Napco Security Technologies, Inc Q3 FY2020 Earnings Call

Greetings and welcome to NAPCO Security Technologies Fiscal Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I would now like to turn the call over to your host, Mr. Patrick McKillop. Thank you, you may begin.

Thank you. Good morning, my name is Patrick McKillop. I am the Director of Investor Relations for NAPCO Security. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal third quarter 2020. By now all of you should have had the opportunity to review the press release discussing the results. If you have not, a copy of the release is available in the Investor Relations section of our website. On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies; and Kevin Buchel, Senior Vice President and CFO. Before we begin, let me take a moment to read the forward-looking statements. This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance or achievements may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the company's filings with the SEC. During the call, we may also present certain non-GAAP financial measures such as adjusted EBITDA and certain ratios that are used with these measures. In the press release, and on the financial tables issued earlier today, you will find a definition of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP financial measure, as well as a discussion about why we think these non-GAAP financial measures are relevant to our results. These financial measures are included for the benefit of investors and should not be considered instead of GAAP measures. I will turn the call over to Dick in a moment, but before I do, I want to mention a few things on the IR front. We remain steadfast in our investor outreach during the COVID-19 crisis and are still available for conference calls and/or video calls with the investor community. Many investor conferences have been switched to a virtual format and we look forward to this new experience. We will be in virtual attendance for the Needham Conference on May 20, the Stifel Cross Sector Insight Conference on June 8, the William Blair Conference on June 9, and the Canaccord Genuity Conference on August 11 through the 13th. There will be presentations and one-on-one meetings at these conferences. So please mark your calendar. Investor outreach is crucial especially for small-cap companies such as NAPCO. Now we'd like to thank all of those folks that assist us in these investor outreach efforts. With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.

Thank you, Patrick. Good morning everyone and welcome to our fiscal Q3 earnings results conference call. Thank you for joining us today. We're living in challenging times, to say the least. I'm very proud of our company's fiscal third quarter 2020 performance which marked another record revenue and profitability performance for NAPCO. Our SaaS recurring revenues continue to grow at a rapid rate. Our recurring revenues' annual run rate is now $25.4 million as of the end of March. Our focus on targeting mostly commercial end markets and professional installation is driving this continuous growth. Our cash balances remain healthy, and our balance sheet is clean with no debt. We continue to be focused on capitalizing on the key industry trends. These trends include wireless, fire, and intrusion log communicators, school security solutions, enterprise access control systems, and architectural locking products. Our management team continues to focus on the key metrics of growth, profits, and returns on equity. These metrics are important to us as well as our shareholders. Our business strategy is executing well and our interests are aligned with our shareholders as senior management at NAPCO owns 38% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our fiscal third quarter financial results, and then I'll be back with more on our strategies and outlook. Kevin?

