Standex International Corp (SXI) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Standex International fourth quarter earnings release conference call. (CALLER INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, President and CEO of Standex International, Mr. Roger Fix. Please go ahead.

Good morning and welcome to the Standex quarterly results conference call. With me this morning is Christian Storch, our Chief Financial Officer. I would like to start the conference this morning by reading the Safe Harbor statement.

Some comments made during this conference call may be based upon management's current expectations, estimates and/or projections about Standex's markets and industries. These statements are forward-looking statements which are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ from what is expressed or forecasted.

Among the factors that could cause actual results to differ are uncertainties and competitive pricing pressures or marketing of new products; changes in general domestic and international market conditions and market demand; failure to achieve the Company's acquisition, disposition and restructuring goals; and the anticipated time frames and significant changes in domestic and international fiscal policies or tax legislation.

Earlier this morning we issued a press release which summarized both our fourth quarter and fiscal 2003 results. I'd like to review those results with you; Christian will then provide some additional financial data and we will open the call for questions.

Net sales for the fourth quarter from continuing operations were $146.8 million, on an increase of 4 percent over the fourth quarter of fiscal 2002. Net income for the fourth quarter was $4.5 million, or 36 cents per diluted share, which compares to net income for the fourth quarter last year of 4.9 million, or 40 cents per diluted share, a decrease of 10 percent.

During the fourth quarter we incurred charges for special items totaling $1.6 million after-tax. These special items included restructuring expenses of 3.3 million before tax, or 2.2 million after-tax, resulting from the restructuring program which we announced previously, and income related to discontinued operations of 578,000 net of tax. Excluding these special charges, fourth quarter net income was 50 cents per diluted share, or an increase of 16 percent on a comparable basis versus the prior year fourth quarter.

Our press release issued today and posted to our website includes a reconciliation of net income and earnings per share, which illustrates the impact of special charges and identifies our profit results on a GAAP and pro forma basis for both the fourth quarter and full year. Reviewing this reconciliation table may assist you in better understanding our reported results.

For the 2003 fiscal year, Standex reported net sales from continuing operations of $574.5 million, an increase of 2 percent as compared to sales reported last year of 563.2 million. The fiscal 2003 net sales include an extra month of European sales totaling approximately $4.4 million, resulting from our decision to conform the accounting year of our European operations to the corporate fiscal year ending June 30th. Excluding the extra month of European sales, 2003 pro forma net sales were 570.1 million, up 1 percent from fiscal 2002.

Net income for fiscal 2003 was 14.1 million, or $1.16 per diluted share, a decrease of 15 percent from the 16.6 million, or $1.35 per share, reported in 2002. Excluding special items, net income for fiscal 2003 was $17.9 million, or $1.47 per diluted share, which compares to net income on a same basis for 2002 of 20.6 million, or $1.68 per diluted share, a decrease of 13 percent.

We were pleased with the overall results achieved in the fourth quarter. We experienced strong sales and booking activity in both the food service and industrial groups. Further, for the first time in six quarters, our earnings per share, excluding special charges, exceeded the prior year. We attribute these improved results to higher volume and the cost reduction activities completed during the past 18 months.

The food service group posted the most improved year-over-year performance. Net sales in the food service group increased 11 percent to $40.3 million, as compared to the 36.4 million in the fourth quarter of 2002. Operating income for this group climbed 53 percent in the fourth quarter to 3.8 million from 2.5 million a year earlier. We were particularly encouraged in that all of the divisions of this group showed solid improvements in net sales and profitability; Master-Bilt, Federal and BKI led the way in this group as they all reported double-digit increases in sales over the prior year's quarter. The increase in sales is attributed to both market share gains and some improvement in market conditions.

In the industrial group, fourth quarter net sales were up 5 percent to 83.2 million versus the prior year fourth quarter sales of 79.5 million. Operating income for the group rose 25 percent to $8.3 million, from $6.7 million for the fourth quarter last year. Double-digit increases in sales were reported in both the domestic and international operating units of Standex Engraving, Standex Electronics and Spincraft. Strong sales and profit results at these units offset lower profits at the Air Distribution Products division, which continues to be impacted by higher metal prices.

In the consumer group we continue to be negatively impacted by lower consumer and retail spending. Net sales in the group were 23.3 million, or 8 percent below the prior year of 25.4 million. Partially as a result of expense reductions initiated earlier in a year, operating income decreased at a more moderate rate than previous quarters, falling 11 percent in the fourth quarter to 1.4 million from 1.6 million in the fourth quarter of last year.

The full year trends in sales and profits for the three groups are much the same as that reported for the fourth quarter. Both the industrial and food service group's reported approximately 5 percent increases in net sales in fiscal 2003 versus the prior year. Operating income for these two groups was up 5 percent for the industrial group and 7 percent for the food service group over the prior year. Sales for the consumer group were down 9 percent from the prior year as soft consumer spending impacted all the businesses in this group for essentially the entire fiscal year. Operating income for the group was down 72 percent as compared to last year.

From our perspective the most significant achievement in fiscal 2003 for Standex was the operating cash flow performance. Generating strong operating cash flow is strategically important to us as cash is fundamental to allowing us to support the payment of dividends to our shareholders, investing in the needs of our existing divisions to fund organic growth and to complete acquisitions.

During fiscal 2003 we placed significant emphasis on aggressively managing our working capital and generating improved operating cash flow. As a result, for the second consecutive year Standex posted a record level of operating cash flow of $50.6 million, an increase of 19 percent, as compared to cash flow from continuing operations of $42.4 million in fiscal 2002.

Improvement in net working capital was the primary driver behind the strong operating cash flow performance. Net working capital decreased $17.9 million during the year from 150.9 million to 133 million, or a decrease of 12 percent, and decreased to 23 percent from 27 percent as a percentage of sales.

Improvement was achieved in all three components of net working capital -- accounts receivable decreased 2 percent to 91.7 million from 93.2 million; inventories decreased 11 percent to 82.5 million from 92.9 million; and accounts payable increased 17 percent to 41.2 million from 35.2 million the prior year.

Strong operating cash flow enabled Standex to invest $17.6 million in the acquisitions of CIN-TRAN and I R International and 7.9 million in capital expenditures, while still reducing total debt to 109.9 million as of June 30th, from 132.3 million a year earlier, or a decrease of 17 percent in total debt.

We believe our year-end debt position and demonstrated ability to generate cash flow leaves us very well positioned to complete additional acquisitions in fiscal 2004. We have an active M&A program and place and are seeking bolt-on acquisitions that will deliver tangible sales and cost saving synergies in order to enhance both topline and profit growth for the overall corporation.

Another significant achievement in fiscal 2003 for Standex was the successful launch of our lean enterprise initiative. Simply put, the application of lean principles -- first developed as part of the Toyota production system -- is a continuous effort on the part of an organization to eliminate all aspects of waste in every process used in a company. Whereas many companies look at the application of lean as an initiative focused on the shop floor, at Standex we're applying lean results to both shop floor and office activity.

The specific objectives of our lean enterprise program are to lower our operating costs, improve the utilization of working capital and to improve the overall velocity of the organization. To date, 8 of our 15 divisions have initiated active lean enterprise programs. Our initial efforts have focused on the training of management and colleagues, development of value stream maps (ph) which are the action plans for lean implementation and the implementation of lean through kison (ph) activities.

Lean enterprise focuses on continuous improvement of all processes within a business, and therefore we believe it will provide us the tools to maintain the momentum already established in the areas of cost reduction and working capital improvement in fiscal 2004 and beyond.

During the fourth quarter we made significant progress in implementing the realignment and restructuring program we announced earlier in the fiscal year. During the quarter we completed both the sale of the real estate and the business of HF Coors China company in two separate transactions, producing a net gain. During the fiscal year we also exited the national metals division. Both these operating units are included in discontinued operations noted in our fourth quarter and full-year results.

