AstroNova, Inc.

and welcome to Asher Nova's first quarter fiscal 2022 financial results conference call. Today's conference is being recorded. I would like to now turn the conference over to David Kell, who's the dean of the company's investor relations firm, Sharon Merrill Associates. Please go ahead.

Thank you. Good morning, everyone, and thanks 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 comment on the financials. Greg will make 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' page 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 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, June 10, 2021. 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. On today's call, management will review occurring to non-GAAP financial measures, adjusted earnings before interest, taxes, depreciation, amortization, and share-based compensation, or adjusted EBITDA. Astranova believes that the inclusion of this measure helps investors gain a meaningful understanding of the changes in the company's core operating results and also can help investors who wish to make comparisons between Astranova and other companies on both a GAAP and non-GAAP basis. A reconciliation of this non-GAAP measure to its most directly comparable GAAP measure is available in today's earnings release. And with that, I'll turn the call over to Greg.

Thank you, David. Good morning, everyone, and thank you for joining us. For the first quarter of fiscal 2022, revenue came in at $29.1 million, down 6% from the prior year, as top-line growth in our product identification segment partly offset continued softness in the aerospace portion of our test and measurement segment due to the effects of the pandemic and the slow recovery in 737 MAX shipments. Although the global economy is still challenged, we're beginning to see signs of recovery in certain areas, as economies begin to open up and air travel increases. Our product identification segment posted record bookings for the quarter, and bookings for the aerospace portion of our test and measurement segment were up 45% sequentially, delivering the first aerospace positive book-to-bill quarter since fiscal 2020. On the cost side, our team members have done an excellent job over the past year and bringing down our expenses as reflected in our higher margins and increased profitability in the quarter. Operating expenses were essentially flat from the prior year's first quarter, and operating profit was up nearly 11%. Turning to our Q1 performance by segment, product identification revenue was up 3% to $23.1 million, with solid contributions across the product line. the T3 OPX, our wide-format, durable, direct-to-package printing system, continues to surpass expectations. Brand owners, OEMs, and commercial printers are profiting from the product's many benefits in terms of greater efficiency and a high return on investment. As a result, the T3 OPX continues to attract new customers in new markets around the world. From a geographic standpoint, The recent enhancements to our EMEA sales organization paced a nice uptick in international revenue in Q1. The international channel accounted for nearly 43% of total revenue, up from 36% in the first quarter of fiscal 2021. Domestic sales accounted for 57% of total revenue in the quarter versus 64% in Q1 last year. On our year-end call, I talked about our recent expansion in China with the addition of a new office in the southern port city of Guangzhou. Since then, we have stepped up by hiring experienced sales and support team members for that location. With sales locations now in both Shanghai and Guangzhou, we're in a much stronger position to grow our business in the Asia-Pacific region. We are reinforcing our APAC investment with a stronger trade show presence, having recently participated in four regional shows in niche industries, including food and cosmetics. Looking ahead to the fall, we will have a booth this year at the PAC Expo Exposition in Las Vegas, where we will be demonstrating our latest product lineup. And of course, we continue to invest in our digital marketing initiatives, expanding our e-books, case studies, support videos, and other tools to attract new customers and to help our existing customers optimize our technology. Looking at our test and measurement segment, first quarter revenue was down 30% from the same period in fiscal 2021, as the effects of the pandemic and the 737 MAX slow restart continue to be felt across the commercial aerospace industry. I talked a moment ago about the positive indicators we are seeing, and while those may be improving a bit faster in certain areas, overall, industry analysts say it will still take many months for commercial aerospace to return to the 2019 levels, and correspondingly, for us to see substantial benefits from that recovery, since our products are designed to nearly the full range of commercial and business jet aircraft used worldwide. We recently entered into a Tier 1 supply agreement with Airbus to ship Astronova manufactured printers for the A320 family of passenger aircraft. The Tier 1 designation enables us to supply flight deck printers directly to Airbus rather than through a third-party intermediary. A third-party supply agreement has been in place since 2017 when we acquired an exclusive worldwide license from Honeywell International to manufacture the PTA-45B narrow-format cockpit printer for the Airbus A320 portfolio. This direct supplier status means that we have achieved all of Airbus' rigorous qualification standards across the areas of quality, engineering, manufacturing, and global aftermarket support as well as program management. We are honored to be part of the Airbus Direct Supplier Network and look forward to expanding our relationship further in the future. Now let me turn the call over to David for the financial review.

Thanks, Greg, and good morning, everybody. In the first quarter, we continued to manage our costs well while continuing to prudently invest in growing the business. Greg gave a comprehensive segment review So I'll just mention a few more items from the P&L and balance sheet. I'll also note that our Q1 10Q will be filed today. Looking at revenue by type, hardware revenue was $7.6 million in the fiscal 2022 first quarter compared to $8.9 million in the prior year period, reflecting the decline in the test and measurement segment. Supplies revenue was $18.2 million. versus $19.1 million in the same period of fiscal 2021. Service and other revenue was $3.2 million, up from $2.9 million a year ago. The year-over-year variance in supplies revenue reflected in part weaker aerospace industry demand in the first quarter of this fiscal 2022 associated with COVID-19 as compared to last year, as well as what we now think was some early pandemic supply stocking orders from some product identification customers in the fiscal 2021. On the supply chain, throughout the pandemic, we've experienced some challenges in obtaining raw materials and components for our products, and this continues. So far, we've not really had shortages and have managed this with some additional costs for things like expedited shipping and express shipping fees and we don't think that these challenges have materially affected our financial results or relationships with our customers and our current view is that these issues will remain manageable but it probably will take a couple of quarters before they're worked out of the system we've been addressing potential supply shortages proactively throughout with long-range planning and supplementing inventories as needed To some extent, these strategies have resulted in us carrying more inventory than we normally would. And it's a reason that inventories at quarter end were down only modestly from the year end period. And for the time being, we plan to continue to err on this side of caution. Bookings for the first quarter were up 5% year over year and 12% sequentially to $32.8 million. Beginning in the fiscal 2021 fourth quarter, we began reporting adjusted ebitda which is ebitda further adjusted just for share based compensation and in q1 adjust adjusted ebitda was 2.5 million or 8.6 percent of revenue compared to 2.6 million or 8.3 percent uh in the first quarter of fiscal 2021 Turning to the balance sheet, cash and equivalents at the end of the quarter stood at 11.4 million, unchanged from year end. But debt at the end of the quarter was 9.6 million, down from 12.4 million at the end of the fiscal year, reflecting the reductions in debt we made when we closed the amended credit agreement this quarter that we talked about on our last call. This excludes the PPP loan of 4.4 million. While our application for PPP loan forgiveness has been in for a while, we just don't know when the government will process it. Before I turn the call back to Greg, I just want to let you know that next week we'll be participating in the virtual East Coast Ideas Conference. Our presentation is scheduled to be available on the investor segment of our website beginning at 8 a.m. Wednesday, June 16th. And with all that, I'll now turn the call back to Greg for closing comments.

