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Raven Industries Inc  (NASDAQ:RAVN)
Q4 2019 Earnings Conference Call
March 21, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Raven Industries, Inc. Fiscal 2019 Year-End Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Bo Larsen. Sir, you may begin.

Bo Larsen -- Assistant Controller Investor Relations Director

Good morning, and welcome to 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 -- Vice President, Chief Financial Officer & Treasurer

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 continued 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. 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 were awarded a new multi-year $36 million contract with the US 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 continued 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'd like to turn the call over to Dan for his comments on our outlook for fiscal year 2020.

Daniel A. Rykhus -- President & Chief Executive Officer

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 positions each division to thrive in these dynamic conditions, as illustrated by the results achieved over the past several years.

The business model which we've had in place for the last 20 years includes: carefully selecting market segments that offer 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 additions, geographic expansions and acquisitions; consistently investing in productivity improvements; and continually generating strong cash flows and maintain 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 acquisitions. At Raven, our mission to solve great challenges includes developing technology, products and services for our selected market segments, and we are passionate about doing so. As for our long-term outlook, we 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 -- CJS Securities -- Analyst

Okay. I was hoping to just 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...

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

Yeah. Thanks. So...

Craig Bibb -- CJS Securities -- Analyst

-- just much more profitable?

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

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 had a large installation project in the geomembrane side in California that we took a -- I think it was about $1.9 million forecast adjustment to profitability in the third quarter. That project had about $4 million of revenue in the fourth quarter at breakeven margin. So that was impacting the year-over-year comparison as well.

Craig Bibb -- CJS Securities -- Analyst

Okay. And then in your comments in the press release, you seem optimistic somewhat about Engineered Films sales into the energy end-market at oil prices 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 OK? I think you'd need rig count growth to kind of drive EF revenues in energy.

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

I think we're 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've got the best product line in the marketplace today. It's not the cheapest, but it's the best performing product in the marketplace today, easiest to install, and so we're seeing market share gains on top of what we're seeing in the underlying rig count development.

Craig Bibb -- CJS Securities -- Analyst

Okay. Are there other key drivers we should be focused on for Engineered Films in 2019 and 2020?

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

Well, we just completed Line 15 and we're in the final stages of commissioning that line, and that line will be commissioned here in the first quarter of 2020. That's a new production line that gives us wide-width goods to serve the industrial and geomembrane markets. And we put that in to largely address growing demand from our existing customer base for those product lines, and so that will be a driver for us that we're pretty optimistic about for 2020 within films.

Craig Bibb -- CJS Securities -- Analyst

Okay. And then Line 15 will start generating revenues in Q1?

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

Yes.

Craig Bibb -- CJS Securities -- Analyst

I thought when you had the Investor Day, that was really focused on flexitank. Is flexitank sold out still?

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

Yeah, flexitank market grew substantially for us in fiscal year '19. And you are correct that some of the capacity of Line 15 is to provide additional film for the flexitank market in 2020.

Craig Bibb -- CJS Securities -- Analyst

Okay. (multiple speakers)

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

But not just -- it's not just the flexitank line though. It's a versatile line that we can sell into multiple end-markets.

Craig Bibb -- CJS Securities -- Analyst

Okay. You've had -- the Applied Technology was kind of a reversal from last quarter. Farm income has been weak for five years, so that's not new. Is there something else that changed versus Q3?

Daniel A. Rykhus -- President & Chief Executive Officer

Sure. Craig, this is Dan Rykhus. During the fourth quarter, keep in mind that our primary market -- not our only market, but our primary market for ATD is US ag retail market. Around 25% to 30% of our sales are international and the rest is in the US. 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 sink 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 the -- 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'm proud of. The new products that we've 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 the market conditions were difficult in the fourth quarter. But long term, I like where we're positioned in the precision ag market to serve both the ag retailers and the growers in the US, as well as the large enterprise farms across the rest of the world.

Craig Bibb -- CJS Securities -- Analyst

Okay. And you guys have had your expanded presence in Brazil for, I guess, about a year now. Are there any key learnings coming out of that so far?

Daniel A. Rykhus -- President & Chief Executive Officer

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're continuing to be affirmed in our decision to build out the way we have down there.

