AstroNova, Inc. Q1 FY2025 Earnings Call

Good morning, and welcome to the AstroNova Fiscal First Quarter 2025 Financial Results Conference Call. Today's call is being recorded. I would now like to turn the conference call over to Scott Solomon of the company's Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

Thank you, Candace, and good morning everyone. By now you should have received a copy of the earnings release issued this morning. If you have not received a copy, please go to the Investors page of the AstroNova website, www.astronovainc.com. You can also access the deck that follows along with our prepared remarks on the Investors section of our website under Events & Presentations. Turning to Slide 2 in that deck. 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, June 6, 2024. AstroNova undertakes no obligation to update these forward-looking statements. For other 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 other filings that the company makes with the Securities and Exchange Commission. 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. Turning to Slide 3. Joining us on the call this morning 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 first quarter operating highlights, and David will take you through the financial results at a high level. Greg will make some concluding comments and then management will be happy to take your questions. Now please turn to Slide 4, and I turn the call over to Greg.

Thank you, Scott, and good morning everyone. Q1 was a profitable yet challenging quarter for us, primarily because we had to navigate a couple of temporary component shortages that delayed the shipment of certain legacy printers in our Aerospace product line. These suppliers were unable to deliver the necessary components on time. That delay, which we expect to be fully remedied this fiscal year, meant we were unable to ship more than $3 million of Aerospace printers in the quarter. As we noted in this morning's earnings release, longer-term, we are well underway on our transition program to upgrade most AstroNova Aerospace customers from legacy products to our newer, more advanced ToughWriter branded printers. Today, ToughWriter printers account for approximately 36% of our total Aerospace printer shipments. Completing this transition will result in a more efficient supply chain, lower manufacturing costs and a streamlined parts and services experience for our OEM and airline customers. In our Product Identification segment, last September, we unveiled next-generation flat-pack and mail-related printing solutions from our Astro Machine subsidiary at the PRINTING United Expo. In this year's first quarter, we needed to push out shipment of a very large order we had received for that equipment just in order to make sure that we are able to do some customer-requested enhancements that were required by that customer. We now expect the majority of that order to be shipped in the fiscal second and third quarters of this year. Despite the challenges caused by component deliveries and order delays, we remain on track to achieve our fiscal full year 2025 expectation for organic revenue growth in the mid-single digits and adjusted EBITDA margin in the range of 13% to 14%. Turning to Slide 5. In May, we significantly strengthened our position in the color digital label and packaging printing verticals with the acquisition of Portugal-based MTEX NS. MTEX provides us with complementary market adjacencies that expand our addressable markets and broaden our global footprint, opening up significant top and bottom-line growth opportunities. We continue to expect the MTEX acquisition to generate $8 million to $10 million of revenue in this fiscal year. MTEX is not only an innovator but a technology disruptor, with new industrial printing solutions that have been exceptionally well received in the market. MTEX operates a sophisticated engineering and manufacturing center at its headquarters near Porto, Portugal. The high level of vertical integration at this facility has made it a model of cost efficiency, reducing MTEX's dependence on outside suppliers. Less than a month into the acquisition, we are more excited than ever about the complementary nature of MTEX NS' product offerings. MTEX moves us further up the value chain with products that generally carry higher average selling prices with large recurring revenue streams and strong customer loyalty. And the initial response to MTEX's newest products bears that out. Turning to Slide 6. I just returned from the Drupa 2024 trade show in Düsseldorf, Germany. Drupa, which began on May 28 and runs through tomorrow, is the world's leading trade fair for printing technologies. The large combined AstroNova-MTEX booth at Drupa was the perfect venue to showcase the broad range of groundbreaking products and solutions. Congratulations to our marketing teams for pulling out all the stops in coordinating the design and implementation of this integrated booth in record time. They pulled it off in just a few weeks from when we closed this acquisition. Together with the full array of our QuickLabel, TrojanLabel and Astro Machine products, MTEX is exhibiting several of their latest color printing products for labeling, overprinting on rigid products, and industrial flexible packaging solutions for both paper and film materials. The MTEX products at the show featured their unique high-quality printhead and ink systems that significantly lower the total cost of ownership for our customers. The printers cover a wide range of printing widths from the ATOM at 8 inches wide to the new AQUAFLEX at 42 inches wide. The AQUAFLEX was by far the largest printer in our booth. This is a high-volume commercial printing solution developed for industrial flexible packaging that can print on both untreated and treated papers. AQUAFLEX represents the next generation of industrial flexible packaging printing for high-volume customers. The system uses multiple five-liter ink tanks of either pigment or dye-based inks to produce full-color wide-format output used in paper bag production and other high-volume packaging applications. Since the Drupa show opened on May 28, attendees have been flocking to the booth to see the AQUAFLEX in action, along with the other new products from MTEX and AstroNova. We collected hundreds of high-quality leads as well as several orders at the show. We even closed deals to sell some of the printers right off the floor in our booth, including the two you see in Slide 6; the Trojan T2-Pro that we previously announced for high-performance label printing and the AQUAFLEX printing system. For more information on the AQUAFLEX and the other MTEX and AstroNova products featured at our Drupa booth, including pictures and videos, check out the Drupa press release on our website, astronovainc.com. Beyond the timely trade show integration for Drupa, our overall integration of MTEX is proceeding well. Another recent step was the formation of an integrated engineering steering committee that is already in place and working on plans to ensure that we are leveraging the fantastic engineering strengths of both organizations to further extend our leadership position in the industry. On Slide 7, let me briefly touch on the developments in our T&M segment. As I mentioned, we are gradually upgrading OEM and direct airline customers to our more advanced ToughWriter branded printers from the other three brands in our portfolio. The ToughWriter upgrades are taking place in both the commercial and defense verticals within our Aerospace product line. Reducing the number of brands that we offer will allow us to significantly lower our overall manufacturing costs, including royalty payments, thereby driving higher margins. By the end of fiscal 2027, we estimate that about nine of every 10 printers we ship will be a ToughWriter compared with a little less than four in 10 today. In addition to our momentum in the aerospace market, our Test & Measurement segment continues to win contracts with Air Force bases that are upgrading their missile programs from legacy systems to our latest technologies. And now with that, I'll turn the call over to David for the financial review.

