Enovix Q2 2024 Earnings Call Transcript

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September 6, 2023

There are 9 speakers on the call.

Operator

Good morning, and thank you for joining the AstroNova's Fiscal Second Quarter 2023 Financial Results Conference Call. Today's call will begin in a few moments' time. CPAD. Thank you for your patience. Good day, and welcome to the AstroNova's Fiscal Second Quarter 2023 Financial Results Conference Call.

Operator

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 Associates. Please go ahead, sir.

Speaker 1

Thank you, Carla. Good morning, everyone, and thanks for joining us on our fiscal Q2 2024 earnings call. Hosting this morning's call are Greg Woods, AstroNova's President and Chief Executive Officer and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's operating highlights. David will take you through the financials at a high level.

Speaker 1

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 this morning. If you don't have a copy, please go to the Investors page of the AstroNova website, www.astronovainc.com. Please note that 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.

Speaker 1

Accordingly, actual results could differ materially except as required by law. Any forward looking statements speak only as of today, September 6, Statements and the factors that may cause differences, please see the risk factors in AstroNova's annual report on Form 10 ks and other filings the company makes with the Securities and Exchange Commission. On today's call, management will be referring 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. It also helps investors who wish to make comparisons between AstroNova and other companies on both a GAAP and a non GAAP basis.

Speaker 1

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. Good morning, everyone, and thank you for joining us. At the beginning of August, we announced the strategic realignment of our Product Identification segment, an initiative designed to further capitalize and the synergies of last year's acquisition of Astra Machine. That restructuring is reflected in the 2nd quarter financial results that we reported this morning. As a reminder, the specific actions we have taken to realign the segment include: 1st, Transitioning more of our PI printer manufacturing from Asia and our headquarters in West Warwick, Rhode Island to our Astra machine plant in Elk Grove Village, Illinois.

Speaker 2

2nd, rationalizing our combined AstroNova and Astro Machine PI product portfolios By exiting certain lower margin or low volume label printers, we concentrate on higher margin product lines with advanced functionality and greater demand and third, consolidating our international PI sales and distribution facilities and streamlining our global channel partner network. These actions enable us to concentrate the segment's manufacturing, marketing and sales resources on the highest return opportunities. This in turn will provide the best products and services to our customers. Although the realignment had a negative effect on our GAAP performance in the Q2, it puts us in a position to achieve an anticipated annualized cost savings of $2,400,000 and create a stronger, more resilient business in the quarters to come. Beyond the restructuring impact, during the Q2, we continued to make operating efficiency improvements And we posted double digit year over year top line growth.

Speaker 2

The key growth drivers were Astra Machine, which we acquired in the fiscal Q3 of last year and the continued momentum of the commercial aviation industry, which is served by our Aerospace product line within our Test and Measurement segment. Looking at our performance by segment, Product Identification revenue was up 10% in the quarter and excluding the restructuring charges, segment operating profit improved by 80%. Over the past several quarters, the performance of the PI segment has been tamped down as we work through our program to retrofit a large number of high volume printers Sidelined due to a supplier's ink quality issue. As an integral part of our restructuring effort to improve the PI segment, We established a reserve to account for the cost of an accelerated effort to rapidly repair or replace the effective printers in the field so they can more quickly be returned to full service. We expect to complete this retrofit program by the end of the current fiscal year.

Speaker 2

Product development continues to be and represent an important part of a growth engine for the PI business, enabling us to increase the breadth of our solutions for brand owners, OEMs and commercial printers. This quarter, We plan to introduce 4 innovative new products to the market for applications, including labeling, direct to package overprinting And high speed mailing and addressing. Earlier this year, we introduced the QL900, A high speed, high performance label printer, printing at speeds of up to 12 inches per second, the QL900 prints vibrant wide format color labels at a resolution of 1600 dots per inch, making it a robust solution for the most demanding applications. Our customers will have the opportunity to see these and other products in action at several major industry events taking place in the coming weeks. These events include PAC Expo in Las Vegas, Label Expo Europe in Brussels and the Printing United Expo in Atlanta.

