Earnings Call Transcript - ALOT Q4 2024

Operator, Operator

Good morning, and welcome to the AstroNova Fiscal Fourth Quarter and Full-Year 2024 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to David Calusdian of the company's Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

David Calusdian, Investor Relations

Thank you, Carla, and good morning, everyone. By now you should have received a copy of the earnings release issued this morning. If you've not received a copy, please go to the Investors page of the AstroNova website, www.astronovainc.com. Please note that beginning this quarter we will be using an earnings slide deck that follows along with our prepared remarks. You may access the deck on the Investors section of our website at astronovainc.com, under events and presentations. Turning to slide two 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, March 22, 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 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 three, joining me on this 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 segment operating highlights and share the company's fiscal 2025 financial targets and outlook. 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 your questions. If you've not received a copy of this morning's earnings release, please go to the investors page of the AstroNova website at astronovainc.com. Now please turn to slide four as I turn the call over to Greg.

Greg Woods, CEO

Thank you, David. And good morning, everyone. I'd like to begin by recognizing the excellent work of the AstroNova team. Every one of our more than 360 team members contributed to our solid performance in fiscal 2024. Their skills, dedication, and hard work are the driving force behind what we accomplished this year, moving AstroNova to a stronger and more profitable financial trajectory. As I reflect on fiscal 2024, three key achievements actually stand out. First, the strategic realignment of our product identification segment, which we completed last summer. By consolidating PI, we have created a far leaner and more efficient business. Our strategic focus is on delivering the best engineered solutions for our customers and the highest return opportunities for the company. The simplification of our PI segment enables us to do just that. Second, the resurgence of our test and measurement segment, which in fiscal 2024, posted its highest revenue in four years. Our portfolio of aerospace products and MRO services is the primary driver powering the T&M segment. Fueled largely by the rebounding commercial air travel and aircraft build rates, T&M is well on its way to returning to its pre-COVID highs. And third, the launching of new PI products in fiscal 2024 in each of our QuickLabel, TrojanLabel, and Astro Machine brands. These include the QuickLabel 900, the TrojanLabel T2 Pro and T3 Pro, as well as Astro Machine's two new flat pack printing solutions. All of these new products feature improved performance and expanded printing width capability. The initial deliveries of these products have been well received by our customers, and we expect them to gain full production momentum in the second-half of this fiscal year. Turning to our full-year results on slide five, we reported fiscal 2024 revenue of more than $148 million, the most in our history. Our 4% top line growth was primarily driven by the T&M segment, which posted a revenue increase of nearly 12%. PI segment revenue was up slightly year-over-year as we worked through the previously discussed retrofit of certain printers affected by the quality and reliability issues related to a large supplier. Our full-year consolidated margin results reflected an easing of supply chain pressures, the benefit of the PI realignment, improving pricing in T&M and disciplined cost management. Compared with fiscal 2023, gross margin improved by 110 basis points on a GAAP basis and 290 points on a non-GAAP basis. We posted record operating profit for the full-year. Operating margin increased 210 points and 380 points on a GAAP and non-GAAP basis respectively. For the full-year adjusted EBITDA, excluding restructuring and retrofit items, increased 60% to $17.6 million. Adjusted EBITDA margin was 11.9% in fiscal 2024, 420 basis points ahead of fiscal 2023. On the bottom line, Astro Machine earned $0.63 per diluted share on a GAAP basis in fiscal 2024, up 75% from the year earlier, while non-GAAP diluted EPS was $0.97, more than double the $0.43 earned in fiscal 2023. During the year, we generated $12.4 million in cash from operating activities, the majority of which was used to pay down debt. David will discuss our balance sheet and cash flow highlights in more detail in his financial review. Looking at our full-year segment performance on slide six, Product ID segment revenue was $104 million, just under a million ahead of fiscal 2023. Increases in revenue from hardware and the service and other category offset lower revenue in PI supplies that was attributed primarily to the retrofit program. PI segment operating profit was $2.2 million in fiscal 2024 on a GAAP basis and $5.3 million on a non-GAAP basis. T&M revenue increased to $44 million, compared to $39.4 million in fiscal 2023, primarily on strong hardware revenue growth. The supplies and service categories also posted gains year-over-year. T&M segment operating profit increased $1.2 million from 2023. The rebound in airline passenger traffic toward pre-pandemic levels, the increasing number of daily flights, and favorable commercial aircraft order and delivery trends provide a favorable growth runway for our aerospace product line. The data acquisition product line within our T&M segment gained traction as we went through the year and performed well in the second-half of fiscal 2024, highlighted by strong order volume in end markets such as energy and defense. I'd like to conclude by taking you through our fiscal 2025 targets, turning now to slide seven. Our global teams are committed to continuous improvement and applying the tools of the AstroNova operating system to drive sustained product innovation, operating efficiencies, and margin enhancement. For fiscal 2025, AstroNova expects to achieve full-year organic revenue percentage growth in the mid-single-digits. Additionally, as we continue to drive operational improvements throughout the business, we expect our full-year adjusted EBITDA margin to be 13% to 14% this year and to further improve by 100 basis points per year over the following two fiscal years.