Thank you, Dick, and good morning, everybody. For the third quarter, net sales increased 4% to $26.2 million which was a record third quarter performance and the 23rd consecutive quarter of year-over-year record sales as compared to $25.1 million for the same period a year-ago. For the nine months ended March 31, 2020, net sales increased 7% to $78.4 million as compared to $73.3 million last year. The increase in sales for the quarter and the nine months were primarily related to increased sales of our alarm communication services and sales of intrusion and access products, partially offset by a decrease in sales of door locking products. Recurring monthly revenue for the Alarm division increased 37% for the quarter, and 39% for the nine months and now has an annual run rate of $25.4 million based on March 2020 recurring revenue. Net sales for the quarter would likely have been significantly higher if not for encountered COVID-19 related supply chain disruptions which have since been rectified, and which was caused by the initial shock of this unprecedented crisis. Gross profit for the third quarter increased 11% to $12 million with a gross margin of 46% as compared to $10.7 million with a gross margin of 43% last year. For the nine months, gross profit increased 15% to $35.6 million with a gross margin of 45% as compared to $31 million with a gross margin of 42% last year. The 300 basis point increases in gross margins for the quarter and the nine months respectively were primarily driven by the previously mentioned strong increases in recurring revenue with gross margin increasing by 500 basis points to 84% for the quarter versus 79% last year and 300 basis points to 81% for the nine months versus 78% last year. Recurring revenue margins continue to expand primarily due to the continued strength of the StarLink Fire communicator sales. R&D expenses for the quarter remained relatively constant at $1.8 million, or 7% of sales compared to $1.9 million or 7% of sales last year. And for the nine months R&D expenses were also relatively constant at $5.4 million or 7% of sales as compared to $5.4 million or 7% of sales last year. Selling, general, and administrative expenses for Q3 increased 17% to $6.1 million or 23% of sales as compared to $5.2 million or 21% of sales for the same period a year-ago. And for the nine months, SG&A expenses increased 10% to $18.6 million or 24% of sales as compared to $16.9 million or 23% of sales last year. The increases for the three and the nine months were primarily due to increased media advertising, additional sales staff, and salary increases. Operating income for the third quarter increased 11% to $4 million as compared to $3.6 million last year. And for the nine months, operating income increased 34% to $11.6 million as compared to $8.7 million a year-ago. Income tax expense for the quarter decreased by $95,000 to $425,000 as compared to $520,000 last year. And for the nine months, income tax expense increased $38,000 to $1,225,000 as compared to $1,187,000 last year. The company's effective tax rate for income tax was 11% for the three and nine months and that compares to 14% for the three and nine months last year. Net income for the third quarter increased 16% to a third quarter record of $3.6 million or $0.20 per diluted share, as compared to $3.1 million or $0.17 per diluted share last year. And for the nine months, net income increased 39% to $10.4 million or $0.56 per diluted share, as compared to $7.5 million or $0.40 per diluted share last year. The change in net income for the three and the nine months ended March 31, 2020, was primarily due to the items previously mentioned. Adjusted EBITDA for the quarter as outlined in the schedule included in today's press release increased 22% to $4.9 million or $0.26 per diluted share as compared to $4 million or $0.22 per diluted share last year. For the nine months, adjusted EBITDA increased 34% to $13.3 million or $0.72 per diluted share, as compared to $9.9 million or $0.53 per diluted share last year. Moving on to the balance sheet. The cash balance at March 31, 2020, was $11 million and that compares to $8 million at June 30, 2019. Our working capital as of March 31, 2020, was $57.9 million and that compared with $51.1 million at June 30, 2019. The current ratio was 5.2:1 at March 31, 2020, and that compares to 4.6:1 at June 30, 2019. Debt remained at zero at March 31, 2020. Net cash provided by operating activities for the quarter was $1.8 million and for the nine months ended March 31, 2020, was $6.6 million. Inventory levels remain higher than normal as we continue to gear up for new product launches that we've mentioned on previous calls, including iSecure which we started to ship at the end of Q2 and continued in Q3, our new Marks Anti-ligature locks and our new line of AT&T LTE StarLink Radios. Inventory levels are also impacted by the level loading of our production output throughout the year whereas our sales are historically highest in the fourth quarter. One additional factor affecting inventory levels: we purchase some of our components from China, and to prepare for the disruption of the Chinese New Year which lasts more like a month, not a day, we purchased extra raw materials. Obviously, we couldn't predict the impact on Chinese factories from COVID-19. But this extra inventory has served us well and has limited any supply chain disruption we may have had. CapEx was $261,000 during the quarter versus $479,000 in the year-ago period, and $1,324,000 for the nine months versus $1,598,000 for the comparable period last year. During the quarter, we bought back approximately $2.4 million worth of NAPCO stock. We buy back opportunistically when we feel the shares are undervalued, and I've done so at various times over the past few years. Our cash balances would have been higher at quarter-end; however, we determined that this was an attractive use of capital during the quarter. That concludes my formal remarks. And I would now like to return the call back to Dick.

