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Raven Industries (NASDAQ:RAVN)

Q2 2014 Earnings Call

August 19, 2013 10:00 am ET

Executives

Thomas Iacarella - Chief Financial Officer, Principal Accounting Officer, Vice President, Secretary and Treasurer

Daniel A. Rykhus - Chief Executive Officer, President and Director

Analysts

Andrea James - Dougherty & Company LLC, Research Division

John Rankin - Boranco Management, L.L.C.

Donald Andersen

Operator

Good day, ladies and gentlemen, and welcome to the Raven Industries, Inc. Second Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded.

I would now like to turn the conference over to Tom Iacarella, Chief Financial Officer. Please go ahead, sir.

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'd like to remind participants that the information contained in this call is current only as of today, August 19, 2013. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to the Safe Harbor disclaimer in today's press release.

With that, I would now like to introduce Dan for a strategic look at Raven's second quarter.

Daniel A. Rykhus

Thanks, Tom. And welcome, everyone, to our fiscal 2014 second quarter conference call. I'll start off with an overview of our performance and then talk about each of the 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'll open up the call for your questions.

So let's begin with our performance. As expected, the economic headwinds and near-term challenges we faced in the first -- in the fiscal first quarter persisted in our second quarter. We reported sales of $93.4 million versus $101.7 million in the prior-year second quarter.

Sales rose modestly in Engineered Films and were down slightly in Applied Technology. Reflecting the current constraints on federal spending, Aerostar sales declined 23%.

Raven continues to become a more technology-focused company centered on solving the specific great challenges of hunger, security, energy independence and natural resource preservation and serving our core markets. We are transitioning from a company with a strong contract manufacturing orientation to one that is driven by proprietary products and services. And during this evolution, we anticipate some volatility in our results. And macroeconomic conditions aside, we saw some of that in the second quarter.

That said, we're 100% committed to executing our strategy, generating profitable revenue from our existing core markets, while driving growth in closely adjacent opportunities. Our pipeline of past investments in technology, capacity and market expansions offers the potential for plenty of growth, while staying focused on markets and strategies that we understand, and we will differentiate ourselves from the competition with superior service and continuous innovation.

As a company, Raven remains well positioned for growth. We are financially strong with no debt, and we serve market segments in precision agriculture, situational surveillance and thin-film barrier applications that have attractive fundamentals for long-term growth and profitability.

We've carefully allocated capital to our long-term growth markets, and are de-emphasizing markets that did not offer returns that meet our objectives. For these reasons, we believe we have fantastic long-term prospects.

And as we said in the press release, we do anticipate improved financial performance in the fiscal 2014 second half. Tackling the monumental challenge of developing technology that helps the world grow more food, produce more energy and protect the environment and live safely, while the company aggressively expands and pursues new close and adjacent opportunities, requires important capital investments.

During the second quarter, we invested $9.6 million in research and development and capital expenditures to support our fiscal 2014 product and growth strategy, and Tom will talk more about R&D and SG&A later.

As a company, we rely on our strong cash position to, among other things, fund dividend growth and deliver above-average returns on invested capital.

I'm pleased to report that our cash balance at the end of the second quarter stood at $55.7 million, up from $44.1 million a year ago.

I would now like to talk about each of our 3 divisions, starting with Applied Technology. For the second quarter, sales in Applied Technology were down 2% with operating income decreasing 8%. The operating income decline stemmed from lower sales amid continued investments in research, marketing and product development to secure future growth. We're pleased that the demand appears to have stabilized and may be recovering. Also encouraging is the fact that OEM demand stayed strong for certain precision agriculture solutions, specifically, our advanced-guided steering systems. However, during the second quarter, we were still pressured by lower demand in the U.S. aftermarket, as growers and custom ag service providers were somewhat apprehensive given the conditions last year and falling commodity prices.

Internationally, growth has moderated in some areas of the world, such as Eastern Europe and South Africa. However, we continue to see strength in Brazil, and we anticipate a ramp-up in Argentina. And to that end, we will continue to invest in growth internationally for the long term.

Of note, Applied Technology introduced 4 new products during the second quarter. The Viper 4 is Raven's next-generation field computer, designed to be a simple, powerful and connected platform bringing the latest in computing technology. This is our most robust field computer to date. And the Viper 4 not only improves our customer's managed critical machine function, but more importantly, enhances the way data collected in the field is managed and utilized.

