Earnings Call Transcript - ALOT Q4 2022

Scott Solomon, Investor Relations

Good day, and welcome to AstroNova’s Fiscal Fourth Quarter and Full Year 2022 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 Associates. Please go ahead.

Gregory Woods, CEO

Thank you, Scott. Good morning, everyone. Thanks for joining us to review our fiscal fourth quarter and full year 2020 financial results. I want to start today by acknowledging the outstanding work of our more than 360 team members around the world. In what was an extremely challenging year, they worked tirelessly to keep themselves and those around them safe while continuing to provide outstanding service to our customers. While COVID-19 has gradually receded into the background in certain regions over the past several months, the economic consequences of the pandemic, including supply chain disruptions, price increases and rising transportation costs continued to have a pronounced effect on our business in the fourth quarter. In round numbers, we estimate that we would have shipped an additional $2 million in products during the quarter but for delays in receiving the parts necessary to fill those orders. The backlog in our supplies business, which normally is about five days, has recently been running in the neighborhood of 15 to 20 days. And that’s despite significantly beefing up our supplies inventory in an effort to help mitigate any potential delays. We’re also seeing steep increases in transportation costs. To put those increases into context, freight-in charges were up more than $600,000 on a sequential basis in Q4, and more than $700,000 year-over-year. We are taking steps to address these cost dynamics in a number of ways including leveraging our pricing power to mitigate the impact of inflation and the increase in transportation costs. We expect to begin realizing benefits of these actions as we move into the second half of our fiscal year. With that as a backdrop, let me briefly review our results which included higher total revenues for the quarter and full year periods, despite the macroeconomic challenges. Total revenue was up approximately $260,000 for the fourth quarter to $29.7 million, as a 20% increase in Test & Measurement revenue more than offset a 4% decline in Product Identification. Total revenue for the year increased 1% to $117.5 million. Increases in supplies and service revenue were key drivers in both periods. In both the quarter and full year, we continued to deliver robust recurring revenue streams. Supplies accounted for approximately 62% of revenue for the fourth quarter and the full year. Hardware comprised 28% and 27% of revenue for the quarter and full year periods respectively, while our Service/Other accounted for 10% of revenue for the quarter and 11% for the year. Bookings were strong at $32.9 million in the fourth quarter, up 12.4% from the fourth quarter of fiscal 2021. Bookings for the fiscal ’22 came in at $128.6 million, up 13.2% year-over-year. Turning now to our segments, fiscal 2022 marked the Product Identification segment’s ninth consecutive year of revenue growth. We continue to be very pleased with the strong performance of our direct-to-package printing solutions such as the T3-OPX, which had a record year in fiscal 2022. Exponential growth of the e-commerce channel over the past two years plays directly into the strength of the T3-OPX. With more and more goods being delivered to customers’ doorsteps, the demand has increased for the use of secondary packaging, both to protect the goods during transport and to provide another branding opportunity for the retailer. The T3-OPX is a best-in-class system designed for overprinting or post-printing on a wide variety of materials and packaging substrates. By using renewable substrates, the T3-OPX also enables package printers to meet the customers’ sustainable packaging preferences. Sustainability is a megatrend that is driving a sea change in the packaging industry. Trivium Packaging’s 2021 Buying Green Report found that 67% of consumers find recyclability of packaging important, while 73% are actually willing to pay more for eco-friendly packaging. Our T3-OPX system also plays directly into another megatrend influencing the direct-to-package printing market, that is brand experience. WestRock’s Pulse Packaging Survey shows that for a majority of consumers, packaging influences product satisfaction. The survey also demonstrates the importance of key sustainability features such as environmentally friendly design and the ease of recycling. So there is a clear link between sustainability and brand experience. The third packaging megatrend that is relevant to our business is supply chain agility. Manufacturers want a package design that is not only e-commerce friendly, but also cost-effective and rapidly adaptable to the changing regulatory environment and rapid shifting in consumer preferences. Supply chain agility also requires packaging that is digitalization-ready by enabling automation, real-time tracking and other benefits that boost consumer confidence. We believe that the value proposition of our direct-to-package printing technology creates sustainable competitive advantage for AstroNova. Looking ahead in the PI segment, we expect to release two new products that build on our leadership in the label printing and direct-to-package printing markets in the next few months. We believe that these new products will make it even easier for our customers to develop full-color, high-quality labels and packaging that distinguishes their brands. Stay tuned for more. Switching now to our Test & Measurement segment, with an ongoing rebound in the commercial air travel in the U.S., Europe and other regions, the segment delivered improved results. Revenue increased 20% in the fourth quarter and 3% in the full year versus the same periods of fiscal 2021. T&M segment operating margins were also up nicely, particularly in light of the higher manufacturing and transportation costs that we have experienced. One need only look at the daily TSA checkpoint travel numbers to see the significant improvement in passenger traffic from calendar 2021. And while domestic passenger traffic has rebounded faster than other routes, the airline industry expects to see a return to pre-pandemic levels in 2023 and 2024. Consistent with the ramp-up in air traffic, we are seeing an increase in both printer supply sales as well as repair services. At the same time, the multi-year backlogs at both the Boeing 737 MAX and Airbus A320 aircraft are growing, which both portend well for the sales of our aerospace products in the future.