Thanks, Kevin. We continue to believe that the growth we have witnessed in our business should continue in the future as our business is comprised of 80% commercial, many of our products are deemed essential, such as non-discretionary commercial fire alarm communicators. NAPCO also plays a vital role in the healthcare vertical with our locking and access control divisions, which for example provide entry exit devices and push-pull locks with anti-microbial finishes. Recently our Alarm Lock division, DL2700 locks, were being held at the U.S. Army Corps of Engineers at a temporary field hospital in the McCormick Place Convention Center in Chicago, which had a need for access control. We were very proud they chose our Alarm Lock products. The need for security is greater now with many businesses closed and employees not there to watch the store, restaurant, or office. Recently, the New York Post published an article that stated NYPD data showed a 25% rise in commercial burglaries during this COVID-19 shutdown, and similar increases have been reported across the country and in other large cities. We continue to see growth coming from a long communicators of fire, intrusion, and the smart home category, as evidenced by the growth of our recurring revenue products. The fire radios, in particular, are literally on fire, as evidenced by an 84% gross margin for recurring revenue in Q3. The school security market remains a contributor to our growth, and there remains a significant marketing opportunity. New funding initiatives continue to take place to help the schools pay for the upgrades they need. Recently, the Kentucky legislature approved its fiscal 2021 budget which includes $40 million for school security despite the expectation of lower tax revenues due to COVID-19. We also continue to monitor the progress of the School Violence Prevention and Mitigation Act of 2019 which was proposed by the representatives Williams and Deutch in the U.S. House of Representatives in July 2019, which would allocate $2 billion over the next 10 years. We remain focused on providing schools the products and solutions they need to protect their students and faculty. Funding for school security products remains available for those who need it, plus we expect growth in this area to continue. Press releases regarding school and university security projects are issued when the opportunity is allowed for us, as you must receive approval from these institutions prior to release. Our pipeline for school security projects remains robust. While many schools are closed during the COVID-19 shutdown, projects are happening depending on state and local government directives concerning COVID-19 shelter-in-place orders, and we're starting to see more of these directives being lifted and expect that to continue in the coming weeks and months. Our recent launch of the AT&T LTE version of the StarLink line of universal fire intrusion and IoT communicators continues to gain market share, and are playing a vital role in the need for the upgrade of older 3G AT&T communicators. Our StarLink Communicators offer the widest coverage in the U.S. to deal with both AT&T and Verizon LTE service. During the quarter, we also continued to see growth of our FireLink Innovative all-in-one 8 to 32 zone fire alarm control panel with StarLink communication technology built in. This pre-configured and pre-activated unit is designed to save the dealers installation time and money, while replacing legacy learn line systems. The FireLink unit is contributing to our sales growth and also contributing to recurring revenue. NAPCO's latest recurring revenue product innovation, the iSecure commercial and residential 80 Zone Alarm system, continued its rollout during Q3. The iSecure offers the most cost-effective functionality in the industry and has the StarLink communicator technology inside, which will generate recurring revenue with every sale and installation. The product is designed for the new breed of professional installers and savvy consumers. iSecure has installation times of one hour and offers the feature-rich set for smart home capabilities that many residential small to mid-sized businesses are looking for today. As we look to the future, expanding our cellular communications technology to other areas in the security business is a focal point for our strategy. During this call, we plan to introduce a cellular-based locking and access control product line using StarLink technology. These product lines will generate hardware sales, as well as recurring revenue while enabling our dealers to provide valuable new services to their end users. Finally, I'd like to take this time to share some exciting changes in leadership in our sales and marketing team. As mentioned in this morning's press release, we're excited to announce the hiring of Stephen Spinelli as our new Senior Vice President of Sales. Stephen brings over 25 years of experience in the security business to us, which will help us expand our presence in new channels within the industry while continuing to grow existing channels. Jorge Hevia, a long time valuable employee of 20-plus years, will now be our Chief of Marketing going forward, and with his efforts focused in this area, plus the addition of Stephen as SVP of Sales, we believe our team has been strengthened for the years to come. We'll begin our Q&A session portion of this call in a moment. Our fiscal Q3 2020 was a very successful record-breaking quarter for us as we continue to grow the company and deliver strong profits. We're now in our fiscal fourth quarter and our business, like countless others, will likely encounter market challenges that can neither be fully anticipated nor quantified. As we continue to make progress against COVID-19, we believe we're well-positioned in the commercial non-discretionary sector of the security market to weather the storm and look forward to the resurgence of the economy. We believe the strong growth of our recurring revenue should continue in the future, while also expanding our profitability. NAPCO's senior management maintains a high-level of ownership in our equity, approximately 38%, and I would like to thank everyone for their support and for joining us in this exciting future we have. Our formal remarks are now concluded. We would now like to open the call for the Q&A session. Operator, please proceed.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Matt Pfau with William Blair. Please proceed with your question.

