AstroNova, Inc. (NASDAQ:ALOT) Q1 2021 Earnings Conference Call June 11, 2020 9:00 AM ET

Company Participants

David Calusdian - Investor Relations
Greg Woods - President and Chief Executive Officer
David Smith - Chief Financial Officer

Conference Call Participants

Dick Ryan - Dougherty & Company

Operator

Good morning and welcome to the AstroNova First Quarter Fiscal 2021 Financial Results Conference Call. I will now turn the call over to David Calusdian, President of the company’s Investor Relations firm, Sharon Merrill.

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 make a few comments 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 historical 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, June 11, 2020. 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.

I will now turn the call over to Greg.

Greg Woods

Thank you, David. Good morning, everyone and thank you for joining us today. These are unprecedented and difficult times, particularly for those on the frontlines of the COVID-19 crisis. But before we get into the details of the quarter, let me publicly acknowledge the doctors, nurses and other healthcare first responders in our home state of Rhode Island and around the world for their heroism and personal sacrifice in battling the pandemic. At AstroNova, the health and well-being of our employees is a top priority. I am pleased to report that the early actions we took to shift the significant number of our global team to offsite working, while enhancing our cleaning and protection procedures in line with government and health agency requirements that our production facilities have proven to be successful. Throughout our facilities around the world, we have maintained production while keeping the health and safety of our employees, customers, suppliers and communities at the forefront of our attention.

I want to recognize the entire AstroNova team for their unyielding commitment during this unique period. They have done an outstanding job supporting our customers and one another. Their dedication makes it possible for us to continue providing our customers with the highest quality products and services everyday. Not surprisingly, our first quarter results reflected the widespread economic disruption caused by COVID-19, which has touched virtually every industry in nearly every geographic region. In terms of our business, the impact was most pronounced in the aerospace unit of our test and measurement segment. Test and measurement revenue was down about $4 million or 30% from the same period a year earlier. The effect of the virus on test and measurement in Q1 has only compounded the disruption created last year by the extended grounding of the Boeing 737 MAX aircraft.

In the wake of the pandemic, aerospace OEMs have cut their production forecasts and airlines have dramatically scaled back their flight schedules, which of course means, fewer planes in service. I know that everyone is interested in when we expect this downtrend – downtrends to stabilize and industry momentum to pickup. Obviously, it’s a fluid situation with a lot of variables. Based on the current environment, we expect results in the second quarter to be weaker than the first quarter. That said, we are seeing encouraging signs for gradual improvement beginning in the second half of the fiscal year. Airlines are beginning to restore flights in response to improving demand for summer air travel. And Boeing restarted the 737 MAX production line at the end of May and is planning for the return to service of the MAX with deliveries scheduled to resume in their September quarter.

And while in general, production rates have been revised downwards in response to the new market environment, I think it’s important to keep two things in mind. First, the recovery of the commercial aerospace industry from this downtrend will be paced by narrow-body airplanes like the 737 MAX and the Airbus A320. These aircrafts are very fuel efficient and provide more mission flexibility to address the evolving needs of the global market than their wide-body counterparts. As a world leader in flight deck printers, we serve both segments. But narrow-body aircraft sales make up the majority of the market and they are growing at a faster rate. That trend was a major driver in our decision to acquire Honeywell’s narrow format printer business in 2017. The second point is that while it will not only take time for the industry to return to pre-COVID levels, the fundamentals of the business are strong, which will drive air travel rebounds and we are well-positioned to capitalize on the upturn.

Turning to Product Identification segment, revenue was down about $1.2 million or 5% from the second – from the record-setting first quarter of fiscal 2020. PI segment relies heavily on trade show participation, in-person sales calls and product demos to generate demand. The stay-at-home mandate, social distancing measures and bans on large gatherings severely restrict those marketing opportunities. While we have just recently started to make sales calls again, trade shows and other key marketing events that have either been canceled, delayed until late in the year or changes to a virtual format, these market realities that negatively impacted our new printer sales.

On the other hand, we are very pleased with the performance of our supplies business in the quarter. Company-wide, supply has accounted for approximately 62% of revenue, up from approximately 55% in the prior year quarter. This increase speaks in part to the ramp up of our new higher throughput printers that we introduced last fall. In addition, we are seeing a strong uptake of labels and other consumable media for both new and existing customers in specific end markets such as cleaning and sanitation, medical supplies and pharmaceuticals where demand is especially robust.

Production Identification segment operating profit improved to $3.1 million or 14.1% of revenue versus $2.9 million or 12.2% in last year’s first quarter. Expanding our recurring revenue stream is the key element of our overall growth strategy. To maximize that growth, we need to remain agile and continue to anticipate the needs of customers in these rapidly evolving market conditions. Our team has continued to perform well in that regard. In recent months, we have enhanced our e-commerce initiatives with the creation of our GetLabels business unit and strengthened our digital engagement marketing with the just launched new Product Identification website, astronovaproductid.com. While we are working aggressively on these and many other top line improvement initiatives, we also continue to implement additional cost mitigation measures, such as reduction in executive compensation and other resource allocation adjustments to lessen the financial impact of COVID-19 on our business and enhance cash flow.

David will take you through more of the details and then I will be back with some closing comments. So, let me now turn the call over to David for his financial review.

David Smith

Thank you, Greg and good morning everybody. Rather than repeating all of the numbers in this morning’s earnings release, let me highlight some of the cost control initiatives that Greg alluded to in his remarks.

