Standex International Corp (SXI) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 Standex International corporate earnings conference call. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

For today's presentation we have Roger Fix, President and CEO, and Christian Storch, Chief Financial Officer and Treasurer. I would now like to turn the presentation over to your host, Mr. Roger Fix. You may proceed, Sir.

Good morning and thank you for joining us. Please note that our fourth-quarter financial results news release which we issued earlier 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 financial results, then I will follow with an update on our operating groups. After that we will be happy to take your questions.

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

Thanks, Roger, and good morning, everyone. I would like to remind everyone that 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 year 2007, revenues were up 5% over last year and came in at $621 million. Acquisitions added $58 million in the year while our base business declined by $32 million due to lower year-over-year sales in ADP, engraving and hydraulics.

Full year 2007 operating income was $30.1 million as compared to $38.8 million in fiscal 2006. Although the two acquisitions intruded positively to the topline, they were dilutive to profitability as a result of the effect of purchase accounting.

Full year 2007 net income from continuous operations was $15.9 million or $1.28 per share compared with $20.9 million or $1.67 per diluted share for fiscal 2006.

The fiscal 2007 results were negatively affected by lower sales volume, higher material costs at ADP and a full product mix at engraving. These factors were partially offset by lower corporate expenses driven by lower executive compensation.

Full year 2007 net income was $21.2 million or $1.71 per diluted share compared with $23.1 million or $1.85 per diluted share for fiscal 2006. Net income 2007 includes the gain from the sale of the (inaudible) [Cushin] stores and Standex publishing businesses.

Turning to our quarterly results for the fourth quarter fiscal 2007 net sales were up by 12% to $171.8 million versus $153.4 million last year. Acquisitions added $25.6 million in the quarter while our base business declined by $7.2 million. As Roger will discuss in more detail, our topline was negatively affected by a number of market factors and timing issues. (inaudible) in the mortgage industry and continued recessionary conditions in new residential construction which reached a new 15-year low affected sales volume at ADP.

The continued downturn of the heavy construction vehicle market affected sales at our hydraulics group and continued project delays at our automotive OEM customers led to lower year-over-year sales at our Engraving Group.

Fourth-quarter income from operations was $7.2 million compared with $10.8 million in the fourth quarter of last year. Operating income as a percentage of sales was 4% compared with 7% in the fourth fiscal quarter a year ago. Fourth-quarter operating income and EPS was affected by the same factors that affected the full year results.

Interest expense for the quarter was $2.9 million compared with $2.1 million in the prior year due to higher volume levels associated with a recent acquisition and higher interest rate. Fourth-quarter net income from continuing operations was $3.3 million or $0.26 per diluted share from (inaudible) compared with $5.9 million or $0.47 per diluted share in Q4 fiscal '06.

Our 2007 fourth-quarter net income from continuing operations reflects a tax rate of 32.8% and [net] income for the fourth quarter of fiscal '07 was $3 million or $0.24 per diluted share. This compares with a net income of $6.8 million or $0.55 per diluted share in the fourth quarter of fiscal '06.

Net working capital came in at $131 million at June 30 compared with $128.3 million at June 30, 2006. We define net working capital as accounts receivables plus inventories less accounts payable. Working capital turns were 5.2 at June 30 compared with 5.4 turns in the prior year quarter.

Net debt which we define as short-term debt plus long-term debt less cash decreased to $144.3 million at June 30, down from $147.5 million at March 31. The Company balance sheet leverage ratio of net debt to total capital was 41% at the end of the quarter.

For the fourth quarter depreciation and amortization expense was $4 million. Capital expenditures in Q4 totaled $3.5 million.

So with that I will turn the call back to Roger.

Thanks, Christian. Since this is our fourth-quarter conference call I would like to start by saying a few words about fiscal 2007.

As Christian discussed in his remarks, from a financial performance standpoint, it was a very challenging year as we were impacted by significant downturns in several key end-user markets that we serve. At the same time, fiscal 2007 was also a year in which we achieved significant milestones in the implementation of our focused diversity strategy.

At the beginning of fiscal 2007 we closed on a divestiture of our consumer group businesses. As a result we have come better positioned to fully allocate management attention and capital resources to those areas that provide us with the greatest prospects or profitable growth, and to capitalize on the synergies between our businesses.

