Standex International Corp (SXI) 2005 Q1 法說會逐字稿

Welcome to the Q1 2004 Standex International Corp. earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your hosts for today's call, Mr. Roger Fix, President and Chief Executive Officer, and Mr. Christian Storch, Vice President of Finance and Treasurer.

Good morning and thank you for joining us. Christian will begin our conference this morning with a review of our first-quarter financial results for fiscal 2005 and I'll follow with an update on our business and operations during the quarter. At that point we'll be happy to take your questions.

Thanks, Roger, and good morning. I'd like to remind everyone that the matters we are discussing on this conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to our recent SEC filings and public announcements for a detailed list of risk factors.

Standex's first-quarter fiscal 2005 financial results which we released this morning continued our record of consistently generating double-digit increases in revenues and operating income from continuing operations. Revenue for the first quarter of FY '05 grew 24 percent to 168.8 million. Our organic sales growth rate for the first quarter was nearly 13 percent.

The Nor-Lake and Magnetico acquisitions completed during the prior 12 months added almost 9 percent to our sales volume and less than 1 percent of our sales growth was related to foreign exchange. Therefore 52 percent of our year-over-year growth was generated organically while 44 percent was delivered by acquisitions.

Operating income from continuing operations for the first quarter of '05 was 12.2 million, up 33 percent. Net income from continuing operations grew 43 percent to 7.1 million or 58 cents per diluted share from 5 million or 40 cents per diluted share for the first quarter of fiscal '04.

Income from operations as a percentage of net sales increased 60 basis points to 8.1 percent for the first quarter just ended, up from 7.5 percent in the first quarter of fiscal '04. Higher sales volume, the impact of cost reductions and restructuring activities completed last year benefited operating margins. These positive impacts were offset somewhat by the diluted impact of price increases implemented to offset commodity metal cost increases which we have received from our suppliers.

While we have offset the majority of commodity metal price increases, the net effect of 1 to 1 price increases versus commodity metal cost increases still somewhat diluted our operating margins.

GAAP net income for the first quarter was 6.2 million or 50 cents per diluted share. This was an increase of 40 percent over net income of 4.4 million or 35 cents per diluted share in the first quarter of FY '04. Excluding special items and discontinued operations, income for the first quarter of '05 was 7.7 million or 62 cents per diluted share, an increase of 44 percent from 5.3 million or 43 cents per diluted share in '04.

Special items included after-tax restructuring charges of 511,000 in the first quarter of '05 and 351,000 in the first quarter of '04. A reconciliation of GAAP net income and earnings per share to non-GAAP amount is included in this morning's release which is available in the Investor Relations section on our website which can be found at www.Standex.com and will be included in our 10-Q.

We continue to be focused on working capital management; however, our working capital increased by nearly 22 percent during the first quarter to 146.3 million. Three factors contributed to the increase. First, a couple of our national chain customers stretched out their payments. While we see no additional credit risk with these valued customers, their deferral produced high receivables and caused our DSO to increase by 1 day to 55 days from the first quarter of '04.

Second, some large projects that were to have been shipped in the first quarter were deferred to the second quarter and third quarter primarily due to the hurricane weather delays experienced in the southeastern part of the U.S. causing an increase in inventories in several of our divisions.

And third, we experienced some softness in sale at our ADP segment which Roger will discuss shortly also creating an increase in inventory levels. We expect to recover most of the increase in working capital during the second quarter of our fiscal year. As a result of these developments our working capital turns in the first quarter decreased to approximately 4.3 turns.

Our depreciation expense of 2.9 million continued to approximate our CapEx of 2.5 million. I would characterize our CapEx as being largely investments in productivity improvements, cost saving measures and next generation manufacturing process technology focused on improving productivity and reducing leadtimes. We expect full year capital expenditures to total 12 to 13 million while full year depreciation is expected to be approximately 12 million.

Our tax rate for the quarter was 35.6 percent and we believe that a tax rate in the range of 35.5 to 36 percent is sustainable. We closed the first quarter with net debt and equity of 285 million and a net debt to total capital ratio of 40 percent which are somewhat less favorable than our net debt and equity of 255 million and our net debt to total capital ratio of 36 percent at June 30, '04.

The increase and debt is all related to the increase in working capital levels I previously discussed. Despite the increase and borrowings, our interest expense for the quarter of 1.5 million was flat with first quarter of '04. Our goal is always to have sufficient balance sheet capacity to pursue opportunistic acquisitions and we currently have availability on our existing credit facilities of approximately 64 million. With that I will turn the call back to Roger.

Thanks, Christian. I'd like to start off by making several comments about our first-quarter financial results and then talk about our new segment reporting format that we introduced with our fiscal 2004 annual report and 10-K published last month. I'll end by discussing our outlook for the Company and updating you on our growth strategy.

We were very pleased with the overall strong performance that Standex demonstrated in the first quarter of our fiscal 2005. In addition, this quarter marks the culmination of our multiyear restructuring and realignment program and the benefits from that program clearly contributed to our results. As Christian mentioned, our sales were up 24 percent ahead of the same quarter last year. This represents the fifth consecutive quarter of double-digit year-over-year top line growth.

It is noteworthy that our first-quarter revenue growth is split nearly 50-50 between organic sales and sales from acquired companies. The 13 percent increase in organic sales demonstrates that our restructuring and realignment program is accomplishing a primary goal which we established at the outset of the program. That goal was to build larger, more agile and synergistic businesses with the critical mass necessary to establish number one or number two leadership position in targeted niche markets and contribute to superior top line performance. We are also striving for a companywide increase in operating income and operating cash flow.

Our core businesses provide a solid foundation that we can continue to leverage with strategic bolt-on acquisitions which will provide incremental sales growth. In the first quarter acquisitions completed in the last 12 months delivered incremental growth of 11 percent. There were several instances in the first quarter where our businesses recorded organic growth rates which comfortably exceeded the overall growth rates of the markets that they serve, thereby demonstrating that they are taking market share away from the competition.

Among our top performing businesses achieving significant improvements in organic growth and market gains were Custom Hoists, Standex Electronics, Spincraft, Master-Bilt and Procon. As we mentioned previously, during the first quarter we introduced a new structure for our external reporting and investor communications.

The objective of this new segmentation is to allow us to more clearly highlight the market leadership positions that our businesses enjoy in selected niche markets, enhance our ability to communicate the business and market characteristics that effect each of these businesses and to make our results more transparent which we believe collectively will make the Company easier to understand and more investor friendly.

The five reporting segments in order of first-quarter revenue are -- foodservice equipment, air distribution products, engineered products, consumer products and the engraving group. The three largest segments -- foodservice equipment, air distribution products and engineered products accounted for 77 percent of Standex's first-quarter revenue and each posted double-digit year-over-year first-quarter revenue gains.

Our foodservice equipment group is a broad line manufacturer of commercial grade foodservice equipment including refrigerated cabinets and systems, commercial ovens and rotisseries, refrigerated and heated bakery and deli display cases, rethermalization systems and pumps for the beverage, espresso and industrial markets. This segment reported a year-over-year 41 percent increase in first-quarter revenues to nearly $60 million and a 37 percent increase in operating income to $6.8 million. The revenue increase included an organic growth rate of 8 percent and a 32 percent gain from Nor-Lake acquisition which we completed last year.

The sales and profit growth demonstrated by the foodservice segment over the past five quarters clearly demonstrates the degree of market share gains and improved financial performance that we envisioned our restructuring and realignment program could produce in our portfolio. Foodservice equipment is estimated to be a $20 billion global market. Primary end users of our equipment typically have product specific requirements for food merchandising, preparation and/or presentation that allows us to add value by using our engineering, service and quality capabilities.

With our Nor-Lake acquisition we now have the capacity and range of products to serve the entire breadth of this industry including quick service restaurants, fast food outlets, fine dining establishments, retail drug and convenient store chains, delicatessens, bakeries, hospitals and even the health, sciences and environmental markets including laboratories and blood banks.

We believe the long-term demographics of these markets are good as consumers continue to seek convenience and variety in their dining requirements driving underlying long-term growth in the markets that we serve. Further the market is still fairly fragmented creating opportunities for bolt-on acquisitions.

In addition, we are (indiscernible) position of market leadership as demonstrated by Master-Bilt and Nor-Lake which in combination are leaders in the supply of walk-in refrigeration and freezer systems for the foodservice, drugstore and quick service restaurant markets; Procon, which is a leader in the beverage market, and Federal Industries, which is a brand leader in the upscale deli, bakery and confectionary markets.

Our air distribution products group, or ADP, is the number one ranked manufacturer of galvanized steel duct work and fittings for the residential HVAC market in North America. In the ADP segment all of the 18 percent sales growth rate was organic; however, the approximate 24 percent growth produced by price increases was offset by a 6 percent decline in real unit volume.

Three industry factors contributed to the unit volume decline at ADP. First, in anticipation of steel price increases, many wholesalers which sell ADP products built inventory during Standex's third and fourth fiscal quarters causing a slowdown in purchasing in the most recent quarter. Second, housing starts, a leading economic indicator for ADP, weakened earlier this year contributing to a decrease in demand for ADP products. And third, a cool air conditioning season this summer also dampened sales.

ADP recorded a year-over-year decline in operating profitability, down 21 percent, primarily from a decrease in unit volume and a limitation on its ability to fully pass through steel price increases to its customers. While ADP's performance tracks new housing starts, housing remodels and upgrades and activity in the do-it-yourself market, it enjoys the competitive advantages of a nationwide footprint that includes eight manufacturing locations. This is very important as we seek to grow sales and capture market share with national HVAC wholesaler chains and do-it-yourself retail chain stores which favors suppliers that can service their needs on a consistent basis throughout the country.

Our engineered products group posted a 30 person year-over-year gain in first-quarter revenue of $29.1 million of which more than 85 percent was organic, and an increase of 94 percent in operating income to $4.8 million. The very significant improvement in operating income was due to the sales gains achieved during the quarter, a lower-cost structure produced by expense reduction and consolidation programs implemented in fiscal 2004, and an adjustment in a long-term contract with a major aerospace customer.

The engineered products group is comprised of three key businesses -- Custom Hoists, a manufacturer of heavy-duty telescopic hydraulic cylinders for the dump truck, dump trailer and material handling industries; Spincraft, a manufacturer of metal spinning and custom fabricated components for OEMs in the aerospace, aircraft and defense industries; and Standex Electronics, a manufacturer of electronic components, custom engineered electronic assemblies and sensors. Spincraft is a world leader in highly engineered metal spinning and Custom Hoists is the number two manufacturer in the U.S. of heavy-duty telescopic hydraulic cylinders.

Our Magnetico acquisition completed in fiscal 2004 has been an excellent addition to Standex Electronics, generating good cash flows in earnings and is demonstrating that it will give our electronics business unit strategically important access to the aerospace industry and resulting sales growth in the future.

Our consumer products group is our turnaround story. After nearly 2 years of focusing on improving the profitability of this segment at the expense of growing sales, we believe this group has turned the corner. For the first quarter, which is typically one of its weakest, the consumer segment posted a 4 percent year-over-year increase in revenue of $20 million and a 157 percent in operating income. Key businesses in this group include a publishing business for children and adult Christian publications, a retail bookstore that specializes in the sale of Christian books, music and related gift items, and a mail-order distribution business with the marketing of citrus products, gift baskets, fruits and vegetables.

The Berean Christian bookstore chain is the largest business unit in this group accounting for approximately 50 percent of the group's first-quarter revenue. This 18 unit retail chain posted an increase in same-store sales for the third consecutive quarter and is slated to open two to three new stores in the next 18 months.

The last segment, Standex (indiscernible) group, achieved sales of $17.6 million for the quarter, a 4 percent increase and operating income of $1.9 million, an 18 percent increase over the first quarter of fiscal 2004. This group has been focused on integrating the IR International acquisition which was acquired at the beginning of fiscal 2004 and the consolidation of the Rochester, New York plant with its Richmond, Virginia facility to achieve significant improvements in its cost structure.

The operations of this division consist of two very related businesses. The largest of these units is the mold texturizing for our Mold-Tech brand which texturizes molds used in the plastic injection parts manufacturing arena. The automotive industry is the largest customer for this segment of the business. The second business unit in the engraving group is focused on the manufacture of engraved rolls and plates used in producing continuous length material such as tissue and towel, linoleum, architectural building products such as wallpaper, paneling and decking material and fabric used in the interiors of automobiles.

Standex engraving has experienced a broad recovery in all of its major markets. Its backlog has increased by 15 percent over the prior year's first quarter and the business has booked several significant orders during the course of the prior quarter.

During its nearly 50 year history, including 35 years of listing on the New York Stock Exchange, Standex has operated as a diversified multi industry mini conglomerate. We have spent the last several years remaking that business model through the realignment and restructuring program, by narrowing our focus and building a limited number of business groups that have both leadership positions in their respective niche markets and have synergies and/or core competencies in the markets they serve.

After closing or selling six businesses including finalizing the James Burn divestiture in the first quarter, consolidating five plants and completing five strategic bolt-on acquisitions, the Company is now comprised of the five business groups we have discussed during the course of this conference. As a result we believe Standex is well positioned to grow organically and to capitalize on selected strategic bolt-on acquisitions.

Our growth strategy involves investing in a wide variety of organic growth initiatives that managers of our business groups have identified and is seeking attractive, strategic bolt-on acquisitions that will strengthen Standex's technology, products or market presence. We also continue to place a high priority on managing working capital to preserve our balance sheet as a resource for future acquisitions.

To use baseball vernacular, our growth strategy is formulated in terms of focusing on hitting a lot of singles and doubles rather than relying on home runs to drive our organic top line sales growth. The perseverance of our business leaders in identifying and pursuing day-to-day opportunities to expand sales via the use of new products, new channels of sales, new geographic expansion initiatives, brand labeling and a host of other tactics is very much like the tenacity demonstrated by our now world champ Red Sox. Got to put a plug in for the Red Sox, we are in New England.

Our goal is to consistently achieve organic sales growth rates which exceed the underlying growth rates of the markets we serve by capturing market share and supplementing the organic growth with solid, well thought out and diligently executed strategic bolt-on acquisitions.

While many of the tactics we use to achieve organic growth and profit improvement with be enacted at the grass-roots levels, Standex is also pursuing some major initiatives for the benefit of the entire corporation. For example, nearly 2 years ago we initiated a roll out of a companywide lean enterprise initiative. Currently we are pursuing expanding our low-cost manufacturing capabilities in Mexico to manufacture some of our lower margin more labor-intensive products for several of our business units. In addition, recently we have hired a country manager for China where we have initiated sourcing of components and raw materials for several of our manufacturing companies. Ultimately we expect to have manufacture operations in China to support our continued emphasis on cost reductions.

I'd like to conclude my statements this morning by saying that we are very pleased with the results of the restructuring realignment program which we initiated 2 years ago and completed this quarter and also with the improvements in our financial performance over the past 18 months. This is an exciting time for Standex and we're very optimistic about our future. Now Christian and I will invite your questions, please.

(OPERATOR INSTRUCTIONS) Steve Wilson, (indiscernible).

A couple things. One, you mentioned that it sounds like you've got some kind of either gain or adjustment on an aerospace contract. Could you talk about that?

Yes, we have a long-term contract with a major aerospace supplier -- we're not privy to be able to release there name -- which is basically a take-or-pay kind of contract. They saw a temporary decline in their needs from a production standpoint. So as the contract was take-or-pay we were able to renegotiate that contract in such a way as to get payments to have access to the facility even though they were reducing the quantities that they were going to ship in the near-term.

And just order of magnitude, how important was that?

On the order of about $1 million pretax.

So then you talked about the national chain stretching out payments. Can you just give me an idea -- I mean normal terms -- what are they supposed to pay and how much of a stretch out have we seen?

We ended up with one case in particular. We got up against their year and it was a situation where they were trying to preserve their numbers apparently for their year end. Typically the chains are on a 45 day terms and they stretch us to over -- the beginning of the calendar month -- a little less than 30 days.

So it went 30 days beyond?

Yes.

And let's just focus because obviously the only disappointment you can really point to in the quarter was the cash flow situation. How much of this are we going to see reverse back? Are we're talking about half of the build up, all of the build up?

All of the build up will reverse over time; it's only a question of how fast does it come back. Some of the receivables were already collected in October. We're saying that the majority of it is going to -- well over 50 percent will be captured in the second quarter and I would expect most of the remainder to be captured in the third quarter. None of this was bad debt or bad inventory or anything like that; it was all very current inventory, all obviously receivables that were stretched over a near-term period. So it's not a matter of quality of the receivable or the inventory. It's more a matter of how quickly does it take to move it out of the inventory to collect the receivable.

And in terms of the strategic move to source Mexico and China, can you talk about which division sort of can play in that of setting up a new sourcing and manufacturing? And whether it makes sense to do something like a shared facility where they can all leverage that one site and work on a scale basis to benefit many of the units?

Absolutely, that's exactly what we have in mind. I think you're familiar with the so-called shelter operation concept that can be used in the kiladoras (ph). We're looking at the possibility -- it will clearly be a shelter operation in which -- and I'll get back to identifying the divisions in a little bit -- but it will be a shelter operation in which several of our divisions are co-located. We're looking at the possibility of either using a third party to initially manage the shelter or to have a Standex shelter itself. In any event, whether we'd start with a third party or not we'd ultimately expect that to be a wholly-owned mikiladora (ph).

A number of the foodservice divisions as well as some of our former industrial divisions are very actively involved with us as we look at that possibility. But Master-Bilt, for example, Procon, Nor-Lake we think could benefit from components and some of their low end, more low margined cabinets and some of the panels. Procon from an assembly standpoint perhaps could benefit.

Even our ADP business. We have an opportunity to use Mexico not only for a source of low cost products, but also to penetrate the southwest part of the U.S. And in that sense even ADP we think penetrating back into the Phoenix area which is -- and Las Vegas which you know are very fast-growing from a housing starts standpoint. We see some real opportunities to use Mexico for that. So our siting is being influenced by really two objectives, one is to get low cost and the other is to have proximity to the southwest of the U.S.

In China -- and we think there's a role for both Mexico and China. Mexico believe for products are more bulky and therefore more difficult and expensive to ship. Some of the cabinets for example in foodservice, you'd be shipping a lot of air if you brought them out of China. It probably doesn't make sense, number one, from a transportation standpoint. And secondly, they tend to be medium volume kind of products where you'd have to carry a tremendous amount of inventory given leadtimes out of China. It probably makes sense to use Mexico for that king of product.

Electronics, for example, clearly much smaller, much lighter, easier to ship, higher volume so you know that you're going to use a given quantity in any given month. So you can take advantage of a longer leadtime if you will, and I think China makes sense in there. So, there is definitely a role for both China and Mexico as we look at our businesses.

Then lastly on ADP, 6 percent volume decline, eight locations. Was that fairly uniform or were a couple of them down double-dip and a couple of them flat to up?

Fairly uniform. The thing that differentiated primarily is we had mentioned previously that we have acquired an account at one of the big box retailers and they are currently taking product out of three or four of the locations. To the extent that we're focused on building that account those three or four locations did somewhat better or more flatish basically on a real volume basis than some of the others.

So the others were down double-digits?

Approximately, some were down (indiscernible) this summer, some were down high singles.

Okay. And the roll out of that big box, it will eventually go to the other sites as well or that for whatever reasons your coverage is sufficient?

Most likely it will stay about where it's at in terms of coverage. They ship through distribution centers and we have set up a logistics network that matches or mirrors our locations with their locations and we're pretty much there in terms of the locations. Obviously the volume is still tending to ramp up a little bit more.

And then lastly, just address steel prices overall, obviously ADP, but in other divisions as well in terms of where you are, pricing your products your cost and whether you're still seeing old inventory or you've caught up on the inventory accounting with the higher price metal?

All the old cheaper metal by now has flushed through the system and we're clearly buying materials that were purchased at higher prices. I would say that steel prices over the last 30 to 45 days have seemed to stabilize at the higher level. We haven't been the continuing increase on the steel side. We have seen, and I think you've watched obviously the copper market. Copper seems to still be a little more dynamic than what the steel side has been most recently. They started to come up after steel came up and the copper commodities fluctuated fairly dramatically over the last 30 to 45 days and I think that's causing some of our suppliers to -- on their refrigeration fronts to take a hard look at that. We think we've probably captured on the order of 85 to 90 percent of our cost increases through price increases. We are lagging somewhat behind 100 percent recovery. But we've recovered a vast majority of it thus far.

Does that leave room to catch up this quarter with the rest of it or the market won't accept that?

We're in the process; it's hard to say, Steve. Clearly the larger accounts are the last ones that you can get to or talk to. They have the bigger leverage if you will and that's really where we're at is we're working very hard with some of our most major accounts. I I'd like to believe that given the magnitude of the commodity increases and the fact that our larger customers are seeing other components and products they're buying being influenced that over time we'll be able to recover price there as. I can't really predict as to what quarter that would be.

Okay, thank you, gentlemen.

(OPERATOR INSTRUCTIONS) We have no further question at this time.

Thank you very much for your interest, we'll look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, we thank you for your participation on today's conference. This concludes your representation and you may now disconnect.