Speaker 2

Turning to our Test and Measurement segment. Revenue also increased 10% year over year in the second quarter, Reflecting the continued strong performance of the aerospace market, robust airline passenger traffic and increased aircraft deliveries are driving stronger demand trends for our aerospace printers, supplies and services. Segment operating profit was down year over year, however, due primarily to a higher than normal adverse mix of older generation product shipments in the quarter. We continue to focus Upgrading and transitioning aerospace customers from these older generation products to our newer, more advanced, tough Raider family of printers. As we gradually consolidate our product offerings into fewer high volume SKUs, we expect the resulting manufacturing efficiencies will positively impact Segment Margins.

Speaker 2

And with that, I'll hand over to David for the financial review.

Speaker 3

Thank you, Greg, and good morning, everybody. I'll start with an overview of the impact of the restructuring charges On our GAAP and non GAAP results in the quarter. Restructuring expenses totaled 2 point $7,000,000 this quarter. It consisted of about $2,000,000 for the write off of certain PI inventory, $611,000 in severance cost spread across our geographic footprint, But concentrated primarily in the U. S.

Speaker 3

And EMEA and $48,000 in lease abandonment expenses. The inventory written up was for low volume, lower margin products. This action allows us to concentrate More efficiently on a small set of higher margin products that cover all of the expected applications that our customers have. We closed a product showroom that was not being used. In a closely related action, We recognized a liability for $852,000 in expenses in connection with the printer retrofit program that Greg described.

Speaker 3

The program is supported by a very detailed schedule of by customer action steps. And we're on track to complete it during this fiscal year. We've backed out both of these charges from our GAAP Financials To give you a clear picture of the business on a non GAAP basis as is presented in detail in the tables included in the press release. All of these details will be further discussed in our 10 Q when it is filed tomorrow. In sum, we delivered net income after tax of $1,100,000 or $0.15 per diluted share in the 2nd quarter on a non GAAP basis.

Speaker 3

As Greg said, revenue in the quarter was up 10% to $35,500,000 driven by gains in both segments And the PI gains were attributable to the Astra Machine acquisition. Compared to last year, Operating expenses on a non GAAP basis, excluding the restructuring charges on the retrofit program costs, We're up only about 200,000 or 2% in the quarter from last year And that was prior to the addition of Astra Machine just over a year just a year ago. Master machine operating expenses exceeded that amount. Also when excluding the non GAAP charges in the quarter, adjusted EBITDA increased to 3,700,000 were 10.3 percent of revenue, up from $2,200,000 or 6.7 percent of revenue in the same period last year. Looking at revenue by type, hardware revenue grew by 31 to $11,300,000 Supplies revenue increased 3 percent to $19,700,000 while the service and other category increased 2% to $4,600,000 In total, Hardware revenue accounted for 32% of total revenue in the 2nd quarter, up from 26%.

Speaker 3

Last year supplies made up 55% of total revenue compared with 59% last year And service and other comprised the remaining 13% versus 15% in Q2 of fiscal 2023. From a geographic perspective, domestic revenue accounted for nearly 63% of total revenue, Up from 59% in the Q2 last year and international revenue, the other 37% compared with 41% last year. In dollars, we saw double digit Revenue growth in the U. S. While Europe and Asia were down low single digits.

Speaker 3

At the end of the quarter, cash was $4,500,000 Up $600,000 from the end of the fiscal year that ended on January 31. Total debt at the end of Q2 was $27,300,000 down $2,700,000 from the end of the year. We're in compliance with all our debt covenants And we have sufficient capacity to support all the operating needs of our business. We still plan to invest about 1,700,000 In new capital equipment that will upgrade our hardware and supplies manufacturing equipment to improve efficiency and keep up with demand And we'll finance that through our bank outside of the capacity of our existing credit facilities. Inventory investment declined modestly in the quarter before the effect of the inventory write off for the products we're getting out of.

Speaker 3

We're still expecting some we're still experiencing some supply chain struggles, primarily Electronic components used in T and M products and in a few instances we are still needing to maintain extra buffer stocks. However, there are clear signs that those supply chain issues in aggregate are abating And we still believe that our inventory levels will decline as we move through the year. Our current plan is to use any free cash flow to reduce debt. So now I'll turn the call back to Greg for closing comments.