Craig Bibb -- CJS Securities -- Analyst

All right. I don't want to monopolize the call. If there's someone else in the queue, I can just jump back in the line.

Daniel A. Rykhus -- President & Chief Executive Officer

No, you can keep going, Craig.

Craig Bibb -- CJS Securities -- Analyst

Okay. And so then, with Aerostar, the $36 million contract, I think, has got under way a little bit in Q4, but it's really gets under way in Q1 and it's a multi-year contract? And...

Daniel A. Rykhus -- President & Chief Executive Officer

Correct. So we started delivering radar systems here in the first quarter of 2020.

Craig Bibb -- CJS Securities -- Analyst

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 the launch of Loon in Kenya?

Daniel A. Rykhus -- President & Chief Executive Officer

I would say, the division 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, the $36 million contract is a five-year contract that we're starting to deliver on now. We expect additional follow-on contracts in the stratospheric balloon market with various agencies of the US government. And then obviously, we continue to provide services in stratospheric balloons to Google for Project Loon and that's been consistent.

Craig Bibb -- CJS Securities -- Analyst

All right. And then coming out of the Investor Day, I had the impression -- you guys were talking about a really full pipeline of M&A. I know you did the AgSync deal in Q4, which looks like a great fit on -- add on. But is there -- should we expect a lot more M&A, or where does that stand?

Daniel A. Rykhus -- President & Chief Executive Officer

I would say, yes, you should expect more M&A. We had spent a considerable amount of time this past 12 months to increase the pipeline of opportunities that we're evaluating. We feel very confident in our pipeline and confident that we'll be able to complete additional transactions here in fiscal '20.

Craig Bibb -- CJS Securities -- Analyst

Okay. And one of the other markets you're trying to grow in is Europe. We felt like you're under-represented with European OEMs. Have you made progress there?

Daniel A. Rykhus -- President & Chief Executive Officer

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 -- CJS Securities -- Analyst

Okay. And then the other kind of adjacent opportunity for Applied Tech is to move more from spraying toward planting. Any progress there that you could share with us?

Daniel A. Rykhus -- President & Chief Executive Officer

I would say, 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 -- CJS Securities -- Analyst

Great. And then RS1 is going into tractors and sprayers or mainly sprayers?

Daniel A. Rykhus -- President & Chief Executive Officer

I would say, just before we move on, Craig, on the acquisitions, I support 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 are going to complement that with a lot more activity that Steven is weeding (ph) 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 -- CJS Securities -- Analyst

Okay. And just back to RS1, is that both tractors and sprayers or...

Daniel A. Rykhus -- President & Chief Executive Officer

Correct.

Craig Bibb -- CJS Securities -- Analyst

Okay. And that would be kind of where you have more -- you're gaining some share on tractors, is that fair to look at it that way?

Daniel A. Rykhus -- President & Chief Executive Officer

That is fair to look at it that way.

Craig Bibb -- CJS Securities -- Analyst

Okay. And then CLI...

Daniel A. Rykhus -- President & Chief Executive Officer

It's a market-leading technology -- RS1 is 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 -- CJS Securities -- Analyst

Okay. And I'm assuming the CLI's large project is complete and we don't have to worry about margin impacts going forward.

Daniel A. Rykhus -- President & Chief Executive Officer

The large contract is -- yeah, it was completed in Q4.

Craig Bibb -- CJS Securities -- Analyst

Okay. And then you...

Daniel A. Rykhus -- President & Chief Executive Officer

Oh, go ahead.

Craig Bibb -- CJS Securities -- Analyst

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?

Daniel A. Rykhus -- President & Chief Executive Officer

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 -- CJS Securities -- Analyst

Are there international opportunities? I know -- either for EF or just now that you're a stronger water player?

Daniel A. Rykhus -- President & Chief Executive Officer

Yeah. 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 -- CJS Securities -- Analyst

Okay. That's all I've got. Thank you very much.

Daniel A. Rykhus -- President & Chief Executive Officer

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 -- Assistant Controller Investor Relations Director

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.

Duration: 20 minutes

Call participants:

Bo Larsen -- Assistant Controller Investor Relations Director

Steven Brazones -- Vice President, Chief Financial Officer & Treasurer

Daniel A. Rykhus -- President & Chief Executive Officer

Craig Bibb -- CJS Securities -- Analyst

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