Scott Solomon - IR Gregory Woods - President & CEO Joe O'Connell - Interim CFO.

Tom Spiro - Spiro Capital Management.

Good day and welcome to the AstroNova Q3 Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. And now, your host for today's conference, Mr. Scott Solomon from the Company's Investor Relations firm, Sharon Merrill Associates. Mr. Solomon, 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 Joe O'Connell, Interim CFO.

Greg will begin the call by reviewing the Company's operating highlights; Joe 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 today.

If you do not have a copy, please go to the investors section of the AstroNova website, www.astronovainc.com. Please note that statements made during today's call that are not statements of historical facts are considered forward-looking statements within the Private Securities Litigation Reform 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; except as required by law, any forward-looking statements speak only as of today, November 22, 2017. 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 Risk Factors in AstroNova's Annual Report on Form 10-K and other filings the Company makes with the Securities and Exchange Commission. Now I'll hand the call over to Greg Woods..

Thank you, Scott. Good morning, everyone and thank you for joining us. The AstroNova team delivered a robust performance in the third quarter with record sales and bookings. We grew across all product categories and geographic areas.

At the same time we continue to invest prudently for the future like forming new alliances, developing new products, installing new state-of-the-art equipment and expanding our geographic footprint. Let me take why through the highlights. Total revenue for the quarter was $28.8 million, up more than 23% and an all-time high for the Company.

The increase was broad-based with Product Identification up 21% and Test & Measurement up 29% from the same period last year. On a geographic basis, domestic revenue grew almost 9% from the prior year. Our international revenue was up, an increased amount of 62%.

Profitability was also up nicely in the quarter with earnings per share coming in at $0.21 which was 40% ahead of the same period last year. Our vision to become a truly global company to compete and win in markets around the world is taking shape.

Now let's go beyond the quarter's financial results to talk about some of the key developments that are helping to drive our business forward. In Product Identification, we achieved double-digit unit growth for our inkjet printers that further fuel the demand for our ink, media and related supplies and services.

During the quarter, we introduced new label press and printer products at the industry's premier tradeshows, PACK EXPO in Las Vegas and Labelexpo in Brussels. The new products included two QuickLabel compact, high speed, thermal transfer printers, QL-30 and QL-60; they are ideal for durable one-color labeling applications.

We also launched two new Trojanlabel products at these shows; the T4 and all-in-one digital label production and finishing press, and the T2C, a powerful tabletop press that supports high capacity label production; the response to these new products at both shows was terrific.

And speaking with current and prospective customers, the reasons were evident. First, we have the most feature rich line-up of on-demand in-house digital label printing solutions on the market.

Second, we are uniquely offering not just fantastic printers but entire labeling printing solution including supply, accessories and end-to-end customer support. Our full support package provides 24/7 technical assistance, loners, repair and replacement services, and a worry-free extended warranty option.

From everything we've observed, the quality of service and support we provide is unsurpassed in the industry. So is no surprise that from a lead generation standpoint, this year's PACK EXPO and Labelexpo Europe shows produced a record response.

The ramp-up of these four new solutions is set to begin this quarter and we're excited about their potential incremental revenue contribution, particularly as we move into the new fiscal year. Updating you on the Trojanlabel integration, things are moving quickly towards completion.

The major operational thesis, finance, HR, logistics and IT are in place and we expect to conclude the sales channel integration this quarter. Moving on now to the Test & Measurement segment; of course the big news of the quarter was the Honeywell aerospace asset purchase and licensing agreement we signed at the end of September.

As we have previously disclosed, AstroNova will take over the manufacturing of Honeywell's narrow format flight deck printers. These printers are primarily used on two of the world's highest volume single line [ph] aircraft, the Boeing 737 and the Airbus A320.

In addition to production of new printers, we'll also be providing repair, support services and supplies. The agreement has been several years in the making and it's a tremendous addition to the aerospace unit which has now completed three asset acquisitions in the past four years.

The Honeywell product line is right now real house [ph], it fits perfectly with our existing business, requiring only a modest increase in our operating expenses. Our plan going forward is to transition these products into our existing facilities as quickly as possible.

