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Raven Industries, Inc. (NASDAQ:RAVN)

Q1 2015 Results Earnings Conference Call

May 21, 2014 10:00 AM ET

Executives

Tom Iacarella - Chief Financial Officer

Dan Rykhus - President and CEO

Analysts

Robert Kosowsky - Sidoti

Rob Bennett - Dougherty & Company

John Rankin - Boranco Management

Marc Heilweil - Spectrum Advisory Services

Operator

Good day, ladies and gentlemen and welcome to the Raven Industries Incorporated First Quarter 2015 Earnings Conference Call. At this time all participant lines are in a listen-only mode. Later we will be conducting a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today’s call, Tom Iacarella, Chief Financial Officer. Sir, you may begin.

Tom 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, May 21, 2014. 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 first quarter.

Dan Rykhus

Thanks Tom and welcome everyone. 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. Sales were $102.5 million versus a $103.7 million in the prior year first quarter. Sales rose 22% in our Engineered Films division. And this was offset, though, by sales declines in the Applied Technology and Aerostar divisions.

As we said in today's press release first quarter sales and net income fell short of our expectations primarily due to continued softness in the North American agricultural equipment market.

Many companies serving this sector are reporting similar results on that concerned that we're losing share. I believe the underlying business in Applied Technology is in good shape and performing well. We underestimated the sluggishness in the macro environment.

Within Aerostar, order delays on important new contracts pushed revenues we expected in the first quarter into the second quarter. Engineered Films, however, delivered a strong performance, posting double-digit gains both over the prior year period and sequentially from the fourth quarter.

Related to Aerostar's performance I would remind you of the intentional shift we're making for long-term margin enhancement. As a company we're continuing to move to more proprietary product lines while we intentionally reduce our low-margin, low-growth contract manufacturing business.

Lower contract manufacturing revenue had a marked impact on Aerostar's first quarter, accounting for more than the full decline in revenue. We're committed to a smart transformation of our business, but we're mindful of the marketplace headwinds we face, particularly in agriculture. To that end, we are actively managing the company to optimize our performance for the year, while we continue to execute these changes.

What I mean by this is that we're narrowing our investment focus to the essential strategic initiatives that will directly drive growth. We'll reduce spending and marketing and corporate infrastructure and tighten up our operations for added efficiencies.

At the same time we're increasing our focus on continuous improvement efforts and value engineering. Through this season of necessary caution, we continue to invest in new product development at levels that will support planned growth and we maintain our vision to be a leader in providing the world with more food, energy, protecting the environment and allowing people to live more safely by delivering diverse technology solutions.

In pursuit of our targeted growth initiatives, we invested $7.9 million in research and development, and capital expenditures during the first quarter to support our product and growth strategy. Given market condition, we’ll work diligently to reduce capital expenditure and to focus our R&D efforts in the coming quarters. Tom will talk more about R&D and SG&A later.

As a company, we rely on our strong cash position to fund dividend growth and deliver above average returns on invested capital for our shareholders. I'm pleased to report that our cash and investment balances at the end of the first quarter stood at $63.7 million, up from last year as well as sequentially from the fourth quarter.

Now I'll talk about each of our three divisions starting with Engineered Films. For the fiscal 2015 first quarter, sales in Engineered Films rose 22% to $42.2 million from $34.5 million a year ago. Operating income was $5.9 million, a nice gain from $4.8 million a year ago. This division is performing well.

As we saw last quarter, sales of multi-layer barrier films for specific agricultural applications drove first quarter performance despite the overall slowness in the broader ag equipment market. In addition, energy, construction and industrial film sales were higher in the first quarter of fiscal ‘15 than last year. In most of our end markets within this division, we're seeing conditions improve.

We’re pleased that operating income rose 23% during the quarter despite higher resin costs compared to a year ago and an additional and unexpected resin price increase that occurred in February. Our strategy is to continue to move the product mix toward more high value films, and this is working. We’ve realized higher sales of these products sold into all five of our end markets. In order to address the lower value segment of our product mix, we have also developed new lower cost product formulations that allow us to segment our products and meet our customer needs across the market spectrum, in energy and construction end markets in particular.

