Standex International Corp (SXI) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Standex International Corporation earnings conference call. My name is Tawanda and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like the turn the call over to Mr. Roger Fix, President and Chief Executive Officer, and Mr. Christian Storch, Chief Financial Officer. Please proceed.

Good morning and thank you for joining us.

Please note that our fourth quarter financial results news release, which we released early this morning, is available on Standex' Web site at www.standex.com.

On this morning's call Christian will begin with a review of our fourth quarter financial results. Then I'll follow with an update on our operating groups. After that we'll be happy to take your questions.

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 fiscal fourth quarter of 2006 revenues grew 2.3% year-over-year to $153.4 million from $149.9 million in the fourth quarter of fiscal 2005. Fourth quarter income from operations increased 22.9% year-over-year to $10.8 million from $8.7 million in the fourth quarter of last year.

Operating income as a percentage of sales was 7% compared with 5.8% in the fourth fiscal quarter a year ago. Net income from continuing operations increased 24.4% to $5.9 million, or $0.47 per diluted share in the fourth quarter of fiscal '06, up from $4.7 million, or $0.38 per diluted share in the year ago quarter.

This significant growth in EPS reaffirms our success in streamlining our businesses for the past five years to focus squarely on those operations that will continue to drive our growth.

Fourth quarter fiscal 2006 income from discontinued operations was $937,000, or $0.08 per share compared with $1.4 million, or $0.12 per share in the fourth quarter of fiscal '05. Discontinued operations include the results of operations for the Consumer Group and our USECO business as well as the gains from the sale of Standex Direct.

Net income for the fourth quarter of fiscal 2006 was $6.8 million, or $0.55 per diluted share. This compares with the net income of $6.2 million, or $0.50 per diluted share in the fourth quarter of fiscal 2005.

Our fiscal 2006 fourth quarter income from continuing operations reflects a tax rate of 34.4%, and net working capital was $128.3 million at June 30th compared with $133.6 million at March 31, 2006. We define working capital as accounts receivables plus inventories less accounts payable.

Since our working capital will increase with our sales volume, we are focused on improving our working capital turns. Working capital turns were 5.4.

Net debt was $85 million at June 30, 2006 compared with $101 million at March 31, 2006. The decrease was driven by strong cash generation in the fourth quarter.

The Company's balance sheet leverage ratio of net debt to total capital was 29.8%. We define 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 sufficiently liquidity.

We begin expensing stock options in fiscal year 2006. The impact on the fourth fiscal quarter was a year-over-year increase in compensation expense of $101,000.

Subsequent to the close of the fourth quarter we completed the sale of our Berean bookstores and Standard Publishing businesses. We expect to recognize a gain of approximately $9.5 million in our first quarter of fiscal year '07.

The proceeds from these transactions have been used to reduce our long-term and short-term debt, our further improving our net debt to total capital ratio.

With that, I'll turn the call back to Roger.

Thanks, Christian.

Standex delivered solid financial performance during our fourth quarter with four of our five operating groups reporting year-over-year top and bottom line gains. Most notably, our Engraving Products and Air Distribution Product Groups delivered double-digit and triple-digit increases in operating income respectively.

Please note that Standex is again segmented into five operating groups, and I'll explain that change as we walk through each group's operating performance. Not only did we perform well financially in the fourth quarter, but we recently achieved a key milestone in the implementation of our Focused Diversity strategy with completion of the divesture of our Consumer Group businesses.

I'll go into further detail on the implications of this accomplishment for Standex later in the call. Before I do that, let me provide some more background regarding performance of each operating segment.

Engraving Group lead sales growth with a 27% year-over-year increase. The business hit on all cylinders in the quarter reporting record sales and profits. We saw strong demand around the globe as all of our mold-tech operations continued to operate at peak capacity.

This demand environment is being driven primarily by automotive customers that are revamping existing models and introducing new models in order to maintain market share in a soft global automotive demand environment.

We also saw good demand from non-automotive customers as we continue to satisfy customer requests for expanded texturizing choices and increased manufacturing flexibility.

Innovent also was a strong performer in the Engraving Group this quarter. 41% of our growth in the quarter for Engraving can be attributed to Innovent, which we acquired in the second quarter of this fiscal year.

We integrated Innovent into our Engraving Group because of its close synergistic fit with our roll-in plate engraving and process equipment businesses. We have been making good progress in leveraging the group's sales infrastructure to help Innovent increase their market share in developing countries. In addition, we have been very focused on broadening Innovent's product line with new products and technology.

