AstroNova, Inc. (ALOT) Earnings Call Transcript & Summary

Good day, and welcome to the AstroNova conference call. Today's call is being recorded. I would like to now turn the conference over to Scott Solomon of the company's Investor Relations firm, Sharon Merrill Associates. Please go ahead, sir.

Thank you, Rob. Good afternoon, everyone, and thanks for joining us. Hosting today's call are Greg Woods, AstroNova's President and CEO; and David Smith, the company's Chief Financial Officer. By now, you should have received a copy of the news release that was issued this morning. If you don't have a copy, please go to the Investors page of the AstroNova website, www.astronovainc.com. The slide presentation related to today's announcement also is available on the website. Please note that statements made during today's call that are not statements of historical fact are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on a number of assumptions that could involve risks and uncertainties. Accordingly, actual results could differ materially. Except as required by law, any forward-looking statements speak only as of today, August 9, 2022. The company undertakes no obligation to update these forward-looking statements. For further information regarding the forward-looking statements and the factors that may cause differences, please see the risk factors in AstroNova's annual report on Form 10-K and other filings the company makes with the Securities and Exchange Commission. With that, I'll turn the call over to Greg.

Thank you, Scott. Actually, good afternoon, everyone. I'm actually talking today from Astro Machine, where we just completed the acquisition that we announced today. As outlined in the press release, Astro Machine designs and manufactures printers and media handling equipment for labeling and mailing applications, primarily for OEM customers. The company was founded here in Elk Grove Village, Illinois, which is adjacent to O'Hara International Airport in 1978. Over the ensuing 44 years, Astro Machine has established itself as a leading provider of printing solutions and automation equipment for direct mail and promotional marketing. As a result, this acquisition adds a key market adjacency to our product identification portfolio, further strengthening our leadership position. Importantly, Astro Machine ticks all the boxes of our acquisition strategy. First, it's a great fit with our existing product identification business. Astro Machine brings synergistic product design and material handling expertise that expands our U.S. manufacturing capabilities, reducing the reliance on overseas locations. The transaction also adds complementary channels to market that will enhance our ability to scale the combined business and capitalize on cross-selling opportunities. In addition, Astro Machine has a track record of strong performance. Its relationships with market-leading customers have enabled Astro Machine to deliver consistent revenue and earnings growth. The acquisition also is highly complementary from a skills perspective, adding an experienced team with capabilities closely aligned with our own. We're also ensuring management continuity by having George Selak, the President of Astro Machine continue to run the business as a wholly owned subsidiary of AstroNova. Moreover, the acquisition meets our financial objectives. The aggregate purchase price is less than 1x revenue on both a full year 2021 and a trailing 12-month basis for the period ending June 30 of this year. The business has very attractive operating margins and a favorable operating expense profile. In summary, we're thrilled to welcome George Selak and the entire Astro Machine team to the AstroNova family. The addition of this business broadens our technical expertise and gives us a new market adjacency that introduces AstroNova to new customers and expand our relationships with existing accounts. Now let me turn the call over to David for some additional information on the financial details of this transaction.

Thanks, Greg, and good afternoon, everybody. I've just got a few quick comments to follow Greg's on the financial aspects of the transaction. The aggregate purchase price of $17.1 million was for the stock of the operating business and the 34,000 square foot engineering, manufacturing and office space that we're sitting in right now here. We funded it with senior debt borrowings under our amended version of our existing senior debt credit facilities with Bank of America. As we said in the slides, we expect the acquisition to be accretive to earnings in the current fiscal year that we're in currently. For 12 months ending at the end of June, the revenue here was about $22 million. In broad brushstrokes, the revenue from recurring revenue sources like inks and parts and printheads accounts for about 60% of Astro Machine's business. On an annual basis, varying obviously from period to period with the hardware comprising the other roughly 40%. As Greg suggested, it's got to very favorable financial profile with, let's say, mid-teens operating margin. The company's gross margins are a little bit lower than AstroNova, but the operating expenses are also lower as a percentage of revenue combined for a back end of operating margin contribution. It's a very attractive business with significant upside potential as we marry the best of the 2 businesses together to capture some synergistic opportunities and drive efficiencies. Obviously, we'll take a few questions in a moment. Just quickly mention that we do plan to present next week and host one on ones at the SIDOTI August Micro-Cap Virtual Conference. If you're not on with that, obviously, we'll be able to talk to people separately later. So with that, Greg and I are happy to take any questions. Operator?

[Operator Instructions] And your first question comes from the line of Samir Patel from Askeladden Capital.

Congrats on the deal. So is the integration going to be easier because the company has already named Astro something, and it's already run by someone named Greg? You knew you were going to get that, right?

Yes, figure something like that coming. Yes, that was one of the hidden criteria in our selection process there, Samir. So it worked out great and they have some nice IP that we get with some Astro-type names, which is kind of nice.

So jokes aside, I was wondering maybe you could provide a little bit more clarification on the end market. So like it looks like I read in there kind of looks like envelopes, packages, things like that, which wouldn't have naturally struck me as kind of a good growth area like your CPG kind of e-commerce type exposures that you have chemicals, all that. So maybe go a little bit more you talked about OEM customers. So who exactly -- I mean not named, so what kind of customers are there and what kind of industries do they play in?

