AstroNova (NASDAQ:ALOT) Q3 2020 Earnings Call

0:00 Good morning, everyone, and thank you for joining us. Hosting this morning's call are Greg Woods, AstroNova's President and CEO, and David Smith, the company's Chief Financial Officer. Greg will discuss the company's operating results. David will take you through the financials. Greg will make some concluding comments, and then management will be happy to take your questions. By now, you should have received a copy of the earnings release that was issued today. If you do not have a copy, please go to the Investors section of the AstroNova website, www.astronovainc.com.

0:51 Please note that statements made during today's call that are not statements of historical fact are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1934. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially except as required by law. Any forward-looking statements speak only as of today, December 4, 2019. The company undertakes no obligation to update these forward-looking statements. For further information regarding the forward-looking statements and the factors that may cause differences, please see the risk factors in AstraNova's annual report on Form 10-K and the other filings the company makes with the Securities and Exchange Commission. I'll now turn the call over to Greg.

1:34 Thank you, Scott. Good morning, everyone. Thank you for joining us on today's call. AstraNova's third quarter results reflected a continuation of the industry headwinds that affected revenue mix and margins in both our product identification and test and measurement segments in the second quarter of this fiscal year. As noted on our Q2 call, these near-term challenges do not compromise our confident, positive outlook or the strong secular tailwinds that we believe position us well for long-term profitability and growth. We continue to focus on accelerating revenue growth in areas not impacted by these specific headwinds and on improving operational efficiencies throughout the company. We are continuing to invest in new products and technologies, as well as strengthening our global talent to achieve our long-term strategic objectives.

2:27 Looking at our segments, tests and measurements continue to be adversely affected by the ripple effect related to the grounding of the 737 MAX, which has been idled since March. As we discussed in our Q2 call, this grounding affects us not only in terms of new installs, but also deferrals on optional maintenance and retrofit printer upgrades to aircraft that are needed to fill the void until the MAX returns to service. As to when that will be, the status of this situation is well covered by the industry and general business press. Based on that information, we expect that the effects will continue through the fourth quarter and likely impact the first quarter as well. Boeing's longer-term outlook for the airplane remains robust, which bodes well for our long-term business as well.

3:17 On a previous call, I also referenced the delay of a multi-year upgrade contract for the military avionics and related networking gear. The good news on that front is that we began to fill that order in Q3, and we expect to complete the shipments over the coming quarters. We're also pleased to see that our data acquisition line performed well during the third quarter. The reception to new products, including the Smart Quarter DDX100 and Daxus DX100, have been very positive. Also during the quarter, we demonstrated our data acquisition products at several industry events, including automotive testing expos in China and in suburban Detroit, and the Railway Interchange Expo in Minneapolis, and ITC 2019, a major telemetry show in Las Vegas.

4:06 In our product identification segment, Third quarter revenue was flat with last year's third quarter, with some regions performing better than others. In Asia, we continued to experience some softness primarily as a result of weaker demand from a few customers in that region. Organizationally, we completed a major portion of the transition of our product identification business, started in Q2, from a regional structure to an integrated global management organization. With these latest changes, we now have in place dedicated leaders for global hardware, global supplies, and global service. This new structure enables AstroNova to enhance our overall effectiveness by clarifying roles and responsibilities, providing centralized accountability, and enabling rapid, coordinated response to industry trends and market intelligence.

4:58 This is especially important as we grow our list of large global customers. On the new product front, the Quick Label QL300 and QL120X, and Trojan Label T2C continue to gain customers and have received positive reviews from following each installation. In September, those products were among the new color label printer offerings AstroNova featured at three major international trade shows, Pack Expo in Las Vegas, POC POC in Germany, and Label Expo 2019 in Brussels. During this quarter, we also introduced and several other new product identification solutions that complete this year's across-the-board refresh of our entire color-label printer offering. These include the QuickLabel QL850, TrojanLabel T3-OPX and the TrojanLabel T2L.

5:50 These products expand our addressable label market and create new opportunities in the areas of digitally printed labels and flexible packaging. Customer feedback on these new products has also been very positive. We're also particularly excited about the new Trojan label T5, the all-in-one digital print and finish inline labeling system that extends our reach into the professional printing market. Finally, in Q2, I mentioned that our global IT upgrade program moved into the hardware upgrade phase. In Q3, I'm pleased to report that we have successfully completed the core hardware infrastructure upgrade from an array of disparate and aged hardware to the latest technology across the board. With this portion of the IT platform completed, we have started updating the endpoint hardware, software, and telephony across the company.

6:42 We anticipate completing this phase of the project in the next few months. In parallel, we are making steady progress on our ERP conversion to the cloud-based NetSuite software. Presently, we are in the process of a very rigorous training and testing phase of that project. While this transition involves substantial time and expense, It will result in a globally unified, state-of-the-art IT infrastructure designed to significantly improve our competitiveness, reaction time, and productivity in fiscal year 21 and beyond. I'd like to commend our many AstraNova team members who have contributed significant time and effort on the implementation of these programs.

