AstroNova, Inc.

Good day and welcome to the Astronovus Fiscal Fourth Quarter and Full Year 2023 Financial Results Conference Call. Today's conference is being recorded. If you would like to ask a question during the Q&A portion of today's call, please do so by pressing start followed by one on your telephone keypad. I would now like to turn the conference over to Scott Solomon of the company's investor relations firm, Sharon Merrill Associates. Please go ahead, sir.

Thank you, Emily. Good morning everyone and thanks for joining us. Hosting this morning's call are Greg Woods, Astronomers President and Chief Executive Officer, 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 this morning. If you don't have a copy, please go to the investor's page of the AstroNova website, www.astronovainc.com. Please note that statements made on 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 seek only as of today, March 23, 2023. 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 other filings the company makes with the Securities and Exchange Commission. On today's call, management will be referring to non-GAAP financial measures. Ashtonova believes that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company's core operating results. It also helps investors who wish to make comparisons between Ashtonova and other companies on both a GAAP and a non-GAAP basis. A reconciliation of the non-GAAP financial measures to their 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, and thank you for joining us. I'd like to begin by recognizing the great work of our team members across the globe in contributing to a profitable year for Astronova against the backdrop of a challenging macroeconomic environment. High inflation and geopolitical tensions created significant supply chain disruptions across our end markets throughout much of the year. However, our team remained focused on working through these issues and on meeting the needs of our customers. by continuing to drive performance initiatives to improve quality, delivery, cost efficiency, and growth. Overall, we grew 34% on our revenue in the fourth quarter to a record $39.9 million. The top line increase was attributable to gains in both segments, with product identification up 5.7 million, or 26%, to $28.1 million, and tested measurement up 4.4 million, or 61%, to nearly $11.8 million. While supply chains remain challenged for certain products, we have been able to resolve some of the more extreme supply chain issues we experienced over the past two years with notable improvement in the fourth quarter, particularly in our T&M segment. Compared to last quarter, our unshippable backlog of scheduled orders decreased by roughly $1 million. However, we still left about 1.1 million of scheduled orders that were unfilled at the end of the quarter, primarily in the T&M segment. Based on the work we are doing with our supply chain, we expect to continue to make progress improving our on-time shipments as we move through fiscal 2024. Looking at growth drivers by segment, test and measurement benefited from a combination of contractors within our aerospace product group which manufactures, markets, and services flight deck printers and electronics for commercial and defense customers. These factors included favorable pricing adjustment, greater cost efficiencies, and the ongoing production ramp-up in aircraft deliveries. In addition to hardware revenue, we've also seen further improvement in our supplies business from our maintenance, overhaul, and repair services all driven by increases in passenger air traffic and fleet utilization. Today, we produce and market a large range of flight deck printers, including models acquired from Milto, Ritech, and Honeywell, in addition to our own Tuffrider family of products. To further enhance our manufacturing efficiencies, we continue to upgrade and transition customers to our more advanced and feature-rich Tuffrider family of printers. Turning to the data acquisition portion of the test and measurement segment, we have won a number of design-ins for defense-related programs, and these agreements are presently working their way through the governmental procurement process. While exact timing is tough to predict, we're pleased to have been selected for these programs and look forward to keeping you updated on the progress of the awards as we move through fiscal 24. Based on current business conditions, we are excited about the outlook for our test and measurement segment in fiscal 2024. Switching over to the product identification segment, Q4 was the first full quarter with Astra Machine, which we acquired in August. While the acquisition is still in its early days, the business is performing very well and in line with our expectations as we advance through the integration process. In particular, We have already made good progress integrating products between our two sales channels. AstroMachine has historically produced good operating margins, and we are focused on further integration with our sales channels to grow the top line and drive additional profitability through better customer focus, operational improvements, and accelerated new product development. We remain excited and confident about the new component of our product identification business as it grows platform in the years ahead. By combining the resources of our joint research and development teams, we will soon introduce several new product offerings. Two of these offerings, which target current and prospective OEM customers, leverage much of the technology used in our very successful direct-to-package overprinting solutions. Separately, during the fourth quarter, we launched the production release of the QL-E100, our full-color label printer designed for small businesses just getting started with the in-house label printing, as well as larger enterprises that require a large number of distributed print stations throughout their facilities. Production shipments are underway and the initial customer response to this new solution has been very positive. The driver behind this introductory level printer launch is to deploy our unique full solution model to a wider audience, whereby customers new to in-house on-demand digital label printing can take full advantage of our combined easy-to-access printer with carefully matched supplies and service offerings. Before turning the call over to David, I'd just like to comment on our improving financial strength. Our balance sheet remains healthy, and we begin the new fiscal year on a solid financial footing with reduced leverage metrics at year-end. We continue to pursue the M&A portion of our growth strategy and are confident we will have plenty of capacity to execute the right strategic acquisitions. Our strong backlog and healthy order demand position gets us set for a continued execution on our strategic priorities. Powered by the Astronova operating system, the foundation of our continuous improvement strategy, we are excited about the opportunities to grow across the markets we serve. I'll now turn the call over to David for the financial review.

