AstroNova, Inc. (NASDAQ:ALOT) Q3 2024 Earnings Call Transcript

AstroNova, Inc. (NASDAQ:ALOT) Q3 2024 Earnings Call Transcript December 6, 2023

Operator: Good morning, and welcome to the AstroNova Fiscal Third Quarter 2024 Financial Results Conference Call. Today’s conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Scott Solomon of the company’s Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

Scott Solomon : Thank you, Carla, and good morning, everyone. With me on this morning’s call are Greg Woods, AstroNova’s President and Chief Executive Officer; and David Smith, Vice President and Chief Financial Officer. Greg will discuss the company’s segment 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. If you’ve not received a copy of this morning’s earnings release, please go to the Investors page of the AstroNova website, www.astronovainc.com. 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 speak only as of today, December 6, 2023. AstroNova undertakes no obligation to update these forward-looking statements. For other 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 refer to non-GAAP financial measures. AstroNova believes that the inclusion of these financial measures helps investors gain a meaningful understanding of the changes in the company’s core operating results.

and also helps investors who wish to make comparisons between AstroNova 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.

Greg Woods: Thank you, Scott, and good morning, everyone. We began the second half of fiscal 2024 with a significantly more profitable third quarter. Where operating income increased more than threefold to $4.6 million. Operating margin improved 890 basis points to 12.3% and adjusted EBITDA hit an all-time record up 81% to $5.7 million or 15% of revenue. This profit improvement is a testament to the great agility, hard work and execution by our teams around the world. The increased profit generation was achieved despite an 11% year-over-year revenue decline in our Product Identification segment. This was primarily from the supply side of the business, or the lingering negative impact of an ink quality issue from one of our suppliers has decreased in utilization on some of our printers.

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Q&A Session

To a lesser extent, the temporary effect of higher customer ink inventories ahead of a price increase from that same supplier, and to a degree, the impact of exiting certain product lines as part of the restructuring we announced last quarter. We believe the ink related slowdown issues will abate as we move through the next few quarters. Additionally, we expect to realize strong margins from several new product releases as they gain traction in the market. Meanwhile, the commercial aviation industry continues to experience robust demand closing in on and in some cases exceeding the 2019 highs. Both aircraft operating hours and new aircraft orders are up markedly. These trends are expected to continue and bode well for the aerospace product line within our Test and Measurement segment in the fourth quarter of fiscal 2024 and beyond.

Now let’s review our segment results in a bit more detail, starting with the PI segment. Operating profit increased 62% to $4.8 million, with margin up to 820 basis points to 18.1%. The vastly improved performance primarily reflected favorable product mix as some of the margin improvement actions we implemented earlier took hold. Additionally, we reduced expenses, and lower warranty costs and improved operating efficiencies from the restructuring. We have simplified the PI segment by transitioning more printer manufacturing from Asia and West Warwick to our AstroNova — Astro Machine plant rather in Illinois, exiting low-margin or low-volume label printers, consolidating international sales and distribution facilities, and streamlined our global channel partner network.

As an ongoing fundamental of our strategy, we continue to invest in new products that meet our customers’ needs for printing solutions that are compact, efficient and flexible. In the third quarter, we unveiled three new printers. The QuickLabel QL-900, the TrojanLabel T2-Pro and the TrojanLabel T3-Pro. The rugged QL-900 is a desktop inkjet label printer designed for full color labeling applications, manufactured at our Astro Machine plant in Illinois. The product features a touchscreen interface and internal job library, enabling users to easily manage printer setup and operation. The new T2-Pro is the latest addition to our TrojanLabel brand of compact digital label presses targeted towards industrial and professional printing segments. With a print width of 12.75 inches, and a print resolution of 1,600 by 1,600 dots per inch.

The T2-Pro offers superior cost of ownership across all available aqueous inkjet technologies on the market. The T3-Pro as a compact CMYK digital print module ideal for OEMs that want to easily integrate a print station into conveyors or other specialty equipment to offer full color digital printing solutions for envelopes, corrugated and a wide variety of flat surface products. In addition to those three printers, we recently unveiled the VF-280, a high-speed commercial vacuum feeder. This product is designed to handle a variety of materials like bags, envelopes, heavy card stocks, corrugated cardboard, jewel cases, calendars and sheet stocks. When integrated with the TrojanLabel T3-OPX the VF-280 offers a modular direct-to-package post printing system that enables high-quality, full-color automated printing.

Customers benefit from faster time to market and reduced waste. In recent months, we’ve had the pleasure of integrating and interacting with the thousands of current and prospective customers who demoed our digital label printers, envelope printers and direct-to-package printing solutions at major trade shows such as PACK EXPO in Las Vegas, LabelExpo Europe in Brussels and the Printing United Expo in Atlanta. What we heard from customers is clear. Within the digital printing market, what differentiates AstroNova is our ability to provide customers with a unique total printing solution. We consistently earn high ratings, not only for the breadth of products we offer, but also for the consultative services and support that we provide that tailors a solution to each customer’s application and business needs.

For instance, within our Astro Machine subsidiary, we are continuing our product innovation initiatives with the upcoming launch of two new digital printing and addressing systems, purpose-built for a large OEM customer. These products embody the voice of the customer methodology that is a central tenet of our AstroNova operating system. Engaging with customers on the design engineering of new products has enabled us to apply that valuable learning to gain traction in both existing and new market verticals. Switching to the Test and Measurement segment. Third quarter revenue increased 16% year-over-year to $11 million, with growth in both our Aerospace and Test and Measurement product groups. Segment operating profit was $2.6 million or 23.2% of revenue compared with $1.7 million or 18% of revenue a year earlier, driven primarily by favorable product mix and the impact of operating leverage on the higher revenue in that unit.

As we’ve discussed on prior calls, we are gradually upgrading OEM and direct airline customers to our more advanced ToughWriter branded printers from the other three brands in our portfolio. Pairing the number of brands that we offer will allow us to reduce our overall manufacturing costs, thereby driving higher margins. By the end of fiscal 2027, we estimate that 9 out of every 10 printers we ship will be a ToughWriter compared with a little less than 4 in every 10 today. As we execute that transition, we want to also point out to investors that an additional benefit of this transition will be that the royalty we pay to Honeywell International under our asset purchase and licensing agreement will decline, and it will disappear completely at the end of the third quarter of fiscal 2028.