Hey, guys thanks for taking my questions and nice job operating in a difficult environment here. So first, I wanted to ask on the production facility in the Dominican Republic, maybe you can just give us an update on how that's been performing and if you've been able to maintain adequate levels of production?

Kevin, do you want to take that one?

The Dominican Republic is operational despite the challenges posed by COVID-19, similar to many regions worldwide. We experienced a minor disruption at the end of the previous quarter and the start of this one, but it turned out to be manageable since we were scheduled to close for Easter week. We have three planned shutdown weeks: Easter week, the week following the end of our fiscal year, and Christmas. Due to the disruption at the beginning of April, we utilized the closures effectively by trading shutdown periods. We closed for two weeks, shifting the first week for Easter and the second week for our end-of-June shutdown. This strategy didn't incur additional costs for us. Fortunately, we are back to full operations, which sets us apart from some competitors facing significant shutdowns, like a rival in Mexico. We have the experience to navigate through crises, having dealt with the 2008/2009 economic downturn. Back then, we had significant debt and no recurring revenue; now, we have no debt and a $25 million run rate, along with cash reserves. While we can't predict the duration of the current situation, we believe things will return to normal soon as states begin to reopen.

Great. And then I wanted to also ask for an update; one of your 10% customers, a large distributor last quarter put a pause on its purchasing as it was going through an M&A process. Could you just give us an update on if you saw that distributor come back in the quarter and make additional purchases?

Yes. So this distributor who last quarter, they were in the midst of being acquired; now it's determined who's acquiring them, the acquisition is going forward. It hasn't closed yet but it will, it's one $8 billion company acquiring another $8 billion company. We saw sequentially, our business with this customer go up 64%. Today, we're virtually back to where they always were and where we think they always will be. We also, of course, look at the sell-through statistics. And the sell-through stats were up 9% in the third quarter versus the third quarter a year-ago. So these were all very positive signs. The way we look at this is, yes, this is a change. The acquisition hasn't concluded yet. But this is more opportunity for us. This is another giant distributor taking over a fairly big one. The company that did the acquiring, we didn't do any business with them. So now we have the chance to do a lot more business. So we don't look at this negatively, we're very happy with the 64% sequential increase. And lots of opportunity ahead is the way we view it.

Got it. And last one from me. Really nice increase on the recurring gross margin, obviously due to the strong sales of your fire products; how should we think about that gross margin going forward? Should there be some variability there depending upon product mix, or should it sort of stay at this 84% level? Thanks.

