Mar 21, 2019
Operator
Good day, ladies and gentlemen and welcome to the Raven Industries Inc Fiscal 2019 Year End Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr.
Bo Larsen. Sir, you may begin.
Bo Larsen
Good morning and welcome to the Raven Industries fiscal 2019 year end 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.
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.
Fiscal 2019 was a strong year for all three operating divisions and we are quite proud of the many accomplishments we achieved during the year. In Applied Technology, we continue to invest for the long-term, while generating improved financial returns.
We completed the acquisition of AgSync, a strategic addition to our Slingshot platform. We opened our new Latin American headquarters in Brazil, expanding our presence in this key geographic market.
We successfully launched our new market-leading steering platform, RS1 and we improved the overall profitability of the division driving division profit margin above 30% for the fiscal year. In Engineered Films, we faced tough sales comparisons due to spikes in hurricane recovery film sales and navigated through these exceptionally well.
We integrated the CLI acquisition capturing the synergies what we prepared for a successful go-live on our new ERP platform, IFS and we invested in new production capacity through Line 15 to capture additional market share in the industrial and geomembrane markets. In Aerostar, we continued to accelerate the turnaround in financial performance through focus on strategic platforms.
We saw sales for the division increase more than 25% and division profits nearly doubled. We successfully broadened the base of government and commercial customers for our stratospheric balloons and we are awarded a new multiyear $36 million contract with the U.S.
Navy for radar systems. Combined, the strong contributions of our operating divisions led to very strong financial results for the company overall.
We achieved record sales of $407 million and nearly achieved record earnings per share for the year. We continue to appropriately balance our investments to drive long-term value creation and we are proud of our performance in fiscal year 2019.
With that, I would like to turn the call over to Dan for his comments on our outlook for fiscal year 2020.
Dan Rykhus
Thank you, Steven. We continue to build momentum in each division by executing our long-term strategy and leveraging our strong business model and we will continue to do so in fiscal year 2020.
While we expect commodity prices, general economic conditions and end-market demand challenges to be more or less the same during the next fiscal year, there is some uncertainty present. However, Raven’s business model positioned each division to thrive in these dynamic conditions.
As illustrated by the results achieved over the past several years, the business model which we have had in place for the last 20 years includes carefully selecting market segments that offers strong growth and strong margin opportunities like precision ag, high value films and stratospheric balloon platforms, intentionally serving a diverse group of end-markets, boldly investing in research and development, capital addition, geographic expansions and acquisitions, consistently investing in productivity improvement, and continually generating strong cash flows and maintaining the balance sheet as a source of strength. As we plan for the future, we will continue to execute the Raven business model investing heavily in these key areas, including a consistent cadence of meaningful acquisition.
At Raven, our mission to solve great challenges includes developing technology, products and services for our Selected Market segment and we are passionate about doing so. As for our long-term outlook, we have positioned ourselves for long-term success and expect to achieve annual earnings growth of 10%.
That concludes our prepared comments. And we can open up the call for questions.
Operator
[Operator Instructions] We have a question from Craig Bibb with CJS Securities. Your line is now open.
Craig Bibb
Okay. I was hopping to start with the segments, the decremental margin at Engineered Films was worse than I modeled.
The decline in hurricane related sales was anticipated, so is there something else going on there? Or is that’s much more profitable?
Steven Brazones
Sure. Good morning.
This is Steven. So overall hurricane recovery film sales were down and that’s the primary driver of the decline in margin.
However, as we noted in the third quarter, we have a large installation project in the geomembrane side in California that we took I think it was about $1.9 million forecast adjustments to profitability in the third quarter. That project had about $4 million of revenue in the fourth quarter at breakeven margins, so that was in fact in the year-over-year comparison as well.
Craig Bibb
Okay. And then in your comments on the press release you seem optimistic somewhat about Engineered Film sales into the energy end market at oil price of I think $50 to $60 a barrel.
The rig count grew in the Permian in the fourth quarter, it’s turned down in Q1, are you guys still okay, I think you would need rig count growth to kind of drive EF revenues in energy?
Steven Brazones
I think what we are seeing, we are seeing continued strength in the energy market even recently and the other thing that we have that’s favorable is market share gains in that market. So we have got the best product line in the marketplace today, it’s not the cheapest, but it’s the best performing products in the marketplace today, easiest to install.
