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ALOT AstroNova

Participants
David Calusdian Investor Relations-Sharon Merrill Associates
Greg Woods President and Chief Executive Officer
David Smith Chief Financial Officer
Samir Patel Askeladden Capital
Dick Ryan Colliers
George Melas MKH Management
Call transcript
Operator

Good day, and welcome to the AstroNova's Fiscal Fourth Quarter and Full Year 2021 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to David Calusdian of the company's Investor Relations firm, Sharon Merrill Associates. Please go ahead.

David Calusdian

Thank you. 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 comment on the financials, Greg will make 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. 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. 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, March 25, 2021. 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 AstroNova's annual report on Form 10-K and the other filings the company makes with the Securities and Exchange Commission. On today's call, management will be referring to the non-GAAP financial measure, adjusted earnings before interest, taxes, depreciation, amortization and share-based compensation, or adjusted EBITDA.

AstroNova believes that the inclusion of this measure helps investors gain a meaningful understanding of the changes in the company's core operating results and also can help investors who wish to make comparisons between AstroNova and other companies on both a GAAP and non-GAAP basis. A reconciliation of this non-GAAP measure to its most directly comparable GAAP measure is available in today's earnings release. And with that, I'll turn the call over to Greg.

Greg Woods

Thank you, David. Good morning, everyone, and thank you for joining us. Overall, the AstroNova team performed well in fiscal 2021 in spite of the significant challenges created by COVID-19 and the grounding of the Boeing 737 MAX aircraft. Amid these unprecedented challenges, we remain focused on the areas within our control. We move quickly to realign our workforce, reduce costs and increase liquidity to ensure that we continue to make progress on our long-term strategic objectives. In our Product Identification segment, we adapted rapidly and launched a comprehensive digital marketing initiative with new interactive content and other tools to accommodate the new virtual environment in which our customers suddenly found themselves. The pandemic and the MAX grounding caused a nearly $20 million revenue drop in our strong gross margin Test & Measurement business.

However, through a combination of focus, expense, reduction and increased efficiencies, on a total company basis, AstroNova was able to post full year operating income of $2.4 million, which is actually in level with fiscal 2020, despite a 13% or $17.4 million overall decrease in revenue on a year-over-year basis.

On the bottom line, we reported full year net income of $1.3 million down $475,000 from a year earlier.

However, adjusted EBITDA increased by $825,000 year-over-year.

Now turning to the segmental results, Product Identification turned in another strong quarter with revenue increasing more than 13% to $23.4 million and double-digit percentage growth across the board in hardware, supplies and our services compared to last year’s Q4. Full year segmental revenue came in at $90.3 million, marking eight straight years of year-over-year growth. Product Identification hardware revenue notched record highs for both the fourth quarter and fiscal year, and we shipped the highest number of color printers in over two years, driven in part by continued strong demand for the T3-OPX printer. With just launched last year, the T3-OPX opened up the adjacent Product Identification market known as direct-to-product printing. Its ability to print in full color on surfaces from folded boxes to paper bags, to wooden planks and many others, the T3-OPX is the ideal product to meet the demand for a high-performance overprinting solution for brand owners and other customers across a range of end markets.

Our printer sales drive our supplies business.

So the record hardware sales we saw in fiscal 2021 portends well for our supplies business moving forward. The combination of higher revenue and cost efficiencies translated to gains in the PI segment, operating profit, margin for both the fourth quarter and the full year. Product margin for the fourth quarter was 13.2% compared with 2.5% in the fourth quarter of 2020. It’s worth noting that for the year, the segment posted an operating profit of 14.3%, which is a record for this segment.

Turning now to our Test & Measurement, revenue in the fourth quarter dropped to $6.1 million compared to $9.8 million in the same period of fiscal 2020 due to the adverse impacts of the continued grounding of the 737 MAX and the aerospace industry demand falloff due to the COVID-19 pandemic.

However, in Q4, T&M revenue did increase 19% sequentially quarter-over-quarter. That increase was in part due to a military aerospace shipment, but we are now seeing early signs of a pickup in the commercial aerospace business as well, especially in our repairs and supplies portion of that business. There are two main drivers to this recovery. One factor is the MAX’s return to service in all major markets, except China, and we’re hopeful that China will come on board soon. And Boeing’s MAX production rates are forecast to ramp up from the current 10 per month to 30 per month in the next year. Early demand is moving in the right direction. The number of carriers placing MAX orders has been increasing in recent weeks, and there are at least 13 airlines flying the MAX.