Well, Matt, gross margins tend to jump around a little bit. We were at 78%, a couple of quarters ago. We got to 81% last quarter. Now we're at 84% in Q3. It can go higher. The more concentration there is of fire radios where we get more money for those than the other radios, the better that mix is going to be. I always like to be conservative. So I don’t like to anticipate it's 84%, it's going to 86% to 88% to 90%. But who knows, it could. We're focused big time on getting the margins as high as they could get. And we're doing a lot of other things beyond the mix to try to get those margins high. So whether we'll be 84% in Q4 and beyond, I can't really say, but suffice it to say, gross margins for recurring are phenomenal. And then as we add more recurring revenue to our other product lines, it's going to get even better because we're not just satisfied that recurring revenue isn't even 20% of the business. We want it to be 50% of the business. And as we go forward and do more things and have our engineers develop more products, that's our goal, that's our five-year goal to have 50% in recurring. And could you imagine that with these kind of margins, it's unbelievable. So that's our goal.

Our next question comes from Mike Walkley with Canaccord Genuity. Please proceed with your question.

Sorry, I was on mute. Hope this time everybody is healthy and well on the call and congratulations, a great quarter in a tough environment.

Thanks, Mike.

So just building on that last question. When you look at kind of the fire radios which you guys mentioned on fire in terms of demand, it's my understanding they have even higher ARPUs. So is there any reason to think that the services revenue gross margin should remain below 80 or above going forward? I know you think they can bounce around but certainly seems like the high-margin business is going to be even improving in the mix over the intermediate term?

The fire radios were introduced after the initial black and connect radios, making them the newest addition to our lineup. As their share in our product mix increases, we expect overall margins to rise. I believe this trend will continue. While margins can fluctuate, I see no indication that our growth into the 80s won't carry on. We are actively promoting the fire radios, and we also offer the FireLink panel, which includes a built-in radio that buildings are required to install regardless of other factors. Therefore, I see no reason to think this growth won't persist.

Great, thanks. I know it's a different world and probably the last time you guys set longer-term targets. But yes, how are you feeling about just the recurring revenue ramp and mix of business over time? And say it hits 50% of your business longer-term. What do you think that does to the model in terms of adjusted EBITDA margins?

Our five-year goal of achieving a 50:50 split remains unchanged. At that point, we expect our EBITDA margins to be impressive, reaching nearly 50%. It’s difficult to predict whether we will achieve this within five years, but we are still pursuing our other target of $40 million in recurring revenue by June 2021. It’s possible that given the current circumstances, this goal may take a few additional quarters to reach. However, achieving such a run rate in a relatively short period of one to one-and-a-half years is significant for us. We are committed to this objective, and while COVID-19 will eventually subside, we anticipate continuing to generate recurring revenue. The timing is challenging to forecast, but overall, we view this as a very successful trajectory.

Okay, thanks. Just as you look into the June quarter obviously, a lot can change, the states open up and demand improves later in the quarter. Can you first maybe help us quantify what happened at the Dominican Republic in terms of the lot sales at the end of March? Have they already been sold into the channel here during the June quarter? If you could help us with that? And then, based on where you're seeing strength more on the enterprise side, how does that impact what you sell during the quarter in terms of gross margin? That's clearly leverage is important, but is there a product mix that's maybe more favorable in what you're able to sell right now? Thank you.

More than a million dollars in sales was affected in the last week of the quarter. However, as we resumed operations in the new quarter and the demand returned, those sales are increasing. This is expected to positively impact Q4. We are uncertain about the overall outcome of Q4; last year was exceptionally strong with $29 million, and while we will strive to achieve similar results, there are no guarantees. A significant portion of our sales typically occurs at the end of the quarter. During the $29 million we achieved last June quarter, about three-quarters of that revenue came in the last few weeks. This situation benefits us, as more states open up and business returns to normal leading into June, giving us a chance to recover or at least meet our targets, which remain above last year’s figures. We aim to maintain our streak of successful quarters, and while this quarter may be challenging, we believe it is possible. The sales mix is a concern; school security plays a substantial role in our sales. Universities do not appear to be as affected as K through 12 schools, as they have funding and are in a good position to invest in security now. In contrast, K through 12 schools face budget constraints but have received federal grants specifically for security, and while they are struggling, they will eventually return to normal operations. Margins are generally better on university jobs, but all schools will eventually require security solutions. This situation is like a pause, but the need will persist. Fortunately, many of our sales representatives are starting to travel in states that are reopening; one of them visited a school job this week. We are relying on schools to help maintain margins. The more products we process through our Dominican Republic operation, the better our margins will be. Therefore, our goal is to maximize performance this quarter, as our Dominican Republic operation is operational, and we are eager to see how it unfolds.