Thanks, Greg, and good morning everyone. I want to start by discussing our financial results for the first quarter, referring to slide eight. Our revenue for the quarter was $33 million, reflecting a decrease of 7% compared to the same period last year, attributed to declining sales in both the P&I and T&M segments, as Greg mentioned. However, our gross margin improved to 36.3%, an increase of 130 basis points from the previous year, benefiting from higher margins in both segments thanks to favorable product mix and cost trends. Regarding operating expenses, they are well-managed and in good shape. We made some minor reallocations in our income statement segment reporting to comply with new accounting rules. Consequently, operating expenses fell by approximately $300,000, representing a year-over-year decline of about 3% to $10.6 million. Of that change, about $250,000 was due to reallocated manufacturing expenses, so the overall decline in total expenses was minimal. If we look at the previous expense allocation, selling and marketing expenses would have dropped by around $200,000, R&D would have increased by about $200,000 due to product development, G&A remained roughly the same, and gross profit would have been approximately $250,000 higher. We will not detail these comparisons moving forward, as the differences between methods are expected to lessen significantly in future quarters, and the new method is more aligned with our economic realities. Overall, our company-wide spending, including operating and manufacturing costs, is more than $1 million lower than it was in the first quarter last year, primarily due to previous restructuring and a solid focus on controlling expenses. When we announced the restructuring last August, we anticipated annual cost savings of roughly $2.4 million. Tracking these savings in detail has become slightly more challenging as our business has evolved, but we are clearly on the right path to meet or exceed these targets. This is a key reason we can maintain a 4.1% margin despite a $2.5 million decline in revenue year-over-year, which Greg noted we believe is due to temporary factors. Our adjusted EBITDA for the quarter was $2.5 million, representing 7.5% of revenue, down just under $600,000 or 19% from last year’s margin of 8.6%, primarily due to those temporary revenue challenges. Despite the dip in revenue, we started the year with a profitable quarter, reporting diluted EPS of $0.15 compared to last year's $0.11 for the same period. Bookings for the quarter were $33.1 million, down from $38.4 million last year. However, I’ve consistently emphasized that this metric shouldn't be overly relied upon as an indicator of short-term performance due to the variable nature of order intake in our T&M segment, which explains much of the quarterly differences. Additionally, we saw a lower backlog in our PI segment due to supply issues with inkjet printer components, related to the previously mentioned retrofit program involving some printers affected by one supplier's quality and reliability concerns. Looking at Slide 9, PI segment revenue was $23.2 million this quarter compared to $25.1 million in the first quarter of fiscal 2024, mainly due to delayed shipments of a significant PI order resulting from changes to customer specifications that Greg referred to. Those shipments are expected to come through shortly. The operating profit for the PI segment was $3 million, or 12.9% of segment revenue, up from $2.5 million, or 10% of segment revenue last year. This increase in operating margin is due to a more favorable mix and expense control. In the Test & Measurement segment, first quarter revenue was $9.8 million, compared to $10.3 million last year. While demand remains robust and trends positively in Q1, as Greg mentioned, we were unable to ship over $3 million in orders from commercial aerospace customers due to supplier shortages of printheads used in some legacy products. This not only affected OEM printer shipments but also significantly delayed some profitable repair work. We are actively collaborating with suppliers to