Aug 23, 2018
Executives
Bo Larsen - Director of Investor Relations Steven Brazones - Vice President and Chief Financial Officer Dan Rykhus - President and Chief Executive Officer
Analysts
Peter Lucas - CJS Securities
Operator
Good day, ladies and gentlemen, and welcome to the Raven Industries Incorporated Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded.
I would now like to introduce your host for today's conference, Bo Larsen, Director of Investor Relations. Please go ahead, sir.
Bo Larsen
Good morning, and welcome to the Raven Industries Fiscal 2019 second quarter 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; Steven Brazones, Raven's Vice President and Chief Financial Officer; and myself. 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.
As such statements reflect the company's current expectations, actual results may differ. I would now like to turn the call over to Steven Brazones, Raven's Chief Financial Officer.
Steven Brazones
Thank you, Bo. Good morning, and thank you for joining us today.
As you’ve already have realized by reading our second quarter earnings release, we have significantly increased the content provided. This is part of a broader change in investor communications in which we intend to hold less frequent investor conference calls, while still providing the same level of relevant information to investors.
The delivery mechanism will be different. It will be concentrated in our earnings release rather than split between an earnings release and prepared remarks on our conference call, and this quarter’s earnings release is representative of the level of detail we expect to provide going forward.
With the sell-side research industry in a state of rapid change and given the low level of active participation on our conference calls, we believe this approach is a more efficient use of everyone’s time. Dan, Bo, and I will still be available as usual for one-on-one discussions and we look forward to new and innovative ways to provide content and context on our financial results to investors.
Turning to results in the second quarter. We are extremely pleased with the strong performances of all three operating divisions.
Consolidated net sales increased 19% year-over-year and all three operating divisions achieved double digit growth in operating income. Applied Technology's division profit margin expansion continued, expanding 560 basis points year-over-year.
The increase in ATD margins was driven by lower expenses and volume leverage on growth, but was also after absorbing $400,000 in start-up expenses to launch their new Latin American headquarters in Brazil. This investment is driving positive momentum and improving long-term growth prospects for the division.
Engineered Films grew net sales nearly $10 million year-over-year or more than 20%, driven by an organic growth and the acquisition of Colorado Lining International. CLI has been a great acquisition for the division, performing to expectations, and exhibiting strong growth characteristics.
Aerostar grew net sales about 45% and almost tripled operating income versus the prior year on continued stratospheric balloon platform success and sizeable aerostat deliveries. Diluted earnings per share increased 65% year-over-year on strong profit growth across all divisions, and lower income tax expense.
Adjusting for the lower effective tax rate, relative to the prior year, diluted earnings per share increased 43%, a very strong performance. While delivering strong financial results in the short term, we are also continuing to invest for the long term.
As a reminder, the company's expectations over the long term are to deliver annual earnings growth greater than 10% on a consolidated basis. With respect to long-term profitability, the company expects Applied Technology to achieve and sustain a division profit margin in a range of 32% to 34%, Engineered Films to sustain division profit margin in a range of 18% to 20% and Aerostar to maintain division profit margin in a range of 15% to 20%.
We are committed to these long-term targets and we are investing in each division as we execute our long-term strategic plan. These investments vary by division.
In ATD, research and development are key to delivering new innovative precision ag technologies, and we are fully funding these activities. At the same time, we are investing in geographic expansion in Latin America.
In EFD, new production capacity is being put in place this year in a new blown film line. This new line will serve the industrial, agricultural and geomembrane markets.
And this was put in place in response to rising customer demand. In Aerostar, research and development to drive innovation in stratospheric balloon platforms and radar systems is the strategic focus for the division.
These investments enable the division to drive higher profitability than typical government contractors. Overall, we are also investing in our foundational business processes to drive efficiencies and speed to scale through Project Atlas, a strategic investment to replace our aging enterprise resource planning platform with iFS, an Oracle-based ERP platform.
EFD will be the first division to go live at the end of this year. Overall, we had a fantastic quarter, and we are proud of our continued improvements and the execution of our strategy.
With that, I'll turn the call over to Bo for a more detailed review of our financials.
Bo Larsen
Thanks, Steven. On a consolidated basis, sales were $102.7 million in the second quarter, up 19% versus the second quarter of last year.
