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Raven Industries, Inc. (NASDAQ:RAVN)

F3Q13 Earnings Conference Call

November 20, 2012 10:00 AM ET

Executives

Thomas Iacarella - Vice President & Chief Financial Officer

Daniel Rykhus - President and Chief Executive Officer

Analysts

Andrea James - Dougherty & Company

Andrew O’Connor - BMO Asset Management

Rob Crystal - Goldman Sachs

Don Andersen - Red Pine Investments

Alan Brochstein - AB Analytical Services

Bes Louis [ph] - Camco Investors

John Rankin - Boranco Management LLC

Operator

Good day, ladies and gentlemen, and welcome to the Raven Industries, Inc. Fiscal 2013 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions to follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, Mr. Tom Iacarella, Chief Financial Officer. Sir, you may begin.

Thomas Iacarella

Thank you, operator. Joining me on today’s call is Dan Rykhus, Raven’s President and Chief Executive Officer. Before we begin we would like to remind participants that the information contained in this call is current only as of today, November 20, 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 strategic look at Raven’s third quarter.

Daniel Rykhus

Thanks, Tom, and welcome everyone to our fiscal third quarter conference call. I will 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. Tom will then provide you with a look at our financials, including a discussion of margins and the balance sheet, and after that we will open up the call for your questions.

So, let’s begin with our performance for the third quarter. Sales increased 4% to $97 million from $93.3 million in the prior year period. Growth resulted from strength in the Applied Technology Division, along with the addition of Vista Research revenues in the Aerostar Division. Engineered Films sales declined slightly from the record levels in the year-ago third quarter. While we faced some headwind during the quarter there were encouraging developments within all of our divisions. We continue to benefit from favorable market dynamics in agriculture and this generated strong Applied Technology sales. Within Aerostar, Vista Research revenues helped to moderate Aerostar’s volatility. Engineered Films saw improved demand for enclosure films used in commercial construction markets, offsetting a decline in energy market sales. Through our diversified business model, we are once again able to deliver a topline gain.

As a company, Raven is well positioned for growth. We are financially strong with no debt and we have fantastic long-term prospects. One of the hallmarks of our proven business model is the ongoing investment in our business development pipeline. The quality of our pipeline is very strong and encouraging even though we faced other uncertainties in the marketplace. It’s this strength that ensures our competitiveness and gives us the ability to grow our business and fulfill our purpose, which is to solve great challenges. Our ability to solve great challenges in the areas of hunger, safety, environmental protection, and energy independence, and aggressively expand and pursue new opportunities requires important capital investments.

During the third quarter, we invested $9.5 million in research and development and capital expenditures to support our 2013 product and growth strategy. Despite these investments we were still able to deliver solid performance. Tom will talk more about R&D and SG&A later.

To obtain our financial goal of 10% to 15% annual earnings growth, annual dividend growth, and delivering above average returns on invested capital, we rely on our strong cash flows, a trademark of the Raven model. I am pleased to report that our cash balance at the end of the third quarter stood at $48.1 million. This rose $4 million from the end of the second quarter. We have been able to raise our dividend 17% on a per share basis this year, invest in our business model and increase operating cash flows both for the quarter and on a year-to-date basis.

I would now like to talk about each of our three divisions starting with Applied Technology. Sales in Applied Technology grew 12% in the third and operating income rose 6%. The bottom-line gain stemmed from sales growth and was achieved while aggressively investing in research, marketing and product development. Both sales and operating income set third-quarter records.

We continue to see rising demand for our precision agricultural solutions, particularly Raven’s advanced guided steering systems that enhance crop yields and reduce operating costs. Emerging and established markets benefit from the precision and resulting cost savings we deliver with this technology, as well as the ability to maximize yields, which is significant in challenging conditions, including drought.

International sales remained strong in the third fiscal quarter, particularly in Brazil, Canada and South Africa.

