NAPCO Security Technologies Inc (NSSC) 2015 Q4 法說會逐字稿

Greetings and welcome to the NAPCO Security Technologies fourth-quarter fiscal 2015 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Todd Fromer of KCSA. Thank you. Mr. Fromer, you may now begin.

Thank you. Good morning and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the 3 and 12 months ended June 30, 2015. By now all of you should have had the opportunity to review the press release discussing the results. If you have not, please contact KCSA Strategic Communications by phone at 212-682-6300 or by email at NAPCO@KCSA.com and we will send it to you.

On the call today is Richard Soloway, President and Chairman of NAPCO Security Technologies, and Kevin Buchel, Senior VP of Operations and Finance. Before we begin 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 may 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 SEC.

With that now out of the way let me turn the call over to Richard Soloway, President and Chairman of NAPCO Security Technologies. Dick, the floor is yours.

Thanks, Todd. 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, 2015. We are very pleased with the way we capped off fiscal year 2015.

As we have mentioned on previous calls, the prime selling season for the security business is spring and early summer, which coincides with our fiscal fourth quarter. This year has been no exception. Our business is firing on all cylinders driven by broad-based increases across all divisions and key financial metrics.

One metric that is particularly noteworthy is our gross margin, which for the fiscal fourth quarter increased 220 basis points to 40.7%. And I think it really demonstrates the hockey stick like leverage in our business model.

NAPCO is unique among the security manufacturers in that we own our own facility. This offers two major advantages. First, keeping production in-house enables us to put in place strict quality control measures that ensure our product meet the highest standards in terms of dependability and performance. Second, it creates a fixed cost structure that results in a significant increase in gross margin as revenues approach and exceed $20 million a quarter.

In the fourth quarter we exceeded that figure, generating record net sales of $23 million. Looking ahead we believe that the growing impact from our recurring revenue services will help us reduce seasonality and smooth out our top-line numbers from quarter to quarter.

Overall as we continue to grow our top line and reduce seasonality in our business through our recurring revenue offerings, we believe we are well on our way to achieving our long-term goals including further margin expansion, a $100 million annual revenue run rate and greater profitability.

As I just touched on, one of NAPCO's major initiatives has been our focus on introducing and growing reoccurring revenue services. During the quarter revenue -- reoccurring revenue from our alarm division increased 40% year over year and 8% sequentially.

Equally impressive reoccurring revenue growth for fiscal 2015 was 53% versus the same period last year. The increase was driven by the sustained strength of our Starlink 3G/4G and Verizon CDMA alarm communicator. These products, which alarm dealers are in process of using to replace defunct 2G radios, as well as the communications link on new alarm installations, are driving considerable growth in the subscription based reoccurring monthly revenue for NAPCO.

Additionally, we are currently in the process of launching a comprehensive line of commercial fire alarm communicators that use wireless radio signal. This introduction will further expand our market share and presence in the lucrative fire alarm communicator category.

We expect this category to undergo significant growth as fire alarms that use traditional phone lines, which are becoming more rare, are replaced with fire alarms that make more use of advanced wireless communication to the central station.

One of our other reoccurring revenue services, subscription-based iBridge Connected Home, also continues to gain traction. IBridge Connected Home products provide customers with a lifestyle management suite of services, enabling them to remotely control various subsystems in the home such as lighting, security, climate control, garage doors, video cameras, small appliances and door locks.

Our dealer network is embracing iBridge in increasing numbers and taking advantage of our iBridge Connected Home dealer program. This program targets traditional residential alarm dealers looking to expand their offerings beyond installing security alarms. The program provides technical and sales training, customized sales material, Web page content, Internet advertising and consumer leads.

Moving away from recurring revenue products, our advanced wireless locking solution, marketed by our Alarm Lock, Marks and Continental divisions, have shown particularly robust growth. These solutions offer a highly versatile, cost effective and easy to install access control solution that can be used in a number of applications including healthcare, education and government.