Thanks, Greg, and good morning, everybody. I'll add a few comments to what Greg said about the quarter and the full-year financial performance. I'll comment on their liquidity and the impact of the AstroMachine acquisition on our results and on the year-end balance sheet. On the top line, full-year revenue grew by double digits across all three major categories contributing to this. was $12.5 million in astromachine revenue since acquisition on August 4th this past year. Supplies revenue increased 12% to $82.1 million, accounting for about 57% of total sales. Hardware revenue was up 35% to $43.4 million, or 30% of total sales. The remaining 13% of sales came from hardware, which contributed 41, which increased 41% to 18 million. Much of that growth was attributable to, as Greg said, the profitable repair service and consumables part of our aerospace product. As Greg noted, that's fueled by aircraft utilization and is closely linked to that on. Fiscal 2023 gross profit was up 10% in dollars, but down on a margin perspective. by 380 basis points to 33.8 percent. Percentage decrease was mostly due to the mixed impact of Astro Machines' lower gross margins. As we've talked about before, compared to the core PI business, the Astro Machine business model has lower gross profit models, gross margin model, but it has more favorable operating margins. Pressure release references both the gap results and the non-gap results, and we reconcile those in the exhibits to the release in a lot of detail. We use adjusted EBITDA as a measure of profitability and operating performance, and for the 12 months ended January 31st, adjusted EBITDA, excluding the acquisition costs of about $720,000, totaled $11.1 million. That's compared to 7.3 million in fiscal 2022, which excludes both the large CARES Act benefits and the write-off of our legacy ERP system. Product ID segment operating profit for the fourth quarter of 2023 was 1.9 million compared to 1.5 million in the same period last year. For the full year, segment operating profit was 7.9 million. compared with $9 million in fiscal 2022, excluding the CARES Act benefits. For the period of ownership, beginning August 4th, Astro Machines' contribution was $1.6 million. T&M segment non-GAAP operating profit for the fourth quarter was $3.2 million compared with half a million in the same period last year. And for the full year of 2023, T&M non-GAAP operating profit was $9 million compared to $2.6 million in fiscal 22, again, excluding the CARES Act benefits. Fiscal 2023 operating expenses were $40.7 million compared to $40 million last year. Increases were due to the addition of Astra machine for half a year and to slightly higher wages and benefits and higher travel related expenses as the pandemic ended and we were able to get back to meeting customers face-to-face again. Our plan is to hold very tight control on operating expenses in fiscal 2024 and expect if they increase, it will be only modestly. At the end of the third quarter, we estimated the allocation of the Astra machine purchase price to the assets acquired, and we finalized that in the fourth quarter. Included in that allocation are the customer relationship and trade name intangibles that were appraised at just under three and a half million dollars. And we're going to amortize that over five years. So it will amount to a non-cash charge of just under $700,000 per year. And just then 340,000 since the acquisition. in accordance with GAAP that will be on the sales and marketing line. We also finalized the fixed asset appraisal and the non-cash expense for the half year with $170,000. The details of the Astra Machine balance sheet will be in a footnote in the 10-K when we file it pretty soon. Despite the borrowings in the third quarter to acquire Astra Machine, our overall financial capacity is strong. our debt-to-EBITDA leverage ratio is declining, as we reduced debt by $4.4 million in the quarter and increased the EBITDA, including the acquisition of the AstroMachine. We negotiated a new covenant structure when we refinanced our credit facilities to accomplish the acquisition, and we're well inside those covenants. As a result of those facts, we believe we have incremental borrowing capacity if or when we need it, and we're in frequent contact with our bankers about our plans. On top of the revolving credit facility availability, our bank agreement provides term loan equivalent secured financing of capital equipment, and we'll likely borrow about 1.7 million for that purpose this year as we plan to upgrade our hardware and supplies manufacturing equipment to keep up with expected demand growth in fiscal 24. And with that, I'll turn the call back to Greg.