David Smith, CFO

Thank you, Greg, and good morning, everybody. I’ll launch right in. Our fourth quarter cost of goods sold and gross margins were adversely affected by the supply chain and the inflationary headwinds that have impacted us as well as so many other industries over the past year. While total revenue was up slightly in the quarter, gross margin in Q4 was down 450 basis points to 32.8% from 37.2% in the prior year quarter. Gross margin was down 320 basis points from the third quarter this year. The decrease was due to both a higher cluster of goods and to a lesser degree unfavorable mix. For the full year, gross margin improved 160 basis points to 37.2% driven primarily by our favorable gross margin comparisons to the prior year in the first nine months. In the fourth quarter comparisons to the prior year, we’ve been hit by higher labor costs, higher material costs and significantly higher freight costs which spiked significantly in the fourth quarter as we were forced to pay for expedited shipping to get parts on time, sometimes even by airfreighting them over the top of the same goods being shipped, and the rates we’re paying are much higher as well. In the quarterly comparisons to the third quarter of the FY22 year, all of the same factors were apparent. Again the freight cost spike was dramatically higher in the fourth quarter. Looking at revenue by type, we continued to have good robust recurring revenue. Hardware accounted for 28% of revenue in the quarter compared to 31% in the quarter last year. Supplies accounted for 62% of revenue in the quarter versus 60% last year. Service and other revenue was 10% in the quarter, approximately flat in percentage terms, but up about $0.25 million compared to the fourth quarter of fiscal ’21. For the full year, hardware accounted for 27% of total revenue compared with 29% in fiscal ’21. Supplies revenue was 62% of revenue for both fiscal ’22 and fiscal ’21, and our service business accounted for 11% of revenue in fiscal ’22 versus 9% of revenue in the prior year. As Greg suggested, this reflects the rebound in the Aerospace portion of our T&M segment. Turning to revenue by geography, domestic revenue comprised 57.3% of the total for the quarter compared to 55.9% in the fourth quarter a year ago. International revenue was 42.7% for the quarter down from 44.1% a year earlier. For the full year, domestic revenue accounted for 58% for fiscal ’22 versus 60.1% in fiscal 2021. International revenue came in at 42% for the year up from 38.9% in fiscal ’21. Revenue from Europe, Canada and Asia was up double digits while the U.S. revenue declined 4% for the year. Operating expenses increased 1.5% in the quarterly comparison or approximately $145,000 to $10 million reflecting higher R&D expenses related to the new product development that Greg mentioned, partly offset by modest reductions in the SG&A and selling and marketing areas. On a full year basis, OpEx was up 1.4% or $557,000 to $39.5 million, which again primarily reflected on higher R&D. This year, operating expenses did increase from last year’s COVID induced sales and marketing expense cutback period, but I should note, not very much. Adjusted EBITDA, which is earnings before interest, taxes, depreciation, amortization and share-based compensation was $773,000 for the fourth quarter this year, and $13.2 million for the full year periods this year. This compares with $3.1 million and $10.9 million for the same periods in fiscal ’21. On the bottom line, this quarter, we reported a net loss of $758,000 or $0.10 a share compared to net income of $837,000 or $0.12 per diluted share in fiscal ’21. For the full year on a GAAP basis 2022, we generated net income of $6.4 million or $0.88 per diluted share, compared with net income of $1.3 million or $0.18 per diluted share in fiscal 2021. This year’s net income included about $4.4 million or $0.60 of diluted earnings per share from the PPP loan forgiveness. Looking at segment results, Product Identification reported a fourth quarter segment operating profit of $1.5 million or 6.5% of revenue. This compares to $3.1 million or 13.2% of revenue in the prior year fourth quarter, again reflecting higher manufacturing and procurement costs. On a full year basis, Product Identification segment operating profit was $10.4 million or 11.5% of revenue versus $12.9 million or 14.3% in fiscal 2021. Test & Measurement segment operating profit improved in the quarter, coming in at almost $0.5 million or 6.8% of revenue compared with $282,000 or 4.6% of revenue a year earlier. The improvement underscores the accelerating level of activity within the Aerospace business that Greg noted. On a full year basis, the T&M segment had an operating profit of $3.4 million or 12.8% of revenue in fiscal 2022, compared to an operating loss of $1 million in fiscal 2021. As Greg noted, the order momentum exiting fiscal 2022 is strong with full year bookings in the T&M segment running 50% ahead of fiscal 2021. Turning to the balance sheet, cash and equivalents at year-end totaled $5.3 million compared to $11.4 million at the end of fiscal ’21. The decline is directly linked to uses to support operations, in particular, inventory. Inventory is up $4.5 million over last year largely to counteract shortages and procurement delays. But our financial position remains very strong. Before I hand it back to Greg, I’ll just mention that the new ERP system for domestic operations went live successfully at the beginning of the fourth quarter. This would be a major undertaking and accomplishment for a company of any size and particularly for us during the COVID era. The ERP investment has consumed substantial resources over the last few years, both people and capital. It’s working effectively, though we’ve experienced some natural adjustment pains. As with any ERP technology, it will take a bit of time for us to perfectly harmonize the entire system, but certainly the heaviest lifting is out of the way. We remain extremely enthusiastic that this will enable efficient growth as we scale the company over time.