David Smith, CFO

Thanks, Greg, and good morning, everybody. Greg acknowledged the tremendous AstroNova team effort and I'll say that I'm happy and proud that we’re making great strides in focusing our investments and streamlining our cost structure and we all share our great enthusiasm about the future. The initiatives he outlined do put us in what I believe is a clear path to execute on our longer-term financial objectives. A key metric, we generated strong cash flow for the year with cash from operating activities at $12.4 million, from which we paid down $7 million of debt on our revolving credit facility. Debt reduction is our current primary use of cash after the working capital and modest capital expenditures inherent in supporting the business. We have ample unused capacity committed in the credit facility with the bank. Turning to slide eight and our fourth quarter results. The $39.6 million of Q4 revenue was in line with the comparable period in fiscal 2023, with a 10% increase in T&M, largely offsetting a 5% decline in PI. GAAP gross margin of 37.2% in the fourth quarter increased by 320 basis points from the same period in fiscal 2023, reflecting a more favorable mix in PI in the 2024 period. Operating expenses for the quarter were down $634,000 or approximately 6% year-over-year to $10.8 million. The key driver was a 10% decline in selling and marketing expense, which reflected the benefit of our strategic realignment of the PI segment. It is also overall a function of a broad-based commitment to efficient use of our resources throughout the organization in keeping with the AstroNova operating system. When we announced the restructuring last August, we projected an annualized cost savings of more than $2.4 million. All of the elements of that restructuring are in place and we now see that the run rate is in line and can be seen in our results. The strength of the higher gross margin and lower operating expenses led to operating margin increasing 460 basis points in the fourth quarter to 9.9%, compared to 5.3% in the fourth quarter of last year. As disclosed in the tables, in Q4, we took back $210,000 of the $852,000 provision reserve for the product retrofit program as the costs were not as high as projected as some planned retrofits were not needed or wanted by some customers and the program is complete. Again, if you look at the reconciliation of non-GAAP results to the most directly comparable GAAP results, that's available in the release. Adjusted EBITDA improved 4% in the fourth quarter to $5.5 million or nearly 14% of revenue from $3.9 million or 10% of revenue a year earlier. Order volume remains strong. Q4 bookings were a record $39.8 million, 9.7% above the same period in fiscal 2023. Turning to slide nine. In the fourth quarter of segment performance, PI revenue declined 5% year-over-year to $26.6 million, a large measure due to the market impact of the suppliers' quality and reliability issues. PI segment operating margin increased by 560 basis points to 12.2%, driven by the strategically-driven activities that Greg has already explained. And frankly, the effect of a whole host of improvements by the AstroNova team that are starting to show real results in aggregate. T&M segment revenue increased 10% to $13 million with contributions from both the Aerospace and data acquisition product lines and segment operating profit was up 14% to $3.7 million and there was a 90 basis point improvement in the segment operating margin. Moving to slide 10. Hardware accounted for about 34% of revenue in the fourth quarter, three points higher than the year earlier period, driven by the T&M segment. Although supplies revenue declined year-over-year, again largely to the same ink issues, our businesses continue to generate a high-returning revenue stream that averages about 50% and sometimes higher. Service and other revenue accounted for about 14% in the quarter versus 13% in the same period last year. The repair and paper supplies part of the aerospace product lines is a major focus of the team and it's helping both revenue and margins. Geographically, we saw a pickup of nearly $1 million in revenue in the U.S., as well as higher revenue in Asia and though those gains were offset elsewhere mostly in Europe. I'll finish up by summarizing the balance sheet and cash flow highlights and you'll find those on slide 11. Cash and equivalents at the end of the fiscal year were $4.5 million, up slightly from the end of the year last year. And that range is where we're currently comfortable in operating our global operations safely, consistently, and efficiently. We generated strong cash from operations, the $12.4 million I mentioned before and we used $7 million of that to pay down our revolving credit debt. Total debt was $21.8 million at the beginning of the year and our total debt to trailing 12-month EBITDA on a bank basis was 1.3 times. Our financial condition is strong and can certainly support our operations and strategy. I believe the responsible and effective way that the AstroNova team managed through the now historical crises of the max crash and COVID impacts on our business, plus the results delivered by our debt-funded acquisitions have enhanced our credibility and access to the capital market as we seek to grow organically and through further acquisition.

