Standex International Corp (SXI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. President and CEO Roger Fix and Chief Financial Officer and Treasurer Christian Storch welcome you to the First Quarter Fiscal 2008 Standex International Corporation Earnings Conference Call. My name is Stacy and I will be your moderator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today, Mr. Roger Fix, President and CEO. Please, proceed, sir.

Thank you, and good morning. Please note that our first 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 first quarter financial results. Then, I'll 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'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.

With that, let's go right to the financials. For the first quarter of fiscal 2008, net sales were up 17% to 175.5 million, versus 149.5 million last year. The increase was primarily due to strong sales growth across our food service equipment group. The recent food service acquisitions added about 25.9 million in revenues. Our top line was negatively affected by the same market factors and timing issues that we have discussed in past calls. The continued recessionary conditions in the new residential construction, which reached a new 14-year low, affected sales volume at ADP. The continued downturn of the heavy construction vehicle market resulted in lower year-over-year sales in our hydraulics group. And continued project delays at our automotive OEMs in the North American market led to a year-over-year decline in our engraving group.

First quarter fiscal 2008 income from operations was 10.8 million, compared with 10.2 million in the first quarter of last year. I would like to note that in the first quarter of a year ago, we recognized a pre-tax gain of 1.1 million on the sale of excess corporate land associated with our office here in Salem.

Very significant increases in operating income in our food service equipment and engineered products group were offset by profit declines at ADP, hydraulics and engraving. Excluding the gain on the land sale from the prior year, operating income as a percentage of sales was 6.2%, compared with 3.3% in the fiscal quarter a year ago.

First quarter net income from continuing operations was 5.3 million or $0.43 per diluted share, compared with 6 million or $0.48 per diluted share in Q1 of 2007. Our net income from continuing operations a year ago included a $0.06 share gain from the property sale.

In addition, net income from continuing operations in the first quarter of fiscal 2008 was affected by higher interest expense, as a result of increased volume levels due to the recent acquisitions and high interest rates.

Interest expense for the quarter was 2.7 million, compared with 1.8 million in the prior year. Net income from continuing operations in Q1 for fiscal 2008, also, was affected by a higher tax rate of 36.1%, compared with 34.5% a year ago. The higher effective tax rate is due to the impact of the decrease in the statutory rate in Germany on deferred tax assets recorded in prior periods.

As I mentioned, the acquisitions were slightly accretive, right on track with our expectations of about $0.01 in the quarter. So if you take those items into consideration, we feel pretty good about our bottom line performance this quarter. In particular, given the very difficult market conditions that some of our businesses are facing.

Net income for the first quarter for fiscal 2008 was 5.9 million or $0.48 per diluted share, compared with net income of 12.1 million or $0.98 per diluted share in the first quarter of fiscal 2007. Recall the net income for the first quarter a year ago included income from continuing operations of 6.1 million or $0.50 per diluted share. This income was the result of the divestitures of the standard publishing and Berean Christian Bookstore businesses last year.

Net working capital was 129.3 million at September 30, compared with 123 million at September a year ago. We define working capital as accounts receivables plus inventories, less accounts payable. Working capital [turns] improved to 5.4% -- 5.4 [turns] at September 30 with 4.9 [turns] in the prior-year quarter.

Our net debt, which we define as short-term debt plus long-term debt less cash decreased to 128.6 million at September 30 from 144.3 million at June 30. The debt reduction was due to improved working capital management and the sale of property. During the quarter, the Company and its lenders executed an amendment to the $150 million unsecured revolving credit facility, which extended the maturity date to September 11, 2012 and also, modified certain financial covenants to reflect the recent acquisitions.

The Company's balance sheet leverage ratio of net debt to total capital was 37% at the end of the quarter. For the first quarter, depreciation and amortization expense was 4.2 million, up from a prior year of 3.3 million. This increase was due to the amortization of intangible assets related to the recent acquisitions.

Capital expenditures during Q1 totaled 2.7 million. Based on our first quarter activity, we estimate total capital expenditures for 2008 will range between 10 million and 11 million. And that estimate for full-year depreciation amortization expense will be 17 million.

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

Thanks, Christian. Our first quarter results were highlighted by excellent performance by our food service equipment group, which grew sales by 48% year over year. We saw strong sales performance across all of our food service businesses and are very pleased to have reported an 8% organic sales growth rate for the quarter. Master-Bilt, Kool Star and BKI performed particularly well during the quarter.

As you may recall, several quarters ago, we encountered some operational issues at Master-Bilt. Although we dealt with those issues swiftly, we had experienced a lingering effect on our top line and bottom line performance at Master-Bilt. This quarter has impressive revenue growth of 10% year over year at Master-Bilt reflects the recovery of some lost sales volume.