Thanks, David. We continue to focus on our core strategic tenants, investing in innovation, expanding our global geographic footprint, and delivering world-class products that enable our customers to achieve greater efficiencies and profitability. In testing measurement, while the lingering effects of the pandemic continue to create uncertainty for the commercial aerospace industry, domestically, the market seems to be gradually turning a corner. However, the pace of recovery remains slow. In product identification, our strategy of addressing adjacent market segments with unique solutions like the T3 OPX is paying off. Demand for direct-to-package printing is growing across the industry, and as a global player, we are well-positioned to capitalize on that momentum in that segment. Now, David, I'd be happy to take your questions. Operator?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, you may press star 1 to ask a question. We'll pause for just a moment to allow everyone to signal for questions. Our first question comes from Nick Ryan with Colliers.

Thank you. So, Greg, you talked about the Tier 1 status with Airbus. Does that now mean you're not required to pay Honeywell any more fees for their participation? And how about on the Boeing side?

Yeah, the Boeing one, that's easier because, yeah, there are no fees with respect to Boeing because we already were a Tier 1 supplier for Boeing. With Airbus, yeah, with the completion of this agreement, We can now work to finalize that. There's still some negotiations going on in terms of the exact timing of wrapping up everything with Honeywell. There's kind of three people in that, you know, agreement there. It's us, Honeywell, and Airbus. So we've got the Airbus piece, which was the most difficult, locked up, and now we just need to wind down the Honeywell transition service agreement piece of that, which we're working on right now.

Okay. And as the 737 backlog starts to flow, what are you seeing there? It looks like, obviously, the booking strength, was it pretty much related to the 737, or was it across the spectrum?

No, it was across the spectrum, and it's still a very small piece that's coming from the MAX, but we are seeing that just start to ramp up now. You know, it's still small numbers compared to where we were, you know, in 2019. But we are seeing that tick up quarter by quarter. And, you know, the latest information we have from Boeing is in line with what they have said in the past, is that they should be getting up to, you know, kind of the low levels they're at now to the, you know, 30, 31 kind of level as we get into the very beginning of 2022. So that's good to hear they're on track with that. And, of course, as they do that, they'll need more and more printers to support that ramp up in their manufacturing.

What does their inventory of printers look like? Can you get a sense of how much inventory they're sitting with?

Yeah, they typically don't keep a lot. They keep it because, again, with the 737, the airlines actually purchase directly from us and we drop ship it to them. bowing in time for the production so they do keep a buffer obviously they don't want to slow it down in case an airline is slow on their delivery but that's typically you know in kind of the low tens kind of numbers that they keep on hand there in seattle okay on the product id side uh you mentioned uh

increased staffing in China. What percent of revenues is APAC now, and what's the opportunity? Where can that grow?

Yeah, we don't break out specific percentage, but it is a very large economy in China, and they've bounced back a lot quicker than most with the pandemic, and they're kind of back to normal from what we can see in January. So we have a lot of business and business potential, but in the South, we weren't very well represented because it's hard to get there from Shanghai. So we expect that we don't publish the actual numbers, but we'd expect our China business to double year over year from this point to next year as we ramp up that office. Because the business in that area is nearly equal to the business we already have and the potential we have in the northern part of the country. Okay.

I know you don't give specific guidance, but can you give us a sense of how you see fiscal 2022, you know, kind of flowing from, you know, first quarter as a base?

Yeah, we don't give that. But, yeah, what I could say is, you know, maybe I just highlight the things that I already have said, which is, Yeah, we're seeing a nice pickup in orders on our product identification side. And, you know, while the orders are still behind where they were, obviously, you know, in the pre-pandemic level in the aerospace and test and measurement portions of our test and measurement segment, we're seeing that ramp up, too. So we see that as a positive indication. And, you know, the macro drivers of, you know, the vaccines and the countries recovering and open up – That's great for us. In the aerospace business, as more and more planes are flying, we're seeing increases in our MRO portion of our business. But the other things are driven by the international, and international is still, it depends who you talk to, but it's kind of down, I saw this morning, down 80% from April of last year to April of this year. So we need that to bounce back, too. But there's positive signs there.

Okay. Okay, great. Thank you.

Thank you. Again, that is Star 1 if you'd like to ask a question. There are no additional questions at this time. I'd like to now turn it back to Mr. Woods for closing remarks.

Great. Well, thanks, everyone, for joining us this morning. We look forward to keeping you updated on our progress, and we'll talk to you next quarter.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.