The other factor is the increasing number of passengers returning to the skies due to the rollout of several vaccines.

For instance, in the U.S., over 20% of the population has already received at least one vaccine dose, according to health officials.

While airlines are nowhere near returning to the pre-COVID levels yet, recent reports indicate that U.S. air travel has reached its highest level since the pandemic began.

Now looking at geographic mix, domestic revenue accounted for approximately 56% of total revenue in the fourth quarter compared with 63% for the same period in 2020. International revenue increased to 44% of total revenue in the fourth quarter of fiscal 2021, up from 37% a year earlier. We saw particular strength in EMEA, where we recently enhanced our marketing team. On a related note, we are also expanding our presence in China by opening an office in the Southern port city of Guangzhou, complementing our location in Shanghai’s Pilot Free Trade Zone.

Before handing the call to David, I want to first thank our team members around the globe for their dedication and commitment in fiscal 2021. Because of the critical role we play for the aerospace and medical industries, AstroNova was deemed an essential business.

All of our global facilities have remained fully operational throughout the pandemic, incorporating all of the necessary health and safety precautions. From the outset, we’ve had no severe COVID-related incidents. That is a credit to our entire team, which over the past year has worked vigilantly to keep themselves and one another safe, allowing us to continue to meet the demands and requirements of our customers.

Now, let me turn the call over to David for the financial review.

David Smith

Good morning, everyone. Thanks Greg. Greg provided a comprehensive review of our performance.

So, I’m just going to highlight a few key points from the P&L and balance sheet. To provide some context about the results and to reinforce Greg’s remarks, the Test & Measurement segment revenue was off nearly $20 million, with strong gross margin revenue. Eventually all of that is directly attributable to the two black swan events of the MAX grounding and the pandemic. The impact of significant drop like that is very difficult to make up for – on the operating income line, but we did it through a workforce realignment, reduction in outside services and other expenses, and through what I would call a digitization of the selling process in our Product Identification business, along with a number of other operational initiatives. Consistent with the goals that we indicated on prior calls, for the year, we reduced operating expenses by $7.4 million or 16% from fiscal 2020. On a percentage basis, the expense reduction exceeded the decrease in revenue by 3 points. The weather cost reductions that improved results that are seen at the gross profit line, for the full year, because of adverse mix, standard margins were down about 300 basis points, but gross margins were only down 90 basis points. But the trend within the year was better. And in the fourth quarter comparisons, while mix was still a factor in standard margins, it was less so, and gross margins were up 370 basis points from the prior year.

We expect a significant portion of the cost reduction initiatives to remain visible in the income statement in fiscal 2020. Others, for example, trade show expenses and travel will likely increase in the future as the ability to travel returns, depending on the degree of our customers’ acceptance of the transition that we’ve made together with them to remote or virtual interaction as opposed to in-person. Beginning with this fourth quarter of fiscal 2021, we’re reporting adjusted EBITDA, which is EBITDA further adjusted only for share-based compensation.

As we said at the outset of the call here, a reconciliation of adjusted EBITDA to net income is included in the press release, and it differs only very slightly from the calculations that are used in our debt covenants. Adjusted EBITDA was $3.2 million in the fourth quarter of fiscal 2021, or 10.7% of revenue, compared to $42,000 in the same period of fiscal 2020.

For the full year, adjusted EBITDA was $10.9 million, or 9.4% of revenue, compared with $10.1 million or 7.6% of revenue in fiscal 2020.

Turning to the balance sheet.

Our liquidity profile has improved dramatically. Cash and equivalents at year end 2021 were $11.4 million. Cash and equivalents at the end of the prior year totaled only $4.2 million. Debt at the end of the fourth quarter, excluding the PPP loan was $12.4 million, which is down from $19.8 million at the end of fiscal 2020 and $24.8 million at the end of the first quarter of fiscal 2021.

As we announced in this morning’s earnings release and which appears in the 8-K filing this morning with more of the details, we just entered into an amendment to our bank credit agreement, which significantly increases our credit availability and improves the term. The agreement which runs 4.5 years through September 2025 provides for a $10 million term loan in addition to a $22.5 million revolving credit facility, it also provides for substantially reduced amortization payments and fewer better structured covenants and other restrictions and some other structural improvements. At closing, our bank term loan debt was $10 million, down $2.4 million from the end of fiscal 2021, and we have nothing outstanding on the revolving credit facility. The facility also includes a $10 million so-called increase or accordion function built within it, which while uncommitted, enables streamlined and accelerated access to additional bank financing, should such a need arise. With that, let me turn the call back to Greg for closing comments.

