Q2 2020 AstroNova Inc Earnings Call

Ladies and gentlemen, good morning, and welcome to the Astronova second quarter fiscal 2021 financial results Conference call. You make you want to ask a question that any time by pressing star one on your Touchtone phone. If you do make sure that your mute function is disabled so make sure that sure signal may reach our equipment again took you have to ask.

Questions Press Star one at any time I'll now turn the call over to Mr., David Calusdian accompanying Investor Relations firm Sharon Merrill. Please go ahead Sir.

Thank you David Good morning, everyone. Thanks for joining us hosting this mornings call or Greg was after nova's, President and CEO and David Smith, The company's Chief Financial Officer, Greg will discuss the company's operating results David will make a few comments on the financials, Greg will make some concluding comments and then management will be happy to take care.

Question.

By now you should have received a copy of the earnings release that was issued today.

You do not at a copy. Please go to the investors section of the Astronova website Www Dot Astronova Dot com. Please note that statements made during today's call that are not statements of historical facts are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1934.

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 September nine 2020.

Any undertakes no obligation to update these forward looking statements.

Information regarding the forward looking statements and the factors that may cause differences. Please see the risk factors and ask you know <unk> 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.

Thank you David.

Morning, everyone and thank you for joining us today.

Well the <unk> 20, Tobin 19, a pandemic has generated significant challenges for all of us.

I'd like to start the call today by thanking our employees around the world for their commitment and extraordinary efforts and adapting to this new reality.

The teams that hearings to our core values and the structure of the Astronova operating system.

Let's do the implementation of several innovative ways to address these challenges.

I will highlight a few of these examples in today's comments.

Now, let's get into the drivers of our second quarter performance.

Starting with our largest segments product identification.

Which accounts for nearly 80% of our business.

Revenue was down by 2% and the second quarter fiscal 2020.

By about 3% from the sequential first quarter fiscal 2021.

This segment traditionally relied heavily on trade show participation in person sales calls and product demos to generate demand.

Well just stay at home mandate, social distancing measures and bands that large gathering severely restricted those marketing opportunities.

Particularly at the beginning of the quarter.

However, as you move through the quarter.

The product that education team made good progress adapting to the cobot.

Challenges.

Accelerating the transition to digital business practices.

Let's switch to digital combined with the customer enthusiasm for our recently refreshed sprinter offerings resulted in a solid pick up in printer sales and supplies in the latter quarter latter part of the quarter.

Based upon our unique full solution offerings and are well established strong position and resilient market segments, such as food and beverage leading supplies and medical products. We expect this growth trend to continue as you move through the second half of the year.

Let me share a few examples just how we've adapted the business.

Digital sales presentations.

During the quarter, our sales teams began conducting online interactive video demos with customers.

These sessions are customized to assess the specific requirements of each customer.

After the demo.

The pritchett samples are overnight, it's the customer so they can fully appreciate the superior quality of our crunchers and our carefully matched supplies.

These presentations led to several orders in July alone.

Advanced remote support and technical assistance.

Due to the unique advanced control systems used on many of our printers during a support call. Our tech support team can take control of the printer perform remote diagnostics and in many cases solve the issue in real time on the spot.

It's also works well for remote training.

Digital marketing.

Our outreach as quickly and dynamically transformed from in person trade shows sway sophisticated digital presence that demonstrates our thought leadership in the product identification industry.

It's just a few of the many actions we're taking.

Well the industry does resumed to more normal practices, we expect that our digital sales and marketing capabilities will reduce the need for our in person presence in many situations, thereby reducing traveling marketing expenses over the long term.

In November.

Bidding it hack Expo 2020, a virtual version of the industry's biggest Daniel trade show.

We're excited to leverage our new digital capabilities at this event, which is typically whatever our most important marketing opportunity severe.

Inline with our improved digital presence.

The coming weeks, you'll be launching new completely overhauled test and measurement and product identification websites that will provide customers with even more stated the our interactive capabilities.

Is important to note that these new sites were placed a significant number of discouraged brand standards.

Legacy sites, writing better search engine optimization, and a more unified branding from Astronova.

Looking closer at the second quarter results.

North American performed well with particular strength in hardware sales boding well for associated supplies revenue in the future.

This is partially offset hardware suppliers weakness in Asia, and Europe do do colgan related shutdowns.

One product it performed particularly well in the quarter was the new Trojan label Tdthree OPX.

This is a next generation over printing system that features highly durable inc. and enables customers to digitally print high resolution color images directly on a broad range of products, including cardboard boxes postcards paper bags fabric raise bags or even wouldn't place.

This is particularly a breakthrough technology in effect.

Applications kick us well beyond the labeling market it into the direct packaging product did education space.

One interesting outgrowth of this new normal.

We have the realized several tier three OPX deals to manufacturers of paper shopping bags.

As cobot 19 restrictions have eliminated the use of reusable bags and local ordinances have done away with plastic bags.

Turning now to our test and measurement segment.

As you mentioned in this mornings press release, the combination of the continued 737, Max rounding and the Cobot 19 pandemic further depressed revenue in the quarter.

