AstroNova, Inc.

Ladies and gentlemen, and welcome to Astronova second quarter fiscal year 2023 financial results conference call. Today's conference is being recorded. I would now like to turn the conference over to Scott Solomon of the company investor relations firm, Sharon Murrell Associates. Please go ahead, sir.

Thank you, Kyle. Good morning, everyone, and thanks for joining us. Hosting this morning's call are Greg Woods, Astronova's president and CEO. and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company's operating highlights. David will take you through the financials at a high level. 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 don't have a copy, please go to the investor 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 1995. 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, September 7, 2022. Astronova 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 be referring to non-GAAP financial measures. Astronova believes that the inclusion of these financial measures It helps investors gain a meaningful understanding of the changes in the company's core operating results. It can also help investors who wish to make comparisons between Astronova and other companies on both GAAP and a non-GAAP basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in today's earnings release. And with that, I'll turn the call over to Greg.

Thank you, Scott.

Good morning, everyone. Strong secular trends, including increasing air travel and the growth of digital print for packaging, continue to drive demand for our products and services in the second quarter. We delivered solid orders growth with bookings up year over year and sequentially. For the first half of fiscal 2023, total bookings reached 67.3 million, just shy of Astronova's previous first half high set back in fiscal 2020. Revenue also grew nicely in the quarter, though less than expected as certain areas of our business continued to be affected by supply chain disruptions, higher component costs, and increased freight expenses. We have taken several actions, including selective implementation of price increases, to moderate the impact of those challenges. Reflecting our demand drivers, we generated 8% top-line growth in the second quarter, while bookings increased 14% year-over-year and 7% from the first quarter of fiscal 2023. These increases were primarily driven by our test and measurement segment with the continued production ramp-up of Boeing aircraft, especially the 737 MAX, an increase in military-related orders, and a considerably higher demand for our repair and parts services associated with the rebound in commercial air travel. Our Q2 service and other revenue was up about 1.2 million, or 36% year over year, to 4.5 million, a quarterly record for the company, demonstrating the importance of recurring revenue in this segment. Turning to our product identification segment, Q2 revenue was essentially flat year over year, but up almost 8% from Q1 of this year. While we were pleased to see the accelerated pace of orders late in the quarter, the volume did exceed our manufacturing and shipping capacity, resulting in extended lead times, especially for some of our PI products and supplies. Over the past several weeks, we have improved our production rates, and we expect to catch up on the delayed shipments and return to our normal lead times as we move through the second half of the year. We've also made good progress addressing the supplier quality issue that we discussed with you a couple of quarters ago that affected certain models of our label printers. Having these printers offline at customer sites obviously impacts PI sales. Our technical teams are aggressively working the process of retrofitting the affected printers to quickly return them to full operating condition for our customers. Although taking these steps has resulted in some unplanned expense in the segment, for us, quality is paramount. Customer first is the foundation of Astronova operating system. Our priority is to make sure every customer has a great experience with our products. Within the PI segment, one of the areas we're particularly excited about is the digital print for packaging market. The growth of this market plays directly into the strength of products such as the T3 OPX, our direct-to-package solution for packaging houses and manufacturers. The T3 OPX is becoming the e-commerce printing system of choice for customers to create unique packaging using environmentally friendly materials to showcase their brand while eliminating waste. The global growth of the e-commerce channel is another important megatrend shaping our PI business. That's also one of the reasons we are thrilled about the recent acquisition of Astra Machines, a leading manufacturer of printing solutions and automated equipment for applications including digital color labels, promotional marketing material, and branded mailers, a new market adjacency for us. As I noted on our acquisition call a few weeks ago, AstroMachine has attractive operating margins and a favorable operating expense profile. Culturally, it's a great fit with our company. And the early weeks of the integration have proceeded smoothly and as planned. From a valuation standpoint, at a purchase price multiple of less than one times revenue on a full year 2021 and trailing 12-month basis, the transaction was also an effective and efficient use of our capital. checking all the boxes of our M&A strategy.

Now, let me turn the call over to David for the financial review. Thanks, Greg, and good morning, everybody.