Greg Woods

Thanks David. We navigated a challenging fiscal 2021 by focusing on the things within our control. The external headwinds of the past year have not disrupted our investment in innovation, the growth engine of our business. We remain on pace to launch at least one major new product per year, coupled with a range of technology innovations and ancillary products.

Now, David and I will be happy to take your questions. Operator?

Operator

Thank you, sir. [Operator Instructions] Thank you.

Our first question comes from Samir Patel with Askeladden Capital.

Samir Patel

Hey guys, congrats on a great year, all things considered.

Greg Woods

Yes, thanks Samir.

Samir Patel

So I guess the first question, I didn't see the actual credit agreement in the 8-K, maybe it will be filed, but once you get the PPP loan paid off, are there any remaining restrictions on your ability to allocate capital?

Greg Woods

Nothing significant.

Samir Patel

Okay.

And so with that, I mean that's a pretty big, it seems like you've built in some pretty big capacity there.

So are you looking at M&A opportunities or kind of what are you thinking as you come out the other side of COVID?

David Smith

I'll take a crack at that and then Greg can chime in as well. I'm sure. Clearly, the first thing we want to do is make sure that we have enough capacity to support ongoing operations. At some point we're going to start to grow again, we'll need working capital to support the business, that's the number one requirement. And there is a level of capital that needs to be reinvested in the business, and that will also be critical. Then beyond that, of course, if there are other external growth opportunities, we'll have some capacity to handle those. Greg?

Greg Woods

Yes, maybe just to answer a little in a simpler manner, we take a look at capital allocation and where is the best return on investment going to be looking at it. There is obviously some short-term things that typically looking at a medium to long-term horizon for that.

As you know in our past that we have done a number of acquisitions, we do have an active pipeline that where we really applicate through acquisitions and that is part of our growth strategy along with product development and the organic growth of the business.

So it'll be a combination and we're always looking for where is the best place to invest that capital. But the great thing about this agreement and it's with our existing bank we’re able to renegotiate this agreement and I think it gives us plenty of fire power if we find a good acquisition or a good investment opportunity to further accelerate the growth in the business.

Samir Patel

Great. And then on the cost reductions, I mean, you actually kind of discussed a little bit saying that some of it's going to stick and obviously some of it may come back. Kind of any more color there, so, I mean, for example – has talked about being able to get back to sort of prior margins at rate 42 on the MAX as opposed to where MAX rates were before.

So I'm just kind of curious, like when you guys think that you'll – how your profits will evolve kind of as the aerospace part winds backup?

Greg Woods

Yes.

So the aerospace part of – that doesn't drive a big part of the cost. We had to keep a kind of a critical mass of people in place, it's a very specialized business.

So more of the cost reductions happened kind of in the general business, as well as product identification side of it.

So I think what you will see is probably not in the first half very much, but the trade shows will open up again, travel opportunities will open up again. Those two spending categories have been dramatically reduced for us for obvious reasons.

On the aerospace side, it is a high margin business in some areas, some places, it depends on which product and which opportunities. But in general, we're kind of under utilizing our resources right now with respect to the facilities.

So as that ramps up, we'll see some nice margin improvements in that segment of our business as well. And I think it's pretty well known what that curve is, it looks like a little more hopeful than what people predicted back at the end of last year, so we'll keep a close eye on it. But the fact that in the U.S. that posting higher and higher records of passenger travel that's a good sign, which perspective the MAX, they've now got, I think it's about 13 airlines around the world that are flying that plane and Boeing is building back there a backlog again, which is good to see.

Samir Patel

Yes. Congrats. And then the last question you mentioned, the major new product introductions.

You usually talk about those a little bit more, anything specific you want to call out for 2021, or you’re going to keep us toasted?

Greg Woods

I'm probably going to keep you a little bit in the dark for right now, but that works anything like it has in the past years, we typically have one of those – I should say product identification releases in the fall trade show season.

So I'd say, keep a look out for that, maybe at PACK EXPO, maybe a little bit later, but that's – there is things like that in the works.

