Standex International Corp (SXI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Standex International Corporation 2007 second-quarter earnings conference call. My name is Cammy, and it will be my pleasure to be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

Your host on today's call will be the President and Chief Executive Officer of Standex, Mr. Roger Fix, and the Chief Financial Officer, Mr. Christian Storch. Now, I would like to turn the presentation over to Mr. Fix. Please proceed, sir.

Good morning, and thank you for joining us. Please note that our second-quarter financial results news release which we issued 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 second-quarter financial results. Then I will follow with an update on our operating groups and provide some further insight into the most recent acquisitions we made in our Food Service Equipment Group. After that, we will be happy to take your questions. Let's start with our financial review. Christian?

Thanks, Roger. Good morning, everyone. I would like to remind everyone that the matters we're 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 second quarter of fiscal 2007, revenue was relatively flat year-over-year at $139.3 million versus $138.2 million generated in the second quarter of fiscal 2006.

Second quarter operating income decreased by 5.1% year-over-year to $7.9 million. Operating income as a percentage of sales was 5.7% compared with 6.0% in the second quarter a year ago. Our operating income performance was primarily affected by sales declines in ADP, Hydraulics, and the walk-in cooler and refrigerated cabinet business. Roger will discuss these items in his operational review.

Net income for the second quarter of fiscal 2007 was $4.8 million or $0.38 per diluted share. This compares with net income of $5.4 million or $0.43 per share in the second quarter of fiscal 2006.

Income from continuing operations for fiscal '07 benefited from a lower tax rate of 25.1% compared with 34.2% in the second quarter of fiscal 2006. The annual estimated tax rate was remeasured during the quarter, as a result of the retroactive extension of the research and development tax credit. The quarter also benefited from a decrease in corporate expenses due to a reduction in performance-based executive compensation.

Net working capital decreased to $117.6 million at December 31, 2006, from $131.2 million at December 31, 2005. The prior-year amount includes the Consumer Group which was subsequently sold. Excluding the Consumer Group, working capital and working capital turns were essentially flat. We define working capital as accounts receivables plus inventories, less accounts payable.

Net debt decreased to $58.3 million at December 31, from $64.7 million at September 30, 2006. The Company's balance sheet leverage ratio of net debt to total capital decreased to 21.6% at December 31, 2006, down from 23.5% at December 30, 2006. We define debt as short-term debt plus long-term debt less cash.

Subsequent to the end of the second quarter, we completed two acquisitions. We acquired all the assets of American Food Service Company, or AFS. We also acquired all the outstanding stock of Associated American Industries, or more commonly known as APW Wyott. The total purchase price for the acquisitions was $94 million subject to postclosing working capital adjustments.

The acquisitions were funded through available credit lines and cash. As a result of these acquisitions, our current net debt level has increased to approximately $155 million, while our current net debt to total capital ratio has increased to approximately 43%. Roger will talk in more detail about these acquisitions in just a few minutes.

For the second quarter, depreciation and amortization expense was $3.1 million. Capital expenditures during Q2 totaled $2.1 million. For the full year, we estimate capital expenditures of approximately 9 to $11 million, and depreciation and amortization expenses of approximately 14 to $15 million. These numbers include the effect of the recent acquisitions.

Interest expense for the quarter was $1.5 million as compared to $1.7 million in the prior year's second quarter. The decrease is the result of lower average borrowing levels. With that, I will turn the call back to Roger.

Thanks, Christian. As you saw from our news release this morning, we reported mixed results for our second quarter. Our Engineered Products Group reported very strong top- and bottom-line results, as all but one of our Food Service Equipment businesses. Our Engraving Group continued to turn in very strong top-line growth, but had some business mix issues that led to a flat bottom line.

The strong performance of these Groups was offset by low results at the ADP and Hydraulics Groups, which were significantly impacted by market conditions. We also had some operational issues at our Master-Bilt walk-in cooler and refrigerated cabinet business that affected revenues and operating income. Let me walk you through what happened with each of these businesses in more detail.

The Engineered Products Group led sales growth in the second fiscal quarter with a 19% year-over-year increase. This growth was primarily driven by robust market demand in the energy, aviation, and space market segments that this business participates in.