Let me touch on the drought briefly. The drought in the US has created some uncertainty in the marketplace, but overall, any sluggishness has been substantially offset by higher commodity prices, resulting in strong farm income projection for the full year. Through this fall season we continue to see strong demand from our OEMs, as we said previously, a single year drought will be mitigated by prior year successes and a strong crop insurance system. A multi-year drought in the US would begin to have a more dramatic impact on our business. It’s important to note, our international business acts as a counterbalance to any drought we may experience in the US. When conditions are challenging domestically, we are often seeing success and growth overseas.

Moving to our progress with OEMs. We continue to cultivate and deepen relationships with key OEM partners which drove our 36% growth in OEM revenues over the same period last year. These partners expand our market share and extend Raven technology to a broader range of customers. We continue to manage and maintain an effective balance of OEMs and after-market revenues in ATD.

On the product development front, we introduced our Envizio Pro XL field computer during the third quarter. Based on our field computer platform, the new device features and extra-large 10.4" color touchscreen display. The larger display greatly enhances the user experience with products like Raven’s OmniRow advanced planter control system. The Envizio Pro XL is just one example of our commitment to product development. Our new product initiatives are done in concert with our OEM and aftermarket channel partners, and this is part of what supports the continuing success in Applied Technology.

Moving on to our Engineered Films. Sales declined 5% for the third quarter from last year’s record level. With operating income down 15%. While the energy and Ag markets were weaker, deliveries of construction films increased. We continue to believe that geomembrane films will be a rising part of our market mix for this division, due to the critical need to protect water and other environmental resources. With geomembrane films, we completed a significant reservoir project in Ohio in the second quarter, and in the third quarter we replaced that business with several new projects utilizing our geomembrane films. We have also been working on a research and development collaboration with Arizona State University related to biofuels for the past two years. That project has led to three commercial opportunities that we are actively engaged in to help grow biofuels on large scales. These business development projects are delivering profitable revenues today and are a good example of our business model at work.

Another good example is our recent introduction of VaporBlock G, an innovative under concrete slab vapor barrier produced with a layer of post-consumer recycled content. VaporBlock G is the first vapor barrier on the market to exceed ASTM Class A and qualify under lead standards for one point. We work closely with our construction customers and building design professionals to meet the need for a recycled product that contributes to higher project lead points. Our challenge was to formulate a product that it can perform to the rigorous standards of our premium vapor block line, and still incorporate post-consumer recycled resins. VaporBlock G has exceeded our expectations by surpassing all performance criteria and providing a sustainable green product to the industry.

A brief aside here, Raven is fully committed to developing innovative construction materials by engineering sustainable and value added products that conform to the latest building practices. And for the company as a whole, we recently embarked on a strategic and substantial commitment to sustainable business practices. We are doing this for a number of reasons recognizing that there are finite amount of certain natural resources in the world, and it just makes good business sense for us in the near and long term. Over the coming months we are launching multiple short, mid, and long-term projects that will advance our sustainability efforts. We are not perfect, but we are dedicated to continuous improvement in this area.

One current project within films that illustrates our commitment to more sustainable business practices is our investment in our reclaim operation to recycle and reuse our waste film generated within our operations. This will come online in the fourth quarter and we will reclaim over 90% of our waste films. This will improve our competitiveness on certain products and keep this material out of the landfill and in productive use.

Let’s look at Aerostar now. Sales in the third quarter increased 9% with the top line gains being driven by the addition of $3.7 million of revenue from Vista Research. Sales of high altitude research balloons also increased. Aerostat sales in electronics manufacturing services revenues declined during the quarter, however operating income rose 14% from a year earlier. Despite a lack of aerostat sales in the third quarter, we were able to deliver year-over-year growth. This affirms our strategy of acquiring business with technology and products that occupy a unique market position, and Vista Research does just that.

Vista’s smart sensing radar systems are employed in a host of advanced detection and tracking applications, including a wide-area surveillance for border patrol and the military. Through Vista, we are continuing to work on a number of initiatives that will broaden our customer base. We see significant future potential with Vista both here and overseas as we work to sell in the new markets.

Throughout Aerostar we are building a strong pipeline of high quality business development pursuits. This includes new programs within EMS to the secure communications market and multiple opportunities for aerostat systems for defense, government agencies, and commercial applications in and outside our country. We are also actively working many new and interesting opportunities for the high-altitude balloons we design and manufacture, as well as some new and very unique selling products for our military. While this pipeline is very strong and will deliver important new business, we are also facing declines in our EMS work for the avionics industry, as well as some uncertainty with the future build levels for our existing parachute manufacturing business. We continue to develop opportunities to add stabilities and mitigate volatility in our Aerostar business, and ultimately drive longer-term growth with breakout potential. That said, we continue to manage the business responsibly, carefully controlling discretionary spending, staffing levels, and R&D.

One last time on Aerostar before I move to our outlook. Recently we confirmed that the high-altitude research balloons used by Austrian Felix Baumgartner in his record-setting Red Bull Stratos mission, were in fact manufactured by Raven’s Aerostar Division. Throughout our company’s 56-year history, we have been furthering the science of these amazing balloons. We understand the level of technology, dedication and effort that was needed to return man to the stratosphere in this program. We are impressed with the professionalism and concern for safety displayed by the entire Stratos team.

Looking ahead to the fourth quarter, we continue to see positive trends in Applied Technology and expect to have a good quarter in ATD. For the near-term, Aerostar will be impacted by the ongoing lack of aerostat orders, while building the broader base of revenues. Within Engineered Films, we anticipate a challenging environment resulting from the general economic conditions and federal government challenges, as well as tough year-over-year comparisons. Given the company's year-to-date performance and a mixed fourth-quarter outlook, reaching our long-term earnings growth target of 10% to 15% is unlikely in the current year. We are committed to our strategy to grow the business, but for this fiscal year we will likely be at a slower pace in the single digits. While our growth rate is not where we wanted to be, we still expect a record year for sales and earnings. We are diligently managing and investing in the business to achieve our 10% to 15% growth target over the long term and expect to continue to meet that goal over the long term given the strength of our business model.

You can also expect to see us continue to build and nurture our business development pipeline. This will take the form of new product developments for our existing markets and key adjacent market expansions; acquisitions will support our overall product and growth strategy; capital expansion to address capacity and capability; and collaboration efforts with key partners throughout our markets where that makes the most sense.

Finally, our financial performance and attractive balance sheet will facilitate our growth plan, while also supporting our growth in the annual dividends. Last month, our performance was recognized by Forbes Magazine. For the 7th straight year, we were named again to the Forbes Top 100 Best Small Companies in America List.

Now, I will turn the call over to Tom, and after that, we will be glad to take your questions.

Thomas Iacarella

Thanks Dan. Hopefully, all of you have had a chance to review this morning’s release. I will discuss our balance sheet changes and operating margins in more depth, and then as Dan said, we will take questions.

First, the balance sheet, we ended the quarter with $48 million in cash and investments. That’s up $3.9 million from last October and $22.2 million more than our January 31 balance. We have been able to sustain our strong cash position, despite investments in production capacity, research and development and Vista Research

We spent $12 million to purchase Vista, then paid off our short-term borrowings immediately after closing in January. We have nine months operating cash flows of $58 million compared to $37.7 million last year. The $20 million increase was driven by improved working capital utilization relative to sales growth and higher nine months income.

Inventories at quarter-end were essentially unchanged from previous October. Inventory turns have been pretty steady and levels did decline as the quarter came to a close. Accounts receivable rose $4.8 million over last October, DSO has moved up modestly, and we have seen some slowdown in payments, so we are monitoring some specific accounts.

Our balance sheet ratio at the end of the third quarter was 4.05 versus 4.07 last year. The balance sheet and cash flow from operations that provide a strong source for investment funding and dividend growth.

Turning now to capital spending, as Dan said, we continue our commitment to invest in our businesses, and to that end, capital expenditures were up slightly for the nine-month period. Year-to-date, we have invested in expanding our Engineered Films extrusion and conversion capacity, along with our ability to reprocess faster growth.

