Good day, and welcome to the AstroNova Incorporated Fourth Quarter and Year-End Fiscal 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would now like to turn the call over to Mr. David Calusdian. Please go ahead, sir..

Thank you, Karen. 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, the company's Chief Financial Officer.

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 historical statements of historical facts are considered forward-looking statements within the meaning of 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 12, 2020. 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 the other filings the company makes with the Securities and Exchange Commission. I'll now turn the call over to Greg..

Thank you, David. Good morning, everyone, and thank you for joining us today. During the fourth quarter, the 737 MAX grounding situation worsened as Boeing announced a complete production halt in December.

This, combined with the product identification softness in Asia continue to affect our revenue and margins to a greater extent than we had expected entering the quarter.

As a result of the revenue shortfall, and particularly the impact of the uncertainty outlook of the 737 MAX, we have taken several actions to bring our costs more in line with near-term demand. I'll talk more about that in just a moment.

But first, on the positive side, we are pleased to see the continued acceleration in bookings from our Product Identification segment this quarter. This led the way for our overall bookings to post double-digit, quarter-over-quarter growth for the second quarter in a row.

The favorable response to our Product Identification products at several trade shows in the fall was a key contributor to this bookings momentum, and we expect that momentum to continue, barring further short-term impacts on demand in the wake of the COVID-19 virus situation.

In addition to these positive demand trends, the secular trend towards digital label printing and the market growth for on-site color label printing, position us well for long-term growth and profitability.

Similarly, our view is that the long-term trend for the global commercial aircraft market remains very strong, despite the short-term MAX issues and the potential COVID-19 short term impacts on air travel.

As we streamline our operations and continue our focus on improving operational efficiencies throughout the company, we also continue to invest in new technologies and strengthen our global talent to achieve our long-term strategic objectives. We see significant growth opportunities in the future for both segments of our business.

In the short term, our lower sales volume necessitated that we take action to improve the profitability of the business. As a result, we implemented a 5% headcount reduction and other cost reduction initiatives that we expect to save in the range of $1.5 million to $2 million on an annualized basis.

I'd like to emphasize that these cost reductions do not affect our investments in our key strategic initiatives. We continue to focus on those strategic initiatives that we believe will drive growth and profitability for AstroNova and generate value for our shareholders. Taking a closer look at our segments.

As I mentioned, Test & Measurement continues to be impacted by the grounding of the 737 MAX. This has affected us, both in terms of new installs, as well as deferrals and optional maintenance and retrofit printer upgrades to aircraft-s that are needed to fill the void until the 737 MAX returns to service.

While Boeing is sticking to its prediction of a midyear return to service, we do not have clear visibility into the actual timing of the return to service, nor post ramp up schedule. We, therefore, expect this will likely be a continued significant drag on results throughout the current fiscal year.

On our past few calls, I discussed the delay of a multiyear upgrade contract for military avionics and related networking gear. While we did not ship any product-related to this contract in Q4, we have already made shipments in Q1 and expect to ship additional releases on that contract later in the year.

Despite the near-term industry challenges, we believe the strong secular trends in aerospace will drive long-term growth when Boeing situation is finally resolved. We have the right products and are making the right investments to be prepared to capitalize on these trends when the market returns.

AstroNova's latest printer products, in particular, offer the highest level of performance and functionality in the cockpit printer market. In our Product Identification segment, sales continue to be affected by the softness in Asia as a result of weaker demand from a few customers in that region.

During the quarter, we completed the transition of our sales organization from a regional structure to an integrated global management organization with dedicated leaders for global hardware, global supplies and global service. We now have greatly improved ability to provide a more effective and rapid response to our customers across the globe.

Our products in the segment are performing quite well, and this has been a big help in driving improved bookings. Our new Trojan label T3-OPX is off to a great start with strong initial demand and very positive feedback. In fact, we sold out of our initial production run in January.

The OPX is a next-generation overprinting system that features highly durable ink and allows customers to digitally print high-resolution color images directly at a broad range of products, including cardboard, boxes, postcards, paper bags, fabric bags or even wooden planks.

I encourage you to visit our website to view the video demonstration of this new breakthrough technology in its applications, taking us beyond the labeling market and into a direct packaging product identification space.

Other new products such as the quick label QL-300, QL-120X, Trojan label T2-C and the T5 continue to gain traction in the marketplace. At the end of the fourth quarter, we announced the launch of GetLabels. A new product identification brand that provides blank label and thermal transfer ribbons for resellers and brand owners.

Through GetLabels, we have developed hundreds of unique label materials, engineered to cover the aesthetics, functionality and durability requirements of a broad range of applications. This enables customers to produce their own labels and tags in-house to their specifications with just-in-time flexibility.

