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Daktronics, Inc. (DAKT) Q1 2019 Earnings Conference Call Transcript

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Daktronics Inc (NASDAQ: DAKT)
Q1 2019 Earnings Conference Call
Aug. 21, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2019 First Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, August 21, 2018 and is available on the company's website at www.daktronics.com.

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, Sheila.

Sheila Anderson -- Chief Financial Officer

Thank you, Rachel. Good morning, everyone. Thank you for participating in our first 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 impact of global trade discussions and policies; management of growth; timing and magnitude of future contracts; fluctuations of margins; the introduction of new products and technology; and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.

With that, let me highlight some of the financials. Orders for the first quarter of fiscal 2019 were $160 million as compared to last year's first quarter of $153 million. Most of the order fluctuation this quarter is attributable to the variability of timing in large projects and account-based business and due to increases in video demand in the High School Park and Recreation unit. Transportation's increase in orders was due to continued intelligent Transportation system investments by City and State Department of Transportations. High School Park and Recreation increased due to the higher demand for larger video systems. Commercial's increase was for orders in the Spectacular niche with Out-of-Home and on-premise tape orders similar in comparison to last year. Internationally, the results included orders across multiple segments. Sports, Out-of-Home, and Spectacular and Transportation are the largest segments internationally.

Live Events' orders were lower than last year due to timing of orders, plus large projects in the marketplace during the same time, and one order cancellation of approximately $3 million. As a reminder, we derive a significant portion of our orders and sales from large dollar sized projects, primarily for colleges and professional sports facilities, entertainment venues, transportation market applications, and for spectacular niche and account-based business in the Out-of-Home niche. The timing and amount of these contracts can cause material fluctuations in our orders, sales, and earnings. Awards of large contracts and their timing and amount are difficult to predict, may not be repeatable, and are outside of our control. Our business also fluctuates seasonally based on the sports market and construction cycles and is dependent on various schedules based on the customers' needs.

Sales for the first quarter of fiscal 2019 were $154 million compared to $173 million last year. Net sales increased in the International business unit; decreased in Live Events, Commercial, and Transportation business units; and remained relatively flat in the High School Park and Recreation business unit quarter-over-quarter. We expect sales for the first quarter of fiscal 2019 to be -- we had expected sales for the first quarter of fiscal 2019 to be less than 2018 as we completed a number of NFL stadiums in 2018, but no similar sized projects expected in the first quarter of 2019. International sales increased as a result of the timing of delivery of large projects for the quarter.

Other financial comparables include gross profit as a percent of net sales at 24.8% for the first quarter of fiscal 2019 as compared to 25.8% a year earlier. The decrease in gross profit percentage was primarily due to lower sales volume over relatively fixed infrastructure costs, partly offset by lower warranty charges. Total warranty as a percent of sales decreased to 2.5% as compared to 3% quarter-over-quarter.

Operating expenses for the first quarter of 2019 was $34.2 million compared to $32.9 million for the first quarter of fiscal 2018. The increase in total operating expenses of $1.3 million was primarily attributable to the increase in selling expense, which was due to personnel-related costs and third-party commissions in our International business unit. General and administrative expenses and product design development expenses in total remained relatively flat quarter-over-quarter. Operating income as a percent of sales was 2.6% for the first quarter of fiscal 2019 as compared to an operating income percentage of sales of 6.8% for the first quarter of 2018.

Our overall effective tax benefit was 13.1% compared to an expense of 29.7% last year. The benefit is caused by our expected discrete tax credit to exceed our estimated tax expense. Lower tax expense is anticipated due to an estimated increase in component costs caused by global trade discussions and market demand. We expect our tax benefit to maintain during the year pending any change in our current assumptions. We would expect a normalized effective tax rate of 21%. As we have discussed previously, our effective tax rate can fluctuate depending on our changes in tax legislation and the actual geographic mix of taxable income.

Our cash and marketable securities position was $43.3 million at the end of the quarter. We reported a negative free cash flow of $14.9 million for the first quarter as compared to a negative free cash flow of $8.9 million for the same period in fiscal 2018. The fluctuation in free cash flow as we felt the timing difference in operating assets and liabilities primarily caused by an increase in accounts receivables, contract assets, and inventory, $6.9 million was used for investments in capital and acquisitions and also the cash decrease was caused by lower net income. We expect capital expenditures to be less than $20 million for the fiscal year 2019.

Our product backlog is $175 million going into the second quarter. Much of this backlog is projected to be realized over the coming few quarters. We expect sales for the second quarter of fiscal 2019 to be similar to last year's second quarter. Of course, sales could change pending project bookings and customer schedule changes.

I'll now turn the call over to Reece Kurtenbach, our Chairman, President, and CEO for a few comments.

Reece Kurtenbach -- Chief Executive Officer

Thank you, Sheila. Good morning, everyone. Our first quarter financial results demonstrate that our path to profitable growth will not always be smooth. Our businesses will continue to be lumpy. Looking at the macro view of our business, we are pleased with the continued interest and demand for our products globally. We continue to believe the market is growing and we are positioned to capture this market growth with our comprehensive portfolio of industry-leading solutions. Some highlights of our outlook by business units would be, we expect sustained demand and growth for larger sized orders due to the adoption of video in sporting applications in the High School Park and Recreation market. During the first quarter, we continued to quote and win higher dollar video projects.

In our International business unit, we believe the market's increased adoption of digital systems as well as our focus on increasing market share in our segments of sports, out-of-home, spectacular, and transportation areas will continue our growth outside of the US and Canada. The Transportation business in the US and Canada has growth opportunities due to continued investment in the US transportation systems, the stability in federal funding, and increasing advertising in on-premise promotional application needs in mass transit facilities.

In our Commercial business unit, we see opportunities for growth mainly driven by digital opportunities in the Spectacular segment, both new and replacement systems for our national account business, expansion of solutions for indoor applications, and continued replacement of -- and new investment activity in the billboard segment. We expect Live Events sales to maintain order levels of previous years.

We are focused on bringing innovative solutions to our customers in all segments. For example, the expected use of narrow pixel technology by the customers in our markets is predicted to grow and we continue to release newer generations of this product line to serve this need. Also in the last quarter, we acquired AJT System's technological assets to expand our control system features and offerings. Other trends also contribute to future demand such as sport, commercial, and governmental entities continuing to choose digital applications to support their needs. This demand is driving long-term growth globally in the LED video display industry as well as other digital applications.

Digital systems have a known end-of-life that will drive continued replacement or refurbishment in the installed base. Our range of solutions and global capabilities make us the industry's most experienced digital display provider and we continue to release new or enhanced product lines and comprehensive solutions targeted toward our broad market base as well as specific customer needs. This allows for success in markets during natural ups and downs of each segment. While we are optimistic about our long-term future, various geopolitical, economic, and competitive factors influence order growth. Daktronics competes on the world stage and we are impacted by the uncertainties in today's trade and business environments, both in the sourcing of components to produce our products and in the shipping of these finished goods globally.

As we know, today's global trade environment is very dynamic. The recent actions on trade from various governmental bodies including the US as well as measures being contemplated by these governmental bodies has created volatility in the marketplace. For example, the pricing and availability for commodities such as aluminum has experienced many changes over the last six months. This type of volatility is being seen in other componentry that we use in our products as well -- as different governments consider and act and the markets react.

Supply chains are intricate and intertwined making the ultimate impact of all these activities on Daktronics difficult to predict. For instance, while some of the components we use are directly named and proposed or [ph] in active tariff changes, we are seeing volatility in pricing and availability of other components as well. We have been closely monitoring these developments and responding as needed to minimize the impact in the short term as well as the ongoing business of Daktronics and we will continue to keep a close watch on the trade situation over the coming months. It is our belief that we will come through this challenging time in a better position to compete on the global stage in our growing markets.

