RAVN
#Thanks, <UNK>, and good morning, everybody.
Before we begin, I want to let you know that we're changing the focus of these calls this morning to a longer term view.
And yesterday, we released our first quarter earnings report and you've had an opportunity, hopefully, to look that over.
And we're not going to step through the press release like we have in the past and like many companies do.
We're going to focus our comments on a little longer view, and hopefully give you a little more color into where we see our business heading, and a little bit more depth on how we've accomplished what we have accomplished.
Now over the last couple of years, we have endured many challenges.
We made a lot of adjustments, what we feel were prudent adjustments.
We've kept our overall strategy intact and now we're starting to see the returns on all that.
And I want to start with our Raven business model, and that's really our strategy and this has been intact for a couple of decades now.
And I think it's important that you, as shareholders, have a good understanding of the Raven strategy that we have been executing and that we intend to execute going forward.
This has proven successful in all circumstances and it really starts with our intentional selection of diverse market segments, segments that we believe we can win in, that offer strong profitability, growth opportunities.
And those markets today in ATD are the agricultural sprayer control systems; for Engineered Films, includes our reinforced multilayer high-value film solutions to selected end markets; and for Aerostar, our focus is on high-altitude balloon platforms.
Those are our core markets, and the Raven strategy has been guided by carefully selecting those markets, as I've said, and then also having a willingness over time to move in and out of certain markets as we determine that the opportunities are strong or less so.
The second important element of our strategy is that we intentionally differentiate ourselves from our competitors on quality, service and innovation.
And we make long-term investments to separate ourselves from those competitors on quality.
We introduce high-quality products, we deliver exceptional service, better we believe than our competitors, and we are focused on innovation as the long-term driver of our success.
Thirdly, we manage a pipeline of growth initiatives that includes research and development investments, again, focusing on our cores.
It includes strategic acquisitions along the way, and really it also seeks to expand our markets that we serve geographically in particular.
We drive continuous improvement.
We've been committed to this for over a couple of decades now.
It takes the form of value engineering, process improvements and other initiatives.
And it's those efforts that allow us to continue to expand our profit margins and uphold the strong margins that we do.
We maintain a strong balance sheet, and this is a something that's been core to Raven for a long time and we're fiscally conservative.
Having a strong balance sheet gives us flexibility to make the investments that we feel are prudent at the time when those come available, but it also gives us the resiliency during difficult market cycles.
And when you serve the ag and the energy and defense markets, you will have cycles where those markets are favorable and less so.
And then finally, we uphold our corporate social responsibility by being a good corporate citizen.
And that's the Raven business model that describes how we compete and how we select the markets that we serve.
Next, I want to talk a little bit about the drivers for our recent performance.
And as I've said and you saw in our press release, we made good progress, we believe, in the fourth quarter of last year and we continued that progress through the first quarter this year.
And in ATD, I can really link our performance to the innovation, our steady R&D investments that we made over the last couple of years have resulted in Hawkeye and the Raven Rate Control Module.
And those 2 combined to deliver $11 million in growth last year and are a significant part of the growth in Q1.
And it's that diligence and commitment to innovation and investing in R&D, even when our market segments in ag were difficult, that is providing that growth opportunity now.
Secondly, in ATD, I linked our success to our service.
We've been very active in our channel, providing more training, and proactive interaction with our end customers.
And our customers continuously tell us that it's that service that they receive from us that sets us apart from our competition, and that's a performance driver for ATD.
And then finally, over the last 1.5 years, 2 years, we've doubled down on our commitment to our core.
We've focused on sprayer control systems and various products that enhance that control system to truly separate ourselves from competitors in that marketplace.
An example of that is our chemical injection technology that we've been ---+ we designed many years ago and we've refined it over the years, and now the market conditions are right to offer good growth with that product line and we saw that in Q1.
And <UNK>, I'd like to ask you to touch on EFD at this point, and share with the listeners your perspective on the long-term growth drivers for EFD.
I'd be happy to do that.
As we step back and look, we are very pleased with EFD's strong performance in the first quarter.
The division benefited greatly from the rebound in the geomembrane market.
