Raven Industries' CEO Discusses F2Q13 Results - Earnings Call Transcript

Raven Industries, Inc. (RAVN)

F2Q13 Earnings Call

August 21, 2012 10:00 am ET

Executives

Dan Rykhus – President & Chief Executive Officer

Thom Iacarella – Chief Financial Officer

Analysts

Andrea James – Dougherty & Company

Andrew O’Connor – Harris Investments

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Raven Industries’ F2Q 2013 Earnings Conference Call. (Operator instructions.) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Thom Iacarella, Chief Financial Officer. Sir, you may begin.

Thom Iacarella

Thank you, Operator. Joining me on today’s call is Dan Rykhus, Raven’s President and Chief Executive Officer. Before we begin we’d like to remind participants that the information contained in this call is current only as of today, August 21, 2012. The company assumes no obligation to update any statements including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to the Safe Harbor disclaimer in today’s press release. With that, I would now like to introduce Dan for a strategic look at Raven’s F2Q.

Dan Rykhus

Thanks, Thom, and welcome everyone to our first F2Q conference call. I’ll start off with an overview of our performance then talk about each of our divisions in more detail, and finally speak to our expectations going forward. Thom will then provide you with a look at our financials, including a discussion of margins and the balance sheet. After that we’ll open up the call for your questions.

Let’s begin with our F2Q performance. The top line trends we saw in F1Q continued in F2Q with sales rising 13% to $101.7 million from the record $90.3 million in the prior year period. Revenue growth was driven by strength in the Engineered Films and Applied Technology Divisions, along with the addition of Vista Research revenues in Aerostar.

We continue to benefit from favorable market dynamics in agriculture and energy and we’re leveraging these trends to drive revenue gains in Engineered Films and Applied Technology. Sales in these divisions continued at a record pace in F2Q. Even though a difficult federal spending environment existed and negatively impacted Aerostar’s performance we delivered a strong first half. The ability to do so once again highlights Raven’s diversified model.

We remain steadfast in our commitments, helping customers solve great challenges in the areas of hunger, safety, environmental protection, and energy independence. As customer needs evolve and market dynamics vary, we embrace change and have the flexibility to shift our operational focus and innovative drive to succeed as a business.

Our ability to meet these challenges and aggressively expand and pursue new opportunities requires important capital investments. During F2Q we spent $15.5 million to support our ambitious F2013 product and growth strategy. Despite these investments we were still able to deliver a solid performance and Thom will talk more about our research & development and SG&A later.

To fund future growth, increase our dividend each year and maintain a low debt balance sheet we rely on our strong cash flows, a trademark of the Raven model. I’m pleased to report that our cash balance at the end of F2Q stood at $44.1 million. This was up slightly from the end of F1Q and includes capital spending that was up 53% from the prior year.

I’d now like to talk about each of our three divisions, starting with Engineered Films. As you saw in the release, this division’s sales were up 13% and accounted for 36% of total F2Q sales. Net income rose 29%. Both sales and operating income came in at record levels. We continue to see solid, sustainable growth in the energy and ag markets. Energy currently comprises about 40% of our EFD revenues and that’s lower than our recent historical levels which had approached 50%, and we see this as a positive trend.

As our ag and geo membrane businesses continue to grow we expect to move to an even more diversified base. Deliveries of geo membrane films for environmental protection were particularly strong in F2Q, stemming from a reservoir project that we recently completed in Ohio. We anticipate that geo membrane films will be a rising part of our market mix for this division due to the critical need to protect water and environmental resources.

Within Engineered Films we’re committed to further enhancing margins and profitability, and we’re accomplishing this by reducing scrap, improving operating efficiencies and implementing a strong pricing policy. While plant utilization rates continue to rise according to plan, we do have extrusion capacity to further grow this business which we intend to do through R&D investments in new growth opportunities as well as enhancements to our existing product line.

Moving on to Applied Technology, sales grew 13% compared to the same period last year. This was another record and accounted for 39% of total sales. However, operating income was down 2% due to the relatively higher sales of lower margin products and an increased investment in research, marketing, and product development. As you may recall, our F2Q 2012 results were over 100% increase in operating income, which made a very challenging comparable period for the current year F2Q.

As I talked about last quarter, we announced the realignment of our Electronic Systems Division. I’m pleased to report that the realignment is complete. As a result, approximately 75% of Electronics Systems sales went to Aerostar in F2Q and the balance to Applied Technologies. All sales and operating income amounts we talk about on today’s call reflect the realignment for current and prior periods.

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