Sure. Yes. So the majority of the sales are to what we call the mail handling business. But the minority of it, and there's a good percentage that actually isn't label business and they sell to some of our competitors, they actually manufacture machines for them. So they're in labeling business as well. But primarily from the OEM perspective, but they also do have a distribution channel that complements ours, there's a few areas of overlap, but for the most part, it's complementary. And those channels there's 2 different channels, one that's selling more mail handling type applications, the other one that's more label. So it expands our label business. That's number one. And the other part of the business, yes, when I first got into it, I was digging a little bit deeper into that. It turns out that, that business is actually growing -- it's not growing at huge rates, but it's a consistently growing business in the mail handling business. And during COVID, they had some nice upticks where, I mean, probably here like everyone else, you get inundated with all the spam and what people and marketers are doing is going to this kind of large-format flyers and things like that, that's actually caused the color part of the mail handling business to expand. In addition, they make a lot of, we call it, mail, the package handling equipment, so they're in the packaging business as well. So in a few different areas, but very strong OEM customers that are related to those types of businesses. Most of the customers have been customers for many years, which we like to see in the business as well.

Okay. That makes sense. It's not entirely reliant on like kind of paper mail, and it sounds like it's still -- it's in kind of the areas that are growing as opposed to shrinking and that there's...

Yes, exactly. One of them is -- one of them is the area that we created the OPX for the overprinting where you can put large mailers, envelopes, paper bags through, so they're in that space as well.

Okay. I wanted to talk a little bit more about the manufacturing footprint as well. I think you kind of mentioned maybe a near-shoring angle. So is there -- I know you already have the facility in Rhode Island, but it sounds like you said something about reducing your reliance on kind of overseas manufacturing. I'm seeing here in the slide deck that they talk about some vertical integration. So are there parts of your business that you think you can -- in terms of the -- I mean, you talked a little bit about the revenue synergies, but maybe talk a little bit about cost synergies. Are there potentially things that you're using third party to manufacture that you can kind of manufacture in the U.S. now and have higher reliability and maybe also put some more margin on the bottom line?

Sure. Yes. So it's kind of all of the above. So from -- we do some overlapping suppliers, they use a lot of mono and color ink and some of those have come from the same suppliers that we get. So we get some benefits from that. But on the manufacturing side, they have a very good machine shop here, extensive sheet metal fabrication capabilities, very large prototyping like 3D printing machinery. So things that we don't have at our facility in Rhode Island, we're primarily -- we do have PC board manufacturing. But beyond that, we're primarily assembly and test. We buy a lot on the outside. And many of those things, like the ones I mentioned, harnessing, a lot of that is made right here in this facility in a very economical way. But if you're familiar with this area, it's loaded with the tool shop. A lot of their subs are also local, so they don't purchase a lot offshore. So all in all, kind of shrinks our mutual supply chains.

[Operator Instructions] Your next question comes from the line of John Dicer from Pinnacle.

I was just curious how this deal came about. What was the process that led to the transaction?

Sure. Well, that's a trade secret. I'm kidding. So I've known George in this company for about 8 years and actually Mikkel, who runs our global hardware sales knew them for even longer. So we're aware of them because they're in the industry. They did some early work with Memjet and some of the people that we work with. So that's how we knew them. And we kind of kept in touch. And then during COVID, we kind of were bouncing back and forth on different items and actually looking for some material handling equipment [indiscernible] that they supply that we could use with our overprinting. One thing led to another, and over the last several months, we decided, hey, why don't we just link up and timing was right, and that's how it came together.

That makes sense. Were there any other bidders?

Not that we're aware of.

Okay. So it was not an auction process or anything like that?

I think with George being a family business and knowing that our interests were aligned, we had similar technologies, similar values with our companies. I think you like the fit and it was a good match for both companies.

Okay. Great. Will there be any 8-K filed with additional details on the transaction?

Yes, that's already been filed.

It was filed at the beginning of this call.

Okay. Sorry, I haven't seen it yet.

[Operator Instructions] And your next question comes from the line of Tom Spiro from Spiro Capital.

Tom Spiro, Spiro Capital. So the revenues for the trailing 12 months are roughly $22 million. How has it been growing over the last few years? What were the revenues 3, 4 years? So what rate of growth has it enjoyed in the last 3, 4 years?

It's been pretty -- it's not a significant subsidiary. We don't have to file historical financials, but it's been growing very nicely. It had a very good '19, fell off a little bit in '20, '21 and '22 have been up pretty sharply. The business has been growing. We dug into the financials really pretty deeply over the last 6 years. And except for a little down step in 2020 as a result of the surge of COVID, it's been growing pretty nicely. And it's a very strong track record of steady improvements over quite a number of years.

As I understand it, they founded in 1978?

Correct.

Right.

So they've been in business for about 44 years, and they've reached a level of sales of $22 million, that sort of sounds like a rather modest rate of growth over 44 years unless perhaps the last few years have seen an acceleration. Am I missing something?

Well, we didn't go back 44 years in our study of the business. We really only went back 4 or 5 or 6 years. It's been a family business that entire time. George's father started it with George back then. And it's been successful family business for that entire time, but we haven't studied the last 44 years.

Apart from this transaction, what rate of growth do you think they would enjoy going forward if you folks hadn't stepped forward, what were they looking at over the next couple or 3 years?

They did not unlike ourselves, they are a little private family company. They didn't have elaborate 3- and 5-year business plan. I think that this transaction was probably ultimately part of their business plan, which is to marry up with somebody like ours to take the business forward. But we do think that their business is performing well with its customers now. The customers regard the firm very, very well and have aggressive plans themselves that we hope to be able to enable. And we think there are some things that the 2 companies can do better together than they would have alone to further that growth rate.

Can you give us the names of any other customers?

They're really OEM customers. So you can take a look at their website, you'll see some of the dealers there. So that's kind of up in the public domain. You can also -- if you take a look at the mailing industry, you'll probably get an idea of who their customers might be, a similar equipment there.