Launching GetLabels as a stand-alone brand gives us a platform to feature all of the labeling options available to our customers. Before I turn the call over to David to review our financial results, I'd like to provide an update on our global IT upgrade program.

We are on track with the hardware upgrade phase of this, and we expect to complete the company-wide updating of endpoint hardware, software and telephony and related hardware products near the end of this quarter.

We're also making good progress on our ERP conversion to cloud-based NetSuite software and expect this to be completed domestically in the middle of the current fiscal year.

We're excited by the potential of these initiatives, which we expect will result in a global unified state-of-the-art IT infrastructure designed to significantly improve our competitiveness, reaction time and productivity in the fiscal year of 2021 and beyond. Now let me turn the call over to David for his financial review..

Thanks, Greg, and good morning, everybody. Revenue for the quarter came in at $30.5 million versus $37.2 million for the same period last year, $3.9 million of the decline was in the Test & Measurement segment for the reasons that Greg mentioned, on the Boeing 737 MAX.

Product Identification was down $2.7 million, primarily because our Asian revenues were strong last fourth quarter and much weaker this fourth quarter. For the full year 2020, revenue was $133.4 million compared with $136.7 million for 2019. Test & Measurement segment was down $4.5 million do, again, because of the situation with Boeing.

Product Identification, though, was up $1.3 million or 1.5%. As Greg indicated, this fourth quarter result was disappointing and has caused us to reduce cost, as I will mention in a minute. Domestic revenue was $19.2 million in the fourth quarter or 63% of total revenue. International revenue was $11.3 million or 37% of the total revenue.

Year-to-date, domestic revenue was $83.7 million, also 63% of total revenue, while international revenue was $49.7 million. Hardware revenue in the quarter was $11.4 million compared to $15.2 million. The decline due to the aerospace printer and Asian issues, again.

Supplies revenue was $16.4 million compared with $18.5 million, primarily as a result of the decline in Asian supply shipments. Service and other revenue was $2.7 million compared with $3.5 million due to the lower aerospace revenues.

The gross margin decline of 560 basis points from last year's fourth quarter to 33.6% is a function of lower sales in aerospace and adverse mix dynamics in both segments. We reported a fourth quarter operating loss of $1.6 million compared to operating income of $2.9 million a year ago.

Full year 2020 operating profit was $2.6 million versus $8.7 million in 2019. Net loss for the fourth quarter was $0.19 per share versus net income of 23% -- $0.23 per diluted share a year ago. Please note that our net loss for the quarter includes about $100,000 in severance costs related to the reduction in force that Greg mentioned earlier.

In addition, we had about $450,000 in costs from unusual nonrecurring expenses relating to the settlement of certain customer-related disputes and expenses for our product reconfiguration for an aerospace customer, the vast bulk of which hit operating expenses.

We expect we will have incurred about $100,000 in additional severance charges in the current first quarter this fiscal year. Full year net income was $1.8 million or $0.24 per diluted share compared with $5.7 million or $0.83 per diluted share a year ago.

This quarter, depreciation and amortization was $1.6 million, while stock-based compensation was $199,000. Full year normal CapEx was $1.4 million with another $1.5 million spent on the NetSuite ERP implementation.

We expected full year 2021 capital expenditures, including the infrastructure upgrades and ERP implementation to be in the range of $2 million to $2.5 million.

The cost reductions that Greg mentioned are primarily wage-related across the income statement, both cost of sales and operating expenses, but they also include the decision to delay certain very long-term product development expenses, a reduction in the number of specific outside service and consulting arrangements and a large variety of other small items.

Our current plan is a reduction in expenses in the range of $1.5 million to $2 million year-over-year, with roughly half of those reductions favorably impacting gross margins and roughly half in lower operating expenses. Before I turn the call back to Greg, I'd like to touch on the COVID-19 virus situation.

As we mentioned in this morning's press release, we're closely monitoring this viral outbreak for potential impacts on our workforce, customer demand and our supply chain. At this time, we do not have any reported cases among our teammates, and we've not identified any clear supply chain or customer impacts.

Locally, we've taken actions to further enhance the health and safety of our people as a result of the state of emergency that's been declared in Rhode Island, and we'll continue to monitor the situation closely. Now I'll turn the call back to Greg for closing comments..

Thanks, David. Looking ahead, we are encouraged by the excellent customer reception to our new Product Identification offerings, and the resulting positive bookings performance in the fourth quarter. We are also optimistic that our new sales structure will result in a more efficient and effective global sales process.

At the same time, our cost reduction measures have enabled us to reduce our breakeven level and position us for improved profitability as we move forward into fiscal 2021. Longer term, we are even more bullish about the opportunities made possible by secular trends on both sides of our business.

As we focus on cost containment across the business, we are also investing wisely in order to capitalize on these opportunities. Now I'll be happy to take your questions.

Operator?.

[Operator Instructions]. Our first question will be from Samir Patel. .