We also launched SmarTrax MD, the first easily transferable assisted steering system capable of up to RTK performance. Farmers looking for ways to upgrade their current equipment to increase efficiency can utilize SmarTrax MD across various machines on their farm. With a single investment, they can experience high-performance steering at an affordable cost.

In June of this year, we unveiled Multi-Hybrid OmniRow, Raven's patent-pending planter technology that allows farmers to switch between different hybrids and seed spacing on the go. This lets growers customize their planting operations for their particular field requirements.

And finally, we will unveil a revolutionary system for complete grain cart control later this month. This is a completely new product line for us within the precision ag market that will offer yet another avenue for revenue growth for ATD.

With respect to new products, we help farmers feed the world's rapidly-growing population by driving innovation and product development and delivering value to our customers through improved yields and decreased production costs and assist the innovation and development that will fuel Raven's growth in the second half of fiscal 2014.

We're pleased with the progress we made in the second quarter. And now, it's time to leverage those investments in new products to build sales.

Turning now to Aerostar. Sales were down 23% in the fiscal second quarter, with operating income also declining. This was expected, and primarily due to reduced demand from U.S. government agency customers and the planned transition away from electronic manufacturing services customers that don't fit our business model.

Within Aerostar, Vista Research continued to deliver strong sales, rising approximately 20%, driven by support activities under existing contracts for Vista's Smart Sensing Radar Systems. It's our intent to fully realize more of the untapped potential within Vista Research by continuing to pursue and win contracts with various U.S. agencies, as well as foreign military opportunities. We also expect to generate long-term growth by serving the commercial asset monitoring markets and other commercial applications.

During the quarter, we announced an exciting new project that you may have seen covered by various news outlets. Raven is partnering with Google on a pilot program called Project Loon to provide high-speed wireless Internet accessibility to rural, remote and underserved areas of the world. Google plans to use Aerostar-designed and developed stratospheric balloons as part of this new initiative for balloon-powered Internet access. We've been working for several months in close collaboration with Google X on the design and development of this technology innovation. While the program is still in its early stages, several successful trials have taken place, including 1 in June in New Zealand involving 30 balloons providing Internet connectivity to an area covering nearly 10,000 square kilometers. Our involvement with Google is another example of Raven's ability to pioneer leading-edge applications of our adaptable technology. And if this unique collaboration effort overcomes a number of significant risk factors, it may constitute another break-out opportunity for which Aerostar has positioned itself in recent years.

Looking ahead to the rest of the year and beyond, we will continue to work to compensate for government uncertainty, focusing on expanding our proprietary technology opportunities, including advanced radar systems, high-altitude balloons and aerostats to international markets.

Over the past 3 years, we've been allocating capital to these 3 break-out growth drivers, believing that, over the course of the next 2 to 3 years, any 1 of these more speculative, high-risk growth opportunities could double or triple the size of the division or any of them could deliver just enough revenue to cover their cost of capital. As a diversified company, we consider Aerostar's role a benefit, believing that Applied Technology and Engineered Films are well positioned to deliver more incremental growth. And Aerostar gives us the potential for strong upside, albeit with a high risk of uncertainty.

For the fiscal 2014 second quarter, sales in Engineered Films rose 1%, with operating income down 30%. Within this division, agricultural barrier films had double-digit growth over the prior year, fueled by sales of fumigation films used in high-value crop production. This growth was substantially offset by lower deliveries of geo-membrane films, which were particularly strong in the second quarter 1 year ago, stemming from a reservoir project in Ohio. We are encouraged by signs that the energy market is stabilizing, and we posted a sequential energy sales increase from the fiscal 2014 first quarter.

Operating income was constrained in the quarter due to a substantially higher resin cost compared to the prior year, combined with market conditions that did not allow pass-through, as well as lower manufacturing efficiencies due to new line start-up costs. The company is working swiftly to address these issues through process improvements, along with utilization of our reclaim production line, which is designed to capture and recycle excess polymer material from internal manufacturing processes.

Despite a difficult environment, we continue to expect revenue growth for Engineered Films for the full year. To reiterate, we will achieve this through R&D investments and new opportunities, enhancements to our existing products and development of specialty films with value-added characteristics.

In the near term, we're capitalizing on the opportunities with agricultural barrier films, working with our energy market distribution partners to increase energy sales into the Bakken formation, and growing sales for our new multi-layer geo-membrane products that help reduce the environmental effects of landfills.