7:21 Now let me turn the program over to David for his financial review. Thanks, Greg, and good morning, everybody. Thank you for joining us. and Michael Nevin. Supplies revenue was $17.7 million, down $400,000 from last year, as declines in quick label printer-related supplies was partly offset by good increases on the Trojan label side. Service and other revenue was $3.5 million, a 17% increase from last year, primarily due to parts and repairs for aerospace printers.

8:53 The noticeable impact of the 737 issue Greg mentioned earlier was tempered somewhat by increase in the test and measurement product line and the sales of the Tufts Switch products in aerospace. The gross margin decline of 380 basis points from last year's third quarter to 36.9% is a function of lower sales in aerospace and adverse mixed dynamics in both segments. Operating expenses in the third quarter were up $300,000 from a year ago all in selling and marketing due primarily to the heavy fall trade show calendar this year. As a result of that, plus the adverse mixed dynamics and lower revenue growth, third quarter segment operating profit was 3.3 million or 9.8%, compared with 5.2 million or 15.2% a year ago. Year-to-date, segment operating profit was 12.5 million or 12.2%, versus 14.1 million or 14.2% in the same period of fiscal 2019.

10:01 Net income for the third quarter was $0.06 for diluted shares versus $0.20 for a diluted share a year earlier. Net income for the most recent period includes a $306,000 credit to tax expense related to the release of an uncertain tax position after an IRS audit closed. After taking all of that into account, we expect our full-year fiscal 2020 tax rate to be about 7%, and for the fourth quarter to be about 19%. Year-to-date net income was $3.1 million, or $0.43 per diluted share, compared with $3.4 million, or $0.49 per diluted share a year ago.

10:47 The new ERP implementation project continues well, and we now aim to go live near the end of the first quarter. We still expect full-year capital expenditures for the base business, including the infrastructure upgrades that Greg mentioned, in the range of $2 million, consistent with our historical levels for the company, plus about that much again for this fiscal year for the ERP project. On non-cash charges for the quarter, depreciation and amortization was $1,550,000, and stock-based compensation was $525,000. Before I turn the call back to Greg, on Wednesday, December 11th, we'll be presenting and hosting one-on-one meetings at the 12th Annual LD Micro Main Event in Los Angeles.

11:36 And on January 15th, we'll be participating in the 22nd Annual Needham Growth Conference in New York City. If you're attending, we look forward to seeing you there. Now I'll hand the call back to Greg for closing comments.

11:51 Thanks, David. In summary, Our overall outlook remains positive and we continue to expect modest revenue growth in fiscal 2020. While a combination of industry headwinds and the investments we are making in future growth are likely to impact near-term results, we are confident in our long-term growth prospects and are well positioned to address favorable secular growth trends across our business. Now I'll be happy to take your questions. Operator? Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

12:48 Once again, that is star one if you would like to ask a question. Our first question comes from Dick Ryan with Daughtry.

12:57 Thank you. Hopefully you can hear me, guys. I've got a bad reception here. Okay, great. You said the max issues likely linger even to Q1. Can you maybe give a little bit more specifics? How did that look? versus the previous quarter, and, you know, maybe on the Airbus side of the business, is everything going along well there?

13:20 Yeah, well, last part first, yeah, we're making, you know, Airbus is going fine. It's not affected by this 737 MAX. Some of their, they may be gaining a few more orders, but that's, you know, years out, so no impact, and we're seeing actually a nice growth in the Airbus units. Yeah, quarter over quarter. So an Airbus is not an issue, but on the Boeing, yeah, I mean, it's, like I mentioned in my comments there, if you go to the Boeing website, you can see what they say there. They keep inching it out. The latest thing that they're projecting, I looked at it again this morning, is they still expect to have an approval from the FAA this quarter.

14:08 So for them, that means this month. If they get that, then it's a matter of what does that actually say and what are the retraining requirements going to be. So that's why we say it's going to affect not only Q4 but Q1 because it's likely there will be some training requirements and you have to restart a lot of these aircraft on the ground. So it's kind of a restarting program there to get that going.

14:32 Okay. In the product ID guide, the restructuring of your presentation, moving from the global footprint there, how should we see that – Thank you for joining us.

15:09 certainly the efficiencies should help us on the profitability side, but I think more importantly on the revenue growth side. We can spot a trend in one part of the world and very rapidly disseminate that to all the players around the world, either to challenge that or confirm that, and then we can take appropriate actions in a much more timely manner in going through our records. Before we made these changes, that was one of the big things that we looked at is a nice improvement to our overall Thank you very much.

16:07 How should we look at OPEX going forward over the next few quarters?

16:16 We don't really predict exactly how that's going to flow, but there's no crazy high expenses that we see other than the typical year-end trade shows are kind of the big thing that we have. And again, we're planning on attending those Label Expo and PAX Expo this year. We did add Drupa to the mix, which is a new show for us, but that's only every several years, so we wanted to make sure we participated in that show. That's every three or four years. Okay. Thank you. Drupa would be at the end of our second quarter, and then the other two shows are in our third quarter.

16:57 Great. Thanks, Greg. Sure.

16:59 Talk to you later, Doug. Thank you. At this time, we will turn the call back over to Mr. Woods for closing remarks.

17:09 Great. Well, thank you for joining us here this morning. We look forward to keeping you updated on our progress, and we'll talk to you soon. Have a good day. Thank you, everyone. This concludes today's teleconference. You may now disconnect.