David Calusdian - Investor Relations, Sharon Merrill Associates Greg Woods - President and CEO David Smith - CFO.

Dick Ryan - Dougherty & Company Steve Busch - Everglades Resources Christopher Hillary - Roubaix Capital.

Good day. And welcome to AstroNova's Third 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 Mr. David Calusdian from the Company's Investor Relations firm, Sharon Merrill Associates. Please go ahead, Mr. Calusdian..

Thank you, Erica. 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 Web site, 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 21, 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 that Company makes with the Securities and Exchange Commission. I will now turn the call over to Greg..

Thanks, David. Good morning, everyone and thanks for joining us. This morning we announced strong results for the third quarter of fiscal 2019, primarily reflecting continued robust aerospace industry demand for our flight deck printers and associated supplies.

In particular, the Honeywell printer product line and new contracts for our ToughWriter brand printers were standouts.

The performance of the business in fiscal 2019 underscores our success in leveraging the elements of the AstroNova operating system to drive long-term value for customers, shareholders and team members through innovative product development, superior quality and lean business processes.

During the quarter, we generated record revenue of $34.2 million, an increase of approximately 19% from the same quarter last year. Our operating profit margin was 6.9% of revenue, up 120 basis points from last year's Q3. And we reported diluted earnings per share of $0.20.

David will provide additional details on our financial results later in the call. But first, let me provide some context around our third quarter results, beginning with Product Identification.

Geographically, we saw a nice acceleration in orders from the Americas and Asia, and we added several new dealers in all regions, further strengthening our global channel build out. Revenue came in 6% higher than the same period a year earlier, with gains across both QuickLabel and the TrojanLabel platform.

In the quarter, we introduced a number of new products and technology enhancements during the major fall tradeshow season at both the Labelexpo Americas and PACK EXPO International trade shows, both held in Chicago this year.

These shows were very successful for us with strong booth attendance and record lead generation that position us well going forward. Of note, we premiered the Kiaro! QL-120 our new narrow format desktop color label printer that we announced earlier in Q3.

We also demonstrated the capabilities of our newest TrojanLabel product, the T4 and T2C at these shows.

The top of the line Trojan T4 integrates advanced digital print technology with a robust label finishing system enabling small to midsized business in the commercial space to be able to move into the professional high production digital label printing market.

The T2C was also a hit particularly among large brand owners who recognize the benefits of our compact, efficient, professional label press and it's high return on investment.

The system is designed with three customer segments in mind; brand owners and manufacturers who want to bring their label production requirements in-house; label converters, seeking a flexible solution that meets the demands for short label runs; and professional printing houses, that see the T2C as a valuable tool to attract new customers and increase profitability.

Perhaps the innovation that's generating the most interest is our new food-safe flexible packaging material that we introduced at PACK EXPO. The material is designed for use with the entire range of the TrojanLabel printers. This breakthrough technology uses unique ultrathin polyester films specially developed to be receptive to our water-based ink.

What makes this technology so compelling is that it broadens the opportunity for our TrojanLabel printers in a wide range of packaging applications, especially in the fast-growing food, medical and pharmaceutical markets.

An increasing number of industries are transitioning to the flexible packaging to lower material cost, reduced waste, increase consumer convenience and enhance brand differentiation. Our TrojanLabel team is excited that we now have a way to enter into this dynamic market.

Turning to the Test & Measurement segment, third quarter revenue was up 51% from the same period in fiscal 2018. Our aerospace business was the primary driver of that increase, reflecting the contributions of our flight deck printers, supplies and networking systems.

We also experienced solid growth in our data acquisition product, especially from the new Daxus and DDX product line. To speaking with you on our Q2 call in August, we’ve continued to make steady progress on the Honeywell Aerospace printer product line integration.

As I’ve mentioned, with the production now fully integrated here in West Warwick, the final cleanup portion of the transition is related to transferring the many individual and customer contracts directly to AstroNova. In late October, we were successful in transitioning several of the larger contracts.

As more and more of these contracts are transferred to us, we’re able to increase our responsiveness and profitability. It is expected that at the current pace, however, it will still take several quarters to wrap up all of the assignments. Let me round out the segment discussion with a few comments on our data acquisition product line.

Q3 was a standout quarter that included the addition of new dealers and the release of several product enhancements. Sales execution was solid and a number of our new products are gaining traction, both existing and new market areas, and we are pleased with how this business is progressing.

Before concluding, I would like to take this opportunity to publicly welcome Jean Bua, Executive Vice President and Chief Financial Officer of NASDAQ listed NetScout Systems as our fifth independent director. We announced Jean’s appointment yesterday, and we’re delighted that she is joining the Board.

Jean brings significant experience in the areas of accounting policy, internal controls and risk management. She is the third independent director we’ve added over the past year, following the appointments of Dick Warzala and Yvonne Schlaeppi.