Let's now turn to the third quarter. Relative to the first 2 quarters of this fiscal year, we see strength across all of our divisions. Applied Technology will benefit from our -- from sales of our new products and improving market conditions. Within Engineered Films, we'll leverage the agricultural opportunity and move forward with our new film capabilities, and Aerostar will continue to experience reduced demand from the Raven -- from our U.S. government customers, but we have opportunities to substantially offset this by increasing proprietary product sales, including Vista Research.

We are reassigning resources within Aerostar to support this transition where possible and have cut back where necessary. As we go forward, we have a very solid balance sheet and have created strong technological positions in our chosen markets. This gives us confidence for the long term, despite potentially volatile results, as we transition to a more technology-oriented company.

We continue to anticipate improved second half performance on a year-over-year comparative basis, but we do not believe that will be enough to report profit growth for the full year. We expect to achieve attractive returns on equity, and we'll continue to deliver strong returns to our shareholders through dividends and long-term growth.

Now I'll turn the call back over to Tom. And after that, we'll 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'll take questions.

First, the balance sheet, which continues to be a strength for Raven. We ended the quarter with $55.7 million of cash and investments, up $11.6 million from last July. We have been able to increase our cash position despite investments in production and infrastructure capacity and research and development. We reported operating cash flows of $29.7 million, compared to $44.5 million last year. The $14.7 million reduction reflected lower net income and an unusually strong working capital influence in the first quarter of the prior year.

Inventories at quarter end were up $4 million from the previous July. Our perception that resin prices are at risk of rising caused us to bring in additional inventory to help mitigate that risk as we enter our third quarter. Therefore, inventory turns have declined.

Accounts receivable declined slightly from July, about $700,000. As a result, average DSO was up a few days from last year. But at the end of the period, that gap narrowed and was very close to the prior year.

Our current ratio was 4.8 versus 4.23 last year. We bolstered our balance sheet through strong operating cash flows over the past year.

Working capital increased by more than $15 million from last July. We believe we have the capacity to fund the investments we are making in our operations, while still delivering dividend growth.

Turning now to capital spending. Our commitment to invest continued. Our businesses moved forward with long-term growth. We are vigorously monitoring spending levels given current performance. Capital spending was more than $29 million for each of the past 2 fiscal years, and we're planning to spend in the same range this fiscal year.

For the fiscal 2014 first half, capital spending totaled $13.7 million. We have accelerated certain spending to support Google's Project Loon, adding new manufacturing capacity. This $7.3 million build-out of flexible production space was originally expected to start late next fiscal year and has been configured for large-scale balloon manufacturing. We're scaling back other projects to help mitigate the impact of this new facility on our overall cash flow.

Further, we have invested in the expansion of our Engineered Films extrusion and conversion capacity for multi-layer agricultural films, a key area of growth for this position. Our reclaim production line is up and running. From a corporate standpoint, we also began the last conversion phase of our headquarters building.

Looking at SG&A and R&D, we continue to believe there are significant opportunities that Raven must be prepared for. So over the past 3 years, we have invested in research and development capabilities, corporate finance, legal, compliance, information technology and human resource development. We recognize that these investments must be matched with higher revenues. And as a result, we have reduced the rate of investment growth compared to prior periods.

For the second quarter, SG&A cost rose 12% compared to 28% in the second quarter last year. The increase reflected the ongoing impact of this infrastructure build-out. Spending for R&D was up 12% in the quarter as well, compared to 50%, 1 year earlier. R&D in the second quarter supported new products in our Applied Technology and Engineered Films divisions, along with support for Project Loon design. We continue to invest in the growth pipeline required for future success.

Now I'd like to talk about second quarter operating margins by division. In Applied Technology, we reported margins of 30.3%, compared to 32.2% in the prior-year period. The impact of a drop in sales is reflected in lower operating profit margins, especially when it occurs in the seasonal low point of the business, and that's what we're seeing here. Most of the shortfall occurred early in the quarter. As the quarter progressed, we were seeing operating margins strengthen in Applied Technology. We are also pleased to see that second quarter gross margin rates increased slightly over the prior year. This was offset by higher selling and R&D expense.