Greg Woods, CEO

Thanks, David. Summary is now on slide 12. AstroNova is well positioned as we move forward in fiscal 2025. We have well-respected brands across our businesses, we continue to launch innovative products that satisfy our customers' most challenging needs and strength in our leading market positions. This sets up a nice position for us 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 and packaging for consumer goods, as well as the resurgent airline industry. We also continue to benefit from the high recurring revenue contribution from our supplies business and expect that to increase as we continue to place more hardware in the hands of our customers. And finally, we have a strong track record of value-generating M&A and we continue actively seeking complementary strategic acquisitions that broaden our presence and capabilities in our growth markets. We start the new year in a strong financial position and are committed to achieving our 2025 and long-term financial objectives. With that, Dave and I would be happy to take your questions.

Operator, Operator

Thank you, Greg. We have a question from Samir Koenig from Delta Analytics.

Unidentified Analyst, Analyst

Good morning, Greg. Good morning, guys. Congratulations on the wonderful accomplishments this year. I think it's magnanimous and really impressive. I just wanted to ask you one question regarding Boeing and Airbus. I understand if I'm correct that in the past year, you also began to put in your printers in Airbus. Is that correct?

Greg Woods, CEO

We have had printers on Airbus aircraft for quite some time. That is accurate, as we have different brands on various aircraft we manage.

Unidentified Analyst, Analyst

What I wanted to ask you also was with all the detrimental news on Boeing and a lot of companies delaying their acquisitions of the different planes from Boeing and Boeing was also saying there was traps and other related items to this incident. How do you think that, that will affect you? Or will that be taken up by the increase in the Airbus orders?

Greg Woods, CEO

Yes. As I mentioned earlier, the overall industry is growing. We're involved with a wide range of aircraft. In the commercial sector, Boeing and Airbus are the largest players, but nearly any aircraft you fly on likely includes our products. So we are generally well diversified in that respect. Regarding Boeing, I expect they will have to address these issues. However, from our perspective, based on discussions with their supply management team, our forecasts and projections remain unchanged. We are still shipping on schedule and anticipate an increase in our output. The growth rate may be slightly lower than what we expected last year, but we are hopeful that it will pick up as the year progresses.

Unidentified Analyst, Analyst

Are there any upgrades coming for these printers? Do you have any upgrades available, or are they just newer products without upgrades?

Greg Woods, CEO

Well, as we mentioned in our press deck, last investor deck that we posted, we have a big encouragement program going on with airlines and aircraft manufacturers to transition to our ToughWriter brand, which is a more modern printer. So we have a number of airlines as well as OEMs taking us up on that. And we expect to have within the three-year period, the majority of our shipments transition to the ToughWriter brand, which is a newer, more up-to-date printer.

Unidentified Analyst, Analyst

Thank you, guys, and keep up the good work.

Greg Woods, CEO

Great. Thanks for your call.

Operator, Operator

Our next question today comes from Samir Patel from Askeladden Capital Management. Please go ahead.

Samir Patel, Analyst

Hey, guys. Congrats again on the great quarter, and thanks for initiating guidance. I know we've been talking about that for a while. On that topic, I wanted to dive into that guidance. So it’s like there's some level of conservatism embedded in that, obviously, year-on-year growth, but it kind of seems more flattish to the last couple of quarters of the year. Is that attributable to seasonality, conservatism on the macro kind of given the previous caller referenced some of the issues at Boeing? Maybe you could just kind of expound on that a little bit.

Greg Woods, CEO

Yes, hi Samir. We want to be cautious, and while not everything is predictable, we don't anticipate any significant challenges in that regard. There are factors that could also drive it higher. Currently, we feel confident in our statements, and if necessary, we’ll make adjustments later in the year if circumstances change.

Samir Patel, Analyst

Okay. So that's what you're starting with. The inclination would be towards upward revisions if things go well, and you're confident that despite any anticipated challenges, you won't fall short. Is that a fair interpretation?

Greg Woods, CEO

Yes, that's a good way to think about it, yes.

Samir Patel, Analyst

The second question was regarding the emergence of product IDs. They performed quite well in Q3, but Q4 appears to return to the levels seen in Q2, despite similar revenues. You mentioned the retrofit program in your remarks. Could you explain what happened there and what we should expect for margins in that segment as we move into next year?

