Standex International Corp (SXI) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter fiscal 2005 Standex International Corporation earnings conference call. My name is Jen and I will be your coordinator for today. Your host for today's call are Roger Fix, President and Chief Executive Officer, and Christian Storch, Chief Financial Officer and Treasurer. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of o today' conference. If at any time during the call, you require assistance, please press start followed by 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Roger Fix. Please proceed, sir .

Good morning and thank you for joining us. Please note that our fourth quarter financial results news release, which we released this morning, is available on Standex's web site at standex.com. On this morning's call Christian will begin with a review of our fourth quarter and full year financial results. Then, I'll follow with an update on our business and operations. As those of you who frequently join our conference calls know, we have been spending a few minutes each call to provide a more in-depth look at one of our 5 business segments. Since I'd like to spend some time reviewing some of our exciting strategic initiatives for fiscal 2006 today, we're going to hold of on segment discussion in the interest of time. We look forward to returning to this format in the future. So let's start with our financial review. Christian?

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 entered a stellar year or financial results with a strong fourth quarter performance. For the fourth quarter we grew revenue by 6.8% to 174.5 million from the fourth quarter of fiscal year 2004. Substantially all of this growth was organic. For the full year fiscal 2005, we reported a 15.4% increase in revenues to 666.2 million. The Company had an organic sales growth rate of 10.6 % for the full year. Fourth quarter operating income increased by 11.9% to 10.8 million. Operating income as a percentage offer sales was 6.2% compared with 5.9% in the fourth quarter a year ago. Full year fiscal 2005 Standex reported a 15% increase in operating income to 43.6 million. It is important to note that four out of our five business segments made a positive contribution to our object operating income in the fourth quarter, in fact, each of these segments reported double-digit year-over-year income operating growth. However, our revenue and operating income performance was effected by disappointing results from the Air Distribution Products segment. Roger will discuss the performance of each segment in a few minutes.

GAAP net income for the fourth quarter of 2005 increased to 6.2 million or $0.49 per diluted share. This compares with a GAAP net loss or 685, 000 or $0.06 per share in the fourth quarter of fiscal 2004. Excluding discontinued operations and special items, net income for the fourth quarter of fiscal 2004 was 6.1 million or $0.50 per diluted share compared with 6.7 million or $0.54 per diluted share in the fourth quarter of fiscal 2004. A reconciliation of GAAP net income and earnings per share to non-GAAP amounts is included in this morning's release, which is available in the investor relations section of our web site, which can be found at www.standex.com. Income from continuing operations in the fourth quarter decreased 18.4% to 6 million or $0.49 per diluted share from 7.3 million or $0.59 per diluted share for the fourth quarter of 2004. Our fiscal 2005 fourth quarter income from continuing operations reflects a tax rate of 32.7%. This is the tax rate for the full year.

Networking capital decreased to 122.1 million at June 30, 2005 from 129.5 million at March 31, 2005. We define working capital as accounts receivables plus inventories, less accounts payable. The improvement in working capital was achieved by reducing DSL by four days during the fourth quarter, reducing inventories by more than 6 million, and a more than $2 million increase in payables. At the end of the fourth quarter PSO were down to 49 days from 53 days at the end of the third quarter. We believe that this is a excellent level for the mix of businesses and international receivables included in the Standex portfolio. Since our working capital will necessarily increase with our sales volume, we are primarily focused on improving our working capital turns, our work capiting -- sorry, our working capital turns increased to a record 5.7 as compared to 5.4 for the same quarter last year. We ended the fourth quarter with a net debt position or 81.8 million, a decrease of 27.6 million from March 31, the result of good cash flow in our fourth quarter. Our net debt to total capital ratio was 31.7% and was down from 38.4% at March 31.

