Standex International Corp (SXI) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2004 Standex International Corporation earnings conference call. My name is Chris and we will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Mr. Roger Fix, President and CEO. Please proceed, sir.

Good morning and welcome to the Standex quarterly results conference call. With me this morning is Christian Storch, our Chief Financial Officer. I'd like to start the conference this morning by reading the Safe Harbor statement. Some comments made during the conference call may be based upon management's current expectations, estimates and/or projections about Standex 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 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 third 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're pleased with the results of the third quarter as we demonstrated continued improvement in the overall financial performance of the company. The improved performance was driven by a broad cross section of the company with divisions from all three business groups, reporting improved year-over-year sales and earnings growth. For the fourth consecutive quarter, we're reporting increased sales as compared to the prior year quarter, driven by both strong organic sales growth from our core businesses and from recent acquisitions. For the third straight quarter, we're reporting substantial improvements in net income from continuing operations. In the third quarter, income from continuing operations was up over 100% and sales were up 22% as compared to the prior year quarter. Excluding the impact of acquisitions and favorable currency exchange, our organic sales growth in the quarter was a robust 8%. Specifically, for the third quarter, we're reporting net income from continuing operations of $4.5m or $0.37 per diluted share, an increase of 104% over prior year net income of $2.2m or $0.18 per diluted share. Net sales in the quarter, as I mentioned earlier improved by 22% to $149.3m from $122.1m. Third quarter 2004 net income including discontinued operations was $3.4m or $0.27 per share, an increase of 118% over the prior year of $1.5m or $0.13 a share. Excluding special items and discontinued operations, net income for the third quarter was $4.6m or $0.38 per diluted share compared to $2.8m or $0.23 per diluted share the year earlier, an increase of 66%. 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 third quarter and for our year-to-date financial results. Income from continuing operations for the first three quarters of fiscal 2004 was $14.3m or $1.16 per diluted share, an increase of 57% from $9.1m or $0.75 per share in fiscal 2003. Including discontinued operations; year-to-date net income for fiscal 2004 was $11.3m or $0.91 per diluted share, up 16% from $9.7m or $0.80 of diluted share last year. Excluding special items and discontinued operations, year-to-date income was $14.9m or $1.21 per diluted share, an increase of 39% from $10.7m or $0.88 per share in the prior year. Net sales for the first three quarters of fiscal 2004 rose 13% to $434m from year earlier sales of $382.9m. Excluding the impact of acquisitions, favorable exchange rate and the extra month of European sales recorded in fiscal 2003, the year-to-date organic sales growth rate for Standex was 5.6%. The improvement in financial results for Standex in the third quarter was driven by strong top and bottom line performance in the industrial products group and by a continuation in the turnaround in operating profit in the consumer group. As we mentioned in our press release, the improvements in operating performance are due to a combination of market share gains by several of our divisions. The benefits we're realizing from the restructuring and realignment program, and a strengthening in several of our core markets. Industrial products group recorded a strong across-the-board performance where third quarter sales increased by 24% to $81.2m from $65.4m and operating income increased 42% to $8.7m from $6.2m as compared to the prior year. Six of the seven divisions in this group recorded double-digit increases in sales. Custom Hoists continued to demonstrate improved sales and profitability benefiting from market share gains made over the past two years and from some recovery in the construction vehicle market. Standex Air Distribution benefited from advanced buying from customers, which are anticipating sales price increases caused by increases in the cost of raw materials to us. Recent share gains made in the do it yourself, big box retail chains and continued strength in general housing starts. Standex Engraving saw sales growth from both organic sales initiatives and from acquisitions. Standex Electronics also benefited from a combination of share gains and acquisitions. Backlog for the industrial products group remained strong at the end of the quarter. The turnaround performance of the consumer group continued, as the focus on cost reductions and restructuring these businesses produced significant year-over-year improvements in profitability. Third quarter operating income increased nearly eight fold to $2.1m from $273,000 the prior year quarter. Sales for the quarter were flat at $23.2m. The most significant improvements in operating profits were at Standex Publishing, and Standex Direct where the effective previous cost reductions, restructuring activities, and efficiency improvements all contributed to the improved results. In addition, we saw a moderate improvements in profitability at the Berean Book Stores where sales on the same store basis were up 5.5% over the prior year indicating some recovery in the religious book, music, and gift markets. The food service equipment group posted a solid quarter during their traditionally slowest quarters. The third quarter is typically this group's weakest quarter because construction of new restaurants, and retail food outlets is impacted by winter weather, which is particularly true this year during January and February. Sales for the group were $44.9m versus $33.6m, or an increase of 34% over the prior year. Excluding the impact of Nor -Lake, and currency the organic sales growth for the group was 2%. Operating income for the group was negatively impacted by $465,000 due to a fair value inventory accounting treatment resulting from the Nor-Lake acquisition. Including this charge, operating income was $1.68m or down 8% from the prior year income of $1.84m. During the quarter many of our manufacturing divisions began to experience price increases imposed by our suppliers of steel products, and other metal commodities, among those items impacted were the price of Galvanized steel strip, stainless steel, carbon steel, sheet material, and copper wire and refrigeration components. These metal, materials and components are key elements in the products manufactured by our industrial and food service groups. Our immediate reaction to this pricing pressure was to attempt to offset or delay the timing of the increase while at the same time increasing pricing to our customer base. We were successful in the third quarter in offsetting most of the price increases realized at this point but are uncertain as to our ability to continue to offset all increased metal prices in the future. This will remain an area where we'll maintain a high level of focus in the near term.

During the third quarter we successfully completed the closure of the roll technology operating unit in Germany, the commercial printing operation at Standard Publishing and the Jarvis Caster facility in Massachusetts. During April we announced our plans to consolidate our roll and plate engraving operation in Rochester, New York into the Richmond, Virginia operation of IR International. As a result of this consolidation, we will incur a $2m pre tax charge, which will be recorded during the fourth quarter of this fiscal year, and the first quarter of fiscal 2005. Savings resulting from this consolidation are expected to produce roughly a one-year payback once the move is completed. We are nearing the end of the restructuring and realignment program having completed the goals we originally established for this initiative. We expect to record our final restructuring charge in the first quarter of fiscal 2005. One of the objectives of this program was to evolve the company's portfolio by creating a smaller number of larger business units that have strong synergistic relations amongst the business units, more critical mass and businesses which possess a leadership position in their respective niche markets. Thus far during the course of this program we have completed six strategic, or both on acquisitions sold or closed five business units, and consolidated the operations of five divisions. Through this process we've repositioned and strengthened a number of our businesses and exited businesses that did not fit our strategic focus on value-add, engineered products and customer solutions. In addition from a financial perspective, the gains on the disposed properties have more than offset the restructuring expenses incurred and the actions that we've taken are expected to achieve more than $8m in annual savings. Christian will now provide more detail on the financial data discuss key balance sheet issues and cash flow performance. Christian?

Thank you Roger. And good morning everyone. The financial highlights for the quarter are as follows. On the balance sheet we ended the quarter with a net debt position of $100.7m, down $500,000 from December 31, 2003. Our leverage ratio, which we define as net debt to total capital remained essentially flat at 38%. While our organic sales growth for the third quarter was 8%, networking capital, which we define as accounts receivable plus inventories less accounts payable at the end of the quarter was $133m, down $4.6m when compared to the end of the prior year third quarter as we continued to see year-over-year improvements in working capital terms. Comments on segment performance and operating performance. We are pleased that we saw a slight improvement in gross profit margins for the third quarter as the margins in our industrial segment improved. Gross profit margin for the quarter was 32.6% compared to 32.2% in the prior year third quarter. The gross profit margin for the first nine months was 33.4% compared with 33.7% in the prior year. Operating margins for the company excluding restructuring charges and special items improved year-over-year both for the quarter and the first nine months. Operating margin excluding restructuring and special items were as follows; for Standex as a whole for the quarter at 5.6%, an improvement of a 130 basis points and for the year-to-date 6.4%, an improvement of 60 basis points. Operating margins by segment, for the food service group we are seeing an improvement of 160 basis points year-to-date, 7.9% versus 6.3%. Operating margins in the third quarter declined 5.5% in the prior year to 3.7%. This decline was caused to some extent by the fair value accounting applied to the [Inaudible] inventory. Consumer group, the operating margins were 5.9% year-to-date compared to 1.2% in the prior year and for the third quarter 9.2% vs.1.2%. We saw an improvement in operating margins in our industrial segment for the third quarter of 140 basis points, operating margins were 10.8% versus 9.4% in the prior year. On a year-to-date basis, operating margins came in at 10.5%, which compares to 12% in the prior year. The year-to-date margins are still affected by restructuring related costs that don't qualify as restructuring but are still according to our operating income. On the non-operating performance, during the quarter we made contributions to our pension plans of $2.3m for a total of $5.9m for the first nine months. We expect to make additional contributions of $0.9m during the balance of the fiscal year. The effective income tax rate from continuing operations for the first nine months was 36%, which compares to 32.6% for the comparable period in the prior year. Last year's third quarter results were favorably impacted by the recognition of a research and development tax credit, related to the fiscal year 2003, resulting in a very low tax rate of 12.5% in the third quarter of last year. Interest expenses for the quarter were down at $349,000 from prior year levels that came in at $1.4m. For the first nine months interest expense was $4.4m, this compares to $5.3m in the prior year. We continue to benefit from low interest rates on our valuable rate debt and lower average borrowing levels. Capital expenditures for the first nine months totaled $5.5m, above the prior year level of $5m. We project full year Capex levels at somewhere between $9m and $10m. Depreciation for the quarter was $3m compared to $2.5m in the prior year. For the first nine months depreciation was $8.9m compared with $8.1m in the prior year. Some Q4 data points, depreciation is estimated to be $12m for the full year. Our effective tax rate was estimated to be somewhere between 36% and 36.5%, diluted shares outstanding are expected to be at 12,350,000. This concludes my remarks and I turn the conference back to Roger.

Chris, we are now ready for the Q&A session, please.

Thank you sir. Ladies and gentlemen, if you wish to ask a question, please press star one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star two. Questions will be taken in the order received. Please press star one to begin. And your first question comes from Michael Gardner of Wedge Capital Management, please proceed.

Good morning gentlemen.

Good morning Michael. How are you this morning?

I'm doing fine, thanks. And hope you all are. Terrific quarter, particularly the industrial side, so of course, I'm going to start and ask you about the food service side, if I may. First, just the fair value charge, is that a one-time item? And that's finished now?

Yes Michael. It's a one-time item. Under the rules for business combinations, you have to allocate the purchase price among the assets acquired and the liabilities assumed. For inventory what that means is you have to value inventory at fair value and not at costs of the target company. So, for the first turn of your finished goods inventory we saw very small gross profit margins. That is behind us and going forward we will realize normal gross profit margins at --

Okay, great. Thanks Chris. Then you mentioned of course the usual seasonality of this business and the weather was even worse than normal this year. I guess, I just wanted to know, do you think that the weather related aspects were the full explanation for the lower profitability or is any of it having to do with the fact that you've kind of bulked up there, which means you make more money when -- in the good seasonal periods, but you're naturally going to, always tend to make less in the tougher seasonal periods, or am I just wrong about that?

Well, certainly there is a volume leverage issue that applies but, I don't think that the acquisition of Nor-Lake changes that other than proportional to the volume that they bring to the mix. Each of those businesses runs autonomously. They have their own manufacturing operation, so they will tend to volume leverage if you will with the seasonality. Nor-Lake coming in the cabinet business, the walk-in business, tend to be a little more seasonal than some of the other product lines they go into ice cream stores, dairy stores, some of those kinds of things and clearly that is a little more seasonal than perhaps some of the other businesses in that segment.

Okay. Fair enough. Let me ask you, Roger about the -- your comments about materials cost and n how it didn't hurt you too badly in the third quarter, but it sounds like you're expecting it to be worse ahead. So, I guess, what I'm trying to get is, first, in terms of timing, do you think this fourth quarter is when it is going to really hit at its hardest or is it actually still ramping up and might even be worse in the first or second fiscal quarters. And then the second part of it is, can you give us any sense of magnitude you know in terms of, are we talking, you know this could beat industrial margins 1% or 2%. Just something that frames it up a little?

Okay. Unfortunately, it's a bit of a moving target because the price increases are coming to us in staggered amounts, particularly on the steel side. In other words, we've actually seen a couple of increases on the hot-rolled galvanized product that is used by our air distribution products. So, to give you an example, prior to January 1, on average we were paying $0.32 a pound for some of the higher volume gauge materials. Some of our more recent quotes for future deliveries, which hasn’t hit us yet are up in the $0.55 to $0.60 range. Now that was hot-rolled galvanized, is where we are seeing our largest increases; stainless steel and carbon steel are our smaller increases. But again the point is they're coming to us in a bit of a staggered approach and in turn, we have unfortunately had to go to our customer base with staggered increases using the example of ADP, we went out with a 10% price increase in the first week of March followed it by a 15% price increase in the first week of April. Again, those are the more extreme situations that we've incurred thus far. To further frame it for you. We've actually done a -- obviously this is a very significant issue. We are monitoring it very closely and we've actually done a rollout through the company to see -- given the increases we've seen thus far what would that do to our cost of goods on a full year basis and we would estimate that for the price increases we've seen thus far, but again recognize that for some of this it's future deliveries so it hasn't rolled through. On an annual basis, same price increase or cost increases in the order of $6m to $7m which is about a point and a half I think if you do the math on our overall total cost of goods for the company. That's a little misleading in that most -- in fact all of those cost increases would apply only to the industrial and the food service business.

That helps a lot and if I just may follow up on that. In terms of your ability to put through compensatory price increases where you can, where competition allows it. What would be typical lag, are these things anticipatable enough that there isn't a lot of a lag but in terms of when you are realizing a higher cost and when you can pass that on to some extent?

Again, it's a bit of a moving target because this is a very unusual phenomenon. Normally, we would see these price increases come to us maybe on an annual basis. There would be an extensive negotiation period, where you’d go back and forth and argue and fuss a bit about what was going to actually happen and what the timing would be. In this particular situation because of the suppliers are getting these increases in a very short period of time because their cost situation is being impacted so dramatically, many of these increases are coming to us in the form of a surcharge which is almost shipment by shipment. In other cases, they are preannounced but the lead time isn’t only a matter of a week or two. So, to answer your question typically we're trying to give our customers if we are going to go for a general increase three to four week notice on their price increases, and in many cases we're seeing that or less from our suppliers.

And my last question on that subject is, from what I hear is some areas these things are actually, it is so volatile, they've actually started to roll back down some of these prices. I don't know whether that applies to any of your input, but have you seen any cases where there was a sharp peak but it is actually started to come down in more recently.

We have heard the same kind of stories we haven't seen that happen yet in our situation. So it's again has there been an overreaction in the market place I would hope so. At the same time, if you look at some of the fundamentals Michael, and I am sure you have seen the same reports that I have. They are saying scrap steel for example has gone up by a factor of three over the last six months, that there is a pretty acute shortage of coke nationwide in the US that the China's demand is up very substantially and they expect it to maintain itself so. Although, there hopefully has been an overreaction there may be some I would hope moderate rollback we are planning for the general price increase to be more of a medium to longer-term phenomenon, not just a couple of months. And have really tried to hunker down and work very hard with our suppliers and go out to our customer base. The good news is believe it or not we have seen some of our competition start to talk about them being rationed and in most cases -- in all cases we've not had any of that kind of discussion from our suppliers. So, we are fortunate in that regard.

Do you think the difference is because some of those competitors are smaller or what else would you attribute that to?

Particularly the case in point was in the hot rolled galvanized. Where we’re clearly the largest buyer in our market of that kind of product and some of the small guys apparently are starting to see problems. I can only assume that there maybe -- our payment track record and the solidness of our balance sheet I think we also make us preferred customers for some of these guys.

And then last thing I want to ask you is just to talk a little about the industrial side and my main, my question is kind of a general one which is aside from the Air Distribution business are these other divisions-- would it be a fair characterization to say that this pickup seems to be - in assuming we are going in fact have a recovering economy that persists. That this pickup would seem to be in the early stages, I mean that's the way it seems to me, is there any way for you to put it into cyclical context that way?

If I did as well as I could, that's our belief that we are in early stages. If you look beyond ADP and look at some of the pieces, look at Custom Hoists as I mentioned, that's a market -- that's a business whose primary markets is construction vehicle, dump trucks and dump bodies. Those markets, we do have very good quantification of data through trade organizations that monitor bills of the OEMs. And we know from that data that over the last two or three years that market has retracted over 50%, and we're beginning to see some recovery in the bill count at the OEMs. We also know that we've taken pretty substantial share at the same time, because our sales remain more or less flat while the margin was coming off, like I said about 50%. So, we're seeing early signs there, but we are also seeing some market share gains. Now look at our engraving business, inside of that business there is a small capital equipment business called Perkins. It makes processing machines for the engraving and related industries. We have seen a pretty marked uptick in incoming orders albeit a small piece of that business over the last six to nine months, whereas the prior two years there was almost no activity in that market. So, there are some early signs and obviously we're cautious about that, but I'll agree with you, there are early signs out there.

Thanks a lot Roger and great quarter.

Thanks Michael.

Once again ladies and gentlemen to ask a question, please press star one on your touch-tone telephone. Please standby for the next question. Sir at this time there are no further audio questions.

Okay. Thank you all for attending and we look forward talking to you again next quarter. Thank you.

Ladies and gentlemen thank you for your participation in today's call, this ends the presentation. You may now disconnect.