resolve these shortages by the third quarter, with some resolution expected in Q2. Long-term, as Greg indicated, these issues will be addressed through the transition of most AstroNova Aerospace customers to newer ToughWriter products. Taking these factors into account, the segment operating profit stood at $1.7 million or 17.6% of segment revenue, down from $2.1 million or 20.1% of segment revenue in the first quarter last year. Moving on to Slide 10, I won't read the details. Supplies made up 57% of revenue in the first quarter versus 54% in the first quarter last year. Hardware represented about 27% of revenue, down 6 points from last year largely due to supply shortages and order deferrals. The service/other category constituted just over 16% of revenue this quarter, up from 13.2% in Q1 of last year, primarily boosted by the T&M segment. In conclusion, I’ll touch on our balance sheet and cash flow highlights shown on Slide 11. At the end of the first quarter, our cash and equivalents were $4 million, down from about $500,000 higher at the end of the previous fiscal year. This level is likely to remain steady at quarter-end as long as we have debt outstanding, close to the minimum we're comfortable with after accounting for the needs of our various global operating subsidiaries. We generated $6.9 million in cash from operations during the quarter and reduced our revolving debt by $5.5 million. Our debt at the end of the quarter was $15.6 million, and our bank-calculated ratio of trailing 12-month EBITDA-to-debt was just under one. We expect this ratio to remain significantly below our covenant limits at the end of Q2, even after the acquisition. As detailed in the 10-Q that we will file today, we took on an additional $19.4 million in debt for the MTEX acquisition, which involved increasing our credit capacity by amending our credit facility with Bank of America. After the acquisition, we still have enough committed revolving credit available to support our operational needs, and along with our banking relationship, we believe it positions us for non-organic growth opportunities that meet our acquisition criteria, should they arise. However, our immediate focus is on debt reduction. Our goal is to repay most, if not all, of the revolving credit debt by the end of the year. It’s worth noting that availability under the bank revolving credit will decrease by $5 million from $30 million to $25 million at the end of the fiscal year, but we do not anticipate needing that additional capacity.

Thanks, David. Turning to Slide 12. Looking ahead, we are excited about the prospects for both segments of our business over the balance of fiscal 2025 and beyond. Our revenues were pressured by supplier issues, the shipment delay of a major order and the transition to higher-margin products across both segments. We believe the move to higher-end, higher-margin products will yield profitability benefits both this fiscal year and over the long-term. We remain on track to achieve our fiscal full year 2025 expectation for organic revenue growth in the mid-single digits and adjusted EBITDA margin in the range of 13% to 14%. Summarizing on Slide 13, we have well-respected brands across our businesses and we continue to launch innovative products that satisfy our customers' most challenging needs and strengthen our leading market positions. This sets us up to capitalize on strong secular trends in both our Product Identification and Test & Measurement segments, including the increasing demand for a wide range of printing solutions to satisfy mass customization of packaging for consumer goods, as well as the resurgent airline industry. And with that, Dave and I will take your questions. Operator, please open the line for Q&A.

Candace, I don't believe we have any questions in the queue. So we'll be happy to turn the call back to Mr. Woods.

Thank you.

Okay. Well, with that, thank you all for joining us here this morning. We look forward to keeping you updated on our progress, and have a good rest of the day. Bye now.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.