And so we are seeing market share gains on the top of what we are seeing in the underlying rig count development.
Craig Bibb
Okay. Are there other key drivers we should be focused on for our Engineered Films in 2019 and 2020?
Steven Brazones
Well, we just completed Line 15 and we are in the final stages of commissioning that line and that line will be commissioned here in the first quarter of 2020, that’s our new production line that gives us wide-width goods to serve the industrial geomembrane markets. And we put that in to largely address growing demand from our existing customer base for the profit for those product lines and so that will be a driver for us that we are pretty optimistic about for 2020 within films.
Craig Bibb
Okay. And then Line 15 will start generating revenues in Q1?
Steven Brazones
Yes.
Craig Bibb
I thought you had the Investor Day that was really focused on flexitank, is the flexitank’s sold out still?
Steven Brazones
Yes. Flexitank market grew substantially for us in fiscal year ‘19.
And you are correct that some of the capacities of Line 15 is to provide additional film for the flexitank market in 2020.
Craig Bibb
Okay.
Steven Brazones
It’s not just the flexitank line build. I mean, it’s a versatile line that we can sell into multiple end markets.
Craig Bibb
Okay. You have had applied technology what’s kind of a reversal from last quarter.
Farm income has been weak for 5 years, so that’s not new, is there something else that changed versus Q3?
Dan Rykhus
Sure. Craig, it’s Dan Rykhus, during the fourth quarter keep in mind that our primary end market, not our only market, but our primary market for ATD is U.S.
ag retail market. Around 25% to 30% of our sales were international and the rest was in the U.S.
And during the third quarter there was a challenging market related to applying fertilizer and other inputs in that region. And but it was – we did well in the third quarter.
As we got later into the season though, the reality started to sync in with the ag retailers that they were just not going to get the amount of fertilizer down in that typical season that they normally would. And we started to feel that sort of contraction in their view on the market as that reality sunk in during the fourth quarter.
So that hurt us a little bit, but fundamentally, I feel fantastic about ATD, the way we have invested in Brazil to grow in that market and to come through a pretty substantial change in our distribution model down there and to hold our revenue and position ourselves for strong growth is something that I am proud of. The new products that we have introduced into the market with RS1 a few years back Hawkeye, CR7 those products are all gaining traction and are improving our ability to serve both the OEM and the aftermarket.
So if the market conditions were difficult in the fourth quarter, but long-term I like where we are positioned in the precision ag market to serve both the ag retailers and the growers in the U.S. as well as the large enterprise farms across the rest of the world.
Craig Bibb
Okay. You guys have had your extended presence in Brazil for, I guess about a year now, are there any key learnings coming out of that so far?
Dan Rykhus
I think the key learning is affirmation that we made the right decision to build a service-oriented capacity in Brazil and knowing that large enterprise farms require a high level of support and service and the expectation for that is great, but when you win those customers, they stick with you and we are continuing to be affirmed in our decision to build out the way we have down there.
Craig Bibb
Alright. I don’t want to monopolize the call.
If there is someone else in the queue, you can just jump back in the line.
Dan Rykhus
You can keep going, Craig.
Craig Bibb
Okay. So with Aerostar, the $36 million contract, I think it got underway a little bit in Q4, but it’s really – really gets underway in Q1 and I saw a multiyear contract?
Steven Brazones
Correct. So we started delivering radar systems here in the first quarter of 2020.
Craig Bibb
And I know you guys are always bidding on other stuff, is there other larger contracts coming down the pike or is the next big event is the launch of Loon in Kenya?
Steven Brazones
Yes, I would say, the vision continues to focus on pursuing contracts within the stratospheric balloon market and the radar market, those are the two primary areas of focus. The new contract with the Navy is a $36 million contract is a 5-year contract that we are starting to deliver on now.
We expect additional follow-on contracts in the stratospheric balloon market with various agencies of the U.S. government.
And then obviously we continued to provide services in stratospheric balloons to Google for Project Loon and that’s been consistent.
Craig Bibb
Alright. And then coming out of the Investor Day, I have the impression I mean you guys are talking about a really full pipeline of M&A and I know you did the AgSync deal in Q4 which looks like a great fit add-on, but is there – should we expect a lot more M&A or where does that stand?
