David Calusian - Investor Relations Gregory Woods - President and Chief Executive Officer John Jordan - Vice President, Chief Financial Officer and Treasurer.

Tom Spiro - Spiro Capital Management.

Good day and welcome to the AstroNova’s Q2 Fiscal Year 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the call over to David Calusian. Please go ahead, sir..

Thank you. Good morning, everyone, and thank you for joining us. Hosting this morning’s call are Greg Woods, AstroNova’s President and CEO; and John Jordan, Vice President and CFO.

Greg will begin the call by reviewing the company’s operating highlights, business outlook; John will take you through the financials; Greg will make some concluding comments; and then, management will be happy to take your questions. By now you should have received a copy of the earnings release that was issued earlier today.

If you have not received a copy, please go to the investors section of the company’s website www.astronovainc.com. Please note that statements made during today’s call that are not statements of historical fact are considered forward-looking statements within the meaning of the Securities and Exchange Act of 1934.

These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially. Such forward-looking statements speak only as of the date made; except as required by law, the company undertakes no obligation to update these forward-looking statements.

For further information regarding the forward-looking statements and the factors that may cause differences, please see the company’s risk factors in the Annual Report on Form 10-K and other filings the company makes with the Securities and Exchange Commission.

To supplement its consolidated financial statements presented in accordance with GAAP, AstroNova uses EBITDA which is earnings before interest, taxes, depreciation, and amortization and free cash flow which company defines its net cash from operating activities less capital expenditures.

The company believes that the inclusion of these non-GAAP financial measures helps investors gain meaningful understanding of the changes in the company’s core operating results. It can also help investors to make comparisons between the company and other companies on both a GAAP and a non-GAAP basis.

For more information, please see the GAAP to non-GAAP reconciliation tables in this morning’s earnings release. I’ll now hand the call over to Greg Woods..

Thank you, David. Good morning, everyone. Our second quarter results reflect the company sustained progress in achieving profitable growth through a strategy that combines product innovation, international sales expansion, and operations excellence delivered through the AstroNova Operating System.

We continue to realize competitive advantages from our StageGate product development process that is fueled the launch of several new AstroNova products in recent months. We also continue to see the benefits from our lean manufacturing culture, which is driving efficiencies across the organization.

Second quarter sales were up nearly 6% to a record $25.3 million, making our 16th consecutive quarter of year-over-year revenue growth. Sales in Product Identification segment improved 3% for the quarter, while sales in the Test & Measurement segment increased nearly 13% year-over-year.

As expected, we are continuing to see increased aerospace hardware revenue from the customers that had extended their delivery requirements in prior quarters. While we are seeing growth across a broad range of markets, overseas expansion remains a significant catalyst for our business.

International sales set a new record and we’re up more than $1 million, or 16% from fiscal 2016, with strong gains across our global distribution network. We again saw a nice uptick in our Asian business that is supported through our Shanghai Technology Center that we opened in fiscal 2015.

Consistent with our strategy, we continue to expand our worldwide sales channels, with the addition of branch offices and dealers in key new regions. Since the end of April, we opened our first direct sales offices in India and Spain and added dealers in Latin America, Southeast Asia, Europe, and Canada. Turning now to recent operational highlights.

In July, we announced that Boeing selected our ToughWriter 5 flight deck printer for its 777X program. This spring, Boeing said the 777X had already accumulated more than 300 orders and commitments from multiple customers worldwide. Production of the 777X is scheduled to begin in 2017, with first delivery is targeted in 2020.

During the quarter, we also completed the RITEC integration. The RITEC aerospace printer product line is now up and shipping from our manufacturing facility here in West Warwick, Rhode Island.

You’ll recall that since the closing of the acquisition last year, the regulatory – and for regulatory reasons, RITEC have been producing those products for us under a services agreement. Now that we are manufacturing the products in our own facilities. We expect to see incremental margin efficiencies on those printers as we move forward.

This month, we also began shipments of our new DDX100 SMARTCORDER portable data acquisition system. As I mentioned in our first quarter call, the DDX100 is the second entry in our new Daxus data acquisition product platform.

This compact lightweight system provides the ultimate combination of convenience in power for engineers and technicians in a broad range of industries. In our Product Identification segment, we continue to see strong demand for our digital color inkjet label printers across a wide spectrum of end markets.