Gregory Woods, CEO

Great, thanks, David. So we enter fiscal 2023 in strong shape financially and operationally. We continue to execute on our strategy to grow organically through the development of new products and through complementary M&A that enables us to build on our leadership positions. Next month we will be presenting and hosting one-on-ones at the Sidoti Microcap Virtual Conference. Please check the Events & Presentations section of our investor’s page for the presentation time. Now David and I will be happy to take your questions.

Samir Patel, Analyst

Hey, good morning, guys.

Gregory Woods, CEO

Good morning.

David Smith, CFO

Good morning.

Samir Patel, Analyst

So I guess, let’s start on the inflation piece. So I think you mentioned in your prepared remarks that you were expecting to kind of see some benefit from your actions there in the second half of the fiscal year. I was curious kind of why you think it will take that long? Is it because of you’re still using some of that expedited freight? You mentioned kind of like fuel surcharges and things that some of your suppliers had put on. I guess, I’m wondering why it’s taking longer to pass those along to year-end consumers.

Gregory Woods, CEO

So we’re being a little conservative on that, Samir, but a couple of things. So price increases depend on what kind of agreements we have with our customers, right. So sometimes there are blanket agreements. So it isn’t like we can raise the price today, and tomorrow they pay a higher price. That is true for a number of our products, but some of them are restricted that way. So we have to wait for time-outs of those existing agreements. So that’s one part of it. And the other is, these other operational things we’re doing that would mitigate that. We have things that are coming by sea, but also in the meantime we’re flying them by air, because sea is taking much longer than it used to. So we expect to be on mainly a sea delivery schedule for some of our heavier and larger purchases from different parts of the world, yeah, by the end of Q2. So that does kind of all play into that.

Samir Patel, Analyst

Okay. That makes sense. And I think you talked about $2 million worth of orders that you did manage to ship in the quarter. Did you break out, were those mostly Product Identification or Test & Measurement?

Gregory Woods, CEO

It was somewhat mixed. I didn't specify which were which, but both groups were affected. There were some minor issues, like solid-state drives that we anticipated receiving a month before the end of the quarter, but they actually arrived about a month after the quarter ended. So that impacted Product Identification as well. Additionally, there’s a strike in Finland affecting many of the paper materials we use for our supplies. We have found alternative sources for those materials, but when the supply chain is disrupted, it requires a lot of adjustments. We now have alternatives in place, but that also had an impact on us.

Samir Patel, Analyst

Okay. All right. I have a few more, but I’ll get back in the queue and I’ll ask if someone else has anything.

Gregory Woods, CEO

Okay, great.

John Deysher, Analyst

Good morning. I just have a couple of quick questions. Is there any inventory left on the 737 MAX that has to be worked through before they can start producing new ones?

Gregory Woods, CEO

They’re actually doing that in parallel. So the production line we’re following continues to ramp up for a new aircraft. And in parallel, I don’t know exactly where they are on the units that they have as far as those deliveries. But that is a kind of a parallel function.

John Deysher, Analyst

So do you?

Gregory Woods, CEO

One before the other.

John Deysher, Analyst

All right. But do you know what the inventory is of the existing 737 MAX at this point?

Gregory Woods, CEO

I’m not sure about that right now. I know they have been ahead of schedule on that, but I'm not certain what the remaining quantity is.

John Deysher, Analyst

Okay, fair enough.

Gregory Woods, CEO

But as we mentioned before those already have our printers on the new course.

John Deysher, Analyst

All right. I was just going.

Gregory Woods, CEO

It’s hard for them.

John Deysher, Analyst

Right. Okay. The other question is, I think a lot of plane manufacturers, Boeing and Airbus specifically rely on Russia for a fair amount of their titanium. And I’m just wondering with the situation there, whether there is any talk of titanium shortages or bottlenecks or anything like that.

Gregory Woods, CEO

I haven’t heard that. I’m currently in Europe. I was at Airbus yesterday, and the team I was with expressed no concerns. Instead, they were discussing whether we could ramp up production quickly enough to meet their schedule, which is quite aggressive. There wasn't any conversation about issues they were facing with deliveries. The focus was more on whether we, as suppliers, can deliver as fast as they want us to.

John Deysher, Analyst

Okay. All right. That’s my questions. Thank you.

Gregory Woods, CEO

Sure.

Tom Spiro, Analyst

Hey, Tom Spiro, Spiro Capital. Good morning.

Gregory Woods, CEO

Hi, Tom. Good to hear from you. Good morning.

Tom Spiro, Analyst

Yes, indeed. Yes, indeed, good to be on the call. On Product Identification, I see that for the year, sales were up $600,000. You mentioned that the T3-OPX had a record year. That’s wonderful news. I wondered given that the segment sales were up modestly, I wonder how the other printers are doing, all of the other stuff we sell.

Gregory Woods, CEO

It's a mixed situation. While things are generally moving in the right direction, progress is slower than desired. We've experienced some overlap with certain products. However, we've noticed faster movement in the tabletop category over the past couple of quarters compared to the larger products. Specifically, the T3-OPX has gained significant traction, generating increased interest and multiple orders. Additionally, we've secured several promising OEM deals for the T3-OPX, which should help boost sales. On the other hand, the PI business is still facing challenges, particularly in Asia, where ongoing issues have hindered sales activities and trade shows. Towards the end of the year, there was a temporary increase in activity, followed by shutdowns, but trade shows have resumed recently, which are vital for generating leads. These disruptions affected a considerable portion of the year, although the last few months have shown improvements. We've participated in multiple shows with positive outcomes, and the attendees are now more active buyers looking for serious interest rather than just browsing.

Tom Spiro, Analyst

I see, and I note from the press release, the unusually high warranty charges in PI. What’s that all about?

Gregory Woods, CEO

We faced some issues with certain suppliers who delivered subpar products. These products made their way into our supply chain, and we had to go back to retrofit, repair, or replace them to ensure full production. This was an unexpected situation, and it required a significant amount of time and cost to resolve. However, we have implemented a solution and are moving forward, working to complete all repairs. While we didn't identify the root cause, we were able to trace the problem and made some preemptive upgrades or replacements. Our main goal is to ensure our customers have a great product experience, and we acted on this quickly, even though it was somewhat costly.

Tom Spiro, Analyst

I see, I see. And when you say that $2 million in sales were pushed from Q4 into next year, is that hardware, I would guess or is it supplies or everything, what is that?

Gregory Woods, CEO

It's related to hardware and supplies, mainly on the media side. There were some issues with ink and toner as well. Some customers prefer complete shipments, but we can't do one without the other. The positive aspect is that orders are increasing, and we need to keep up with that demand. In the fourth quarter, we experienced some COVID-related quarantine situations where if one person in a work group tested positive, anyone in contact had to stay out for five days and be retested before returning. This caused some manpower challenges in our media operations. Currently, we're looking at a delivery timeframe of about 15 to 20 days, although we typically aim to deliver media in five days or less.

Tom Spiro, Analyst

And when you speak of supply chain difficulties, is that principally on the hardware side and the supply side or again it’s both?

Gregory Woods, CEO

It's both. The transportation costs are significant challenges. One of the hardest things is getting a quick replacement, especially for complicated components like FPGAs. We often have to reach out to third-party sources if our main suppliers or wholesalers don't have what we need. While we generally succeed in obtaining those products, it usually isn't within our desired timeframe, and we often have to pay a premium to find the parts.

Tom Spiro, Analyst

I see, and a while.

Gregory Woods, CEO

Relatively a lot. Yeah.