Congrats on the nice launch in product ID..

Thanks..

Yes. So I've got three questions here. The first is in aerospace. I know that Boeing and Spirit and some others have talked about kind of their expectation for MAX builds over 2020. I understand your lack of visibility.

But in general, can you provide some color on the cadence of how new builds of 737s would translate into revenue, would your MAX-related revenues kind of ramp ahead of production along with production, behind production, et cetera? Just some timing if you can give that..

It's a little bit difficult to predict, of course. I mean, we've seen, I think, probably half a dozen different estimates on that. Most likely, there would be some advanced need for the printers. It's a function of what's coming down the production line. If you remember, the -- with the Boeing 737, this is BFE or buyer furnished equipment.

So we need to make sure that the right tails have the right printers associated with them. So typically, and I say, I emphasize typically because we don't know exactly half the staff in this case, those would have to lead the production. It's not a just-in-time thing.

It's typically months, if not several months in advance that some of these things start arriving. Again, it's a follow up in the air at this point..

Okay. Also in aerospace, you guys talked here, and you've previously talked about the MAX-related supply constraints, making airlines unwilling to take plans offline, which impacted your kind of spares and upgrades business. With the coronavirus-driven drop in passenger demand.

Have you seen additional opportunities here or airlines deferring maintenance and focused on conserving cash?.

No, we haven't seen anything yet. I mean, the airline hit other than place to China and whatnot and within China. That's probably the biggest impact we've seen in airline travel. But now Europe, as of yesterday, that looks like that's going to take a bit of a hit. So it's tough to estimate that exactly.

I would guess, and I haven't talked directly to any airline CEOs, and I was at the Chamber of Commerce aerospace event last week in D.C. and no one mentioning about changing their mode of operation with respect to taking aircraft out of service.

One thing that does impact us kind of on the supply side of our business, I think, if you're flying the planes less. They're printing less paper in the cockpit because the planes are on the ground. They don't need to print. So that does -- it will probably have some impact that way..

Okay, understood. And then the final question. You guys pride yourself on your capital allocation.

So can you maybe talk about the decision to maintain the dividend versus using that cash to pay down debt, buy back stock or acquire something?.

Yes. So the dividend question is always reviewed at the Board of Directors meeting, we just had one this week, of course. And it's debated back and forth. And though I can't comment on exactly what's said in the Board of Directors meeting, but at this point, they felt comfortable with being able to meet our capital needs and also pay the dividend..

[Operator Instructions]. We do have a question coming from Dick Ryan with Dougherty..

Greg, I wasn't sure on your headcount and cost reductions.

Is that across both segments or more into one or the other?.

It was basically a mix. We kind of took a look at -- I mean, you never like to have to do these things, but we took a look at our work, could we trim costs and affect our long-term programs or customer support. So it did affect both sides, but not equally, it was -- really was based on the functionality of the different individuals involved..

Okay.

And you talked about this lowering breakeven, where would you kind of ballpark your breakeven level at now?.

We don't actually disclose that. I don't know if David wants to comment on that. But we normally don't -- we don't publish that information..

Yes..

And Dave, one for you. I wasn't sure on the $450,000 of cost, how that was split.

Could you just kind of run through that one again?.

Yes, the split that I talked about was, as between sort of where it hit on the income statement. The bulk of it was in operating expenses. There was a little bit in cost of sales, but primarily in operating expenses, and I didn't go any further than that..

Our next question will be from Samir Patel..

I had a couple of others on product ID, since it doesn't seem like there's anyone else.

So one is, how quickly do those bookings typically translate to revenue? Is that more of a long-term thing over the course of the year? Is that more kind of quarter-to-quarter?.

What exactly about product ID, the new products or just in general?.

You talked about the strong bookings for -- just in general, but specifically related to that new Trojan products?.

Yes. Typically, there's a couple of things I can tell you about that. So when new products come out, typically, they turn pretty quickly, but then the supplies will lie behind that. So someone will get a new printer. Typically, our biggest competitors are commercial printers. So they have a stock of in-house labels.

So as they're learning to use the new product, they're kind of burning -- fairly low production load, while it burned through their existing supplies. Then we see the supplies ramp up 3 to 6 months after that in terms of getting to full production level.

That's a typical curve of someone buying a new printer from us and then ramping it up to full production. So the hardware [indiscernible] relatively quickly. And then the supply is following..

That's helpful.

And so I guess, in bookings, you're only really reporting hardware because they're probably not ordering those supply 6 months out?.

No, no, no. We report both in the bookings. And I guess, as the whole market, we're talking about the complete bookings being ramped up, and that just means more people coming back online. Essentially, what happens is you are kind of making up for that deficit in these Asian customers that have dropped off significantly.