Also during the quarter we initiated the consolidation of the manufacturing operations of BKI in the United Kingdom with the BKI facility in South Carolina. Through this consolidation we expect to reduce our overall manufacturing costs at BKI, while maintaining our sales, engineering and service presence in a UK, which is critical to holding our market share in Europe. In addition, we enclosed -- we closed both the Mold-Tech operation in California and an under-utilized (indiscernible) distribution price facility in North Carolina distributing their sales to other facilities in the US.

The realignment and restructuring program is approximately 50 percent complete and remains on track with the schedule and financial objectives we set for this program. As per the commitment we made at the outset of the restructuring, we're pleased to announce the gains realized from the sale of properties has offset approximately 75 percent of the restructuring expenses incurred during fiscal 2003. Further, we expect that we will achieve annual savings in the order of $8 million once the restructuring program is completed.

Christian will now provide more detail on the financial data and discuss key balance sheet issues.

Good morning all. First, a couple of comments on the balance sheet.

In fiscal year '03 we generated $50.6 million in cash flow from continuing operations, the highest level in the history of the company. As Roger outlined in his comments, our success at managing working capital was the primary driver in achieving this level of cash flow. We saw significant improvements in inventory turns, DSOs and DPOs as more and more divisions implement lean enterprise techniques. As a result of the strong cash flow performance, we were able to reduce our debt levels and improve our leverage, despite the fact that the Company reported a $34.7 million after-tax equity charge to reflect the additional minimum liability under its pension plans.

During fiscal 2003, historically low interest rates and another year of negative market returns caused the Company's pension plans to be underfunded. This after-tax equity charge did not impact cash or earnings, and could reverse in future periods should either interest rates increase and/or market performance and plan returns improve.

The impact on equity was partially offset by a favorable year-over-year change in foreign currency adjustments of about 11.4 million, mainly as a result of stronger European currencies.

In fiscal 2004, we expect to make contributions to the plans of approximately 6.8 million. Requirements in 2005 will depend on market performance and other factors, but should be in line with 2004 requirements.

The decline in pension assets and changes and actuarial assumptions will result in additional pretax pension expense in fiscal '04 of approximately 25 cents per share. We believe that a significant portion of this impact can be offset by ongoing cost reduction initiatives, combined with future savings from our restructuring and realignment program.

In respect to operating performance, in our income statement a couple of comments. Overall, gross profit margin for the quarter was 32.3 percent, a slight improvement of 10 basis points over the prior year's fourth quarter performance. The gross profit margin for the full-year was also 32.3 percent, down from 33 percent in the prior year. The year-over-year decline is mainly due to the substitution of lower margin sales in the food service and industrial groups for higher margin sales in the consumer group.

The operating margins by segments were -- for the food service group 9.5 percent for the fourth quarter, 7.4 percent for the full-year; for the industrial groups 7 percent for the fourth quarter, 10.5 percent for the full-year; the consumer group 5.9 percent for the fourth quarter and 2 percent for the full-year.

The effective income tax rate for the full-year was 33.6 percent. The rate was 33.9 percent for the fourth quarter, slightly higher due to higher income levels. As many of our tax savings programs (indiscernible) are relatively fixed, the effective rate trends higher as profitability increases.

Interest expense for the full-year was $1.6 million below last year's level and $270,000 below the prior year's fourth quarter in our Q4. This was the result of lower average borrowing levels, combined with lower interest rates on our variable rate debt.

We continue to cautiously invest in our businesses. We spent $7.9 million during the year and 1.9 million during the quarter, which compares to $10 million in the prior year and $900,000 in the prior year's fourth quarter.

Depreciation was 13.5 million for the year and 3.3 million for the quarter, compared to 13.4 million and 3.6 million respectively.

For those of you that follow us a little bit more closely, here are four data points for our fiscal year '04 -- we expect depreciation to be approximately $14.2 million; we expect our effective tax rate to be between 33 and 35 percent; CapEx levels at between 9 and $10 million; and diluted shares outstanding to be about 12,350,000.

I'd like to conclude my remarks and turn the conference back to Roger.

As mentioned previously, we were pleased with the sales performance of the industrial and food service groups in the fourth quarter. We're cautiously optimistic that the strong sales finished at fiscal 2003, coupled with the stronger backlogs with which we entered fiscal 2004, signals that we have found the bottom of the recessionary trend in the Corporation's sales. We are not satisfied with our bottom-line performance and remain focused on completing the restructuring and realignment program and other cost reduction initiatives currently underway. We continue to stress the generation of operating cash throughout the Company in order to support the payment of dividends to our shareholders, fund organic growth of our existing divisions and to complete acquisitions.

With those comments, we will now open the call for questions.

(CALLER INSTRUCTIONS)

Michael Gartner (ph), Wedge Capital Management (ph).

Good morning, gentlemen. It looks like a terrific quarter. If I may just follow up on something you just said, Roger, that it looks like maybe there has been a turn on the revenue side. In terms of what you do see in book orders and inquiries and anything else, how would you characterize the level of visibility that you do have? In other words, can you see out maybe one or two quarters, and after that it's a matter of what the macro-economy does? Or do you actually see some longer leadtime indications that give you greater confidence that this is really the turn?

I wish I could say that we had long-term visibility. We really don't. It varies by group within our Corporation, but -- for example, take the food service group -- our backlog varies by division, but typically are in more the four to eight weak range. In some of the industrial businesses they are a bit longer. Our Spincraft group does benefit from some long-term contracts that stretch out through the year, but that's an exception. In general even in the foods -- in the industrial businesses, they're in more the four to eight to ten week kind of leadtimes. So we really don't have that long-term visibility. We tend to track our bookings and compare them year-over-year in respective businesses to get a better feel for it, and that's really the metrics, if you will, that we are using to be cautiously optimistic.

So there no softer way, in terms of what your salespeople hear and how many presentations they make that kind of backs that up and gives it longer legs?

Certainly we pay attention to that, and certainly those kinds of things are tracked. In general, I would say the mood is more upbeat from a quotation activity and that type of thing. In our engraving business, as an example, we do have a small element of our engraving business that is capital equipment related, and we have seen some very positive signs in that element over the last two or three months. I repeat, though, it is a pretty small piece of our total business. Perhaps that is in early sign. Again, too early to say for sure, but we like what we see so far.

Switching gears, if I may, on the working capital reduction, which is terrific -- how much do you think this is a permanent improvement as a result of your lean management initiatives versus the inevitable it's easier to reduce working capital when business is kind of rounding the bottom? In other words, if in fact we're having an economic recovery and your business picks up, how much of these savings do you think you could keep?

That's a very good point, because you're right. Obviously it's easier to take working capital down as volume comes down. The other metrics that we track internally is what we call net working capital turns, where we take sales divided by the net working capital, and we track that in addition, which non-dimensionalizes the working capital trends relative to sales. If you go back, let's say, roughly two years I think our net working capital turns were in the 3.2 to 3.3 range; we finished the year over 4, so we would submit that there's been a permanent change in working capital turns. Obviously as volume comes back up, we would expect to see some trends upward in working capital, but our goal is to continue to improve that working capital turns number, which again factors out the trends (multiple speakers)

Has that been backed up with specific -- whether it is compensation related or whatever goals that the divisional people have?

Absolutely. Ted Trainor, our Chairman, introduced about three years ago a BPP -- balance performance plan -- where we have specific both financial goals for the year, as well as longer-term strategic goals for the divisions. One of their -- the financial goals are sales, earnings and cash flow and 60 percent of their bonus is determined on their performance against those three metrics. So cash flow, and net working capital as a result, is an inherent part of the culture, certainly tied to their paycheck.

One last one, if I may, just to be sure. On this pension hit of 25 cents per diluted share, I just want to be sure because hearing your comment, Christian, it sounded like -- reading the release I thought that was an after-tax number -- that takes 25 cents out of EPS, but I thought I heard you say pretax, so --

We have to after-tax that, yes.

So the after-tax hit to annual earnings -- next year's earnings per share might be a little more like 15 cents or so?

Yes.

Thanks very much.

Good questions. We appreciate that.

(CALLER INSTRUCTIONS)

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Again, thank you very much for your attendance. We appreciate it and we look forward to speaking to you again next quarter. Thank you.

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(CONFERENCE CALL CONCLUDED)