Steven Brazones
I would say yes, you should expect more M&A. We have spent a considerable amount of time this past 12 months to increase the pipeline of opportunities that we are evaluating.
We feel very confident in our pipeline and confident that we will able to complete additional transactions here in fiscal ‘20.
Craig Bibb
Okay. One of the other markets you are trying to grow on is Europe, you felt like you are underrepresented with European OEMs.
Have you made progress there?
Dan Rykhus
Well, our European ATD business has performed very well this last year and so we continue to see strength within our European operations. It would not be inconceivable for us to look at acquisitions to supplement our strategy in Europe and in Latin America, but Europe is performing very well in terms of our international markets.
Craig Bibb
Okay. And then the other kind of adjacent opportunity for Applied Tech is to move more from spring towards planting, any progress there that you could share with us?
Dan Rykhus
I would say you know we continue to evaluate how our technology and our expertise can be applied in adjacent markets within Precision Ag outside of application controls and the sprayer market. And also there too, we may be interested in some acquisitions that strengthen our position in adjacent markets.
So, I think everything we mentioned during the Investor Day Conference is still true today.
Craig Bibb
Okay. And then RS1 is going into tractors and sprayers or mainly sprayers?
Dan Rykhus
I would say just before we move on, Craig, on the acquisitions, I report everything that Steven said and I also remind you and anybody else who might be listening that, we’re really boldly moving forward with acquisitions, but we’re still going to retain our view on not overpaying and making sure that we’re buying companies that bring technology that really fit in our strategy. And there’s a lot of companies out there that put their balance sheet to work and accumulate a whole bunch of mistakes along the way and we’re just not going to do that.
That doesn’t mean that we’re being overly cautious, but we are going to uphold the investment discipline that we’ve demonstrated over the many years and we’re going to complement that with a lot more activity that Steven is leading now to build a better pipeline of opportunities for us to consider. So, that’s really exactly where we’re at.
And the expectation is that, that is going to bear more fruit, more meaningful acquisitions and more of them.
Craig Bibb
Okay. And just back to RS1 that kind of both tractors and sprayers or?
Dan Rykhus
Correct.
Craig Bibb
Okay. And so – and that – is that would be kind of do you – where you have more share – you’re gaining some share on tractors, is that fair to look at it that way?
Dan Rykhus
That is fair to look at it that way.
Craig Bibb
Okay. And then CLI –
Dan Rykhus
It’s a market-leading technology, RS1 is a market-leading technology and the response has been very, very strong, and we’re very optimistic about the growth prospects of RS1 in 2020.
Craig Bibb
Okay. And I’m assuming the CLI’s large project is complete and we don’t have to worry about margin impacts going forward?
Dan Rykhus
The large contract is – yes, was completed in Q4.
Craig Bibb
Okay. And then do you –
Dan Rykhus
Well, go ahead.
Craig Bibb
So, with CLI, one of the other focal points in the Analyst Day was CLI moved you more into water conservation and it’s one of the great challenges Raven would like to help solve, now that you’ve been in that market for longer, are you seeing other opportunities to grow there?
Dan Rykhus
Yes, yes. And the division – the CLI acquisition has been a very successful transaction for the company and for EFD.
We had some learnings this last year with that large contract in the third quarter, but if anything has validated for us, the long-term value creation potential of CLI within the EFD particularly on the geomembrane side of markets particularly focused on water conservation as you mentioned.
Craig Bibb
Are there international opportunities, I know – just either for EF or just now that you’re a stronger water player, I guess?
Dan Rykhus
Yes, I would say for Engineered Films, one of the things that we’re looking at over the long-term is expanding internationally, and so I think nothing imminent there, but I think that’s an area that we’re particularly interested in on the geomembrane side, as well as on the industrial – in the industrial market.
Craig Bibb
Okay. That’s all I’ve got.
Thank you very much.
Dan Rykhus
Thank you, Craig.
Operator
At this time, I’d like to turn the call back over to Bo Larsen for any closing remarks.
Bo Larsen
Thank you for joining us today. We appreciate you listening in and your interest in Raven Industries.
We’re going to continue to provide detailed press releases as our primary means of communication. Have a good day and we look forward to providing the next update in May.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program.
You may now disconnect. Everyone have a great day.