Good morning, Dick. How are you?

Good morning, Fred. How are you?

Okay, congratulations, looks at you had a good quarter. Wanted to hear some comments -- I know I believe you closed the London sales office, you've been disappointed with the European sales efforts, et cetera. Have you thrown in the towel entirely regarding that? Or do you still have some hopes to resurrect that?

No, what we've done is, we are just doing a different way of marketing. Rather than having the expensive aspect of having an operation in a warehouse, where expensive to maintain. It makes us have an additional inventory spread out in multiple locations, because we had to buy -- we had London and of course New York. It's better to consolidate all the inventory in one place and go to additional trade shows with a specialized sales group that is used to our international sales.

So, we are going around and meeting new distributors and new dealers at seven additional trade shows this year, and going to put together a different operation. It will take a little bit of time to build it, but we have exciting products, and we have a crack team that is going to be building relationships with new people, and a lot of different countries where we haven't been. That's our plan. We believe that we can grow our international business once again, but it's going to take a little bit more time. Right now, we want to be economical and that is why we did this.

Okay, thank you very much.

Mr. Solway we have no further questions at this time. I would now like to turn the floor back to you 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 for your interest and support and look forward to speaking to all of you again in a few months to discuss Napco's fourth-quarter and year-end results.

Operator, I believe there is another question in the queue. We would be willing to take it at this time.

(Operator Instructions). Our question is from Chris Doucet from Doucet Asset Management. Please proceed with your question.

Hi gentlemen, congratulations on the progress in the quarter. Just a few quick questions. SG&A as a percentage of revenue is still running at about 27.3% this past quarter, although we did improve a lot from the most recent quarter, down from whatever was, 31%. I was curious about two things with the SG&A. It do we have a target SG&A that we are looking for as a percentage of revenue ?

Clearly, lower than where we are now. We expect our revenues to grow, and we expect our SG&A to come down even further. The only thing that changes on the SG&A line, when our revenue grows, is the commission expense and the freight expense, and that's roughly, call it 5%, 5% to 6% of the incremental additional revenue. So, when our revenue gets back to where we believe it should be, and we are on our way, as we can see. More in the low 20s, 23%, 24%, is more of our target than where we are now.

Okay, can you give me an idea of what the -- just mark out the S and tell me what the G&A is now?

I don't have that Chris, right now, but I can get back to you on that.

Can you tell me what it was last quarter?

I don't have the breakout of the S and the G&A for either period, but I can get you that.

All right, and then what is your goal for debt reduction? At the end of this year, I know the year ends in June, but the end of this calendar year, what is your goal for the debt number? I know you guys have done a good job of bringing the debt down from $35 million to $22 million or whatever it is, but what is your goal by the end of the year?

If you are talking about the end of the calendar year, we expect to reduce it by another $3 million or $4 million.

Are you on some sort of fixed payment schedule where you're paying down a certain amount of debt every quarter or every month?

Yes, we are, the term loan which is the acquisition loan, there is a scheduled payment every quarter of $893,000.

Okay.

We will have three of those, and then like we just did, we just paid $1 million against our line, so maybe we can do a couple of those too along the way. There is no schedule for that. Between those three scheduled payments, and maybe $2 million more, maybe it's closer to $5 million that we could reduce by December 31.

Okay, and your recurring revenue, I think, last quarter was about 10% of revenue, what is it now?

What we said is that we are going to publish it when we break over the 10%. So, we are getting very close now to publishing it, but we haven't broken it out.

All right. Thanks, guys, and good luck with the quarter.

Thanks Chris. Operator?

Gentlemen, we have no further questions at this time.

Okay. Thanks everybody, and if you have any other questions, or if you'd like to get together with us and meet and see the new exciting things that we are doing, we would welcome it. We wish everybody a great day today and we will speak to you in a few months. Take care now.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.