Raven Industries' (RAVN) CEO Dan Rykhus on Q2 2015 Results - Earnings Call Transcript

Aug.20.14 | About: Raven Industries, (RAVN)

Raven Industries, Inc. (NASDAQ:RAVN)

Q2 2015 Earnings Conference Call

August 20, 2014 10:00 AM ET

Executives

Thomas Iacarella – Vice President and Chief Financial Officer

Daniel A. Rykhus – President and Chief Executive Officer

Analysts

Andrea James – Dougherty & Company LLC

Robert A. Kosowsky – Sidoti & Company, LLC

Andrew O'Conor – Bank of Montreal

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Operator

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

I’d now like to introduce your host for today’s conference, Tom Iacarella, Chief Financial Officer. Please go ahead.

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 20, 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 second quarter.

Daniel A. 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 in the balance sheet. And after that, we’ll open up the call for your questions.

So let’s begin with our performance. For the second quarter, sales were $94.5 million, up from $93.4 million in the prior-year second quarter. Sales rose 14% in our Engineered Films division and this was offset by declines in our Applied Technology and Aerostar.

While Engineered Films again delivered strong performance, posting double-digit gains over the prior-year period and driving improvement overall sales and net income for the corporation fell short of expectations, primarily due to persisting weakness in the North and South American agricultural equipment markets.

Within Aerostar our work with Google is ramping successfully and Vista continues to grow. However, we experienced lower contract manufacturing revenue as anticipated.

Related to our performance, I would like to underscore the fact that Raven continues to make important progress moving to more proprietary product lines with advanced technologies. But as we exit the lower margin, low-growth contract manufacturing business in the short-term, Aerostar and Applied Technology revenues are reduced and that had a measurable impact on second quarter results.

As we said in today’s press release, Raven continued to show growth in its strategic proprietary product lines, which represent all of the Company excluding contract manufacturing. These revenues increased by 10% over the prior year’s second quarter.

As we purposefully work to transform and evolve our business to capitalize on key growth opportunities, we are actively managing Raven to optimize our performance for the year. This entails narrowing our investment focus to the essential strategic initiatives that will directly fuel growth, and continuing to constrain expenses to lower our operating costs.

At the same time we are increasing our focus on continuous improvement efforts and value engineering that directly relates to our purpose of solving great challenges through our products in areas of safety, food production, energy independence and resource preservation.

Our emphasis on growing Aerostar and growing and optimizing Engineered Films’ opportunities going forward will help shift Applied Technology’s percent of the corporation’s total operating profit from around 65% historically to around 55% over the next several years. This will result in improved balance for the corporation while still maintaining a strong emphasis and commitment to precision agriculture.

Again, to be clear, this will be the outcome of our past and future emphasis on investing in the growth of Aerostar and Engineered Films while we work through this downturn in the ag cycle.

In pursuit of our targeted growth initiatives, we invested $8.8 million in research and development and capital expenditures during the second quarter to support our product and growth strategy. 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 am pleased to report that our cash and investment balances at the end of the second quarter stood at $62.4 million, up from $55.7 million last year.

Now I’ll talk about each of our three divisions starting with Engineered Films. For the fiscal 2015 second quarter, sales in Engineered Films rose to $42.3 million from $37.3 million a year ago. Operating income was $5.8 million, compared with $4.8 million in the year-earlier quarter. This division continues to perform well.

Sales of barrier films for specific high-value agriculture applications, specifically multi-layer barrier films for fumigation and silage drove performance despite the overall slowness in the ag equipment market, a trend that continues from previous quarters. In addition, construction and industrial films sales were also higher in the second quarter of fiscal 2015 versus last year.

Operating income for Engineered Films rose 22% during the quarter. Pricing changes, operating improvements and leveraging our reclaim production line have enabled us to improve margins. Our strategy is to continue to move the product mix toward more high value films, and this is working.

We have realized higher sales of these products in four out of our five end markets. In order to address the lower value segment of our product mix, we’re also continuing to develop low cost product formulations that allow us to segment our products and compete across the entire market spectrum.

Looking ahead to our second half of fiscal 2015, we expect to see continued solid growth in Engineered Films revenues from high-value agriculture films in most of our end markets. We also expect to continue to make steady progress on improving operating margins.

Now let me comment on Applied Technology. For the 2015 second quarter, sales in this division were $36.2 million versus $39.1 million last year, again reflecting a sluggish ag equipment market and the significant impact of the planned declines in our non-ag market segment.

Operating income was $8.8 million, compared to $11.9 million in the prior-year period. With falling commodity prices further eroding grower sentiment, demand remained subdued for precision ag equipment.

Our underperformance relative to our plans and expectations was really a function of the velocity at which U.S. ag market conditions eroded. Market conditions were challenging through the winter and spring of 2014, but dropped out sharply as we entered the June to July timeframe.

Internationally we’re seeing similar trends with most global ag markets in declined phase, but our exposure to overseas is less than the United States. There were pockets of strengths that the primary markets in Brazil, Canada, Argentina and the former Soviet states are challenging for a range of reasons.

In addition, the anticipated decrease of non-strategic revenues in ATD accounted for over 50% of the second quarter division revenue decline and 45% of the year-to-date division revenue decline.

In response to these headwinds, we have implement cost control measures to manage spending levels closely for this division, something that we’re doing for all of Raven. And our focus remains consistent, pursuing long-term growth through international market expansion, new products and broadening our OEM relationship.

Sales growth from our recent acquisition of SBG, which designs and manufactures advanced GPS steering systems for a variety of ag applications, generated $1.1 million in sales for the second quarter. Q2 revenues met seasonal expectations and the integration is progressing on plan and this looks to be another strong fold-in acquisition for ATD.

On the new product front, several of our recent introductions are gaining traction and helping to offset challenging market conditions and declines. Raven’s advanced field computers, planter and seeder controls and harvest controls are each gaining momentum and we expect to continue to deliver important growth in segments of the precision ag market, which are relatively new to us.

In addition, we recently announced a new collaboration with Kinze Manufacturing to develop a standalone planter control solution, which integrates our new Viper4 field computer and our recently introduced multi-hybrid solution. We also recently announced our Hawkeye nozzle control system, bringing a new level of precision application to agricultural equipment.

As we look to the third quarter, we expect continued softness in the North American ag market. However, our long-term view of the precision ag market remains optimistic. A growing global population and greater demands for food will ultimately support healthy growth and Raven is well positioned to leverage our technology, expertise and product portfolio.

That being said, we continue to expect challenging market conditions for the next four quarters. Despite these near-term challenges, we are aggressively pursuing closely adjacent growth opportunities. For example, we’re adding new aftermarket distribution in key global markets and executing on high-quality growth projects with existing OEM customers to further utilize our existing and emerging product lines.

For the fiscal 2015 second quarter, Aerostar reported sales of $19.3 million, versus $20.7 million in the year-earlier quarter; and operating income of $1.6 million, up from $1 million in the fiscal 2014 second quarter. Planned sales declines of $5.5 million in contract manufacturing were partially offset by a $2 million increase in balloon-related revenue from Google, which rose to a total of $3.1 million.

Despite the anticipated declines in contract manufacturing, we are pleased that operating income rose nicely. Aerostat and radar shipments increased as a result of previously announced government contracts. While we expect additional aerostat contracts in the second half of the year, there remains uncertainty surrounding these opportunities.

On the Google Project Loon front, our revenues ramped nicely in the second quarter, increasing 175%. Our product continues to perform very well for Project Loon, with consistent balloon endurance in the 75-day range and we expect the project to continue to accelerate in the second half of fiscal 2015. Transitioning to higher levels of balloon production in the third quarter may result in certain disruptions that temporarily reduce the growth rate.

As we’ve said before with Project Loon, Google is striving to provide Internet access to remote and underdeveloped 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.

Looking at Vista Research, sales grew 8% in the fiscal second quarter, fueled by Vista’s Smart Sensor Radar Systems. Vista was selected by Raytheon as a preferred radar solution for future U.S. and export opportunities and continues to build volume with this relationship. Additionally, Vista’s systems are being integrated with aerostat solutions under an $8.4 million contract in support of the U.S. Army.

Looking ahead, we remain steadfast in our focus for Aerostar: expanding our proprietary technology opportunities, including advanced radar systems, high-altitude balloons and aerostats to international markets. For the fiscal 2015 second half, we anticipate some variability in performance, with much of Aerostar’s profits coming in the fourth quarter.

Now I’d like to discuss our expectations for the fiscal 2015 third quarter and year. While Raven is facing marketplace challenges in the fiscal 2015 second half, we are confident in our long-term opportunities and we’re aggressively pursuing our objectives, which are: measurably growing revenues from our situational awareness and lighter-than-air product lines, 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 third quarter, we expect to see continued solid growth in Engineered Films revenues from multiple end markets; a difficult quarter for Aerostar stemming from the transitional impact of moving to higher-scale production of Project Loon balloons, and a deferred ramp up of aerostat and radar deliveries, difficult market conditions in Applied Technology and our continued contract manufacturing declines.

For the third quarter, ATD will see year-over-year percentage declines in revenue and operating income, similar to the Q2 percentage declines. Despite our expected strong performance in EFD and conservative management of corporate resources, we expect double-digit declines in net income for the third quarter compared to our record third quarter last year. Growth is expected to resume in the fourth quarter, but not at a rate to produce higher earnings for the full year.

Going forward, we will maintain an intense focus on executing our strategy and generating profitable revenue from our existing core markets, while driving growth in closely adjacent opportunities.

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

Thomas Iacarella

Thanks, Dan. Hopefully all of you’ve 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 fiscal 2015 second quarter with $62.4 million in cash, up $6.7 million from last July. Over the past year, we have been able to increase our cash position while maintaining investments in growth opportunities, including new products and geographic reach, production capacity, and research and development.

Raven’s first half operating cash flows were $31 million compared to $29.7 million last year. The increase of $1.3 million reflected a favorable working capital influence driven by an improved inventory position at the end of July. Inventories were down $3.1 million from a year ago, consistent with the decreases from July and April levels.

Aerostar’s contract manufacturing levels declined and Engineered Films levels have improved significantly since January. Lower than expected deliveries in Applied Technology partially offset those reductions.

Inventory turns were down from 5.2 last year to 5.1 in the current year. We believe there is room for further improvement in inventory levels as we continue our shift to more proprietary products.

Accounts receivable were up $3.3 million from last July, which was a little higher than the sales increase. Most of the increase came from sales growth in Engineered Films.

Overall, our receivable position is solid. our average day sales outstanding, has stayed in the 51-day range.

Raven’s current ratio was 6.63 versus 4.8 over last year. Our balance sheet is quite strong. Our cash position increased by $9.2 million from January and we believe we have the capacity to fund the investments that we are making in our operations while continuing to pay an attractive dividend.

Looking closer at our growth investments, as Dan discussed, we acquired SBG in May, paying $5 million in cash at closing with a contingent earn-out that could reach $2.5 million over the next 10 years. SBG provides both the technology that expands our product offering and a presence that can expand our European distribution.

We continue to look for opportunities to grow through acquisition. The Company’s first half capital spending was down from $13.7 million last year to $7.3 million. The longer-term investments and corporate infrastructure are winding down, and we have invested in new capacity for Engineered Films. We continue our commitment to invest in our business, but we expect capital expenditures to be in the $20 million range in fiscal 2015, down measurably from fiscal 2014.

On the SG&A and R&D front, we continue to believe that there are significant opportunities that Raven must be prepared for. And over the past three years, we’ve invested in research and development capabilities and corporate functions to support a more dynamic business model.

Our selling, general, and administrative expenses rose 4% in the second quarter compared to last year. Much of that increase was due to acquisition-related spending. R&D investment in new products for Applied Technology and Engineered Films, Vista radar, and Project Loon rose 10% in the quarter. We continue to invest where necessary to support the growth pipeline record for future success. At the same time, we’re looking hard at overall spending levels.

Turning to operating margins, I’ll detail these by segment. Within Applied Technology, operating margins were 24.4% versus 30.4% in last year’s second quarter. The impact of lower sales and production levels with fixed overhead costs reduced gross profit rates. Since the second quarter is a seasonal low point for this division, the impact was magnified.

Applied technology carries our highest gross profit rates and sales have a very direct impact. That accounted for most of the decline. Additionally, R&D expenses were up about 23% in the quarter due to new product development and product enhancement activities.

Within Engineered Films, margins rose to 13.7% over last year’s 12.8%. Sequentially, we held on to the margin gains we saw in the first quarter despite resin price fluctuations in a challenging marketplace.

We continue to develop new films to meet customer needs while protecting our profit margins. Plant efficiencies also continue to improve. Additionally, despite competitive pricing pressure, we’re able to increase our average selling price about 3% sequentially from the first quarter and by 9% from the second quarter last year.

We continue to emphasize marketing of more highly engineered films with higher margin potential. Compared with the second quarter last year, pounds extruded were down about 7%, still reaching almost £20 million as we work to reduce inventory levels.

Aerostar’s fiscal second quarter operating margins were also up, 8.5% versus 4.7% last year. We worked hard at spending – we looked hard at spending levels after a difficult first quarter and have seen some solid recovery in this division.

Moreover, higher sales of proprietary products, including Vista Radar processing units, aerostats and research balloons, helped drive the improved results. Higher gross profit rates and relatively flat R&D and selling costs also helped improve profitability over the second quarter last year, while continuing to support Project Loon and Vista Radar enhancements.

I’ll wrap things up with our overall results. Second quarter sales were up 1%, and operating income declined 15% compared to last year. This shortfall was partially offset by a discrete, favorable income tax benefit. Including that benefit, net income came in 7% below last year’s level. The impact of lower sales lower sales of high-margin Applied Technology products, was greater than improved performances in Engineered Films and Aerostar.

As Dan noted, we have a number of initiatives in place to build sales and earnings. This is our top priority across Raven Industries.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) In the interest of time, we ask that you please limit yourself to one question and one follow-up question. (Operator Instructions) Our first question comes from the line of Andrea James with Dougherty & Company. Your line is open.

Andrea James – Dougherty & Company LLC

Good morning guys. Thank you for taking my questions. I just was wondering if you could unpack for me what you were saying about what’s going in Aerostar in Q3. You said there was the transitional impact of moving to higher scale production of Project Loon balloons, and then there’s I guess, a coinciding deferred ramp-up of aerostats and radar deliveries. Can you just explain what’s kind of going on physically at the plants there?

Thomas Iacarella

Sure. I’ll take it one at a time, first on the Google balloons. We are continuing to significantly ramp up our volumes of production. And along with that we’re going to experience some – a part of Q3 where additional investments, not much in the way of dollars, but perhaps fairly large in the way of disruption of weeks of time where we’ll be transitioning over to get to these higher volume rates.

And that will have an impact, as well as some design changes that we go through probably hitting the later part of the third quarter, as we move to newer designed balloon that will continue to deliver the scale and the ability to scale up and the ability to carry the payloads that the customer requires. So those things all combined are going to have an impact during the third quarter and will set us up in extremely good shape for the fourth quarter.

On the others, it’s just the push-pull of the world we live in with the pursuit of aerostat contracts and when those actually hit. It looks like they are going to hit further out. And they won’t be huge volumes, but what there will be further out in the year than what we expected. And the Vista radar deliveries are the same. It’s always a mix with Vista, and Q3 deliveries are going to be a little lighter, and we expect, again, a very strong Q4 just due to timing.

Andrea James – Dougherty & Company LLC

Okay, so they are not exactly related to the Google and the deferral of the other (indiscernible)?

Daniel A. Rykhus

No.

Andrea James – Dougherty & Company LLC

Okay. And then just for my second follow-up, and then I’ll hop back in the queue, can you just – will you give us an update on your relationships with Monsanto and Deere? You guys know Monsanto said they are going to double down on their precision agriculture investments, and I’m just wondering if any of that has come through to in your relationship with them. And then just maybe a little bit about Deere as well. Thank you.

Daniel A. Rykhus

Sure. The relationship with Monsanto is one that we’ve been developing for the last probably four years now. And they’ve made a lot of internal investments, acquisitions that they’ve made. And I would say we still have a good working relationship with Monsanto, but I’m not counting on a lot of additional revenues as a result of that relationship that we’ve put in place over the last four years. They’ve taken a different path of doing more of the work themselves, and that’s okay.

They’re going to be a large player in the market space. We have a good relationship, and that’s important to us, and there could be opportunity down the road. We always like to maintain strong relationships with the significant players in the space. But it’s not one that’s going to yield any immediate revenue growth for us, I would say, in the next four quarters that I can see.

Deere is really different from that. We continue to grow excellent relationship with Deere, and they continue to become a more significant customer of ours for ATD. And it’s a very healthy and great relationship whereby we can deliver some technology to Deere to address gaps that they have in their technology suite that they develop primarily in-house, but they have specific projects whereby we provide steering solutions and other control solutions, and that continues to grow. It's been slow growth, but it's been very steady, and we expect that to continue to be a strong opportunity for us going forward.

Andrea James – Dougherty & Company LLC

Thank you.

Operator

Our next question comes from the line of Robert Kosowsky with Sidoti. Your line is open.

Robert A. Kosowsky – Sidoti & Company, LLC

Good morning guys. How are you?

Daniel A. Rykhus

Good.

Robert A. Kosowsky – Sidoti & Company, LLC

Dan, just first a top-down question on the precision ag market in general. Just wondering if you can comment on the demand of precision ag equipment, given that you have a very strong yield environment and the cost benefit might not be there for investing in further productivity.

Daniel A. Rykhus

Yes, I don't – I'm not sure about that, Rob, in terms of that being a damper on precision ag demand. I really don’t think so, I think there’s going to be – even though there is a strong crop expected this year. The growers know they are on a steady march to have to improve yields, and long-term they’re going to continue to invest in technology that helps them do that, because as they are seeing right now, they live in a world of extreme price volatility, and they can’t control that. And what they can control is to attempt to produce more bushels off the acre.

So I don’t think that’s going to happen. But it’s a tough ag market out there right now and you’re seeing it from us. We saw for the last several quarters starting in fourth quarter of last year and our first and second quarter to be tough and we expect it’s going to be difficult going forward because of that formula, that the growers have a rapidly declining commodity price for corn and that of fixed cost.

And we give the analyst and we like to believe there is a condition where there is a slowdown in the ag market where there’s a case to made for investing more aggressively in precision ag technology, because of the lower cost than buying a piece of equipment and it’s a high ROI. Yes there gets to be a point where the market conditions are uncertain to the extent where people are just sort of climbing up and that’s what we’re seeing now. But that’s why – that’s really a counting for about half of our sales decline right now in [HD] (ph).

Robert A. Kosowsky – Sidoti & Company, LLC

Okay that’s sort of perspective. And then you mentioned in the press release about some high-quality growth projects and with existing OEMs. And I’m wondering which product lines you’re seeing the most traction with, with some of these customers?

Daniel A. Rykhus

Sure, I’m glad you picked up on that. That’s a really important part of our business model going forward. We have gotten over the last three quarters probably more selective and in projects we chose to invest our R&D dollars in, in terms of new products and with who. And when I mentioned the high-quality projects that’s what I’m talking about these are with existing larger OEM customers using extensions or enhancements of mostly existing technology. So to answer your question specifically, there’s steering related opportunities, there are field computer opportunities and there are fundamental sprayer control and product control opportunities.

Robert A. Kosowsky – Sidoti & Company, LLC

Okay so it seems pretty across the board then?

Daniel A. Rykhus

It’s pretty well across the board and it’s pretty much in our sweet spots. So we feel good about those.

Robert A. Kosowsky – Sidoti & Company, LLC

So I’m wondering switching to Aerostar, I’m wondering with the aerostat contract deferral, because you first mentioned in last quarter we still haven’t seen yet, I’m wondering what’s going on in the environment there and also what is the expected growth rate is for Vista, as well over the next few years?

Daniel A. Rykhus

All right, I’ll do my best on this so that the international pursuits of aerostat surveillance is a, we have a mix of projects and opportunities, a handful if you will. And all of them are tending to take longer to bring the fruition than we expected, because of a variety of funding related challenges, getting the technology to do exactly what the customer wants, with the different technology providers can be challenging and add time too those contracts. So, that’s all part of it.

And when we look at Aerostar, I really see and I’ve talked about this, we have three strong growth drivers in Aerostar. We have our Google and stratospheric balloon opportunity, we have our Vista Research radar surveillance opportunity, and then we have our aerostat opportunity. And the first two are progressing very nicely, and the aerostat piece of the business is slow and it’s lumpy. And then, of course, across all of that for Aerostar we have the ongoing decline in contract manufacturing.

Getting back to your question on growth rates for Vista, we really expect Vista to grow at more like a 20% rate on the minimum side. We think we have that much opportunity. And we have been able to post growth rates recently and significantly higher than that. But we would expect a minimum of 20% out of Vista, and really hope for more than that.

Robert A. Kosowsky – Sidoti & Company, LLC

Okay. So this quarter was a little bit more volatility on the lower side – you’d see for that?

Daniel A. Rykhus

Right.

Robert A. Kosowsky – Sidoti & Company, LLC

Okay. And then finally, this question might not go anywhere. Can you shed any light on what significant ramp-up Project Loon means? And is there going to be enough volume to generate meaningful profitability once it’s deployed in the fourth quarter or first quarter?

Daniel A. Rykhus

I’m probably not going to give you the detail and the answer you want, but I would say look at what you’ve shared so far in terms of the growth. And I know it’s been spotty and mixed, but we are in a phase and have been for the last – however long it’s been, six quarters, I believe, of working with Google to develop a long-term solution that will meet their objectives and one where we can get to volumes where it can be meaningful for us from a profit standpoint. And I would say that we are – the volumes that we’re going to start to realize in the third quarter will bring us very close to that baseline objective, but it’s just scratching the surface of the volume potential for this project.

And I know I’ve talked for a long time about potential, but we’re seeing it in the last – well, since April-May timeframe. The volume progression is meeting our objectives. So it gives us even greater confidence that that trajectory will be maintained in terms of the growth in the volumes. So we feel really good about not only the volumes and the potential for profitability, but also probably, more importantly, the endurance and the overall performance of the balloon solution.

Robert A. Kosowsky – Sidoti & Company, LLC

All right. Thank you very much, and good luck with the back half of the year.

Daniel A. Rykhus

Thank you.

Operator

Our next question comes from the line of Andrew O’Conor with Bank of Montreal. Your line is open.

Andrew O'Conor – Bank of Montreal

Good morning, Dan, Tom. Dan, I wanted to ask and you’ve already, I guess, talked around this a little bit. But can you expand a bit on new software offerings with Raven’s precision ag equipment that the Company is now or will soon be bringing to market? Again, software offerings. Thanks so much.

Daniel A. Rykhus

Trying to think what else I can give you. I’m not really going to spill the beans on new products that the division hasn’t had an opportunity to address appropriately.

Andrew O'Conor – Bank of Montreal

Sure.

Daniel A. Rykhus

I can tell you that we’re really highly focused on those segments of the market that we have entered now. So that means sprayer controls, planter controls, harvest controls, steering and then all the mapping applications that go across each of those four segments. So I would say that’s a starting point that we will keep – we have projects in the works that will continue to offer applications, as well as embedded software solutions in our proprietary hardware to address those opportunities in those spaces.

Andrew O'Conor – Bank of Montreal

Okay. And then secondly, is there any crossover benefit to the precision ag segment from Raven’s work on Project Loon and the expansion of Internet availability with Google? And it just struck me that your work related to Internet availability might have some crossover benefit in the precision ag area.

Daniel A. Rykhus

Definitely. As Google looks to Project Loon, and they can talk for their project, one of the benefits that we see and they see is, as you bring Internet access to the world, you can improve medical care, you can improve education. You can also improve agriculture productivity at a very local level. So I would say at the highest level, those opportunities are discussed and that we have a front row seat as to how those opportunities might take form going forward.

Andrew O'Conor – Bank of Montreal

Okay. So from a broader point of view, I hear what you’re saying. I was wondering is there anything more closely adjacent to precision ag from the work with Google, or not really?

Daniel A. Rykhus

Yes, I’m not able to comment any further on that.

Andrew O'Conor – Bank of Montreal

All right, sir. All right, thanks.

Operator

Our next question is a follow-up question from the line of Andrea James with Dougherty & Company. Your line is open.

Andrea James – Dougherty & Company

Thanks for taking my follow-up. I have, I think, two and half follow-ups. The Google Project Loon – but at the same time, Google has got drones and satellites and they are always doing a lot of stuff. In my sense it’s always that more of a 2020 event or later. And I just was wondering could you give your sense on the balloon take rate. I mean it seems like they are excited about balloons with what they’re investing in now and some of the other stuff is for later. I’m just curious to get your thought.

Daniel A. Rykhus

Well, that’s exactly what they tell us, Andrea. And I’m not an expert on the investments they’re making in satellites or drones. I read the same press releases that you guys have. The insight that I can provide is that Google X provides us around the Loon initiative and that is that, for the foreseeable future they believe that is the leading method by which they’ll connect the next billion people, on the planet. And it makes sense to us.

We think the balloon option is a shorter path. It's an economical path, and it's a path that allows them to refresh the technology on the balloon every 90 or 120 days, however, long they want, because once you launch a satellite its more difficult to refresh that technology. So we feel like this has a good, long runway for us. We have had these direct discussions, and we’re confident in our ongoing investments in Loon.

Andrea James – Dougherty & Company

Thanks and then for the second one. I know in the May call you guys had maybe channeled that ag would pick up in the second half. And now it seems like you are saying no this is going to be a fourth-quarter headwind, so. And you did talk about what your weakness, that you are seeing. Is there anything that really changed the price view? And then just as a kind of piggybacking on that, if there’s a large crop next year, do you think that there could be some upside maybe? I’m just curious.

Daniel A. Rykhus

I think what I said in May is that it was going to be tough through the year with the potential for some pick-up next year.

Andrea James – Dougherty & Company

Okay.

Daniel A. Rykhus

But it's been tougher than even I expected in May. And it’s really – in North America, you’re seeing it from a lot of the large ag equipment manufacturers have reported their results in the last three weeks, had given their outlook. And theirs is consistent with ours, which is we saw a pretty rapid decline over the last few months based on corn in particular, commodity prices really plummeting. And growers realizing, I’ve got a fixed cost base in this crop and I might have sold some of it ahead at $5, but I also – some of us didn’t and we're feeling the pinch.

So that’s really the difference, is that you might that you might have sensed some hope in my voice for the second half of this year. And we’re strong and it isn’t going to be a – as a Company, we're going to be fine. We’re going to produce strong earnings, but growth is just going to be really difficult for the Corporation based on the situation that ATD faces and the contract manufacturing runoff.

Now, next year, you said something about maybe there is reason for optimism based on what was it? I didn’t really follow you.

Andrea James – Dougherty & Company LLC

Yes if there’s a large crop. Or, well, no sorry, well actually it just depends because of the commodities prices. I was just curious what you thought about next year?

Daniel A. Rykhus

Yes. We think four quarters, the next four, are going to be challenging with market conditions. We really feel good about our pipeline of new product initiatives with our OEM, and that will give some offset there. Some of the international markets are harder to predict, but South America looks like it's going to be down overall for awhile. The former Soviet states, we all know what's going on there, and that have a negative impact on our opportunity to sell there. And Canada is suffering from some of the same market conditions. So I want to give you the hope, but Andrea, I think the reality is, it’s just going to be difficult for us in ag for a while.

Andrea James – Dougherty & Company LLC

No, I appreciate the candor. That’s great. And then…

Daniel A. Rykhus

Then you.

Andrea James – Dougherty & Company LLC

And then my half question, thanks so much for breaking out the – I guess you’re calling it strategic revenue.

Thomas Iacarella

Right.

Andrea James – Dougherty & Company LLC

Isn’t that helpful. Can you give us the nominal number? You gave us how much its sell-by, but can you give us the Q2 a year ago and Q2 this year, what contract manufacturing was?

Daniel A. Rykhus

Who maybe Tom can. What we call our strategic revenue are now 94% of the Company revenue versus 86% last year.

Thomas Iacarella

Strategic sales numbers were about $88 million for the quarter.

Andrea James – Dougherty & Company LLC

And last year?

Thomas Iacarella

$89 million.

Andrea James – Dougherty & Company LLC

Okay. And so I would just get the contract number by subtracting the full from the $80 million from last year.

Thomas Iacarella

Yes, yes.

Andrea James – Dougherty & Company LLC

Just to make sure.

Thomas Iacarella

$6 million versus $13 million.

Andrea James – Dougherty & Company LLC

Got it.

Daniel A. Rykhus

Do you have the year-to-date numbers for her, too Tom?

Thomas Iacarella

I do. On the contract side, $12.5 million versus $27.3 million for contract. And then the strategic numbers are $184.5 million and $169.8 million.

Andrea James – Dougherty & Company

Thank you so much. I appreciate that.

Thomas Iacarella

Sure.

Operator

Our final question comes from the line of Beth Lilly with GAMCO Investors. Your line is open.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Good morning.

Daniel A. Rykhus

Good morning.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Dan, you made some interesting comments about Deere, which I wanted to just try to flush out a little bit. They’ve been really focused on having more of a closed platform and their own system and everything, and I was wondering if you could talk about your work with them and give us a little more qualitative understanding of the types of work you are doing with them and the potential opportunity.

Daniel A. Rykhus

Sure. We started off our work with Deere maybe four years ago now, developing a planter control solution that worked with their GreenStar system. And that’s an example of a gap that they had where they wanted a solution that was additive to their overall system. Since then, we’ve developed control solutions that improve their anhydrous ammonia toolbar application performance. So, again, a niche gap. But probably the more significant one over the last couple of years is what we call a universal auto track. So it’s an additional automated steering system that Deere can sell through their dealer channels for a variety of different equipment, much of them non-Deere equipment. And this allows those Deere dealers to sell a steering solution onto other type of equipment that can interface with the central Deere system.

And then beyond that, it’s really proprietary, but along those same lines. I’ve given you three different examples. And if you use those to play forward, I think, that’s the right direction in terms of the ongoing types of opportunities we have with Deere.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Would you view these as significant steps forward in your relationship with them?

Daniel A. Rykhus

Yes. The volumes have been slowly growing, but it’s given us a wonderful platform to develop a strong relationship with Deere by proving our technology, our ability to meet their stringent product testing and quality and reliability requirements, and just really grow deeper in our understanding of their needs, and the relationship building and all those things that come along with it.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Are they using any other outside precision ag companies to help?

Daniel A. Rykhus

That’s a better question for them. I really can’t speak to that. We’re in a strong position there, we believe.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Yes. This strikes me as a big development for the Company, because Deere is so big in the ag market. The fact that you’re starting to make inroads with them, and also maybe that the recognition that they need to do – have more of an open platform is significant in the industry.

Daniel A. Rykhus

I don’t know if I would – I’m not sure that that would be the right conclusion, the second part of that. Certainly the first part of that is the right conclusion, but I’m not sure that our work with them constitutes a significant move towards an open platform for Deere. Again, better question for them than me.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Okay. The other question I wanted to ask is, in terms of Google and the balloons – and I’ve seen some articles come out about other competitive balloons or other companies trying to penetrate that market. As far as you know, are you the only supplier of the balloons to Google?

Daniel A. Rykhus

Yes.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Okay. Is it a sole-source relationship?

Daniel A. Rykhus

I’m not going to get into that level of detail. It’s a very strong relationship. We have an agreement in place with Google that we feel protects us very well and gives us as much opportunity as we can handle with them to grow.

Beth Lilly – GAMCO Investors, Inc./Gabelli & Co.

Okay, great. Perfect. Thank you so much.

Daniel A. Rykhus

You bet.

Operator

I’m not showing any further questions at this time. I’d like to turn the call back over to Dan Rykhus, Chief Executive Officer, for closing remarks.

Daniel A. Rykhus

All right. Thank you again for taking the time to join us on today’s call. By remaining true to the Raven business model and exercising fiscal prudence, honoring our purpose to solve great challenges, we’re confident that that the markets we’ve chosen will continue to provide long-term growth opportunities. And we look forward to updating you on our third quarter call in November. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a good day.

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