Okay, last question for me and I'll pass it on. More big picture strategic with your mix pretty good for this tough environment. Some of your competitors might not be as so, how do you see NAPCO's position in the market on the other side and especially since like you highlighted earlier, you have a much stronger balance sheet than 2008/2009; do you see your market share gain opportunities or even the ability maybe to consolidate the market on the other side? Just strategically, how are you guys thinking about things? Thank you.

The way we're thinking about it is we're going to be adding recurring revenue to all our product lines. And come the fall this year, we'll have it for a cloud-based radio system which will allow access control of locking dealers to be able to get recurring revenue, a different type of recurring revenue for them, utilizing our hardware and paying a fee for the services that we're going to provide them. And we think that's going to be very exciting for them. It's a system where it doesn't require the IT departments of companies to give it a blessing; the dealer and the management of the company get it done without affecting the network of the company. It’s going to be an exciting time for the dealers. And we're gearing up for that. And that’s going to add now recurring revenue to all three legs of our business. And we still feel very confident that, as Kevin was talking about, that we can come out with additional technology products. There’s a lot of products we have in the pipeline that are going to be coming out or going to be enhancing our recurring revenue with equipment and hardware products which are new and unique to the industry. We believe that five years out, we will get to that 50:50 split of recurring revenue and equipment sales. So we’re optimistic that way. More and more security is needed; more and more security is going to be needed. It’s a very important aspect of life today. So we’re in a good field and we know how to capitalize on it. And we also know how to control our costs. As you can see, we've controlled our costs very well, so that we can get more efficiency out of our operation. So keep an eye on that because we don’t want that to get out of hand.

Our next question comes from Jeff Kessler with Imperial Capital. Please proceed with your question.

Thank you for taking my questions. Can you provide some insight into which sectors you are currently working with that are facing site restrictions, and the challenges you’re experiencing depending on the integrator? Additionally, which markets are allowing your installation and service teams access? It seems like universities are shut down, but can you elaborate on the first group that faces more difficulties? Also, are there cases where small businesses have placed orders that have not been fulfilled due to issues on their end?

Well, Jeff, we’re very diversified. Because we sell more than 15,000 security dealers and integrators and we sell more than 10,000 locking people. And the products that we sell are in all areas of all types of commerce, as well as residential. Of course 80% of what we do is commercial and a lot of that is legislated into a get a certificate of occupancy for buildings. We have great demographics happening now where buildings are changing over from landlines, plain old pots lines, and they need a communications network that works for them. And that’s what our StarLink Radio Communicators do. So in a lot of cases, the work continues in all kinds of buildings, and they’re converting those buildings over to radios and utilizing our network. So it's scattered all over. I can’t give you a specific of one type of business or another. But you read about in the newspapers that there’s a lot of — crime is picked up a lot in the commercial line because lots of buildings are closed. And there’s burglaries and break-ins, plus you have the phone lines that are not functioning in places that have to be engaged with new StarLink Radios due to the fact that the phone company doesn’t want to support those lines. So we need continuity of communication between a building and a central station. And when the lines go down, because of service issues, the alarm company is dispatched, and the communications link is made using our StarLink. So there are a lot of driving forces in cross-currents, but all of it bodes for good business going forward.

My follow-up question is about the fire business. It has been established for quite some time and is characterized by low growth and high regulation. It's a reliable market if you meet the necessary standards. However, there are large companies in this sector that have marked their territories as providers of products ranging from enunciators to basic online communicators. How can you gain market share from these long-established leaders? It seems unlikely that a smaller company could suddenly compete effectively and add new products that customers are seeking. There must be some resistance or pushback from these established firms despite the success you’re experiencing with your new fire product.

