David Calusdian - President, Sharon Merrill Associates, Inc. Gregory Woods - President, CEO & Director David Smith - VP, CFO & Treasurer.

Richard Ryan - Dougherty & Company.

Good day, and welcome to the AstroNova's Second 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 from the company's Investor Relations firm, Sharon Merrill Associates. Sir, please go ahead..

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 today are not 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, August 22, 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. With that, I will now turn the call over to Greg Woods..

Thank you, David, and good morning, everyone. As you've seen, we posted a strong second quarter with significant increases in operating income and earnings per share on record sales of $33.8 million, up 23% from the prior year. On the bottom line, we reported a profit of $0.17, that's up 42% from a year earlier on improved operating expense leverage.

Revenue in our Test & Measurement segment increased more than 80%, driven by strong contributions from our Honeywell printer business and new ToughWriter contracts in our Aerospace business unit. Over the past few months, we've made excellent progress in ramping up production of the Honeywell printers at our plant here in West Warwick, Rhode Island.

We began manufacturing the printers at our facility in late May, and I'm happy to report that the production line is running smoothly. The speed of this transition is a tribute to the efforts of our Aerospace team and our ongoing operational excellence initiatives.

Even though the manufacturing of these printers is now under our roof, we will continue to incur transition costs over the next several quarters as we work through the process of transferring the many individual end-customer contracts to AstroNova.

In addition to the Honeywell product line, we're seeing a strong order cadence in our flagship ToughWriter series of flight deck printers. The recent Farnborough International Airshow in the U.K.

generated airline orders for hundreds of new 737 MAX aircraft from Boeing, and many of these carriers will be installing AstroNova's ToughWriter 5 and ToughWriter 640 printers on those new aircraft. Turning now to Product Identification. Revenue was up mid-single digits year-over-year.

The segment benefited from the ramp up in new products this year, particularly the innovative TrojanLabel T2-C, our high-capacity desktop digital label press designed for brand owners and commercial printers. In addition to the T2-C, we continue to see strong demand across the broad portfolio of inkjet color label printers.

Further strengthening that portfolio, this month, we unveiled the new Kiaro! QL-120 , the first of our second-generation Kiaro! digital color label printers. The QL-120 combines 1,200 dpi resolution with an industry-leading 50% speed increase over our first-generation Kiaro! printers that we brought to the market over 5 years ago.

Built on the pioneering Kiaro! color label printing platform, the QL-120 produces professional quality color labels on demand at a fraction of the cost and time of outsourcing. The printer integrates seamlessly into the desktop and enterprise platforms, and eliminates the need to maintain costly and often wasted preprinted label inventory.

What made the QL-120 introduction so special from our perspective is that this was the first coordinated global launch in the company's 49-year history. The QL-120 was introduced in five languages to customers around the world on the same day through our direct sales force and dealer network, reaching more than 75 countries.

The QL-120 will be among our featured products at the upcoming Labelexpo Americas and PACK EXPO trade shows this fall in Chicago. To meet the growing demand within our Product Identification segment, we continued our channel expansion in the second quarter, signing a number of new dealers in several countries.

On a related note, during the second quarter, we also opened a new Innovation Technology Center in Mexico City to better support our Latin American customers. We now have six such locations up and running worldwide. Now let me turn the call over to David for the financial review..

Thanks, Greg, and good morning, everybody. Q2 was another solid quarter as revenue increased 23% from the prior year, driven primarily by our Test & Measurement segment. In addition, we drove operating expense leverage and profit growth across the business. International revenue was $13.8 million, an increase of 34%, and was 39% of total revenue.

Domestic revenue then was $20 million, up 16.4% year-on-year, and accounted for 61% of total sales. Looking at revenue by segment. Product Identification increased 4.5% over the prior year on higher sales of printer hardware and supplies. Test & Measurement was up 81% from the same period last year.

By product category, consolidated supplies revenue in Q2 was up 10% from the prior year. Hardware revenue increased 50%. And revenue from service and other grew 16%.

Higher revenue and favorable product mix in Q2 contributed to a gross profit of $13.4 million or 39.6% margin, up from a gross profit of $10.3 million or 37.3% in the same period last year, so a 230 basis point increase. Operating expenses of $11.2 million were up 21% from the second quarter of 2017.

As I noted in our Q1 call, customer relationship and intangible assets acquired from Honeywell are amortized into sales expense, and they accounted for the majority of the year-over-year increase.

Q2 operating expenses as a percentage of revenue declined by approximately 70 basis points from the same quarter last year and more than 120 basis points on a sequential basis. Product Identification generated operating income of $2.2 million for a segment operating margin of 9.9% compared with $2.6 million or 12.5% in Q2 last year.