Thanks, David. We finished what was a challenging fiscal 2023 with a crescendo in the fourth quarter. Based on current market conditions, we expect to continue our growth with improving results in fiscal 2024. The gradual recovery of the commercial aviation market has allowed our test and measurement segment to return to a growth trajectory. We're taking steps to further enhance the efficiency of our aerospace product lineup through the continued migration to our tough greater family of printers, and our outlook for the business is positive. In our product identification segment, the integration of Astro Machines is proceeding on plan, and we will have the benefit of a full year of revenue from this business in fiscal 2024. The new products and operational upgrades planned for Astro Machines should enhance the overall growth and profitability of the product identification segment as we move forward. Now, David and I will be happy to take your questions. Operator, please line the question.

Thank you. If you would like to ask a question, please do so now by pressing Start followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, please press Start and then 2. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Peter Sidoti with Sidoti and Company. Peter, please go ahead.

Greg, I noticed that inventories and accounts receivable are up. Do you expect to be bringing this down?

Yeah, that's something that we are working on through the year. We're taking advantage of pricing efficiencies as well where we find them. We're still in a situation where occasionally we have to It'll buy more than we need just to secure the supplies. But as I mentioned, that's starting to decrease in terms of supplier reliability increasing. So we expect to continue to bring that down as we move through the year.

Peter, I'd just also remind you that included in those numbers are the consolidation of the Astro machine. So they jumped up during the year in part because we bought a company.

Okay. And what about capital spending this year and next?

This year, like I said in my comments.

Okay. So you will be generating a lot of excess cash flow this year and next. Do you expect to use that? pay down the existing debt?

Sure.

I mean, we all have to take a look at the capital allocation. Okay.

It just seems like this is quite a catch. Okay. Thank you very much. Sure.

As a reminder, for any further questions today, please ask these now by pressing start, followed by the number one on your telephone keypads. Our next question comes from Tom Spiro with Spiro Capital. Please go ahead, Tom.

Tom Spiro, good morning.

Good morning, John.

Just a couple. Greg, you mentioned on the data acquisition side of the business that if I understood you, you've won a couple of contracts with the government. and they'll begin to kick in this fiscal year. Do you expect those revenues from those contracts to be material to the income statement?

Yeah, and the test and measurement data acquisition part of the business is primarily what I was referring to. And, you know, the data acquisition is a smaller part of the test and measurement segment, but, you know, within that product group certainly would be significant. And, you know, it will make an impact on the overall financials, you know, When you look at the kind of run rate that we're at right now, it won't be orders of magnitude, but it's an important win for that team. I see.

And on the product identification side of the house, the last quarter or two while we owned the Astral Machine business, if I back out the revenues from that acquisition, I just did this quickly. It looked to me like the revenues from what I would call core product identification or legacy product identification were down. Am I right, or perhaps I'm not doing the numbers correctly?

