Mar 28, 2017
Executives
Bo Larsen - Investor Relations Manager Daniel Rykhus - President and Chief Executive Officer Steven Brazones - Vice President, Chief Financial Officer and Treasurer
Analysts
Jon Fisher - Dougherty Investments Tyler Etten - Piper Jaffray
Operator
Good day, ladies and gentlemen. Welcome to Raven Industries, Inc.
fourth quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would like to introduce your host for today’s conference, Bo Larsen, Director of Investor Relations. You may begin.
Bo Larsen
Good morning. And welcome to Raven Industries’ fiscal fourth quarter 2017 investor conference call.
Today’s call is being webcast live and will also be archived on the company’s website for future listening. On the call today will be Dan Rykhus, Raven’s President and Chief Executive Officer, and Steven Brazones, Raven’s Vice President and Chief Financial Officer.
Before beginning, the company would like to inform everyone that certain matters discussed during this call will include forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. Since such statements reflect the company's current expectations, actual may differ.
In addition, during today’s conference call, the company may discuss certain non-GAAP financial measures, specifically adjusted operating income, adjust net income, and adjusted earnings per share. All of the non-GAAP measures discussed today should not be construed as an alternative to the reported results determined in accordance with GAAP.
Management believes that a discussion of these measures is useful to investors because it assists in understanding the operating performance of the company and its operating segment by excluding the impact of unusual charges, which are non-recurring in nature and which, from management’s perspective, significantly impacts the comparison of year-over-year changes and underlying financial performance. The non-GAAP information discussed today may not be consistent with methodologies used by other companies.
All non-GAAP information is reconciled with reported GAAP results in the company’s earnings release and will be included in the company's fiscal year 2017 Form 10-K. I would now like to turn the call over to Dan Rykhus, Raven’s President and Chief Executive Officer.
Daniel Rykhus
Thank you, Bo, and welcome everyone. We're very pleased with the progress made and performance achieved throughout fiscal year 2017.
Both Applied Technology and Engineered Films continued to drive improved sales and profitability and Aerostar returned to profitability in the fourth quarter following several quarters of operating losses. Our financial performance continues to be driven by but strong growth and profitability improvements in both Applied Technology and Engineered Films.
These divisions have continued to accelerate growth in sales relative to the prior year and achieved significant growth in the fourth quarter. As we have discussed during the year, ATD’s new product introductions and market share gains are enabling the division to outperform the market.
EFD’s superior product quality and investment in new production capabilities, coupled with an improvement in geomembrane demand, is driving growth for the division. While Aerostar sales declined slightly in the fourth quarter, cost reduction throughout the year and more focused business development efforts are positively impact the division.
Our commitment to our long-term strategic plan, despite the end market challenges faced over the last few years, has led to our improved financial return and we remain steadfast in executing our strategy for sustained long-term growth in fiscal year 2018. I’ll now discuss the progress made on our long-term plans during the fourth quarter and then turn the call over to Steven for a review of the financial statements.
Beginning with Applied Technology, the division’s performance was outstanding and it continues to strengthen. During fiscal year 2017, we announced expanded relationships with both CNH Industrial and John Deere, which leverage our sustained new product development investments.
Through these continued investments to advance our product offering, while building broader and deeper relationships with our core customer base, we are expanding our market share position and driving growth. In addition to the significant sales growth from our core application controls, ATD also benefited from higher demand for its direct injection systems in the fourth quarter.
The division developed this core technology many years ago in an effort to make spraying less complicated for sprayer operators. We have continued to refine and improve the direct injection product line, realizing that this spraying method offered strong value in certain circumstances.
ATD’s industry-leading injection technology enables operators to more efficiently comply with evolving environmental regulation, while also improving stewardship and making retailer and grower operations more efficient. As a result, the marketplace response has been very strong, driving significant growth in this product lines.
With strong sales in ATD, we have driven substantial growth in division operating profit in the fourth quarter. Incremental margins in the division are exceptionally strong.
Fixed cost leverage within manufacturing, coupled with operating expense discipline, resulted in incremental margin in line with our expectations. Moving Engineered Films, growth in both sales and division operating profit also accelerated.
Year-over-year growth in revenues improved from 4% in the third quarter to nearly 36% in the current quarter. Like ATD, EFD’s incremental margins were quite strong, making progress towards our long-term profitability expectation.