The difference primarily relates to investment this year in our second-generation Kiaro! products and other growth initiatives, as Greg mentioned. Test & Measurement generated operating income of $2.8 million for a segment operating margin of 23.4% compared with $700,000 or 9.9% in the prior year.

In the quarter, we incurred other expense of just over $500,000 related primarily to an adverse sales tax audit and the unfavorable foreign exchange impact of the weakened euro. Income tax provision in Q2 was approximately $459,000 for an effective tax rate of 27.8%. We continue to expect the full year fiscal 2019 tax rate in the range of 27% to 28%.

Turning to the balance sheet. We exited the second quarter with approximately $21.8 million in debt, $5.9 million in cash and a net debt to capital ratio of about 20%. Working capital statistics show a slight increase in both receivable days outstanding and inventory days on hand.

Working capital has been -- has increased due to impacts of the Honeywell production ramp as we've been careful to support West Warwick production, and hence, the customer base during the transition and because the nature of our transition services arrangement with Honeywell prior to having the direct-to-customer contracts, has Honeywell in the middle of the AR collection process.

But as I said last quarter, working capital, more generally, remains an area of opportunity for improvement and of our focus. During the implementation of our new ERP system, we're focused on enabling better asset management, but we're also taking care to avoid disruptions in operations.

So it may be a few quarters before these efforts will be found in our published financials. Capital expenditures for the second quarter were only $180,000 and $723,000 year-to-date.

I expect that our normal CapEx will still be in the $2 million to $2.5 million range for the year, but at this point, I think we will have an additional $2 million invested in the new business system by the end of the fiscal year.

Our margin improvement, higher returns on equity and the improvement on revenue per teammate to $356,000 on a trailing 12-month basis are all consistent with our operating model and the direction we are heading as we seek to enhance shareholder value.

Before I turn the call back to Greg, just want to let you know that we'll be presenting and hosting one-on-one meetings at the Midwest IDEAS Investor Conference in Chicago on Wednesday, August 30; and at the Dougherty Institutional Investor Conference in Minneapolis on Tuesday, September 6. Now I'll turn it back to Greg for closing comments..

Thank you, David. Looking ahead, we have solid order momentum and a strong backlog heading into the third quarter of fiscal 2019 and are positioned for continued growth. We expect the second half of the fiscal year to outperform the first half, with improved operating efficiencies driving gains in both Product Identification and Test & Measurement.

Now David and I will be happy to take your questions.

Operator?.

[Operator Instructions]. Our first question will come from Dick Ryan from Dougherty..

Say, Greg, where are we in the Honeywell integration? I think previously, you talked about maybe the end of this fiscal year, it might string into the first part of next year, but when do they get out of the middle of things? And then, when are you, kind of, in working through the individual customer contracts and the potential impact that could have on T&M margins in the second half of the year?.

Sure, yes, I can give you an update on that. So as I mentioned, the production, that's been fully transferred here. Now we're working through the contract assignments. And we expect -- well, we already have a few of those done. There are quite a few of them. In Q3, we'll start to see a decent pick up in that.

We've got a lot of them kind of teed up right now. So you'll see that in Q3 and Q4. And then we think there'll be some stragglers that will carry into next year, but the bulk of them should be behind us by the end of this fiscal year.

And what that -- the benefit to us then is right now, we manufacture the products and we'd have to ship them through Honeywell, so there's of course the handling charge involved and all of that. And one by one, as we transition to direct shipment to the customers, we'd no longer pay those fees..

What's been the response as you work through some of these contracts with you taking over the Honeywell product line?.

Well, it's favorable. Because certainly, we have a good reputation in the industry with respect to the company itself and also this particular product line. We do -- we have other printers with a number of these airlines. So a lot of it's really, quite frankly, just the logistics, getting into their purchasing system if we're not already there.

We have new part numbers to get set up, so it's just -- mostly, it's just mechanics..

Okay.

How should we look at the backlog flowing through? And how does that make up between the Product ID and the T&M section -- segment?.

Yes, I mean, we don't break that out separately. But from the nature of the two businesses, I can give you a little insight on that. We said that in the Product Identification space, most of the tabletop printers, there's a pretty quick turnaround in those.

The larger printers there, like the larger Trojan printers, they may be a little bit longer, both sales cycle and delivery cycle. But the bulk of what you see in terms of the long-term sales, in either -- in the backlog, relates more to the Aerospace business and some of the larger company contracts we had in Product Identification..

Okay.

David, do you have depreciation, amortization, and stock-based comp in the quarter?.