Speaker 2

Thanks, David. With the strategic realignment of the PI business behind us, we entered the second half of twenty twenty four well positioned for accelerated revenue growth and margin improvement. We are very excited about the 4 new TI products to be unveiled in the coming weeks and expect our T and M segment To continue benefiting from the strong demand environment we are seeing in the commercial aviation market. With that, David and I will be happy to take your questions. Operator?

Operator

Thank We will now take our first question, which comes from Peter Sidoti from Sidoti Inc.

Speaker 4

Good morning, gentlemen. Just a quick question. Can you talk about your capital spending for this year and next? And with these adjustments, can you talk about the free cash flow you'll be freeing up?

Speaker 2

Sure. We'll let David down the line.

Speaker 3

Yes, Peter, we're going to spend probably right around $2,000,000 this year, which traditionally would have Pretty consistent. We had a period where we're spending a little bit more on business systems and That's behind us now. Traditionally, we've said that we'd spend about $2,000,000 a year in Maintenance CapEx, I don't think it's probably quite that high. I think it's probably more like $1,000,000 to $1,500,000 in maintenance CapEx, But about $2,000,000 this year as we make those investments. I think the critical issue on the free cash flow side is Working Capital Management and I mentioned that a little bit during my remarks where our focus is on Reducing inventory and improving terms, converting more of our earnings to free cash And utilizing the balance sheet more efficiently and clearly streamlining the product line You should help us in that direction, but we don't have any specific guidance.

Speaker 4

Okay. Thank you, gentlemen.

Operator

Thanks, Peter. Our next question comes from Sameer Patel from Aftel Adam Capital. Sameer, your line is now open. Please go ahead.

Speaker 5

Hey, Greg. Hey, David. First question is on the restructuring benefits. You quoted $2,400,000 in Cost savings. I wanted to understand, are those just direct costs such as leases, manufacturing costs, labor, Or does that include any of the benefit from getting these printers retrofitted more quickly and kind of getting those units returning to consumer Supplies or is that or would that be incremental for those restructuring benefits?

Speaker 3

That would be incremental.

Speaker 5

Okay. That makes sense. And then the second question is, I noticed that the bookings So we're down kind of fairly significantly, but you talked about kind of strong demand. Is that just related to some of that product realignment or some of the printer issues? Or maybe you could help me understand what's going on there.

Speaker 6

Yes, it's

Speaker 2

Yes, I can address that. So it's a combination of 2 different factors really. So it's when we get Blanket orders, that tends to boost it up, and then we kind of work those down. That happens more from the test and measurement Side of the business, we get kind of large blankets that come in a kind of a bulk way quarter to quarter disturbances. Yes, Matt, the CI business tends to be fairly steady.

Speaker 2

Although, as I kind of mentioned in my notes there, With some of these printers offline, the ink demand for the printers that are offline does decrease and the effective printers unfortunately tend to be our higher Highest volume machine. But it's nothing It's mostly on the Trojan label side, right? Pardon?

Speaker 5

I said it's mostly on the TrojanLabel side.

Speaker 2

On the The affected admission. For the bookings, For the affected ones that we retrofitted. Okay.

Speaker 3

Yes. The affected machines are target machines.

Speaker 5

Got you. So your summary, you'd say that it's not any sort of a there's not really a structural demand issue. It's more just Kind of a timing of some of the lumpier orders?

Speaker 2

Correct.

Speaker 3

Yes. Keep in mind that the Backlog in the Aerospace business is very lumpy and It's not necessarily a great indicator of revenues in the short term. The PI business is a little bit more short cycle, although as Greg discussed, we do get quite a few blanket orders for labels On that side of the business as well. So it's an interesting metric, but it can't be used Effectively, I don't think to predict short term revenues. It's important obviously to have a lot of bookings, It will fluctuate.

Speaker 5

All right. Understood. I'll turn it back over. Thanks.

Speaker 4

Thanks,

Operator

Our next question is from Tom Spiro from Spiro Capital. Tom, your line is now open. Please go ahead.

Speaker 6

Good morning, Greg. Good morning, Dave.

Speaker 2

Hey,

Speaker 6

Dan. Hey. First on the restructuring and retrofit initiatives. With respect to retrofit, The charge I see is $852,000 My recollection is that a month or so ago you folks estimated that at $600,000 If I'm recalling correctly, can you explain the difference?