While food and beverage remains our largest segment, we’re making share gains in many newer markets as well, such as, chemicals, pharmaceuticals, and medical applications.

One of the big drivers in the success of our QuickLabel division is the fact that, we provide our customers a unique value proposition to meet their on-site color label printing requirements.

As the creator of this business, we developed a holistic approach to offer our customers an integrated end-to-end labeling solution that is optimized to deliver simplicity, as well as consistent high-quality results.

Of course, this starts with the innovative printer designs, but also includes our award-winning software, consumables, and custom media offerings. With die cut label production facilities now operating in several countries around the world, we’re able to offer customers rapid turnaround under label requirements, oftentimes in the matter of days.

Due to the broad spectrum of applications using our printers, we now offer nearly 100 types of custom manufactured White Label stock for our printers. Each material is carefully matched by our Materials Research Center to the specific operating characteristics of our printers, as well as the end-users application.

By uniquely providing this end-to-end solution for our customers from a software to printers, to consumables, and custom media, QuickLabel has revolutionized the on-site color label printing business. Before I conclude, let me take this opportunity to publicly thank Joe O’Connell for his financial leadership as our CFO for the past 20 years.

Joe has been an important contributor to our growth and profitability, and we’re fortunate that he will be able to continue to do so in his new role as AstroNova’s Vice President of Business Development. I also want to welcome John Jordan who took over the CFO responsibilities as of August 1.

John’s experience at global technology companies combined with his business expertise and financial background will benefit AstroNova as we continue to execute our growth strategy. And now, let me turn the call over to John for his financial review..

Good morning, everyone, and thank you, Greg, for the introduction and the warm welcome to AstroNova. I’m delighted to join AstroNova and I’m impressed with what I’ve seen in the past few weeks.

I’m looking forward to working with you and the entire AstroNova team to continue building on the company’s history of innovation and leadership in data visualization technology. In my discussion of the second quarter results, I’ll first discuss the income statement then the balance sheet and cash flow.

Net sales for the second quarter of fiscal 2017 increased approximately 6% over the prior year quarter to $25.3 million, a record for any quarter. Domestic sales increased 2% to $17.6 million, and international sales rose 16%, with gains in Europe, Asia, and Canada. Foreign exchange rate movements reduced net sales in the quarter by $129,000.

By segment, Product Identification sales were $17.6 million, about 3% ahead of the second quarter of fiscal 2016. Test and Measurement segment sales of $7.7 million were up 13% over the same period a year ago, largely related to the timing of aerospace-related orders that we had received in prior quarters.

By product category, consumable sales were $14.4 million, 8% higher than the second quarter of fiscal 2016. Slower traction in ramping up new product identification hardware sales in certain selling regions damped the growth somewhat in consumable product lines moving from thermal transfer and laser printing to inkjet consumable products.

Hardware sales increased 3% over prior year quarter to $8.9 million, and sales for parts, repairs, and service were essentially flat with the prior year at just over $2 million.

Gross profit for the fiscal 2017 second quarter increased to $10.3 million from $9.8 million in the same quarter of the prior year, and gross margin was 40.7% in the current year quarter and 41.1% in the second quarter of fiscal 2016.

The variance in gross margin related largely to product mix and costs associated with product line integrations and rationalization.

Operating expenses in the quarter increased 6.8% to $8.6 million from $8 million in the prior year quarter, largely attributable to additional R&D resources in new product development and administrative expenses incurred in connection with our rebranding.

By segments, Product Identification generated $2.6 million in operating profit with a margin of 14.9% in the Test and Measurement segment reported operating income of approximately $1.1 million with a margin of 14.8%. The income tax provision in the quarter was just under $500,000 with an effective tax rate of 27.7%.

Last fiscal year’s rate was 37% in the second quarter. The difference is attributable to benefits affecting the rate in this year’s quarter that didn’t affect last year. Net income in the quarter was $1.3 million, or $0.17 per diluted share, compared to $1.2 million, or $0.16 per diluted share in the second quarter of fiscal 2016.

Cash and marketable securities at July 30, 2016 were $23.8 million, $3.4 million higher than the $20.4 million balance at the end of fiscal 2016.