Excuse me. I'll give you some comments on our financial performance through the first half of fiscal 2023. Please note that our earnings release includes GAAP to non-GAAP reconciliation tables. primarily reflecting the CARES Act benefits that contributed to our results in fiscal year 2022. I'll be discussing our first half results excluding the CARES Act benefits we had in last year's second quarter. We believe this lens provides a more appropriate perspective on our operating results. But the gap results and the comparisons as well to of the GAAP to non-GAAP and the reconciliations are detailed in the press release and the related tables that are included with it. At the midpoint of the year, our revenue is up about 7.4 percent to 63.3 million, driven by growth in the T&M segment. T&M revenue is up 47 percent through the first half of fiscal 2023 to 18.2 million. primarily attributable to the ramp of the 737 MAX and the return of commercial air travel as the pandemic continues to recede. As Greg suggested, our aerospace repair overhaul and parts product lines were particularly robust. This part of the business also has relatively higher margins than the average. Product ID revenue came in at $45.3 million through the first six months of this fiscal year, down about 3% from the prior year due to the issues Greg discussed. Looking at revenue by type, hardware was up almost 16% to $17.9 million through the first six months of the year. Service and other revenue climbed 26% to $8.2 million while revenue from supplies was 37.1 million, essentially unchanged from the prior year period. Combined segment operating profit came in at 7.1% or 11.3% of revenue, compared to 7 million or 11.8% of revenue in the first half of last year. Operating expenses remain under good control. Through the first six months of this year, they were 20.1 million, up about 200,000 on a year-to-year basis through six months, and up about 400,000 when comparing Q2 to the same quarter last year. Most of the increase is due to employee-related costs as the business recovers, as well as some broad catch-up after two years of COVID-induced cost controls. Our plan and expectation is that as revenue recovers, we'll see operating leverage and operating expenses grow more slowly than revenue. So far this year, that's been the case. Operating expenses as a percentage of revenue are 200 basis points, about 200 basis points lower than last year at 31.8%. Operating income was 2.0 million or 33.2% of revenue. to 2.1 million and 3.5% of revenue in the same period last year. As Craig highlighted, product demand remains strong with bookings through the first half of fiscal 23 at 67.3 million of about 6% from last year. Looking at revenue by region, at the midpoint of the fiscal year, U.S. revenue accounted for 61% of our total business with international making up The remainder, 39%. Turning to the balance sheet, inventory has grown substantially since last quarter, up almost $5 million since the end of Q1, and it has grown $7.6 million since the end of last year. At the end of the second quarter, the lack of about $330,000 in delayed T&M segment parts presented prevented shipments of about 2.4 million of product with the associated inventory of about half of that. Additionally, T&M segment inventory has also increased to support higher demand, part shortages, and the needs to build buffer stocks to be able to respond to the demand pulses. In the PI segment, there's also been a significant inventory build as we intentionally moved to increase buffer stocks by multiple months in response to the numerous supply chain disruptions we've experienced earlier this year to make absolutely certain we can provide our customers with timely and consistent delivery of their consumables. Maintaining customer access to consumables is a critical part of our value proposition and the business strategy. We've started to see some of those supply constraints ease somewhat recently. and we've begun to unwind these inventories, but it'll take a couple of quarters to accomplish this fully. As we discussed in the recent press release and conference call, we completed the astral machine acquisition after the quarter, and we'll talk about their income statement contribution and balance sheet impact in much more detail, but on our next quarterly call. But to reiterate, we do expect this to be accretive to earnings, in the second half of this year, even after the effect of transaction expenses. So I'll turn the call back over to Greg now.

Thanks, David. Let me close with three key takeaways from today's call. First, underlying demand is robust, with favorable secular trends creating tailwinds for growth. Second, We are confident in our long-term strategy as we continue to build on our track record of value generated M&A and new product development. And third, we have added an important strategic component with Astra Machine, which gives us expertise in automation and material handling, expands our color-label printer offerings, adds to our domestic manufacturing base, and creates meaningful cross-selling opportunities with other areas of our PI business. With that,

David and I will be happy to take your questions. Operator? Thank you.

Ladies and gentlemen, if you would 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, press star 1 to enter the queue. We pause just for a moment to allow everyone an opportunity to signal.

As a reminder, that is star one to ask a question, star one to ask a question. Well, it looks like we have no questions in the queue, so we'll turn the call back to Mr. Woods for any closing comments.

All right, then. Well, thank everyone for being with us here this morning, and enjoy the remaining weeks of the summer, and look forward to catching up with you at Q3 or at one of the fall packaging labeling shows, most notably the FOC Talk end of September and the PAC Expo end of October. So long for now.

Thank you. With that, this concludes today's call. Thank you for your participation. You may now disconnect.