In addition, despite competitive pricing pressure, we were able to increase our average selling price by about 2.6% sequentially from the fourth quarter and 6.3% from the first quarter last year. We continue to raise prices when possible and our sales and marketing team is emphasizing more highly engineered films with stronger margin potential. We’re also making good progress on operating improvement including leveraging our new reclaim production line and optimizing capacity scheduling to achieve additional cost savings and drive margins.

Looking ahead to our fiscal second quarter, we expect to see continued solid growth in Engineered Films revenues from high value agriculture with incremental improvements in the energy, construction and industrial film markets as well. We also expect to make small but steady progress on margin gains as we actively manage the product mix and pricing and lock in operational improvements.

Now let me comment on Applied Technology. For the first quarter, sales were $46.3 million versus $51.2 million last year, reflecting a sluggish ag equipment market in North America. Operating income was $15.9 million compared to $19.2 million a year ago. As we said in the press release, in addition to the weakness in the North American ag market approximately 38% of Applied Technology sales drop stand from the anticipated decline of non-strategic legacy customers from our former electronic systems division. ATD’s ongoing strategic revenues from ag were down 6% after this adjustment, which still fall short of our expectation that is a better representation of the business unit performance.

Going forward we are committed to managing spending levels closely for this division as well as for Raven as a whole and we intend to drive growth three ways, through international market expansion, new products, and broadening our OEM relationships.

Several key new products introduced in the past months met our expectations for initial sales revenues. Raven’s advanced field computers, planter and seeder controls, and harvest controls are each gaining critical traction in the early stages and we expect to continue to deliver important growth in segments of the precision ag market which are relatively new to us.

Related to our new product strategy I am pleased to talk about the capabilities we now have through our most recent acquisitions. We purchased SBG and its affiliate Navtronics on May 1st of this year. Headquartered in Middenmeer, Netherlands, SBG designs and manufactures advanced GPS steering systems for a variety of agricultural applications. The acquisition broadens our guided steering system product line by adding high-accuracy implement steering applications and improves our distribution network in Western and Eastern Europe, as well as in the former Soviet states. SBG specializes in very precise, real time kinematic GPS steering systems with a focus on high-value crops. Their highly accurate implement steering technology expands our existing capabilities and integrates well into the Raven product portfolio. This acquisition as well as the new products I just discussed are examples of executing closely adjacent growth initiatives.

Sales to our strategic OEMs in the U.S. were flat for the first quarter compared to last year, which is not a surprise given the reports we continue to hear from these important customers. We are in good shape with these customers and take rates are expanding in many cases, but machine volumes are just not growing. Going forward we anticipate continued softness in the second quarter in the North American ag environment. We will also continue to see declines in our non-strategy non-ag product revenues which were around $10 million for the full year and last year.

We expect this will be closer to $5 million for the full fiscal 2015 year. That said, we are confident both in the long-term health of the market and that we're well positioned to leverage our technology, expertise and product portfolio once conditions improved, and we continue to develop closely adjacent opportunities to drive growth.

Turning now to Aerostar, for the 2015 first quarter the division reported sales of $17.7 million versus $21.7 million in the year earlier quarter. Operating results were breakeven versus operating income of $1.8 million in the fiscal 2014 first quarter. Plan declines of $5.8 million in contract manufacturing revenues and the delayed multi-year tethered aerostat contract were factors in our performance. However, a $1.4 million increase in balloon-related revenue from Google, to $2.6 million contribute to the quarter’s revenues. And Vista Research continues to perform well. Aerostar short fall is really due to timing issues and the contract manufacturing decline.

We expect aerostat contracts to materialize in the second and third quarters and we anticipate balloon shipments to Google to ramp up to planned levels later this year, it’s important to note that with Google’s project Loon, our product is performing very well and our collaboration continues to strengthen. A project of this magnitude is subject to a number of variables and adjustments and that’s what we experience in the first quarter.

