David Calusdian - IR, Sharon Merrill Associates, Inc. Gregory Woods - President and Chief Executive Officer David Smith - VP, Treasurer and Chief Financial Officer.

George Melas - MKH Management Company, LLC.

Good day, everyone, and welcome to AstroNova’s First Quarter Fiscal Year 2019 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to David Calusdian. 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 David Smith, CFO.

Greg will discuss the company’s operating results; David 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 fact 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, June 5, 2018. 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 turn the call over to Greg Woods..

Thank you, David. Good morning, everyone, and thank you for joining us. Let me provide you with a brief overview of our Q1 performance. Revenue increased 29% over last year to $31.5 million.

The T&M segment turned in an especially strong quarter with a record quarterly revenue of $11.5 million, up 98.4%, with significant contributions from recently acquired Honeywell Aerospace printer product line. In addition, we achieved double-digit growth from our line of data acquisition and recording systems.

The Product Identification segment with its product line of QuickLabel-branded digital color label printers and related supplies, along with the TrojanLabel product line of digital color label presses and commercial printing systems continued their year-over-year growth with a 7% increase over the prior year.

During the quarter, we accomplished a major milestone in the Honeywell printer transition by completing the installation of a new production line for the Honeywell printers in our West Warwick location.

That line has since been qualified and I’m pleased to report that two weeks ago, we transferred the production from the Honeywell plant in Asia to our facility here in Rhode Island. The takeaway is that production of these printers is up and running in a state-of-the-art lean one-piece-flow operation.

With the production successfully transferred, we can now focus on obtaining the necessary regulatory and customer approvals required for direct ship authorization. During that process, which we expect to take several months, we will continue to incur significant charges related to the transition services agreement with Honeywell.

However, we expect to complete the majority of this work before the end of the year. The transfer of this production line was a significant accomplishment, and I’m exceptionally proud of our team for getting it done in a timely manner. The Honeywell integration is one of several highlights from our Aerospace business in recent months.

Let me touch on a couple of the others. In April, we received a Supplemental Type Certificate from the Federal Aviation Administration. This certificate allows us to install our ToughWriter 5 flight deck data printer, or TW5, as a retrofit on six models of Boeing 737 next-generation aircraft.

For those of you who are interested, this includes the 737-600, 700, 700C, 800, 900 and 900ER series aircraft. Aircraft retrofit programs represent a new world-wide market for our TW5 printer.

For airlines operating these aircraft, switching to the TW5 typically means a 40% reduction in printer weight, resulting in significant fuel savings over the service life of the aircraft. Our aerospace printers also continue to gain traction on Boeing’s newest 737 MAX aircraft.

China’s Shandong Airlines is the most recent carrier to select the TW5 for its new Boeing 737 MAX aircraft. This follows a similar commitment from carrier flydubai in March. Turning now to our Product Identification segment, revenue was up 7% in the first quarter from the prior year.

QuickLabel continues to see nice growth in its inkjet printer units and we’re excited about these – the response to these new products that we’ve introduced over the past few quarters.

In April, we announced the first shipments of our new Trojan T4, which is the flagship color label press in our finishing system product line that was first delivered to new customers in North America.

The T4 changes the game for small and midsized commercial printers, allowing the move into high-production digital printing at a far lower cost than competitive offerings. The pressure ramp up of the TW4 and T2C are getting underway nicely and we expect these products to accelerate TrojanLabel growth as we move through the fiscal year.

The customer response to our new Innovation Technology Centers has been terrific. As I mentioned in our Q4 call, to date, we’ve opened centers in Chicago, West Warwick, Copenhagen, Shanghai and most recently, Frankfurt, Germany.

The German location which serves as the Europe, Middle East, Africa is now in full production mode, which should significantly increase our distribution efficiencies in those regions. Our next Innovation Technology Center will open later this quarter in Mexico City.

We also continued to enhance our corporate governance during the quarter with the employment of Yvonne Schlaeppi, Managing Director, Partner at international strategic advisory firm, Stratevise, to our corporate Board of Directors.

Yvonne is a seasoned global business executive who has served as General Counsel at leading international corporations, including companies in the printing solutions and manufacturing industries.

Her extensive international business background is a valuable addition to the AstroNova Board, as we continue to enhance our presence in Asia, Europe and Latin America.

Yvonne is the second Independent Director appointed to the Board in the past six months, following the appointment of Dick Warzala, the Chairman and CEO of Allied Motion Technologies last December. Now let me turn the call over to David for the financial review..

Thanks, Greg, and good morning, everybody. As Greg noted, we had a solid Q1 with revenue up 29% from the prior year, with Test & Measurement accounting for the majority of the increase. Domestic revenue was up 22% year-on-year and accounted for 61% of the total sales. International increased 40% and accounted for the other 39%.

Looking at revenue by segment, as Greg said, Product Identification increased 7% over the prior year, which reflected higher sales in hardware – printer hardware and supplies. Test & Measurement was up 98% from the same period last year and reflected primarily contribution from the new printers, but also from other hardware repair and supplies.

By product category, consolidated supplies revenue in Q1 was up 13% from the prior year. Hardware revenue increase 64% and revenue from service and other revenue grew 21%.

Gross profit was $12.1 million, or 38.5% margin, compared $9.3 million or 38% margin – 38.0% margin for the prior year, largely due to the higher revenue and some favorable product mix.

Operating expenses of $10.8 million were 26% higher in the first quarter, as customer relationship and tangible assets acquired in the Honeywell deal now amortized into sales expense. Operating expenses as a percentage of revenue declined roughly 70 basis points from last year.