We estimate that most of the production will be transitioned to AstroNova by the end of next year's second quarter. And as in our previous acquisitions, we expect the product line to be accretive in the first year of ownership.

We are particularly excited about this deal due to the large order books and accelerating demand forecast for the A320 and 737 aircraft in the years ahead. We expect to see a ramp-up in our business from the Honeywell products beginning in the fourth quarter and continuing into fiscal 2019.

Staying with Test & Measurement; our data acquisition product line also posted a solid quarter. We are starting to see some nice benefits from our investments in both, personal and product development in this section. In October, we introduced our newest data acquisition in mid-quarter, the EV-5000.

It replaces our popular Everest Chart Recorder which for decades has set the standard for reliability and ease of use. The speed, accuracy and storage capacity of the EV-5000 make it ideal for energy, aerospace, defense and other mission critical applications. Stay tuned for more new product announcements from T&M in the months ahead.

Earlier in the call I referred to our global vision for AstroNova. We believe that international expansion is one of our key strategic drivers for consistent profitable growth.

This year alone, we opened a new office in India, added sales personnel in Latin America and Asia, and set up a wholly owned foreign enterprise in the Shanghai free trade zone area.

We're also growing in Europe; to that end you may have seen the announcement we made last week about the opening of our new Europe, Middle East, Africa headquarters near Frankfurt, Germany. At nearly 20,000 square feet, our new facility is more than twice the size of the building it replaces.

On the operating side, that feature is a greatly expanded label media production area outfitted with new state-of-the-art high speed machinery, high day warehousing and four new loading docks to support around the clock operations.

On the customer facing side, it features a world-class innovation technology center with a large hands-on showroom where we can demonstrate the full range of AstroNova products.

For our customers across the EMEA region, this new centrally located hub means faster and more efficient deliveries through greatly expanded production and capacity and expanded logistic support. The new hub is up and running. We look forward to servicing customers from this new location for many years to come.

Now, let me turn the call over to Joe for the financial review..

Thank you, Greg. Good morning, everyone. I'm pleased to report AstroNova's third quarter financials for the fiscal year 2018. As you heard we're doing great presentation and the Company's revenue in the third quarter was a record $28.8 million or 23.2% over the prior year with both segments contributing to the double-digit growth.

Revenue through our domestic channel was $18.2 million in the quarter, that's up almost 9% over the prior year whereas international revenues at $10.6 million in the quarter were up almost 60% year-over-year. International revenues represent almost 37% of our total quarterly revenue.

Relative to the product lines, our hardware revenues in the quarter were $9.4 million, that's up 21.2% from the prior year and our supplies revenues were $16.6 million in the quarter, up 22.4%. While revenue from our technical services, parts and repairs were $2.8 million in the quarter, up 36.5% from the prior year.

Following [ph] the third quarter results by segment, our Product Identification revenue at $20.5 million was up 21.1% from the third quarter of fiscal 2017. Within the segment, hardware revenues increased 13.1%, driven by contributions from the QuickLabel digital inkjet printers and the Trojanlabel digital label press [ph].

Revenue from supplies including [indiscernible] in print head products was up 21.1% over the prior year. Test & Measurement segment revenues increased to $8.3 million in the quarter, that's up 28.7% from the prior year's third quarter.

The increase reflects a solid contributions from both, the aerospace and the T&M data product lines including the launch of our new EV-5000 product. Gross profit in the quarter was $11.8 million, that's up 22.3% from the third quarter of fiscal 2017.

Gross margin in the quarter was 41%, that's down some 30 basis points from year-over-year basis, primarily as dealt with some of the cost associated with the Trojanlabel integration, as well as the Honeywell TSA.

But margin -- it's a significant improvement from the margins in the first and the second quarter of fiscal 2018 that was 38% and 37.3% respectively. We expect these to complete the Trojanlabel integration by the year end, January 31 and the Honeywell TSA would run above six months.