We mentioned last quarter that we were taking action to capitalize on the trend toward outsourcing in the energy sector. We have already seen significant success in this effort. In the second quarter, we were awarded a large multiyear contract in the energy sector by a customer that had decided to outsource their fabrication and machine work and as a result is shutting down one of their facilities. We expect this contract to drive top-line growth in this business beginning in the latter part of this year and carrying into the next several fiscal years.

The electronics business also performed well. Although the overall automotive market has been slow, we continue to see good demand from our automotive customers, as we have captured business on growing platforms. In addition, our efforts to diversify our customer base have resulted in an increase in volumes from the aerospace and general industrial markets. We continue to focus on product innovation to capitalize on opportunities in new markets for this business.

For example, our efforts have recently enabled us to broaden our penetration in the appliance market. In the appliance market we have developed a patented technology for a viscous liquid level sensor that is used to sense liquid detergent levels in both clothes washers and dishwashers. This innovative design, coupled with our low-cost manufacturing capability in China, has opened up some exciting growth opportunities for our electronics business.

On the bottom line, our recent initiatives to increase prices and to enhance productivity have resulted in higher margins in the electronics business. In addition, we're seeing early signs of the benefits from our manufacturing operation in Tianjin, China. We also closed a plant in the U.S. in the second quarter that should result in cost benefits going forward. As a result of these initiatives as well as the increased sales volume in our Spincraft businesses, the Group's overall income from operations rose by 56% year-over-year.

Turning to the Engraving Group, we delivered a 14% increase in revenues year-over-year due primarily to strong demand at the Innovent, roll and plate engraving, and machinery businesses. The mold texturizing business is also seeing strong demand, but experienced a lull in shipments in the second quarter due to temporary delays in several new platform projects.

This business is dependent on large projects from automotive OEM customers that typically require new molds when they roll out new models or revamp existing models. As a result, sales for this business are relatively lumpy. Because of this temporary lull, second-quarter income from operations was essentially flat year-over-year due to lower sales leverage at the mold texturing business, which has high fixed costs.

[Like] to emphasize that overall sales volume for our Engraving Group are running at all-time highs, and we're very enthusiastic about its prospects.

The Food Service Equipment Group posted year-over-year second-fiscal quarter sales growth of 2%, and 1% operating income growth. We had excellent performance from all of our businesses in this Group in the second quarter except for the Master-Bilt walk-in cooler and refrigerated cabinet business.

At Master-Bilt we have had some operational issues which occurred in previous quarters that affected quality and delivery lead-times and resulted in a sales decline in the second quarter. We also implemented a new ERP system in December in this business, and that led to the loss of eight shipping days and was an added cost which affected the bottom line. The operational issues have been corrected, and the new business system is performing to expectations.

Although we anticipate that there will be a lingering effect on the top line in the third quarter, because of the operational issues at Master-Bilt, we fully expect this business will rebound in the coming quarters. In fact, we're beginning to see a return to normal order patterns at this moment. The solid performance of the other foodservice businesses gives us reason to be very enthusiastic about the overall performance of this Group in the fourth quarter, and as we head into fiscal 2008.

Our Air Distribution Products Group is affected by the very weak residential housing construction market and reported a year-over-year sales decline of 13%. Based on the order rate we have seen in the past three or four months, it does appear as though we have found the bottom of a downturn in new residential construction. Despite the sales decreased, ADP is outperforming the overall market by increasing its market share.

I mentioned last quarter that our strategy for ADP is to leverage our unique nationwide manufacturing infrastructure as we continue to strive for market share gains in the traditional large HVAC wholesaler market segment and big box retailer accounts. This strategy is working. Several new wholesaler accounts have committed to procure product from ADP beginning in the second half of the year; and a major big box retailer is increasing the percentage of its business that it will procure from ADP.

While we reduced our workforce at ADP due to lower volumes and implemented strict cost controls, income from operations at ADP dropped year-over-year by 46%. The significant decrease in operating income was due to lower overall sales and higher metal prices compared with last year.