Speaker 2

Yes, I can give it kind of the high level on that is that As I mentioned in my comments, we wanted to get this done and make sure we get it done as fast as possible. So that involves more direct Travel to customer sites as opposed to sending the unit in, checking it, then validating it, then updating it, then sending it back out. So for certain customers, more of the high volume ones, we're actually going to go on-site and do it that way. So that's more expensive, but it gets it done quicker.

Speaker 6

And this process will be complete by the end of the fiscal year?

Speaker 2

Yes. We've got a very systematic process on that. I mean, there be a few stragglers, but by and large, well over 90%. And we expect if it follows our plan, it will be over 100%, I mean, at 100%.

Speaker 6

I see. Okay. That's very helpful. Thanks very much. There are some low volume and low margin products that we're withdrawing from.

Speaker 6

We're Streamlining channel partners, etcetera, etcetera. Roughly speaking, how much by way of sales We'll be walking away from through these initiatives?

Speaker 2

It's Very little on the sales front. Part of it it's really some overlap in products between the AstroNova products, pre Astra Mesquite acquisition and post. We kind of did a lineup and in some cases the AstroNova product is going to win out or has won out And in other cases, it's the extra machine product. So we're kind of that's the bulk of what we're doing is kind of consolidating and rationalizing those Product lines between the 2, there's no point having 2 kind of products that are very similar, just with different brand names on the box. And there are some other products that they were decreasing and currently low revenue anyway.

Speaker 2

And just to streamline operations, we've end of life those products so we can eliminate those manufacturing processes associated with those units.

Speaker 6

Thanks. And on the streamlining of channel partners or reducing channel partners, are we doing that domestically primarily? Is that Where that's occurring? Is that overseas? Is it both?

Speaker 2

No, no, it's globally. So it's in all regions and it's really to get more focused. There's some whatever. We're keeping the best of the breed out there and making sure that We have channel partners that are totally aligned with our strategy and also where we have overlap again between Astra Machine Distributors and AstroNova distributors, we're kind of sorting that out as well. So it's really just to make sure that within each given geographic region, We have a strong partner who is dedicated to AstroNova.

Speaker 6

I see. And on Astro Machine, as I recall, when we Acquired at its sales were running something like $21,000,000 $22,000,000 $23,000,000 a year. And then I believe last quarter it seemed kind of a little weak On a quarterly basis, is it still running at that annual rate of 21.2.3? Has it changed much?

Speaker 2

It's off a bit from where it was running, but I don't know if we disclosed that. Is that in the queue, David?

Speaker 3

The amount of the current quarter was in will be in the queue. And it's still running in The same range, slightly lower, but I think by the end of the year, we'll be in the range that you talked about.

Speaker 7

I see. I see.

Speaker 6

So product I'm sorry, did I cut you off?

Speaker 2

No, just Greg. I was just going to highlight something I said last Quarter as well is that the from what we've seen in the historical information from Astra Machine, their second half of the year tends to be stronger than the first half.

Speaker 6

I see. So if I were to look at the PI sales for the quarter of just under 26% and back out 5 ish. PI is running well under where it was last year.

Speaker 3

It is running last year. It's behind where it was, yes.

Speaker 6

Yes. Okay. Right. This is most helpful. Thanks very much and good luck.

Speaker 2

Thanks, Tom.

Operator

Thanks, Tom. Our next question comes from John Deysher from Pinnacle. John, your line is now open. Please go ahead.

Speaker 7

Good morning. Just a quick question on the retrofit expense, dollars 852,000 That seems to be a supplier related issue. And I'm just curious, are they sharing in any of the costs of retrofitting The machines, and do we have any recourse against them?

Speaker 2

Yes and yes. And it's something that we actually announced that earlier. So there was a financial restructuring and there's also some pricing concessions As well.

Speaker 7

Sorry, I must have missed out. Where was that disclosed?

Speaker 2

That was a year and a half, David, 2 years ago. I forgot exactly what quarter that came out in.

Speaker 3

I can't remember

Speaker 4

the quarter.

Speaker 2

I just recognized what that was. And there's a limitation of liability per event in that particular Buyer's contract.

Speaker 7

Limitation of liability. Okay. Yes, you maximize the

Speaker 2

payout on that already. Go ahead.