We look forward to benefiting from Jean’s financial acumen, corporate governance experience and technology background. Now, let me turn the call over to David for more detail on our financial results..

Thanks, Greg and good morning, everyone. As Greg noted, revenue in the third quarter increased 19% from the prior year, primarily reflecting another strong quarter for Test & Measurement. We also continued to show leverage at the operating expense line. Domestic revenue was $21.5 million, an increase of 19% and represented 63% of the total revenue.

International revenue was $12.7 million, also up 19% year on year and accounted for 37% of total sales. By product category, consolidated supplies revenue in Q3 was up 19% from the prior year, hardware revenue increased 39% and revenue from service and other grew 8.5%.

Gross profit in Q3 was $13.9 million, an 18% increase from $11.8 million in Q3 2018. Gross margin was down 30 basis points to 40.7%. Operating expenses of $11.5 million were up 13.6% from the third quarter of last year.

But as a reminder, customer related intangible assets acquired from Honeywell are amortized in the sales expense and that accounted for the majority of the year-over-year increase. Q3 operating expenses, as a percentage of revenue, declined by 150 basis points from the same quarter last year.

Looking at revenue by segment, Product Identification increased 6% over the prior year on higher sales of printer hardware and supplies. Test & Measurement was up 51% from the same period last year. Product Identification generated operating income of $2 million for segment operating margin of 9.3% compared with $2.7 million or 13% in Q3 last year.

The difference relates primarily to investment this year in new products and growth initiatives.

Test & Measurement generated operating income of $3.2 million or a segment operating margin of 25.4% compared with $1.6 million or 18.9% in the prior year due to the benefits of the Honeywell transaction and better results in the Test & Measurement product line.

For the investors who’d asked for it, we’ve added a table to our press release with this segment detail. In the quarter, we incurred other expense of about $540,000, which related primarily to interest expense, as well as FX losses. Income tax provision in Q3 was $407,000 or an effective tax rate of 22.3%.

We expect the fourth quarter tax rate to come in at around 25% and bring the full year to around 27%. Turning to the balance sheet, we exited the third quarter with approximately $19.2 million in debt, $7.8 million in cash and a net debt to capital ratio of about 22%.

Normal operating capital expenditures for the third quarter were $99,000, bringing the total to $882,000 year to-date. This year, we expect it to be about $2 million in total, in line with our normal ongoing annual business related CapEx in the $2 million to $2.5 million range per year.

In addition, this year with the implementation of our new ERP system, which we expect to be completed in the early part of next year, we will spend another estimated $2.3 million. About $1 million of that has been spent to-date. That ERP related spending will show up in construction and progress until we go live on the system early next year.

For the total capital investments, this year is effectively in the $4 million to $4.5 million range. For non-cash charges disclosure; in the quarter, depreciation was $456,000; amortization was $1.1 million; and stock based compensation was 510,000.

We believe the margin improvements, higher returns on equity and the improvement in revenue per teammate grew $386,000 on a trailing 12 month basis, all confirm we’re heading in the right direction as we seek to enhance shareholder value.

Before I turn the call back to Greg, please note that were we’re scheduled to present and host one on one meeting at next month's LD Micro Main event in the Los Angeles area. The date and time of our presentation will be posted on the Investors segment of our Web site under Events and Presentations.

Now, I’ll turn it back to Greg for closing comments..

Thanks, David. In summary, we begin the fourth quarter of fiscal 2019 with good momentum. Our Test & Measurement business is performing well, led by contributions from our Aerospace product line, including Honeywell and ToughWriter.

New products and enhancements in our Product Identification segment expand our capabilities and our reach into new markets. We continue to expect the second half of fiscal year to outperform the first half with gains in both Product Identification and Test & Measurement. AstroNova’s future is bright. Now, we’ll be happy to take your questions..

[Operator Instructions] We will now take our first question, caller please go ahead. Mr. Ryan, you can begin..

Greg, you mentioned an acceleration of orders in the Americas and Europe for Product ID side.

Can give us a little more perspective and is your -- is the investment in the new Tech Centers is that helping to drive the order churns here?.

Actually, I said Americas and Asia, because they are - those two areas. But as you’re aware, we’ve added a number of those Innovation Technology Centers.

And in the quarter, we did open up the one in Mexico City, which certainly was a help in that area and in the Asia area it had more to do with ongoing business that we’re developing and started to accelerate in terms of higher-level of orders and larger orders in that part of the world..

Any tariff issues presenting any headwinds for you guys at all at this point?.

It’s not a big factor for our business, because we don't do a lot of manufacturing and importing from carriers that are being hit by tariffs. So it’s something we keep an eye on but it’s not meaningful at this point and we don’t expect it to have a significant impact going forward..

On the Test & Measurement side, the printers are you shipping direct yet to any of the end customers or is that still a work in progress going through Honeywell?.

No, we’re doing that and that’s what I meant with the contract transfers. For people who aren’t aware until we actually move it into a direct ship mode, we actually ship still through Honeywell, which of course they charge us a fee for that service.