Accounts receivable at the end of the quarter were $15.2 million, reflecting 52 days sales outstanding, compared to 51 days at the end of Q1 2017, 50 days at the year-end 2016, and 54 days outstanding at the end of Q2 fiscal 2016.

Inventory at the end of the quarter was $17.6 million, reflecting a 105 days of inventory on hand, compared to $14.9 million at the end of fiscal 2016, equivalent to 92 days on hand. The higher inventory level is related to the ramp up of the new products we discussed.

Capital expenditures for the second quarter were $181,000 and the company returned just over $500,000, or $0.07 per share in dividends to shareholders in the second quarter, the 100 consecutive quarter of paying dividends. The company had 321 employees at the end of the quarter, two more than at the end of Q1 and 15 fewer than at the end of Q2 2016.

Sales per employee in the quarter increased to $301,000, a 11% higher than the $271,000 per employee in the same period last year.

Orders received in the second quarter were down 5.1% to $24.1 million, mostly due to the later than anticipated ramp of the DDX100 and the push out of orders in the Test and Measurement product group that we expect to roll into the second-half of the year.

The delay in orders and the record sales level in the quarter reduced the quarter-end backlog to $15.6 million, approximately 5% lower than at the end of Q2 2016. Cash utilization continues to be very effective. Free cash flow from Q2 was $4 million, compared with free cash flow of $2.9 million in last year’s second quarter.

Now, Greg and I will be happy to – let me turn the call over to Greg for his closing comments..

Great. Thank you, John. The AstroNova Operating System is continuing to improve our operational efficiencies, as well as the overall quality of our operations. We are increasing the vitality of our data visualization product offerings to accelerated refresh cycles, as well as more frequent innovative new product introductions.

In summary, with our pipeline of new products and expanding international presence and a healthy balance sheet, we are optimistic about the future. And with that, we’ll be happy to take your questions.

Operator?.

Thank you. [Operator Instructions] And we will take our first question from….

Good morning..

Hi, go ahead with your question..

Hi, guys.

How are you?.

Hi, is this Jim? We didn’t see it or heard your name, sorry..

Yes. This is Jim [indiscernible]..

Yes. Hi, Jim.

How are you doing?.

Good.

How are you guys?.

Good..

Listen just a couple of questions to you. Lately, the QLS segment has a – seemed a little slowdown in the growth – in the revenue growth, just wondered if you could expand upon that a little bit, I know that the consumables are still producing [ph] growth.

But as a new products, people are waiting for new products to come out, can you just expand a little bit on the growth rate there?.

Yes, sure, be happy too. So it’s continuing, I think, I mentioned a little bit of this on the last call, but essentially what we’re going through now is the transition of people phasing out of the older non-inkjet printers into inkjet printers.

And I think to drive that from a revenue point of view even though we’ve got many more units of the inkjet printers going out there than the rate of the older electrophotographers and the older printers we had. The average selling price of the new printers is actually a lower dollar amount.

So you’ve got lower cost printers replacing higher cost printers is essentially what we’re seeing there. That also impacts the consumables a bit in the sense that, you’ve got kind of the higher cost consumables decreasing for those older printers as well, so kind of transition through that.

But we don’t break it out, but the inkjet printer business, which is our newer business since four years ago, we already [ph] used it, is ramping up very nicely pretty much right in line with our expectations. It’s a little bit harder to predict how people will stop using some of the older machines..

When do you think that this transition will kind of lap, is it going to take a couple more quarters or can you just give us a little bit of a timeline on what you think you will work through this transition?.

Yes, we’re more than halfway through those older generation printers, I think, for the most part, I mean, there’s some that – we’ll always stay out there. So, again, this is just really approximate numbers, so let’s say half of them are still on production.

We probably, roughly 25 printers will stay in production, because they need that specific type of printer. So I think we have another 25% of those to kind of work through.

I would guess that the bulk of those would be done by the end of this fiscal year, we’ll probably see a little bit of tail off in next fiscal year, but most of that we should be through this fiscal year..

Okay. Many thanks for that color.

So basically, unit shipments are still pretty strong, just so the overall ASP is down, and so therefore, your revenue growth is not showing as much strength, is that safe to say?.

Yes, exactly. We don’t publicly say for a competitive reasons as well..

Sure. And then just on the old delay that you mentioned in this quarter, could you just repeat? Was that mainly in Test and Measurement, or is that to your less [ph] is working, can you just, I just….