So for fiscal 2019, we expect to invest at similar levels as last year in our development area. In the coming months, we will continue to see the results of this investment with the expansion of our narrow pixel picture product lines and new releases of our control systems. We will also continue development for modules using chip-on-board technology. While these efforts will increase development expenses as a percent of sales in the near term, we believe this investment is appropriate to drive forward new solutions to meet customer needs and to expand our global market share. Rollouts of products, including display and control solutions, are expected throughout the coming year.

With that, I would ask the operator to please open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Greg Pendy of Sidoti. Your line is now open.

Greg Pendy -- Sidoti -- Analyst

Hey, guys. Thanks for taking my questions. My first question, I just wanted to dig into you called out the warranty expenses that came down to 2.5%. Is that something that we should think about as winding down going forward, where -- and kind of where are we at in that? And then just second, I apologize I might have missed you on the tax. You're still sticking with the 21% tax rate, is that correct?

Sheila Anderson -- Chief Financial Officer

So for the tax rate, we are expecting a benefit for the fiscal year; but overall our rate would be at 21%.

Greg Pendy -- Sidoti -- Analyst

Okay.

Sheila Anderson -- Chief Financial Officer

For the year, we're expecting a benefit.

Greg Pendy -- Sidoti -- Analyst

Okay.

Reece Kurtenbach -- Chief Executive Officer

And then for the warranty, Greg, we -- our internal goal is to get the warranty cost down below 2% and we've been striving for that in our investment in quality and reliability. That can vary based on unexpected things, but we continue to try to control our warranty expense.

Greg Pendy -- Sidoti -- Analyst

But just so that I understand, the outsized warranty expenses that we've seen was -- over the past couple of quarters, that's primarily still related to the 2016 issue, I take it which is starting to wind down?

Reece Kurtenbach -- Chief Executive Officer

Yes, we believe so.

Greg Pendy -- Sidoti -- Analyst

Okay. And then just one final one, just kind of on the overall -- it was very helpful what you gave us on the the sourcing of components and the input cost. How should we be thinking about the pricing environment and the pass-through environment right now just from what you're seeing?

Reece Kurtenbach -- Chief Executive Officer

Yes. The course of pricing environment globally can be hard to predict, but we believe that as we continue to drive cost down, we won't see a dramatic price increase, but we may not see prices fall as maybe we once would have predicted.

Greg Pendy -- Sidoti -- Analyst

Okay. That's helpful. Thanks a lot.

Reece Kurtenbach -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Lisa Springer with Singular Research. Your line is open.

Lisa Springer -- Singular Research -- Analyst

Good morning. If I heard you correctly, you mentioned that there was a $3 million order that was canceled during the quarter. Could you give us a little more color on that and if that order is something we may see turn up in subsequent quarters?

Reece Kurtenbach -- Chief Executive Officer

Yes. It's highly unusual for us to have an order that is backed out of our backlog and we don't think we'll see that in future quarters and we don't think we'll see a repeat of this in the near term for sure.

Lisa Springer -- Singular Research -- Analyst

You see this as a postponement and/or something that is not going to happen this year at all?

Reece Kurtenbach -- Chief Executive Officer

It's not going to happen this year at all.

Lisa Springer -- Singular Research -- Analyst

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back to Reece Kurtenbach for any closing remarks.

Reece Kurtenbach -- Chief Executive Officer

Thank you, operator, and thank everyone for your participation in today's call. As a part for our Annual Shareholders Meeting on September 5, we are celebrating our 50 years in business that evening. So if you're in the Brookings area, you're welcome to stop by. And if you haven't yet, if you could fill out your Proxy Filing, that would be very helpful. Thank you, everyone, and we'll see you in a quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may now disconnect. Everyone, have a great day.

Duration: 17 minutes

Call participants:

Sheila Anderson -- Chief Financial Officer

Reece Kurtenbach -- Chief Executive Officer

Greg Pendy -- Sidoti -- Analyst

Lisa Springer -- Singular Research -- Analyst

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