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Raven Industries Inc. (NASDAQ:RAVN)

F2Q10 Earnings Call

August 19, 2009 3:00 pm ET

Executives

Ron Moquist - President & Chief Executive Officer

Tom Iacarella - Vice President & Chief Financial Officer

Dan Rykhus - Executive Vice President

Leslie Loyet - Investor Relations, Financial Relations Board

Analysts

Michael Cox - Piper Jaffray

John Rankin - Boranco Management LLC

Jeff Evanson - Dougherty & Company

[David Delio] - Canaccord Adams

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Raven Industries Incorporated second quarter 2010 earnings conference. Today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions.

I would now like to turn the conference over to Ms. Leslie Loyet of the Financial Relations Board. Please go ahead ma’am.

Leslie Loyet

Thank you. I’d like to thank everyone for joining us today. Earlier in the day, we sent out a press release, outlining the results for second quarter of fiscal 2010. If anyone has not received the release, please visit Raven’s website at www.ravenind.com to retrieve a copy.

Management will provide an overview of the quarter and then we’ll open the call up to your questions. Before we begin, we’d like to remind participants that the information contained in this call is current only as of the day of the call, August 19, 2009 and the company assumes no obligation to update any statements, including forward-looking statements made during this call.

Statements made by the company that are not historical facts, are forward-looking statements that are subject to the Safe Harbor Disclaimer in today’s press release. Joining us today from management of Raven Industries, we have Ron Moquist, President and Chief Executive Officer, Tom Iacarella, Vice President, Chief Financial Officer, and Dan Rykhus, Executive Vice President.

At this point, I’d like to turn the call over to Ron for his opening comments. Please go ahead.

Ron Moquist

Thanks Leslie and thank you all for joining us today as we highlight our second quarter results and then hopefully provide some inside as to how we’re looking at the second half of the year. As Leslie mentioned we released our second quarter results this morning and you all should have received a copy.

Three months ago I thought the second quarter would be our toughest especially in light of the agricultural situation. We were thinking that earnings could be down as much as 30%, 35% from last year’s strong second quarter. It didn’t turn out that way it was still a tough quarter, but the results were better than expected and all operations beat our revised internal projections and when I say revised internal projection, those were once that were made after we had the results of our first quarter.

I never thought I’d be saying when he a good performance when sales are down 18% for the quarter and net income is down 9% but these are different times and any manufacturer serving basic industries as we do that is down say 20% or less for the full year has done a pretty good job in my book. Some good companies are not going to achieve those results regardless how well they manage their business.

The fact that we earned a 12.7% net return on sales for the first half of the year versus 12.3% in the same period last year in spite of a 16% drop in sales, speaks to the strength of our business model and how we executed. In Engineered Films, sales are way down from last year, but about where we thought they’d come in, but operating income was a lot better than we projected and our gross margins for the first half of the year are actually up 2.5 percentage point points and that’s a result of three main drivers.

One is as it was in the first quarter we benefited from some good polyethylene resin buys, but the deals want nearly as good as in the first quarter, but our prices held up a little better than we thought they would so we didn’t have to give all of our hard-fought and material savings away. Our prices are down about 11% from the past year and prices in raw material costs are moving around almost daily but as I think we don’t hedge, we stick to the spot market.

Then the aggressive cost cutting we’ve done over the last nine months is really making a difference. We’ve cut $5 million on an annualized basis out of our cost structure in films and this doesn’t count raw materials. Cost cutting is always the easy part of the equation, reconfiguring your operation to perform efficiently and with high quality with a greatly reduced staff is the tricky part and it’s hard to be efficient when you’re operating at 50% of capacity, but we are doing pretty well on that front.

All-in-all raw material savings net of price decreases, plus cost cutting, enhanced operating income by about $3.2 million in the first half of the year. Sales of engineered film in the second quarter were only $15 million, down 43% from last year when film sales to the oil drilling market were strong and commercial construction was still at a relatively high level.