I'll give you depreciation and amortization in a second, Dick. I'll look it up while we're talking. I don't have it right off the top of my brain..

Okay. And then, Greg, maybe just the follow-up on the Farnborough Airshow. It looks like you had a decent string of orders.

Were they kind of already in the flow, would you say? Or are these new customers or existing customers?.

Yes, it was a mix. I mean, yes, a lot of these are kind of long-term efforts that we're working on. But -- and sometimes, you'll find people will hold off to the big events like an airshow like that to make the announcement. But we're in pretty good contact with a number of these customers. There's a few surprise orders, which is always nice to see.

But most it's things we've been working on..

Our next question will come from Daniel Koenig from Delta Analytics..

Yes, I can hear you.

Can you hear me? Can you hear me?.

Sure. Yes, I can..

Congratulations on an excellent quarter. I just wanted to elaborate a couple small points.

Number one, what is your -- what is the prospect besides the Boeing contracts? Are there any other contracts that you're expanding on with other airlines that you can elaborate on in terms of the printer and other -- you had once mentioned possibly using it on shipping and other things.

And I was just wondering whether you have expanded on that [indiscernible]..

Yes. Most of these are ruggedized printers. We do have models that do go on ships, and we do have for kind of rugged land vehicles as well. But the bulk of it is aerospace. And just to clarify, the contracts -- many of these contracts are directed with the airlines, not just with the OEMs like Boeing or Airbus, for example..

The other two questions are, number one, a while back, you had purchased stock from the Ondis family.

And I was just wondering, do they still have a significant amount of stock? And in terms of planning, even though you mentioned that you're going to have another $2 million in terms of expense -- capital expenditures to facilitate the Honeywell takeover of their product manufacture, I'd like to know, do you have any plans either to possibly raise the dividends or is it still in place that you purchase, buyback of stock? Because I think you had authorized....

Yes, there's, I think, several questions there. Let me see if I can address them. So with respect to the Ondis family, I mean, you can see that, there is a public disclosure that, so you have to take a look at that. I mean, prior to this quarter, I know they still held shares. Obviously, they've significantly reduced their holdings.

With respect to the CapEx, it's not just to support the production, the major item that David mentioned was the new ERP system that we're putting in, so we're going to -- doing a global upgrade to one system. We have multiple system right now, it's all being consolidated. We referenced a number of about $2 million for that system.

And David, you can clarify if you need to. But our overall CapEx, we expect to be in that kind of $2 million, $2.5 million in total for the fiscal year, not an additional $2 million..

Correct. Greg has a lot of points..

[Operator Instructions]. Our next question will come from Paul Goncalves from Abmomics [ph]..

Just wanted to touch on the Product ID segment for a second. Wondering if you could give a little bit of color on the growth investment that you're making there.

Should we expect those kind of investments to be accelerating or decelerating in the coming quarters? And then second question related to that is the sales growth in that segment seemed a little bit muted.

And I just wonder if you -- like, what you'd attribute that to? And then are these investments that you're making right now sort of maintain that same kind of growth trajectory? Or do you expect them to kind of ramp up to kind of a higher level once the growth initiatives have been sort of implemented?.

Sure. Thanks, Paul. So I think they're kind of -- they go hand-in-hand, actually, your two questions there. So the -- most of the investment that we're making there is in the R&D area with new products. And as you saw from my comments there in the press release that came out earlier this month, we had a major product upgrade here.

The Kiaro! is the flagship tabletop product that we introduced over five years ago. And just this month -- actually, the first week of August, we announced the upgrade to the next-generation Kiaro! printer product line.

So from an investment point of view, of course, those are big developments, and that's where we put a fair amount of our development, both in the TrojanLabel and the QuickLabel. And it did have a bit of an impact to us in the second quarter with respect to the changeover in product.

So there's a fair amount of sales training that goes on and demo recycling and some kind of customer close out deals, those type of things, on the old products as you switch to the new products. So we certainly saw some of that impact, the growth in the second quarter with respect to the Product Identification product line.

And now that launch is behind us and we have a trade show season coming up, where sellers will be debuted and people will be coming to see those products, we'd expect to see that both ramp back up to more of our normal trend..

I want to jump back in here to answer Mr. Ryan's question. I had one piece of his question I wanted to look up. The depreciation and amortization for the quarter was $1.544 million. Stock-based comp, which is the one I had to look up, is $466,000. If you add those two together, if you're trying to figure out what our non-cash charges were..

Thank you, sir. At this time, I have no further questions in the queue. I'll now like to turn it back over to management for closing remarks..

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

Thank you, ladies and gentlemen, this concludes today's conference. You may now disconnect..