Just the general kind of across the globe, people printing more and us placing more units out there on a regular basis. And then they generate more supplies as they ramp up..

Do you have -- this may be something you're not willing to disclose, but do you kind of have a number in terms of like how your hardware -- sometimes like for software, you'll have like a 20% maintenance or 30% maintenance relative to your initial license fee, or whatever it may be.

Do you guys have kind of a number like that with regards to how much supplies you typically pick up for a hardware unit or does it just depend on kind of the unit and like the size of it?.

Yes, we don't get that granular with it.

I mean, we typically write about the 10%, 8% to 10% on the service side of things?.

[Operator Instructions]. We do have a question coming from George Melas..

Can you talk a little bit about your Trojan product line. You acquired it in February of '17. So you've had it for 2, 2.5 years now. Can you sort of give us a little bit of a -- and I think when you purchased it, there was sort of some pretty good products, but almost no revenue.

Can you give us a little bit of the story of how that has evolved under your ownership?.

Yes, sure, George. Well, you got that correct. It's the beginning of 2017, we acquired it, we went through the integration phase. We ran it the first 7 or 8 months is kind of a stand-alone operation in a parallel track. And then it wasn't an effect as we had a lot of people kind of cross-selling between the QuickLabel and Trojan label.

So later in that year, we actually fully integrated it with the Product Identification team. So it's really one team that's out there selling. And since that point, we've seen a nice, steady ramp-up in their placement of products as well as new products generation. So the T2-C happened after that.

Of course, the one I just mentioned today, the T3-OPX just happens. So that they've got a fantastic design team out there and so a lot of things that they're working on right now for the future as well. So those products are well received in the market, and we put it through our full channel on a global basis.

As a matter of fact, the founder of that organization, Mikkel, is actually the person who now heads up our global hardware. So he's selling all -- in-charge of selling all the products that we have in the Product Identification space on that forward side..

And I guess you won't sort of say what's the revenue sort of that product line, but can you give us a sense of whether sort of it met expectations from a product development perspective or from a sales perspective? And if there are some hurdles to adoption, what might have those been?.

Yes, it was mainly that kind of sales team, getting them focused and get identified with our overall channel and not having kind of 2 different channels. So let me say, probably the best way to characterize it is, after a slow start in the first year, it's ramped up and then meeting our expectations ever since. We're very pleased with it..

Okay.

And have you expanded the sort of available market through the product introductions? Or is it still very much focused on sort of that? I think you're really focusing on sort of smaller commercial printers, right?.

Well, yes, that was -- the quick label brand is tabletop printers and the Trojan label kind of bridges that. They have a very high end kind of a -- it's a hybrid, if you could call it a tabletop, it's really a small production press. And then it takes us into the commercial printing market.

So that's where Trojan label really -- the Trojan label brand is really more for that higher end, very large brand owners, kind of global companies, but also large commercial printers that nets a new space for us. In the T3-OPX, for example, there's not even a label involved.

We print directly on the box, or on the package, flexible packages, wooden boxes. So that's a whole new market for us..

Okay.

And just maybe a question on the sales reorg, just for very high levels, help us understand how that's going to benefit you guys?.

The biggest thing has been better coordination? Sorry, can you say that again?.

And I'm trying to understand what are the plus and minuses of the new sales structure..

Yes. I mean, we don't see really minuses in it. So the advantage of doing it this way is, instead of having a leader in Asia, a leader in Latin America, some kind of sales leadership. So a sales leader in Asia and Europe -- and each one running their own show and making -- completely their own rules, but it's not fully coordinated.

Now when you have one person in-charge of it on a global basis, whether it's the supply side of the business or the hardware or the service, we can make sure we get much faster communications and then better consistency.

And as we've evolved as a company, we have now very large customers, like Fortune 100 type customers that have operations all over the world, and we can make sure that they're treated properly in terms of the same type of service and support that they expect on a global basis. It's really that. It's little things, too.

A service issue, you might notice it in Bangladesh and then you say, hey, let's get -- make sure around the world, people are aware of this, instead of waiting for it to escalate, we can get instant follow-up on that..

Okay. And just a follow-up on that, are there very large customers that purchase in multiple geographies.

Is that a big part of the business? Or is that something that is not so big, but you're trying to expand?.

No, it's a more and more significant part of our business every year, and we have a number of those types of customers. And they have a production facility.

Typically, these customers have things like a medical products company, and they making those medical products or chemicals or whatever it is on a global basis and they want consistency, not only in the product, but the labeling that goes on to those products, and they need to know exactly what was printed, when it was printed.

And so they've got excellent choice and ability..

I'm showing no further questions in the queue at this time. I'd like to turn the call back over to our speakers for closing comments..

Thank you, Operator. And thank all of you for joining us here today. We look forward to seeing you on the road or speaking with you again at our next quarterly meeting. Have a good day..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect..