RAVN
#Thank you, <UNK>, and welcome, everyone.
We are relatively pleased with our first-quarter performance.
It's hard to call Q1 a big success when sales actually declined on weak comparables, but we are gaining good momentum and we are pleased with that.
While our sales decline slightly year over year, we continued the trend of incremental improvement and took a big step in restoring the Company back to a growth trajectory.
The declines we experienced in the first quarter in both applied technology and engineered films were substantially less than those we'd been experiencing in the second half of last year.
There are several reasons for this improvement.
For applied technology, we are starting to see more stability and end-market demand.
While conditions are still tenuous, they are not deteriorating.
For engineered films, the portion of the division tied to the energy and geomembrane market is substantially less than in previous years, and the challenging comparisons are easy.
But more importantly, we are successfully executing our strategy to generate growth opportunities across all three divisions despite the challenging market environment.
The decisions we made in March of last year to restructure the Company while largely maintaining our investment in research and development activities positively impacted our results in the first quarter and are expected to continue to benefit the Company going forward.
It's still early in the year and there's a lot to accomplish, but we are off to a good start.
I will now discuss the results of the first quarter in more detail, division by division, and then turn the call over to Stephen for a review the financial statement.
Beginning with applied technology, momentum continues to build for the division, and we are pleased with the strong start to the year.
The sequential improvement in the sales development for the division continued, with sales nearly flat to the prior year in the first quarter.
Sales through the aftermarket channel increased approximately 6% year over year, while sales through the OEM channel declined 12% year over year, a substantial improvement from the fourth quarter.
From an international standpoint, the division sales activity remains strong, with sales outside the US growing 26% year over year.
All major regions experienced solid growth during the quarter, led by Europe.
Our European results continue to benefit from the commercial synergies resulting from the acquisition of SPG over two years ago.
SPG has been very successful in selling Raven field computers such as the Viper 4 through our European sales channel.
Although the underlying strength of the ag market remained subdued, conditions appear to be stabilizing.
Steady market conditions, combined with our early success in growing our market share position, give us reason to be optimistic for the balance of the year.
New product introductions are gaining traction.
Hawkeye is on pace to achieve the growth expectations we have for the year, and we are excited about the prospects for our next-generation rate controller, which we will launch later this year.
What the enhanced quality of our new product portfolio, we expect OEM sales declines to ease further in the second quarter and ultimately achieve growth in the second half of the year, driven by increased Raven content per machine and new OEM development.
With respect engineered films, the division experienced a moderate decline in sales in the first quarter, driven by a decline in the energy and geomembrane market.
Energy-related sales declined $2.5 million, or approximately 60%, while sales into the geomembrane market were down about 13% year over year.
Combined, these two markets were down approximately 40% versus the first quarter of last year.
Although oil prices did improve from the low 30s to the low 40s over the course of our fiscal first quarter, active land-based US rig counts have continued to fall and were down approximately 55% year over year.
Sales of the remaining three markets in aggregate were up 3% year over year in the first quarter, driven by growth in both the construction and industrial markets.
Although the division was unable to achieve growth in the first quarter, sales trends did improve sequentially.
With comparisons continuing to ease throughout the year for energy and our efforts to drive incremental growth in both the industrial and geomembrane markets from our new production capacity, we are optimistic that we will make meaningful progress during the year toward returning the division to growth.
Now let me turn to Aerostar.
Sales for the division were up $1.3 million in the first quarter, driven by strength in stratospheric balloon-related business, in particular, Project Loon.
Revenues related to the project were up materially in the first quarter of fiscal 2017, versus the prior year.
Last year's first-quarter Project Loon sales were relatively modest, as we were in the midst of changing to the next-generation balloon design and unit volumes were lower.
Project Loon revenues in the first quarter were consistent with our expectations and up slightly versus the fourth quarter.
In addition to the growth in revenue related to Loon, we also generated stratospheric balloon sales from two new US government customers during the first quarter.
We are pleased with this development.
While the revenues from these new customers were modest, they affirm that the advanced capabilities we have developed in stratospheric ballooning have alternative uses in the market.
This is a very important year for Aerostar.
We are intently focused on turning around the performance of the division and returning it to profitability once again.
