NAPCO Security Technologies Inc (NSSC) 2011 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NAPCO Security Technologies Incorporated fiscal 2011 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the 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, Rob. Good morning, and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the fourth quarter and fiscal year ended June 30, 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 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 Kevin Bouchel, Senior VP of Operations and Finance. Before I ask our host, Dick Soloway 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, our host. Dick, please proceed.

Thanks, Don. Good morning, everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the 3 and 12 months ending June 30, 2011. I'm pleased with the financial results that we reported, both for the quarter and the fiscal year. We saw excellent increases across our income statement, especially starting with the topline growing 5% percent during fiscal 2011 to $71.4 million. The increase is also continued to flow to our operating income, EBITDA and net income, which also 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 fourth quarter to $20.7 million, due to the strength of our door locking division and intrusion products division. While revenues only increased modest late in the fourth quarter, improved gross margins, combined with tight expense control and much lower interest expense, enabled the Company to post a positive adjusted EBITDA for the 3 months ending June 30, 2011 of $3.257 million, as compared to an adjusted EBITDA of $127,000, for the same period a year ago.

In addition, we were also able to report net income for the fourth quarter of $1.403 million, or $0.07 per share, compared to a net loss of $1.892 million, or $0.10 per share for the same period a year ago. The Company is solidly positioned itself for continued, future growth by launching new, innovative products in a variety of promising, security-driven market segments and categories.

Alarm Lock's Trilogy Networx wireless networking locking system continues to grow nicely in sales. This innovative product fits multiple commercial applications in office buildings, hospitals and schools. More importantly, it enables facilities to cost effectively install a stand-alone locking device network at a fraction of the cost of wired access control systems.

Also another key product for NAPCO, the StarLink wireless GSM communicator is in the process of being rolled out across the country. Traditional phone lines for communications of alarm signals are becoming a thing of the past. The product provides full channel cellular alarm notification and gives alarm dealers a way to program the alarm panels remotely by providing complete uploading, downloading capabilities. Importantly, StarLink provides our dealers, as well as our Company with an incremental, future source of recurring revenue income.

Furthermore, our new, breakthrough NAPCO Commercial integrative fire and intrusion product platform has quickly gained momentum and market presence. The product uniquely provides our dealers with a wide array of solutions when a high-capacity, 8 to 255 addressable points of intrusion, fire, or a combination of intrusion/fire installation is required.

Within our Marks USA division, we are introducing the innovative LocDown, wirelessly controlled network of locking hardware. This product line enables public facilities, such as school campuses, to totally lock down all of its standalone locking hardware in the seconds. The product line is comprised of a battery-powered cylindrical, mortise and exit locking hardware that communicates wirelessly with a master controller or individual portable key fobs. This product pioneers a whole new category of stand-alone, wireless locking hardware.

To summarize, while our efficiency enhancement and cost savings measures has returned us to profitability for fiscal 2011, we are also excited about our new product offerings and the positive effect they may have on our profitability going forward. 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. Good morning, everybody. Sales for the 3 months ended June 30, 2011 remained relatively constant at $20.697 million, from $20.636 million a year ago. And, that's despite the ongoing global and national economic pressures that we are all facing. Sales for the 12 months ended June 30, 2011, increased by 5% to a record level $71.392 million as compared to $67.757 million for the same period a year ago. The increase in sales for fiscal 2011 was primarily the result of increased demand of the Company's retrofit door locking products, and domestic sales of intrusion products, as partially offset by reduced export sales of intrusion products.

Gross profit for the 3 months ended June 30, 2011 increased 113% to $6.475 million, or 31.3% of sales, as compared to $3.04 million, or 14.7% of sales for the same period a year ago. Gross profit for the 12 months ended June 30, 2011, increased 38.4% to $20.101 million, or 28.2% of sales, as compared to $14.522 million, or 21.4% of sales for the same period a year ago. The increase in gross profit in dollars and as a percentage of sales for the 3 and 12 months was primarily due to the increases in sales, as well as the decreases in production overhead and research and development expenses.