Looking to next quarter, because of the winter months, our third fiscal quarter is typically the seasonally weakest of the year. We also expect to see higher metal costs that will not be covered by price increases. Our fourth fiscal quarter should show some improvement due to material cost improvements.

Hydraulics Products Group revenues fell by 20% year-over-year due to a downturn in the market which led to lower sales volume. During our first quarter call I discuss the new Environmental Protection Agency rules that went into effect for all engines on Class A trucks manufactured after January 1, 2007. We believe that this new rule, as well as a shortage of chassis in the second quarter, also contributed to the weak demand. Operating income dropped 43% year-over-year as a result of lower sales volume.

Let's now spend a few minutes discussing our recent acquisitions and how they fit into our growth strategy. The goal of the Focused Diversity strategy we announced approximately five years ago was to divest non-strategic and underperforming businesses, while building larger, more profitable operating groups with greater sales and cost synergies. Since announcing this strategy, we have dedicated ourselves to delivering on this commitment.

Over this time frame Standex has divested eight companies representing about $212 million in annual sales and acquired another $195 million in annual sales. So we have essentially come full circle, in that we have replaced the divested sales volume with new acquisitions. But more importantly, we divested underperforming and non-strategic assets and replaced them with growing companies with strong brands that are very strategically aligned with the core businesses upon which we plan to build a future of Standex.

The core businesses in the portfolio have demonstrated good organic growth, and we are optimistic about the potential for additional acquisitive growth as well.

As a result of our working capital management initiatives, due to the funds realized from the divestiture of businesses and property, and our ongoing strong cash flow generation, we have been able to complete these acquisitions at or below prevailing market purchase price multiples and still maintain a solid balance sheet with healthy levels of leverage.

In the Food Service Equipment Group we have completed four acquisitions, namely Nor-Lake, Kool Star, American Food Service, and most recently APW Wyott. This series of transactions represents the largest number and greatest sales volume of acquisition activity completed by any single company in this market segment during this time frame. As a result, we believe we're now the sixth largest Food Service Equipment manufacturer in North America, with very strong brands that cover the breadth of the cold and hot sides of the Food Service Equipment market.

Our recent acquisitions of American Food Service, or AFS, and Associated American Industries, more commonly known as APW Wyott, represent excellent strategic additions to our Food Service Equipment Group and have established Standex as a full-line Food Service Equipment player.

Prior to the recent acquisitions, our Food Service Group was recognized as a leader primarily in the refrigerated products segment of the Food Service Equipment market. With APW Wyott's core competencies in cooking, toasting, warming, heating, and holding we have added a significant presence in the hot side of the Food Service Equipment market. With the acquisition of American Food Service, we're now in custom fixtures and custom fabrication segments as well. The acquisition of these two businesses gives us a significant presence in all of the major Food Service Equipment market segments.

In the next few minutes of going to focus on three key areas relating to these two acquisitions. First, I will discuss the broader range of sales channels and markets that we now sell into. I will then talk about how our entry into the hot side of the foodservice market provides us with real potential for margin growth. Then I will review a few of the cost synergies that we are expecting.

The first channels I will discuss are the manufacturers' representatives and dealer channels which are fundamental to the Food Service Equipment market. Manufacturers' representatives are key to demonstrating the features and benefits of, and having the products they represent selected for use by, end-user accounts. The dealers are instrumental to the delivery, installation, training, and aftermarket service and support to the end-users. The dealer channel is extensive in nature and provides sales and service to all of the individual nationwide foodservice market outlets.

As with other recent foodservice acquisitions, we intend to preserve the brands and sales channels without consolidation, while leveraging the strong customer relationships that all of our businesses have developed over time.

APW Wyott, as with our existing foodservice business units, has established contractual relationships with some of the best manufacturer representatives in the U.S. and has strong and deep relationships with key buying groups. It sells its entire product line, including toasters, warmers, countertop cooking equipment, as well as baking and cooking ovens, through these channels. Not only can we leverage APW's relationships with these important sales channels, but with a full product line we now have become more important to these channel partners, thus providing additional growth opportunities.

APW Wyott also has very strong end-user customer relationships with a number of significant, very well-known national chain accounts. As just one example, APW won the 2005 Yum! Brands Star Global Equipment Supplier of the Year award. Yum!'s restaurant subsidiaries include Kentucky Fried Chicken, Taco Bell, Pizza Hut, A&W, and Long John Silver's.

