Good day, ladies and gentlemen and welcome to the Daktronics fiscal year 2019 fourth quarter earnings results conference call. As a reminder, this conference is being recorded today, Wednesday, May 29, 2019 and is available on the company's website at www.daktronics.com. At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the conference over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks. Please go ahead, Sheila..

Thank you Cherry. Good morning everyone. Thank you for participating in our fiscal and fourth quarter earnings conference call.

I would like to review our disclosure cautioning investors and participants that in addition to statements of historical facts, we will be discussing forward-looking statements, reflecting our expectations and plans about our future financial performance and future business opportunities.

All forward-looking statements involve risks and uncertainties, which may be out of our control and may cause actual results to differ materially.

Such risks include changes in economic conditions, changes in the competitive and market landscape, including impact of global trade discussions and policies, management of growth, timing and magnitude of future contracts, fluctuations of margins, and the introduction of new products and technologies and other important factors as noted in detail in our 10-K and 10-Q SEC filings.

With that, let me highlight some of the financials starting with the fourth quarter results and the related comparison to fiscal 2018's fourth quarter. Orders were relatively flat. Sales decreased by 7.5% resulting from order timing and related conversion to sales to meet the various needs of the customer.

Gross profit as a percentage of net sales was 19.1% as compared to 21.6%. Gross profit was positively impacted by the decrease of warranty as a percent of sales to 2.2% as compared to 4.4% and negatively impacted by $3 million of costs for adjustments made to business combination contingencies and project sales margins being lower.

Operating expenses for the fourth quarter of fiscal 2019 was $34.7 million compared to $35.2 million. We had a tax expense of $0.1 million for the Q4 loss as we trued up actual income tax estimates to the actual results. For the full fiscal year, orders were up 4.4% as compared to last year and was our third highest order volume year in history.

The change in orders reflects the broad range of offerings and highlights our ability to serve the diverse range of needs of our end markets. It also highlights our ability to win orders of varying types and sizes.

For the year, we had fewer than five projects valued at $5 million; and in past years, we would have multiple orders over $5 million to reach the volumes reported.

Commercial orders slightly increased primarily due to the increased activity in the spectacular market, including the awards of Barclays Capital Building upgrade and replacements of five other properties based in Times Square, the award of Harrah's and [indiscernible] from Las Vegas and for a number of awards in mall properties and for cruise lines.

Demand was strong for digital billboard replacements, new digital billboard installations, and other applications for our customers in the out-of-home third-party advertising segment. We were successful from both customers on a national network to local billboard operators.

The high school park and recreation orders increase was related to the continued overall strong market demand and an increase in projects for larger video systems. Larger video system projects can range from $500,000 to $3 million or more, all depend on the school district size and facility needs.

Often, these customers can generate additional revenue from the advertising or provide additional curriculum for students by designing classes for broadcast or content creation using our displays and control systems.

Transportation orders grew in both intelligent transportation systems and tolling applications as state transportation departments and private public partnerships continue to invest in technology to better inform travelers, manage transport systems, and collect revenues.

We had continued order success throughout most of our live event sports and entertainment markets but had lower order volume in professional sports as there were fewer projects in the market as well as for strong competition.

In professional sports, we were awarded orders for either upgrades or replacements for the Texas Rangers, Atlanta Braves, and the Kansas City Chiefs to name a few.

We were also awarded a number of projects for minor league baseball stadiums and had continued success on college campus athletics as these customers are looking to increase the fan experience and attract both players and fans to their events.

International business unit orders were down due to the general variations in timing of large contracts and account-based order placements. We work across a number of different customer types and geographies outside the United States and Canada, including transportation and governmental sports and commercial type of customers.

We had continued order success with global and regional out-of-home advertisers as they build out their digital network and had continued success for projects for malls and casinos, sports complexes, and transportation stations around the world, including a multi-million-dollar transportation type project in Riyadh.

