RAVN
#Thank you, <UNK>.
Good morning, and thank you for joining us today.
Fiscal year 2019 is off to a great start for Raven Industries, and we're pleased with the financial performance of all 3 operating divisions.
Organic growth continues on top of the significant gains made in the prior year, driven by market share gains in our core markets.
Profitability across all 3 operating divisions is up versus the prior year.
Adjusting for all the unusual onetime items, which <UNK> will elaborate in more detail later in the call, we grew pretax profits more than 20% year-over-year.
In addition to a strong financial performance, we were also able to enhance our focus on our core markets by successfully divesting 2 noncore assets, our minority interest in Site-Specific Technology and Aerostar's client private business, with each generating a gain on sale.
While we are quite pleased with our financial performance in the first quarter, we are even more pleased with the balance we continue to maintain between the short and the long term.
During the first quarter, we grew sales and profits while also continuing to invest in key projects for sustained long-term growth.
In Applied Technology, we opened our new Latin American headquarters in Brazil during the first quarter.
Momentum in this key geographic region is accelerating.
We're building out our network of distributors and developing relationships with key industry participants.
We are establishing a world-class sales and service center to provide consistent customer value in that region.
Additionally, we continue to fully invest in R&D in Applied Technology to drive next-generation innovations.
In Engineered Films, we are on schedule with the planned manufacturing capacity expansion, a project we are calling Line 15.
Line 15 will be a new state-of-the-art blown film extrusion line, capable of producing 16 million pounds of film per year.
Line 15 will further enhance our capabilities to service customers in the industrial and geomembrane markets.
The division's market share capture and demand from current customers required additional manufacturing capacity be put in place.
In Aerostar, we continue to focus on our stratospheric balloon platform, as evidenced by the divestiture of our client private business in the first quarter.
Interest in and sales of our radar products and services is also growing.
Investment in R&D to build upon our industry-leading capabilities to advance access to the stratosphere is leading to expanded interests with our key customer partners.
The division is successfully building a market for its unique stratospheric balloon technology, and we are really excited about the future of this platform.
And for all of Raven, we are investing heavily in our next-generation ERP platform.
We started with Engineered Films and expect to go live at the end of this year.
This is a key investment we are making to improve the nimbleness of the organization, the efficiency of operations and the long-term scalability of the enterprise.
This year, we will spend approximately $4 million to implement Phase 1 of this project and launch Engineered Films.
The project team is heavily engaged, and this gives us a lot of confidence.
Each division performed well in the first quarter.
We'll take a closer look at each, starting with Applied Technology.
The division did a very good job sustaining the significant growth achieved in the prior year, especially given the lack of any meaningful improvement in commodity prices.
At the same time, division profit margin increased significantly year-over-year, driven primarily by lower warranty expense and favorable legal recoveries.
The division continues to invest heavily in R&D efforts and the pipeline development of new products.
Additionally, ATD made a significant investment to go all-in in Brazil to leverage its proven technology portfolio to a new region in region sales and customer support center.
The division's Latin America general manager was previously leading the global sales function for the division.
He has robust knowledge of our precision ag technology portfolio and is a champion of customer service.
Turning to Engineered Films.
The division's strong financial performance continues.
Sales growth and profit margin expansion continue as a result of market share gains, enhancements to the division's geomembrane market capabilities and improved energy market fundamentals.
On an organic basis, excluding the impact of hurricane recovery sales, Engineered Films grew the top line more than 5% year-over-year in the first quarter.
At the same time, division profit margins expanded to 22%.
The division has done a tremendous job in driving incremental margins on volume growth.
Through excellent operational discipline, the division is effectively managing the price and raw material dynamics in the marketplace, integrating the CLI acquisition and continuing to innovate to capture market share.
Lastly, for Aerostar, the division had fantastic results in the first quarter.
Adjusting for the sale of the client private business, sales were up more than 30% year-over-year for the division.
<UNK>th lighter-than-air and Radar product lines achieved strong growth year-over-year.
Fixed cost leverage from the improved sales volumes, combined with continued expense discipline and favorable sales mix, resulted in the division doubling division profit versus the prior year.
The financial benefits of focusing on the core are clearly paying off for the division.
With that, I'd like to turn the call over to <UNK> for a more detailed review of our financials.
Thanks, <UNK>.
We're off to a tremendous start to the year.
What a terrific start it's been.
I couldn't be more proud of the team members of Raven Industries.
They're leveraging our dimension for competition, service, quality, innovation and peak performance to drive results across the enterprise.
Looking forward, we're excited about the path we're on.
We have the right strategy, we have the right vision and our business model is proven.
We intentionally serve a diverse group of markets with attractive long-term growth potential, and we're proactively investing in our capabilities to continue to capture opportunities and achieve long-term sustainable growth.