Operating income was $16.6 million versus operating income of $11.7 million in the second quarter of fiscal 2018, increasing 42% year-over-year. Second quarter net income was $13.7 million or $0.38 per diluted share versus net income of $8.2 million or $0.23 per diluted share in last year's second quarter.
Turning to Applied Technology. Second quarter sales were $30.4 million, up 7% year-over-year.
Division operating income for Applied Technology was $8.8 million in the second quarter of fiscal 2019, an increase of $2.2 million or 32%, compared to the second quarter of fiscal 2018. Division operating margin increased 560 basis points year-over-year from 23.3% to 28.9%.
Incremental margins were strong for Applied Technology, driven mostly by leverage on higher sales volume and lower engineering support costs. For Engineered Films, sales were $58.9 million, up $9.8 million or 20% year-over-year.
The increase in net sales was driven by organic growth and the acquisition of CLI. Excluding sales associated with CLI from the second quarter of last year and the second quarter of this year, division sales increased 2% year-over-year.
Division operating income for Engineered Films was $10.8 million, up $1.3 million or 13% versus the second quarter of fiscal 2018. Strong division profit margins were sustained in the second quarter even with the heavier mix of installation services.
As previously disclosed, in the second half of last year, the division realized $24.2 million in sales of hurricane recovery film, $8.4 million of which occurred in the third quarter. Substantial sales related to the hurricane recovery disaster film is not typical for the division, as sales of such film are generally less than $2 million on an annual basis.
In the third and fourth quarters of the current fiscal year, the division does not expect significant sales from hurricane recovery film. As a result, year-over-year sales comparisons in the third and fourth quarter of this fiscal year will be negatively impacted.
Excluding the impact of hurricane recovery film, we expect the division to continue to grow sales and generate profit margins in line with our long-term expectations. For Aerostar, second quarter net sales were $13.5 million, up $4.1 million or 44% year-over-year.
This increase in net sales was driven primarily by improved sales volume in Aerostar's stratospheric balloon platform and $3.8 million in aerostat contract deliveries. Keep in mind, too, that we divested the division's client private business in the first quarter, and this business generated $1.4 million in sales in the second quarter of last year.
Division operating income in the second quarter of fiscal 2019 was $3.8 million, up $2.4 million versus the second quarter of fiscal 2018. This increase in division profit was primarily driven by favorable product mix and a higher proportion of costs being allocated to specific stratospheric balloon contracts.
With that, I would like to turn the call over to Dan for his comments on strategy and outlook.
Dan Rykhus
Thanks, Bo. What a great second quarter and first half of the year we've had.
Organic growth was strong for Aerostar. New product success drove growth for Applied Technology, and Engineered Films executed well and has realized the benefits of the CLI acquisition.
Future growth looks promising for each division. In Applied Technology, we're very pleased with their performance and expect the division will continue to grow sales and drive further margin improvement through enhanced sales execution on our investments in new products.
Expanding margins in a tough ag market sharpens the division and makes them more disciplined and at the same time provides a strong indication of the value their products deliver to their customers. For Engineered Films, the division continues to operate at a high level, generating strong growth both in sales and division profit and showing once again how successfully they can acquire and integrate new businesses.
The division is investing in new manufacturing capabilities and leveraging its newly acquired installation capabilities to drive growth. In Aerostar, their second quarter performance was outstanding, and the division is executing its strategic growth plans for both their stratospheric balloon platforms and radar systems.
The division continues to lead the industry with its stratospheric balloon capabilities and is achieving new milestones with performance and customer programs. These programs are leveraging the division's research and development activities and driving strong margin enhancement this year.
From a corporate governance standpoint, we made an exciting announcement during the quarter with the appointment of Jan Holloway and Lois Martin to the company's Board of Directors. They're accomplished business leaders who will bring diverse perspective and insight to the board.
Jan and Lois's respective backgrounds in agriculture and finance, along with their strategic business and public governance experience, make them a strong fit for the Raven board. And we look forward to their contributions to our long-term success.
In closing, Raven's overall financial performance in the first half of fiscal 2019 has been excellent. We're executing our long-term strategic plan with urgency and purpose.
We are investing heavily in new product development in Applied Technology, new manufacturing capacity in Engineered Films and the commercialization of our stratospheric balloon platforms and radar systems in Aerostar. Acquisitions remain a strategic focus and we are optimistic about the existing pipeline of opportunities.