Speaker 7

Okay. I was just going to say, so there's really no recourse at this point against the supplier?

Speaker 2

No. We understand that.

Speaker 3

Not for the amount that we've reserved,

Speaker 7

no. Yes. Okay.

Speaker 2

Separate from that is for the longer term pricing deal.

Speaker 7

Sorry, longer term pricing.

Speaker 3

The amount that we just Go ahead. The amount that we have on the income statement is or that we reported is the amount that will hit us.

Speaker 2

Right.

Speaker 7

That's okay.

Speaker 3

Yes, that's helpful.

Speaker 7

Well, I guess, but I'm trying to understand is The supplier matching that obligation or who's on the hook primarily here, you or the supplier?

Speaker 2

Well, it's a shared amount, but we're not because of negotiations, we don't release the exact dollar amount Between the 2 of us. Okay. Yes, well, we can probably try and disclose what we're reserving for.

Speaker 7

All right. Thanks very much.

Operator

Thanks, John. Our next question comes from Dennis Scannell from Rutteberg Capital Management. Dennis, your line is now open. Please go ahead.

Speaker 8

Yes. Good morning. Most of my questions have been answered. Just real quick though, Maybe could you talk a little bit about the timing of the $2,400,000 in savings, Kind of how that will lag in over the next few quarters and kind of when you expect to be realizing the full benefit of the realignment Actions?

Speaker 2

Yes. So as far as the $2,400,000,000 that's what we expect to get on an annualized basis. But it will take a little bit of time to ramp up. So it'll ramp, but it's not really back end loaded. It's just That there's kind of a startup in Q3 and Q4 to get to the full amount, but we fully expect to hit it within the 12 month Yes, it's 4th quarter.

Speaker 2

And then it's an ongoing benefit of course.

Speaker 8

Right. Yes. So annualized. So full benefit In fiscal 2025 then? Is that your January 2025 fiscal year?

Speaker 2

Sure.

Operator

Thanks, Dennis. We now have a follow-up question from Sameer Patel from Alkhan Capital Markets. Please go ahead when you're ready.

Speaker 5

Hey, a couple of follow ups. One is you didn't talk unless I missed it about the E commerce site, just kind of any early readings there?

Speaker 2

Sure. So we continue to add customers there. So that's I don't know if you've been on it and off, but there's more and more things getting added to it and linked into it. So that's growing. We'd like to see it grow a bit faster, but it's more an uptake and we've got our customer service people whenever they're talking to our customers, We encourage them to use it.

Speaker 2

But we also picked up a fair number of third party It's on 3rd party customers where they bought a printer from somebody else, but they're buying label material from us via the e commerce site. The other benefit, Sameer, from that is we're seeing a nice uptick in our Internet Marketing results getting higher up in search and the higher number of inquiries.

Speaker 5

Got it. And then I know we've talked about this before. Is there with where you are right now with the retrofits, I mean, do you have Any sort of sizing around how much of an impact those issues are to your revenue in the TI segment or put differently like You did $26,000,000 this quarter give or take. I mean, where would you see that figure once you get those retrofits done kind of based on the Supplies, the printers that are offline and the supplies that you're not selling.

Speaker 2

Yes. We haven't given guidance on that. I mean, what I can tell you is Yes. The T2Cs that are primarily the ones that have the highest volume that are impacted by that, they typically generate In the neighborhood of $20,000 a year in revenue. And there's roughly I think we're about halfway through that upgrade program.

Speaker 2

So And as far as units that are touched, so one thing to keep in mind too is once we upgrade it, then they need to use the Ink supplies and or label supplies that they have in house before they buy more. So It's a bit of a ramp up in that process.

Speaker 3

Yes, Samir, it's David. I'll just Comment that obviously to take a step like this where we are moving rapidly to spend all this money, We are expecting a return on that. I mean it's a good economic decision to do it. The faster we do it, the faster we'll get the money back. So and I think it's pretty high return endeavor

Operator

Thanks, Sameer. At this time, we have no further questions registered. So with that, I will hand back to Greg Woods for final remarks.

Speaker 2

Great. Well, thank you everyone for joining us here this morning and we look forward to keeping you updated on our progress. Have a good rest of the day. Bye now.

Operator

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

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