End-users and developers can choose from two technologically advanced access control solutions depending on their requirements. The first, the Networx Wireless Locking System, has a sturdier commercial grade appearance. The second, the ArchiTect Designer Wireless Access Control Platform, is used when architecturally aesthetic locking hardware is preferred.

Other locking success stories for the past year include the Loc-Down Intruder Lock by Marks, which enables a teacher to lock his or her door safely from inside the classroom in the event of an active shooter incident, as well as the Anti-Ligature suicide prevention LifeSaver lock, also by Marks, for use in prisons and behavioral health setting.

With all the positive momentum in our business we believe our stock is undervalued, particularly when you look at the intrinsic value we have been creating. During the past fiscal year we opportunistically bought back, as part of a 1 million share buyback program that was enacted in September 2014 -- as of June 30, 2015 we bought back 453,048 shares of our outstanding common stock at a weighted average price of $4.81 per share.

As part of our normal course of operation the management team and Board of NAPCO routinely evaluate the Company's capital allocation strategy. At the current share price we still believe that buying back stock is a prudent use of cash, but we are also exploring other value accretive ways of deploying our cash.

With our business continuing to move in a positive direction, our net debt position solid and our CapEx spend stable we are on pace to continue our trend of generating strong free cash flow. We have a sophisticated Board in place who are committed to putting the cash to use in a way that provides the most value for shareholders. And as we do we will be sure to keep the financial community updated.

Overall, all the pieces are in place for NAPCO to start fiscal year 2016 on a strong note. As of June 30, 2015, our sales backlog increased 60% to $2 million, compared to $1.3 million during the same period one year ago. The increase was driven primarily by several large purchase orders from our Marks brand door locking products.

We also continue to see strong interest for the number of our other products which should bode well as we progress throughout the year. With that said I would like to turn the call over to Kevin to review the quarterly results. Kevin.

Thank you, Dick, and good morning, everybody. Revenues for the three months ended June 30, 2015 increased 7% to a record $23 million compared to $21.5 million in the same period a year ago. For the 12 months revenues increased 5% to a record $77.8 million from $74.4 million for the same period one year ago.

The increases in sales for the 3 and 12 months was due primarily to an increase in door locking, recurring revenue and access control products.

Gross profit for the three months ended June 30, 2015 increased approximately 13% to $9.3 million or 40.7% of sales compared to $8.3 million or 38.5% of sales for the same period a year ago. Gross profit for the 12 months increased approximately 10% to $26 million or 33.5% of sales compared to $23.7 million or 31.9% of sales in the same period a year ago.

The increase in gross profit for the 3 and 12 months was primarily due to increased sales and a positive shift in product mix to higher margin products. This also demonstrates the impact of increased recurring revenue as well as our overall efficiency as our sales volume increases.

Selling, general and administrative expenses for the quarter increased approximately $400,000 or 8% to $5.9 million or 25.6% of sales compared to $5.5 million or 25.3% of sales for the same period last year. Selling, general and administrative expenses for the 12 months increased by $1.4 million or approximately 7% to $20.8 million or 26.7% of sales compared to $19.4 million or 26.1% of sales a year ago.

The increase in selling, general and administrative expenses for the 3 and 12 months is due primarily to the addition of selling personnel and increased media, advertising and tradeshow expenditures.

Operating income for the quarter increased by approximately $600,000 or 23% to $3.5 million as compared to $2.8 million for the same period a year ago. Operating income for the 12 months increased approximately $1 million or 22% to $5.3 million from $4.3 million in the same period a year ago.

Interest expense for the quarter decreased by $2,000 or 4% to $54,000 as compared to $56,000 for the same period a year ago. Interest expense for the 12 months decreased by $80,000 or 27% to $215,000 as compared to $295,000 for the same period a year ago.

The decrease in interest expense for the 3 and 12 months ended June 30, 2015 resulted from lower average outstanding debt and lower interest rates during the current period as compared to the same period a year ago.

Net income increased by approximately $1 million or 43% to $3.3 million or $0.18 per diluted share as compared to $2.3 million or $0.12 per diluted share for the same period a year ago. Net income for the 12 months increased by approximately $1.4 million or 39% to $4.8 million or $0.25 per diluted share compared to net income of $3.5 million or $0.18 per diluted share for the same period last year.

Adjusted EBITDA for the quarter, as per the schedule included in today's press release increased, approximately $500,000 or 16% to $3.9 million or $0.20 per diluted share as compared to $3.3 million or $0.17 per diluted share last year. Adjusted EBITDA for the 12 months increased approximately $800,000 or 13% to $7 million or $0.36 per diluted share as compared to $6.1 million or $0.32 per diluted share for the same period a year ago.

At June 30, 2015 the Company had $2.3 million in cash and cash equivalents compared to $2.5 million at June 30, 2014. The Company also had working capital of $35.6 million at June 30, 2015 compared with working capital of $33.4 million at June 30, 2014.

Paying down our debt and optimizing our cost of capital remains a top priority for NAPCO. Debt net of cash was $8.4 million at June 30, 2015 and debt net of cash has now been reduced by $27.5 million from $35.9 million since we acquired Marks in August of 2008 with $1.1 million of the reduction occurring in fiscal year 2015.

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

Okay, Kevin, thank you. In conclusion, we are excited about our growth trajectory and we look out to fiscal 2016 and beyond -- the investments we have made in recurring revenue services and many higher margin products are bearing fruit. And our product lineup continues to be met with a positive reception from our customers and 10,000 plus strong dealer network.

Simultaneously, our commitment to doing what is in the best interest of our shareholders remains as strong as ever. Over the next several months we intend to increase our average to the financial community, crisscrossing the nation to conduct non-deal road shows and attend conferences.

We are eager to share our story with new investors or remind investors who have heard our story before of our track record as one of the most dynamic and innovative security companies in the world. We firmly believe that our best years are still ahead of us.

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

(Operator Instructions). Kara Anderson, B. Riley.

Just to start on net sales, was any increase in the quarter a result of a single large project?

No, it was a blend of orders from all divisions.

And then beyond the leverage from the Dominican Republic facility and then the higher margin recurring revenue, was there any portion of sort of product mix that helped drive the 40%-plus gross margin in the quarter?

Kara, most of our sales now are higher margin type products. So when we sell school security product as an example, whether it is the K-12 or university, those are high-margin products. If we sell the Anti-Ligature Anti-Suicide lock, those are high margin products.

A lot of the products that we come out with in the last year or two are high GP products. So between that, the recurring revenue, the Dominican facility, you have got all things leading to higher GP and of course the volume. The volume leverage is a big one. But all of it contributes.

Great, thanks. And then can you sort of break out roughly the increase in SG&A that was due to additional sales and how much to advertising expenditures?

You know, we don't break that out. We just gave you like the main categories. What we are doing is trying to spend more money to get that sales number up faster. And so, we are controlling how much we spend, but we added more personnel, we spent more on advertising, trade journals, trade shows, it is all of the above and it is going to help us get to where we want to go to that $100 million goal faster.

Now that we have all these products and we're firing on all cylinders and the different divisions are producing nice numbers, it is time to spend a little bit more money, and that is what you saw with the SG&A, so that we can kind of get the word out and to do a lot of hand-to-hand combat in the field with advertising, marketing and additional sales personnel. So we think it is a good expenditure of money.

Okay, so just to confirm, it sounds like you guys [aren't] going to continue at the same level of spending going forward?

That is how it looks for now, but we will see how it goes. We are analyzing this thing constantly. We see that when you spend a little you get a nice benefit for it. So, it is a balancing act because we want our earnings to be record-breaking all the time.

Great. And then the last question is on the tax rate. Kind of low in Q4 and for the year, is the expectation still for 10% to 15% for full year going forward?

It is. It jumps around, but in the end usually we wind up in the 10% to 15% range for full year.

Okay, thank you.

Pete Enderlin, MAZ Partners.

Approximately what is your overall capacity utilization rate between the Dominican and the Long Island facilities?

The designs of the product, the inventory and everything are here in Amityville, Long Island. And manufacturing is in the Dominican Republic where we have a 175,000 square foot factory where we can get all the labor we need.

Right now at our rate we can do -- we believe that $100 million per shift is our capacity per shift. Of course we can run two or three shifts because we can get all the labor we need. So we are not near capacity and our CapEx is running $500,000 to $700,000 a year. So we have lots of room to grow.

Yes, Dick, you mentioned that you could use some of the cash position to try to increase return to shareholders. Besides the obvious things is it possible that you could make acquisitions to increase the (technical difficulty) utilization of the facility?

It is possible if we can find the right acquisition that is priced right, has a line of equipment which our dealer base can sell to their end-user customers. And that the management takes a payout rather than a lump sum. So if all those things are in place there is a possibility.

There aren't that many companies that are around that can -- that have products that we don't have. But there are a few different areas that we are not into. So we are looking at them right now actively.

And so how narrowly would you define your product area? I mean obviously there are lots of sort of general electronics -- assembly type products that you could buy, but you don't want to go off into a different field entirely.

We want to stay close to our field, which is electronic security in all its aspects. And with what is going on in the world today, more and more of this is going to be needed, protection of schools, the recurring revenue is a big part of it, using the radios.

We are now going into this new fire radio business which is replacing copper dial-up lines, which I think will use a lot more capacity. So we want to have controlled growth of product that our dealers can use.

And if you got to something like 85% capacity utilization based on some additional shift or shift and a half, or something like that, what kind of potential gross margins could we be talking about -- recognizing that it is an assembly operation and you source most of the components from outside?

Well, we manufacture a lot of components inside. The electronic microprocessors and the capacitors, resistors and circuit boards we get on the outside. But most of the metalwork, the packaging, the plastics, the decorating and everything is done in-house, full turnkey. We built the factory so we could do that.

Okay, so I mean asymptotically what kind of a gross margin could you approach under those possible scenarios?

Well, we said we think that at $100 million we could earn $1 a share, along with $10 million worth of recurring revenue. So those are the points we are shooting for out in the 2017 year. So that is what we are trying for. And then we keep growing beyond that.

And that is a 41% GP and it could be higher because, as you saw with the $23 million we did this quarter, we are almost there. So the GP seems to be exploding even beyond what we predicted. So it is a very good thing between recurring revenue, higher-margin products, Dominican leverage, all three.

Yes. We are about two-thirds of the way through the first quarter; is there any indication of the continuing sales trends so far?

We will let you know at the end of the quarter. We don't give projections early on.

Yes, okay. And then just one financial detail. What are noncurrent inventories?

Noncurrent inventories are inventories that are not expected to be used in the next 12 months. As an example, the (technical difficulty) components where, let's say it's an end-of-life component. So you want to buy X number of years of those components because the manufacturer is not making them anymore and you want to make sure you have them. So you buy a two-year or three-year supply, something like that.

Okay I see. Okay, thank you very much.

(Operator Instructions). Beth Lilly, GAMCO Investors.

Good morning.

Good morning, Beth.

I wanted to -- I had to get on another call for a quick second, so I don't know if anybody asked this question. But I wanted -- on your prepared comments you talked about the capitalization of the Company and the cash position and you've been buying back stock.

And you made a comment I think about other shareholder creating activities. And I wanted to just explore that a little bit more. Are you talking about possible acquisitions? What is your thought process behind that comment?

It is a whole potpourri of things. It could be acquisitions, it could be dividends, more stock buyback, all of these different things. So we are exploring all the possibilities as we rack up the cash and we are on a great trajectory. So we have to be open to all of these different things.

Are you finding product lines -- small product lines, tuck-in acquisitions that are of interest? And could you talk about valuations of companies in the marketplace?