We continue to manage our balance sheet with a eye on potential acquisition opportunities by maintaining sufficient liquidity. Our current bank revolver is scheduled to expire the third quarter of fiscal year 2006. We have begun discussions with our existing bank group about current market conditions and we plan to initiate the process of establishing a new revolving credit facility in a few weeks. We expect to complete these bank negotiations during the second quarter of fiscal 2006. We reported full year CapEx of 8.8 million under spending or full year depreciation of 11.9 million. With that I will turn the call back to Roger.

Thanks, Christian. We performed very well in the fourth quarter. As Christian mentioned earlier, three of our five business segments reported double-digit sales growth and four had double-digit increases in operating income. Of course, we're also very pleased with our financial performance for the full year as we were able to achieve a second consecutive year of double-digit sales growth and double-digit increases in operating income and net income. Our efforts to grow the top line through organic sales initiatives such as leveraging new sales channels, new product introductions, and geographic sales expansion, coupled with previous acquisitions, provided us with a very significant sales increase of 15.4% versus the prior year. Sales volume growth coupled with the previously completed restructuring program, the impact of our lean enterprise initiatives and other cost reduction initiatives yield a 15% increase in operating income.

After I review the fourth quarter performance for each business segment this morning, I'd like to provide some insight on some of our initiatives for 2006 that we believe will allow us to generate even greater long-term value for our shareholders. Our five reporting segments in the order of fourth quarter revenue are food service equipment, engineered products, air distribution products, consumer products and the engraving group. Let me take you through each of the groups to give you some context around our financial results for the fourth quarter.

Sales for the food service equipment group grew 15% year-over-year to $70.6 million. Our food service and commercial refrigeration business drove the performance of this group in the fourth quarter. That segment benefited from strong new construction activity, store retro fit roll outs, and a good ice cream season. The hot foods side of the business also did very well, especially in Europe where they retro fitted a major supermarket chain following a merger. We've been discussing our efforts to grow each of our segments by leveraging existing products into additional markets. Our fluid dispensing and circulating systems division has delivered several perfect illustrations of this strategy.

This division successfully diversified sales of its products beyond its traditional beverage market into higher margin industrial applications. For example, they're now selling pumps into the industrial welding market to be used as part of a cooling system. The division also is selling its pumps to be used to distribute pesticides in both commercial and residential applications. Wherever possible, across all of our business segments, we're seeking to sell our products into new markets and to achieve geographic sales expansion on a global basis. The 13% increase in food service operating income was not quite as high as our revenue growth because we did take on some low margin business during fiscal 2005 as we increased our market share in several large retail accounts. Margin improvement continues to be a focus for the food service group. We've significantly increased our lean manufacturing efforts and we expect that our new manufacturing facility in Mexico and sourcing initiatives in China will be particularly beneficial for the food service group. I'll talk more about these initiatives in a moment.

Sales from our engineered products group were up 9% to $31.8 million. Custom Hoist achieved double-digit sales growth for the quarter as it continues to take share in a growing market. Operating income for the group was up 25% year-over-year to $4.3 million buoyed by a positive performance by both Custom Hoist and Spincraft. You may recall that last quarter Spincraft's margins had been hindered by a shift towards a higher percentage of business in the turbin after market segment. In the fourth quarter, Spincraft delivered a strong double-digit increase in profitability after rapidly moving its way up the learning curve in this new market. The engraving group grew sales by 6% to $19.6 million. We saw a strong demand across each of the Company's three business areas, mold texturization, Roehlen plate engraving, and embossing equipment. We continue to see strong demand in North America coupled with a nice upswing in business in Europe after a few soft quarters. Operating income in the engraving group outpaced sales growth as we reported a 39% year-over-year increase to $2.8 million. We're seeing the benefits of the consolidation of the Richmond and Rochester facilities, which was completed in the first quarter of fiscal 2005.

Our consumer group reported 22.3 million in sales, essentially flat with the fourth quarter of fiscal 2005. We had a strong sales performance from the publishing group by which benefited from the success of its Heart Shapers Sunday School curriculum that was introduced and other new product introductions which occurred in the fourth quarter. We continue to receive very positive feedback from customers on the Sunday School materials and expect them to help boost sales in fiscal 2006 as well. The publishing group's performance was offset by a sales decline at our religious bookstore chain. The religious bookstore chain had another difficult year-over-year comparison due to sales in the fourth quarter of fiscal 2004 related to the release of the Passion of the Christ. Same store sales decreased by 6%, although this is in line with our peers in the religious retail market. We also had a lower store count this year.

Consumer group operating income was up by 90% to $2.1 million compared with the fourth quarter of 2004. The fourth quarter of fiscal 2004 was negatively impacted by termination and severance costs aggregating $369,000. Excluding these costs from the fourth quarter fiscal 2004, operating income for the consumer group was up, current year, by 42%. So you can see that all four of these businesses performed very well, especially on the bottom-line. The year-over-year performance by our air distribution products or ADP segment, however, offset this performance. ADP sales declined by approximately 6% to $30.2 million. In the fourth quarter of 2004, this group benefited from unusually high demand and lower material costs. In the fourth quarter of 2005, the group's price increases did not completely offset higher steel prices.

The combination of these factors led to a 92% year-over-year decrease in operating income to $326,000. We are aggressively moving to lower ADP's cost structure. During the fourth quarter we closed one of the ADP factories resulting in $1.9 million restructuring charge and are reorganizing several facilities through the use of lean manufacturing techniques. ADP's year-over-year financial results should improve during fiscal 2006, as the segment benefits from these cost reduction efforts and increasingly easier year-over-year comparisons.

Now, as I've promised, I'd like to discuss some of the exciting initiatives we're focusing on in fiscal 2006. On last quarter's call, I briefly reviewed some of the actions that we are taking to improve operating margins. You might remember that in addition to our constant focus on lean enterprise disciplines to enhance productivity and drive down costs, we are opening a new manufacturing facility in Mexico and aggressively pursuing sourcing opportunities in China. We made a lot of progress in both of these areas and these initiatives will be significant elements of our value creation strategy going forward.

First, let me discuss the development of the new manufacturing facility in Mexico, which is consistent with our strategy to locate new manufacturing operations in low-cost labor areas. With this facility we believe we can achieve three very important strategic initiatives. First, we'll be able to lower the cost of high volume, labor intensive products. This will enable us to improve profit margins on these types of products. In addition by co-locating manufacturing cells for several smaller divisions into this one facility we'll derive significant savings by sharing our overhead costs and reducing our execution risk; but this facility is not just about cost savings, it also fits right in line with our efforts to expand our products into new geographic territories and markets while broadening our customer base.

Because it will be located in Nogales, in the state of Sonora, which is approximately one hour drive directly south of Tucson, Arizona we'll be able to reach new customers in markets in California and the southwest portion of the United States. Finally, the low-cost structure will also allow us to achieve in this operation -- we'll be able to penetrate several new market segments that have been targeted for strategic growth. Construction of the new 127, 000 square foot facility has already begun, and it should be ready for occupancy during the second quarter of fiscal 2006. We expect that four divisions will be operating in the facility by the end of the fiscal year with a direct shop for head count in the range of 100 to 125 employees. Over time we anticipate that this head count will double.

Our plan is to spend $5 million on the land and building and then 2 million more in initial capital improvements in fiscal 2006. As a result, our CapEx spending for the year will be approximately 17 to $19 million compared with 8.8 million CapEx spending that we reported for fiscal 2005. While the ramp up will be diluted to earnings by approximately 700, 000 to $1 million this fiscal year, we expect to realize annualized savings in the range of 2 million to $2.5 million per year, once the ramp up it is complete beginning in fiscal 2007, and this annualized savings does not take into account the benefits we will receive in terms of our ability to reach new markets and customers.

Another very exciting initiative we're working on is the development of a sourcing capability in China. This will provide a way for all of our divisions to reduce costs for components and materials used in higher level assemblies in the United States. We already have a team in China that is working with more than half of our divisions on sourcing activities. We've hired a country manager and four sourcing engineers, which have been assigned to work with a specific part of our portfolio of companies. For example we have an individual specifically dedicated to finding sourcing opportunities in the electronics area and another for our food service equipment group. So far the team has identified approximately $10 million in potential purchases and the actual placement of purchase orders has begun. Purchases should ramp up beginning in the second quarter this fiscal year and continue throughout the fiscal year. We expect to have $5 million in annual purchases in place by year end and we could achieve between 20 to 30% in cost savings on these purchases. We'll be adding additional staff to include more sourcing resources, quality assurance personnel and other capabilities as needed. We also plan to expand our sales effort in China during fiscal 2006 as we will open our second Mold-Tech's texturizing operation in the Shanghai area.

As you know it has been our strategy to seek attractive bolt on acquisitions that broaden the reach of our products and technology into complimentary markets. In fiscal 2006, we plan to be very aggressive in finding acquisition targets that could quickly contribute to our organic growth. Traditionally, we've used primarily our in-house M&A resources to prospect for acquisition opportunities. In addition to using these resources, we have begun working with several investment banks to conduct searches on our behalf. Each bank is charged with pursuing targets in specific market segments. We are specifically seeking companies in areas that are the most strategically significant to our portfolio. These areas include food service equipment, scientific chambers and cabinets, electronics, hydraulics and engraving. We are conducting our searches on a global basis, and are particularly looking for targets that would expand our presence in Europe and in Asia Pacific. While we are focused on acquiring larger companies with sales in excess of $30 million, we'll continue to be opportunistic in making smaller bolt on acquisitions.

Based on the nice pipeline of acquisition targets we already have to look at we're very enthusiastic and our prospects in this area for fiscal 2006. In summary we performed very well financially in fiscal 2005. Through the solid execution of our focused diversity strategy during the past few years, we have a very strong foundation from which to build on our momentum. We are confident that these -- that investing in these new initiatives such as offshore manufacturing and sourcing, will enable us to be in a even stronger position to accelerate our growth on the top and bottom-line for the long-term. We look forward to reporting our progress to you on these initiatives throughout the year. Now we'd like to open the conference call for questions.

[OPERATOR INSTRUCTIONS] Gentlemen your first question comes from Michael Garner [ph] with Wedge Capital Management.

Good morning, fellas.

Good morning, Michael. How are you?

All right. Yourselves?

Good.

Congratulations on the strong organic growth. That's terrific. I just have a couple of topics. Well, one is just a probe at the painful area, the air products area -- air distribution area. This is -- I don't know if it's the second or third consecutive sequential quarter with a sales decline. So leaving aside the margin issue for the moment, you know, one would think with overall construction levels still being very robust that would not be the case. Are there market share issues? Was there pre-buying? I mean, how would you explain these last several quarters of sequential decline there?

Good question. It's really two sequential quarters. It's our third and fourth quarter of this year versus third and fourth of last year. We don't believe there has been any significant market share loss. We do believe it is related to what was going on with metal prices and the announced price increases in the market last year. We announced two price increases along with the rest of the market in the March and April time frame of last year. As a result of that we saw what we call hedge buying, significant orders being placed in advance of the price increases going into effect in both the third and fourth quarter, and as a result of that saw very, in our minds, inordinate sales volume in both those quarters and as a result of that saw higher volume. Didn't see that repeat.

In fact if you'll recall we actually saw some weak sales starting with our first quarter albeit we were still above prior year in this year. So hedge buying in the third and quarter fourth quarter coupled with the fact that our metal prices this third and fourth quarter were significantly higher than the prior year.

And so do you have any read as to whether that pre-buying has worked itself through at this point? Or where the market is in that process?

We believe the pre-buying has worked its way through the system. What hadn't worked its way through the system was the year-over-year comparisons. We believe going into the first quarter we should see a pretty, a pretty normal year-over-year comparison from a volume standpoint.

Okay. And the fact that fourth quarter sales, 30.2 million down, just raw numbers from the third fiscal quarter sales of 31.8. I guess I thought fourth quarter seasonally was bigger than the third quarter and that would normally be up, which leads me to believe maybe this thing is still working its way out because just, just quarter-to-quarter, sequentially you were down.

Our fourth and first, if I recall correctly, Michael, are our strongest quarters. But I think -- I think you'll find that the hedge buying in the prior year just started that seasonality so I'm not sure you can draw the conclusion by looking at those numbers.

Okay. So, so maybe the fourth quarter would be a low point for sales in that division? Is that a --

No. Again fourth and first are historically the strong he. strongest.

But this fourth quarter being it was still weak at 30.2, down from the third quarter, down versus a year ago, maybe in the first quarter of fiscal '06 since that is also usually a strong quarter --

Again, yes, I would agree with that. As I mentioned, we think the year-over-year comparison issues would have worked its way through the system as of this fourth quarter. You should see more normal comparisons in the first, which is one of our stronger quarters.

And on the margin side, Roger, how much of that is the volume as being somewhat disappointing and how much is steel costs or any other factors you want to site?

Well, we clearly still have a price to cost issue. We have not recovered all of our cost -- material cost increases and the price increases that we've achieved in the marketplace. So we're still seeing and will see, into the first quarter, some margin deterioration as a result of that -

Okay.

- and that's why we're taking the moves on the cost sides as aggressively as we are.

And then the second subject is on acquisitions. Why the apparent step up in aggressiveness? Is it more a matter of what you just happen to be seeing out there in the marketplace? Or does it derive from just feeling you have the house in order and you really want to make some things happen?

I think it's the latter. You know, as we went through the restructuring and reaIignment, particularly the divestitures that we went through the latter part of the prior year with the the divestiture of James Burn, we really had to dedicate a lot of our management resources to that effort. With that now behind us we feel that the time is right, given our balance sheet situation I think we've got a much better understanding of where some of our opportunities are at in terms of what we could you do to benefit some of our businesses with the bolt ons, with the balance sheet the way it is it seems like the time is right it move in that area.

And what are you finding in terms of asking prices? Because what I hear from various companies is, I mean, that -- that's typically the biggest obstacle, that a lot of owners of small to mid-sized businesses just have unrealistic expectations. Can you give me a sense of what you're seeing?

Well, we certainly would concur that in general acquisition multiples from up, if you will, compared so to say, what,12, 24 months ago? And I would concur with their your thought process that aggressive doesn't mean silly. We want to move but we're not going to overpay. We are very disciplined in our approach as far as pricing. I think the other thing we can say is that, as we look at acquisitions we're very disciplined in establishing a business plan and synergies that we expect to develop from those acquisitions and when we do complete a acquisition are very disciplined to going out and executing synergies beyond the sales or cost site, so we're not going to overpay, but we still feel that there are those opportunities that are out there.

I think our historical pattern of or the way we've built the Company that being based on acquiring private help businesses where companies can come in and become part of our management team and have some identity as part of our portfolio, is still attractive and as a result of that we believe week do acquisitions.

So you would think, other things equal, that you would still tend to want to keep that, that management in time in place from --

Historically that's been our approach. In some cases management is selling out for retirement purposes and as a result of that we would have to obviously replace, but historically, we like to bring management on and keep the management as part of the team.

Okay. Thanks a lot, Roger.

Thank you, Michael.

Bye, bye.

[OPERATOR INSTRUCTIONS] Gentlemen, there are no questions in queue at this time. Please proceed to your closing remarks.

Well, if no other questions, again we thank you very much for your time this morning and we thank you for following us. We look forward to talking to you again at the end of our first quarter. Thanks very much.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.