Standex International Corp (SXI) 2004 Q2 法說會逐字稿

Ladies and gentlemen. Thank you for standing by.

Welcome to the second quarter earnings release conference call.

At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time.

If you should require assistance during the call, please press star then 0. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, President and CEO, Mr. Roger Fix. Please go ahead, sir.

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 in competitive pricing pressures or marketing of new products; changes in general, domestic, and international economic conditions and market demand; failure to achieve the company's acquisitions; disposition and restructuring goals in the anticipated time frames; and significant changes in domestic and international fiscal policies or tax legislation.

Early this morning we issued a press release which summarized Standex's financial performance for the second quarter of our fiscal year 2004. We would like to review those results with you. Christian will then provide some additional financial data, and at the conclusion of the call, we will answer questions.

We are pleased with the results of the second quarter as we demonstrated continued improvement in the financial performance of the company, and at the same time we achieved several very important milestones in the restructuring and realignment program. For the third consecutive quarter, we are reporting increased sales as compared to the prior year quarter. More importantly, we have achieved double-digit increases in income from continuing operations for the past two quarters.

In the second quarter, income from continuing operations was up 58%, and sales were up over 12%. Excluding the impact of acquisitions and favorable currency exchange, our organic sales growth were a healthy 4%.

Specifically, for the second quarter we are reporting net income from continuing operations of $5 million, or 40 cents per diluted share, an increase of 58% over prior year net income of $3.1 million, or 26 cents per share. Net sales for the second quarter were $148.7 million versus $132.4 million in the prior year quarter. Second quarter, 2004 net income including discontinued operations was $3.6 million, or 29 cents per diluted share, which was flat with income including discontinuing operations from the prior year of $3.5 million, or 29 cents per share. Excluding special items and discontinued operations, net income for the second quarter was $5.1 million, or 41 cents per diluted share, compared to $3.7 million or 30 cents per diluted share the year earlier, or an increase of 37%.

Our earnings summary, released this morning, includes a reconciliation of net income and earnings per share from reported GAAP amounts to non-GAAP amounts for both the second quarter and first half financial results.

Income from continuing operations for the first half of fiscal 2004 was $9.8 million, or 79 cents per diluted share, an increase of 42% from $6.9 million, or 57 cents per diluted share in fiscal 2003. Including discontinued operations, net income for the first half was $7.9 million, or 64 cents per diluted share, down 3%, from $8.2 million or 67 cents per diluted share last year.

Excluding special items and discontinued operations, income from the first half of fiscal 2004 was $10.3 million, or 83 cents per diluted share, an increase of 29% from $8 million or 66 cents per share in the prior year. Net sales for the first half of fiscal 2004 rose 9% to $284.7 million versus $260.8 million in the prior year.

Sales for the first half of fiscal 2003, included an extra month of European sales of $4.4 million resulting from our decision to conform our accounting year for the European operations to the corporate fiscal year. Excluding the extra month of European sales, net sales for the first half of 2004 were up 9% from $256.4 million in 2003.

Excluding the impact of acquisitions and the favorable exchange rate, the organic sales growth rate in the first half of fiscal 2004 for Standex was 4.5%.

The improvement in financial results for Standex in the second quarter was driven driven by strong top and bottom line performance in the food service equipment group and by a significant turn around in operating profit in the customer group. A number of our businesses are benefiting from market share gains and improvements in their cost structures implemented through cost reduction and the effect of the restructuring and realignment activities implemented over the past 18 months.

To most significant improvement in year over year second quarter performance was delivered by our food service equipment group where sales increased 32% to $43.1 million from $32.8 million a year earlier. Excluding the sales from Nor-Lake, which was acquired during the second quarter, the group posted an increase in organic sales of 17% compared to the prior year.

Master-Bilt posted a 37% increase in sales as it benefited from market share gains in the traditional dairy, ice cream and drugstore markets and new penetrations into the food service market. USECO benefited from last year's restructuring as a reported improvement of $780,000 in operating profits versus the prior year quarter. Procon reported a double-digit increase in sales and also saw the benefit of cost reductions doubling its operating profit. Federal Industries also continued to report improved sales and profit results.

Sales for industrial group were were up $79.4 million or up 13% versus the prior year quarter sales of $70.6 million. Excluding the impact of acquisitions and currency, the organic sales growth for this group was approximately 4%.

Standex engraving, Standex electronics and Custom Hoist all reported double-digit sales increases. Custom Hoist is enjoying an improvement in market conditions and a significant increase in market share achieved over the past two-years. Standex electronics has seen a 30% increase in backlog driven by both acquisitions and new products. Standex engraving sales increased due to the acquisition of I R International, market share gains and improving market conditions.

Operating profit for the industrial group was down from $8 million by 19% from last year's $9.8 million. The unfavorable profit comparison results from a one-time pretax payment of $1.3 million made as a contract price adjustment to Spincraft in the second quarter of 2003, the effective of increased steel prices on Standex Air Distributions operating margins and the one-time expenses, and temporary operating inefficiencies encounted by Standex electronics as it upgrades and expands its Mexico facilities to accommodate the integration of operations relocated from Canada and the U.S. The overall back log for the industrial group was up 20% at the end of the quarter as compared to the prior year.

During our first quarter conference call we stated that our near term plans for the consumer group were to right size the workforce and reduce our discretionary expenditures in these businesses to bring our total costs in line with the sales volume we are currently experiencing. Longer term, we still see selective opportunities to grow these businesses and will invest as, and when, the appropriate opportunities present themselves.

As a result of this operating strategy, while the consumer group recorded a 10% decline in revenue for the second quarter, operating income for the group increased almost six fold. Second quarter sales of $26.1 million compared with 21 -- $29.1 million for the prior year quarter. Operating income was $1.6 million versus $275,000 in the second quarter last year.

Over the past three quarters at Standard Publishing, we have reduced head count, strictly prioritized discretionary expenditures, and most recently announced the closure of the commercial printing operation. The printing business is on track to be wound down by the end of our third quarter. At the same time, the management team for Standex publishing has been developing a series of new and exciting publications that we believe will benefit the top line of this business as they are introduced into the market over the next 12 to 18 months. At the Berean bookstore division, the recovery in religious book and gift sales continue to lag the resurgence in the secular book market. Other participants in the religious book and gift store market have reported sales off 3 to 7% during the quarter just completed versus the prior year. The sales of Berean track with the rest of this market.

Again, consistent with our consumer group operating strategy, we decided to maximize a return of our Standex direct business by reducing our investment in it's direct marketing expenses this fiscal year. As a result Standex direct's second quarter sales were down, however operating profits in this business improved driven by nearly $1.3 million.

We achieved several important milestones during the quarter in our restructuring and realignment program. The most significant was a divesture of the Jarvis Caster group. The Caster business has become more of a commodity than an engineered product over the past several years and manufacturing has been moving offshore to Asia Pacific, primarily China.

After reviewing several strategic alternatives for Jarvis, including making a significant investment to restructure the business, we have determined the best course of action was to divest of Jarvis and to reinvest the sales proceeds in a business that better matches our strategy and offers greater opportunities for sales and earnings growth in the future.

This review led us to acquire Nor-Lake. Nor-Lake is the leading manufacturer of walk-in coolers and freezers and reach-in refrigerated cabinets for food service and scientific industries with sales of approximately $53 million.

The addition of Nor-Lake to the Standex food service equipment group makes Standex one of the largest suppliers of walk-in coolers and freezers in the U.S; provides us with significant access to the large chain, quick service restaurants, which is the fastest-growing category in food service; and increases the size of the food service group to more than $200 million in annual sales, giving it a larger critical size and making it a more formidable competitor in it's market.

Also, as part of our restructuring /realignment program, we successfully finalized the union negotiations for the closure of both the European Roehlen engraving located in Germany and the commercial printing operation at Standard Publishing. The cost of closing of the European Roehlen engraving business was included in our first quarter results and will be completed by the end of January. We will incur an estimated pretax cost of $1.2 million to close the commercial printing operation, which is included in our second quarter results under discontinued operations.

Closure of the commercial printing operation will be completed by the end of our third quarter. We remain on track with the restructuring / realignment program and are pleased to see some of the results of this program begin to impact our current financial performance.

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

Thank you, Roger, and good morning, everyone.

As Roger pointed out in his comments, we achieved a number of milestones during our second quarter. We announced the closing of our printing operation at Standard Publishing, continued to execute the closing of our German Roehlen engraving business and completed the divesture of our Jarvis Caster Group. We also completed two acquisitions by adding Nor-Lake and Magnetico(ph) to our portfolio of businesses. We achieved these milestones without affecting our leverage, as indicated in our release.

Net debts to total capital was 37.9% at December 31st of 2003, which compares to 37.3% at the end of June 30th, the end of our last fiscal year. We ended the quarter with a net debt position of $101 million, compared to $109 million at the end of last fiscal year.

During the first half, we made contributions to our pension plans totaling $3.6 million and expect to make additional contributions of $3.2 million during the balance of the fiscal year. You may recall that for the last several quarters, we have placed an emphasis on managing our balance sheet by improving our working capital performance. I am pleased to report that we continue to see improvement in our working capital turns. While sales for the first six-months increased 9% over the comparable prior year period, net working capital, which we define as accounts receivables, plus inventories, less accounts payables, remained essentially flat at $132 million. Inventory turns continued to improve and our DSOs continued to decline.

A few comments on segment performance. Overall, the gross profit margin for the first six-months was 33.7%, compared with 34.4% in the prior year. The decline is mainly the result of low gross profit margins in the industrial group, as a result of higher steel prices, and a contract price adjustment that Spincraft recorded, or did record the prior year. We saw improved operating margins at both our food service equipment and our consumer segment.

For the food service group, gross profit or the operating margins for the first six-months was 9.6% which compares to 6.8% in the prior year, the consumer group reported operating margins of 4.3% which compares to 1.2% for the same period in the prior year.

Net operating margins for the first six-months of our industrial segment declined by 280 basis points for reasons that we stated in the release. This segment continues to perform at margin levels above 10% for the first six months the operating margin for the industrial group was 10.4% which compares to 13.2% in the prior year.

A few comments on the company's nonoperating performance. Effective income tax rate from continuing operations for the first six-months was 36.9%, which compares to 37.2% for the comparable period in the prior year.

Interest expenses for the quarter was $1.4 million, which is $400,000 below prior year level of $1.8. For the first six-months, interest expense was $2.9, compares to 3.5 million in the prior year. We continue to benefit from low interest rates on our variable rate debt in lower average volume level.

We continue to invest cautiously in our businesses by focusing on productivity improvement projects. We spent just under $400 million during the first six months, slightly above prior year levels of $3.4 million. We continue to project full year Cap Ex levels of between $9 and $10 million. Depreciation for the quarter was $3 million compared to $2.7 million in the prior year's quarter, depreciation for the first six months totaled $5.8 million which compares to $5.6 million in the prior year.

Some data points for the full year, we estimate now depreciation to be around $12 million, which is different due to the divesture of Jarvis and the inclusion of Nor-Lake to the numbers that we have previously communicated. The effective tax rate is estimated to be 36.5%.

And with those remarks, I conclude my remarks and would like to turn the conference back to Roger.

Thank you, Christian. We will now open the conference call to questions.

Ladies and gentlemen, if you wish to ask a question, please press star then 1 on your touchtone phone. You will hear a phone indicating that you have been placed in queue. You may remove yourself from queue at any time driven by pressing the pound key. If you are using a speaker phone, please pick up the hand set before pressing the numbers. Once again, if there is a question, please press star, then 1.

One moment, please, for the first question. We have a question from the line of Michael Gardner of Capital Management. Please go ahead.

It is always me. Maybe we will get some other people on these calls too.

Good morning, Michael, always good to hear your voice.

Congratulations. It looks like some of your actions are starting to gain traction here. I have a few questions all in the industrial area.

The first is does what you are seeing in terms of order flow or inquiries or whatever, make this recent sales growth look sustainable? How would you characterize that?

Again, cautiously optimistic. Our backlogs are up, looking, running, reasonably strong. We made a point of trying to identify our organic growth rates to try to communicate the basis of what we are doing.

Right, only 4% or so, yes.

So I think, again, cautiously optimistic with the backlog and bookings that we have been seeing, we hope to see things continue. We mentioned before that our backlogs are measured in weeks, not months, and therefore our visibility is somewhat limited.

What did you do about Custom? You mentioned share gain.

Can you just talk a little about who most of your customers are and how you were able to do that?

Custom Voice, their primary product is these large telescoping hydraulic hoists that are used in dump truck trailer bodies. So there are a number of OEMs, a good sized number of OEMs in the U.S. that use our product, use the telescopic voice. We also have a number -- the same kinds of equipment but also can be used in other kinds of earthmoving, garbage trucks, compactors, that type of thing.

The basic business, dump truck, dump bodies, depending on your sources, that market has shrunk upwards of 50% over the last three years. Just a huge crash on those markets. We stayed the course, we did do our downsizing, but they have emphasized quality and delivery as, really, their fortes, and as some of these OEMs suffered, frankly, from declining volumes, our ability to provide product without them tying up a lot of cash on their side, without having to incur a lot of costs from a warranty standpoint, really brought us into significant favor as compared to some of our competitors, and we think our market shares have increased pretty substantially.

We are beginning to see the early signs of recovery in that business, and I think the net/ net is, they have been a couple of very good quarters for us.

Is that in the business where it was part of Commercial Intertech or something? Was one of your your competitors at one time?

Commercial Intertech, which has now been purchased, is now our largest competitor and we believe that most of the share we have taken is from them.

And what about a volumn rebound among those hard hit OEMs that you serve.? Has volume come back at all or is it all just share gains for you?

Just beginning to see some early signs. I don't have any quantification of that. But certainly we have seen some increase in their builds over the last six-months.

Okay. And then just a question on the margins in this area.

Obviously there's a couple of noise factors in this quarter, but, I guess, my question is, do you think you can get the operating margins in the industrial group, you know, to the mid teen, defining mid teens as 14 to 16%, is that something that is possible a few quarters out or is that not realistic?

I think our first goal is just to get back to where we were in that 12 to 13 range, and that's really our near term goal. I don't know that it's going to happen in the next couple of quarters. But clearly some of this restructuring activity that we are we are doing, some of the other things that are going on inside those businesses, we believe we are on track to get back to those kinds of levels.

Thanks, Roger. I will let somebody else go, if there is somebody else.

Thanks, Mike. I appreciate it very much.

Once again, ladies and gentlemen. If you do have a question or wish to make a comment, please press star 1 at this time.

Okay, Mr. Fix, we have no questions in queue, please continue.

We thank everyone for their participation and we look forward to talkin to you again at the end of our third quarter. Thanks very much.

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