Selling, general and administrative expenses for the 3 months ended June 30, 2011 decreased by 15% or $704,000 to $4.033 million, or 19.5% of sales, as compared to $4.737 million, or 23% of sales a year ago. Selling, general and administrative expenses for the 12 months ended June 30, 2011, decreased by 9% or $1.622 million to $17.188 million, or 21.4% of sales as compared to $18.81 million, or 27.8% of sales a year ago. The decrease in selling, general and administrative expenses in dollars and as a percentage of net sales for the 3 and 12 months, was due primarily to reduced wages and expenses resulting from the closure and consolidation of the Company's Marks and European offices in the Company's operations -- into the Company's operations in Amityville, New York.

Operating income for the 3 months ended June 30, 2011 increased by $3.739 million to $2.042 million as compared to an operating loss of $1.697 million for the same quarter a year ago. Operating income for the 12 months ended June 30, 2011 increased by $7.724 million to $2.513 million, as compared to an operating loss of $5.211 million for the same period a year ago.

Interest expense, net for the 3 months ended June 30, 2011, decreased by $280,000, or 46%, to $327,000, as compared to $607,000 for the same period a year ago. Interest expense net for the 12 months ended June 30, 2011, decreased by $706,000, or 30%, to $1.66 million, as compared to $2.366 million for the same period year ago. The decrease in interest expense for the 3 and 12 months ended June 30, 2011 resulted from lower interest rates charted by the Company's primary banks, as well as the Company's reduction of its outstanding borrowings under the revolving line of credit and it's term loan.

Net income increased by $3.295 million to $1.403 million, or $0.07 per diluted share for the 3 months ended June 30, 2011, as compared to a net loss of $1.892 million, or negative $0.10 per diluted share for the same period a year ago. Net income increased by $7.621 million to $1.121 million, or $0.06 per diluted share for the 12 months ended June 30, 2011, as compared to a net loss of $6.5 million or negative $0.34 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 is important to point out that our adjusted EBITDA, as per the schedule included in this morning's release, increased in the fourth quarter by $3.13 million to $3.257 million, as compared to adjusted EBITDA of $127,000 for the same period a year ago. For the 12 months ended June 30, 2011, adjusted EBITDA increased by $5.834 million to $6.268 million from $434,000 for the same period a year ago.

NAPCO's balance sheet continues to show improvement. Cash at the end of the fourth quarter amounted to $3.1 million. Inventories at June 30, 2011 were $24.187 million, relatively constant compared to March 31, 2011 quarter of $23.987 million, as well as compared to the $24.082 million at June 30, 2010.

Cash generated by operating activities was approximately $4.4 million for fiscal 2011, and was $2.1 million for the 3 months ended June 30, 2011. Debt, net of cash, has now been reduced by $15.2 million, from $35.9 million to $20.7 million, since acquiring Marks USA in August of 2008. $3.627 million of this reduction occurred in 2011, of which $1.83 million occurred in the fourth quarter. That concludes my formal remarks, and I would now like to return the call back to Dick.

Thanks, Kevin. Fiscal 2011 saw renewed positive trends specifically in gross profit and net income, as compared to recent years. In addition, interest expense continues to be reduced as we further reduce our outstanding debt. We are optimistic that the improved SG&A, overhead and interest expense levels will continue -- contribute to increase net income and shareholder value when economic conditions improve and sales growth increases. As we look ahead, we remain confident in our ability to building NAPCO into a Company that develops the most technologically advanced and designed securities 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 years, has returned us to sustainable profitability and strong cash flow. By adding our exciting new products to our standard setting existing products and keeping focus on continued expense management, we are optimistic that we can continue this trend of improving profitability and shareholder value. That concludes our formal remarks. Kevin and I would like to open the call for any questions. Operator, please proceed.

Thank you. (Operator Instructions). We will pause moment to poll for questions. Thank you. Our first question for today is coming from the line of Fred Hart of EKN Financial. Please state your question. Mr. Hart, your line is open for questions. Please proceed. Mr. Fred Hart, your line is open for a question.

Kevin, you did a very good job of paying down debt in the current fiscal year. Congratulations. What are your plans for the current fiscal year? What would you envision this time next year in terms of what you could tell us?

