AstroNova Q3 2024 Earnings Call Transcript

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December 6, 2023

There are 4 speakers on the call.

Operator

Good morning, and welcome to the AstroNova Fiscal Third Quarter 20 24 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Scott Solomon of the company's Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

Speaker 1

Thank you, Carla, and good morning, everyone. With me on this morning's call are Greg Woods, GastroNova's President and Chief Executive Officer and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's segment operating highlights. David will take you through the financials at a high level. Greg will make some concluding comments and then management will be happy to take If you have not received a copy of this morning's earnings release, please go to the Investors page of the AstroNova website, at www.astronovainc.com.

Speaker 1

Statements made on 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 1995. 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 6, 2023. AstroNova undertakes no obligation to update these forward looking statements.

Speaker 1

For other information regarding Forward looking statements and the factors that may cause differences, please see the Risk Factors in AstroNova's Annual Report and Form 10 ks and other filings the company makes with the On today's call, management will refer to non GAAP financial measures. AstroNova believes that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results and also helps investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non GAAP basis. A reconciliation of the non GAAP financial measures to their most directly comparable GAAP measures is available in today's earnings release. And with that, I'll turn the call over to Greg.

Speaker 2

Thank you, Scott, and good morning, everyone. We began the second half of fiscal twenty twenty four with a significantly more profitable third quarter, Where operating income increased more than threefold to $4,600,000 operating margin improved 890 basis points to 12.3 percent and adjusted EBITDA hit an all time record of 81% to $5,700,000 or 15% of revenue. This profit improvement is a testament to the great agility, hard work And execution by our teams around the world. The increased profit generation was achieved despite an 11% Year over year revenue decline in our Product Identification segment. This was primarily from the supply side of the business The lingering negative impact of an ink quality issue from one of our suppliers has decreased ink utilization on some of our printers.

Speaker 2

To a lesser extent, the temporary effect of higher customer ink inventories ahead of a price increase from that same supplier And to a degree, the impact of exiting certain product lines as part of the restructuring we announced last quarter. We believe the ink related slowdown issues will abate as we move through the next few quarters. Additionally, we expect to realize strong margins from several new product releases as they gain traction in the market. Meanwhile, the commercial aviation industry continues to experience robust demand closing in on and in some cases exceeding the 2019 highs. Both aircraft operating hours and new aircraft orders are up markedly.

Speaker 2

These trends are expected to continue and bode well For the Aerospace product line within our Test and Measurement segment in the Q4 of fiscal 2024 and beyond. Now let's review our segment results in a bit more detail, starting with the PI segment. Operating profit increased 62% to $4,800,000 with margin up to 820 basis points to 18.1%. The vastly improved performance primarily reflected favorable product mix as some of the margin improvement actions we implemented earlier took hold. Additionally, we reduced expenses, had lower warranty costs and improved operating efficiencies from the restructuring.

Speaker 2

We have simplified the PI segment by transitioning more printer manufacturing from Asia and West Warwick To our Astra Nova Astra Machine Plant rather in Illinois, exiting low margin or low volume label printers, Consolidating international sales and distribution facilities and streamlined our global channel partner network. As an ongoing fundamental of our strategy, we continue to invest in new products that meet our customers' needs For printing solutions that are compact, efficient and flexible. In the Q3, we unveiled 3 new printers, The QuickLabel QL900, the TrojanLabel T2 Pro and the TrojanLabel T3 Pro. The Rugged QL900 is a desktop inkjet label printer designed for full color labeling applications. Manufactured at our Astromachine Plant in Illinois.