The first quarter was a slight improvement versus the prior year, but we need momentum to build quickly as we progress through the next two quarters and we need to deliver a step change in performance.
Key to achieving this will be winning meaningful new business in the second half of the year.
Our pipeline of new business opportunities has improved significantly, and this gives us some tempered optimism and near-term patients.
Now we must turn these opportunities into revenues for the division.
And with that, I will turn the call over to <UNK> for our financial review.
Thanks, <UNK>.
On a consolidated basis, sales were $68.4 million in the first quarter, down 2.7% versus the first quarter of last year.
Applied technology and engineered films both declined year over year but exhibited improved sales trends despite continued end-market demand weakness.
Aerostar grew sales 20.5% year over year, driven primarily by stronger sales of stratospheric balloons and related products.
Operating income for the first quarter of fiscal 2017 was $7.6 million, up $400,000 versus the first quarter of fiscal 2016.
Operating margin was 11.1% of net sales, up 80 basis points year over year.
The increase in operating margin was principally driven by lower operating expenses year over year as a result of our continued expense controls and prior-year restructuring benefits.
First-quarter net income was $5.5 million, or $0.15 per diluted share, versus net income of $4.9 million, or $0.13 per diluted share, in last year's first quarter.
The increase in net income and earnings per share was driven primarily by favorable tax development and lower shares outstanding as a result of repurchase activity over the last five quarters.
For the remainder of fiscal year 2017, we expect an effective tax rate of approximately 30%.
For applied technology, first-quarter sales were $31.5 million, down $1 million or 2.9% year over year.
Although sales were lower versus the first quarter of last year, the sequential improvement in the year-over-year sales development continued.
Sales for the aftermarket channel increased 5.7% in the first quarter versus the prior year, compared to a decline of approximately 20% in the previous quarter.
Sales through the OEM channel decreased 11.9% year over year in the first quarter, compared to a 33% decline experienced in the fourth quarter.
Geographically, domestic sales were down 13.8% year over year and international sales were up 26% year over year.
Division operating income for applied technology was $8.7 million, essentially flat with the first quarter of fiscal 2016.
The impact of lower sales volume versus the previous year and increased R&D spending was offset by the benefits of ongoing expense controls and the prior-year restructuring actions taken.
For engineered films, sales were $29.1 million, down $2.2 million or 7.1% versus the first quarter of 2016.
A decline in sales for the division was driven by declines in the energy, geomembrane and agriculture markets.
These markets were up 61%, 13% and 5% respectively versus the first quarter of last year.
Sales into the construction and industrial markets increased versus the prior year.
Sales into the industrial market were relatively strong, increasing 29% over the prior year, while sales into the construction market were up slightly, more than 1% year over year.
Division operating income for engineered films was $3.9 million in the first quarter of 2017, a decrease of $0.6 million or 13.3% year over year.
Division operating margin was 13.3% in this year's first quarter, down 100 basis points versus the first quarter of last year.
Lower gross profit margin resulting from lower production volumes and scale of cost of new production equipment are primarily led to the decline in operating margin.
For Aerostar, first-quarter net sales were $7.9 million, up $1.3 million or 20.5% year over year.
The increase in sales was driven primarily by increased stratospheric balloon-related revenues.
Project Loon-related revenues were up strong year over year, and we realized first-time sales from two new customers interested in our stratospheric balloon capabilities.
Research balloon revenues tied to NASA were up slightly versus the first quarter of last year.
All other business lines in aggregate were down slightly versus the first quarter of last year.
Division operating loss for Aerostar was $600,000, versus an operating loss of $900,000 in the first quarter of last year.
Fourth-quarter 2016 Vista restructuring benefits are meeting expectations, but continued R&D spending in anticipation of improved sales is largely offsetting these benefits in the short term.
Turning to the balance sheet, we ended the first quarter with $32.8 million in cash, down slightly versus the previous quarter.
Repurchase of shares during the quarter reduced cash balances by $5.7 million, but this impact was largely offset by free cash flow generation driven by favorable working capital developments and reductions in capital spending.
Net working capital as a percentage of annualized net sales decreased 510 basis points year over year from 33.8% to 28.7% in this year's first quarter.
The decrease in net working capital percent was primarily the result of lower inventory levels, particularly in applied technology and engineered films.