Operating income for the quarter was down 41%, not great, but 43% drop in sales will usually put your bottom line in the red and that didn’t happen for the reasons I mentioned earlier. Operating income actually dropped less than sales on a percentage basis, with sales down so dramatically from last year, you may think that the sales mix would change, but it really hasn’t all that much expect in energy and last year’s first six months Oilfield Pit Liners were 36% of the sales total and construction was 34%.

This year oilfield sales are 30% and construction 36%, most all of our film markets are struggling this year. Even though oil prices have been over $60 of barrel, which seems to be the number when drilling picks up because of price volatility, uncertainty, no one is rushing into reopen cap oil wells or gas fields, so that hasn’t helped us.

The one market doing well for us is geomembranes, where we make liners and covers for landfills and canals, fish ponds and reservoirs and geomembrane sales are up 26% and I think we can take it a lot further even though it’s still a relatively small base projected at about $6 million for the full year.

Our strategy in this difficult economy is to develop new products and take market share, but not through price cutting. Our new products must outperform the competitive offerings, but be priced at a value based premium and our new FeedFresh silage covers are an example of that.

It’s quite a bit more expensive product than the standard commodity product, but it provides features with its oxygen barrier, which keeps the silage fresh and allows preservatives then enhancements that are injected into the silage to remain there, so that when the silage is finally opened up, it looks almost as good and as fresh as when it was put in.

Rather than tell you all about the new products we’re developing, I’ll wait until we see some meaningful sales as we have with geomembranes, but certainly the FeedFresh silage cover the vapor barrier plus, which protects against radon leakage from concrete floors, geomembranes, these are three new products that all have good potential for us.

This is hurricane season, but we haven’t received any orders for disaster film. It’s always a possibility, but it’s not included in any of our planning, but I knew you’d want to here about that and know what’s going on there, because we are in the middle of hurricane season. We’re not how often with the large drop in sales and profits in Engineered Films, but operationally I think we’re doing a good job and the improvement in gross margin pretty much affirms that. We jumped on costs early back in late 2008 and that’s allowed to us stay profitable.

Our Electronic Systems division had a strong second quarter. We knew it would be a good quarter and it was even better than expected, which was to be flat with the first quarter. Sales were up 22% year-over-year and operating income more than doubled going from $1.2 million to $3 million. For the first six months of the year revenue of $34.1 million improved $6 million over our 22% year-over-year and operating income of $5.5 million almost tripled. We’re finally starting to get a fair return on invested capital in Electronic Systems.

For the first six months all three of our major business segments are doing well. Our avionics business, which sells electronic subassemblies used in commercial, and military and private aircraft, had exceptional growth with sales up 34% and operating income growing much more than that, although on a very small low margin base last year. Shipments to aircraft manufacturers have not yet slowed down in spite of the delays in production push outs we read about at Boeing and Airbus.

Sales in our secure communications product line were also very strong in the second quarter and for the first six months are now up 12% year-over-year and operating income grew at a much faster rate than that. This market space which we call encrypted communication devices, we believe is a good growth area although it currently accounts for only 22% of electronics systems sales.

Then sales of our hand-held wireless bed controls were slightly down in the second quarter as they were in the first quarter, but again margins were good as we became more efficient and right-sized our manufacturing operations in our St. Louis plants. Bed sales are depended on home sales and home improvements. So we don’t anticipate any short term growth.

Contract electronics manufacturing will always be a tough low margin business and you only have to look at the big players like Flextronics and Sanmina, flexes and other smaller ones like Winland, in Rochester, Minnesota, understand that, but our business model of low volume high mix production with a heavy dose of engineering support and customer service I think gives us the best chance of success. You’ve heard me say many times it’s not a business we look at as a growth vehicle.

It can be grown, but it only means you by new business at low margin and then for the first two years you clean up engineering drawing package, manufacturing process instructions and suffer from low productivity and high scrap rates. As you get through that, it starts getting profitable. So in this business, the faster you grow the tougher it gets and, the opposite of how we normally operate. So we’ll grow this business, but slowly and sensibly and in fact we’re taking on a new account this year.

Last year during my second quarter conference call, I introduced the strategy we would be pursuing of deemphasizing top line growth in our electronics systems division and focusing on operational excellence and we said we do that by lightning up on assets employed, by consolidating facilities and equipment in reducing inventory and overhead, and right-sizing the organization, which we did. We have $2 million less invested capital, 6% fewer people on 20% higher sales.

Second, we would work with a small group of high quality customers and bring our new customers slowly and third, we would redouble our efforts to improve quality, reduce cost and increase cycle time. Our productivity ratio so far this year has gone up an amazing 24% and the way we measure productivity at Raven is by dividing sales by total salaries. So in a sense, its sales per employee is the way we measure our productivity. So last year at this time after the first half, the productivity number was ex and this year it’s 24% higher than that.

We have great expertise in advanced electronics manufacturing and that’s the technology we will need for the future success of our company and that’s why it remains an important part of our business model. Our applied technology division had a second quarter that mirrored the first quarter with sales down 18% year-over-year and operating income off 28%.

Last year’s second quarter was very strong, because we pulled in some sales by offering dating programs to smooth out production in what’s normally a weak second quarter. What’s important is that, we are aren’t losing market share and our products are performing well in the field and it hasn’t taken any discounting or special deals to main those sales levels and we continue to invest in R&D a new products at a high level.

R&D is up slightly from last year and sales and marketing expenses are about even. I told you last quarter about our decision to sell a limited number of our products through John Deere and that’s still moving forward.

No shipments went out in the second quarter, but we’ll start benefiting in the third quarter and go from there. It’s not a game change here in terms of total sales volume, but it’s new business and we gain access to a large number of Deere dealers and Deere farmers and expand our reach into markets where we had little penetration in the past. I think everyone got caught a little off guard by the slowdown in AgX spending this year, but it’s really not that bad. It’s just that comparisons with last year’s incredible performance don’t look good.

If you go back to calendar 2007, which was a pretty good year for Ag, you get a better feel for where we are today. In 2007, Applied Technology sales in the first half of the year were $31.6 million and operating income was $9.7 million. This year it’s $48 million in sales and $14.7 million in operating income and that’s a 24%compound sales growth over the two year period and 23% compound income growth. I’m not trying to paint a rosy picture here, but just to remind ourselves that last year was really abnormally strong year where everything came together exactly right.

We believe we can take current sales and build on them at a solid rate of growth going forward. The 17% drop in sales for the first half of $10 million is pretty equally spread across all product lines and across all regions of the country and as would you expect our operating profit margins are down in this case by 5 points, not because we’re discounting our products, but we just don’t have the same level of sales to cover our fixed costs.

GPS based auto steering and location mapping is still the basic building block in precision farming today, but demand for precision planting and precision chemical spraying and precision record keeping continues to build. Growers are not only interested in properly placing seeds and at the right depth, but they also want to control seed population and soil conditions and the nutrients in that soil vary.

The same is true for the spraying of chemicals in different places and at different rates based on soil conditions or infestations and this is where Raven itself because we are not just a GPS steering company. We’ve been designing and building control systems for 30 years and have a deep understanding of systems engineering for on farm use.

Looking at Aerostar their second quarter results were a repeat of the first quarter with sales up 5% to $5.8 million in operating income up 58% over last year’s second quarter. We’ve got three main business segments in Aerostar, high altitude research balloons in aerostats and this somewhat down for the year. Military parachutes are strongly up and specialty Government Issue protective wear which is also up.

We are getting close to the ends of our MC-6 parachutes contract which was a three year program that brought in revenues of $18 million to $19 million and the follow on contract should dovetail fairly well with the completion of the MC-6. The MC-6 is for the Special Forces and the new T-11 chutes for our paratrooper. The T-11 total contract value is about $200 million and will be split among four or five suppliers based on price and past performance and it will run for three to four years.

In comparison the MC-6 contract was for about $85 million and split among four suppliers. At that time when we got that contract we were the new kid on the block with no experience in building personnel chutes and a steep learning curve so we hope to get a good share of the contract this time around and be more efficient. Specialty protective ware is a business that probably won’t grow next year since we’ll be using some of their manufacturing capacity for parachute production.

In high altitude research balloon and aerostats there are a number of R&D projects under way. Our second prototype the High Sentinel durable airship is being built and scheduled for flight in October. If successful the airship would have the capability to stay a lot of for many weeks and would have a number of military surveillance and communication applications.

This is a project with high market potential, but also some technical issues to deal with such as the use of solar panels as the energy source for proportion, unmanned airships and aerostats can be an important tool for our military as well as other security agencies. We just need to have some successful flights to boost interest and then convert that interest to sales.

In the area of large tethered aerostats which perform many of the same duties as High Sentinel but at a lower altitude, lower cost and easier transportability we have some currently flying in Afghanistan and it also is a product with a lot of market potential that’s drawing attention from several agencies. A high altitude super-pressure research balloon and carrying scientific instruments will be flown this winter in Antarctica by NASA and this will be the largest super-pressure long duration balloon that we have ever built.

Is generating renewed interest in using balloons for research based on the extended time the balloon can stay a lot of and its relatively low cost versus satellites. So Areastar is doing well and has potentially a strong future and just as an aside we’ve recently received the order for the figures for the Macy’s Day Parade and although it’s not a high revenue or profit generator, it’s something we’ve done for over 20 years. So we take pride in it and have a lot of fun with it.

All-in-all it was a good second quarter and a pretty decent first half for Raven, especially in view of how our Ag business suffered. If the Ag market were just flat with the first half of last year, Raven would be up 9%. We all know that last year was the best every for Ag equipment sales and probably an anomaly, but overall we’ve done relatively well company wide compared to most manufacturers for a number of reasons. We acted quickly last year, when the downturn first hit.

Our diversifications helped smooth out performance. We’ve maintained good pricing integrity and we went into the recession with a spot less balance sheet; that balance sheet is stronger than ever with no debt and $43 million of cash versus $32 million at the end of the first quarter and $32 million is the same number we had at the end of the second quarter in 2008. $43 million is the most cash we’ve ever carried and that’s even after paying out the quarterly dividend of $2.5 million in July and a quarterly tax payment of $4.3 million. I’m prepared to let cash go to $60 million and then when it gets to that level then we’ll start talking about how we want to deal with it.

Sales for the first half are down 16%, but inventories are down 31% and accounts receivable 17%. I think we’ve managed our working capital. We got on our inventories early and we haven’t let receivables payments get pushed out and haven’t had any significant write offs. We haven’t purchased any of our stock this year and have no current plans to do so.

Our CapEx is set at $3 million for the year versus $8 million last year and as you know we increased the quarterly dividend that our May board meeting to $0.14 from $0.13, that’s our 23 consecutive annual increase and I fully expect we’ll increase it again next year. On the acquisition front there’s nothing hot right now, but there are opportunities out there. If they fit strategically and can be purchased at a fair price and would help us driving profitable growth, we’d look seriously at doing a deal, especially one in precision agriculture.

Back in May, I said that the second quarter would be our most difficult of the year. I didn’t turn out that way. Now it looks like the third quarter will be that so-called toughest quarter, but not significantly worse than quarters one and two and then in the fourth quarter, we should see a relatively flat performance on a year-over-year basis and that’s not because I’m looking for a turnaround in the economy. I think it’s still at least another year off. It’s just that last year’s fourth quarter was weak when we only earned $0.26 per share, so the comparisons are easier.

Just briefly by division here’s how it looks in the seconds half. Engineered Films will continue to struggle with raw material increases and soft demand. Third quarter comparisons will look bad, but the fourth quarter will look favorable because films lost money in last year’s fourth quarter. Electronic Systems will start to see some order deferrals for avionic products in the fourth quarter, but quarter three should be strong.

Applied Technology will be down in the third quarter, but up in the fourth as we get back on a growth plan with new products and new markets and Aerostar will have a good third quarter and then a fourth quarter that doesn’t look good in comparison because again of the big fourth quarter they had last year.

A lot is riding on some important test flights for our balloon and aerostat product line and that’s going to be much more important than any short term quarterly results in this operation. So the full year is shaping up to be down in earnings, but down by low double digits, our first non-record year since fiscal 2001.

With that, I will open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Cox - Piper Jaffray.

Michael Cox - Piper Jaffray

My first question is in relation to the out performance that you produced in the quarter and it sounds like you’re approaching the current quarter with a certainty agree of caution not unlike what you did in the second quarter. So I’d just be curious perhaps what perhaps you might have changed here recent that would give you that reason for caution.

Ron Moquist

As I mentioned Engineered Films will be down in the third quarter; electronics in comparison with last year I don’t think Tom, those comparisons are good.

Tom Iacarella

They started to show some progress beginning in the second half of last year and so the comparisons do get tougher for Electronic Systems as we get into the second half.

Ron Moquist

Well, the third quarter will be already for electronics and the fourth quarter they deteriorate. I think, Michael, you’re talking specifically of third quarter though, right?

Michael Cox - Piper Jaffray

I am just because of the big out performance in Q2, I guess it seems that you’re carrying good momentum into the third quarter, but it’s a general comments seem more cautious.

Ron Moquist

Yes, I’d say, again Engineer Films is one reason for that Applied Technology. Those comparisons again aren’t too bad. Aerostars’ aren’t too bad. I don’t think it’s necessarily that we look at the third quarter as something that’s showing weakness going forward as much as it is in a lot of cases just comparisons versus the previous years third quarter.

Just like the fourth quarter is an easy comparison, because we didn’t do very well on the fourth quarter, so I think it’s more in terms of comparisons and, Tom or Dan if you want to add anything to that go ahead and jump in.

Tom Iacarella

I think the other thing that might cause us to be a little bit more cautious as we look at the third quarter compared to the second is. We continue to see pricing pressure in films and our ability to hold our pricing and we’re also seeing cost increases in resins.

So after seeing some of the results that we had, say, in the fourth quarter, where the margins got squeeze pretty rapidly we’re concerned of that we’ll continue to see that type of pressure. So we think there’s a possibility that the margins May compress us squeezed.

Ron Moquist

Just to show you the difference in pretax income Michael between the second quarter of last year versus third quarter of last year we earned about $10.5 million pretax in last year’s second quarter and we’ve earned $12.5 million pretax in last year’s third quarter.

Michael Cox - Piper Jaffray

On the film side if I’m looking at the math correctly it sounds like volumes would be down in the low 30% range in the quarter. Do you see that continuing I guess through the back half of the year or should we see that moderate against some of the easier comparisons you referenced?

Ron Moquist

I think again what’s going to happen is that the sales in third quarter for Applied or Engineered Films, did you say Engineered Films?

Michael Cox - Piper Jaffray

That’s correct.

Ron Moquist

For Engineered Films, the sales are going to be comparable to second quarter. Margins just aren’t going to be the same. We are not going to get the same benefits from raw materials and there’s going to be more pressure on pricing. That could change, of course, if we get some extraordinary order like you could from FEMA, or hurricanes or something like that, but that’s the way we’re looking at it.

Then in the fourth quarter although sales will be probably the lowest of the year last year’s fourth quarter was actually a loss and so we can easily beat that by quite a large amount. So fourth quarter will be our smallest quarter of the year for Engineered Films both in terms of sales and operating income, but the comparisons are going to be quite easy in the fourth quarter versus last year, especially not so much on the sales side, but certainly on the operating income side.

Michael Cox - Piper Jaffray

On the Electronic Systems side could you provide maybe a little more color around the new account, what end market that would be associated with?

Ron Moquist

That’s going to be in secure communications. That’s going to be similar to what we’re doing now. It’s going to be a slightly different product, but it’s in that same field.

Michael Cox - Piper Jaffray

My last question is on within the Applied Technology. I was just wondering if you could provide any more detail around the Deere agreement, perhaps if you could quantify what you think the sales potential could be from that, that venture and perhaps any channel disruption that you might perceive with introducing this product to a competing dealer.

Ron Moquist

Good question, I’m going to let Dan handle that one.

Dan Rykhus

Yes, the Deere agreement is moving along just exactly where we thought it would be at this point. All the work has been done to get our systems integrated from a supply chain standpoint and the forecast that Deere is giving us are what we expected and we will start to make deliveries this week and continue on through the third quarter.