Speaker 2

The product features a touch screen interface and internal job library, Enable users to easily manage printer setup and operation. The new T2 Pro is the latest addition to our TrojanLabel brand of Compact digital label presses targeted towards industrial and professional printing segments. With a print width of 12.75 inches And a print resolution of 1600x1600 dots per inch, the T2Pro offers superior cost of ownership across all available aqueous inkjet The T3PRO is a compact CMYK digital print module ideal for OEMs that want to easily integrate a print station to conveyors or other specialty equipment to offer full color digital printing solutions for envelopes, corrugated And a wide variety of flat surface products. In addition to those 3 printers, We recently unveiled the VF-two eighty, a high speed commercial vacuum feeder. This product is designed to handle a variety of materials like bags, envelopes, Heavy cardstocks, corrugated cardboard, jewel cases, calendars and sheet stocks.

Speaker 2

When integrated with the Trojan label T3 OPX, The VF-two eighty offers a modular direct to package post printing system that enables high quality Full color automated printing. Customers benefit from faster time to market and reduced waste. In recent months, we've had the pleasure of integrating and interacting with the thousands of Current and prospective customers who demoed our digital label printers, envelope printers and direct to package printing solutions at major trade shows Such as PAC Expo in Las Vegas, Label Europe in Brussels and the PRINTING United Expo in Atlanta. What we heard from customers is clear. Within the digital printing market, what differentiates AstroNova is our ability to provide customers with a unique Total Printing Solutions.

Speaker 2

We consistently earn high ratings not only for the breadth of products we offer, but also for the consultative services and support that we provide that tailors a solution to each customer's application and business needs. For instance, within our Astra machine subsidiary, we are continuing our product innovation initiatives With the upcoming launch of 2 new digital printing and addressing systems, purpose built for a large OEM customer. These products embody the voice of the customer methodology that is a central tenet of our AstroNova operating system. Engaging with customers on the design and engineering of new products has enabled us to apply that valuable learning to gain traction in both existing and new market verticals. Switching to the Test and Measurement segment.

Speaker 2

3rd quarter revenue increased 16% year over year to $11,000,000 With growth in both our Aerospace and Test and Measurement product groups. Segment operating profit was $2,600,000 Or 23.2 percent of revenue compared with $1,700,000 or 18 percent of revenue a year earlier, driven primarily by favorable product mix and the impact of operating leverage on the higher revenue in that unit. As we've discussed on prior calls, we are gradually upgrading OEM and direct airline customers to our more advanced top rider branded printers from the other 3 brands in our portfolio. Pairing the number of brands that we offer will allow us to reduce our overall manufacturing costs, thereby driving higher margins. By the end of fiscal 2027, we estimate that 9 out of every 10 printers we ship will be a ToughWriter Compared with a little less than 4 in every 10 today.

Speaker 2

As we execute that transition, we want to also point out to investors That an additional benefit of this transition will be that the royalty we pay to Honeywell International under our asset purchase and licensing agreement will decline And it will disappear completely at the end of the Q3 of fiscal 2028. We will not be forecasting that decline for you, But we will report on that as it happens beginning next year. Finally, I'd like to mention another platform design win for our ToughWriter printer. The TUF Rider will be standard equipment on Boeing's new 777X, a wide body twin engine jetliner expected to enter service in 2025. Last month, our aerospace group exhibited at the Dubai Air Show, where I had the privilege of touring the 777X flight test aircraft And hearing from a number of commercial aircraft airline pilots about the favorable experiences with our printers.

Speaker 2

An Embraer captain captured it best when he referred to our printer as a lifesaver. We agree. With that, let me turn the call over to David for some further financial comments.

Speaker 3

Thanks, Greg, and good morning, everybody. I'll reinforce and add some comments about the Q3 financial performance. As Greg said, total revenue for the quarter was $37,500,000 down about 5% year over year with lower revenue in the PI segment, partly offset by growth on the test and measurement side. Hardware revenue of $12,900,000 was about 8% higher than last year's Q3 And supplies revenue was down about 13% to $20,000,000 while the service and other revenue grew about 4% to 4,700,000 Domestic revenue was $21,800,000 for the Q3, 55.8 percent of the total compared with 57% in the year earlier period. International revenue was $16,600,000 or 44 percent of revenue compared with 43% in the Q3 of fiscal 2023.

