Standex International Corp (SXI) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Standex International Corporation quarter one 2006 earnings conference call. My name is Dana, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

Now, I would like to turn the presentation over to your host for today's call, President and CEO Mr. Roger Fix, and Chief Financial officer and Treasurer Christian Storch. Please proceed, sirs.

Good morning, and thank you for joining us. Please note that our first-quarter financial results news release, which we released earlier this morning, is available on Standex's website at Standex.com. On this morning's call, Christian will begin with a review of our first-quarter financial results. Then I will follow with an update on our operating groups and some insight into our plans for the second phase of our focused diversity strategy.

As we announced this morning in our news release, we have hired an investment banker to identify potential buyers for our consumer group businesses. I'm looking forward to discussing more about that very important strategic initiative later in the call.

Let's start now with our financial review. Christian?

Thanks, Roger, and good morning, everyone. 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.

For the first fiscal quarter, we grew revenue by 6% year over year to 170.4 million. All this growth was organic. First-quarter operating income decreased by 22% year over year to 9.5 million. Operating income as a percentage of sales was 6%, compared with 8% in the fiscal quarter a year ago.

Our operating income performance was affected by slower sales in our consumer group and the timing of certain corporate expense items. These expenses included the acceleration of stock-based compensation to employees eligible for retirement, and other general and administrative costs. Additionally, the year-over-year comparison was difficult because of certain one-time high-margin revenue contributors in the first fiscal quarter one year ago. Roger will discuss these items in his operational review.

Net income for the first fiscal quarter was 5.4 million or $0.43 per diluted share. This compares with net income of 6.2 million or $0.50 per share in the first quarter of fiscal 2005. Income from continuing operations was 5.4 million or $0.43 per diluted share, compared with 7.1 million or $0.58 per share in the first quarter of fiscal 2005.

While fiscal 2006 first-quarter net income reflects a tax rate of 34.7%, depreciation for the quarter was 2.8 million. Net working capital decreased to 130.4 million at September 30, 2005, from 146.3 million at September 30, 2004. We define working capital as accounts receivables, plus inventories, less accounts payables.

DSO was at 53 days, which compares to 55 days in the prior year's first quarter. Since our working capital will increase with our sales volume, we are primarily focused on improving our working capital turns, and working capital turns increased to 5.2 times for the fiscal first quarter from 4.4 times in the prior year's first quarter. This strong working capital performance helped to significantly improve our first-quarter cash flow performance.

While we had use of cash from continuing operations of 12.4 million in the prior-year first quarter, we generated $1 million of operating cash flow in the first quarter just ended. Net debt increased to 88.4 million at the end of the quarter from 81.8 million at June 30, as we invested approximately 5.1 million in capital expenditures during the quarter. Of this, 3.4 million was invested in our new facility in Mexico. We expect to spend the balance of approximately 4 million in the second and third quarter.

The Company's balance sheet leverage ratio of net debt to total capital decreased to 31.8% at September 30, 2005, from 33% at June 30. We define net debt as short-term debt plus long-term debt, less cash.

We continue to manage our balance sheet with an eye on potential acquisition opportunities, by maintaining sufficient liquidity. Our current bank revolver is scheduled to expire in the third quarter of FY '06, and we are in discussions with our existing bank group regarding a new facility. Initial pricing indications are favorable when compared to the current facility, and we plan on structuring the facility in a way that it will support our acquisition strategy. We expect to complete these bank negotiations during the second quarter.

During the first quarter, we started the expensing of stock options on FAS 123R. The impact on the quarter was an increase in compensation expense of approximately $70,000.

With that, I will turn the call back to Roger.

Thanks, Christian. Four of our five business segment reported year-over-year sales growth in the first quarter, resulting in topline growth of 6% for the quarter. However, as Christian mentioned, slower sales at our consumer group and certain extraordinary corporate expenses affected our bottom-line results. To walk you through our segment performance, I will also point out some one-time high-margin revenue transactions that occurred in the first fiscal quarter a year ago that contributed to our disappointing year-over-year operating income comparison.

With that said, let's get right into the performances of each operating segment. The order of the operating segments in terms of total first-quarter revenues are Food Service Equipment, Engineered Products, Air Distribution Products, Engraving and Consumer Products. Let me take you through each of these to give you some context around our financial results.

The Food Service Equipment Group led sales growth among our operating groups with a 14% year-over-year increase in reported sales of $67.9 million. This growth was driven by market share gains at our refrigerated merchandising and walk-in cooler and freezer businesses.

We achieved this topline growth through market channel development and expansion efforts, increased penetration of dealer buyer groups and growth in national accounts.

Operating income in Food Service rose by 6% over last year's first quarter. Year-over-year operating income growth in the first quarter lagged revenue growth in this segment. This was due to the extraordinarily high level of Unitron meal-delivery systems sold during the first quarter of last year. In contrast, we shipped very few of these systems in the first quarter of fiscal 2006, due to reduced orders from the veterans' hospitals. The reduced demand for these systems by the VA hospitals is due to reprioritization of government spending.

During the past year, we anticipated this reduced demand, and downsized the meal-delivery systems business from a cost standpoint and are focusing on selling these products into new markets.

We continue to emphasize improving margins in the Food Service equipment segment through the implementation of lean enterprise techniques, sourcing initiatives and low-cost manufacturing alternatives.

The Engraving Group grew revenues by 8% on a year-over-year basis. The segment experienced good demand across its mold texturization, roll and plate engraving, and embossing equipment businesses. Operating income trailed sales, raising 2% year over year. The gap in our sales and operating income growth numbers was due to product mix and certain productivity issues. We've already taken steps to resolve these issues.

The Engineered Products Group grew revenues by 2% year over year, with a very strong performance from the hydraulics business. However, a high-margin revenue transaction in the year-ago quarter offset this performance on a year-over-year basis. In the first quarter last year, we received a large payment from a major aerospace manufacturer with whom Standex has a long-term contract. The payment represented an access charge for our continuing to keep our facility available to the aerospace manufacturer, in exchange for them reducing the quantity of products shipped under the contract.

Operating income in Engineered Products was down 29%, due primarily to the previously mentioned payment, which transferred completely to the bottom line. Operating income was also affected by higher material costs. We continue to seek alternate supply sources and price increases in the market in order to offset these higher costs.

Air Distribution Products Group sales increased by 3% year over year, while operating income decreased by 2%. While we did not demonstrate year-over-year operating income growth, we are pleased with the dramatic improvement in our bottom-line performance this quarter versus the profitability reported by this group in the third quarter and the fourth quarters of fiscal 2005. In both of those quarters, ADP had large, double-digit declines in profitability. ADP continues to streamline and consolidate operations in its facilities by utilizing lean enterprise techniques, and will leverage the Company's manufacturing initiative in Mexico.

Consumer Group sales declined by 8% on a year-over-year basis. The decrease was primarily attributable to three distribution channel issues. First, sales were affected by the transition of a large publishing business customer from direct buying to consigned inventory. Second, we had some order timing issues at a few of our large retail customers. And finally, there was high turnover at one of our sales rep firms that called on small bookstore chains throughout the United States on behalf of our publishing business.

To a lesser extent, reduced consumer spending and a softer market also affected our first-quarter results. In the corresponding quarter of last year, the publishing and religious bookstore businesses benefited from strong market demand generated by the DVD release (technical difficulty) Christian-themed movie. I should note that our consumer group is a very high gross margin business. Therefore, lower sales volume can have a very significant effect on operating profit.

So as a result of the lower sales volume this quarter, the Consumer Group reported a loss of 372,000, compared with an operating income of 765,000 in the year-ago quarter.

Improving margins continues to be a key goal for Standex. On last quarter's call, I discussed two important strategic initiatives that we are undertaking in fiscal 2006 in order to improve margins. Let me give you a brief update on our new manufacturing facility in Mexico and our sourcing initiative in China.

The new manufacturing facility in Mexico will enable us to lower the cost of high-volume, labor-intensive products. Furthermore, by colocating several of our businesses within a single facility, we will derive significant savings by sharing our overhead costs and reducing our execution risk.

In addition to cost reductions, the location of the facility will enable us to strengthen our presence in the southwest portion of the United States, and the lower cost position will allow us to successfully penetrate new retail markets we have targeted.

The construction of this 127,000-square-foot facility is on track and will begin moving in during the second quarter of 2006. We will start some limited production in the third quarter of this fiscal year, and continue to ramp up production into fiscal 2007.

Our sourcing initiative in China also is proceeding according to schedule. We are identifying potential sources of components and finished goods, qualifying suppliers and launching initial purchase orders. Our team on the ground is working with many of our divisions on the sourcing activities. We expect to be on a run rate to stay in the range of 20 to 30% on about 5 million purchases by the end of the current fiscal year.

Now, let's discuss our decision to divest the businesses in our Consumer Group. This decision marks a major turning point in the history of our Company. Yet, it is also squarely in line with our focused diversity strategy that we embarked on a few years ago. The first phase in the execution of the focused diversity strategy was the restructuring and realignment program that we finished in fiscal 2005. During this phase, we successfully restructured several of our businesses and consolidated several major manufacturing facilities in order enhance profitability. At the same time, we also divested several underperforming businesses, such as Jarvis Casters and James Burn.

The second phase in the implementation of the strategy is about narrowing the focus of the portfolio and building on those segments in which we feel we can generate profitable growth and achieve increased levels of synergies between our businesses in the future. In short, the second phase in the implementation of our strategy is about leveraging the strength of our core strategic businesses to build larger, more profitable operating groups. During this phase and the implementation of our strategy, we will aggressively search for strategic acquisitions that will very quickly contribute to our profitability, and the same time seek buyers for our Consumer Group businesses.

We have retained Berkery, Noyes out of New York City to represent Standex in the divestiture process. This investment banking firm has significant expertise and experience in M&A work in the publishing and consumer products segments. Our decision to divest of the Consumer Group is driven by the fact these businesses do not fit strategically with our other operating groups, and they share very few cost or operational synergies. Each of our other segments all market engineered products into sectors where we can provide differentiated solutions to our customers and offer significant opportunities to leverage operational and cost synergies.

What's more, we will be able to reallocate capital resources that would've gone into the Consumer Group toward the growth of our strategic businesses. As a result, divesting of the Consumer Group businesses is a key component in our effort to build on the sales growth and profit potential of our other businesses.

As I mentioned on our last call, we have combined our own in-house M&A resources with those of several investment banks to prospect for acquisitions. Each bank that we're working with is charged with pursuing targets in specific market segments. We are specifically seeking companies in areas that are most strategically significant to our portfolio. These areas include food service, engineered products and engraving.

Let me give you a few examples of the types of acquisition opportunities that we are targeting. We are focusing on acquiring companies that would help us to grow the sales of our products into new geographic regions and/or industrial market segments. For example, currently we have a small presence in the scientific chamber and cabinets market that we gained through the acquisition of NorLake. The scientific market is relatively fast-growing and offers good profit margins for those companies that can deliver differentiated value-added products. We're looking to expand our presence in this market through another acquisition, while we continue to pursue organic growth as well.

Another example is our Food Service Equipment Group, whose product lines include primarily refrigerated merchandising cases and walk-in enclosures for markets here in the United States. Acquisitions that would have established channels of sale in Europe and/or Asia-Pacific, or that would expand our product offering, would all make strategic sense.

In the Engineered Products and Engraving Groups, we're seeking acquisitions that would expand our product offering, where we can leverage existing channels of sale, and companies that would either leverage our existing global footprint or add to it.

Based on the nice pipeline of acquisition targets we've already had to look at, we are very enthusiastic about our prospects for fiscal 2006. 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.

Of course, we will remain very disciplined in our approach to acquisition pricing, and all acquisitions will include business plans that clearly identify the specific synergies we seek to achieve. All of our acquisitions will go toward building a larger, more synergistic operating groups with stronger leadership positions in their respective markets.

Before we take your questions, let me sum up by outlining what you can expect from Standex in fiscal 2006. You can expect significant progress in three major strategic areas. First, we will seek to divest of the Consumer Group by finding buyers for each of these businesses. Second, we will acquire other businesses that enhance our profitability and enable us to grow our market leadership positions. And third, we will work toward enhancing our margin performance in the long term through our sourcing and low-cost manufacturing and lean enterprise initiatives.

Fiscal 2006 should be a very exciting year for Standex, and we look forward to reporting our progress to you throughout the year. Now, I'd like to open the conference call for questions.

(OPERATOR INSTRUCTIONS). Gentlemen, currently you have no questions.

Okay. If there's no questions, thanks very much for your attendance, and we look forward to speaking to you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.