Samir Patel

Understood. Thanks. Appreciate it.

Greg Woods

Thanks.

Operator

Thank you.

Our next question comes from Dick Ryan with Colliers.

Dick Ryan

Thank you. Hey Greg, you mentioned military shipment for aero in Q4. Can you give us kind of an order of magnitude of that and is it still ongoing or was it completed?

Greg Woods

Yes, as far as the order of magnitude, I don't want to comment on that specifically. I mean, it certainly wasn't a lion share of what shipped up. It was part of an ongoing contract that we have, it's a multi-year contract.

I think I mentioned in earlier calls, we can pick up some of these during the course of the year, last year, and I think there are multi-year agreements, it’s a little bit unpredictable exactly when they give us the releases.

So it's hard to call, this quarter, they're not hitting them on an annual basis, we have a fairly good idea of how that's going to drop in and we're working on some other ones as well.

So hopefully we can add to that.

Dick Ryan

Okay. And you just spent a little bit more time on the aero side, obviously with the Airbus, your standard offering there, the max, it's kind of airline decision, any sense of Boeing had inventory of your printers or are you starting to ship with kind of a clean inventory slate from them?

Greg Woods

Yes. Typically we don't keep a lot of inventory of our printers, because that's buyer furnished equipment.

So the airlines actually purchased the printers for us for their particular aircraft, as this is going into production and we ship those to Boeing, so they can be installed on that airlines production tail.

So we are starting to see the order comes back in from the airlines for us to ship to Boeing. We don't get visibility on what they have for military, so they keep some for last minute emergencies and things like that, but they don't typically keep a lot of inventory of our printers.

Dick Ryan

Has COVID impacted, however, airlines are viewing either new printers or upgrading old printers that are already installed, any sense of airlines making kind of different decisions post-COVID?

Greg Woods

Well, we're not 100% post-COVID yet, but where we'll see the impact there, I mean, we had a couple of announcements last year of airlines actually adopting our newer printers. We do expect that kind of upgrade program would continue, and our ToughWriter brand has the number of superior features and functions compared to some of the other brands that we acquired.

So I think we'll see this more of a migration to our ToughWriter, it's a multi-year process, right as in the airline industry things tend to move fairly slow. But we will see that – another thing that can reengaged with a number of these airlines, we had several potential deals in the works prior to COVID for people to upgrade their old printers to our newer printers. And one of the biggest things is the weight is about half the weight of a typical competitive model.

So we're reengaging with some of those airlines now, as they get on better financial footing, they're able to make those kinds of decisions. And we're seeing that now with a few airlines already.

Dick Ryan

Okay.

On the supply chain side for both ends of the business, we hear of obviously electronic shortages, we hear of plastics, you've got some supply issues up and down the line. How has that impacted you guys? I didn't see any boost in inventory.

So you're building kind of some stockpile there, but how are you seeing your supply chain?

Greg Woods

We're seeing things link in out in a certain areas, because of the – our supply chain is fairly long, right, so some aerospace products especially are six to 12 month delivery. The only good thing about that is, things dropped off, so quickly that we had a huge surplus.

So the surplus is actually in this case kind of a good thing, because it's cushioning some of these disruptions we're seeing. With transit times, things we shipped by sea, I think you know all the stories, right? Ships are sitting out there, trying to get into docs, or they're stuck in a canal somewhere. Those things haven't been critical for us because we have a pretty big buffer. And we do that on purpose too. We didn't have it quite as high as it was because of the downturn, but in this year it's actually turning out to be a good thing because we haven't really seen things that are disrupting our operations in any significant way.

Dick Ryan

Okay. Thank you.

Greg Woods

Sure. Thanks, Dick.

Operator

Thank you.

Our next question comes from George Melas with MKH Management.

George Melas

Hi. Good morning, Greg and David. Congrats on a good year, certainly an interesting year. Kind of sort of a follow-up question on aerospace, I think you guys noted that it was down $17 million year-over-year. Is there anything that makes you doubt whether you can go back, whether that business can go back to the revenue level of fiscal 2019 or fiscal 2020?

Greg Woods

Yes.

Just one, George, quick correction, we went through a lot of numbers quickly there.

So the Test & Measurement segment, which of course is largely aerospace, decreased by $19.6 million.

So that was the aerospace related hit.