Thank you, Fred. Well, as you know, when we bought Marks, our debt level is really pushing about $40 million, and we have cut it in half in basically three years in times that weren't the best economic times. So, now we feel that since times have gotten better, I envision that we will be able to get rid of the rest of this debt probably within the next two years, if all goes well. It is hard to say for sure. You don't know what the economy is going to bring, but if we can keep doing what we did in the last three years, we will get rid of it in a couple of years. That's our goal, that's our hope.

Thanks, Kevin.

Thank you. (Operator Instructions). There are no questions in the queue at this time, I would like to give everyone a final opportunity. (Operator Instructions). Thank you. There are no further questions at this time. Actually, we do have a question that is coming from the line of [Harold Weinberger], private investor. Please state your question.

Congratulations. I think the Company has done an excellent job in balancing growth and debt pay down and cash flow generation in the last three years of what we've come through in the economy. At the same time, I would like to know what the outlook is for recurring revenue on that model. How soon that could take hold? And, could you give us a feel for approximately, if you sell a system, how much revenue comes to the Company on an annual or monthly basis?

Hi, hello. It's Dick. We have a product that is out there called IC video. And IC video is a video product which dealers, large dealers put in such as ADT and certain jobs under their brand name and then non-ADT dealers put it in under another brand name. And we get recurring revenue. We don't really discuss how much we split it up, as far as recurring revenue, but it's making -- it's building a nice bank of recurring revenue every month. Because of the fact that that is successful, we are now introducing a new product called StarLink, which is actually going to be shipped in the next few weeks, which will be the most exciting recurring revenue device for us because it's going to be very high volume. It replaces ordinary copper telephone lines using the GSM cellular network, and it is going to communicate to the police department and fire department, emergency conditions through the central stations.

So, we expect that many, many dealers are going to be using this product, and the volume should pick up nicely because of the many, many thousands of systems that are installed every single month all across the country. So, it's going to be a fantastic offering, it's been under test and development for years now. We make it from every part of the radio and communicator. We manufacture in our Dominican factory, and we are going to be shipping the first batch of quantities in the next couple of weeks. As we've said in previous press releases, by the end of the summer. So, we have high hopes for this to be a very important contributor to our recurring revenue. So, -- we also --

I'm sorry, Dick.

We also said that when it becomes 10% of our business, we will start breaking out the numbers. And, I believe that the StarLink is going to get us there, along with other versions of the IC Video.

So think, Dick, and as well as you, Donald, the real story for the Company is that we are going from a cyclical or a semi-cyclical Company, and we are beginning to transition for some of our companies who are recurring revenue model. And therefore, the stock, in my opinion, is quite a bit undervalued, based on those metrics. And, I think that's the true story that needs to be told for the Company. And, I think you've started to tell the story, and I think we could even improve on the way you tell the story.

Do you have any suggestions on how we can get that message out?

I think that when you go ahead and you go to trade shows or you go to the various presentations that you do, I think you should begin to show people that look, we are moving to a recurring revenue model and cash flow. We theoretically could have all our debt payed down and be debt free, if we don't do any other acquisitions, that is in 24 months. And we will be generating significant cash flow to where the stock doesn't reflect that theoretical multiple.

And, we will have the opportunity tomorrow, as we present at 3.40 PM tomorrow at the Rodman & Renshaw conference in New York City.

Right, I think you should push up that you're moving from cyclical to a -- you are beginning to build a base of recurring revenue, and it is happening now. And it is happening with the product that could be sold in high volumes.

Thank you for that. Good comment. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back to management for further comments. Excuse me, gentlemen we do have one question that just came in from [Ike Duvak], a private investor. Mr. Duvak, state your question, please.

I just wanted to congratulate the team for a wonderful quarter and continue doing the same, going forward.

Thank you, Ike, and I appreciate the longtime support and we've got a lot of irons in the fire. And we hope to -- if the economy cooperates, we hope to get back into continuous profitability at high levels.

Okay, that's great, a great feeling to have. And, I'm glad I'm a long-time investor with the Company.

Thank you.

All right, be well.

Thank you.

Thank you am I will now turn the floor back to management for closing comments.

Okay, 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 all of you for your interest and support and look forward to speaking with all of you again in a couple of months, to discuss NAPCO's first quarter results of fiscal 2012. Take care, bye-bye.

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