We have a strong platform for organic growth and we are making the right investments and expanding margin. We're on track to deliver another strong performance in fiscal year 2019.
And this concludes our prepared comments. Operator, would you please open up the call for questions?
Thanks.
Operator
Thank you. [Operator Instructions] And our first question comes from Craig Bibb with CJS Securities.
Your line is now open sir.
Peter Lucas
Hi, good morning. It's Pete Lucas for Craig this morning.
Just on Aerostar. It continues to perform well.
I was just wondering how key were radar systems to the current quarter. And any more detail you can give us around those sales and the longer-term outlook for that product line?
Steven Brazones
This is Steven. Radar sales were down slightly for us in the second quarter, but overall, the pipeline of opportunities that we're developing is very strong.
And we're investing in new platforms and radars and expect to bring those to market here next year.
Peter Lucas
Great, thanks. And the 14% increase in domestic applied technologies in the face of a U.S.
– a weak U.S. farm market was impressive.
Just wondering, was the driver replacement, new products or share gains? And can you kind of help us understand the size and timing of the replacement cycle in the U.S.?
And also, any comments on international volume? I know – had large orders last year.
Ex those orders, what does international demand look like now?
Steven Brazones
Yes. So, in the second quarter, a lot of the growth is driven by market share gains brought about by our new products that we introduced over the last 18 months to 24 months.
Hawkeye sales were strong in the second quarter. We are seeing the replacement cycle demand pick up a little bit lately, which is encouraging.
However, the underlying backdrop of the ag economy is not very favorable for us. Internationally, we had a few large orders, timing of which in the last fiscal year impacted the comparisons this year.
Underlying growth, though, excluding those is commensurate with what we're seeing here in the United States.
Peter Lucas
Great. And then just jumping to Engineered Films.
Another strong quarter there, but I think you mentioned, ex the CLI acquisition, it looks like it was about 2% organic growth. And just wondering, comparing that to the increase in the Permian rig count, which seemed to be strong, is there any type of shift in the usage of the films at the rig side or in terms of market share changes?
Steven Brazones
We feel pretty strong – pretty good about our market share position within the energy subsector of the geomembrane market. Permian Basin rig counts were up about 26% year-over-year in the second quarter.
And our sales into the energy market were – matched that, for the most part, in the second quarter. Drilling practices are changing and continuing to evolve, which is reducing the number of liners that are required, but the liners are getting bigger.
So, we feel pretty good about our long-term prospects there. We're the market leader in that space.
Peter Lucas
And just two more quick ones from me. In terms of you've done well and continue to actively evaluate potential deals, just wondering how we should think about what's coming on the horizon there, if that's still active for you guys and what the pipeline looks like there.
And then last question for me will just be on international outlook. And any impact, any continued impact from the recent trucker strike in Brazil and turmoil down there?
Steven Brazones
Sure. Yes.
Regarding M&A, we continue to develop our pipeline. It's a strategic focus for us and has been for quite some time.
We're coming up on the anniversary of the CLI acquisition here in the third quarter. And we're continuing to evaluate a number of opportunities and timing of which remains uncertain, but it's something that we continually focus in on and is part of our long-term strategy.
So, we would envision continuing to evaluate opportunities, particularly within Applied Technology and Engineered Films. Regarding the international outlook, we feel pretty bullish about the – our international outlook, particularly with respect to Applied Technology.
We've been investing heavily in Brazil to build up our presence there. We've got 16 folks on the ground there now versus one a year ago.
And we're in the process of signing up dealers throughout Brazil. And we see a lot of growth out of Latin America coming in the future and we're investing heavily to capture that.
Peter Lucas
Very helpful. Thank you very much and congrats again on a great quarter.
Steven Brazones
Thank you.
Operator
Thank you, ladies and gentlemen, and that does conclude today's question-and-answer session. I would now like to turn the call to Dan, for any further remarks.
Dan Rykhus
Thanks, operator. As Steven outlined, we are changing our approach to our quarterly results reporting, and we'll continue to build out our press releases to add more and more material there.
And we look forward to updating you again in November. The year has gone extremely well, so far, and we expect to have a great year, as we've already commented on.
So, we look forward to updating you on our third quarter in November. Thanks.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.
You may all disconnect and everyone have a great day.