Cash flow from operations was $11.1 million in the first quarter of fiscal 2017, versus $9 million in the previous year's first quarter.
Higher net income and favorable working capital developments principally drove the improvement year over year.
Capital expenditures were $800,000 in this year's first quarter, down $4.2 million versus the first quarter of fiscal 2016.
Last year's first-quarter spending included a significant amount of spend related to the new engineered films production line, which was commissioned during the first quarter of this year.
For fiscal year 2017, we continue to expect capital expenditures to be approximately $9 million.
There are no significant engineered films capacity expansions planned for the year, and the other divisions are expected to maintain a disciplined approach to capital spending.
During the first quarter of 2017, we repurchased approximately 380,000 shares at an average price of $14.93 per share for a total of $5.7 million.
Over the previous five quarters, we have repurchased approximately 2 million shares at an average price of $17.66 per share for a total of $35 million.
During the first quarter, the Company's <UNK>ard of Directors authorized an incremental $10 million for share repurchases, increasing the total amount authorized to $50 million.
The Company's remaining authorization at the end of the first quarter of 2017 was $15 million.
With that, I would like to turn the call back to <UNK> for our outlook going forward.
Thanks, <UNK>.
We are pleased with our overall performance in the first quarter and, in particular, the improved performance of applied technology.
Despite continued end-market challenges, the decisions we made last year to restructure the cost profile of the Company and to continue R&D investment amidst declining revenues are positively impacting our results.
We are off to a good start, and this gives us optimism for the balance of the year.
With that said, our optimism is tempered.
We still have a lot to accomplish to improve the growth and profitability of the overall business in order to meet our expectations for the year, and we believe we will.
For applied technology, we will continue to expand our OEM relationships and grow our share in a down market.
We are executing our plan in driving for growth by leveraging our new product portfolio and investing more intently to drive international sales.
For engineered films, we need to increase sales volumes despite continued energy and geomembrane market weakness.
We will continue our first-quarter progress in ramping up sales in the industrial market, leveraging our new production line; and we need to drive strong performances in ag and construction.
For Aerostar, we must continue the progress made toward improved financial performance.
Key to sustaining this progress will be establishing a regular cadence of new business wins across product platforms.
Resources are aligned to continue the progress we've made, but uncertainties do remain.
In addition to each division's sales initiative, the Company will remain vigilant on costs, drive down inventory levels and generate additional value engineering benefits.
Successfully driving growth when end-market conditions are weak is not without its challenges.
But doing so will ---+ while maintaining operational discipline has been and will continue to be our focus for the rest of the year.
Given our performance in the first quarter, we are on track to deliver revenues and operating profit consistent with prior-year revenue and adjusted operating profit, with the potential to achieve modest growth in both for the full year.
With that, we would like to open up the call for questions.
Well, <UNK>, our seasonality has changed a little bit over the last year.
We used to have an energy market in EFG that was relatively stable quarter to quarter to quarter last year, and that's not the case this year.
So for EFG, we've seen the seasonalities shift a little bit so that third quarter is the strongest quarter for EFD, with fourth quarter being the weakest, first quarter gets a little stronger and second quarter a little stronger.
And for ATD, the strongest quarter is in the first quarter.
So you've kind of got to weigh out your assumptions by division to get to what you think for a seasonality for our overall earnings.
Sure.
I will make a few high-level comments and then I will put it to <UNK>.
I think each year at Raven when you have three different business units like we do, you are trying to forecast three different market conditions and three different sets of new products and opportunities.
And it is challenging, as you know, <UNK>.
We think our second quarter is going to be a challenging quarter to beat.
I think we ---+ in terms of last year's performance, I think we have a shot at it, but it's going to be the hardest quarter probably for us for the year.
And we think as we get into the second half, our third and fourth quarters provide good opportunity for us to realize growth from our ag OEM partners based on the new product that we've introduced and the take rates on those new products.
We believe we will continue the momentum we've had with [line 14] throughout the year, which is our new line for engineered films which will serve the industrial markets, which will just add on top of the normal seasonality.
And the points that <UNK> made about the energy market, those will be new incremental revenues that will help the back half of the year in a new way for us.