We have also made significant progress on our corporate facilities, renovation project and the Raven innovation campus in Sioux Falls area. Additionally, we have established steadily our research center for Applied Technology in Austin, Texas. This facility provides support for growth in engineering and technology enhancements.

Looking at SG&A and R&D, we have said before that we must build out our infrastructure to operate as a larger company. Therefore, investing in our research and development capabilities, corporate finance, information technology and human resource development remains a priority. Spending in all of these areas has, as expected, increased over the prior year, but the pace of growth is moderated somewhat from the first half of the year. Substantially, all the growth in R&D in the third quarter was in Applied Technology and Engineered Films.

From a corporate standpoint, we are improving the level of support our operating divisions require to successfully drive their initiatives, and we continue to judiciously bring on newer talent. Examples include resources to move us forward on key competitive developments, identify and integrate acquisitions, and improve service level of our information technology, while meeting the increasing compliance burden coming from new regulations.

Raven is committed to investing for sustainable long-term growth. But given the more modest results, we are now seeing, we are adjusting our plans, this with prudent course of action. We continue to support growth opportunities, while at the same time mitigating the impact on our shorter-term operating results.

Now, I would like to talk about operating margins. Remember, we repositioned Electronic Systems assets and people during the second quarter. In the third quarter, segment information reflects that realignment. Within Applied Technology, margins for the third quarter were 31.1% versus 32.7% a year ago. While we held comparable gross profit rates relatively flat, spending levels reflected our higher investments in engineering sales and research and development. Bad debt expense also partially offset the impact of higher sales on operating results.

Engineered Films operating margins were 14.2% compared with 16.0% in the prior-year third quarter. Product development costs rose from the prior-year third quarter and accounted to most of the operating margin change. We continue to benefit from improved plant productivity and operating efficiency. Compared to last year, gross profit margins of 19.1% held in the face of lower demand for Films, selling price pressure and the negative impact of our fixed cost base on more revenue levels. In the third quarter, we extruded slightly over 17 million pounds of film. That’s down about 6% from last year as we look to keep inventory in line with lower sales levels.

Aerostar margins for the quarter increased to 14.5%, up from 13.2% last year. Contributing to the gain was Vista’s new contract along with favorable mix of EMS business. As you may recall in the first quarter of the year, Vista was sustaining operating losses. We can’t from time-to-time have a stronger quarter like this one, especially if we have significant sales of proprietary products by radar processing units and aerostats. We believe the nine-month operating margin rate of 9.6% is more representative of Aerostar’s prospects for the foreseeable future.

Looking at the company’s overall results, sales rose 4%, a third quarter record for the company. We also saw a 5% decline in profits. Net income return on sales was 11.2% for the quarter compared to 12.2% last year. The profit impact of higher sales was offset by increased spending from investments and research and development, and other new business initiatives. We continue to constrain new spending as we finish the year, but will aggressively move our growth initiatives forward. We fully intend to capitalize on the opportunities we see in our selective markets.

Taking advantage of our opportunities has delivered outstanding returns. On trailing four-quarter basis, Raven’s return on sales has been 12.7%. Our return on average assets was over 21%, and we delivered a return on shareholders’ equity in excess of 30%. The Raven business model continues to invest in a pipeline of opportunities that we believe will continue to benefit our shareholders over the long run.

With that, I would like to turn the call back to the operator, so we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Andrea James from Dougherty & Company. Your line is open. Please go ahead.

Andrea James - Dougherty & Company

Hi, thank you for taking my question. So, Dan and Tom, what’s been sort of the biggest surprise for you this year, relative to sort of the growth guidance that you have tried to stick to 10% to 15%? I guess what sort of surprised as we head into Q4?

Daniel Rykhus

I think there has been a combination of things, Andrea, that got us to the performance, and we have touched on a lot of that in the comments already. But certainly, the overall demand in Aerostar (inaudible) and we had hoped and expected that we would start to see a little bit of additional demand on the aerostat side by now that hasn’t materialized. So, that would be probably the largest factor. The other factor would be just a little bit of softening in the energy market that’s impacting your Films division. So, that would probably yes, in Films, we did have some Ag demand, softening as a result from the drought and certainly less green was produced in the Mid-West and that resulted in less need for green covers, which held that down a little bit. And so, those would be the things that I would attribute where we are at today.

Andrea James - Dougherty & Company

Okay. Thank you. And then my one follow-up, and then I will hop back in the queue to be polite. I guess how are you thinking about revenue and earnings growth next year, just given this deceleration, and if you know, you are sort of sticking to this long-term 10% to 15%, what kind of gets you excited or gets you there, or gets you to that number?

Thomas Iacarella

We outlined in the comments already. Our business development pipeline is fundamental part of our business model. And you have heard me talk about our business model that we serve market niches that we think have great growth prospects, and we stick to those, we invest in the business development pipeline. So, we have prospects that will come from the Vista Research acquisition that we think are going to make a good contribution next year. We have just a variety opportunities in Aerostar that we believe are going to deliver some strong opportunities next year in EMS, in lighter-than-air applications, and this is a little difficult, because we have protect the customers and partners that we have been working with in building this pipeline. But I feel very good about our prospects for Aerostar next year.

In Applied Technology division, we think they are going to continue to have a good year next year. And I have already talked about the Films opportunities with the green films and the sustainable films that we are introducing. Our continued work at margin enhancement in films I think will continue to pay dividends for us. So, I am actually pretty bullish about our year next year, and I think what I said in the comments hold true to – we think we are going to continue to meet our long-term earnings growth expectations, and I feel that way, because I can see the pipeline that we have invested in over the last couple of years, I see it maturing. And yes, that gives me confidence.

Operator

Thank you. Our next question is from the line of Andrew O’Connor from BMO Asset Management. Your line is open. Please go ahead.

Andrew O’Connor - BMO Asset Management

Good morning Dan, good morning Tom.

Daniel Rykhus

Good morning.

Andrew O’Connor - BMO Asset Management

With interest rates so low, are there any thoughts about a modest use of debt to finance a portion of Raven’s growth CapEx or perhaps a strategic use of debt again to finance a portion of Raven’s growth CapEx? Thanks so much.

Daniel Rykhus

Tom can talk about the use of extra CapEx. What we have said is that if there is an acquisition that we were pursuing that really fit our product strategy for one of the three divisions and it was larger than what we have done in the past, we wouldn’t shy away from using some debt. So, we are not averse to debt completely. We do like to keep our balance sheet strong in our view, but Tom, why don’t you go ahead and talk to the use of debt for CapEx and maybe on an overall basis?

Thomas Iacarella

Thank you, Dan. The use of debt is something, as Dan said, we are not averse to, we just have a business model that generates tremendous amount of operating cash flows and have been able to demonstrate that over the years. So, in terms of creating a funding that we need internally to fund our organic growth, that’s been a pretty consistent cadence over the years and have been pretty effective for us. I think if we found an opportunity to move the company forward in some ways, as Dan said, through an acquisition or found some other opportunities to take on some debt, we would certainly take a hard look at it.

Andrew O’Connor - BMO Asset Management

Got you. And then, Dan, is it possible to guesstimate what precision Ag sales might have been without the U.S. drought? And if you can take a stab at quantifying this, could you speak to it on a qualitative basis? Thanks again.

Daniel Rykhus

Our OEM demand was strong, right on through the drought, and that’s a significant part of our business. There might have been a little hesitancy through our aftermarket demand, which is over half of our business that could have been 5% to 10% pull-back on demand as a result of just uncertainty, I don’t think it’s a fundamental shift in the marketplace, I think it’s a timing issue. And that would be a guess, and that’s all it is, a guess. It’s very, very hard to quantify that.

Operator

Thank you. Our next question is from the line of Rob Crystal from Goldman Sachs. Your line is open. Please go ahead.