On a year-to-date basis, sales were up in all business units except live events for the same reasons noted for order changes.

On a year-to-date basis, gross profit declined to 22.9% as compared to last year's 23.9%, primarily due to increased commodity pricing and tariff costs, discrete negative impact for projects, litigations, or other claims during the year relating to the sales conversion, and lower sales on the last half of the year to cover primarily fixed costs.

Our warranty as a percent of sales improved by 1.2% for the year and primarily as our past issue is out of contractual warranty coverage. On a year-to-date basis, operating expenses have increased by 1.4%, primarily due to increases in selling expenses.

Selling expenses have increased due to personnel related costs and an increased mix of international orders sold through third-party representatives which earned commissions. On a year-to-date basis, operating loss as a percentage of sales was 0.8% for fiscal 2019 as compared to an operating income as a percentage of sales of 2% in fiscal 2018.

The effective tax rate for fiscal 2019 was an 80.6% benefit as compared to a 55.2% expense a year earlier. In fiscal 2019, we reported one-time benefit totaling $3.3 million for the release of allowances and reserves and a benefit for the loss. This was contrasted by the costs in fiscal 2018 as we were impacted by significant changes to the U.S.

tax code and the related write-downs of deferred tax assets. We estimate an effective tax rate of approximately 21% for fiscal 2020, but as we have previously discussed, our effective tax rate can fluctuate depending on changes in tax legislation and the actual geographic mix of taxable income.

Our cash and marketable securities position was at $62.1 million at the end of the quarter, and we generated $29.5 million in cash from operations and used $19.5 million for investments in capital, for new production, system capabilities, information system infrastructure, and for an acquisition to advance our technology offerings, and used $35.6 million in product development.

We expect capital expenditures to be less than $25 million for fiscal year 2020. Our product backlog is at $202 million, which we expect to convert to sales over the coming two to three quarters. We expect sales for the first quarter of fiscal 2020 to be up slightly as compared to last year's first quarter.

Of course, sales could change pending project bookings and customer schedule changes. And also of note, fiscal 2020 is a 53-week year for us with the additional week falling in Q1. I will now turn over the call to Reece Kurtenbach, our Chairman, President and CEO for a few comments..

Thank you Sheila. Good morning everyone. As Sheila highlighted, our financial results for fiscal 2019 were lower than anticipated and we had a disappointing second half to the year. Like many other U.S. companies, the dynamic and changing global trade environment and strong global economy has impacted our fiscal year costs by at least $6 million.

The biggest impacts were for aluminum price changes, electronic product cost increases and tariffs on components and commodities. We are not only always able to change our prices to match these cost increases. We desire a free and fair global trade and while the global trade environment remains in flux, we are evaluating ways to reduce the impacts.

For example, we filed for a U.S. government toll exemptions but have not been granted any to-date. We continue to evaluate new component suppliers from geographies not really currently impacted by high tariff rates.

We entered into fixed-price contracts for commodities to stabilize price fluctuations and we are evaluating manufacturing locations that could help reduce the impact. However, many of these countermeasures need additional investments or evaluation to ensure viability and would also impact our ongoing cost structure.

On a more positive note, we are able to capitalize on the strong global economy and growing market in digital space. We focused on winning more orders in fiscal 2019 and we’re able to achieve the third highest level of order value in our company's history.

This is also a testament of our continued leadership in the marketplaces as customers choose Daktronics for a broad range of solutions, the reliability of our products, and our commitment to serve them over the lifetime of their system.

During fiscal 2019, we made continued progress on releasing new offerings to our already competitive and diverse line of solutions, positioning us to better meet our customers' needs both today and in the future.

Some examples of new solutions include a line of narrow pixel pitch displays, new control system features and functions, and a continued broadening of our offerings in other areas to meet varying customer expectations on cost, quality, reliability, and lifetime.

Moving into fiscal 2020, we remain positive on the overall outlook in the business and growth in the industry. With continued strong global economic environment, we predict continued and expanded uses and applications of digital solutions in all business units.

