Daktronics - Earnings Call - Q4 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year twenty nineteen Fourth Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, May 2939, and is available on the company's website at www.daktronics.com. At this time, all participants are in a listen only mode. Later, will conduct a question and answer session and instructions will follow at that time. I would now like to turn the conference over to Ms.

Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks. Please go ahead,

Speaker 1

Thank you, Sherry. Good morning, everyone. Thank you for participating in our fiscal and fourth quarter earnings conference call. I would like to review our disclosure cautioning investors and participants that in addition to statements of historical facts, we will be discussing forward looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. All forward looking statements involve risks and uncertainties, which may be out of our control and may cause actual results to differ materially.

Such risks include changes in economic conditions, changes in the competitive and market landscape, including impacts of global trade discussions and policies, management of growth, timing and magnitude of future contracts, fluctuations of margins and the introduction of new products and technology, and other important factors as noted and detailed in our 10 ks and 10 Q SEC filings. With that, let me highlight some of the financials, starting with the fourth quarter results and the related comparison to fiscal twenty eighteen's fourth quarter. Orders were relatively flat. Sales decreased by 7.5%, resulting from order timing and related conversion to sales to meet the varied needs of the customer. Gross profit as a percentage of net sales was 19.1% as compared to 21.6%.

Gross profit was positively impacted by the decrease of warranty as a percent of sales to 2.2% as compared to 4.4% and negatively impacted by $3,000,000 of costs for adjustments made to business combination contingencies and project sales margins being lower. Operating expenses for the 2019 was $34,700,000 compared to $35,200,000 We had a tax expense of $100,000 for the Q4 loss as we trued up actual income tax estimates to the actual results. For the future for the full fiscal year, orders were up 4.4% as compared to last year and was our third highest order volume year in history. The change in orders reflects the broad range of offerings and highlights our ability to serve the diverse range of needs of our end markets. It also highlights our ability to win orders of varying types and sizes.

For the year, we had fewer projects fewer than five projects valued at $5,000,000 and in past years, we would have multiple orders over $5,000,000 to reach the volumes reported. Commercial orders led the increase primarily due to the increased activity in the spectacular market, including the awards of Barclays Capital Building upgrade and replacements of five other properties based in Times Square, the award of Harris and Paris Hotel updates in Las Vegas and for a number of awards in mall properties and for cruise lines. Demand was strong for digital billboard replacements, new digital billboard installations and other applications for our customers in the out of home third party advertising segment. We were successful from both customers owning national networks to local billboard operators. The High School Park and Recreation orders increase was related to the continued overall strong market demand and an increase in projects for larger video systems.

Larger video system projects can range from 500,000 to $3,000,000 or more, all depend on the school district size and facility needs. Often these customers can generate additional revenue from the advertising or provide additional curriculum for students by designing classes for broadcast or content creation using our displays and control systems. Transportation orders grew in both intelligent transportation systems and tolling applications as state transportation departments and private public partnerships continue to invest in technology to better inform travelers, manage transport systems and collect revenues. We had continued order success throughout most of our live events, sports and entertainment markets, but had lower order volume in professional sports as there were fewer projects in the market as well as for strong competition. In professional sports, we are awarded orders for either upgrades or replacements for the Texas Rangers, Atlanta Braves and the Kansas City Chiefs, to name a few.

We were also awarded a number of projects for minor league baseball stadiums and had continued success on college campus athletics as these customers are looking to increase the fan experience and attract both players and fans to their events. International business unit orders were down due to the general variations and timing of large contract and account based order placements. We work across a number of different customer types and geographies outside The United States and Canada, including transportation and governmental, sports and commercial type of customers. We had continued order success with global and regional out of home advertisers as they build out their digital networks and have had continued success for projects for malls and casinos, sports complexes and transportation stations around the world, including a multimillion dollar transportation type project in Riyadh. On a year to date basis, sales are up in all business units except live events for the same reasons noted for order changes.

On a year to date basis, gross profit declined to 22.9% as compared to last year's 23.9%, primarily due to increased commodity pricing and tariff costs, discrete negative impacts for projects, litigations or other claims during the year relating to the sales conversion and lower sales on the last half of the year to cover primarily fixed costs. Our warranty as a percent of sales improved by 1.2% for the year and primarily as our past issue is out of contractual warranty coverage. On a year to date basis, operating expenses have increased by 1.4%, primarily due to increases in selling expenses. Selling expenses have increased due to personnel related costs and an increased mix of international orders sold through third party representatives, which earn commissions. On a year to date basis, operating loss as a percentage of sales was 0.8% for fiscal twenty nineteen as compared to an operating income as a percentage of sales of 2% in fiscal twenty eighteen.

The effective tax rate for fiscal twenty nineteen was an 80.6% benefit as compared to a 55.2% expense a year earlier. In fiscal twenty nineteen, we recorded onetime benefits totaling $3,300,000 for the release of allowances and reserves and a benefit for the loss. This is contrasted by the cost in fiscal twenty eighteen as we were impacted by significant changes to The U. S. Tax code and the related write downs of deferred tax assets.

We estimate an effective tax rate of approximately 21% for fiscal twenty twenty. But as we have previously discussed, our effective tax rate can fluctuate depending on changes in tax legislation and the actual geographic mix of taxable income. Our cash and marketable security position was at $62,100,000 at the end of the quarter, and we generated $29,500,000 in cash from operations and used 19,500,000 for investments in capital for new production, system capabilities, information system infrastructure and for an acquisition to advance our technology offerings and use $35,600,000 in product development. We expect capital expenditures to be less than $25,000,000 for fiscal year twenty twenty. Our product backlog is at $2.00 $2,000,000 which we expect to convert to sales over the coming two to three quarters.

We expect sales for the 2020 to be up slightly as compared to last year's first quarter. Of course, sales could change pending project bookings and customer schedule changes. And also of note, fiscal twenty twenty is a fifty three week year for us, with the additional week falling in Q1. I'll now turn over the call to Rice Kurttenbach, our Chairman, President and CEO, for a few comments.

Speaker 2

Thank you, Sheila. Good morning, everyone. As Sheila highlighted, our financial results for fiscal twenty nineteen were lower than anticipated, and we had a disappointing second half to the year. Like many other U. S.

Companies, the dynamic and changing global trade environment and strong global economy has impacted our fiscal year costs by at least $6,000,000 The biggest impacts were for aluminum price changes, electronic part cost increases and tariffs on components and commodities. We are not always able to change our prices to match these cost increases. We desire free and fair global trade. And while the global trade environment remains in flux, we are evaluating ways to reduce the impacts. For example, we filed for U.

S. Governmental exemptions, but have not been granted any to date. We continue to evaluate new component suppliers from geographies not currently impacted by high tariff rates. We entered into fixed price contracts for commodities to stabilize price fluctuations, and we are evaluating manufacturing locations that could help reduce the impact. However, many of these countermeasures need additional investments or evaluation to ensure viability and would also impact our ongoing cost structure.

On a more positive note, we were able to capitalize on the strong global economy and growing market in digital space. We focused on winning more orders in fiscal twenty nineteen and were able to achieve the third highest level of order value in our company's history. This is also a testament of our continued leadership in the marketplaces as customers choose Daktronics for our broad range of solutions, the reliability of our products, and our commitment to serve them over the lifetime of their system. During fiscal twenty nineteen, we made continued progress on releasing new offerings to our already competitive and diverse line of solutions, positioning us to better meet our customers' needs, both today and in the future. Some examples of new solutions include a line of narrow pixel pitch displays, new control system features and functions and a continued broadening of offerings in other areas to meet varying customer expectations on cost, quality, reliability and lifetime.

Moving into fiscal twenty twenty, we remain positive on the overall outlook in the business and growth in the industry. With continued strong global economic environment, we predict continued and expanded uses and applications of digital solutions in all business units. Specifically, in International, with our establishment of localized sales and service channels, our sales focus on increasing market share and our current outlook on known opportunities, we expect growth in sport, out of home, spectacular and transportation areas outside The U. S. And Canada.

Looking into the Live Events business, we know this business is lumpy, primarily consisting of larger contracts and can be highly competitive. We expect some growth over the long term. However, we predict a similar sized business as previous years, driven by replacement cycles and new product uses. We expect sustained demand for larger sized orders due to the adoption of video and sporting applications in the high school, park and recreation market. In our commercial business unit, we expect similar overall order volumes as compared to FY 'nineteen, mainly driven by both new and replacement systems for our account based business, expansion of solutions for indoor applications, continued replacement and new investment activity in the out of home segment.

The spectacular segment includes multimillion dollar projects that are discretionary choices by customers, which can cause ups and downs in timing and trends. We are starting the year with strong activity and a good pipeline of projects, but it is difficult to predict closure on this business. The transportation business in The U. S. And Canada remains strong due to continued investment in The U.

S. Transportation systems, the stability in federal funding, and increasing advertising and on premise promotional applications in mass transit facilities. However, the timing of these large projects and a strong FY 'nineteen caused volatility in the comparisons. In all of our markets, we have a natural replacement cycle and strive to serve our customers with their needs today and be there for them for future purchases. We have recently introduced indoor narrow pixel pitch offerings and see a receptive market for these products across our business units.

We continue to foster and build out indirect sales channels. Our range of solutions and global capabilities makes us the industry's most experienced digital display provider. And to support our customers over the long term, we are focused on developing and releasing innovative solutions and services tailored to different applications in each segment. We entered fiscal twenty twenty with a strong backlog and a positive outlook. During fiscal twenty twenty, we are focused on increasing orders as we serve a growing global customer base in commercial, sports and government markets.

We are also focused on maintaining our product development activities and continue to invest in new technologies and advanced manufacturing techniques. Finally, we are focused on carefully managing capacity and spend on our path of long term profitable growth. With that, I would ask the operator to please open the line for any questions.

Speaker 0

Thank you. Our first question comes from Greg Pendy with Sidoti.

Speaker 3

Hey guys, thanks for taking my questions. I guess, just first you mentioned the warranty expenses were, I guess 2.2%. So it's kind of a tick up from 3Q. Do you think the 1.5% to 2% normalized is reasonable going forward? Or is it do you think it will stay around above 2%?

Speaker 1

I think that 2% and under is our goal, and I think we can get there as well. There is some variability from quarter to quarter. But overall, our warranty trends have been in a positive direction.

Speaker 3

Okay. That's helpful. And then just moving on just I guess to the impact from tariffs. Can you just give us a sense of was some

Speaker 1

of

Speaker 3

it are there longer term contracts that are starting to roll off that might give you a little bit of relief in 2020? Or do you think the trend right now if the regulations stay in place is what we should assume for 2020?

Speaker 2

Yes, that's for a volatile situation, Craig. And we continue to evaluate both the situation and different reactions to that. The recent increase in the tariff amounts on these List one, two and three will likely have some impact in this next fiscal year.

Speaker 3

Okay. That's helpful. Thanks a lot.

Speaker 0

Thank you. Our next question comes from Lisa Springer with Singular Research.

Speaker 4

I wanted to ask how much of the fourth quarter gross margin decline was due to the higher commodity costs, if you can just give me kind of a range of what you thought?

Speaker 1

I guess maybe half to 1% range.

Speaker 4

Okay. And then in terms of the orders, projects larger than $5,000,000 was that does that tend to be focused on a couple of the business units? Or is it spread across all of the business units or how do those work?

Speaker 2

Certainly our live events business has this large project aspect as well as our spectaculars. And then in our transportation business, can get orders in that level. Our international business plays in all three of those customer segments. And so we'll see, depending on the year, opportunities in those areas as well.

Speaker 4

Okay. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, thank you for participating in today's question and answer session. I would now like to turn the call back over to Rice Gurtinbach for any closing remarks.

Speaker 2

I appreciate everybody's time and attention this morning. I hope you have a great summer, I look forward to talking to you in August, September. Thank you.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and have a wonderful day.