Good day, and welcome to the AstroNova's Fiscal 2019 Fourth Quarter and Full Year Financial Results Conference Call. Today's conference is being recorded. .

At this time, I would like to turn the call over to Scott Solomon from the company's Investor Relations firm, Sharon Merrill Associates. Sir, please go ahead. .

Thank you, Shantel. 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, March 14, 2019. 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..

I'll now turn the call over to Greg. .

Thank you, Scott, and good morning, everyone. Let me begin today's call by recapping some highlights from our record fourth quarter and fiscal 2019 results. .

From a financial perspective, we generated double-digit gains in revenue and profitability and delivered improved operating leverage year-on-year. Fourth quarter revenue came in at a record $37.2 million, an increase of approximately 14% from the same quarter last year.

For the full year, revenue increased 21% to $136.7 million, led by continued strong momentum from our Aerospace group. .

Our Q4 operating profit increased 37% to $2.9 million, resulting in an operating margin of 7.9%. It's important to note that our operating margin improved in each successive quarter of fiscal 2019 with the full year coming in at 6.4%, an increase of 160 bps over fiscal year '18..

Throughout the company, we continue to focus on leveraging the AstroNova Operating System to improve our productivity. And one measure of that progress is our revenue per team member, which hit an all-time high of $374,000 for the year, up from $352,000 last year..

In addition to productivity gains, we are managing expenses prudently and driving a greater percentage of our growth to the bottom line. Our performance in fiscal 2019 bears that out with GAAP EPS in the fourth quarter up 256% to $0.32 and full year GAAP EPS up 72% to $0.81. .

David will provide additional details on our financial results later in the call, but first, let me provide some background on the performance of our segments and overall operations. .

Starting with Test & Measurement. Segment revenues were up more than 57% year-on-year, driven primarily by our Aerospace product line. Clearly, the Honeywell business is a major contributor to this growth. But we're also very pleased about the growing adoption of our ToughWriter 640 aerospace printer.

We saw a number of new contract wins during the year. Our fourth quarter was also helped by a large Aerospace customer that accelerated delivery of products we had planned to ship in the first quarter of fiscal year '20.

Unquestionably, the biggest accomplishment of fiscal year 2019 was the successful integration of the Honeywell Aerospace printer line into our manufacturing plant here in West Warwick, Rhode Island. I can't overstate the level of coordination and efficiency required to complete that task as quickly as our team did. .

We continue to make progress on finalizing the overall Honeywell integration as we work through transitioning the remaining customer contracts to AstroNova. We expect this process to be completed by the end of Q2. In the meantime, we'll continue to incur associated transitioning and operating costs associated with those outstanding contracts.

In addition to new printer sales, our growing installed base of units is having a positive impact on our upgrade business as well as our maintenance, repair and supplies business. .

In our Test & Measurement product line, we recently launched the first in a series of new I/O modules for the Daxus product family. This new module, the ITCU-16 thermocouple input module, eliminates the need for adapters, simplifies wiring and detects subtle changes in temperature and voltage.

The module is ideal for applications such as research and development, product verification and validation, and asset and process monitoring..

Turning now to the Product Identification segment. Revenue grew 6% in fiscal 2019, with our TrojanLabel products gaining nice momentum at the end of the year. Our Trojan T2-C product performed particularly well. We introduced and ramped several major new products during the year.

Among the highlights was the coordinated global launch of the Kiaro! QL-120 digital color label printer. We also began commercial shipments of the compact Trojan T2-C and Trojan T4 professional label press and finishing system. And we introduced a new solution to digitally print food-friendly, flexible packaging materials. .

From a geographic perspective, we continue to see nice growth in the Americas and Asia. However, Europe underperformed expectations due to a variety of factors, but we have made several changes to our sales organization there and expect to see results improve as we move through fiscal year '20.

In North America, we continue to expand our sales presence, getting more dealers in Q4 to this new channel expansion program..

Innovation continues to be an engine that drives the Product Identification segment. In late January, we launched our latest printer, the QL-300, the world's first 5-color, toner-based, tabletop printer designed specifically for production label printing. The QL-300 is a game changer in on-site digital label printing.