As far as the size, we’re working off forecasts right now and like Ron said, it’s not going to be a game changer for us this year, but it is going to add to our revenues in the third and fourth quarter and the real impact as far as our profit growth and sales growth we think will come next year.

As far as channel disruption, we think and I’ve talked to some of our resale customers and they’re going to watch us, they’re going to look at our service levels to them and I think that’s how we’ll be judged is, how well does Raven provide ongoing service to them as a resale customer and as an OEM customer. So we’re committing resources to providing better service than we have ever before and I believe our service has been pretty good. So that’s how we’re going to be judged, we believe and we’re hitting that head on.

As far as numerics, we haven’t seen any decline in new orders and we’re in the middle of some of our dating programs and we’re seeing increases in dating program participation on a year-over-year basis. So the tangible proof is in the orders and so far that’s been strong.

Ron Moquist

I think that’s important, Michael, that the order book is not going down, it’s actually strengthening and we’re seeing some momentum year-over-year on the order side and that’s always a good thing to look at and I probably look at new orders closer than I look at billings, because it’s just a lead lag situation. You got to have those new orders coming in and we’re very encouraged by new orders we’re seeing in Applied Technology.

Operator

Your next question comes from John Rankin - Boranco Management LLC.

John Rankin - Boranco Management LLC

You mentioned productivity was up 24%. So I have a few questions. My first question is you alluded to the fact that, you thought you’d begin to come out of this with second half of 2010. To ramp up, will you need to bring back some of the people that were furloughed and if so, what is the strategy to gear up without losing sales? The literature talks about a lot of companies might have cut a little too deep and I would like to have some color on that.

Ron Moquist

Any particular division, that you’re specifically interested? Because they’re all a little bit different in terms of how and what condition we bring people back and what our capacity constraints are. Engineered Films we’re operating at 50% capacity. For example, now when you take Electronic Systems division just because of what we’ve done in terms of consolidating facilities and equipment and really tightening up that operation, we’re probably operating at 80% to 90% capacity.

So anything we do there we’ll do slowly and we’ll do methodically and we’re going to control growth in Electronic Systems. Engineered Films, if something were to break lose, that’s machine based manufacturing as opposed to labor based and so with a few additions of people you can increase volumes quite handily.

Now there’s handling costs, but as far as running the machinery it doesn’t take a lot of people. Moving the product around efforts it’s been built and loading it and unloading raw materials and the like does, but it’s a good question because for a couple of reasons. One is as you bring back people and there are no problem bringing back people because there’s a lot of people unemployed and even in South Dakota which has one of the lowest rates in the country at a little over 5%.

We are still going to be able finds plenty of workers and good workers and which you are always going to have inefficiencies on the front ends. That’s part of the situation and on the backside it’s just the opposite when you do some cut backs unfortunately as it turn out you gain efficiencies because you are keeping your more senior people around and there you’re more experienced and sometimes more talented people. So you gain productivity sometimes when you make cut backs. I’m not sure if I’m answering the question directly, but...

John Rankin - Boranco Management LLC

You’re answered perfectly. My main focus was on Engineered Films and you covered that, so my second question, this would be on accounts receivable. I notice accounts receivable year-over-year was a little down further than sales and it’s always a juggling act in markets like this, how far you extend credit because when the time get good and you put people on COD early, but I was just curious, have there been an accounts receivable, have they been a problem? Have you had to tighten up credit at all or is it just been business as usual?

Ron Moquist

Well, it’s never business as usual in this environment, but you’re right that we’ve done a good job in accounts receivable. We’ve had very little bad debt write-off, our days of accounts receivable is very similar to what it was last year. We haven’t tightened the screws too much but on the other hand we’re not buying business.

We’re not buying it with price and we’re not buying it with terms and we’re just not going to do that. We’re not going to loosen up to get an order because it’s no fun to make the sale if you don’t get paid and for us, but business as usual for us is pretty cautious when it comes to handing out terms.

Operator

Your next question comes from Jeff Evanson - Dougherty & Company.