Greg Woods, CEO

Yes. I don’t have the exact details on that, but there was an adjustment that David could discuss regarding Q4. However, moving forward this year, we expect those margins to increase as more of the T2C and related products come back online. This will help drive supply revenue, which supports growth and improves our margins. David, would you like to add anything?

David Smith, CFO

Yes. We made some inventory adjustments in Astro Machine during the fourth quarter that slightly impacted the margins. However, this is not expected to happen again. We believe that the margins and product mix will improve moving forward compared to the fourth quarter.

Operator, Operator

The next question is from George Melas from MKH Management. Please go ahead.

George Melas, Analyst

Thank you, operator. Hi, Greg and David, the previous caller asked exactly my question. So I don't have any other, I'm sorry.

Greg Woods, CEO

Okay. All right, good catching up with you.

Operator, Operator

The next question is from Dennis Scannell from Rutabaga Capital. Please go ahead.

Dennis Scannell, Analyst

Good morning, Greg and David. I want to echo what everyone else has said about a great quarter and a strong end to the year. It's encouraging to see this rebound. My question is similar to those previously asked, but I'd like to approach it from a slightly different angle. In the third quarter, Product Identification recorded operating margins of 18.1%, which I believe is the highest I've seen, followed by 12% in the fourth quarter. David, you mentioned potential inventory adjustments at Astro Machining, and I know this segment has historically been as high as around 14%. Looking ahead, can we expect margins to trend towards the high teens as seen in the third quarter, or were there specific factors in that quarter that may make such expectations unrealistic?

Greg Woods, CEO

I'll provide a general answer, and perhaps David can offer more specifics. The inventory adjustment you mentioned had a significant effect. When averaged out, it aligns more with the longer-term trend we’re focusing on. Previously, we were around 14%, and moving towards the mid-teens seems to be a more realistic expectation as we move forward.

Dennis Scannell, Analyst

Yes. Go ahead, please David.

David Smith, CFO

I agree with that. That's the way I would frame it. I would have said that you kind of take a look at the average there.

Greg Woods, CEO

Alright, thanks, Dennis.

Operator, Operator

Our next question is from Samir Patel from Askeladden Capital Management. Please go ahead. Your line is now open.

Samir Patel, Analyst

Yes. Hey, I think we got cut off. We're sorry about that. I just wanted to follow up and see if you had any comments on the M&A pipeline.

Greg Woods, CEO

Yes. Well, it's similar as we've talked about before. We've got some interesting opportunities in both T&M and the PI segment and we'll see if we can finish any of those up. Typically, it's about 1% or 2% of the things that we look at that we end up closing. But we're actively looking at it. As David mentioned, we're in great shape from a financial position to be able to pursue acquisitions in the size of the last one we did or even larger. So we're out there. And hopefully, we do something this year. And if not, it means we didn't find a good one here. So we're kind of prudent about that as well to make sure it's a good strategic fit and also that we don't overpay, of course.

Samir Patel, Analyst

Makes sense. And again, sorry if you referenced this in the script, but David, we've discussed your inventory levels and cash flow. You provided guidance on EBITDA, but could we go over the cash flow dynamics you anticipate for this year? Do you expect inventories to remain steady at current levels or continue to decline? Are there any other working capital or related items you would like to mention?

David Smith, CFO

Inventory continues to be a focus and it needs to be. We do see what I like to call areas of opportunity for improvement. We have had to make still some commitments to bring in inventory to support the supplies business, primarily ink, which has drawn off a lot of cash that would have otherwise been able to pay down more debt more recently. And we continue to have some commitments that we need to make on the T&M side of the business. I think as we move through the year, the combination of improvement on the inventory side and obviously, the benefit of the higher margins are going to give us the ability to really go after the remaining portion of the revolving credit debt barring acquisitions, of course, which will cause us to take on more debt. And I think by the end of the year, we'll take a very large bite of what remains there and have the dry powder to do some things on the acquisition side and that will probably be the pattern. It's been the pattern for a while and we work that continuously, pay down the debt and redeploy it first to support operations and then to do acquisitions.

Samir Patel, Analyst

Makes sense. Thanks.

Operator, Operator

We currently have no further questions. So I will hand back over to Greg Woods to conclude.

Greg Woods, CEO

Great. Thank you, operator. So thanks, everyone, for joining us here this morning. In June, we'll be presenting at the East Coast Ideas Conference in New York City. We hope to see many of you there in person as well, and have a great weekend, everyone. Bye now.

Operator, Operator

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