As we’ve said before with Project Loon, Google is striving to provide internet access to remote and under developed areas throughout the world. And our Aerostar division continues its support of the program, bringing decades of experience in high-altitude balloon engineering and manufacturing, including the latest breakthroughs in super pressure balloons.

Bringing internet to the next 1 billion people has the potential to improve lives through advanced medical care, access to knowledge and enriched agriculture all benefits of connecting people through the Internet. Our involvement in Project Loon is consistent with our purpose to solve great challenges. We continue to anticipate modest revenues from this project through the fiscal 2015 first half, with the possibility of significant revenue growth later in fiscal 2015, subject of course to continuing success.

Within Aerostar, Vista Research had another strong quarter. Revenues from the Smart Sense Radar Systems fueled a 29% revenue increase for Vista. As we've mentioned previously, Vista Research was selected by Raytheon as a preferred radar solution for future U.S. and export opportunities. Additionally, the U.S. Navy is utilizing Vista's system and were included in the initial budget submitted to Congress this year.

Looking ahead, our fiscal 2015 focus remains on expanding our proprietary technology opportunities including advanced radar systems, high-altitude balloons and aerostats to international markets. We're excited about each of these opportunities and anticipate an improved fiscal second quarter from both the top and bottom-line perspective.

Before I wrap things up and discuss our outlook for the year, I'd like to touch on a couple other developments at the company. Last month, we announced that Tom will be named Raven’s first Chief Risks Officer but will remain a CFO until a successor is on-board. Tom has played a significant role in the growth of Raven Industries in terms of revenue, business evolution and helping build the infrastructure for a $400 million company.

In his new role, Tom will remain a key member of our executive team and provide important leadership in establishing a durable risk management function. Having him serve in this capacity also will give us depth in a variety of potential situations including due-diligence and integration leadership on acquisition activities. This is an exciting transition for Tom.

I'd also like to share the fact that Raven was recently named to the Forbes list of America’s most trustworthy company. This is great recognition for Raven. And I'd like to thank all of our team members and our Board of Directors for your contribution to earn this distinguishing.

Now I'd like to discuss our expectations for the fiscal 2015 second quarter and year. Despite the marketplace headwinds already discussed, we remain steadfast in our fiscal 2015 objectives, measurably growing revenues from our situational awareness and lighter-than-air product line; driving Applied Technology through international market expansion, new products and broadening OEM relationships; and bringing high-value plastic film applications to each of our Engineered Films markets.

For the fiscal 2015 second quarter, we expect to see solid growth in Engineered Films revenues and operating income from multiple end markets, improvement in Aerostar stemming from tethered aerostat and high altitude balloon revenues, and higher OEM deliveries in Applied Technology partially offset by ongoing declines in lower-margin contract manufacturing customers and uncertain agricultural aftermarkets. We do anticipate year-over-year profit growth in the second quarter.

For the full fiscal year, we expect continued ag market uncertainty in North America for Applied Technology; Engineered Films should continue to grow; and Aerostar will show mixed results with success in all three of our strategic product lines offset by the continued planned decline in our contract manufacturing business.

We are managing the company to optimize our results in fiscal ‘15, while staying committed to our key growth drivers for the future. We’re building a sustainable company that has the people, products and capabilities to capitalize on the long-term growth opportunities we face in our chosen markets.

Now I’ll turn the call back over to Tom and after that we’ll be glad to take your questions.

Tom Iacarella

Thanks Dan. Hopefully all of you had a chance to review this morning’s release. I will discuss our balance sheet changes and operating margins in more depth.

We ended the quarter with $63.7 million in cash which was up $12.5 million from last April. Over the past year, we have been able to increase our cash position while maintaining investments in production and infrastructure capacity, and research and development.

As we’ve indicated, we are going to moderate spending levels and only fund critical strategic growth drivers. We reported operating cash flows of $18.2 million compared to $14.9 million last year. The $3.3 million increase reflects favorable working capital flows in the current year.