As noted on our Q4 call, in response to lower volume – lower sales volume related to the 737 MAX grounding, we began implementing a 5% headcount reduction and other measures expected to generate savings of approximately $1.5 million to $2 million on an annualized basis from the run-rate towards the end of last year. This quarter, once the COVID-19 situation became clearer, we announced additional cost reductions that included an across the board freezing of executive employee compensation at 2019 levels. We also applied for and received a $4.4 million loan from the small business administration’s Paycheck Protection Program, which has put us in a significantly better liquidity position and we expect to be able to comply with all the terms of that program.

With the aircraft OEMs now bringing down their build forecasts, we are as Greg said evaluating additional cost reductions given that the industry will take some time to recover once the pandemic is behind us. From an expense perspective, it’s worth noting that due to decline in aerospace printer volume in the quarter, the royalty payments to Honeywell on our asset purchase and license agreement were lower than last year’s first quarter by $600,000. In addition by pushing out some projects, we have been able to reduce outside service and consulting arrangements, the impact of COVID on trade shows, some related advertising expenses and lower company travel along with lower incentive compensation, all reduced variable expense spending. All of this combined with the impact of the more permanent changes I referenced a minute ago resulted in an overall operating profit reduction of $1.6 million in the current quarter compared to the quarter last year.

It’s always important to note when reviewing our results. The heavy non-cash amortization related to acquisitions, which was $1.058 million in the quarter. Other non-cash charges were depreciation of $511,000 and stock-based compensation expense of $495,000. While reported EPS on operating margins have obviously taken a negative trend in the current difficult environment, I would like to point out that our EBITDA margin was still 6.7%. As we will disclose an update in more detail on our [indiscernible] we are in the process of renegotiating our credit facility with our existing vendor and believe that we will read a satisfactory arrangement. Regarding our 10-Q due to the disruption caused by COVID-19, we are taking advantage of this SEC's filing deadline extension and expect to file our 10-Q sometime probably on the 19 or 22, but certainly no later than the 26 as we said in the 8-K we filed this morning. On the IT front, we continue to make good progress on our ERP conversion to the cloud-based NetSuite software albeit at a slower pace due to some of the remote working inefficiencies. We are working diligently to complete this project domestically as soon as we can.

With that, I will turn the call back to Greg.

Greg Woods

Thanks, David. In summary, we continue to take steps to mitigate the financial impact of COVID-19 on our business, while preserving and improving liquidity. We have accelerated some of those cost reduction measures in recent weeks to align with adjustments in certain customer forecasts. At the same time, we remain committed to supporting our key strategic objectives so that we are well-positioned to take advantage of future growth opportunities post-COVID. Based on the current environment, we expect results in the second quarter of FY 2021 to be weaker than the first quarter. We anticipate gradually improving results beginning in the second half of the year contingent on the resumption of business investment and economic recovery in our end markets.

With that, David and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Dick Ryan of Dougherty & Company.

Dick Ryan

Thank you. Hey, Greg on the outlook for Q2 sequentially weaker is that for both segments or there is one going to perform a little better than the other?

Greg Woods

It’s again particularly be driven by the aerospace reduction there, Dick, it’s as you know Boeing just announced May 27 the restart the MAX, so that’s pretty late in the game as the slow ramp up, so primarily driven by the aerospace drop off.

Dick Ryan

Okay. How will product ID look sequentially?

Greg Woods

Again, it’s a little bit hard to tell on the hardware side and on the supplies as I mentioned in my comments that seems to be holding up fairly well. I mean again in these kind of times, it’s hard to predict everything exactly. Right now, if you look at our variability band about our forecast, it’s wider than I have seen it since I have been at AstroNova, but we are encouraged by the results so far and that continued into many. We have no reason to think it’s going to make a dramatic turn one way or another. We think it should to continue on the trend that is on.

Dick Ryan

Okay. How was the – can you tell what the inventory is like for the flight deck printers from Boeing’s perspective. I mean, when they increase their production, will you see it immediately or is there printers in inventory that it may hit you a little bit later?

Greg Woods

As far as we know, Boeing has a fairly low inventory especially with the MAX with regard to our printers mainly because they are purchased by the airlines themselves when their planes are coming down the production line. So, we actually get the order from the airline itself, because it’s a buyer furnished equipment. So, ABC airlines would say we need 5 printers, they would place the order on us and we would ship to Boeing. So they are all – everyone is well aware at this point of what the production rate is at Boeing. So all of those forecasts have been adjusted as far as we know there shouldn’t be much inventory buildup.

Dick Ryan

Okay. Hey, Dave, I missed your comments on the credit facility, are you working on a new one and how are you sitting with your covenants?

David Smith

Dick, my comment on the script was that we are in the process of working through that. We expect to do so successfully. It’s still in process and we will have more to disclose when we file the 10-Q shortly. I don’t want to get into the details of where we stand, but I do think it will be resolved successfully.

Dick Ryan

Okay, great. Thank you.

Greg Woods

Thanks, Dick.

Operator

Thank you. At this time, I would like to turn the call over to Gregory Woods for closing remarks.

Greg Woods

Okay. Thank you all for joining us here this morning. We look forward to keeping you updated on our progress and stay well.

Operator

Thank you. This concludes today’s conference. You may now disconnect.