Specifically, in international, with our establishment of localized sales and service channels, our sales focus on increasing market share and our current outlook on known opportunities, we expect growth in sports, out-of-home, spectacular, and transportation areas outside the U.S. and Canada.

Looking into live events business, we know this business is lumpy, primarily consisting of larger contracts and can be highly competitive. We expect some growth over the long term. However, we predict a similar-sized business as previous years driven by replacement cycles and new product uses.

We expect sustained demand for larger-sized orders due to the adoption of video in sporting applications in the high school park and recreation market.

In our commercial business unit, we expect similar overall order volumes as compared FY 2019, mainly driven by both new and replacement systems for our account-based business, expansion of solutions for indoor applications, continued replacement and new investment activity in the out-of-home segment.

The spectacular segment includes multi-million-dollar projects that are discretionary choices by customers which can cause ups and downs in timing and trends. We are starting the year with strong activity and a good pipeline of projects, but it is difficult to predict closure on this business. The transportation business in the U.S.

and Canada remains strong due to continued investment in the U.S. transportation systems, the stability in federal funding and increasing advertising and on-premise promotional applications in mass transit facilities. However, the timing of these large projects and a strong FY 2019 cause volatility in the comparisons.

In all of our markets, we have a natural replacement cycle and strive to serve our customers with their needs today and be there for them for future purchases. We have recently introduced indoor narrow pixel pitch offerings and see a receptive market for these products across our business units.

We continue to foster and build out indirect sales channels. Our range of solutions and global capabilities makes us the industry's most experienced digital display provider. And to support our customers over the long term, we are focused on developing and releasing innovative solutions and services tailored to different applications in each segment.

We entered fiscal 2020 with a strong backlog and a positive outlook. During fiscal 2020, we are focused on increasing orders as we serve a growing global customer base in commercial, sports, and government markets.

We are also focused on maintaining our product development activities and continue to invest in new technologies and advanced manufacturing techniques. Finally, we are focused on carefully managing capacity and spend on our path of long-term profitable growth. With that, I would ask the operator to please open the line for any questions..

[Operator Instructions]. Our first question comes from Greg Pendy with Sidoti..

Hi guys. Thanks for taking my questions. I guess just first, you mentioned the warranty expenses were, I guess, 2.2%. So it's kind of a tick up from 3Q.

Do you think the 1.5% to 2% normalized is reasonable going forward or do you think it will stay around above 2%?.

I think that 2% and under is our goal and I think we can get there as well. There's some variability from quarter-to-quarter, but overall our warranty trends have been in a positive direction..

Okay. That's helpful. And then just moving on just I guess to the impact from tariffs.

Can you just give us a sense of are there longer term contracts that are starting to roll off that might give you a little bit of relief in 2020? Or do you think the trend right now, if the regulation stay in place is what we should assume for 2020?.

That's a volatile situation, Greg. And we continue to evaluate both the situation and different reactions to that. The recent increase in the tariff amounts on these List 1, 2, and 3 will likely have some impact in this next fiscal year..

Okay. That's helpful. Thanks a lot..

Thank you. Our next question comes from Lisa Springer with Singular Research..

I wanted to ask how much of the fourth quarter gross margin decline was due to the higher commodity costs? If you could just give me kind of a range of what you thought?.

I guess maybe 0.5% to 1% range..

Okay.

And then in terms of the orders, projects larger than $5 million, does that tend to be focused on a couple of the business units or is it spread across all of the business units or how do those work?.

Certainly, our live events business has this large project aspect as well as our spectaculars. And then in our transportation business, we can get orders in that level. Our international business plays in all three of those customer segments and so we will see, depending on the year, opportunities in those areas as well..

Okay. Thank you..

Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to Reece Kurtenbach for any closing remarks..

I appreciate everybody's time and attention this morning. Hope you have a great summer and I look forward to talking to you in August, September. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and have a wonderful day..