It features a key breakthrough white toner. In addition to the traditional cyan, magenta, yellow and black toners, the addition of white enables printing on a wide variety of new materials from clear labels to black polyester to metallic finish papers and many others.

The versatility and low total cost of ownership of the QL-300 are huge benefits for brand owners, commercial print shops and manufacturers alike. It allows them to print in-house jobs that could once only be done by professional printers. .

software, global support and, of course, the carefully matched label materials, toners and related consumables. Even though it's only been in the market for a few weeks, the QL-300 has been greeted with strong enthusiasm by our customers and sales reps alike around the world..

Customers that want to see this new product in action can visit one of our 8 Innovation Technology Centers around the world, including our newly opened ITC in Irvine, California. The Irvine center is our third in North America, joining Chicago and West Warwick, Rhode Island.

These centers bring us much closer to our customers, allowing them to see and test our full line of tabletop printers, all-in-one digital printing presses, data acquisition systems and associated supplies..

Finally, as I noted in this morning's release, I want to reiterate that I'm exceptionally proud of our global workforce of more than 375 team members who have worked tirelessly throughout the year to deliver record results that we have achieved. .

Now let me turn the call over to David for more detail on our financial results. .

Thanks, Greg, and good morning, everybody. First of all, I want to note that last year, in the fourth quarter, we had a $0.15 per share expense from the Tax Act changes; and this year, a final true-up expense for those changes of $0.01 per share. Those non-GAAP items are detailed in the press release tables..

The fiscal year 2019 earnings of $0.81 per share are up 72% from fiscal 2018 on a GAAP basis and up 32% on a non-GAAP basis. The revenue increase of 13.7% for the fourth quarter compared to the prior year and for the full year, up 20.5% compared to the prior year, is in large measure to the product -- Honeywell product line acquisition.

That transaction was concluded at the end of September 2017, so it was in the results for 4 months last year. This is the first quarter where the acquisition was in the financials for the full comparable quarter last year..

Domestic revenue was $22.9 million in Q4, an increase of 22% and represented 61.7% of total revenue. International revenue was $14.3 million, up 2% year-on-year and accounted for 38.3% of total sales. For the full year, domestic revenue of $83.7 million was 61.2%. International revenue of $53 million was 38.8%. .

For the quarter, consolidated supplies revenues of $18.5 million was up 5.5% from the prior year. Hardware revenue of $15.2 million increased 25%. And revenue from service and other of $3.5 million grew 17%. For the year, supplies of $71.2 million was up 9.1%. Hardware of $53.2 million was up 42%. And service and other of $12.3 million was up 15.4%.

We've got a solid base of profitable, recurring revenue. .

Turning to the segments for the fourth quarter. Product Identification revenue increased 8% over the prior year to $23.4 million, and the full year increased 6.3% to $86.8 million on higher sales of printer hardware, supplies and service.

Test & Measurement was up 26% to $13.8 million from the fourth quarter of fiscal 2018 and for the year was up 57% to $49.9 million, again largely due to the Honeywell acquisition..

Gross profit in Q4 was up 15% to $14.6 million or a 39.2% margin. That's up 50 basis points from the same period in 2018, reflecting more favorable product mix in this quarter. For the year, gross profit was 39.5% of sales, up 70 basis points from the prior year..

Fourth quarter operating expenses of $11.7 million were up 10.8% from the fourth quarter of fiscal 2018. As a reminder, customer relationship intangibles acquired from Honeywell are amortized into sales expense, and they account for the majority of the year-over-year increase.

Operating expenses were only up about $100,000 from the third quarter, the lowest real increase in quite a few quarters. Fourth quarter operating expense as a percentage of revenue declined by 80 basis points from the same quarter last year and, on the same basis, declined 240 basis points sequentially..

Product Identification generated segment operating income of $2.1 million for a segment operating margin of 9% compared with $2.8 million or 12.9% in Q4 last year. For the year, the operating income of $7.9 million or 9.1% of sales compares to $10.6 million or 12.9% of sales last year.

The difference is due to the growth initiatives, including for new products that Greg detailed..

Test & Measurement generated segment operating income of $3.7 million in Q4 for a segment operating margin of 26.7% compared with $1.5 million or 13.3% in the prior year. And for the full year, the operating income was $11.9 million or 23.9% of sales compared to $3.7 million and 11.8% in 2018, once again due to the acquisition..

Income tax provision in Q4 was $532,000 for an effective tax rate of 18.7%, bringing the full year tax rate to 21.6%. We expect the fiscal 2020 first quarter tax rate to come in at around 27%. .

Turning to the balance sheet. We continue to reduce our debt and exited Q4 with approximately $18.1 million in debt, $7.5 million in cash and a net debt-to-capital ratio of about 21%..

Our normal operating expenses for the fourth quarter were $405,000, bringing the total to $1.23 million for the year. That's lower than we projected and roughly half of our normal ongoing business-related CapEx, which is in the $2 million to $2.5 million range. That normal level is where we project 2020 at this time..

As I've noted in previous calls, we're implementing a new ERP system. We now expect to be completed midyear. And in addition to our normal CapEx, we spent about $1.5 million on that project in fiscal 2019 and expect to spend in the range of $1 million before we go live. .

In terms of noncash charges. Fourth quarter depreciation was $479,000, amortization was $1.04 million and stock-based compensation was $547,000. Noncash charges for the full year are depreciation, $1.962 million; amortization, $4.19 million; and stock-based compensation, $1.886 million. .

Before I turn the call back to Greg, please note that on Thursday, March 28, AstroNova will be presenting at the Sidoti Spring 2019 Investor Conference. If you're attending and would like to schedule a meeting, please e-mail ALOT@investorrelations.com, and we hope to see you in New York City. .

So now let me turn the call back to Greg for some closing comments. .

Thanks, David. Looking ahead, we anticipate another strong year for fiscal 2020, with modest growth in revenue and a greater percentage of that revenue flowing to the bottom line. Our commitment to product innovation, operational efficiency and working capital improvement will continue to strengthen our fundamental competitiveness as we move forward..

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

Operator?.

[Operator Instructions] Our first question will come from Robert Hellauer, Casey Capital. .

I just have 2 quick questions. One, so it sounds like great timing around the QL-3000 (sic) [ QL-300 ] launch coinciding with the dealer expansion. Can you just talk about what's -- I know we're only 2 months in, but what's the early feedback there? Are they getting excited? Are they happy with the new products? And then I have a follow-up. .

Yes, sure, Rob. Yes, actually, everyone's excited, both the end users as well as the commercial printers. And the big thing here is -- I mentioned in my notes there, is the white. So we have a variety of printers we have had over the years that are CMYK.

But there's a lot of things that only professional printers couldn't do prior to this because of the white. So with the white, you can put that down first on a black material or any kind of opaque material, clear material, then you can print on top of that with the other colors.

So it just gives you a wide variety of materials, especially taken up in a couple of trade shows we've had since then. Things like a lot of the beverage industry people, wines and beers, those type of things, have really gone, let's say, very excited. They're very excited about that product.

And we've seen that -- we've had product demos of this all over the world so far. .

And will that -- you talked about how revenue contribution margin will potentially accelerate going into 2019, given you had the investments in 2018.

Is that -- is this one of the products that will help contribute to that increased contribution?.

Yes, we would expect to see that. I mean, it's a great product, and we think we're well out ahead of the competition on that one. But we see that in other areas as well. And that's kind of in the top line, but we also see it from the operating efficiencies that I talked about. We see that as a big driver in fiscal '20, which we're in right now. .

Right, right. That's great. And then can you talk a little bit about the operational improvement? It sounds like you guys are halfway through the ERP system upgrade, which I'm sure will potentially accelerate those operational improvements. But it does seem like you're starting to get traction there.

Can you just talk about what you guys have done and kind of where you see it going in fiscal year 2020?.