I've experienced this before when we developed new products and gained significant market share, which is how our company originated. We created a tape dialer communicator at the start, and our big competitors, who have been in the industry since the 1920s, couldn't produce the same technology we did or entered the market later with inferior versions while we established ourselves. We're seeing a similar situation today; there's a lot of innovation and uniqueness in our communicator business. The value we provide is being acknowledged in the industry, leading to a lot of interest. Our competitors are like massive ships that take time to change direction, while our strategy is clearly effective as shown by our success. We're planning to introduce more products and stay ahead of the curve. With the shift in communication moving towards radio rather than traditional copper lines, which many competitors still rely on, the functionality they offer doesn't match what we provide. Dealers want the best for their clients, and we're attracting higher-quality dealers as a result. This strategy has been effective since the beginning of NAPCO, it has driven our growth, and it will continue to do so. As Kevin mentioned, our five-year plan aims for a balanced focus of 50% on equipment and 50% on recurring revenue, leading to strong margins.

Our next question comes from Abba Horwitz with Old School Partners. Please proceed with your question.

Good morning. I have three small questions. First, what was the average price at which you repurchased shares during the quarter?

$16.99.

Okay, that’s pretty good. I also wanted to understand your new locks called Germline that you have on your website. It seems like this presents a new opportunity, which you mentioned at the beginning of the call. Could you explain what the opportunity is for you with these Germline locks that you are starting to sell?

Are you talking about the ones with the coatings on them?

And anti-microbial finishes?

We do extensive work with hospitals through our dealers and we have developed anti-microbial coatings applied to lock handles that eliminate germs that come into contact with them. This product has gained significant popularity since its introduction a couple of years ago, and I anticipate it will continue to grow in demand. This specialized coating effectively kills germs upon contact.

Have you gotten interest since the whole corona breakout?

We’re selling lots of different types of locks. As you can see, we got chosen by McCormick for their hospital because they recognized that our locks are special and more and more dealers are recognizing that. So I expect more and more business from that going forward. We have business from a lot of different areas, Abba. We do hospitals and we do schools and I would expect that more and more people are going to want the anti-microbial on their locks because it just makes for a safer type of environment within a facility.

Okay. But you're not seeing anything special because of the Coronavirus in terms of huge spectrum demand for this kind of product?

It's very early now, but I would expect it to be very popular.

Okay. And just one last question. Since your supply chain is mainly secure and most, if not all, of your production is based in America, including the Dominican Republic, have you seen any interest from distributors that you previously didn't work with due to supply chain issues affecting availability of products typically made in China?

Yes. We're recognizing that a lot of our competitors now make their entire product in China. And besides the fact that there’s a lot of disruption and because of the news reports about buying American and everything else, I would expect that there’s going to be a lot of disruption; with our competitors to make their products in China. So a lot of dealers are wanting to buy American. So that's going to help us also; it's another thing that helps us. Then we have our competitors who make products in Mexico, a lot of Mexican factories of our competitors are closed down. They're not allowed to operate. So we're going to get business from that also. So we're ready with ready-to-build as much as needed to satisfy the dealers. And what's great about NAPCO is we're Amityville Long Island, out in JFK airport, where they can get answers right away; they can get inventory. They can call and they speak to people who speak English and are technical. We have a very good technical department. So the dealers can get instant answers. And it's a very good thing and that's why we like to make our products and keep our business in the United States because it's a big market that we can do well in.

There are no further questions at this time. I would like to turn the call back to Dick Soloway for closing comments.

Thank you everyone for participating in today's conference call. As always, should you have any further questions, please feel free to call Patrick, Kevin, or myself for further information. We thank you for your interest and support and we look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q4 2020 and fiscal year 2020 results. Please stay safe, healthy and strong. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.