In Engineered Films, operating margins were 12.8%, versus 18.5% in fiscal 2013. This year, resin prices are up year-over-year. Further, in the second quarter last year, we saw some of our key resin prices decline by double digits, or $0.14 a pound. We held on to a substantial part of that cost decline.

This year, resin prices were relatively flat during the quarter, and we were not able to realize that same benefit. In addition, we helped meet the competitive challenges through product reformulations, which lowered our average selling price by about 4% from the second quarter last year. Start-up costs on new manufacturing equipment also reduced profits during the quarter.

As we move past these, we believe we can pick up margin points going forward. Compared with the second quarter last year, pounds extruded were more than 21 million, which was up about 13%.

Looking at Aerostar, operating margins came in at 4.7%, down from 8.6% last year. And as Dan noted, we had a significant drop in sales with contracts that were established performers coming to an end. The start-up and development costs related to new product initiatives also hurt operating margins.

Turning now to our overall results. Second quarter sales declined 8%, and profits were down 28% compared to last year's record level. We continue to constrain new spending as we move through the year, making adjustments where needed and we are tying that spending to the execution of growth opportunities and initiatives. To reiterate, as we outlined in the press release: we expect a second half performance that will be stronger.

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] And our first question in queue is from Andrea James of Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

So just to unpack this Google concept -- my question is on this Google project. You talked about the opportunity for significant growth in the first half in -- of 2015 for -- and you said you're investing in the manufacturing ability today. So I was just wondering, did you get some sort of reassurance from Google that they're going to be there, sort of, for a while to make this work for you? That's my first question.

Daniel A. Rykhus

Sure. I'll take that. Thanks, Andrea. As Tom mentioned, that investment was scheduled for next year anyway, and it is flexible manufacturing space. So we have intentions of using it in the manufacture of balloons as required, but it's also directly adjacent to our existing ATD building. In fact, it shares a common wall that's been opened up. So it provides future opportunities for supporting ATD growth. It's on our Industrial Park campus. So long, long term, it's been built to support the potential for EFD expansion. But in the near term, the intent is to use it to build the balloons necessary for the Google project. So like I've said, I think, in my comments, this is a opportunity that has a lot of risks and the potential for a lot of growth. And we're investing, we think, smartly to cover our bases to be prepared for that opportunity as it develops, but to also invest in what we know we're going to need anyway for a broader strategy.

Andrea James - Dougherty & Company LLC, Research Division

That helps. And then, the second -- I wondered if you could talk about how you think about Google's introduction to Raven and maybe different touch points between the 2 companies. For example, they've got -- they're working on a driver-less car, and you guys have intellectual property in guided steering. So I'm just wondering, do you get to leverage this relationship into other avenues there? And also maybe the other commercial contracts with -- not Google, but maybe folks who are more aware now of the capabilities that you have?

Daniel A. Rykhus

Well, the first thing that we need to do is to prove ourselves to be a great supply partner for Google on the project that's in front of us, and the company has been fantastic to work with and just very bright people, move very fast. And this opportunity is something that we're working on really hard. And, sure, there's -- Google X is working on a lot of different technologies, and there could be some overlap, but our priority right now is to really prove technological success with the Loon project that's right in front of us. And if we do that, there could be other opportunities. But we're not getting ahead of ourselves, and there's nothing in the works there that's significant. So our focus is on helping them to be successful on their Project Loon.

Operator

Our next question in queue is from John Rankin of Boranco Management.

John Rankin - Boranco Management, L.L.C.

Last week, there was an article in The Wall Street Journal regarding tax advantages for purchasing large ag equipment. And I was -- the big talk is it could very well be reversed dramatically. And if the tax advantages are reduced, how much will that -- how much will that change your ag sales that are currently enhanced by tax advantage? Or is that more for large equipment and will not affect your -- the equipments that you sell?

Daniel A. Rykhus

Well, I'll take a cut at that and then, Tom, go ahead and weigh in. I didn't read the article, but I assume you're talking about the accelerated depreciation advantages.

John Rankin - Boranco Management, L.L.C.

Yes.

Daniel A. Rykhus

I would say that, that is one of several factors that have helped the ag market over the last several years. Certainly, having strong commodity prices and the value proposition we offer in our equipment is much more significant. I would believe that this would impact the OEM business more directly than it would ours. But of course, the OEM -- our supply of products to the OEMs is a significant part of what we're doing today. I don't -- it isn't a type of factor that's going to give you a double-digit percentage decline in our revenue. I just don't believe that. I think it's been additive, especially with year-end purchases with certain customers. But not -- it's certainly -- in my mind, has not been one of the significant drivers of our success over the last couple of years.