Yes, it's an ongoing thing, Rob. So we've done a lot of -- in fiscal '19, we continue to make a lot of progress internally with our operations. That's how we get that increased productivity. And it gets down to a lot of little things that add up, quite frankly. There isn't one major thing I can point to.

But if you look at -- in different work cells, the people in those cells are always looking for ways of how can they make things more efficient, eliminate motion, eliminate waste, and those things add up.

And we do the same thing driving back to our supply chain, how can we be more efficient there in terms of costs, packaging, so we can reduce handling. So there's a lot of those little things that add up through the course of the year. Of course, we're expecting big benefits from the ERP system. It will kick in later this year.

But in the meantime, quite frankly, it's extra work, right? So you have the people doing their day job, so to speak, and then there's a lot of work to transition from a legacy system to this new system.

So that's a bit of a drag you're probably continuing into the first half because we've got that extra work to do that really isn't -- we don't see the benefit until we get the new system online. .

That's really great. And then, I guess, just finishing now. My last question is, if I'm looking at kind of EPS and adjusting for the intangible amort, some of which is from the acquisition, et cetera, I'm getting -- I'm looking at cash EPS, which is much higher than the stated EPS.

So I guess my question is, what are you going to do with all that cash next year?.

Well, first thing we'll do is we'll continue to pay down the debt, and then we'll put it on the balance sheet until we find an appropriate use for it. .

Yes. I mean, as you know, we're always looking for acquisitions as well. So hopefully, we'll find one that's a good use for some of that cash. .

Our next question will come from Dick Ryan, Dougherty. .

Say, Greg, you mentioned the pull-in on the flight printers from a major customer.

Can you give a little more perspective on that? Is that somebody that you're already shipping direct to? And how should we view Q1 Test & Measurement if you're initially expecting that to flow in Q1 versus the pull-in?.

Yes. So it's a customer that typically orders, over the last couple of years, a fairly large order in Q1. So we were kind of already staged for a lot of that. We had to scramble to get it out, but they wanted to see if we could pull it in. And of course, we did our best and we're able to do that.

Yes, that might have -- it's going to be low single-digit impact possibly in the first quarter in terms of revenue being reduced from where we would otherwise expect it to be. That's about the size of what that quarter represents. And of course, we'll try to make that up with other things. We're not just sitting still.

But it was a nice surprise, and we were happy that we're able to accommodate the desires of our customer there. .

Okay.

And where are you in transitioning to the direct ship mode to your customers?.

We don't give an exact percentage of that, but we continue to make progress one by one. We had a couple of Chinese customers, which we've been working on for about 4, 5 months, finally come through and agreed to the transition. It's different in different companies and different countries, quite frankly. But yes, we're making progress on that.

And like I said in the comments, we expect by midyear to be through this. .

Our next question will come from Steve Busch, Everglades Resources, Inc. .

So 3 questions, I guess.

First one, on your estimated revenue growth for 2020, what are you -- can you give us kind of a percentage range? Are you thinking moderate -- is that 6% to 8%? 1% to 3%? 10% to 12%? Any kind of color on that?.

No, we're not giving specific guidance. But obviously, last year, we had the benefit of the Honeywell acquisition, which we don't have that again recurring this year. I mean, hopefully, we'll find something in the year, but nothing that we can predict. .

Okay, I see what you're saying. Okay, that's good.

For the print material for this new food packaging product, do we make printing material?.

We don't make it in-house. We have third-party agreements where we have a proprietary system for actually manufacturing that. .

So that's what I'm trying to get around.

I mean, do we have patent on the material itself? Are we the sole source of the material for processed foods?.

No, it's not patented because I didn't tell everyone how to do it. So it's just an industry trade agreement we have with a supplier or probably put us -- who may have additional materials that we do with that supplier or other suppliers as well.

We already have probably 100 different materials, nonfood-safe materials that we work with the same kind of agreements with our suppliers. .

I see.

So on the food-safe stuff, if someone buys our printer to use with this food-safe material, is that -- are we the sole source of the material, so that's one of our razor blades?.