Rob Crystal - Goldman Sachs

Hi Dan and Tom, I had two questions. One was on the bad debt expense, can you quantify how much higher than normal that was? And then, secondarily on the energy slowdown, is that primarily natural gas-related and can you refresh us how much your business goes gas versus oil? Thanks.

Daniel Rykhus

Sure. Tom, you want to go ahead on the first one?

Thomas Iacarella

Yes, the bad debt expense was about $300,000 beyond what we have typically been running, but we have been running at a very, very low level. We haven’t had any significant write-offs for several years. So, that’s the pace with that, that was in the quarter.

Rob Crystal - Goldman Sachs

Okay, great. So, nothing too significant?

Thomas Iacarella

No.

Rob Crystal - Goldman Sachs

Okay.

Thomas Iacarella

So, rig counts are down about 12%, I believe over the prior year, and that hurts a plan-based rig count that is – the majority of our business is related to oil, but the natural gas slowdown has been pretty substantial. So, that’s about as much color as I can give on the breakdown.

Rob Crystal - Goldman Sachs

Okay. That’s great. Thanks so much. I will jump back in the queue. Thanks.

Operator

Thank you. Our next question is from the line of Don Andersen from Red Pine Investments. Your line is open. Please go ahead.

Don Andersen - Red Pine Investments

Good morning. I just wanted to ask a question about your EFD division. I noticed over the last many years, you had very good growth overall, but it has been quite, not so much cyclical, but large increases and small increases, and then this year, went from 37% up to 5% down. And in terms of, I know you have already talked about opportunities, but do you see like you are seeing Aerostar and you have mentioned this in past report, do you see any sizeable or breakout opportunities in the Engineered Films division in light of the fact that you have got such really good strong capability there?

Daniel Rykhus

I guess it depends on how you define breakout, but our Films growth is, we like to believe it will be stable, steady growth business for us, and it is a capital-intensive business and capacity-driven business. So, our ability to grow in a breakout fashion will always be tempered by our ability to actually produce the pounds. We think we can grow the business, 15%, 20%, 25% in any given year, and that’s on the top line, we think that we can continue to see strong margins out of that business. We have demonstrated our ability to improve operating efficiencies and to buy Raven rights and price our products appropriately to manage strong business. And certainly, when we look at growth, we look at bottom line growth, operating income growth for that division. So, those are the ways that we look at, how we can grow the operation. We do have a cadence of ongoing capacity and capability investment, which consumes a large part of our overall corporate capital investment strategy, and we do that in order to continue to refine capabilities and product offerings that we can deliver to our five key markets and have that ongoing capacity available to support our growth.

Don Andersen - Red Pine Investments

Thanks. That’s a great answer. Could you just give me correctly the five markets you are talking about?

Daniel Rykhus

Certainly. We serve the agriculture market, construction, what we call energy, geomembranes and then industrial, which is kind of a mixture of different applications.

Operator

Thank you. Our next question is from the line of Alan Brochstein from AB Analytical Services. Your line is open. Please go ahead.

Alan Brochstein - AB Analytical Services

Okay. Not to beat the dead horse, Dan, on the bad debt, doesn’t sound like it’s a big problem, but I am just curious, maybe bigger picture, the shift to international, does that impact the DSO rise, and is that maybe where some of these credit concerns come up?

Daniel Rykhus

Tom, go ahead and take that.

Thomas Iacarella

While there is no question that when you do ship internationally that those has some impact on the risk profile of your accounts receivable, and certainly that has had some impact on the bad debt situation. And it’s just a matter of managing those risks and keeping on top of it. Again, the number was not used, but it’ a little bit of a change for us and something different, something that we haven’t had in the past.

Operator

Thank you. Our next question comes from the line of Bes Louis [ph] from Camco Investors. Your line is open. Please go ahead.

Bes Louis - Camco Investors

Good morning Dan and Tom.

Daniel Rykhus

Good morning.

Bes Louis - Camco Investors

I wanted to, I am sorry if I missed this, but in terms of your Applied Technology, there you saw a good growth on the top line. Could you point out international versus domestic?