Accounts receivable were down $4 million from last April and were within 600,000 January’s balance. Overall, we did see some positive movement in the quarter on receivable aging. Our average DSO has stayed consistently in that 50 day range.

Inventories were also relatively flat compared to January levels but were up about 6 million from last April. Contract manufacturing inventory in Aerostar is down but inventory growth in Engineered Films and Applied Technology has more than offset Aerostar’s reductions.

Inventory turns were 5.1 down from 5.3 last year at this time. We are working to reduce inventory and bringing production levels in line with demand. Our current ratio is 5.43 versus 4.53 last year. Indicating the strength of our balance sheet, Raven’s cash position increased by 10.4 million from last January.

We believe we have a capacity to fund the investments we are making in our operations and continue to pay an attractive dividend.

Turning now to specific investments, capital spending was down from $8.1 million last year to $2.9 million in the quarter just ended. We are committed to investing in our business as evidenced by our May 1st, acquisition of SBG to enhance Applied Technology’s product offerings in European presence.

This transactions will be included in our second quarter financials, we expect fiscal 2015 capital expenditures to be less than $25 million. The final amount will likely reflect the progress of Project Loon.

As we look ahead, we believe there are significant opportunities that Raven must be prepared for. So over the past three years, we have invested in research and development capabilities and overall infrastructure. Selling, general and administrative expenses rose 5% in first quarter, compared to last year’s first quarter. Much of that increase was due to acquisition related spending.

Bending on the R&D side, which in support of the Radar and Project Loon allowing with new products for Applied Technology rose 17% in the quarter. We continue to invest where necessary to support the growth pipeline required for future success. While Dan said, we can hide overall spending levels and managing the business in response for more.

Now I would like to talk about operating margins by segment. In Applied Technology margins came in at 34.3% versus 37.4% last year. The impact of lower sales in production levels on overhead cost reduced gross profit rates. Overall, we had a strong operating performance on lower revenues. This division trade our highest gross profit rates and sales have a very direct impact on profits. Additionally R&D expenses were up about 4% in the quarter in support of the a higher level of precision and applications.

Engineered Films margins rose slightly to 14% from 13.8% last year. We are encouraged not only by the increase over last year, but a strong 4.5 percentage point sequential improvement over the fourth quarter ended in January. Some of that increase is seasonal but we believe we will see margins sustain a 2% to 3% percentage point improvement over the last year.

That said, we continue to be impacted by Raven price fluctuations and a challenging market place to help offset this, as Dan indicated. We are introducing new films to meet customer needs more protecting our profit margins. We have also seen improved performance in plant efficiencies during the quarter.

In spite of competitive pricing pressure, we were able to pass along [resin] price increases that affected our average selling price up about 3% sequentially from the fourth quarter and 6% from the first quarter of last year. We continue to raise prices and emphasize the marketing of our more highly engineered films with higher margin potential. Compared with the first quarter last year, pounds [extruded] were up about 5%, reaching almost 20 million pounds.

Aerostar's operating margins were breakeven versus 8.3% a year ago. The leverage impact of the sales push outs, greater capacity costs that flow to the bottom line. We have adjusted and continue to look at where we can further reduce overhead spending to be more in line with revenue levels.

As indicated, we expect to secure aerostat contracts that will improve profitability as we move into the second quarter and for the remainder of the year. R&D costs were up over $800,000 in this division compared to the first quarter of the prior year. This was primarily in support of Project Loon and Vista Radar enhancements.

Looking at the company overall, first quarter sales were down 1% and profits decline 21% compared to last year. The lower sales of high margin Applied Technology products combined with Aerostar breakeven results to lower our overall profitability. Despite strong performance from Engineered Films. As Dan said, we are expecting stronger performance going forward.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Robert Kosowsky from Sidoti. Your line is open sir.

Robert Kosowsky - Sidoti

Hi, good morning guys. How are you doing?

Tom Iacarella

Good.

Dan Rykhus

Good morning Rob.

Robert Kosowsky - Sidoti

I was wondering, if you could talk a little bit more about the Applied Technology segment and aftermarket was big [chunk] last quarter. How does that look in first quarter and any thoughts and how may have looking given that we're now pretty far to the planting season?