And then as I said in my comments opening up, this is a big year for Aerostar, which means we've got to book orders in the second quarter.
That's what we are going to be looking for in terms of progress and success is that we book meaningful orders in the second quarter through Aerostar.
And we have a nice product pipeline of new business development opportunities much broader than we've had in the past, but that will lead to second-half deliveries, we believe, for Aerostar.
So, I think ---+ high-level, I just want to make sure that you and others understand the second quarter is going to be challenging for us, but we have some good things happening.
We were off to a good start in May.
As I said, it needs to be a good, strong quarter out of EFD.
May is a big ---+ Q2 is a big quarter for EFD and for the Company that way.
And then we see things continuing to grow throughout the rest of the year.
Well, long-term, it has incredible revenue opportunities for us.
We will be releasing that throughout the second quarter and third quarter with different OEM customers.
It's a general platform that we will be able to take to a wide variety of customers, but there will be some specific announcements.
And I'm not going to get ahead of our OEM partners on that, but throughout the second and third quarter, you'll start to see those announcements come forward.
And we are excited about it.
And really it sort of is an indication of how we have changed our R&D investing over the last two years, and we are carrying that forward in ATD and in films and Aerostar and all of them.
But ATD, we really narrowed our R&D investment toward fewer opportunities with larger potential returns, and we are seeing that get traction.
So we delivered Hawkeye this last year, and that is progressing well for us.
We're going to deliver a new platform, a new rate controller platform that is already attracting new OEM customers.
So I want to be clear.
When I say we expect improved performance out of our OEMs in the second half, that's not because I somehow think that the ag market for OEMs is going to improve in the second half.
That's not it at all.
It's because our take rate for the products that we are introducing is going up.
And our content per machine is going up with our existing partners, and we are bringing on new OEM partners because of R&D investment that we've made.
I think for the near term, <UNK>, that's a reasonable expectation that it would be in that range of what we expect Hawkeye ---+ I think both of them have good 2017, 2018 ramp-up potential.
So, yes, they are similar.
Sure.
Well, as everybody on the call knows, the macro environment in Brazil is challenging, to say the least.
And as some of you have followed us for a while, you know that we've had some challenges of our own in Brazil that link back to some product quality issues and then a market that was tough.
We have really turned the corner on that.
And we are seeing substantial improvements out of Brazil in the first quarter, and maybe Stephen can talk to that.
But we expect to see a full-year improvement out of South America.
And <UNK>, can you (multiple speakers) go over some of those details.
<UNK>, Latin America for us ---+ for ATD was up 17% in the first quarter.
It was largely driven by the performance in Brazil.
Brazil was up about 45% year over year in the first quarter.
We have seen some success in generating additional interest through Hawkeye in Latin America and in Brazil in particular.
And we've hired ---+ we've got a new sales individual on the ground in Brazil now who is gaining a lot of traction.
In addition to that, our division leader, Brian Meyer, has spent considerable time there developing with our sales leadership and these new market opportunities.
So we are ---+ we definitely ---+ when we say we are focused on a narrower set of international growth opportunities, you should be thinking about Europe, both Western and Eastern Europe, and our Eastern Europe results have been outstanding this year.
And then you should be thinking about South America and Canada.
Well, we are ---+ I feel confident and comfortable that we have changed the profile of the pipeline greatly for our radar opportunity.
Instead of having a couple very large contracts, those are done.
And now we have a pipeline full of half a dozen to 10 smaller but really ---+ contracts that we think we can win.
And as I said earlier in my comments that Q2 is going to be what ---+ we will know as we progress through Q2 and into early Q3, these pursuits will need to bear fruit, and we expect that they will.
I'm confident in the leadership that we have in place.
We have a gentleman running our Vista office now that's been with the Company for over 25 years.
He has a great mix of sales and technical perspective, and he is connecting very well with our past customers and developing new customers.
So, we will see, but I'm more confident in the transparency into that operation and the profile of our business development pipeline than I have been in the past.
Well, thank you, operator.
And thank you <UNK> for asking all those great questions.
I guess you covered all the bases for everybody.
And it was a good quarter; it was a good start to the year.
I will say we are not out of the woods yet, but we feel confident in the direction and progress that we've made, and we look forward to updating you again in August.
Thank you.