Yes, that was mainly Test and Measurement and there’s kind of two factors in Test and Measurement. And in the aerospace side, it was a bit of orders delayed into our future quarters.

And on the data acquisition component of that, we have the DDX100 I talked about even though it was ready to ship in the end of last quarter, we didn’t have our final CE approval. So we couldn’t actually ship them out of the door, but they’ve already started to go out now..

Okay. And again hear you – last quarter you gave some guidance, is there any guidance going forward, or are you sticking with that or….

Yes, our tradition is that, we do once a year and you have to see something dramatic where we need to adjust it we will, but otherwise we would just do it once a year..

Okay. And if I may continue seaseon….

Sure..

…seasonally why is Q3 is usually your – one of your biggest quarters, do you continue to expect that?.

I would think so. I mean, it’s – there’s not a huge seasonal impact. But the last couple of years that has been true that Q3 tends to be up a bit. So we kind of model it similar to the last couple of years. So we’re kind of expecting that, but it’s not a huge pop, but we would think that would be the case..

And then I read a lot lately about the aerospace Boeing’s shipments are mostly down this year. And I think from the business jet, forecasts are down for 2016 and then kind of rebounding in 2017. Now, you guys are actually seeing some uptick and some – I think, because you had some delays last year – last fiscal year.

What should we expect in your second-half here for the aerospace shipments? Are you seeing the same kind of a slowdown as we see or is there a lag in your results versus macro shipments?.

Yes, we’re not really tied at the hip. I mean at our – over a very long-term, of course, we are, but in the short-term, a lot of it depends on unique orders. We sell in three different tiers, I think, I may have mentioned this before. But so Boeing is kind of in the middle there.

So you have Tier 1 suppliers of Boeing and then you have ourselves, where we can actually supply to the Tier 1s, or the Boeing, or we can supply to the airlines directly. So there’s a variety of places where we can get orders from. In the past, there was just the Tier 1s.

So what we’ve done is kind of have gone higher and lower in a sense in terms of the market. So we now sell directly into airlines who can do upgrade program.

So, for example, earlier in the year we talked about the fact that we’re now in the Boeing catalogue for the 737 to our printers, with some about 737, they can just check the box and by our printer.

But a lot of times, what we’re finding now is, we’re getting negotiations with those airlines and say, what I’ve got – I’ve got these old 737s too, we want them to be identical for the pilot, give me a code in upgrading our old printers, so that we have, both our new 737s and the old ones all with the same printer.

So we’re able to get upgrade orders, as well as we don’t have to rely exclusively on new aircraft production..

Okay, guys. I’ll let somebody else jump in. Thank you very much..

Okay. Thanks, Jim..

[Operator Instructions] And we will take our next question from….

Tom Spiro, Spiro Capital. Good morning..

Good morning, Tom..

First, Greg, I just want to echo your comments about Joe’s service, I appreciate it very much, many years of great contribution to the company. So thank you very much, Joe, and John welcome aboard..

Thank you..

Hey, Greg, I noticed that G&A keeps – keeping up, seems to be grown faster than just about anything else for income statement, and so that’s been for sometime now and I was curious why?.

Well, a section of that, as John mentioned there in this past quarter had to do with again rebranding costs and some legal costs that we had associated with that, as well as renaming foreign branches, which tends to be kind of expensive, but at least, it’s a one-time shop there..

Do you expect G&A to come down to several $100,000 each of the next couple of quarters, or is this a new plateau or what’s your outlook?.

No, we expect that they keep dropping, that can drop dramatically, but it’s going to ramp down over the next several quarters. And then, again, as a percentage of our overall revenue, we expected also that keep decreasing..

I mean, it keep shrinking, I mean it’s actually been growing as a percentage of the overall revenue for sometime?.

No, no, I was adding on to my comment of the one-time, at least, one-time things will drop off over the next couple of quarters, and then you’ll – I think, we’ll still keep decreasing as a percentage of the overall revenue..

Okay, great. That’s great.

And CapEx seem to a little light, I think we’re up about – we spend about $400,000 for the six months, what’s the plan for the year and for a company with this the ambitious growth plan that you have, it seems a little light?.