So at the end of October, we had some nice decent sized agreements actually transfer to direct ship, so we got a little bit of benefit for that a last couple of weeks of October. But of course those will carry on and we’ll keep adding more as we move forward..

Is there a way to quantify what kind of a drag that is, at this point?.

We can’t -- by the terms of the agreement, we’re not allowed to do that but it’s a reasonable pickup in profitability when we can avoid that double shipping and service charge on a per printer basis..

And how far are you through the process, I may have missed that, next couple of quarters, is that it? But I mean do you have the bulk of the larger customers in now or what’s the….

It’s hard to quantify it exactly. I’d say we have more than a third of them in right now. But there’s little ones and there’s large ones. So in terms of dollar value, it’s hard to know exactly where that’s going to head.

But some of them are just going to -- some like for example in China, and they tend to take longer to get the contracts actually transferred. But we’ll keep working through it. So we should see a steady improvement in the profitability as more and more of these things tick into our column..

Okay, great, again congratulations on a good quarter, thanks..

Thanks very much, Mr. Ryan. Our next question comes from Steve Busch of the Everglades Resources Incorporation..

So just a couple of questions and what’s the realistic addressable market size for that new flexible food label packaging product? Is there some size you can disclose?.

It's hard to quantify what our piece of that would be I mean just knowing general stats for the packaging market, flexible packaging is still over $30 billion but it includes all the equipment that goes into making those plastic bags.

And it’s things -- think about your snack foods or things that are in flexible packaging so there’s no labels on those flexible bags, but what this do is print on that film that is turned into the bags for the food or medical products or whatever they might be. So it’s brand new area for us.

So it’s a technology breakthrough in the sense that we weren’t able to print on this type material that can be used in these machines because you heat seal those packages. So prior to this material breakthrough, we didn’t have a way to even enter that market.

So we’ll know more as we go forward but what I can say is there’s a lot of interest at the tradeshows this fall. People haven’t seen it -- before, we actually had a TrojanLabel machine feeding directly into a vertical form fill and seal machine, making plastic pouches, which is pretty impressive for people who came to the booth..

Interesting.

I mean do you’ve a goal for the first year or just feeling your way?.

Yes, it’s early to know right now. I mean the main thing was an R&D technology breakthrough to try and figure out a way. We've looking for about a year and a half on how to actually do this and materials -- it’s lot of chemistry actually, material sciences.

So now we’ve got it it’s a question of well -- meeting with the packaging companies and the brand owners and moving into that market. But yes, with such a large market we would expect that it should have nice impact but these things take time..

So we’ve had some nice increase in hardware sales.

Do you expect our consumable side to increase at a higher rate going forward or…?.

Yes, that’s certainly our goal. We still have – like we mentioned in some prior calls we’ve the toner based products decreasing still, which is a bit of a drag. We’re still seeing a nice steady increases in the inkjet, both labels and inks. So that’s still on a very nice upward trend.

And the toner based product, we discontinued those about four years ago. So it’s not too surprising to see that continue to dwindle..

Good luck. You guys are doing a great job..

[Operator Instructions] Our next question comes from Christopher Hillary of Roubaix Capital..

I just wanted to ask if you care to share some comments on how you see today’s results in relation to your longer term targets, particularly on your operating margins?.

Yes, well as you see, the margins did improve year-over-year and even quarter-over-quarter. So we’re looking at a steady march in that direction.

We've got a number of initiatives that are underway with respect to both on the gross margin side of things, as well as the operating expense leverage that we expect should continue to march us in that direction of our goal..

And then maybe just -- do you have any color on how you view the M&A pipeline as it changed much given the way in which the backdrop has shifted a bit over the last, I don’t know, couple of months?.

Are you referring to anything specifically or what do you mean by backdrop…?.

Just whether or not you feel like the opportunity set has improved or stayed the same or…?.

The names change, as you might guess. But each of the three businesses, we’ve got a decent number of items that we’re looking at.

Obviously, nothing in detail that we can discuss but we actually in the Aerospace area see a number of additional opportunities, but Product Identification, test and the data acquisitions there’s typically 20, 25 opportunities that we’re looking at any given time and typically three or four of those are relatively serious.

But as you might guess, most of these -- if you look at -- it start with set of 100 at the beginning of the year, most of those never make it to the point of being seriously considered, whether it’s due diligence or price or other issues we discover as we go through our diligence..

Thank you. That concludes today’s question-and-answer session. Mr. Gregory Woods, at this time, I would like to turn the conference back to you for closing remarks..

Okay, thank you. Well, thank you everyone for attending and for your time and interest today in AstroNova. We look forward to keeping you updated on our progress, and everyone out there have a wonderful Thanksgiving, Bye now..

This concludes today’s call. Thank you for your participation. Have a Happy Thanksgiving, and you may now disconnect..