John Rankin - Boranco Management, L.L.C.

Okay. And my follow-up, concerning the new OmniRow product, does anyone else have a similar product? And then, also, do you have a guess at this point in time how much that product with OmniRow would contribute to revenues going forward?

Daniel A. Rykhus

Okay. I'm not aware of anyone that has the same technology that we're offering with the Multi-Hybrid and the seed-spacing capabilities, and we think this could be a $5 million, $10 million, $15 million contributor over the next few years. And we hope that we develop the channels and access to the growers that can help them take advantage of it.

Operator

Our next question in queue is from Donald Anderson of Red Pine Investment.

Donald Andersen

My questions are -- could you talk a little bit about your joint venture with Monsanto? And then, the other one is, could you just reiterate what you referred to earlier with -- I thought I heard grain car or -- but I didn't know if that was rail car? Just to...

Daniel A. Rykhus

Oh, sure. Well, first off, we don't have a joint venture with Monsanto. We have collaborated with Monsanto on developing some different planter technologies. And we continued to collaborate with them on technology, some of which I am not able to speak to specifically yet because of non-disclosures and competitive advantage. But the relationship is healthy, and we continue to support them with technology in their mission. So that's solid, but there's nothing really that's being generated significantly in terms of sales revenues at this time, but we still have confidence in that relationship leading to profitable revenues over the next year or 2. The second question was about grain carts. So we've been working over the last year-plus, probably, to develop our grain cart control system. And later this week, our partner on that, that will make an introduction into the marketplace. And I'd really rather let them have the lead on that, and -- but we're excited about it. It's a space within precision ag that we have not participated in the past, so it gives us some fresh, new revenue opportunities to serve a new part of the precision ag marketplace. And again, we think this can be a strong contributor to our growth going forward.

Operator

Our next question in queue is from Andrea James of Dougherty & Company.

Andrea James - Dougherty & Company LLC, Research Division

And forgive me if I missed this, you mentioned a new start-up line in Engineered Films, and I was just wondering, is this a new extruder or a new material? And then, what vertical market does it open up for you?

Daniel A. Rykhus

Well, we've been in the process of opening up our Line 12, which primarily serves our agricultural market with barrier films. And we were still also working through our reclaim operation, which is another line. So those are the 2 newer lines that we referred to.

Andrea James - Dougherty & Company LLC, Research Division

And the reclaim operation, does that help you on the margin side?

Daniel A. Rykhus

It will, yes.

Andrea James - Dougherty & Company LLC, Research Division

Okay. And then, you mentioned the Vista partnership with a large U.S. prime contractor. Do we assume this is defense related? And also, do we think about it as steady order flow or it is just a contract vehicle where they, I guess, put in orders to you as they come up?

Daniel A. Rykhus

Well, this -- the prime contractor that we mentioned in the press release, I believe, and I don't think we called them out by name, but the partner is Raytheon. And this is an opportunity that where we've demonstrated our capabilities with radar. And through a selection process, we were selected to be their provider for this particular radar solution. We have particular pursuits that they have won as a prime contractor outside the U.S., where our radar systems will be delivered. And this is funded and real orders and deliveries happening. And then, we expect that this will build a -- this is progress in building a new channel for that radar system through that prime contractor relationship.

Andrea James - Dougherty & Company LLC, Research Division

It seems significant to me, but I don't want to overstate it. But I mean, Raytheon is, I mean, sort of, known as the sort of radar systems provider.

Daniel A. Rykhus

Right. It's important that we build multiple channels. And as I mentioned in my comments, really, Aerostar is exciting for us. And we have 3 different major lines that we continue to invest in: the tethered aerostats systems; the radar systems; and our stratospheric balloons. And within each 1 of those, we have really interesting growth prospects. And they all have risks, but they also have some tremendous upside. So the likelihood of winning big on all of them is low. But we continue to believe that we're going to get some strong returns over the next 2 to 3 years on some of that.

Andrea James - Dougherty & Company LLC, Research Division

Since you mentioned aerostats, there was an article about using them to track -- for drug trafficking monitoring in the Caribbean. Is that sort of a big deal or just a one-off project?