The divestiture of our consumer group completed our transition to a truly manufacturing company and positioned us to execute on the next phase in our focused diversity strategy.

The next phase in the implementation of our strategy is to acquire businesses that are synergistic with our current operating groups and that can quickly contribute to our profitability. In the third fiscal quarter, we did just that with the acquisitions of American Foodservice and APW Wyott.

With those acquisitions, we became one of the leading food service equipment manufacturers in North America, with $350 million in annual revenues and very strong brands that cover the breadth of the cold and hot side of the food service equipment business.

We also made significant strides in our sourcing and manufacturing efforts in China and our low-cost manufacturing initiative in Mexico. We expect these initiatives will yield positive results to both the top and bottom line for years to come. Because of these achievements, we are enthusiastic about a long-term growth potential.

In the short term we continue to face strong headwinds in several of our key markets -- mainly, residential housing construction, automotive, and off-road heavy construction vehicles. These market trends are having a significant effect on the sales volume and operating income for several of our operating groups.

While our Q4 financial results are clearly not satisfactory to us we are making good progress in capturing market share in many of our businesses, including those being affected by negative market conditions. In addition, a few bright spots during the quarter included improved bottom-line results at our engineered price group and continued solid performance of our Foodservice Equipment group.

Let's get right into the details of our operating group performance starting with Foodservice. Revenues for the Foodservice Equipment group increased by 44% year over year, driven primarily by the recent acquisitions of APW Wyott and American Foodservice Company. We have very high expectations for these two businesses and they continue to track according to our plan for both revenues and operating income.

APW turned in a solid fourth-quarter performance as the Company continued to deliver on significant project business with key players in the restaurant industry. APW is continuing to build upon its strong relationships with the YUM! brands group, as evidenced by the 2006 Equipment Supplier of the Year award we received from Taco Bell, and its continued participation in major rollouts and product development work with several YUM! brand chains. For one YUM! chain, we have been selected to retrofit approximately 1800 stores over a three-year period. We are also the middle of helping another YUM! chain develop their next generation equipment for heating and serving their entire menu lineup.

We have completed the integration of the sales channels of the BKI product line and the APW brands for the Foodservice market. Historically, the vast majority of BKI sales were to grocery stores and supermarkets, as opposed to traditional foodservice restaurants. The acquisition of APW allows us to leverage the excellent customer relationships and sales channels that APW has created into the quick service and casual dining restaurant market, by selling BKI's products to markets where BKI has traditionally been underpenetrated.

At American Foodservice our focused postacquisition has been to enhance cross-selling opportunities between AFS and our other Foodservice Equipment divisions. We have begun to see some initial results through efforts of several of our operating units. For example, we have made nice progress in building cross-selling opportunities at our Federal Industries business. This past May, Federal Industries introduced a new counter program -- which is a combination of Federal's traditional stand-alone merchandising cases -- coupled with AFS's custom-fabricated counter products. With this new program we now have the capability to provide the entire customized front of the store [lineup] for applications such as delis and bakeries.

We have also been successful in introducing Standex products into one of AFS's largest customers. In that instance we sold our [Norlake] walk-in coolers and Federal refrigerated cabinets and cases as part of an AFS offering.

We are very pleased with the progress made in the integration of both APW, A&F in the short eight months since the acquisitions were completed, and the potential they hold for future growth.

Foodservice operating income in the quarter increased by 17% year over year. The difference between the increases in revenue and operating income was mainly due to a $1.2 million increase in depreciation and amortization expense related to purchase accounting associated with the acquisition.

As I mentioned earlier, the Engineered Products Group was another bright spot in our results this quarter. You may remember that our sales were impacted in Q3 by some timing issues at Spincraft. As we had anticipated, Spincraft reported double-digit sales growth in the fourth quarter as they capitalize on strong demand, and the capture of new business in all of their end markets, including aviation, aerospace and energy. We expect to see this trend continue to fiscal 2008. Overall revenues were up by 4% year over year at the Engineered Products Group.

Let me give you one example of why we are enthusiastic about the near-term performance of the Spincraft business. For many years, Spincraft has been the sole supplier of fuel tank domes for the Boeing Delta IV Rocket Program but was not the prime supplier to Lockheed for their Atlas V rockets.