Daniel Rykhus

Tom, did you – I don’t believe we provided that this quarter. Did you, Tom?

Thomas Iacarella

No, it’s not in the numbers that we have disclosed. It’s grown at a little slower pace than what we had seen in some of the prior quarters, probably in that little less than 10% for the quarter in Applied Technology.

Bes Louis - Camco Investors

The domestic pieces?

Thomas Iacarella

Pardon me?

Bes Louis - Camco Investors

Domestic has grown less than 10%?

Thomas Iacarella

No, the foreign group investment, just a little bit less than 10%.

Bes Louis - Camco Investors

Okay, because in prior quarters, the international portion of that has grown at a much faster rate. Is that correct?

Thomas Iacarella

It’s varied, it’s been faster, I think probably for the last few years. I think over the course of this year at least, for the last few quarters, I think it’s grown lot of pace. That’s been pretty consistent with the overall growth.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up from the line of Andrea James from Dougherty & Company. Your line is open. Please go ahead.

Andrea James - Dougherty & Company

I thank you for taking my follow-up. I have just two. The first on Engineering Films. I feel like we are seeing some emerging players in this space in the energy market. And I was wondering what you think about your market share there and do you feel like it’s stable? And then on the geomembrane side, would you say that you were taking market share there? Thank you.

Daniel Rykhus

I think we have long – we have a lot of customers that have been with us for a long, long time. So, we have some pretty deep relationship built there into each of our market segments. So, I feel like we are in a strong position in ag and energy and instruction, the geomembrane business is really more of an emerging market. And we have good partners that we have developed over the last two to five years in that market space that we are winning some business with.

As far as new competitors we take, our strategy is largely built on high value, high performance films, and we have some competition there, but a lot of the competition that we face really takes a different approach in terms of the performance of films that they provide the marketplace. So, our challenge is to continue that out innovate, provide high service and high quality solutions, and we think that that’s going to continue to be a winning formula for the markets that we serve.

There are certainly going to be focus that get share that we don’t go after. But we are okay with that, we think our strategy will serve us well and provide the growth and hold up the margins that come to expect for that business. As far as the geomembranes, I think a lot of these are bid jobs. So, when we win it, we take it away from somebody else. So, I suppose you could say that’s in market share increase for us in the geomembrane space.

Andrea James - Dougherty & Company

Okay. Thank you. And then on the Applied Technology, do you think you are done scaling up the business there or do you feel like you have right-sized your operating staff and support, or do you still have some more to go?

Daniel Rykhus

In ATD?

Andrea James - Dougherty & Company

Yes.

Daniel Rykhus

The way you grow ATD is we need to continue to develop new products. So, we have an ongoing cadence of identifying new technology that we think is going to be important in the precision ag space and developing and bringing on engineering product development, product management, marketing talent to help us execute on that. So, we have an ongoing need for additional talent. In terms of physical spaces we are in good shape now for quite a while, we have made some investments in our buildings and we are good shape that way. Now we are going to continue to have to invest in staffing levels to support our growth expectations there. And we will continue to look for acquisitions that can bring on technology like we did Ranchview 3 years ago and that delivered clean shot. We are going to continue to look for technology place that we have done in the past that can really enhance our overall product line.

Operator

Thank you. Our next question is from the line of John Rankin from Boranco Management LLC. Your line is open, please go ahead.

John Rankin - Boranco Management LLC

Single-digit growth, is that for this fiscal year or next fiscal year? And if so, could you tell me – are you talking middle single-digits or what are your thoughts?

Daniel Rykhus

I am sorry, John. I didn’t get the first half of your sentence, but I think what you asked is, is the single digit growth for this year’s projection or for next year? Is that correct?

John Rankin - Boranco Management LLC

That’s exactly right. And then, is it middle single-digit growth or could you venture a guess on that?