Speaker 3

Gross profit increased 770 basis points to 39.4% in the 3rd quarter, Driven by better product mix, lower manufacturing expenses and better absorption and reduced Of the improvement, the directly trackable impacts on the PI segment restructuring benefits Was approximately $450,000 in the 4th quarter 3rd quarter rather and that impacted both gross margin and operating expense. Operating expense declined about 9% in the 3rd quarter to $10,200,000 on a non GAAP basis. This and the factors Craig outlined were why the operating income increased more than 2 fold to $3,600,000 while non GAAP operating margin improved over 7 10 basis points to 12.3 percent. On the bottom line, we reported net income of $2,800,000 or $0.37 per diluted share for this just finished quarter versus $289,000 or $0.04 per diluted share in the year earlier period. But keep in mind that the GAAP net income for the Q3 of fiscal 'twenty three included transaction costs $540,000 or $0.07 per diluted share Associated with the August 22 acquisition of Astra Machine.

Speaker 3

On a non GAAP basis, net income for the Q3 of fiscal 'twenty three was $0.11 per diluted share. Adjusted EBITDA in the 3rd quarter of this year was 5.7% or 15% compared to $2,400,000 or 6 percent of revenue in the same period last year. Excluding transaction costs, last year's Adjusted EBITDA for the 3rd quarter was $3,100,000 or 8%. Bookings for the Q3 of fiscal 'twenty four increased 1% to $35,500,000 from $35,000,000 in the Q3 of last year. Backlog as of October 28, 2023 decreased 20% The $31,200,000 from $39,300,000 a year ago, but this decline It's largely due to the timing in the PNM segment and is not indicative of what we expect in the Q4 this year.

Speaker 3

When we expect the income statement overall to be consistent with the 3rd quarter. As previously discussed, we had identified about 150 printers sold to Customers that were affected by the faulty ink and we're working with those customers to either repair or replace the effective printers on a gradual basis. We anticipate this will be largely done by the end of this fiscal year, at the end of January 2024, With maybe some of it trailing into the Q1. In Q3, we incurred cost of about 240,000 for that program, which have been reserved for in connection with the restructuring. Inventory reduction was modest, While the supply chain challenges are abating, we're still recovering on the inventory level reduction test that we have.

Speaker 3

Inventory was $46,300,000 at the end of the quarter, down 9% from the end of the fiscal 'twenty three. Term loan debt at the end of the 3rd quarter was $9,500,000 compared with $12,000,000 at the end of last fiscal year. The revolving credit is down $1,000,000 to $14,900,000 Our expectation is to generate cash from earnings and working capital reduction In Q4 and to continue the current focus on using available cash to reduce debt. So I'll turn the call back to Greg for closing comments.

Speaker 2

Thanks, David. Our operational and financial momentum entering the final quarter of fiscal 2024 is strong. The recently completed strategic restructuring has Significantly improved the cost structure and margin profile of the business and we expect both segments to perform in line with these results again in the 4th quarter. The restructuring of our PI segment allows us to focus on those products with the strongest volume and margin potential, While continuing to drive demand through innovative new solutions such as the QL900, the T2 Pro and the T3 Pro. And we're very excited about the new OEM products in our Astra machine pipeline.

Speaker 2

In the Test and Measurement segment, The key demand drivers are commercial air traffic, new aircraft orders and OEM market forecasts, all of which are pointing up into the right. Based on strong demand, high barriers to entry and the extended nature of the contracts, we feel very good about the prospects for our Aerospace Products Group over the long term. Now with that, I'll turn the call back to the operator for questions.

Operator

Thank you, Greg.

Speaker 3

And

Operator

We can now pause here briefly to wait for questions to be registered. So we have no questions registered at this time. So with that, I will hand back to Gregory for final remarks.

Speaker 2

Well, thanks everyone for joining us here this morning. As always, we look forward to keeping you updated on our progress and hope you have a wonderful holiday. Bye now.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect your line.

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AstroNova Q3 2024
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