Yeah, they're basically flat, which was a little disappointing, and it had to do with some items you mentioned before where we had some supply issues poor supplies from one of our suppliers really that caused us to have to refit some of the machines in the field. And we're working our way through that process now. We're probably about halfway through that. It really gets involved with kind of flushing out the bad ink and getting new ink in there. And that did cause, you know, those machines not to produce as much revenue as we had expected. But, you know, I say we're coming back out of that right now. So I think by the end of Q1, we'll have most of that behind us. a little bit to clean up in Q2. But in general, the product lines that weren't affected by that are doing fine.

That's great. That's okay. Okay. And if the problem that we had came from one of our suppliers, are we seeking compensation from that supplier?

Of course. And that comes in different ways.

Okay, well, how's it going? Are we doing any negotiations? Do we have a lawsuit? How does that look?

No, no, it won't be a lawsuit. We've got a mutually agreeable way to work our way out of that. I don't want to get into details of it because it's not public, but it'll help as we go into FY24, let's put it that way.

Okay, great. Well, thanks much, and good luck.

All right, thanks, Tom.

Before we take our next question, as a final reminder, to ask any questions today, please do so now by pressing start followed by the number one on your telephone keypad. And with that, our next question comes from George Melas with MKH Management. George, please go ahead.

Thank you. Good morning, Greg and David. Morning, George. My line of question was very much, good morning, was very much along Tom's, you know, question on revenue in the PI segment. So I think you answered some of that. But maybe I can ask you just a few little bit more details on that. You said it was a problem with Inc. And when did it start?

It started, well, a little bit actually at the beginning of last year, but it became a bigger issue about the middle of the year.

okay and can you know then we deployed our children go ahead yeah because i mean i think i you know i mean i do the same math as tom right so revenue was roughly flat um but then um then if you take out the contribution from master machine the the ebit was down quite a bit So just trying to understand, did you have extra cost and less revenue because of that problem?

Yeah, it hits us in a couple different ways. So, you know, well, actually probably three ways. So number one, the machines that are impacted don't run or don't run as often, right? So you get less revenue. And, you know, that's kind of, you know, typically the ink and supplies, which are a higher margin product for us. And then you have the issue of, you know, having to spend testing, you know, basically our technical support teams have to go out and repair these, you know, because we do warrant the products that we sell through to our end customers. And then you have essentially the costs of those supplies that go out there. So it ends up as a warranty expense and extra technical support costs for us to do these takeovers. Okay.

And you're probably going to have that in the OK, but can you say sort of how much was the warranty expense in the year and in the quarter?

Yeah, I don't think we divulged that specific number. Okay. It was significant.

Okay. And when you say you're halfway through it, does that... that seems like a long time to solve a problem because if it started like at the beginning of last year, I mean, that has run through at least 12 months, right? And so help us understand sort of how a problem like that gets solved.

Well, first of all, you've got to, you know, it shows up, you see a few issues in different locations for different reasons. And the issue really is, getting to the root cause. So you chase down a variety of different, you know, it wasn't as simple as, oh, let's just change this, and then it works instantly. So, yeah, the technical teams, both from the supplier as well as our own teams, had to go through a lot of diagnostics to figure it out. Please just say they did come up with a solution, but now, you know, it takes time to implement it because you've got to get, you know, it requires a physical change, kind of a flushing of the machine, basically, to make it as simple terms, and then change out a couple of components. And once we do that, they work fine again. But, yeah, we have several hundred machines in the field, so you can't do them all instantly.

Okay. And may I ask, how many ink suppliers do you have? Maybe I'm giving you too much of a list there. I don't know.

Oh, yeah, we have, you know, actually quite a few different ink suppliers. Yeah. More than 10, let's put it that way. Okay.

And the problem was with just one?

Correct.

Okay. Okay, great. And so you saw, so, okay, great. Thank you very much.

Okay, George. Good catching up with you.

Thank you, everyone, for your questions. We have no further questions at this time, so I'll hand the call back to Mr. Woods for any concluding remarks.

All right. Well, thank you, and thank you, everyone, for joining us here this morning. As always, we look forward to keeping you updated on our progress, and enjoy the rest of the week. Bye now.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.