We are looking at acquisitions. Now we have somebody working with us on that. It is not exactly a top priority unless it fits just right into our mix. And as I explained to the gentleman before that, got to go down the channels that are dealers could use, it has to be priced right, there has to be some type of a payment to the management, not a lump sum, so we keep them very interested in the business and things like that.

Okay. And my other question is a follow-on from the prior caller's question about gross margins. So you are now at the 40% level. Do you think that you could sustain that level going forward? I know you have talked about getting it to a higher level at $100 million (technical difficulty), but can you sustain the 40% going forward?

40% is easy for us when we have the volume. So for this quarter we had $23 million, it was even better than 40%, as you saw. What our job is to do is to do that every quarter, not just one, every quarter. And we can do that and we believe the products that we have introduced will get there.

And then we will sustain 40% all the time. And when you can do 40% GP fourth quarter or four times you wind up having a full year in the 40%s. Right now our full year was 33.5%. So what we want to do is have higher GPs throughout the year and that will lead to a nice GP growth for the full year. And we can do that.

And at what level of quarterly revenue, is it $23 million that you need to generate, is it $22 million to get that 40%?

For us $20 million is the magic number, once you go over it it starts. Just to remind everybody, last year we did $21.5 million and the GP was 38.5%. This year we did $23 million, the GP was over 40%. So the higher that number goes, yes, we are not capped out at the GP we performed this quarter. If we are at $25 million the GP is probably going to go 41%-42%.

Okay, great, thank you. Those were all my questions.

Walter Ramsley, Walrus Partners.

Nice quarter, congratulations. As far as the home security business all by itself, could you just kind of review how the year went in that segment?

The radios, which generate recurring revenue, are growing very nicely, we talked about the percentages year over year. And we have a lot of new radio types that we're going to be introducing this month and going forward, which get us different parts of the alarm business.

As an example, we are talking about the fire business, which is a big business because copper lines are also going away in the fire business.

So we expect to get a nice boost from our fire radios, plus the recurring revenue on a fire radio is more than the recurring revenue on a household alarm system. And we have other radios that are coming out there after. So it is a nice trajectory for us.

The connected home products are being adopted as the population -- the younger population want to control everything on their smartphone. Our iBridge has been touted as the best connected home product on the market. It has tremendous versatility and great range and it really works well with all the apps.

So we have very high hopes for that. It has a menu of recurring revenue services that the dealers subscribe to and as they put more and more of the services in place we get more and more recurring revenue. So it is a very good scenario.

So, overall would you say the home security business grew the same rate as the commercial?

I don't break it down that way, but it was a great contributor to the overall volume.

Okay. I've got another question about the tax rate. I mean it was pretty low. Can you just kind of explain how you manage that?

Well, you know, because of our tax structure with the DR, etc., when you make a lot of money, believe it or not, the tax rate goes down. That is just the way it works with -- the DR. So earlier in the year when we weren't making as much money our rate was higher.

It usually comes to a 10% to 15% when it is all said and done. We are doing certain things that maybe improve it. For somebody who is doing modeling out there I would stay with the 10% to 15%.

Okay. And the higher ed business, were there any installs in the current quarter, the first quarter of fiscal 2016?

We have more than 500 schools of all different types, both K-12 and higher ed schools. And we have our sales team beating the bushes and meeting with the management of the schools and the architects of the schools and the different family groups that are with the K-12 and explaining what we do. And more and more people are buying into it.

We also have something we put out called the savvy report where we are trying to get the schools -- we have written this report, generated by us. We are trying to get it sent all around the country through the educational tier of business where it tells schools how to protect themselves from active shooters, how to build the proper type of lobby and bulletproof glass, what type of access control and lock down systems you should have.

There is no unified regulation for schools. There is like after 911 the TSA was created and they regulate passengers to go onto planes. But nothing has been done since Sandy Hook even though there is an active shooting that takes place near a school or in a school every 13 days.

So our savvy report is something that we are promoting because we want schools to get armed and protected. And we believe that they can get insurance discounts. So there is a lot of interest in this and we expect to sell additional products to protect the schools and the children.