APW Wyott supplies quick service, casual dining, and other national restaurant chains with custom solutions, ovens, food wells, toasters, holding cabinets, and specialty refrigeration equipment. We're planning a special initiative to meet with APW Wyott's largest chain customers and work with them to determine how we can increase our share of their business by offering them the entire breadth of the Standex product offering.

APW Wyott also has a significant presence in regional and national traditional convenience store chains. The company supplies this market with equipment such as hotdog rollers, tabletop ovens and warmers, and specialty refrigeration equipment. Standex also has good relationships with convenience stores through our existing Federal, Master-Bilt, and Nor-Lake businesses. Now, with a larger base of convenience store customers, we plan to cross-sell a much broader range of products that go into this growing market. So this is a great opportunity for us to penetrate new c-store chains with our existing products and to sell APW Wyott products into the c-stores where we already have existing strong relationships.

One specific opportunity that we plan to capitalize on in the near term is to sell our existing hot side products from BKI into these new channels. BKI has traditionally sold its fryers, rotisseries, merchandising cases, and combi-ovens only to supermarkets. Now we anticipate selling BKI's products to a large number of key foodservice chains, quick service restaurants, convenience stores that we now have access to through APW Wyott.

In addition to the channels I have just reviewed, APW sells into international markets where we do not have a strong foodservice presence. We now have a stronger international foundation that we will build on going forward.

AFS has expertise in custom fabrication of stainless steel, millwork, and solid surface stonework which it sells primarily to restaurant chains and through foodservice consultants. The first synergy we expect to capitalize on with AFS is to introduce them to our traditional quick and casual service restaurant customers, and retail and convenience store chain accounts, all of which use customized fabricated products in their stores.

The second sales synergy for AFS is the area of foodservice consultants. Foodservice consultants are hired by corporations, hospitals, colleges and universities, and casinos and hotels to design and specify food service equipment for new restaurants, cafeterias, and commissaries. Although we have had success in establishing relationships with foodservice consultants, we have lacked the critical mass in our product offering to become a major player in this segment.

As a result of the acquisition of AFS, we have the opportunity to offer a broader offering of equipment solutions to the consultant community. The combination of the custom fabrication capability of AFS and specific product offerings of our other Food Service Equipment businesses will allow us to become a larger player in the consulting segment.

I would like to talk for a minute about the hot side of the market and why this is so important to Standex. With the acquisition of APW we have created critical mass for Standex on the hot side of the market, where we can provide greater product differentiation and thus margin enhancement through technology and innovation. Product differentiation on the cold side of the Food Service Equipment market is centered mostly around energy efficiency. On the hot side of the business, however, there are a number of factors that can differentiate products and enable suppliers to meet specific customer needs.

One such factor in the cooking segment is cooking time. Shorter cooking time helps to keep labor cost down for the end-users. In addition, the ability to enhance food quality and adjust food appearance to the specific criteria of the customer also can be a key differentiator. For example, a leading nationwide sandwich chain has specific requirements as to how toasted the bread for their sandwiches should be, including the visual appearance of the darker versus the lighter areas on the toasted bread product.

These are just a few examples but it should give you an idea of how we can use technology and innovation to differentiate our offerings, enhance the value-add of our products, and thus increase our margins.

Finally, we expect to generate significant cost synergies with these acquisitions. For example, we plan to incorporate APW Wyott and AFS into the Food Service Equipment Group's purchasing programs to leverage Standex's scale and secure better materials pricing. In addition, we're going to take advantage of sourcing opportunities from China and apply to lean manufacturing techniques across our new operations.

So in summary, APW Wyott and AFS are just the type of synergistic, strategic acquisitions that we have strived to accomplish when we set out on our Focused Diversity strategy five years ago. We look forward to updating you on our progress as we integrate these businesses into our Food Service Equipment Group and begin to realize their growth potential.

With that, we will now take your questions. Operator, can you assist us with the Q&A session, please?

(OPERATOR INSTRUCTIONS) John Walthausen with Paradigm Capital Management.

We are moving ahead smartly with our strategy here. But I guess I wanted to delve a little bit more into the foodservice business. One, in the businesses that we have owned, not the recent acquisitions, but we have had for a while, you have talked about how three out of five were doing very well in sales, and four out of five were doing very well on earnings.

Could you talk about where their successes are coming from? Is this new products? Are they doing some good things on the distribution side? Or is it just a very good market right now?

Really, all of the above. We believe we're taking share. Really if you look at the various businesses, there's been a number of new product innovations and new product lines that we have developed over the last several years.

We have also spent a considerable amount of time broadening and diversifying the sales channels of our foodservice businesses. Traditionally, if you go back, say, six, seven, eight years ago, several of our foodservice divisions were more focused on a specific market segment. For example, a Master-Bilt would have been focused on the ice cream business and in retail. But over the last five years, the management of that business has developed a very strong representative system that allows them now to go into the, what we call, foodservice or restaurant business. So a considerable amount of what I will call channel development diversifying, taking the products into new end-user accounts through new channels.

At the same time, we do have a rather upbeat perspective on the foodservice market itself, longer term. The demographics -- and we have mentioned this in previous calls -- we like. People are going to continue to eat out. The two-paycheck family, the hectic life pace that all families are in today, we expect to continue. That will encourage families to be spending money on the outside for their meal needs.

Consumers tend to be rather fickle. As a result, the end-users have to update menus and have to remodel and do things to improve their stores and their menu selection. So that all means, if you will, new equipment, whether it be in the opening of new stores or in the remodeling and refreshing of existing stores.

Okay. Then on the new system that we put in at Master-Bilt in December, is that a system that will be uniform across this Group? Is this the first of the operations that we have it in?

It is a business system that is really uniform across the entire breadth of Standex. In fact, Master-Bilt is one of the last divisions. We are probably on the order of 75% complete in the rollout of the systems to our business units. Master-Bilt being one of the larger ones we kept to, if you will, towards the end of the implementation process.

Okay. Am I correct in understanding the backlog -- you missed shipping days; you had problems delivering; and the backlog deteriorated during this period of time? Or do we have a significant backlog that we have to work through?

No, the backlog is very much under control. The business system, because we had to convert from a completely independent legacy system to the new business system, which required migrating all the various aspects of the database. Bills of materials, item masters, customer accounts, vendor accounts, there was a pretty massive -- and all the current inventory and work orders that were out there -- a pretty significant data migration as a result of that.

You typically will end up shutting down while you make that transfer; and that is really what occurred in December. But we did it in hopefully a quieter part of the market period, and there really is not a backlog problem, if you will, at Master-Bilt.

Okay. Then on the two operations that we just acquired, can you talk about the parameters that you used in valuing those, and how important achieving the synergies that you talked about are in getting the returns that we want on those businesses?

I would say there's really three criteria. First and foremost is the strategic fit. We have talked, particularly as it relates to APW Wyott, we have indicated for several years that bringing a larger presence in the hot side, coupled with our cold side, we felt was a very important strategic move for us. As many of the chains in particular are looking to buy more and more products from fewer vendors, we felt enhancing our presence on the hot side was fundamental to our growth going forward.

Synergies? We have a pretty rigorous and disciplined process we go through in evaluating all acquisitions, not just those in foodservice. We will develop obviously a base case that would, if you will, evaluate the business on a stand-alone basis. We also evaluate and develop a synergy case in which we will identify both sales and cost synergies.

Then thirdly, we will run that through our financial models to determine return on investment. So in this case, the synergies, particularly for APW Wyott, were an important part of justifying the purchase price that we used.

Okay. What is the time frame that you would expect to be able to realize those synergies over?

Typically we look for synergies -- to capture the majority of our synergies in the second and third year of full operation after the acquisition. Then I think we indicated on our press release on APW that it was our third year we expect to realize approximately $5 million of sales and cost synergies going to the bottom line.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) At this time, there are no more questions in queue. Back to you Mr. Fix.

Thank you, operator; and thank you all for listening in. We look forward to keeping you abreast of the developments, and talk to you next quarter. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect. Good day.