Dan Rykhus

Go ahead Tom. You can take that one.

Tom Iacarella

Sure. On the aftermarket front, we're seeing similar types of declines year-over-year, kind of 5% range. As Dan said, the overall is down about 6 when we adjusted for the non-ag piece of the business. And we continue to see some timing issues I think as we've gotten into the second quarter, it's really still pretty early. The trends are fairly consistent flow, we are seeing some ups and down, but overall the same sort of trend towards a difficult make market especially North America.

Robert Kosowsky - Sidoti

And then any I guess initial thoughts about what the growth rate of the ag market to be like into next year I know it's very far, seeing a long way away, but if we got the stabilization of commodity phrases where we are today, you think that next year would be a better year for I guess farm equipment sales and therefore your position ag sales?

Tom Iacarella

That's a hard one. The forecast Rob on your some point recycled, which actually turned the other direction and history will prove that out. So it's really hard, I don't think we're going to see, I would be cautious as we look at even next year thinking that at some point we're going to start to see single-digit growth again in ag equipment sector and maybe that would be next year, but I would be hesitant to give anymore guidance on that.

Robert Kosowsky - Sidoti

Okay. That’s helpful. And then also on aerostats, niche hear about the order is coming in. And I am wondering if this is the beginning of a sustainable trend or it’s just a one-off order and any sense on how to think about this business say from like a five year growth perspective?

Dan Rykhus

Aerostat, it’s hard to model in comparison to our other two divisions. So, each of our division plays a specific role within the Raven business model. And ATD’s role over the course of time is to provide steady high growth. And if you look at the last five years, we’ve delivered 20% compound annual growth rate in earning in division profit out of ATD and films to deliver steady growth. And if you look at the five year span, we do that as well.

But Aerostar’s role is very different and that is to pursue as we exit the contract manufacturing business, we’re really focused on developing our proprietary product based opportunities in three areas. Radar, that’s going well, 40% growth last year, 29% Q1 that’s going well. The second area is our stratospheric balloon technology, some of that being sold to Google, but also other opportunities that we’re developing and that’s going well. The third piece is aerostat business and we are close. And once we complete the deals that we have in the pipeline, we’ll announce those. And I think we’re going to continue to see growth out of Aerostar once we get the contract manufacturing business completely run-off, we’ll start show some nice growth but it’s going to be lumpy as I’ve said in the past. And it could be triple-digit growth some years and it could be flat or slight declines in others. But Aerostar is in our business model is our what we call a home run plan. And we don’t rely on it to give a steady stable growth each year but we do rely on it to pursue very high growth opportunities. And we believe deeply that we are going to deliver on those over the next two to five years.

Robert Kosowsky - Sidoti

Okay. And so I guess within aerostat specifically, do you still see a very deep or very good pipeline of opportunities I guess of three, five year?

Dan Rykhus

We do. Yes.

Robert Kosowsky - Sidoti

Okay, alright. Thank you very much.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Rob Bennett from Dougherty & Company. Your line is open.

Rob Bennett - Dougherty & Company

Hi, good morning. I am on for Andrea James.

Dan Rykhus

Good morning and welcome.

Rob Bennett - Dougherty & Company

Thanks. So Google contributed a little bit in the quarter and then you mentioned it’s tracking to planned levels. Can you speak to what those planned levels might look like?

Dan Rykhus

Sure. It’s totally dependent on the success of the program but we continue to be told and believe that we’ll ramp up throughout the year and our volume should show steady increase. I am not going to put a percent on it for you but because we don’t know what it’s going to be and we know that it’s increasing each month and it’s increased -- it’s starting to increase substantially. And if we continue on the pace we believe we’ll have good revenue growth in the fourth quarter. And that’s awfully vague but that’s about as much as I can tell you. Tom, if you have anything else you can share.

Tom Iacarella

Yes, it’s an uncertain situation with sales folks and also it’s a major project that is in development. And for us to see the kind of revenues that we are I think it’s an indication we have a real possibility here of moving this forward and at the same time it’s not certainly driving results today.

Rob Bennett - Dougherty & Company

Okay. Thank you. And then just actually kind of unrelated but margins and Engineered Films went sequentially lower, more than we anticipated, do you expect it to be around this 13.9%, 14% margin level for the remainder of the year or is it going to grow from there?

Dan Rykhus

Growing margins in films is our number one priority in films. And we are happy with the sequential progress we have made but we also are committed to continuing to grow that. We will get it back to 20% or anything like that. But we believe we can continue to gain back share by our efforts in pricing, our efforts to bring more high value premium products into the mix and we make progress on that every quarter. So that improves our mix. We’ve got operating efficiency improvements that we have implemented that are showing returns and should expect and we expect they will continue to show some improvements. So we’ve got a variety of factors that we feel will continue to nudge that operating margin in a more positive direction. And we think we can get another one to two percentage points, maybe even a little bit more back this year. And for us on a $150 million division, that is significant.

Rob Bennett - Dougherty & Company

All right, thank you for that. Good luck on everything.

Dan Rykhus

Thank you.

Operator

Thank you. Our next question comes from the line of John Rankin from Boranco Management. Your line is open.

John Rankin - Boranco Management

Hi, good morning. My question was here in our state of Colorado, I noticed you only had one dealer and that dealer is located in an area that is declining in ag. So, for the real ag market, it's clearly 100 miles south and I believe that county you know is like in the top five for corn growing, 200 miles to 300 miles from Western Colorado. And (inaudible) my question is then, do you feel that you are adequately covered coast to coast as far as your ag dealers?

Dan Rykhus

Sure, I'll take that one John. And thanks for the call. So, our distribution model in Applied Technology or what you speak well control division is really based on two pieces, one is we sell directly to OEMs and we work hard to cultivate and broaden those relationships and we've got some great progress going on there. That gives me confidence in growing our product line across those 30 OEMs, in particular the three or four strategic OEMs we have.

The other part of our distribution model is one where we sell through distributors in the U.S. In other parts of the world, we do have a dealer direct model where you see a much higher concentration of dealers in Canada. But in the U.S., we sell through distributors who maintain they sell some direct, but they also maintain a set of dealers below them that deliver our products to end users.

So, while it may look like in one region we only have a certain point of light, more than likely that business has multiple dealers, if they are supporting as well.

John Rankin - Boranco Management

Okay. Thank you.

Dan Rykhus

So, your final question, your final question was do we feel like we have good representation? I think we have good representation across the U.S., whatever you maintain at a distribution network like this you need to work to continue to educate and train those distributors and their dealers on our technology. I believe for the last two decades that our success in selling technology out through our distribution channel is completely dependent on the comfort level, those people who are selling past with the technology and it's on us to provide great training and equip those resellers with the confidence that allows them to sell the product.

So I think we could, there is places where we could probably add a little distribution, but overall this is a model that we've developed over the last couple of decades and we feel a pretty good about the concentration levels we have.

John Rankin - Boranco Management

Okay. Thank you for that. And my follow-up question is regarding the dividend in the past, if my memory serves me correctly, when you hit $60 million at times there’s been a special dividend. I'm curious what your thoughts are on the dividend this time growth of the dividend any thoughts on the special dividend or will you use that case to fund growth? Thank you.

Dan Rykhus

Sure. We are a different company today, we are a larger company than when we issued a special dividend last, I don't remember what year that was, but probably we are around half or 60% of the revenue that we are today at that point in time. But our cash management strategy remains the same and that is to use our prior year's earnings roughly 70% to support organic growth for the corporation and to return roughly 30% to our shareholders via dividend.

So in the dividend side our first priority is growing the dividend. And that will be a board level decision that will make quarter-to-quarter. But I would expect it will continue to grow the dividend this year at some point. So that’s priority number one within that part of our cash management strategy. As it relates to a special dividend again we look first to fund our organic growth initiatives. We also look for acquisitions that make sense to complement our organic growth strategy and we did that with SBG recently. But we’ll also look at additional acquisitions and we are today.

So, I don’t anticipate a special dividend coming anytime soon. There is no longer a magic number of $60 million whereby we start to think differently about the cash we have. We have a lot of, we have a different business model now that has different cash usage requirements, but overall our cash management strategy remains the same.

John Rankin - Boranco Management

Okay. Thank you very much.

Dan Rykhus

You bet.

Operator

Thank you. Our next question comes from the line of Marc Heilweil from Spectrum Advisory Services. Your line is open.

Tom Iacarella

Hi Marc.

Marc Heilweil - Spectrum Advisory Services

Hi guys. Thank you. I guess one would be on the Loon Project, you’re putting a fair amount of money in this I gather, is there any sharing of risk or any guarantees in terms of that this investment is protected, should the project not work, should the project have cool results presumably not through any fault of your but just from Google standpoint?

Dan Rykhus

I can’t tell you about the specific details of any agreement that we have with Google. But I can tell you that number one we have confidence that there is going to be a level of success that will generate a level of profitable revenues that will more than cover our costs. The second thing I can tell is that the investments that we have made in facilities were built in a way that will support growth with stratosphere balloon technology, but if that isn’t the way that facility can be used or those facilities in the future that we have other needs for our Applied Technology division which is right next door or our Engineered Films division which is on that campus in the longer term you may think.

And then the second thing I would -- the last thing I would to say that and Tom you can jump in on risk if you would like, is probably the most important asset to have us is how far we have moved the technology forward. And the work that we have done to refine our stratosphere balloon designs and to fly balloons from moving from five days duration to 75 or 100 days duration lapping the globe couple of times. That benefit has great value to us that we’ll continue to own and utilize just as we have our core legacy the company that started on this technology 58 years ago and we’ve been refining it and this opportunity has come along and it’s going to be a wonderful contributor to our growth. But as that opportunity runs its course over the next several years and maybe decades, we still have a much stronger asset from a intellectual property standpoint at the end that we’ll continue to use in other ways as we go forward as a corporation.

Marc Heilweil - Spectrum Advisory Services

That is good. Dan, you we might also think about getting some movie rights to a remake of around the world and maybe days, maybe around the world in five days, or I maybe gating myself, I [haven’t seen] the movie, but balloons, [pardon me].

Dan Rykhus

Okay.

Marc Heilweil - Spectrum Advisory Services

My second question relates to international outlook for precision ag, with the new acquisitions and the like, do you think to some degree that -- well, how would you calculate the percentage of precision ag sales that may come from outside North America over the next few years?

Dan Rykhus

Well, it’s going to continue to grow faster than the U.S. and of course we count Canada as our part of our international sales.

Marc Heilweil - Spectrum Advisory Services

Yes.

Dan Rykhus

So we see stronger growth rates overall. Right now there is -- Canada is constrained in a similar way as we are seeing in the U.S. in the aftermarket business in particular. In South America, there is mix of issues going on there with Argentina having its own set of challenges. And in our Brazilian market we show -- we accomplished tremendous growth last year, both in the OEM business as well as aftermarket, growth above 50%. And we're working hard to lock that in and sustain that. We're making some product changes right now that will improve our product performance in Brazil. So, that's had an impact on our Q1 deliveries actually.

So, we think long-term we should see 30% of our revenues from ATD over the course of the next few years, coming from international markets and really going that closer to 45% or 50% as you look out five to seven years. We think the capacity; the opportunities to have capacity in the markets that we serve internationally could deliver that kind of growth. So, we continue to be bullish on it. And you are right; the acquisition of SBG does give us a new beachhead in Europe. And we have a headquarters now in the Netherlands, where we're able to capitalize on the distribution channels that SBG has developed over the last several years. And those channels complement and really strengthen ours, as we didn't have strong channels throughout Western Europe in the past.

So, we're able to take advantage of those as well as channels that SBG developed into the former [Soviet states].

Operator

Thank you. Our next question comes from the line of [Stephen Lewis from Lewis Capital Management]. Your line is open.

Unidentified Analyst

Good morning. I'm glad to see that we've moved away from the income statement discussion of Project Loon to thinking a little bit more about the way the Board of Directors would as far as return on investment, discounted future cash flow that sort of thing. The previous question was interesting and that you said that if for some reason the Google Loon Project doesn't work out, the plant can be use for something else?

Dan Rykhus

Yes.

Unidentified Analyst

And I'm assuming therefore that there is some sort of assignment of plant expense into the fixed capital requirements for the program for the Board of Directors. So, if it doesn't work out some reason than there is sort of an interim costs where there is no income coming out of it, but some other program gets assigned to it, to the plant?

Tom Iacarella

This is Tom. I would say that that's fair. I think that as Dan said a lot of the intellectual property assets that we're developing are going to be valuable to us in the longer term. We're not carrying a lot of assets on our balance sheet right now but that would give you cause for concern as I look at downside scenario for project. We're not carrying a lot of inventory or intangible product development costs on our balance sheet.

Unidentified Analyst

How about working capital requirements; are they modest or they deserve big build up before you deliver or what?

Tom Iacarella

Well that will depend on the rate of ramp. But we think that we've got good commercial turns with the folks at Google in terms of producing and selling [it too].

Unidentified Analyst

What sort of return over several years on capital with them Board think for this project?

Tom Iacarella

I think that’s maybe getting into a level of detail that we're not going to get into today. But I would tell you that this is one where the potential is very large, the initial investment was modest outside of this acceleration of the [balloon] of facility to help support the project. And it’s one that there is certainly opportunity cost that arise from pursuing this as opposed to other opportunities that may be in the marketplace. But we believe that if business is successful, the rate of return will be extraordinary.

Operator

Thank you. And I have a follow-up question from the line of Robert Kosowsky from Sidoti. Your line is open.

Robert Kosowsky - Sidoti

Yes, guys. I was wondering at Engineered Films there was really good growth this quarter. Was there any -- were there any major lumpy orders in there or is this pretty broad and sustainable sales? And then secondly could you comment on seasonality of this business now as you get more of these ag sales [grown]?

Dan Rykhus

Sure. I’ll take the first one. There wasn’t any lumpy sort of one time reason there. This is very broad growth; we did have strong growth in our ag segment. And I guess it’s important to make sure right now as the ag business for films is very different from than ag business for Applied Technology. Film sells solutions mostly into the very high value crops grown in California and other regions and also sells film into the silage usage market, which is mostly dairy and some other channel operations. So, no we didn’t see any sort of one-timer that drove this; we expect to see continued strong performance from films throughout the year. And the ag segment concentration now is upto about 19% for the last year and that has been a big part of our success to pull down our energy concentration from where it was around 50% down the, I believe a 38% now.

Robert Kosowsky - Sidoti

Okay and any comments on the seasonality of the business, as the product mix changes?

Dan Rykhus

Historically we have strong second and third quarters relative to the other quarters but it isn’t as pronounced as the Applied Technology.

Operator

Thank you.

Tom Iacarella

This is Tom. Just going to say one of the things that we do see is we see a lot more construction shift in the mix in the fourth quarter which tends to be some of our lower profit films. So we do see some seasonality in the margins.

Operator

Thank you. That is all the time that we have for questions today, I would like to turn the call back to Dan Rykhus, Chief Executive Officer for closing remarks.

Dan Rykhus

Well thank you all again for joining us today. The market we have chosen will continue to provide long-term profitable growth opportunities overtime. We’ll execute the Raven business model, employee fiscal prudence and stay true to our purposes solving great challenges. In doing so we will optimize our fiscal 2015 performance while ensuring the soundness of our business and preparing for future growth. And we look forward to updating you again on our second quarter in August.

Operator

Ladies and gentlemen thank you for participating in the conference today. This now concludes the program. And you may all disconnect. Everyone have a great day.

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Source: Raven Industries' (RAVN) CEO Dan Rykhus On Q1 2015 Results - Earnings Call Transcript

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