Yes, from a year-to-date point of view, it is – we expect – our plan is to finish the year in kind of mid-$2 million range, obviously, we’re not in that take right now. But a big contributor to that is the new converting machines that we’re using. I talked about those a couple of quarters, for the first one in the end of last year.

And actually that machine has been working so well that it covers about – it runs about actually more than double the speed and efficiency of our current equipment. And is working out so well. We’ve actually expanded its use. It was designed to cover about 60% of the materials that we use.

I mentioned that we’re kind of in the 100 kind of different types of materials, as well as our aircraft paper, and that existing configuration could handle about 60% of that. We’re actually having our existing machine upgraded to at a few different stations in there, I’m not going to give the details of what it does.

But actually expanding its capabilities do about 90% of our capacity. So what happened, instead of buying another machine for $400,000, $500,000, we’re upgrading an existing one, prove out that it works and then we have kind of the more expensive one that will start cloning.

So that’s about a six-month gap in terms of – we fairly have our second machine up and running, but we feel better we go to the one we can handle almost all of our materials. So we had that kick in and then we’ve got couple of IT things that we just selected the suppliers for that actually a few weeks ago. So you’ll see those hit in Q3..

Great, great.

And then just lastly, just to be sure, I understand one of your earlier answers, your forecast – your projection for this year, which you announced at the end of Q1, you’re standing by that, you’re sticking by that as we speak today?.

Well, I guess that, we only think the change that we see a reason that it dramatically move it one way or the other, so, yes..

Okay. Thanks a lot..

Sure. Thanks, Tom..

And we will take our next question from Jeff Silver with [indiscernible]..

Hi, Greg, thanks for taking my question. You’ve made two small acquisitions in the last couple of years and they are now fully integrated into the company. And you’ve also – you also, I would imagine passed the ERP introduction phase.

And I was just wondering if you can make some qualitative comments about acquisitions and whether just sort of a sense of the degree of importance you’re placing on looking for acquisitions, maybe say couple of things about potential size pipeline something like that?.

I’ll give you a rough idea, obviously we don’t make any specific comments on acquisition. But just, in general, in terms of our strategy, it is one of the pillars of our strategy for growth. One I’ll say before getting into anything is that, overall, we’re very careful about the acquisition. So, yes, we’re kind of in a one-year of pace.

And there’s no reason financially or from a personal point of view, we couldn’t do two or more per year, it’s a function of what they are, which segment they had.

But we’re very deliberate, matter of fact, in the past six months, we’ve had a couple that got pretty fall on the process and ones you’re looking at the covers, you say, look, this is not as good as we thought and we walked away. So and we’ll continue to do that.

But essentially, I can tell you what our strategy is, there is that, we have an active program. We have a funnel just as we do in the sales process. The screens on that are number one, it needs to fit strategically.

So, I mean, for us right now, it needs to be one in these three products segments that we have the data acquisition Test and Measurement or aerospace. It was not in those areas we won’t even look at it. And then, of course, we have the normal financial screens that we would take a look at to make sure, it’s accretive and a good use of our capital.

And then we have – there’s plenty of dozen other criteria that we look at before we even get serious with things. Regarding what’s in the funnel, we do have quite a bit actually in each of those three segments.

And we’re in the process of working with a new third-party group, that’s kind of helping us in the identification of suitable acquisition targets just to kind of reinforce that. As you say, we’ve got these last two digested, they’re working well, we’re very happy with the results so far.

And if we had one that we can do and close tomorrow, we will announce it the next day. But when we get that close, you’ll hear about it as soon as everyone else, what else can I say about that..

Well, let me just say, Greg, is this something that – is this really now something that Joe is dedicating himself to?.

Exactly. And he is in – when I mentioned the other group, I won’t say who it is. But the firm that we’ve retained for that, Joe has been really working with them. Of course, he has been probably he’s working on these deals as well.

So that’s a big part of what he is doing and that we would like to ramp it up again we’ve got to be diligent about making the selections, but we’re kind of eager to get some deals done here as soon as it make sense..

Good. Thank you..

Okay..

Now we have no further questions in queue. I would now like to turn the conference back over to Mr. Woods for any additional or closing remarks..

Great. So thank you very much and thank everyone here for joining us this morning. We look forward to keeping you updated on our progress and enjoy the rest of the summer everyone. Bye now..

And this does conclude today’s conference call. Thank you all for your participation. You may now disconnect..