Growth for the division was well-balanced. Geomembrane sales more than doubled year-over-year on the improved demand in the energy sub-market and industrial and construction both achieved notable growth.
EFD has also done a very good job expanding its market share position, by leveraging past investment in both R&D and CapEx. These investments are driving growth and have further strengthened the division's reputation as a manufacturer of high-value innovative specialty films.
We continue to make strategic investments in EFD. In February, the division acquired a production facility in Pleasanton, Texas, which is located near key gulf ports.
This facility expands the division's geographic footprint and will enable it to service geomembrane customers in the Eagle Ford basin. The Eagle Ford basin is one of the largest oil-producing basins in Texas and will lead to incremental growth opportunity for the division starting later this year.
Moving to Aerostar, the division's overall financial performance improved relative to prior quarters. Although sales declined slightly relative to the prior year, the division was profitable in the fourth quarter.
During the past year, Aerostar has prudently reduced its cost structure and strategically refocused its business development efforts on key stratospheric balloons opportunities. Subsequent to the end of the fourth quarter, the division was awarded a new $4 million stratospheric balloon contract with a new customer.
In addition, Aerostar saw an increase in the activity with Project Loon in the second half of the year and sales to Google in the fourth quarter increased at a double-digit pace year-over-year. Project Loon continues to make advancements and we're pleased with the progress.
With that, I’ll now turn the call over to Steven for our financial reviews.
Steven Brazones
Thanks, Dan. On a consolidated basis, sales were $68.9 million in the fourth quarter, up 30.5% versus the fourth quarter of last year.
Applied Technology and Engineered Films both achieved growth year-over-year, increasing sales 40.4% and 35.8% respectively. For Aerostar, sales declined 2.5% year-over-year.
Operating income improved significantly in the fourth quarter of fiscal 2017, increasing nearly $6 million from $0.6 million in the fourth quarter of last year to $6.3 million in this year's fourth-quarter. Significant operating leverage and volume gains, coupled with restrained growth in operating expenses, drove the improvement year-over-year.
Correspondingly, operating margin increased 800 basis points versus the fourth quarter of last year, increasing from 1.1% to 9.1%. Corporate expenses increased $1.9 million versus the fourth quarter of the prior year.
The increase was primarily the result of higher incentive compensation accruals and approximately $600,000 of expenses associated with the restatement process and remediation actions. Net income for the fourth quarter of fiscal 2017 was $4.4 million or $0.12 per diluted share versus $1.9 million or $0.05 per diluted share in last year's fourth quarter.
The increase in fourth quarter earnings per share was primarily driven by the significantly improved operating performance at both Applied Technology and Engineered Films. For Applied Technology, fourth-quarter sales were $25.9 million, up $7.5 million year-over-year.
The growth in sales was driven by market share gains from the sale of new products and progress in key international markets. Geographically, domestic sales were up 44% year-over-year and international sales were up 30% year-over-year.
Division operating income for Applied Technology was $6.4 million, up 184% versus the fourth quarter of fiscal 2016. The increase in operating income was driven primarily by higher sales volume and lower manufacturing costs versus the previous year.
Operating margin for the division increased substantially versus the prior year, from 12.1% to 24.6%. The increase in operating margin was driven by a fixed manufacturing cost leverage on the higher volume and operating expense discipline.
For Engineered films, fourth-quarter sales were $34.5 million, up $9 million or 36% versus the fourth quarter of fiscal 2016. Volume as measured by pounds sold increased 34% year-over-year.
Division operating income for Engineered Films in the fourth quarter was up substantially versus the prior year, from $1.9 million to $5.3 million. The year-over-year increase in operating income was driven principally by higher sales volumes and lower operating expenses.
Division profit margin increased 780 basis points year-over-year, from 7.5% to 15.3%. For Aerostar, fourth quarter net sales were $8.8 million, down $0.2 million or 2.5% year-over-year.
The decline in sales was driven primarily by lower aerostat sales, partially offset by an increase in sales of stratospheric balloons and services to Google versus the prior year. Division operating income for Aerostar was $200,000, flat year-over-year.
Turning to the balance sheet, we ended the fourth quarter with $50.6 million of cash, up $4.3 million versus the previous quarter. The increase in cash was largely driven by free cash flow generation as a result of improved profitability.