That's a measurement revenue was down about 47% from the year ago quarter and 29% sequentially.

We adjusted by taking significant additional actions to reduce expenses to better align this business with the current macro environment.

Customer and analysts data indicate that a full rebound in aerospace is likely to take many quarters.

However, we are already starting to see some positive signs.

For example, during the second quarter repair business started to pick up as you progress through the quarter.

Pick up correlates well with the increasing number of global flight.

For example, during our second quarter percentage of U.S. commercial aircraft. There were operated increased from 48% to 69%.

We believe that this momentum will continue.

Based on the gradual but steadily increase.

Number of aircraft being flown.

And those aircraft will need printer suppliers and maintenance.

It's also worth noting.

The numbers are much better for narrow body single aisle aircraft and wide body aircraft.

Which also bodes well for the Astronova business.

Another positive sign was the progress at Boeing is making with several aviation regulators on the seven to seven Max returned to service certification.

In the U.S.U.S.A. is completed their certification flight test transport, Canada is now doing their flight test in the European Union Aviation Safety Agency Diasa as scheduled airplay tested again this week.

And our test and measurement segment.

The biggest factors that will drive significant revenue growth remains rebound in new aircraft deliveries and the increase in commercial air traffic.

While these factors are outside of our control.

Our 10 M. team has also undertaking a number of innovative initiatives to increase revenue.

One example is the increased pursuit of military business.

In the second quarter was entered the million dollar printer contract for military transport aircraft.

Sitting out additional programs is also underway.

Another example is the increased penetration of the airline direct market.

As you May have read we recently closed an exclusive multiyear commitment from a major north American carrier to standardize on our Toughwriter narrow format flight deck printers first Boeing seven to seven Max aircraft.

This will likely result in over 200 printed orders.

During the term of the agreement.

These innovative initiatives to expand our market phase combined with our cost reduction and restructuring measures better position us to emerge stronger was increased profitability as the industry rebounds.

Before I close with our outlook, let me first during the call over to David for his financial review.

Thank you Greg Yeah, good morning, everybody.

Rather than repeating a lot of the numbers in this mornings press release and give you just a few additional comments in key areas.

I also want to point out or let you know that we plan to fly all the 10-Q for the second quarter later today.

In the second quarter income statement operating expenses declined by about 11% or 1.2 million.

From a year ago quarter.

Biased about 6% or 600000 from last quarter that is the first quarter.

This year.

During last year's fourth quarter and in this year's first quarter as a result of the lower sales volume related to the 737, Max grounding, we began implementing a number of head count reduction in cost savings measures.

Then more recently as we continued to respond to that plus also the coded crisis, we took other measures, including furloughs and works you're arrangement along with further expense reduction actions.

For example, these actions in the second quarter included a reduction in executive compensation.

Then across the board freeze on all other employee compensation that 2019 levels.

And reduced professional one.

Other outside service expenses.

On a year to date basis operating expenses are down 2.8 million from the same period last year.

And if we're able to maintain our current cost structure.

As we currently expect to be able to do.

We expected full year reduction in operating expenses.

Year over year will be on the range of about 7 million.

There are additional.

Savings that show up in lower cost of sales, but those impacts are muted are hidden by the adverse consequences of the lower aerospace volume.

And we're going to continue to look for other ways to realign the cost structure.

The revenue outlook and we'll report on those those results next time.

Couple of quick items I want to highlight due to the decline in aerospace printer volume, we had no excess royalty payments to Honeywell under our asset purchase in license agreement in the quarter.

In a year ago corridor, we had royalty payments of 129000.

Of course, we did and we'll continue to pay the guaranteed minimum royalty payment.

And the next four quarters of that shows up on the balance sheet in current liabilities.

The comment on tax the effective tax rate is quite high this quarter due to discrete items discrete expense items and the impact of a higher taxable earnings forecast this quarter as compared to last quarter on a year to date required tax provision.

You'll also note that we reported other income of 328 death in the quarter compared to other expense of 183000, a year ago quarter.

This differences due to a large foreign currency gain due the impact of strength of the euro and Danish kroner currencies relative to the dollar on translated intercompany receivables balance.

Balances.

Finally, turning to the balance sheet.

Cash and equivalents at the ended the quarter.

Were 11.2 million and debt was 16.3 million.

A good portion of the cashes in foreign accounts that we used to be able to use a meaning full part of it.

To reduce debt a little bit later this year.

The debt amount I just mentioned includes the excludes excuse me the P. P P.

Loan of 4.4 million that we received early in the quarter and which we expect will be forgiven before the end of the year.

Then just prior to the close of the second quarter.

We successfully finish the renegotiated.

Credit facility with our existing lender.

Providing restoration of availability under the revolving credit.

Reduced amortization requirements on the term loan and financial covenants aligned with current market realities.

We now have $2 million outstanding and $8 million available under our revolving credit line.

During the quarter, we reduced our total net debt by 4.3 million to 9.4 million, partly due to cash from operating activities.

Working capital reductions, primarily and also for a more efficient use of domestic cash now that the revolving credit is available again, so we don't have to keep as much cash and reserve.