Daniel A. Rykhus

I'll answer this one and then we should probably keep moving through whatever questions are remaining. You might be referring to the demonstration we did on the swift boat, and that was important to us because it continues to get the word out not only to U.S. agencies, but across the world. And we've got some strong response to that demonstration, as people start to understand the way aerostats can be used in different applications beyond just forward operating bases in the Middle East. So, it's important that we continue to have these opportunities to demonstrate the use of aerostats, in particular, with our radar system. So that one isn't important in terms of immediate volume revenues, but it's -- it was a wonderful opportunity for us to do some additional PR and test and demonstration on our product line.

Operator

And we also have a follow-up from John Rankin of Boranco Management.

John Rankin - Boranco Management, L.L.C.

In the past, when you've reached $60 million in cash, you talked -- you have talked about special dividend. At $55 million now, if you do increase up to the $60 million, do you anticipate a special dividend or you did anticipate that, that -- those funds will be retained for growth?

Daniel A. Rykhus

Well, our first priority is to return via a consistent dividend cash to our shareholders, and that's what we're committed to continuing to do, to grow that dividend and to make sure that's healthy and consistent. Secondly, we do need cash as we grow. The $60 million is, sort of, a static figure when we were a $200 million, $250 million revenue company; now we're a $400 million revenue company growing on that base. So we need more cash in order to execute this growth strategy, both for allocating capital internally and taking advantage of potential acquisitions. So with those 2 things being said, it's a Board decision if we want to return some additional cash to the shareholders. But I think those are our top priorities for now. And then, after consistent dividend distribution and supporting our growth initiatives, third in line would be some sort of special dividend or a buyback.

John Rankin - Boranco Management, L.L.C.

Okay. And if I may, a quick second question. In your press release: "We continue to expect stronger second half performance, but we do not believe that will be enough to deliver profit growth for the full year." Does that not mean that you may come close to the $1.44 from last year?

Daniel A. Rykhus

I think we've given as much guidance as I care to give in that commentary. And I don't know, now we're into trying to define quote. And we believe we're going to have a decent third quarter and return to growth. We think the fourth quarter can provide us some growth as well, but it's not going to provide enough to grow year-on-year. And if we have that much confidence in our statement, then it's -- it isn't -- if we were going to be within a couple pennies, I probably wouldn't be saying that.

Operator

We also have a follow-up question from Don Anderson of Red Pine Investment.

Donald Andersen

So could you just give a little inputs on the differences or similarities in sales cycles and sales patterns between you and companies like Deere and AGCO and Case New Holland?

Daniel A. Rykhus

I'll try to answer your question. I'm not exactly sure what angle you're going here.

Donald Andersen

I'm just somewhat new to Raven so...

Daniel A. Rykhus

Okay.

Donald Andersen

Over the last 12 months. So if -- when I see levels of growth in 1 area versus another, I just want to get a little bit more knowledge more about what might be going on?

Daniel A. Rykhus

Sure. Okay. The OEM business within our Applied Technology division is over 1/2 of our revenue. And so, that part of our revenue is driven fairly closely with Deere, AGCO, Case sales. But we do have -- beyond those 3, we have about 30 other OEMs that we supply both in the U.S. and overseas. So that dilutes that half of that business a little bit in terms of the real close match to the sales cycles that you mentioned. The other slightly less than half of our sales are what we consider aftermarket, and those patterns can be different than the OEMs within the ag space in that the size of a purchase of precision ag systems on an aftermarket basis might be anywhere from $5,000 to $15,000. So it's substantially less than buying a new tractor, combine, sprayer for $200,000, $300,000, $400,000. So we tend to see, at times, a more aggressive investment in the aftermarket, when market conditions are not as strong because people will invest in the upgrade of an existing piece of equipment rather than the outright purchase of a new piece of equipment.

Operator

And with that, I'm showing no further questions in queue. I'd like to turn it back to Mr. Dan Rykhus, CEO, for any closing comments.

Daniel A. Rykhus

Sure. Well, thank you, again, for taking the time to join us on today's call, and I really appreciate all the great questions. The Raven team will maintain our intense focus on executing our strategy and generating profitable revenue from our existing core markets, while driving growth in close and adjacent opportunities. We'll remain true to the Raven business model, exercising fiscal prudence and honoring our purpose of solving great challenges. And we look forward to updating you on our progress next quarter. Thank you.

Operator

Thank you. And again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.

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