Daniel Rykhus

Okay. Well, I will answer the first one and it’s definitely for this year is what the commentary is around. And as far as, narrowing that down, I am really not going to go there. It’s a challenging fourth quarter and it would really be an interesting finish for the year because ATD has the potential to have a very strong fourth quarter. But the other two divisions have some uncertainties. So, I am comfortable with our statements that it will be in the single digits and I am not able to give you any more specific guidance beyond that.

John Rankin - Boranco Management LLC

Okay. Can I get just a little more color on income statement elimination in the balance sheet, is that going to continue, maybe a little more from that?

Daniel Rykhus

Tom, I will let you handle that one.

Thomas Iacarella

Sure. The eliminating entries that we have on our income statement rollup of the segments, our primarily sales from the Aerostar’s EMS products to ATD. So, they do some self-assemblies and some other work for ATD, just like they would do to an outside customer. And of course, we can’t recognize those sales twice, so we have to eliminate those in our consolidation process. And that’s something that will continue on, as long as they continue to pursue that way.

Daniel Rykhus

John, I don’t know if you are still on, but I do want to clarify also that for next year we expect to definitely grow the business at least hitting our 10% to 15% long term earnings growth expectations. We manage the business towards that end and we believe that we will have opportunities to meet that long term growth expectation next year.

Operator

Thank you. Our next question is a follow-up from the line of Alan Brochstein from AB Analytical Services. Your line is open, please go ahead.

Alan Brochstein - AB Analytical Services

Two of the last several years you guys have paid a special dividend, have you ruled that out this year, or is it under consideration?

Daniel Rykhus

Operator, I am not getting the half of the first sentence here, so, Allen could you repeat that please?

Alan Brochstein - AB Analytical Services

Yes, I am sorry, Dan. In two of the past 4 years you guys have paid us special dividend, I was just wondering if you have ruled it out this year, or is it under consideration?

Daniel Rykhus

That’s a Board decision of course. I would not say it’s ruled out, but we as I have said throughout the year we have plenty of opportunities to invest in high quality business development activities for the companies and we really believe in our growth prospects for next year and the following year, and we believe that those are prudent investments to help grow earnings in the further. So, I am not ruling it out, but I wouldn’t give it a high probability.

Alan Brochstein - AB Analytical Services

Okay, thanks. And then as a follow-up, last time you told us a little bit more about your OEM business, I think it was new information regarding Monsanto as being a partner. It’s growing very well, can you give us a little bit more information just about your OEM partners in general, and kind of what you guys – why you think they are partnering with you?

Daniel Rykhus

Sure. Well, we have had long term relationships with the big three agricultural OEMs for well, in the way of Agco in case for decades, and with Deere we have been developing a new relationship over the last 3 or 4 years to bring technology to them that fills the gap that they are not developing on their own. But beyond that we have I believe 30 OEM relationships. So, we do a lot of business with smaller agricultural companies that you may not have heard of but domestically and internationally. And what we do is we develop control systems that help to make their equipment more efficient and we fill gaps that they are not interested and not able to be leading edge on, and once we fill the relationships with an OEM we are pretty good at maintaining that for the long term. And knowing that we need to commit resources to understand what their needs are and their strategies are and develop technology that help them differentiate themselves. So the OEM business for us has grown to be a substantial percentage of our overall business within ATD, I will tell you, it’s over 40% of our business today. So, it’s good work for us and we enjoy it and I think our customers believe that we add good value to what they are trying to accomplish.

Operator

Thank you. I am showing no additional questions in queue. I would like to turn the conference back over to Dan Rykhus for any closing remarks.

Daniel Rykhus

Sure, thanks operator. And thanks again for taking the time to join us on the call today and for all those questions. Helping customers solve great challenges in hunger, safety, environmental protection and energy independence remains the driving force behind everything we do. We are continuing to invest in the company, expanding both our base of fixed assets and product lines. And Raven’s diversified business model enables us to weather the near term challenges, while continuing to grow and build for the further. And we look forward to updating you on our progress in the future. Thanks again.

Operator

Thank you. Ladies and gentlemen, thank you for your participation today. This does conclude the conference and you may all disconnect. Have a great rest of the day.

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