As I step back and look at the underlying fundamentals of the company's 3 operating divisions, I'm very proud of the market position each division has created and the investments they are making to further strengthen their positions in the future.
For Applied Technology, the industry continues to endure a sustained downturn in commodity grain prices and, correspondingly, farmer incomes.
At this point in the year, we don't see end market conditions improving any time soon.
However, our strategy is not to wait for end market conditions to improve, rather it's to invest in the development of new products and next-generation capabilities to further enhance our product portfolio and the value it provides to our core customers, the ag retailers.
We will also look to aggressively grow in international markets, and we will invest in the resources required to drive success, particularly in Brazil.
Our pipeline of potential acquisition targets continues to grow, and we're continuously cultivating and generating new ideas.
Market multiples are at the upper end of the traditional range, but we still feel there's deals to be done while maintaining prudence.
All things considered, Applied Technology is in a strong market position and investing in the right area to generate both long-term growth and improved division profit margins.
For Engineered Films, the division continues to capitalize on past investments and successfully drive organic growth and division profit margin expansion.
The division has strong market positions in the niche markets they serve with a robust portfolio of value-added specialty films.
Customers associate Raven with premium quality and performance.
We will continue to invest in the division to further enhance our specialty product and service offerings through new unique manufacturing capabilities, research and development on new products and acquisition.
Regarding last year's acquisition of CLI, the integration has gone very well.
We're clearly in a stronger position today to capitalize on the growth opportunities present in the geomembrane market as a result of making this strategic acquisition.
From a market perspective, we continue to see growth opportunities in each, but particularly within the industrial and geomembrane markets.
We have seen oil prices advance into the low $70s recently.
If sustained, we would expect this to favorably impact sales growth in this market too.
With respect to Aerostar, we've moved beyond optimism to confidence.
The strategic shift that we've implemented over the last 2 years back to our core stratospheric balloon platform and radar processing systems has heightened our focus and led to multiple successes in landing new customers.
We're very proud of the significant improvement in financial results the division has achieved, and we're investing in the right areas to continue to drive long-term profitable growth in this division.
The future is very bright for our stratospheric balloon platform, and the potential uses of our technology are garnering increased interest.
We are the industry pioneer and market leader with capabilities to make the stratosphere affordably accessible now.
In closing, the company is off a strong start to the year.
Underlying organic growth and consolidated net sales and operating income were approximately 5% and 20%, respectively.
Each of the divisions is well positioned in its markets, and we expect our positive momentum to continue.
With that, we'll take your questions.
Yes, <UNK>.
This is <UNK>.
So in the first quarter, we launched our Brazilian operations and headquarters, and obviously, we had some expenses associated with that.
We've also been busy hiring sales and service professionals in Brazil.
I think we're at 12 as of the end of Q1, and we're expecting to have 20 people in Brazil by the end of the fiscal year.
So we had several hundred thousand dollars of expenses associated with that in the first quarter.
Very little revenue impact from those resource adds at this point in time, but the momentum is building and we expect significant improvement in the growth trends in Brazil as a result of the investment.
Separately from that though, the Brazilian market's a very strong market for us, grew double digits in the first quarter, and a lot of that groundwork was laid in the prior year so we would expect sales momentum to continue to build through the year as these resources are in place and ramp up.
Well, included in that SG&A, obviously, is the back ---+ you have to back out the SDSU investment, and we also had Project Atlas in there for about $1 million in the first quarter.
And depending on how you're looking at the financials, R&D might be included in the SG&A as well.
We've ramped up our R&D spend, investment, particularly within Applied Technology, in the first quarter and we expect that to continue.
And in terms of our underlying growth rates, we would expect, over the long term, 10% compound annual growth rate in our revenues and get some leverage through the balance ---+ through the income statement and grow our bottom line a little bit faster than that.
<UNK>, this is Dan.
Thanks for the question.
And we intend to grow ATD throughout this year.
Despite the market conditions being what they are and the tough comps, we've got new products in the pipeline and new products that were introduced last year that we expect are going to help us grow.
We've got ---+ we are investing in Brazil, and we do expect some growth out of Brazil this coming year, the year that we're in.
So while it's still tough out there, we're not expecting and planning for a flat performance out of ATD, not at the revenue line and particularly not at the division profit line.
We expect we can grow division profits this year.
Sure, thanks.
Thanks for your questions, <UNK>, and thanks to all of you who dialed in.
We are off to a great start.
The underlying business is performing exceptionally well.
And we do have ---+ we have strong expectations for this year and the out-years, and I just feel great about the path the company's on.
We entered the year well positioned, and we're executing on those opportunities in front of us.
So we look forward to updating you again in August.
Thanks.