Okay. And then just one last question. The macroeconomic situation in America, is that sufficient to allow the Company to meet its growth targets?

The world is a very unstable place and we have all these situations in schools and shopping malls, burglaries, things like that. So we are doing our thing, showing the best products out there. We are trying to create additional products with recurring revenue that our dealers can use and the industry seems to be pretty busy right now.

Okay. Well, thanks, Dick. Thanks, Kevin. Nice talking to you again.

Scott Billeadeau, Walrus Partners.

Just one question, a follow-up from Walter. More on the inventory set. Could you maybe talk about as you get more recurring revenues from radios and so forth, what will the trend be of inventory and your turns?

Should we start to see turns improve at some point? Just trying to figure out what kind of -- as you go forward with that model -- how should we look at modeling the inventory and continuing to build a little inventory or should that start to lever out?

It should improve, Scott, no inventory required for those sales. So let's say we had $10 million of recurring revenue, there is no inventory. So yes, you are going to see the stats improve as we go forward.

And we are always working to reduce inventory levels to begin with. So between that and more recurring revenue the trend should be toward lower inventory levels. That is always a goal of ours throughout the year.

And is there -- can you characterize the inventory, how much would be electronic versus how much would be more kind of legacy lock business for security? What -- can you maybe characterize what that inventory is?

Well, we really don't break it down that way.

Okay.

But the electronic -- with the micro process business, circuit boards and the components are a predominant part I would say. In the intrusion business and locking business. In some of the architectural locking it is more mechanical. So there is a lot of metal parts in that. We haven't really broken it down.

All right, I didn't have too much else. Good quarter, thanks.

Rick Fetterman, Fetterman Investments.

Great quarter and I had just one question regarding recurring revenue. You had said, Kevin, previously that when it got to -- when the recurring revenues got to I believe it is 10% of total revenue that you would be breaking it out as a separate item. Are we likely to get there in fiscal 2016?

We are getting closer, Rick. I don't want to predict it. If it is not 2016 we think it will be for sure by 2017.

Okay. Fair enough. That was the only question I had, everything else has been answered. Thank you very much.

[Leon Seronian], private investor.

The stock purchases you have been making, can I presume that they are held in treasury -- as treasury stock and not retired?

Right, treasury, exactly.

Right. Can I ask how many shares you have now in the treasury?

Well, we bought back the 400,000, right -- 480,000. And what do we have now, I don't know that offhand, I will look. We have done this before. Let's see. We have 2,083,000 in the treasury right now.

2,083,000, okay, that is very good. And by the way, compared to other companies I own stock and you people never disappoint me as others do. Congratulations.

In decades past, and notice I said decades past, we have been stockholders that long, you used to pay almost on a yearly basis when you were a smaller Company stock dividends. In view of the fact I consider the shares outstanding now as extremely thin, considering 26% is held by institutions, it is a -- for many people institutions might be a difficult stock to buy in decent quantities.

Is there a chance you'd consider to get more stock out in the public hands, stock dividends? And I know that you can use this for purchases too, which would be the ideal thing to do to use it to make acquisitions.

But you get my point that, as I say, I'm still an active buyer of the stock and it can be sometimes difficult to buy as I had a problem last week. Somebody kept raising the bid, every time I raised the bid they immediately raised it up higher. And -- which is okay, but then it makes it sometimes difficult to try to bid in the purchase and your schedule.

Well, we bought over a period about six months about 500,000 shares. And if you are patient you can get the shares. So that is our experience. Over the years we have split the stock and I think we did one 10% backed dividend over the years. So all of those are possibilities going forward.

Thank you. You have answered my questions.

Thank you, I would now like to turn the conference back over to management for any closing comments.

Thanks, everyone, for participating in today's conference call. As always, should you have any further questions please feel free to call KCSA, Kevin or me. We thank you for your interest and support and look forward to speaking to you all again in a few months to discuss NAPCO's fiscal 2016 first quarter results. Thanks a lot and have a great day, everybody.

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