Overall as we said in the press release, we believed that the short term liquidity concerns that may have clouded the perspective on us at the end of the first quarter have lifted.

And that together with the other operating actions we're in a position to successfully manager liquidity requirements through this coded crisis in the 737 rig related decline in aerospace revenue.

A noncash charges depreciation and amortization in the quarter was 1.565 million and share based compensation expense was 601000.

I, particularly like to know.

As we decided to detail in this quarter in the press release.

EBIT da.

Was $2.32 million.

For 8.4%.

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So in summary, we.

We believe these aggressive actions to reduce costs and our hands liquidity with the company had a solid position to weather the airline industry downturn.

And to continue to drive growth.

In the product I'd business.

So I'll turn the call back to Greg.

Thanks, David.

Looking ahead, the resilience and innovative nature of the Astronova team has enabled us to dynamically adapt to many of the challenges of them at current macro environment.

We have taken aggressive cost reduction actions to enable more rapid profit improvement as the market recovers.

And as David mentioned, we have strengthened our liquidity position to drive the growth of our product in education segment, and whether the downturn in the aerospace industry.

Based on the strength of the product and they occasions large and diversified global installed base and the renewed new printer sales growth driven by our digital transformation.

We expect growth in product in education segment to increase beginning in the second half of the fiscal year.

Additionally, we are encouraged by recent demand trends and expect to see total revenues grow sequentially in the third and fourth quarters of this year.

With that David I'd be happy to take your questions.

Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may signal by pressing star one on your Touchtone phones now please make sure that your mute function is disabled to allow your signal to reach our equipment again to queue up to ask a question.

Please press star one now.

I won't give it a few months, while our system compiles the people queuing up for questions.

At this time, we have no questions I'll turn it back to Mr. Woods for closing comments.

Thank you all for joining US here. This morning, and we look forward to keeping you updated on our progress stay safe and stay well.

Excuse me Sir.

Yeah Okay.

Yes are we did have a question or queue up in this question comes from Mr., Dick Ryan with Colliers.

Okay, great. Thanks.

Thank you sorry, Greg <unk> Star, one, but it didnt take first time.

Can you you know they did the guidance for sequential growth Q3, Q4, obviously is heavily weighted on the product I'd side.

Can you give a sense of where are your arrow business should be I mean, if we hit bottom at this kind of 6 million recorder level or is.

Yeah, you know your we're seeing a slight uptick in flight. So how should we look at that for the rest of year.

Yeah, It was little bit hard to here, either but I think you're saying.

When we predicted we hit bottom or not and doubled your question was.

Yeah I'm in the Aero side, how should we look at Arrow for Q3 in Q4 is it kind of.

Hey step this 6 million a quarter and could we see some growth there or is that probably pushed into next year.

Yes, it's it's a little bit difficult to predict at aerospace market was it seems to change every few weeks a with one thing or another yeah. We just saw this week or you know some issues. The 77, just doesn't impact that production yet, but you never know how those things are going to trickle through.

It's tough for us to predict that I mean, if I get different reports from different Ellis and our customer contacts or you know like I mentioned in my comments. It seems like a there's number of things are kind of breaking towards the positive side, but I think it's a little too early to predict that at this point I think we'll have a better picture on that in Q3.

Yeah, it's it's really tough to nail that down right now, but yes, it's at a fairly low level right now so hopefully we'll see some improvements as we move through the year, but it's the exact timing is tough to predict.

Okay, great Yeah, nice win a nice win on the good Toughwriter off so that's your or are you know astronova is form factor rather than Honeywell can you talk a little bit more about the recent aware how did you get it what would the dynamics behind the Oh the contract award.

Yes, so that Oh, yeah in that case, it kind of extends our market because it was Ah if someone that hadn't purchased a lot of our product in the past so that was a nice win but in general the Toughwriter 640 is by far the best a product out there in the marketplace or near the Honeywell.

All a product or of course every manufacturer we license or you know, it's a solid product or it's had a 20 year track record is a very reliable, but Ah you know the new 640 is roughly half the weight or has a better print a resolution Ethernet has a lot of kind of nice to features that.

Pilots would like to have.

The team has been working on this the around the world to in terms of Oh.

Different airlines and trying to get airline direct business, because with the a 737 Max or the.

Airline is the one who actually makes the purchasing decision and we drop ship the printers to a falling so hopefully we'll see several more of those in the future you know it's a it's a pickup is a benefit to the airline in terms of.

Weight reduction and cost efficiencies and in a it's a benefit of course to us in terms of increasing the volume of our own product.

And you said or.

200 over the life would be.

Contracts, how should we look at that it let's say next year going forward.

Yeah, it depends on how fast they a take either upgrade existing aircraft your take on new aircraft, but it's a multiyear deals. So you're you wouldn't expect to see all that in one year, but.

You should expect to see some of that are starting next year for sure.

Okay, great. Thank you.

Great. Thanks Dick.

Thank you speakers at this time no further questions.

Okay. Let me just thank everyone for joining US here. This morning are we look forward to keeping you guys updated and we'll talk to you after next quarter I know.

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