Net working capital as a percentage of annualized net sales improved 9 percentage points year-over-year, declining from 36.9% in the fourth quarter of last year to 27.9% this year. The improved net working capital efficiency was primarily the result of managing to lower inventory levels and an increase in favorable balances as a result of improved timing of payment to suppliers.
Ongoing net working capital improvements are expected in fiscal 2018. Cash flow from operations was $10 million in the fourth quarter of fiscal 2017 versus $8.8 million in the previous year's fourth-quarter.
Capital expenditures were $900,000 in this year's fourth-quarter, down $1.4 million versus the fourth quarter of the prior year. For fiscal year 2017, capital expenditures were $4.8 million, down $8.2 million year-over-year.
For fiscal 2018, we expect capital expenditures of between $10 million and $12 million. With that, I’d like to turn the call back to Dan for our outlook going forward.
Daniel Rykhus
Thanks, Steven. As we look forward to fiscal year 2018 and beyond, we are optimistic.
We have weathered some very challenging conditions in the recent past, but we have remained steadfast in the execution of our strategy. We’ve reduced the cost structure of the company, but not to the detriment of sustaining long-term growth.
The capital allocation choices we have made over the last several years in research and development as well as strategic acquisition and capital spending have put us in a much more favorable position today and position the company for growth in fiscal year 2018. For Applied Technology, the ag market is expected to remain subdued, but we’ll focus on capitalizing on our new products and strong customer relationships to drive additional market share gains.
In addition, our direct injection system, which is industry-leading technology, is poised for growth this year. Regarding Engineered Films, the geomembrane market, which includes energy, is rebounding from trough level in fiscal year 2016 and momentum continues to build in the industrial market.
Market share gains and success in selling the capacity of our recent strategic investments in new production lines are driving sales growth in this market. With Aerostar, cost controls that were implemented throughout fiscal year 2017 and refocused business development efforts have the division better positioned for improved financial performance.
Overall, we are optimistic about the future and expect to make continued progress on our long-term goal to sustain 10% annualized earnings growth, while also generating strong relative returns on equity and asset. We have a solid strategic plan that emphasizes investment for growth, encompassing both organic development and acquisition.
We will continue to invest our research and development dollars to support new product introductions, not just for the next year, but for the intermediate and long-term horizons as well. With that, we will open up the call for questions.
Operator
[Operator Instructions]. And our first question comes from the line of Jon Fisher from Dougherty Investments.
Your line is now open.
Jon Fisher
Thank you. Good morning, everyone.
First, just like to say, for the public record, I had under-modeled the restatement expenses there for the quarter. So, my OpEx wasn't as high as it should have been.
I almost feel like I’m part of the blame for the “miss” that hit the headlines this morning last night when you reported earnings. So, just for the public record, that’s on me, not you guys.
So, just did want to delve into the CapEx, obviously, $10 million to $12 million is a jump over $17 million. I was just curious, how much of that is targeted at Engineered Films.
Obviously, you guys have made a couple of press releases this year, in the month of March, on Permian Basin expansion. You talked about the Eagle Ford entry.
Obviously, with energy falling over 90% from peak to trough for you. Line 14 has taken a little bit longer to ramp up, I think, than what you had expected in overall and Engineered Films.
You’ve got excess capacity. Just wondering, how confident you are on the profitability of this CapEx expansion and how confident are you that you’re not getting out too far over on your skis here, so to speak?
Steven Brazones
Yeah. Jon, it’s Steven.
Just to kind of go back to your first question, I think $6 million to $7 million CapEx probably is earmarked for EFD. We’ve got $2 million to $3 million for ATD and around $1 million probably for Aerostar.
Included in the EFD CapEx is the approximately $2 million that we spent on the new production facility in Texas. And currently, the Eagle Ford basin is not a basin where we have a big presence.
We don't service that basin out of our Midland location today. And so, that does represent incremental growth opportunities for the division and we do expect to start up production here in the second quarter.
Jon Fisher
OK. And so, from a line 14 and just overall excess capacity in E&D and operating margin expansion.
You’re pretty confident with the increased investments in incapacity that revenue and operating margin this is going to follow sequentially here through 2018 from these investments?
Steven Brazones
We are confident that the investments we’re making for growth in the division are going to translate into incremental sales and incremental volume and capacity utilization. So, line 14 was put into production first quarter fiscal 2017 and we continue to see strong growth in the industrial market, and it was up substantially in the fourth quarter and we continue to see progress there in selling our capabilities.