Yes. We would expect like our other materials that people would typically buy them from us. I mean, there -- it's not like no one else in the world could figure it out. But the benefit we provide our customers is we have an immediate test lab.

We go through a lot of vetting of all of these materials, and they can just focus on whatever their product is and not have to deal with different supplier issues with the product.

Is the material going to work properly with the printer? Does it have the right adhesion, et cetera? So that's really what the service that we're providing, not that you couldn't get it somewhere else potentially, but you're guaranteed that it's going to work if you buy it through us. .

Right.

And so is this material any safer than other materials currently out there or just safe for our particular needs?.

No, it just meets certain requirements. So there's requirements as to when you print on certain materials, will it incur any kind of material transfer into the food product, and that's really what the differences with this product is. You can actually put food inside the package. .

Right. Okay, fair enough. Good to know. And then, I guess, maybe you can comment on the 737 MAX issues.

And is this going to affect, you think, shipments this year? Any kind of color you can add to that? Any knowledge?.

Sure. Yes, obviously, it's just happened, right? So we don't expect anything. I mean, through our supply chain with our Boeing contacts, there's been no change at this point. Everything is kind of full speed ahead. I mean, as you might be aware, Boeing has been trying to increase production as quickly as they can.

So it hasn't impacted our orders to this point. Obviously, if it was to continue for months and months and months, there might be some impact, but at this point, we don't expect it. And we deliver a lot of other products to Boeing as well. I mean, the 737 MAX, of course, is an important customer -- or an important aircraft.

But we're still delivering for the NG, which is the predecessor to the MAX, and obviously a wide variety of other aircraft for Airbus and other major OEMs. .

Right. And most of your sales to them would be for planes that aren't going to be built for another couple of years anyway, right? Anything you already -- planes that are going to be processed... .

Yes, those are planes that are going to be kind of -- it depends on the OEM. But typically, we see orders that are anywhere from a year to sometimes 2 years or longer in advance of the actual tail being shipped to the customer. .

Our last question will come from Christopher Hillary, Roubaix Capital. .

I just want to ask you, you made some great progress on your margin improvements. And you've obviously got your long-term targets, and you referred to your ERP plan and et cetera.

Can you just speak to how you feel about that long-term target and whether you expect the type of improvements we saw year-over-year going forward? Or are there certain years or certain drivers that would have a more meaningful contribution as they occur?.

Yes. So it's really an ongoing process, Chris, that we're working on here. And we had -- if you remember from a few years ago, from the calls, we talked about a lot of the buildup in infrastructure we had to put in place. And one of the last big pieces, of course, is the ERP system that we're working on right now.

But if you look at the -- what I talked about earlier in the call, the AstroNova Operating System, that helps to drive a lot of productivity. And then it's a matter of cost improvements and careful management of the operating expenses. And we'd expect as we go forward that -- it's not going to be a perfectly linear thing.

But we'd expect that year-over-year, we'd be able to improve the operating margin percentages. And that's -- a lot of it is leveraged, yes. .

And then can you... .

Pardon? Sorry. .

Oh, no, pardon me.

And then I -- the other question I wanted to ask was, can you remind us what percent of the sales are coming from consumables and supplies and whether you see that changing much for the current fiscal year?.

Yes. It's typically in the 50% range if you look at it. Quarter-to-quarter, it fluctuates a bit, but it's been over 50% for the last several quarters, and I had expected to be right in that range as we continue to grow. I mean, one of the things that lowers it a little bit is the Trojan products that are much higher dollar sales.

Like the Trojan T4, for example, is $150,000 kind of a product. So we have some higher dollar hardware, an aerospace hardware that kicked in last year with the Honeywell acquisition, knocks it down a few percentage points, but the overall revenue keeps increasing there. .

Thank you very much. At this time, we have no further questions in the queue. So I would like to turn the conference back over to Mr. Woods for closing remarks. .

Well, thank you for your time and your interest in AstroNova, and we look forward to keeping you updated on our progress. Bye now. .

Thank you very much. Ladies and gentlemen, at this time, this now concludes today's conference. You may disconnect your phone lines, and have a great rest of the week. Thank you..