The operating income results at Engraving this quarter were also very exciting. Group operating income rose 66% year-over-year driven by sales leverage, productivity enhancements and the Innovent acquisition.

Our digital process for mold texturizing, which has now been now commercialized, is significantly improving productivity and throughput in our mold-tech operations.

Air Distribution Products year-over-year sales grew by 2% as the segment did well amid a soft housing start market. ADP is making progress at each element of its growth strategy.

First through our operations in Nogales, Mexico, we are expanding our reach into the U.S. southwest and west markets, the strongest housing markets in the country. We're in the early stages of ramping up ADP's Nogales operation, but we have had positive feedback from the customers in this part of the country about our new location and presence in that part of the world. We see this as a real growth opportunity for ADP over time.

Also during the quarter we were successful in entering into a large HVAC buying group which offers us the opportunity to gain new business as well. Using the contacts established through this buying group and by leveraging our unique nationwide manufacturing infrastructure, we continue to strive for market share gains at national wholesaler accounts.

Operating income for ADP increased five-fold driven primarily by favorable metal prices compared with last year. We're starting to see metal prices begin to climb again and we have implemented price increases in an effort to offset these costs.

At the same time we are focused on enhancing our margin at ADP through operational improvements, our focus on lean manufacturing and our low cost manufacturing operation in Nogales. I should note that we were able to achieve the substantial fourth quarter increase in operating income at ADP even though profitability continued to be affected by start-up costs in Nogales.

Food Service Equipment Group sales declined by 7.5% in the quarter. We had a difficult year-over-year comparison due to two significant rollouts that took place in the fourth quarter of 2005. In addition, one of our largest key customers pulled back on plans to open new stores in the current fourth quarter due to an acquisition.

The Food Service Group has traditionally been one of our top performers, and this was the first time we have not seen year-over-year sales growth in this segment for several years. We expect more favorable year-over-year comparisons going forward. In addition, we are seeing positive results from our sales diversification efforts.

Food Service operating income was also lower in the quarter declining 13%. There were three reasons for the decline. First was lower sales leverage due to the reason I just described.

Second, we were affected by product mix and material cost increases for our refrigerated cabinets and walk-in coolers and freezers. We aggressively moved to counter these cost increases during the quarter through a series of price increases and material surcharges.

And third, we continued to experience some dilution from our low cost manufacturing initiative in Nogales, Mexico.

As I referenced earlier, we have changed the composition of reporting segments adding one operating group. This change primarily affects our Engineered Products Group.

Given the growth of our hydraulics business as a percentage of our operating income, we are reporting this business separately. As a result, our discussion of Engineered Products excludes the operations and financial results of our hydraulics business. I'll discuss the new Hydraulics Products Group segment in just a moment.

Having said that, Engineered Product revenues rose 8% year-over-year in the fourth quarter of 2006. Both our energy, aviation, aerospace, and electronic businesses performed well from a top-line perspective.

The energy side of this business remained strong during the quarter and we are beginning to see some pick up in aviation. We have been successful in diversifying sales into new geographic markets for aviation and new market segments as well.

Although we saw a year-over-year growth in operating income for the segment, we are not satisfied with the profitability generated by our electronics business which is part of this segment.

With the opening of the new electronics assembly operation in Tianjin, coupled with the new third party sources we have established in China, we are positioned to move forward with reducing our manufacturing footprint for this business in North America. We recently closed one facility and have plans to complete additional plant consolidations throughout fiscal 2007.

Let's turn now to the Hydraulics Products Group which, again, is a new reporting segment for us. In the fourth quarter Hydraulic Products increased revenues 10% year-over-year.

We continued to see strong demand in our North American market and are seeing the benefit of market share gains achieved during the current and prior years. Operating income, however, was essentially flat year-over-year.

During the quarter we incurred higher marketing expenses associated with the introduction of a new product for the domestic Chinese and east European markets which affected the year-over-year profit comparisons.

In addition to reviewing business segment performance, we'd like to give you an update regarding our key operating initiatives in Mexico and in China. First, let me say that we are pleased with our progress in Mexico.

Currently we have three operations up and running in Nogales, the walk-in coolers and freezers we acquired from Kool Star, pumps for fluid dispensing and circulating systems and our Air Distribution Products operations. As we discussed on the last call, it's taking a little longer than we expected to complete the production ramp-up which has had a negative effect on our Food Service and ADP operating profits.

During the quarter we completed the manufacturing ramp-up of our walk-in coolers and freezers, as well as our fluid dispensing and circulating system pumps. So we believe that the dilutive effect on our Food Service operating income is largely behind us.

We are excited by the opportunities created by Nogales for our Food Service Group. For example, not only will we reduce manufacturing costs on our coolers and freezers, but the geographic location will allow us to eliminate excess freight charges which will improve our competitiveness.

Also, we have recently identified several significant sales opportunities through the existing Kool Star sales channels and are developing new opportunities in the domestic Mexico markets as well.

Since ADP moved into the facility several months after the Food Service Equipment businesses, we expect that it will take a few more months for this unit to completely ramp-up. Like the Food Service Group, we expect that the Nogales operation will have a good effect on ADP's bottom line as a result of low cost manufacturing and reduction in freight costs to customers in the southwest.

Now let me give you just a quick update on our low cost manufacturing initiatives in China where we brought on two new plants in the fourth quarter. First, we opened a new 35,000 square foot facility in Tianjin near Beijing in the northern part of China.

In addition to housing our sourcing office, we're also using the Tianjin facility for electronics assembly and a small repair and service capability for our hydraulics businesses. We've already begun production and shipment of electronics components and currently have about 80 employees in Tianjin.

We also began production for the Engraving Group at our Shanghai facility which also opened in the fourth quarter. This plant will support our global automotive OEM customers in that area and is geographically positioned for growth.

The area around Shanghai is one of the fastest growing regions for the production of automobiles and components in China. In fact, industry analysts believe that Shanghai is going to become the Detroit of China.

This new plant will service both Chinese and global OEM customers and we are excited about the growth prospects that this plant will open up to the Engraving Group.

So you can see that we are making good progress on both our low cost manufacturing operation in Mexico and our low cost manufacturing initiative in China. We expect that these efforts will have a positive effect on Standex' bottom line performance and even on the top line for the long-term.

As I mentioned at the outset of the call, we completed a major milestone achievement in the execution of our Focused Diversity strategy. This, of course, was the divesture of our Consumer Group.

We completed this strategic initiative with the sale of Standard Publishing in July and Berean Christian Bookstores earlier this month. We had divested Standex Direct in March of this year.

Let me put this accomplishment in perspective. Since we began implementing our Focused Diversity strategy in 2002 we have divested about $200 million of revenue through a series of divestitures and replaced this with about $100 million of organic growth and another $100 million of growth from strategic acquisitions.

Now while we are essentially the same size in terms of revenue, we are a stronger organization with better potential for long-term profitable growth. So what's next?

We believe we have now the right composition of businesses to execute on the next step in our Focused Diversity strategy. First, through the divesture of non-strategic businesses and the reorganization of our operating groups we are better positioned to grow organically by capitalizing on the synergies between our businesses. We also plan to leverage the combined strengths of our business to say better penetrate our current markets and enter new geographic and serve markets as well.

Our second major growth initiative is to make strategic bolt-on acquisitions. We will continue to focus on acquiring businesses that are synergistic with our current operating groups and that can quickly contribute to our profitability.

Before we take your questions, let me leave you with a few thoughts. First, we performed well in the quarter. Four of our operating groups reported year-over-year top and bottom line improvement, and we're confident that we are taking the necessary actions to enable our Food Service Equipment Group to return to becoming a leading performer for Standex.

Second, our Nogales low cost manufacturing and Chinese sourcing initiatives are proceeding well and we expect our efforts to resolve in significant benefits for Standex for the long-term.

Thirdly, the completion of the divestiture of our Consumer Group provides us with the right composition of businesses to allow us to grow profitably both organically and through strategic acquisitions. Our balance sheet is in very good shape, and we have significant capacity to complete acquisitions.

As you can see, we are excited about Standex' future, and we look forward to continuing to update you on our progress.

With that, Christian and I are ready to take your questions.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Mr. Dennis Delafield of Delafield Asset Management. Please proceed.

Good morning.

Good morning, Dennis. How are you?

I'm fine. Thanks, Roger. Two questions.

One is, what is your net debt position today after the sales? And two, overall what sort of margin improvement in basis points or however do you think we should look for from both the Mexican and the Chinese ventures as they mature?

This is Christian.

Our net debt position is around $65 million is our net debt.

Great.

That would indicate, I didn't do the math, but that our leverage ratio is probably in the 27ish, 26ish percent range.

That's great. Thank you.

On the margin point improvement, Dennis, what we have said is that we expect in our fiscal 2008 that our Mexico operations should generate savings in sort of the 2.5 to $3 million pretax savings, and that from China we expect it to exit this year at a run rate that would achieve somewhere between $1 million to $1.5 million of savings and we would continue to see that accelerate beyond that. I'm not really in a position to forecast beyond where we're at currently on China, but we do expect to continue to see that ramp-up.

The actual flow-through- obviously- is a function of what happens in terms of inflation and our ability to pass on price to our customers in the event we have continued inflation which is really the wild card.

And the Mexico, the 2.5 to $3 million, would you just remind me, is that an improvement in '08, in '07 over '08 over '06, excuse me or was part that far achieved in '06?

That's '08 versus before we started Mexico. So it'd be, say, versus our, basically our '05 number.

Versus '05. And how much of that do you think you actually captured in '06?

None of it.

None of it. Okay.

We mentioned that I think in the last call that we'd about $1.5 million, $1.6 million of dilution, actually, through our first three quarters, and our [cables] show that all in we had about $2 million dilution in '06 from Mexico.

Great. That helps a lot. Thanks, Roger.

Thanks, Dennis.

Your next question is from the line of Mr. John Walthausen with Paradigm Capital Management. Please proceed.

Good morning and good quarter. A couple of questions.

On the Air Distribution business in the final uses, how much of that is residential new construction versus other construction and repair and remodeling?

Great question. I wish I had a precise answer for you. At the end of the day well in excess of 90% of our products end up in the residential applications.

There is a small component that would end up in what I call small commercial applications, strip malls, relatively small office buildings, nature of that type, but again well in excess of 90%. It's very difficult for us to project exactly how much is in repair versus new because we go through a two-step channel to the contractors with a wholesaler that sits in between us.

We do have a component of about 6 or $7 million that goes through the do-it-yourself channel, and we assume that a great deal of that's going into remodels, and there's a small percentage for sure of the wholesaler channel that also goes in repair, but unfortunately, we don't have a good number because of, again, the fact that we don't have visibility.

Okay.

Now, in the Nogales facility you mentioned that there was going into a strong market in the southwest, but my understanding is that some of those markets actually in the past few months have dramatically weakened. How does that change your strategy?

They have softened. The point we failed to make there, at least in this call, we haven't mentioned in the past, is that we are, because of our poor proximity to that market geographically, historically we are very underpenetrated in that market. Our market share on average around the nation is on the order of 15%. We probably only have a couple of percent market share in that part of the world.

So even though it is softening, we believe we have opportunities to capture share because we are underpenetrated. Most of our competition in that part of the world are relatively small businesses. We are the only really national player that has a presence now in the southwest.

The wholesalers, we believe, would preferentially prefer to work with a larger national supplier and that's the basis of our expectations that we can take share there over time.

And overall for the group with new home construction weakening and inventories of unsold houses up, are we budgeting a down sales year and if that is the case, can we maintain margins or is that not going to be --

We don't give forecasts, but it's obvious over the last 60 to 90 days that we have seen softening in housing starts. We're beginning to see that effect in our ADP business.

It's really difficult, again, because the housing starts are -- the amount they're off are really varied by geographic territory, and our penetration tends to vary, but we would expect to see, obviously, the impact of softening in our fiscal '07 for ADP.

Okay. Good.

And then on the Food Service business, and you may have hit it because you covered a lot of material, but you talked about the lower sales being a function of a couple of difficult new product rollouts and a temporary hiatus in buying by one of your major customers because of an acquisition.

Can you update, give us a little bit of color on what those rollouts were and where we are in terms of acceptance and shipability of those products and where that key customer is in their planning?

Sure, sure. First of all, the rollouts, and we probably should have provided a little more detail there, weren't relative to new products.

In the Food Service business from time to time our customers will have a significant number of new stores or new store remodels that they're addressing in a relatively short period of time that represents an anomaly in their normal buying practice. We had two of those rollouts last year where two of our larger customers had -- was the result of an acquisition where they had acquired a large business and went into the number of remodels in about a six-month period which benefited our third and fourth quarter from last year.

Those didn't repeat, obviously, this year. That won't be a problem for us going forward as far as comparisons because, again, that primarily was a third and fourth quarter event in our prior year.

The other situation was in this year's fourth quarter. One of our large drug store customers, which has traditionally been a very steady performer for us, acquired a small chain of drug stores and as a result of that, rather than focus on opening new stores, they chose to integrate those stores and as a result didn't buy as much product from us. Again, our expectation is that should be less of a problem going forward.

Okay, good. Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] Currently at this time there are no further questions in queue.

Thank you very much for joining our call. We look forward to talking to you again after our first quarter. Thank you.

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