Turning to our operating expenses; selling, R&D and G&A expenses were $10.2 million in the third quarter or representing 35.3% of our total revenues.

This compares with operating expenses of $7.8 million or 33.4% of revenues in the year ago quarter reflecting the increased costs associated with the Trojanlabel that we acquired in February of fiscal 2018.

Operating income in the third quarter was $1.6 million or an operating margin of 5.7%, this compares with $1.8 million or a margin or 7.9% in the comparable period in 2017 and $943,000 or 3.4% margin in the second quarter of the current fiscal year.

Looking at the segment operating profits for the quarter; Product Identification earned $2.7 million in segment operating profit with a margin of 13% while our Test & Measurement segment posted operating income of approximately $1.6 million with a corresponding margin of 18.9%.

Our federal state and foreign tax provisions in the quarter were $201,000 representing an effective tax rate of just over 12%. The low effective tax rate reflects a study done by on our R&D and tax credit which provided a tax benefit of $285,000. We also received a benefit related to our federal return to provision adjustment on our 2017 tax return.

Third quarter net income was $1.4 million or $0.21 per diluted share, that's up from $1.2 million or $0.15 per diluted share from the third quarter of fiscal 2017. Reflecting strong demand in both segments, bookings in this year's third quarter was $31.2 million, that's an increase of 38.2% over the same period last year.

The backlog increased 21% from the year-over-year to $21.3 million at the end of the third quarter. Let me touch on the Honeywell transaction briefly; Greg talked about the significant benefits of the agreement to our aerospace business.

As we've discussed in our SEC filing, the agreement provides for an upfront payment to Honeywell of $14.6 million in cash and additional payment of $400,000 upon completion of certain manufacturing transition and the assumption of certain liabilities of royalty payments based on gross revenues from sales of the services associated with the printers with the minimum total royalty payment equal to $15 million in aggregate to be paid over a 10-year period.

The upfront payment was funded through our existing credit facility which was amended to increase the amount available for borrowing under the revolving credit line to $15 million. Moving to the balance sheet; our cash position at the end of the quarter was $11.8 million versus $24.8 million at the end of fiscal 2017.

The change primarily reflects the purchase of AstroNova's shares in the second quarter of the current fiscal year.

Accounts receivable at quarter end were $17.9 million reflecting some 48 day sales outstanding, our inventory value was -- at the end of the quarter was $23.7 million, that's up 21.3% from year over and represents 126 days of inventory on-hand. Our revenue per employee increased to $315,000 per employee, it's up from $300,000 of prior year.

Our capital expenditures during the first nine months of fiscal 2018 were $1.4 million distributed among capital improvements in machinery, as well as information technology, as well as building improvements. Finally, the Company paid $473,000 in cash dividends during the quarter at $0.07 per common share.

That completes review of AstroNova's third quarter financial results. Now, let me hand the call back to Greg for closing comments..

Thanks, Joe. To wrap up, the global AstroNova team executed well on our third quarter delivering record revenue in bookings and increases in all major product groups. Our focus on driving organic growth through product innovation and geographic expansion complemented by the Honeywell agreement bodes very well for our business in Q4 and beyond.

Our strategic plan is working. The investments we have been making in building up our global team and infrastructure position us well as we conclude fiscal 2018 and gear up for the year ahead. Now Joe and I will be happy to take your questions.

Operator?.

[Operator Instructions] And for our first question we go to Tom Spiro with Spiro Capital..

I thought I might start by focusing from [indiscernible] on the Honeywell transaction since it seems to be such an important one for the Company.

I understand that you will be supplying slide deck printers to 737 and 320s; on the 737s, could you give me an estimate roughly of what percentage of the new production goes for wide format, what for new format? And what percentage of the new 737s take no printer at all?.

Yes, we will update on that Tom. We'll know more about it obviously when we start shipping the narrow format; so we have not good data exactly on how that breaks out. We know that most people do take a printer and we estimate that more take the narrow than the wide format but that's about as actual I can give you at the moment..

I see. And how about on the 320 the same -- same set of questions..