Our overall AstroNova revenue was down $17.4 million year-over-year, just kind of clarifying that. But to your question there, we do expect that it's going to grow back, but it depends who you listen to you, right? Some people are saying two years, between two and four years is what people are predicting to get back to those kinds of levels. The one thing that we do know from a couple points of view, people switching to the ToughWriter like I talked about our brand, tends to be a higher volume product for us. This is our main brand and the margin, therefore, a little bit better on that.

So the more people switch to that brand, that's been overall improvement to our bottom line.

So the other thing that's going to help us is, having to reduce costs and be more efficient on things this past year, we've learned a few things as well.

So as we ramp back up, we're fairly confident that you're going to see higher margins on the way back up as we get back to that level.

So, whenever we get there, it's hard to predict. But getting back to those kinds of revenue numbers, you'll see higher margins if we can stick to the plan that we have in place right now.

George Melas

Okay. And from a revenue perspective, from a market share perspective with airlines with Airbus, is there any meaningful change in the last two or three years?

Greg Woods

We picked up a little bit of market share, so we have a substantial market share already.

So we kind of added to that a little bit. I don't expect it to decrease, but you never know what's going to happen out there. And going forward, really our game plan and we've talked about this before, is like our networking products adding other products to the mix since we're a supplier right now to all of the major OEMs, some 200 airlines we’re a direct supplier to, and a lot of the tier one companies like the Honeywell and Telesis in the world, for example.

So our focus really now is kind of on the upgrades and adding more products to the mix.

George Melas

Okay, great. And then a question for David. David, the cost came down quite – the OpEx came down significantly this coming – this year.

I think sort of sequentially they're picking back a little bit. What do you expect in the coming year from an OpEx perspective?

David Smith

We're not going to give any specific guidance on our OpEx expectations. What we have said and I'll just reiterate is that we do expect a fair portion of the operating expense reductions that we've been able to obtain to stick and to be available to us this coming year. We've been a little bit cautious and letting people know that there are some expenses that probably will pick back up.

So it's going to be not 100% of what we've been able to reduce. We'll get to keep, but it'll be a substantial portion of it.

George Melas

Okay. Thank you very much.

Operator

Thank you.

Next, we have a follow-up from Samir Patel with Askeladden Capital.

Samir Patel

Hey. I just wanted to follow-up on the aero side. I don't know if you still disclose the breakdown of supplies and hardware in that business, but I was just curious, kind of independent new two drivers, right? You have the production ramp of the MAX and then other aircraft back to pre-COVID levels over the next two to four years, as you said. And then you hopefully have sort of the shorter-term.

You talked about the pickup in the U.S., domestic travel, for example, on the supply side.

So I was curious if you have any thoughts there.

David Smith

Yes, we don't disclose it down at the segmental level, but what you see first is, the more the planes fly, we aimed at this kind of before, the more the planes are flying, the more they use our supplies and the more they'll break printers or our cup of coffee gets dumped in, and whatever happens to them, right, over 20 years or 10 years, some they can wear out.

So our MRO portion of the business, we've seen that pickup faster than the new printer orders. And I would think that would be the case that'll tend to level off and get back, it’s not back to where it was, but that particular part of the business is probably a 40% back. And as the OEM picks up and more printers are out there that kind of helps support that business as well, but it's a smaller part of the overall aerospace contribution.

So it's helped. It's great to see that coming back and that's driven basically by passenger revenue model, the more that they fly, the more we see that business pickup. But on the new equipment, it's really based on aircraft production kind of supplemented by upgrades.

Samir Patel

Understood.

And sorry to be nitpicky, David, but you mentioned RPKs just now. Wouldn't it be more driven just by flights? Like, is it actually – I would assume the amount of paper used during a flight is kind of constant whether the load factor is like 5% or 95%.

So is it more the number of flights or actually the RPKs?

David Smith

Yes, it's flight, but it's also the distance of the flights too.

So it's – maybe a better measure…

Samir Patel

Okay.

Okay. Understood. Thanks. That's all I have.

Greg Woods

Sure.

Operator

Thank you. This concludes today's Q&A.

Now I’d like to turn the call back over to Mr. Woods for closing remarks.

Greg Woods

Okay.

So thank you everyone for joining us this morning, and we look forward to keeping you updated on our progress in the future. Have a good day. Bye now.

Operator

Thank you, ladies and gentlemen. This concludes today's teleconference.

You may now disconnect.