However during the latter half of the past fiscal year we were awarded the fuel tank domes for the Atlas V program, which now makes us the sole supplier of fuel tank domes to all the heavy lift launch vehicles in the United States. In addition to the supplemental revenues that this will generate, it better positions Spincraft as the supplier of choice for the lift vehicles that are going to replace the shuttle as part of the Moon, Mars and Beyond Program.

Even at this early stage we are receiving developmental contracts as part of the Moon, Mars and Beyond Program. These early purchase orders and contracts are for tooling and prototype hardware. We anticipate we will receive additional commitments in fiscal 2008 as a direct result of our position as a premier supplier in the aerospace business for this type of component.

On previous conference calls, we discussed a large multiyear contract with an OEM energy customer that had decided to outsource their fabrication and machine work to us. As a result, they have shut down one of their facilities. This program is proceeding according to plan. We saw the initial sales hit from the fourth quarter as we anticipated and expect to record a multi-million dollar increase in sales in fiscal 2008 as a result of that contract.

Our focus on enhancing profitability in our electronics business drove a 23% year-over-year increase in operating income for the Engineered Products Group. We have been improving margins ahead of the electronics business through price increases, plant consolidations and low-cost manufacturing through our Tianjin, China facility. The impact of these initiatives was highly evident in the results for the quarter.

As planned, we exited 2007 on a run rate whereby nearly 15% of Standex Electronics sales volume is being produced in China after less than one year of operations. Our goal for the end of fiscal 2008 is (inaudible) run rates produce approximately 30% of total electronics volume from China.

At our Hydraulics Group, revenues fell by 14% year over year and operating income was down 22% year over year, as a result of the lower sales volume. As we have said for several quarters now, we are on the downside of the off-road heavy construction vehicle market cycle. In addition new EPA rules that went into effect for all engines on Class A trucks manufactured after January 1, 2007, are continuing to contribute to the weak demand environment.

If we compare our operating results with the wider construction equipment market, which some analysts are estimating to [a] decline by at least 25 to 30%, it is clear that as we continue to gain share, in short, we believe that this business is executing well in a very poor market.

We have seen two consecutive quarters from our Hydraulics [Groups] at very consistent volume which leads us to believe that we have probably hit the bottom in the market cycle. We expect that this business will demonstrate sales growth once our customers need to purchase new vehicles after the market fully absorbs the excess supply of truck chassis built with engines manufactured before the new EPA standards went into effect. We expect this recovery will begin to occur in the second half of our fiscal 2008.

(inaudible) and Products group sales were down 15% year over year as a result of a continued downturn in the new residential construction market. In a broader context results compared favorably to the overall 25 to 30% decline in housing starts. This would indicate that we continue to take market share during the downturn.

Some analysts are now expecting that the housing market will not begin to rebound until calendar 2009. In this uncertain environment we are taking every measure to increase our market share in order to be well-positioned for profitable growth with the housing market construction does rebound and to implement cost reductions wherever possible.

In ADP, we continue to leverage our unique nationwide manufacturing infrastructure to achieve market share gains at major HVAC wholesalers and big box retail accounts. We are the only nationwide competitor in this market which gives us a distinct advantage against smaller regional competitors.

Looking at the bottom line, ADP reported a loss of approximately $1 million for the quarter, primarily as a result of costs associated with our Nogales facility (inaudible) cost increases as well as significant pricing pressure in the Greater Phoenix area. When we first announced the establishment of the ADP facility in Nogales we believed that it would enable us to enter new geographic markets such as Arizona, Nevada and Southern California; and we have been successful in entering those markets and broadening our customer base.

However, because of pricing pressure in the Phoenix area, our ADP facility in Nogales has not contributed to the bottom line as we would have hoped. As a result we have decided to discontinue manufacturing of ADP products in Nogales during the current first quarter of fiscal 2008. We will continue to focus on the production of Foodservice Equipment products and other Standex businesses in that facility.

Even though our efforts to penetrate the Phoenix market through Nogales were not successful, we have been able to broaden our reach into other areas in the West and other regions of the country by leveraging the other plant locations of our manufacturing infrastructure. We are not optimistic about a recovery of ADP's top line in the current fiscal year due to the severe downturn in the U.S. housing market. So in order to improve our bottom-line picture we are taking very aggressive actions on driving material cost reductions. We believe we have seen the trough of the downturn in our profitability and expect to return to profitability in the second half of fiscal 2008.

Turning to our Engraving Group, sales declined by 18% year over year due to the ongoing delays of several new platform projects by our European and North American OEM automotive customers. Year over year, the Engraving Group sales comparisons are further challenged as Q4 fiscal 2006 was an exceptional quarter in terms of sales volume. As we reported on our last conference call, we began to see these project delays in the mold texturizing part of the business in the latter part of the second quarter of fiscal 2007, and we have yet to see this business pick up.

Our North American customers such as Ford and Chrysler, our European customers including Renault and PSA have been telling us that the molds for the new platform products should be coming online soon. However there is a high degree of uncertainty as to the timing of these automotive projects and we cannot be sure as to when these molds will in fact hit our shop floors.

On the positive side, we believe that these programs will eventually come to fruition and we are encouraged by the fact that the number of programs we have been awarded means that we are in fact growing market share. Our global presence and our response in this continue to differentiate us from the competition; and we remain optimistic about the prospects in the medium to long term for this group.

Our fourth-quarter operating income was down 78% due to lower sales volume, lower sales leverage at the mold texturizing business resulting from its high fixed cost pressure and an unfavorable sales mix whereby the less profitable (inaudible) engraving sales increase versus the prior year.

As we reflect upon fiscal 2007 we note that the action we have taken during the past few years have transformed Standex from a conglomerate with disparate operating groups to a focused, industrial manufacturing company. The businesses within each of our five operating groups are leaders in their respective industries and have the ability to continue to grow and capture market share. We will continue to invest in those companies that have the greatest opportunities for profitable growth going forward.

While we believe the implementation of our focused diversity strategy is essential to our future, we now have a portfolio of manufacturing businesses that can drive sales and profitability over the long term. We are not immune to the business cycles that occur in several of the markets we serve.

While we now face difficult conditions in multiple into markets we plan to leverage our strong synergistic portfolio of industrial manufacturing businesses to drive long-term growth in sales and profitability. We believe we have the opportunity to enhance our leadership position in each one of our operating groups in fiscal 2008.

Even in the residential housing and off-road heavy construction vehicle markets where we expect to continue to see headwinds for much of the year, we plan to take every opportunity to enhance market share and implement cost reductions throughout the organization. When these markets rebound, our ADP and Hydraulics Groups will be very well-positioned for accelerated growth.

In the meantime we expect ADP to return to profitability in the second half of fiscal 2008 as a result of our actions on pricing and material cost reductions. We believe that the Hydraulics Group has hit the bottom of its market's decline and we expect to see growth beginning in the second half of fiscal 2008.

We also anticipate that our Engraving Group will report improved sales and profits when the delayed automotive programs finally come online. In addition our Foodservice Equipment Group and Engineered Products Group should continue turning in solid top and bottom line growth for the foreseeable future.

With that we will now take your questions. Operator.

(OPERATOR INSTRUCTIONS) Gerry Heffernan from Lord Abbett.

This is kind of a detail question. For the full year what was the MD&A amount?

(inaudible) depreciation and was for the full year $15.2 million.

15.2 and that includes all --

That includes the depreciation and the amortization.

And you mentioned the depreciation and amortization aspect associated with the recent acquisitions. Is there anything that is one-time about that? Or how much longer will that purchase accounting charge be going on?

It was a one-time effect which wasn't in the third quarter of about $600,000 or $700,000 related to the fair value of inventory. As it relates to depreciation amortization that will continue. It is not a straight line depreciation and I think it is being amortized over 15 years. You'll see that come down slightly in the second year after acquisition, but that will continue I think in '08 pretty much in line with what we have seen.

So for the fourth quarter you did mentioned that the D&A was $4 million. It is reasonable to assume that is a good run rate going forward for the next year?

Yes, our run rate is somewhere between 15 -- around $15.5 million.

Very good. Forgive me. I am somewhat new to understanding your Company. The hydraulics that you supply for the off-road heavy vehicle -- heavy construction vehicle market, is that associated with the body or with the engine aspect?

With the body. We provide predominantly what are called telescopic hydraulic hoists that are used in dump trucks and dump trailers as well as other heavy material compacting or transfer devices. But predominantly dump trucks, dump trailers and refuse vehicles. So hydraulic hoists.

I certainly understand how the truck manufacturers had a build up of chassis and engines to have the pre '07 emission standard engines. I'm not exactly sure how that affected you. Did they go through the full completion of these things and then have them sitting on the lots completed so that they had already bought your products at an accelerated rate? Or -- just help me understand a little bit how this has affected -- negatively affected your business?

Two things were going on there. As it relates to the EPA requirements, it was anticipated that the fuel economy of the vehicles with the new engines would be significantly worse than the vehicles produced prior to the EPA standards. We have read as much as 10 to 15% deterioration of fuel economy as well as the actual acquisition cost of the engines was going to be considerably higher. So what we feel happen, based on our reports from our customers is, is that operators chose to buy the old engines in advance of their real needs. So effectively some hedge buying going on which -- it had no requirements in early '08 and the middle of '08 to buy their trucks.

The second thing that is going on in our minds is --

I'm sorry. You said early '08. Did you mean early '07?

'07, I'm sorry. Our fiscal (inaudible). The other issue is the overall construction market is cyclic and there is a bang-on effect of associated with residential construction. Obviously although the commercial construction stayed strong, residential construction has obviously softened quite a bit; and we also use a fair amount of our dump trucks [don't trade] is going to be cold industry and that also saw some slowdown this year.

Yes because it seems to be there would be -- and please correct me where I'm wrong here -- that a fair amount of this truck usage would be for more infrastructure tied building which I understand is a pretty strong segment of the economy. And it also sounds like waste hauling.

Correct. The commercial side, again, has been strong but there is a part of our demand that goes into the residential side and again a fair amount of what we do in the dump trailer business is for coal hauling. And that tends to be a little cyclic.

Yes and certainly railcar motives for coal have been down all year. So it is a little bit of a [punked] market there.

The auto OEM engraving, if you could just give me a little bit better insight as to what your program does for the OEMs there?

We are -- provide the texturing that goes on the mold used to produce the plastic parts in not only automotive, but toys, games, computers, but automotive is a big piece of what we do. So as you look at your car, look at the plastic components both in the interiors, say the instrument panel, side moldings and the doors. Side moldings and the seats as well as the plastic components on the outside of the car. All have a texture in the plastic. In other words it is not smooth, it will have a grain or a texture sometimes. We apply the texture to those molds.

So that's the Corinthian leather, right?

Correct. There you go. And so what happens is that as new platforms are launched by the OEMs or as they go through major overhauls where they will do a freshen up, it typically requires all new tooling and that tooling then after it is produced by the toolmakers comes to our facilities where we apply the grain. The business is therefore not driven by build count, but it is driven by the launch of new vehicles and we have just seen enough of what we believe are cash constraints on the part of some of the OEMs, that they have chosen to delay, extend out the launch of some of these new or modified platforms.

And to the extent that they need to use new tools which would require the dies coming to you to be engraved, there is going to be a usage component to that, is there not? I mean at a certain point it wears out and has to be replaced?

Yes. There is a repair or refurbish component. It's a minority piece of what we do because those tools are typically very, very long-lasting.

So for the most part they last to the extent that that platform is in production?

That's correct. Most other repair work is limited to where there was damage in the production process, for some reason the tools malfunctioned and that caused damage to the face of the tools and they had to be reworked. Or if you have a very, very heavy drag pattern you can have a need to again replace the texturing. But it's predominantly driven by new or modified platforms being launched.

Jumping over to Foodservice here, did you say that your BKI sales you are already seeing crossover sales into the QSR customers?

No. What we said there about BKI is we have completed the integration of the sales channels specifically for the restaurant business; and we are just starting the joint cross selling. What we are referring to as far as the change was the base business that we purchased -- that being the APW business. They were awarded a -- again, a three-year rollout contract with one of the young chains that's going to involve about 1800 stores. So a sizable contract for them.

Will the 10-Q be filed today?

No. The 10-Q will be filed the week after next. The 10-K, sorry. Will be filed (multiple speakers)

In regards to getting a full balance sheet and cash flow that won't be available till then?

That won't be available till then, yes.

I'm sorry to hear that. Very good, then. I will jump off.

(OPERATOR INSTRUCTIONS). At this time, Sir, you have no further questions in the queue.

We thank you all for joining us. We do look forward to talking to you next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's presentation. You may now disconnect and have a wonderful day.