Tom Spiro, Analyst

I see. I see. And lastly, while back you suspended the dividend. Your balance sheet is in pretty good shape now. What are your thoughts about reinstating a dividend of some size?

Gregory Woods, CEO

Something that comes up at Board meetings. In fact, we have a Board meeting later on today. So it’s always a topic that we cover and the Board will take a look at that and decide what’s the best allocation of capital. So stay tuned, if there is something like that. We had a preliminary Board meeting already. We have a follow-up one today. Yeah if they decide to do it, it will be up via 8-K and we will announce it.

Tom Spiro, Analyst

Okay. Well, thanks much. Good luck.

Gregory Woods, CEO

All right. Thanks, Tom.

Samir Patel, Analyst

Hey, so at the close of your comments, you mentioned M&A and I was wondering if that was something you were closer to than you had been at any point over the past few years.

Gregory Woods, CEO

Well, Samir, yes. We are somewhat out of the game due to banking reasons and other factors.

Samir Patel, Analyst

Right.

Gregory Woods, CEO

So we did restart kind of filling the funnel and engaging in conversations again really in the fourth quarter. So what I can say is we have some things in the funnel. Some look good, some we’ve already washed out. I mean I think I mentioned before that more than 90% of the things we’ve taken a close look at, we end up not going forward for one reason or another. But the activity level is definitely up in terms of our group that does take a look at these acquisition opportunities. And I can say, we have quite a few that look interesting. So ideally, we can close one or more of those this year.

Samir Patel, Analyst

And would you be focused more on Product ID or T&M?

Gregory Woods, CEO

It really depends on which opportunity presents itself first with the right numbers. We have promising prospects in both areas. The focus will be on which deal we can advance first, and depending on their size, we may be able to pursue both. We are considering options that would be beneficial in each category.

Samir Patel, Analyst

Understood. That sounds fairly concrete. So I guess it sounds like it’s more a matter of price or diligence as opposed to whether or not an interesting acquisition?

Gregory Woods, CEO

Yeah, that’s how we do it. We’re relatively conservative about it. So we want to make sure that it’s accretive relatively fast and that it’s a good fit, and that we feel, it gels well with doing so. It needs to be directly in one of those three product groups that we currently have or kind of a close adjacency that uses similar technology. We’re not looking to go too far afield. I mean we get things over the transom from our bankers all the time, but we’re not going to go very far afield from where we’re already planning.

Samir Patel, Analyst

That makes sense. And then following up on the previous caller’s question about plane production, so obviously MAX production is ramping up pretty nicely as you mentioned with Airbus. That’s also they have a pretty aggressive ramp schedule for the 320neo family. I know I’ve asked you this before, but I just want to confirm, kind of, if anything’s changed based on the current environment. Like the orders you shipped in Q4, like, how does that relate to kind of Airbus or Boeing production rates in Q4? Are you kind of ahead of them, behind them, just trying to figure out kind of how we should think about those revenues ramping over the course of this fiscal year?

Gregory Woods, CEO

Yeah. So depending on the particular program and whether it’s SFE or BFE where the airlines purchase it and then ship it to the manufacturer, it depends on which plane we’re talking about. But typically we are looking at three to six months ahead of time that we will be shipping product. I would say, don’t want to cut it too close. So that’s typically the range that you look at. So we probably like be on average three, four months from, if you look at the production numbers.

Samir Patel, Analyst

So you lag or lead those by three to four months.

Gregory Woods, CEO

We lead, and then with the production numbers that come out, we will ship those three months before, probably maybe four months before.

Samir Patel, Analyst

Okay. So you should consider that we will be shipping product three to six months ahead of time. We don't want to cut it too close, so that's typically the range to keep in mind. On average, we are likely looking at three to four months based on production numbers.

Gregory Woods, CEO

I mean, in both camps on those two aircraft you mentioned, we do have their production schedules and they’ve been bumping them up and not back. Like I said, my Airbus meeting yesterday was very aggressive, but we’re a small part of the plane, but we get to enjoy that ramp-up.

Samir Patel, Analyst

Got it, okay. I appreciate it. That’s all I had. Thank you.

Gregory Woods, CEO

Sure. Thanks.

Scott Solomon, Investor Relations

Thank you. And as there are no further questions at the moment, I will turn the call back to Greg Woods for the closing comments.

Gregory Woods, CEO

Thank you. All right. Well, thanks everyone for joining us here this morning and we look forward to keeping you updated on our progress. Have a good weekend. Bye now.

Scott Solomon, Investor Relations

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