Operating income increased 79% in Q1 and operating margin improved to 4% in the quarter from 2.9% in the prior year.

Product Identification generated operating income of $1.7 million for a segment operating margin of 8.3% of revenue versus $2.5 million, or 13.4% of revenue last year, the change primarily related to increased investments we’ve made in the last year to support our growth strategies.

Test & Measurement generated operating income of $2.3 million for a segment margin of 19.6% versus operating income of 71,000, or 1.2% last year, the increase driven primarily by sales from the acquired printers. The income tax provision in Q1 was approximately $181,000 for an effective tax rate of 18.2%.

You can expect or we can expect at this point a full-year rate in the 27% to 28% range.

As we mentioned in the pressure release, we were able to recover a total of $1.4 million in income from a change in accounting estimates of that product and operating costs during the period that the aerospace printers were being manufactured by Honeywell in Malaysia, as well as better estimates about rebates due on those products.

We’ve incurred a lot of transition costs over the last two quarters, so this helps.

And while we will still incur additional costs until all the production – all the contracts rather are transferred directly to AstroNova, now that we have manufacturing under our own roof and under our control, we expect this product line to be nicely profitable and increasingly so over the balance of the year. Turning to the balance sheet.

We exited the first quarter with approximately $21.4 million in debt, $6.8 million in cash and net debt-to-capital at about 18%, so our ability to service the debt remains strong. Working capital was about a $5 million use of cash in the quarter, largely to support the Honeywell business and the transition of manufacturing.

Working capital remains an opportunity area as we move through the year. Capital expenditures for the first quarter are a bit over $0.5 million and normal CapEx remains in the $2 million to $2.5 million range.

However, as part of our growth initiatives, we have just decided to implement a new state-of-the-art ERP business system that will unify all of our global operations.

We’re currently running two independent ERP systems, one domestically and one internationally, and we’re taking the opportunity while moving to a common platform to make a number of improvements that will streamline and enhance our business processes.

We’re in the early stages of this implementation and this may all change a bit, but we anticipate capital expenditures of approximately $1.6 million for this ERP implementation. Most of that will occur over the remaining three quarters of fiscal 2019.

We expect a high return on investment for this project, which should improve both our revenue generation effectiveness and our operational efficiencies. Before I turn the call back to Greg, I want to remind you that we will be in Chicago in August to present at the Midwest IDEAS Investor Conference.

If you’re planning to attend, we’d welcome the opportunity to meet with you. So e-mail alot@investorrelations.com to arrange a one-on-one. Now, I’ll turn it back to Greg for closing comments..

Thanks, David.

Looking ahead, we continue to expect fiscal 2019 to be an even stronger year for the company than fiscal 2018 with the results in the second quarter better than the first and improving operational performance in the second-half of the year, as we wind down the transition service agreement for our new aerospace printer product line and our new TrojanLabel products gain traction.

Now David and I’d be happy to take your questions.

Operator?.

Thank you, sir. [Operator Instructions] We’ll take our first question from George Melas with MKH Management..

Yes. Good morning, guys..

Hey, George, how are you?.

Very well. Thank you.

Can you guys give us a little bit more color on the TrojanLabel product and sort of the contributes – how is it contributing now to your revenue, to your costs? And what do you expect in fiscal 2019? And if you can’t really put numbers, maybe could you talk about the product launches and how you expect them to contribute or to do?.

Sure. So the TrojanLabel product line enhances the the QuickLabel product line in a sense that the QuickLabel is primarily focused at brand owners and tabletop production units. And TrojanLabel goes up market from that to the larger brand owners and the commercial printing market.

So to give you an idea on the price ranges, the tabletop units are typically in the $3,000 to $30,000 per unit, and the TrojanLabel products kind of go from the $30,000 range all the way up to over $100,000 for the T4, the newest one we’ve brought out.

So, as you might remember, we acquired TrojanLabel at the beginning of last year, so they were in our numbers for last year. But what they did during the year, we did some extensive market research and essentially came up with some additional products that we’ve wanted to bring to the market. The team in Denmark did a fantastic job.

We actually got those start to finish – ship the first product at the very end of the fiscal year, so about nine months start to finish. So that’s the T2C and T4 that I referenced in the call. And those products are – really, don’t have any equal in the market right now in terms of price and performance.

So let’s just go to the commercial printing market where we really didn’t have a product that was good fit there and attack a whole new market segment for the digital printing market. So yes, we don’t break out the exact sales by brand, but we do expect that it’s going to be a significant contributor to the PI business this year..

Okay. And are you launching the T2C and the T4 in the U.S.

or in Europe or sort of everywhere at the same time?.

No, we do our launches for the most part – with this one, we did it globally. And that’s really our modus operandi right now is that, we launched globally as long as we’re able to in all the countries that we serve. So that product is now being distributed around the world. There’s actually a trade show in Mexico going on right now.

We’re exhibiting some of those products..

Okay. And just to remind me sort of the products that Trojan has on the market right now, the T2C and the T4, are the newest. But they are sort of older or I don’t know if legacy is the right word, but older product that they sell as well.

Is that right, or...?.

Yes, there’s a full product line. The other main products are the T2 and the T3, which you can see all of those on our website there..

Okay, great. Okay. Thank you very much..

Thank you, George..

[Operator Instructions] And there are no further questions at this time. I would like to turn the call back over to Greg Woods for any additional or closing remarks..

Okay. Well, thank you for joining us this morning. We look forward to updating you on our progress and have a great day, everyone..

And that concludes today’s presentation. Thank you for your participation and you may now disconnect..