Jeff Evanson - Dougherty & Company

Eventually we’ll see Engineered Films get back into a growth mode. Ron, what are some of the things you’re looking for to see those first signs of growth in Engineered Films? Specifically I’m wondering about what initiatives you have with respect to geomembranes or if you are watching oil prices or what?

Ron Moquist

Well, there’s two aspects to that, obviously you can sit around and weight for the economy to come back and I already I’m an old man, but I could become a very old man waiting for the economy to come back strong and waiting for construction to be anywhere near where it was in 2005 or 2006. So construction obviously, if it were to come back strong and housing starts now are at an annualized basis of little over 200,000 to 500,000 units.

A few years ago, it was well over 2 million, so we’ve got a long ways to go before we get back to those days. Would that be helpful, absolutely if oil and gas they start opening up those wells and start pumping again, that’s a big bonus for us, but our attitude is not to wait around for the economy.

Our attitude is to continue to introduce new products, go aggressively after new markets, takeaway business from the competition, out market, out hustle, our work the competition and take business that way. If we can do that, we’ll outperform the market and we’ll grow and it’s my absolute intent to grow the business regardless of what the economy does. So anything the economy gives us is a bonus. Love to have it, but not counting on it.

Jeff Evanson - Dougherty & Company

So, should we expect that you’ll have some new products selling in Q4, then? It’s what you said when you thought things would start to show a little bed.

Ron Moquist

Engineered Films, you’re talking about?

Jeff Evanson - Dougherty & Company

Correct.

Ron Moquist

Yes, the, again, the geomembrane is still a new product and that’s catching on and that’s going to be bigger and we’ve had this discussion before in previous conversations, quarterly conversations about the need for membranes especially in states where water needs to be preserved and they’re losing so much of it by singing into the ground or evaporating so we continue to hit that real hard in states like California and Arizona, we’ll continue to do that.

A product like vapor barrier plus, which is a construction product could be a lot better than it is, but it’s still doing well because it’s taking market share because when people find out that they can block not only moisture, but radon with our product, it becomes an easy sell. People want it because, especially in our part of the country in the Midwest here there is a lot of radon that’s permeating into houses and people are becoming more aware of that and there’s a number of other products we’ve got coming out.

Conkure blankets for curing concrete both in the winter and in the summertime and there’s any number of products, but again I’ve done this too often where I’ve talked about what’s going to be with a brand new product and then it got off to a slow start and then people became disappointed.

So we have the new products. We are working on them. We are doing it aggressively and we think we’re going to have some success with that starting in the fourth quarter, but I’d be happy to talk about it after I have the success and we can brag about what we did. I think the philosophy is the thing, Jeff, and that’s most important to me and it should be to our shareholders and that is that we’re going to grow this business in spite of the economy and we believe we can.

Jeff Evanson - Dougherty & Company

Then within Applied technologies, I think it was maybe a quarter or two ago you talked about some new initiatives around remote sensing for the Ag market and the Data solutions or data had a business. Can you give us an update on where you’re at with that?

Dan Rykhus

I’m not sure the comments you’re referencing on remote sensing specifically, but we’ve been pursuing an element of our strategy that is centered around better collection of data from the field and aggregation of data and development of products, software products that will allow for more efficient movement of data from our Viper Pro and Envizio Pro in the field back to a means of data warehouse that has useful for a grow our order custom applicator or Ag retail customer.

So, what that means in terms of actual products and work that we’re doing. You’ve maybe recently heard about our strategic alliance with SST. SST is a software company that has had great success with Ag retail market space and the custom applicators and that just happens the overlap very nicely with where our strength is in precision Ag. So these alliances allows us to operator or integrate their data protocol, information protocol into our Viper Pro and E Pro and allows for a much more efficient use for the end user of SST Software and moment of data back and forth.

So, but that mean to us, how do we monetize that and have that mean anything to us is ultimately in the sale of Viper Pro’s and E Pro’s now and as we move forward and build out this information strategy further, we believe there will be opportunities for us to cell services and establish other alliances with other companies in the Ag business sector that will allow us revenue opportunities through them, but in the short term it means we believe that we’ll be able to continue to push us our Viper Pro and Envizio Pro sale.