It's a bit different, the A320 because the Honeywell printers, what they call SFE or standard equipment essentially on the A320. There is only one printer on the A320..

I see. So you're paying $15 million or so upfront and you've got the royalty which is $1.5 million a year over 10-years which is probably something like a $10 million or $12 million present value.

So it's a $25 million acquisition plus you've got the contingent potential, can you give us some senses of how the financials of it -- I mean, how important is this to aerospace; how much does aerospace grow? Is it going to be up 50% figure or 20% figure or 100% figure, just some kind of broad sense of -- I see what it cost but some broad sense of the upside to it?.

Yes, it's -- we can't really give you that. I mean what you can do is, you can take a look at -- probably do your own analysis there, take a look at how many A320s have been built and how many are going forward.

What I can tell us is this Honeywell product line has been out there for about 20 years, since a huge installed base; so that drives the parts, spares, repairs, and the supply business.

And then you can take a look at A320 production, it's online, it's easy to find, there is a 10-year or 20-year forecast actually from both, Airbus and Boeing, and we can run the numbers..

And that's why I was asking for the percentages a moment ago but -- okay….

100% on the A320 and -- you will have to -- you can find out in the industry analysis online roughly..

Okay.

And is this transaction expected to be accretive in the fiscal year '19?.

Correct..

Next year; the new fiscal year?.

Yes, we're starting in February 1..

Correct. And lastly, the financing of it; we've now financed it off -- I guess it's our revolver.

Do we plan to refinance that into some kind of a term loan? And if so, when?.

Good question, Tom. Yes, we do.

We'll have that -- we'll close on a new term loan on the end of this month here which is very favorable rate and we'll basically then restore the revolver; as you may recall, we had basically a $10 million revolver available through Bank of America and that will be restored after we establish these new term loan for $15 million through Bank of America, as well..

That's great.

And are we going to be manufacturing the Honeywell equipment -- former Honeywell equipment in our facility in Rhode Island? Is that -- we're bringing all over to Rhode Island?.

Yes, that's correct. So it's now in Asia and we've already had teams in multiple visits actually over there now to bring that back. And unlike Joe said, we've got about a six month window, we hope to do it even sooner than that; again, these aerospace deals, it's a function of the end customer and regulatory approvals..

I see.

And the quarter just reported where revenues from the Honeywell transaction in the quarter just reported?.

A little bit but there -- we only had about a month of -- owning it, so it is pretty minimal in that quarter..

And how about the -- sort of integration cost and such in the quarter? I noticed for example, your G&A was way up in the quarter; is there a lot of -- I don't know, acquisition expenses or something in there or what's going on?.

No, that's exactly right, Tom. With the combination of both, there is still some spending going on with Trojanlabel, as well as the Honeywell but yes, we probably picked up about maybe a couple of hundred thousand in terms of the spending in the third quarter related to the two activities..

Okay.

Just to stick with G&A for one second, it was up so much -- was there something else going on besides the couple of hundred thousands from acquisitions?.

Yes. We've got -- that is also, we've got a search going on for CFO which is in that number. Also we had a couple of other outside with some part of the tax work that we paid for associated with the research on the R&D tax credit also was funded as part of the G&A expenses. [Indiscernible]..

I'm sorry, go ahead..

No. I think it should be back, we've had some one-offs quite frankly in this third quarter which I don't think you will necessarily see at the same level in the fourth quarter and certainly not in fiscal 2018..

[Operator Instructions] And for our next question we go to Steve Bush with Everglades Research [ph]..

Most of my Honeywell questions were kind of answered but maybe my own ignorance should ask some questions.

Are we going to be able to replace the installed base of the 737 and 320s with any of our newer printers or is it all going to be Honeywell printers?.

No. On the 737 we already have products on that aircraft, so tougher to five [ph] is our newest wide format printer which is available in that aircraft.

And you may have seen the announcement earlier this year that we do have a narrow format version of our printer, also [indiscernible] that was approved for the catalog in -- I think probably February of this year.