Jon Fisher
Okay, thank you.
Steven Brazones
Welcome.
Operator
Thank you. And our next question comes from the line of Tyler Etten from Piper Jaffray.
Tyler Etten
Good morning, guys.
Daniel Rykhus
Good morning.
Tyler Etten
I was wondering if you could talk about where you are finding success in the international ATD market, just by region or by demographic.
Daniel Rykhus
Sure. Specifically, we've had good success in Latin America, in Europe and Australia.
For the full year, Canada was a strong international market for us in FY 2017 and we expect to continue to realize good opportunities in those markets. Long-term, growth in the international ag markets is exceptionally important to us.
We have a great presence domestically and do well here. We have strong OEM relationships here.
But we have a lot of opportunity abroad that we need to continue to capitalize on. And you’ll see us more and more active in those particular markets, including Eastern Europe as well as Western Europe.
Tyler Etten
Got it. And then, obviously, some strong results out of the domestic market for ATD.
Can you talk about the customer sentiment between the aftermarket sales and the OEM sales?
Daniel Rykhus
I’d say, it’s not great out there. I know you cover other ag companies.
And I would say it’s improving at a real fundamental level of getting used to commodity prices in this country where they are and where they have been for, what seems like, several years now. So, I think the sentiment among growers and the ag retailers, it’s still cautious.
People are not laying in a lot of inventory in our aftermarket channel. So, what we’re seeing in growth is really what's moving through.
For the OEMs, you can listen to their earnings calls, but I think that there is an expectation that the fundamental ag market is not going to be our friend in calendar 2017, but that there is a growing necessity for fleet replacement and upgrades as we continue to move through this long low element of the typical ag cycle.
Tyler Etten
Understood. And, obviously, impressive to see it was kind of gains in a difficult market.
Daniel Rykhus
That is an important point, is that we have focused, over the last three years, on expense controls and focusing our R&D on our core. And the results that we were able to attain in 2017 and what we believe we’ll do in 2018 are only because of that and they are a direct result of being prudent on all other expenses and being laser focused and generous with our R&D investments where we believe the best opportunities were.
Tyler Etten
Absolutely. One more from me.
First, the sales from Google to Aerostar in the fourth quarter, was that the increase of one-time sales or is that expected to be reoccurring? And then also, I know you guys don’t provide formal guidance, but is it safe to assume breakeven or better for operating profit for Aerostar in fiscal 2018?
Thanks.
Daniel Rykhus
So, to answer your first question, there were no one-time events that drove the improvement. We just continued to collaborate well with that customer and they continue to realize progress.
So, what we’re seeing is that, is progression, sequential improvements, and we hope and expect for that to continue. As far as Aerostar, our expectation now is that Aerostar will be profitable throughout the year, for FY 2018.
As we sit here today, we have every reason to believe that’s going to be the case.
Tyler Etten
Great, thank you.
Daniel Rykhus
You bet.
Operator
[Operator Instructions]. And I’m showing no further questions over the phone lines at this time.
I’d like to turn the call back over to Dan Rykhus for closing remarks.
Daniel Rykhus
Thank you. One thing that I want to close on and comment on, even though it wasn’t a question is that, we’re really pleased with our FY 2017 performance of $0.56 a share.
But we do need to keep that in the proper context of what this company has been able to do in the past. And while $0.56 on 40 is great growth – 40 as our adjusted earnings – it’s a long ways from where we’ve been historically.
I just want our owners and our investors to know that we are focused on that long-term return to our expected growth rates of 10% and we’ve made progress. But in the larger context, we still have a long ways to go and we look forward to continuing to make progress on that challenge.
The conditions were very different when we reached our peak several years ago. We had very favorable ag market conditions.
We had oil trading at $110 or $120 a barrel. We had plenty of incentives for ag producers.
And those conditions are very different now. We also had around $80 million in contract manufacturing revenue that we strategically moved away from.
So, we have a different set of circumstances. We're making good progress on our long-term growth objectives and we’ll expect to continue to make good progress on that throughout the coming year.
And we did one of these calls it seems like just a month ago and here we are at the end of March. And I guess we'll be talking to you all again in mid-May as we close out our first quarter at the end of April.
So, we look forward to updating you on our progress in Q1, on our long-term goals and we’ll do that sometime in mid to late May. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect.
Everyone, have a great day.