But importantly, and more importantly, the rebound of the geomembrane market was not the sole driver of growth.
The industrial market was also up significantly year-over-year, growing over 50% versus the first quarter of last year.
The new production line that we put in place about 18 months ago is really driving growth in market share gains in the industrial market.
Construction and ag were also up for us in the first quarter, so we saw all of our markets served within EFD growing year-over-year.
The division's superior product performance and service and focus on specialty solutions are driving market share gains.
Additionally, the division has continued to drive profitability improvements.
They're focused on expense discipline; value engineering and pricing discipline are really having a positive impact on the financial performance of the division.
In the first quarter, EFD achieved a 20% division profit margin, so the profitability is very strong within EFD in the first quarter.
EFD's weathered the downturn in the geomembrane market very well, and we are well positioned for growth in the future in this marketplace.
In support of this, we increased our investment in EFD's geomembrane strategy in the first quarter with an investment in a new facility in Pleasanton, Texas, that'll allow us to expand our geographic footprint serving the geomembrane market, and we're excited for the growth opportunities that, that investment will allow us to make.
All in all, a very strong quarter for EFD.
Dan.
Thanks, <UNK>.
And I want to touch on Aerostar, and it's really simple with Aerostar.
The drivers for performance improvement, our focus in costs and expense discipline.
And Aerostar has benefited ---+ and we're starting to see it in Q1 with a nice profit contribution Aerostar made by focusing.
And that has generated new customers for our stratospheric balloon opportunities and good growth and good performance on those strato balloon opportunities.
And our cost structure has continued to be monitored and held tight, and that has allowed us to start to generate profit, which is a great change for Aerostar and for the company.
I want to talk about our capital allocation model and give you a little bit of insight on that going forward at this point.
Just as ---+ at a high level, we do invest in research and development, we invest in capital expansions and we occasionally make acquisitions.
And those are important as we consider how we allocate capital.
We also are committed to returning cash to our shareholders.
As you've seen, last year, we returned over $25 million to our shareholders via our dividend and then an additional share repurchase.
And in the prior year, we returned about $50 million to our shareholders.
So we are committed to both.
First, to growing the business by allocating capital wisely.
And secondly, returning cash to our shareholders.
And <UNK>, if you could provide a little more detail on that overall capital allocation model, I think our shareholders would appreciate that.
Sure.
We are in a very strong and enviable position today.
We've got a lot of flexibility.
As I step back and take a look at the business, we've got $50 million in cash on the balance sheet.
And the profitability improvements that we're driving through all 3 divisions, coupled with our intense focus on net working capital efficiencies is resulting in strong free cash flow generation.
On top of that, we have an unused $125 million revolving credit facility at our disposal.
So we have a lot of options, and I think our first priority is to focus in on acquisitions and driving acquisitional growth within ATD and EFD.
At the same time, we're going to continue to invest in our R&D efforts to drive the development of new product offerings.
We've seen a lot of success in the new product introductions over the last 12 months, particularly within ATD but also within EFD, and the Aero, on their stratospheric balloon platform.
At the same time, we're going to continue to return capital to shareholders through our dividend policy and also being opportunistic with share repurchases.
Over the long term, we're targeting a payout ratio of 30% to 40% on our dividend on prior year earnings.
And with the growth in earnings that we've seen up to this point and expect in the future, we expect to grow back into that range in time.
And with respect to repurchase activity, I think we're going to be opportunistic here in fiscal year '18.
We have $13 million remaining on authorization and we expect to be active with that in the fiscal year.
Dan.
Thanks.
Let's shift to the full year outlook.
And before we open up the call for questions, I would like to touch on not only this year as I see it, but beyond that.
As you know, we don't give much numeric guidance, historically, so I won't be sharing a lot of that with you this morning.
But I will say that we're off to a great start and the rest of the year we expect to be good, but more challenging than our first quarter.
Our comparison quarters are going to become more challenging in Q3 and Q4 as we anniversary the improvement that we saw in our energy market late in last year as well as we anniversaried the introduction of Hawkeye in ATD.
There's a lot of time left in the year for things to go well or otherwise.
But we certainly have regained our momentum, that's clear.
As we approach our historical noncontract manufacturing revenue peak of $330 million, growth will become more difficult.
And what I mean by that is there's really a couple ways to look at the Raven revenue peak.
One is in FY13, we generated $406 million of revenue.
The other is to understand that we intentionally got out of contract manufacturing following that, and we ran off about $75 million in revenue as we exited contract manufacturing.
So the $330 million is a good mark as you think about what's our core revenue peak.
And I believe that this year, we'll approach that revenue peak.
But more important than that, we have good growth, and the only reason that we're getting that now is the focus that we've had over the last year.
We've focused on margin expansion and those efforts improved our operating return on sales after-tax margin to 7.5% last year.
And for the trailing 12 months, we're running at a 9.5% return on sales after-tax for the company.
Now that's a nice improvement, and we'll continue to work on that, and I believe that we can do better.
We're committed to spending on our R&D and investing aggressively in R&D on our cores.
We've seen the returns that we can get as we focus more on our core business and you'll see more of that going forward.
We're intent to find good acquisitions that complement our strategy for ATD and EFD, and we're carefully considering several right now in our pipeline.
And as we are successful with those, we'll share that with you.
And in summary, one of the lessons that I've learned over the last couple of years is just the tremendous strength of the Raven business model.
And I started my comments by sharing with you and reminding you our ---+ the Raven business model and how we compete and our strategy, and it's been successful over many, many years.
And I just want to ---+ I want you to know that we're committed to that winning business model.
We've got a great team in place to execute on it and that gives me great confidence in our future.
And with that, I'd like to turn the call back to the operator and open it up for questions.
Sure.
Go ahead, <UNK>.
Yes.
So we started up the facility here in April in Pleasanton, Texas, and revenues from that ramp will grow.
I think we did about $100,000 in the first month, and we'd expect that to continue to ramp as we go through the year.
It's going to help us serve the Eagle Ford basin in Texas and it's an area that we have not serviced before.
So we do see that as incremental growth for EFD.
But stepping back, we saw the geomembrane market rebound quite nicely for us in the first quarter, growing over 200% versus the first quarter of last year.
As I mentioned in my comments, Industrial was up about 57% in the first quarter.
Construction was also up on increased construction activity and market share gains.
And Agriculture was up mid-single digits.
Yes, Flexitanks is one of the big drivers for our industrial growth in the first quarter.
We've seen some market share gains in that market for us.
And our investment in the industrial capabilities of the organization is driving that.
Thanks, <UNK>.
Good question.
I wouldn't say that we're more committed to films than we ever have been.
I think the balance remains the same.
And we know that our Applied Technology division has tremendous potential and has a strong, strong influence on the performance of this company.
And we're committed to spending the majority of our R&D efforts on ATD this year.
We're also committed to looking for strategic acquisition, and we're actively engaging in that now, that can assist us both in our product strategy and also in our distribution strategy internationally.
So we're no less focused on ATD than we ever have been.
But we are opportunistic, too.
That's been a characteristic of Raven over the long term.
And when there is opportunity for growth in the core part of our business like we see with films, we're going to aggressively invest in that, too, and that's what you've seen over the last year.
<UNK>, this is <UNK>.
Most of our international revenues are driven in the first quarter from ATD.
And within ATD in the first quarter, we had about 75% of our revenues generated in the U.S., 25% internationally.
And that's been pretty consistent over time.
And as we look to grow internationally, we would expect that mix to change slightly, but it's still sticking in that 75-25 range.
And longer term for the full company, we're pursuing 12% to 15% international sales.
We're not quite there yet, but that's our goal that we have in the 3- to 5-year range, and we'll continue as we grow.
We think we've got stronger opportunities in certain international markets for ATD.
And so that's why you're seeing so much effort there and emphasis.
So they certainly help and we see that, for example, in Canada; a lot of our OEM sales that go on self-propelled sprayers built in the U.S. go into Canada.
So you may see a rise or a fall in our international sales component based on the content that's either going in on a new machine ---+ take Hawkeye for example.
We have strong sales of Hawkeye continuing into Canada.
A lot of those machines ---+ those units are going in on OEM machine.
Whereas in the prior year, those were being sold in the aftermarket in Canada after ---+ during the first year launch.
That's one example where certainly our OEM relationships assist and sometimes mask our overall international sales because we count those as originating in the U.S. if that's where they're sold.
Sure, I'm not going to be as bullish as you probably want me to be on ag.
I'll tell you a few data points though, <UNK>.
Our underlying ---+ if we take out our successes with new products in Q1 in ATD, what we consider our underlying business performed at about a 6% growth rate year-on-year.
So we're happy with that, actually.
To be able to grow 6% without the benefit of our new products in a market that we believe is still generally very difficult, we count that as a strong performance.
But the reason for the exceptional performance is our new products that we've introduced.
As far as the ag cycle, I would also remind you all that the farmers spending money is sort of the root of the ag market.
But for us, we sell a lot of our products, that again are mostly on self-propelled sprayers, to custom applicators and these are ag businesses.
And as those machines get years on them, they need to be replaced.
So those cycles are eventually inevitable because people will still fertilize and spray their crops with herbicide.
So I wouldn't say that this year I am at all counting on a ag recovery, no matter what other people might be saying in the marketplace.
But beyond that, one of the lessons that we've learned is that we can do better to manage our business more for mid-cycle conditions.
And that's a broad statement, I know, but we sort of tested the highs and the lows in terms of what corn prices at $7 can do and corn prices below $3.
And we'll continue now to manage our ATD business for more of a mid-cycle condition, which we're not at yet.
But the ag market will continue to perform below mid-cycle, in my opinion, for the next year, and then we'll see after that.
Thanks, <UNK>.
Well, we touched on our capital allocation strategy, so I would guide you back to those comments and our overall business model.
And those are the things that are going to permit whatever growth we can realize.
As far as the comments, as we press the peak of our prior revenue, we will return to our expectation for a 10% long-term year-on-year annual revenue growth.
We believe that Raven has proven over the last several decades that executing on our business model, which guides us to profitable market segments with growth, that differentiates ourselves from our competition on quality and service, that both invests prudently in the growth of our core divisions and returns cash to shareholders and maintains a solid balance sheet, we believe that, that combination historically has generated 10% annual growth and will in the future.
Yes, <UNK>.
So in the first quarter, we traditionally have a large sale to NASA of a super pressure balloon that typically falls in the fourth quarter of the year, and that delivery got pushed out to the first quarter of this year.
So there is some lumpiness in the first quarter from that.
That's a very large sale to NAS<UNK>
In addition, as we indicated on last quarter's announcement, we did solidify a new contract with a new customer on the stratospheric side.
And that began in the first quarter of this year and contributed to the first quarter growth versus the prior year.
So we had those 2 benefiting the first quarter.
On top of that, we saw growth in Google as well.
So the stratospheric balloon business for Aerostar is performing very, very well and had a very strong quarter in the first quarter and that's what's driving the revenue growth.
And on top of that, as we look back over the last 12 months, we have done a very good job, and the division has done a very good job, in managing their cost structure down, given the challenging conditions that existed over the previous 24 months.
So the combination of the revenue gains on the stratospheric side and expense reductions contributed to the improved financial profitability in the first quarter.
I'll make some comments, <UNK>, on our longer term, and we're really avoiding these calls being model building exercises.
So the CapEx, we expect to spend $10 million or $12 million in CapEx this year.
So what we spent in the Q1 versus that is what you'll see throughout the year.
We believe that that's what's necessary to support the growth initiatives that we have that depend on our CapEx investments for this year and next year.
As far as R&D and the selling expense, we're going to continue to invest R&D at a similar rate as what we did in Q1, and the same for selling expenses.
So those are not going to flex on a short-term basis with revenue performance that follows the annual seasonality of our business.
Okay, thank you, operator.
And thank you all for your questions.
And welcome, <UNK>.
We appreciate having you on the call today.
And we look forward to sharing more on our long-term outlook and our progress on the year when we give you a call again in August.
Thank you.