So we already have products on those aircraft, so it's really upto the customer -- the customer being the airlines primarily to decide which printer they'd prefer. So in some cases, people may replace it with ours, in some cases they may take the Honeywell or obviously in the past, maybe [indiscernible] product on that aircraft also..

So which one do we get the highest margin on; do we have the ability to kind of sell upto that or….

Yes. I mean, that's -- we don't really comment on that but it's really what -- the products have different features and benefits, so it's upto the end customer to select what's best for their operation..

I see, okay. All right, I like it anyway.

Is there any other potential business we can grab from Honeywell? I know they are doing a lot of reorganizing?.

Yes, we always talk to a lot of people, so it's -- we have a pretty tight shelter on what it has to be, it's got to fit into our strategy and exactly the businesses -- business areas that we're in, and there are some Honeywell and Rockwell and lot of people have businesses that we could be a good fit; so there is a lot of other companies.

So, we're always in the look for that and if we see something good, we'll pursue it..

Right.

While clearly, I think we've doing good job of using our cash in a prudent way now going forward; is there -- in order to grow and now take on too much debt or debts cheap right now and you guys have a pretty strong balance sheet, so you can probably get good rates but would you ever do a sale leaseback for the Rhode Island property or not?.

I don't think at this point, Steve. I think, we -- our expectation is to really throw up some decent cash for the company. I think we've got some product and margins and certainly we think that the Honeywell acquisition is going to be -- or I should say the licensing agreement is going to be a nice opportunity for us to increase that cash flow.

So I think at this point we're looking at all the different options but I'm not sure with necessarily the sale lease pack would necessarily be the one we would pursue at this point..

So you guys have a lot of products to go across a lot of industries, printer-wise, label-wise; are you seeing any slowdowns anywhere? Are you seeing a pick-up in activity across the world or you're kind of on the front lines of the basic royalty of the small business?.

Like I said in my opening comments, we're seeing a very good response around the world. I mean, almost all of the economies that we deal in; and if you look at the projections for calendar 2018, for the most part they are all looking pretty good from a macro perspective.

And as I mentioned earlier, we're expanding into a lot of new areas, all of which have good GDP forecast which bodes well for our businesses. The aerospace is pretty well published specs on that, you can see that they are forecasting very good backlogs, the Dubai Airshow just completed, there are lot of sales for both Boeing and Airbus and others.

So it's looking pretty good at this point..

Definitely the airline side was picking interest in the last few months; so are you getting any contact from the larger investment firms, coverage now; I mean we're still pretty small market cap-size, so I'm just kind of gauging when we flip the script and become interesting to some of the bigger investment firms out there?.

Yes. We do obviously from time to time, and we do have an investment relations firm. As a matter of fact, Joe and I will be out at the -- the next one for us is the LD Micro-Conference which is their 10th Annual Event which will be out in California and Los Angeles in December 6.

So we may be attending multiple events there and pretty much every time we go to LAN [ph], we're talking to new investors; I mean, there is our existing investors who typically run into as well, but I'd say probably one-third or maybe even more of the one or one's we have there with new investors..

I think also to add to Greg's comments; I think that -- we hope to expand the participation next year in industry conferences. I also think that one of the things we have on our agenda is an Investor Day here at [indiscernible].

I think we've had a lot of interested people coming to see first-hand the operation, I think the transformation is taking place and the company is quite significant; so I think the timing perhaps is somewhere in perhaps Rhode Island, Newport is a lovely place to visit at the end of the summer; so we're thinking investing there will be most appropriate to plan for fiscal '18..

That would be awesome, excellent. As a long-term investor I've been very happy and I think you guys are now in a growth path better, and very appealing to me. So I thank you, and good luck..

Thanks, Steve..

And with that ladies and gentlemen, we have no further questions on our rooster. Therefore, Mr. Woods, I will turn the call over to you for any closing remarks..

Thank you. And thanks to everyone for joining us on this call this morning. We look forward to keeping you updated on our progress and have a wonderful Thanksgiving. Bye now..

Thank you. Happy Thanksgiving all..

And ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect..