Standex International Corp (SXI) 2005 Q3 法說會逐字稿

Standex International Corporation’s Earnings Conference Call. [OPERATOR INSTRUCTIONS.] I would now like to turn the presentation over to your host for today’s call, Mr. Roger Fix, President and Chief Executive Officer. Mr. Fix, you may proceed sir.

Thank you. Good afternoon, and thank you for joining us. First we’ll begin with a review of our third quarter financial results. And I will follow with an update on our business and operations. Please note that our third quarter financial results news release, which we released at the market close this afternoon, is available on Standex’s website at Standex.com.

Our objective is to continue to make Standex more user friendly for investors by making the Company easier to understand and analyze. In that spirit, on each conference call we are spending a few minutes to provide a more in depth look at one of our five business segments. Today we’ll discuss our engraving group. After that, I will discuss our outlook for Standex. And then we’ll be happy to take your questions. Christian?

Thanks Roger, and good afternoon. 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 third quarter fiscal year 2005 financial results demonstrate our success in gaining market share, and capitalizing on new market opportunities. As a result of this success, we grew revenue by 13.7% to $163.1 million from the third quarter of fiscal 2004.

All of this growth was organic, and compares to an organic growth rate of 12.6% in the second quarter. Our year over year operating income from our business units was flat, however, due to three primary reasons. They include inconsistency in passing continued material cost increases through to our customers, the completion of certain large projects that carried lower margins, and an unusually strong profit performance by our ADP group in Q3 of last year.

Corporate expenses increased mainly due to greater cost for Sarbanes-Oxley compliance. We continue to work on SOX compliance, and expect SOX related cost will total approximately $2 million for fiscal year 2005.

The combination of the performance of our business units and increased corporate expenses caused an 8% decrease in overall operating income. Operating income as a percentage of net sales was approximately 5%, compared with 6% during the prior year’s fiscal third quarter. Income from continuing operations increased 4% to $4.9 million, or $0.40 per diluted share, up from $4.7 million, or $0.38 per diluted share for the third quarter of fiscal 2004.

Our fiscal 2005 third quarter income from continuing operations reflects a lower tax rate of 30.9%, compared with 33.3% reported for the sequential second quarter. The lower tax rate is the result of additional tax benefits we took advantage of when we filed our Federal tax return for 2004 during the third quarter.

GAAP net income for the third quarter increased 40.7% to $4.7 million or $0.38 per diluted share, up from $33.4 million or $0.27 per diluted share in the third quarter of fiscal ‘04. Excluding discontinued operations and special items related to the Company’s restructuring and realignment program, income for the third quarter of fiscal ‘05 was $4.9 million or $0.40 per diluted share, up from $4.8 million or $0.39 per diluted share in the third quarter of fiscal 2004.

A reconciliation of GAAP net income and earnings per share to non-GAAP amounts is included in this release, which again is available in the Investor Relations section of our website, which can be found at www.Standex.com, and will be included in our 10Q.

Despite the strong revenue performance, net working capital remained flat at $134 million, when compared to the prior year’s third quarter, as working capital turns improved. We defined working capital as accounts receivables, plus inventories, less accounts payable. Working capital turns increased to 4.9 from 4.3 in the year ago quarter.

We ended the fiscal third quarter with net debt of $109.5 million, an increase of $19.3 million from December 31, and a net debt to total capital ratio of 38.4%, up from 33.9% at December 31. During the quarter, we contributed $18.3 million to our defined benefit plans. These payments included a $15 million voluntary contribution. We expect this voluntary contribution will eliminate the minimum funding requirements of the plan for the next several years.

In addition, the voluntary contributions substantially improves the overall funding status of our defined benefit plans. And it lowers the Company’s current income tax liability for 2004 by $4.1 million. This refund was received last week.

We continue to manage our balance sheet with an eye on potential acquisition opportunities, by maintaining significant liquidity. At March 31, we had $61.9 million available under our borrowing base. CapEx continued to approximate our depreciation expense in the third quarter.

We are focusing most of our capital expenditures on investing in next generation manufacturing technology and other process improvements. We expect our full year depreciation and CapEx to be in the range of $12-13 million. With that, I will turn the floor back to Roger.

Thanks Christian. As Christian discussed earlier, we reported a double-digit increase in revenues, with a somewhat lackluster bottom line performance. Our five reporting segments, in order of third quarter revenue, are the food service equipment group, air distribution products, engineered products, consumer products, and the engraving group.

Four of Standex’s five business segments posted year over year top line gains. Three segments --the food service equipment group, the engraving group, and engineered products -- posted double digit revenue gains. Let me take you through each of these groups, to give you some additional detail around our financial results.

Sales for the food service equipment group grew by more than 25% year over year to $56.2 million. When we highlighted this group in our conference call last quarter, we discussed the success they are having in building market share in new and existing markets. The group continues to gain share through new product introductions and expanded distribution channels. I’d also like to note that we are very pleased with the sales and profit performance of Nor-Lake, which we acquired in late 2003. Nor-Lake had strong demand for both its food service and scientific products during the quarter.

Food service operating income increased by 142%, to $4.1 million year over year. The significant year over year improvement in operating income was a result of the increased sales volume, the cost reductions achieved through Standex’s restructuring and realignment program, and other productivity initiatives. With that said, we still have some work to do in improving our margins in this segment.

Our third quarter margins were negatively affected by two factors. Material cost increases as a group has been unable to pass through to customers, and an unusually high percentage of revenue from large, lower margin projects in the retail area. Air distribution products increased sales by approximately 8% to $31.8 million. The year over year increase is due to price increases instituted last year.

We experienced a decline in real year over year unit volume. And operating income from ADP was down 63% to $1.3 million. Last year, during the third quarter, ADP benefitted from an unusually high demand, as customers placed advanced purchase orders as a result of price increases announced, to be effective early in the fourth quarter.

In the current year quarter, the price increases we implemented previously have not been completely offset by higher steel prices. The combination of these two factors resulted in lower real sales volume, and profitability for this group during the quarter. We’re working with our customers to implement price increases to offset these higher metal costs.

Sales from our engineered products group were up 14%, to $31 million. Custom Hoists and Spincraft were the top performers from a revenue perspective. They both continued to gain share in growing markets. Operating income was down, however, 5% year over year to $3.6 million. At Spincraft, we have been working very hard to diversify our customer base. Traditionally, this business has relied heavily on supplying components for rocket engines.

Although this business has excellent margins, it is stagnant from a growth perspective. One of the new market segments we have targeted is supplying engineered components to the power turbine after market. This is very good business, but carries a lower margin than the aerospace business, that has comprised the majority of our revenues over the past several years. As we head up the learning curve in manufacturing products for this new customer segment, we believe our margin at Spincraft will improve.

Our consumer group reported $22.4 million in sales, a year over year decrease of 3%. We had a difficult year over year comparison, due, as the sales in the third quarter of fiscal 2004 benefitted from the theatrical release of the Passion of the Christ. Our religious bookstore chain reported a same store sales decrease of 1.3%, which is line with our peers in this market. Standex Direct reported a slight year over year increase in sales.

Consumer group operating income was down 26% to $1.6 million, compared with the third quarter of 2004. The operating income decline was due to the combination of lower sales revenue, and the unusually large amount of returns in allowances in the quarter, and one-time expenses related to the closure of the store. Keep in mind that the fiscal third quarter is seasonally slow for the consumer group.

We expect improvement in the consumer group sales in the fourth quarter of our fiscal year, and also expect to benefit from strong sales of Standard Publishing Vacation Bible School materials and Sunday School products. These items already have received positive early customer response.

The engravement group grew sales by 16%, to $21.8 million, and operating income by 30% year over year, to $2.5 million. The group experienced strong demand in North America, where they are realizing increased market share and good growth in all of their end markets. The group also continued to benefit from the consolidation of our Richmond and Rochester facilities late in fiscal 2004.

Let’s now spend a few minutes discussing the engraving group in more detail. Standex Engraving puts texture on tools that product thousands of products that we all use every day. Let me give you a few quick examples. I am sure most of you are in your offices listening to this call. Notice the texture on your telephone, the texture on your computer monitor, your PDA, and your cell phone.

Later on, while you’re driving home, take a look around the interior and exterior of your automobile. There’s a texture on your steering wheel, the instrument panel, your leather seats, and literally dozens of other interior and exterior parts of your car. Texturized surfaces are more durable than smooth finishes, easier to keep clean, aesthetically more appealing, and generally more functional.

The total available industrial engraving market is about $300 million annually. Standex Engraving reported sales of $59 million in the first nine months of fiscal 2005, accounting for about 12% of Standex’s total sales. Looking at these sales geographically, about 70% came from North and South America. Most of the remainder comes from Europe, with a few percentage points from Asia and Australia.

The Standex Engraving Group has three primary segments -- mold engraving, roll and plate engraving, and embossing and calendaring equipment. Let me take you through each of these businesses. Our mold texturization business engraves primarily plastic injection and blow molds, that impart texture to a variety of products. Standex was the first company to put texture on molds. And we now have a strong leadership position, with approximately 40% of the mold texturization market. We estimate this total market to be about $100 million.

About 70-80% of our mold texturization business is in the automotive industry. Other applications include heavy truck, computer cases, cell phones, printers, PDAs, luggage, furniture, doors, and other consumer products. A major driver in this business is the increase in the number of new car models entering the marketplace each year.

Other competitive pressure on a global basis, all of the automotive OEMs in the U.S., Europe and Japan are shortening the life cycle of car models, and introducing new or updated models in order to protect and grow their market share. Every year, each of the three major American auto makers releases three or four different models. With every new model comes a need for tooling for the new textures inside and outside of the vehicle. The typical new model program has between 50 to 500 molds.

In addition to our American automotive customers, we have also strong relationships with the Japanese and European auto makers. Typically we will receive the business for the entire program, interior and exterior. For example, we now are working with a major American OEM on a new line of SUVs and trucks. Like most new models, the texture on all the parts inside the vehicle must match, to provide aesthetic harmony.

We also are developing the molds for the exterior, such as the bumpers and body side moldings. Interior and exterior patterns are increasingly more complicated, and must be of a higher quality than ever before. We have invested heavily in our technology, in order to meet their needs and provide fresh, rich textures to our customers.

For example, we recently developed a new finish we call Micromatte. This finish, which is engraved over the base grain, dramatically reduces dashboard glare, makes parts look richer, and reduces our customers’ cost, because they do not have to paint over the parts to control gloss.

We also have invested in our rendering, or virtual mapping technologies, in order to help customers speed time to market, while reducing costs. Using our proprietary mathematics based software, we helped the customer map the grains of the desired texture in a 3D image. The software calculates the appearance, and then adjusts the grains.

We then use a proprietary process to build the product, without the need for prototype tooling. Our customer evaluates the product and verifies the design. This new process is incredibly fast and efficient. We expect this trend toward virtual mapping, which is very popular with younger auto designers, to continue.

Now let’s turn our attention to the roll and plate engraving business. Roll and plate engraving is used to product the embossed grains on upholstery, fabrics, paper, flexible plastics, packaging, and other thin materials that need texture. Having pioneered the roll engraving process, Standex Engraving has been the primary force in this field for more than 80 years.

We currently have a leadership market position in North and South America, and with a 35% share. We estimate the total market to be about $200 million. Our roll and plate engraving business sells into four primary markets, namely architectural materials, tissue and towel, flexible plastics, and automotive.

The architectural market can best be described as consisting of anything that has a texture inside and around your house. For example, metal or vinyl siding, wallpaper, linoleum, ceiling tiles, garage doors, and synthetic deck lumber. The recent increase in the building materials commodity pricing has led our customers to once again begin spending capital on new patterns and projects. This has led to a significant sales increase for our products in North America.

The tissue and towel market includes paper towels, napkins and fine papers. For the flexible plastic market, we make specialty ice cream wrappers, trash bags, and food wrap. In the automotive market, we have a distinct advantage as one of the only companies in the world that can engrave both the injection molds and embossing rollers, allowing designers to match grains easily between the hard and soft interior plastics and leather. This allows our customers to improve quality and reduce time to market.

A key trend in the roll engraving business is the use of digital and laser technologies. For example, the customer can come to us with an intricate grain pattern that they want for a new synthetic lumber product. We scan the board, digitize it to make any necessary changes. We then send the data to a laser, that quickly cuts a pattern. After the customer reviews and approves the pattern, we engrave a roller with that pattern.

We also have used our digital and laser technology to engrave texture on very thin plastics. For example, a consumer goods company was having a problem engraving texture on a very fine plastic product. The measurements on the male and female rollers for such a job must be perfect, in order to accurately capture the pattern without damaging the plastic. Using our digital and laser technology, we solved all of the customer’s manufacturing problems. And the product is now selling extremely well.

The third component of our engraving group is our embossing equipment businesses. We estimate the total market for this equipment to be about $300 million annually. We have a very small percentage of the calendaring market. However, we are a leader in North America, for the supply of metal embossing machines that product textures on refrigerators, garage doors, ice chests and siding.

We design and manufacture metal embossing machinery for a wide variety of applications. Around the world, steel service centers, (cull) (ph) coaters, building products manufacturers, and garage door producers come to Standex for our superior performance and innovative designs.

While the equipment manufacturing side of the business is less sizeable, we are able to leverage this business with customers who contract us to buy the mold and roll to fit the equipment. Standex has been responding to market needs with web forming and web finishing equipment for more than 100 years, by blending high-tech design with skilled craftsmanship, to provide our customers with the equipment they need to increase productivity, and maintain their competitive edge.

So what helps us win this business? First and foremost is our quality. More than ever before, our customers are seeking perfection in our texturized products, and are putting them through extensive testing. For example, a texture depth must be highly accurate. And the products must pass stringent scratchability tests. And since quality of appearance also is critical, we product the most luxurious looking textures on the market.

The second major differentiator is our program coordination capability. This applies mostly to our automotive work, where we are seen as a valuable resource in helping customers coordinate a program’s entire tooling for the worldwide manufacturing.

Third, our customers turn to us because of our worldwide presence. We have 21 company-owned factories and licensees located near the major tooling centers in North America, Europe, South America, and Asia. Because of this geographic scope, we are ready to respond very quickly to a customer’s requirements on a global basis.

Fourth, we are now selling directly to the designers, who understand our technology and make purchase decisions based on the quality of our work. During the past few years, our significant investments in technology and our ability to leverage the breadth of our product offerings, have resulted in dramatic market share gains, and impressive financial performance.

Going forward, we plan to enhance our leadership position in quality engraving business, by continuing to provide innovative technological solutions to our customers’ toughest problems, leveraging our product offerings to sell into new applications, with stringent specifications, such as optical components and electronics, and expanding our presence in areas such as China, Mexico and Eastern Europe.

With that, I will wrap up our prepared remarks for some overall comments about Standex’s outlook. I will start by discussing some of the actions we are taking to improve operating margins. First, we are continuously working with our customers to implement price increases in order to recoup material cost hikes. We are also using leaner price disciplines to enhance productivity and drive down costs at our existing manufacturing facilities.

In addition, we will be opening a new facility in Mexico. And we are driving sourcing work in China for components and materials to use in our higher level assemblies in the U.S. To continue the sales growth momentum we have established, we will continue to invest in the development of innovative products across our portfolio of businesses, leverage our products to enter new markets, and seek attractive bolt on acquisitions.

Now I would like to open the conference for questions.

[OPERATOR INSTRUCTIONS]. Mr. Fix, I show no questions in the queue at this time sir.

Very good. We thank all the participants, and we look forward to talking to them again next quarter.