Operator

Your final question comes from [David Delio] - Canaccord Adams.

David Delio - Canaccord Adams

So last quarter you had been benefit from some beneficial resin purchases and this quarter you said, you had some of those, but not to the extent and any of the other segments. Did you have any kind of beneficial purchases, inventory sales that helped gross margin? Aero wasn’t strictly confined to Engineered Films in the quarter?

Ron Moquist

Well, it wasn’t so much anything special from a material standpoint, but the cost cutting that I talked about in Engineered Films has been something that’s more or less been done across the company, a little bit less so in Applied Technology, only because R&D and the sales and marketing effort we felt were so important that we didn’t want to make any drastic cuts there, but all operations have been trimmed up and reduced and so there’s been some cost savings there. Tom, I don’t know if you can think of anything else that would be a major factor in terms of…

Tom Iacarella

I don’t think there are any significant one time items that really affected our results in the second quarter that would take out of my own projections going forward.

David Delio - Canaccord Adams

Then within Applied Technology, can you just kind of talk direction speaking, since the end of the quarter, end of July, how that business has kind of gone, flat, up, down, any kind of color there?

Ron Moquist

We talk a little bit about new orders and we’re very excited about the trends in new orders, but again I’ll let Dan take that one, because he’s much more familiar with the details in Applied Technology.

Dan Rykhus

The specific question was about orders or business after the end of the second quarter?

David Delio - Canaccord Adams

Yes, so since July, just kind of trying to get a feel for how the business has performed even direction speaking is fine.

Dan Rykhus

New orders continued strong in August, on a year-over-year basis and that’s a continuation of our June and July order volume increases and that doesn’t include any of the Deere business. So we’re seeing decent order increases in the double digit on a percentage basis without Deere factored into those numbers at all.

So that’s positive news for us and as far as the 19 days that have happened after the end of the quarter we’re just continuing that trend and like Ron said in his opening comments, we expect that we will still be down in the third quarter on a year-over-year basis in ATD, but we think that rate of decline will start to moderate and in the fourth quarter we hope to bring that to a flat performance or possibly slightly up.

David Delio - Canaccord Adams

Then just lastly, Electronic Systems good color there going forward, talking about a strong Q3 and then kind of a little bit of a falloff in Q4. In Q3 with another strong quarter expected, how do you think about margins there? I mean the margin expansion here has been tremendous. I’m just trying to get a sense for how you guys think of that continue to grow with another strong quarter, have we kind of peaked?

Tom Iacarella

Are you talking strictly about margin expansion?

David Delio - Canaccord Adams

Yes, just within Electronic Systems, Op margin expansion.

Dan Rykhus

There won’t be margin expansion in the third quarter and in the fourth quarter that will be actually relatively weak, because not that necessarily Airbus and Boeing are cutting back on avionics equipment, but some of our major accounts that are between us and Airbus and Boeing simply have got enough inventory to hold them over for now so they’re trimming their sails a little bit, but the only way there’s not going to be margin expansion is the simple answer.

We’re going to have to start growing the business. We can always get 1% or 2%, because no matter how good you get, you can always improve things 1% or 2%, but where we’re operating right now is at a fairly high level and we are happy with that. What we’d like to do then is just overlay some growth on that and maintain those good margins.

Operator

It appears there are no further questions. I’ll turn the call back over to you Mr. Moquist for closing remarks.

Ron Moquist

Thank you again for joining us today. It was a tough six months, but we came through it in good shape. As I already told you, I don’t see any snapback in the economy in the near term. Our planning has always been for a slow turnaround in the second half of 2010, but as I mentioned before, that doesn’t mean we can’t grow.

New products, new markets, taking market share, we can execute these strategies and outperform the market. We’re not just sitting around waiting for a better economy and we know you can’t see your way to success, you have to grow. You have to beat the competition and we’re doing that. So we’ll talk to you again in November and good luck everybody. Thanks.

Operator

Ladies and gentlemen that does conclude today’s conference. We thank you for your participation.

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