First quarter operating income growth of 95% at our food service equipment group outpaced revenue growth, primarily as a result of a dramatic bottom line improvement at Master-Bilt, Kool Star, and BKI. Higher sales volume, price increases, cost reductions and improved productivity resulted in an excellent operating income performance at those businesses.

We're very pleased with the progress we have made in the integration of both APW Wyott and American Food Service during the past three quarters. As Christian mentioned, they were accretive by $0.01 on an EPS basis for the first time this quarter. This is in line with our expectations and we look forward to sharing more good news about these two acquisitions on future calls.

Turning to the engineered products group, sales were marginally lower this quarter, down 3% year over year. Last year's first quarter revenues for this group were positively affected by non-reoccurring low-margin shipment of $1.2 million. Operating income increased 46% as a result of positive developments at both Spincraft and the electronics business.

At the electronics business, cost reductions, price increases, the positive effect of our new Chinese operation and plain consolidations contributed to year-over-year improvement in operating income. At Spincraft, product mix and productivity improvements contributed to the increase in operating income. We're optimistic about the prospects for this group as we anticipate a continuation in the strong demand from the aviation, aerospace and energy end user markets.

During the quarter, Spincraft began the installation of several major machine tools required to support the previously-announced contract with a large energy OEM customer. That should contribute to revenue growth in the second half of this fiscal year. In addition, we're currently quoting on several significant aerospace programs, which are intended to replace the space shuttle and to support the Moon, Mars and Beyond programs that we believe will contribute to the top line of this business over the next two-to-four years.

Turning to electronics, we continue to improve margins at this business due to the [positive] effect of our Tianjin China facility, plant consolidations, price increases and cost reductions.

Our engraving group turned in a mixed set of results this quarter. Engraving revenues declined by 5% year over year due to ongoing delays of several new platform projects by OEM automotive customers primarily here in North America. As a result of the lower volumes over the high fixed costs in this business and an unfavorable product mix, our operating income declined by 55%.

Internationally, the story's more positive as we brought on a new operation in Turkey, which has been highly successful and increased our penetration of non-automotive-related [tech stream] in Western Europe.

Let's talk about our Turkish operation first. As automotive manufacturers seek low-cost tool producers in developing countries, several of them, including Toyota and Ford, have established a presence in Turkey. However, in order for these OEM customers to be able to texturize their tooling, they need to send the molds to Western Europe.

Some of these molds were coming to our facilities but many were also going to our competition. We recently decided to establish our own texturing facility in Turkey to capitalize on the business opportunities in the area. We are the first major texturizing company to establish a facility in Turkey and we are benefiting from our first mover status in this market.

Already in a few short months since the plan came online, we have seen significant momentum in this business. Another bright spot in our international engraving operations has been our ability to capitalize on non-automotive-related texturizing projects. These non-automotive molds run the gamete, in terms of industrial and consumer-related products and include everything from suitcases and plastic patio tables to toys and house ware products.

Taking on more non-automotive business enables us to leverage the high fixed costs at our European engraving operations, especially, during a time when we are experiencing delays from our automotive customers. We're also being aggressive in diversifying our sales efforts into non-automotive markets in North America as well.

Domestically, we continue to believe that the projects we have been awarded will eventually come to fruition from our customers around the world who continue to hear that our global presence and our project response times differentiate us from the competition.

Air distribution products group sales, which were down 8% year over year, continue to be affected by the extremely weak residential housing construction market. We do believe that we have made progress in gaining market share in the quarter. However, the recent additional deterioration in housing starts, coupled with the growing inventory of new and existing homes, leads us to be cautious on ADP's outlook for the remainder of the fiscal year.

Turning to the bottom line on ADP, although we reported a profit in Q1, after a loss in the sequential fourth quarter, our profitability was significantly lower on a year-over-year basis. This was due to significantly higher material costs compared with last year, a decline in real volume of roughly 11% and costs associated with the closing of ADP's production in Mexico, which we did complete late in Q1.

We will continue to focus on the production of food service equipment products and other Standex businesses in our Nogales facility. In fact, Kool Star, our walk-in cooler and freezer product line that is exclusively manufacturing Nogales was very profitable for us in the quarter. We are addressing the need to maximize the facility's capacity to fully leverage overhead costs.

At our hydraulics group, revenues fell by 12% year over year. As we have said for a few quarters now, we are being affected by the downturn of the off road heavy construction vehicle market cycle. In addition, EPA rules that went into effect for all engines on Class A trucks manufactured after January 1, 2007 are contributing to a weak demand environment.

Operating income declined by 30% due to the lower overall sales volume, as well as expenses associated with our efforts to expand our sales into new geographic markets, including the European, Latin American and Chinese markets. We continue to develop these markets in order to diversify our revenue base and decrease dependence on the North American market. We see long-term growth opportunities in these geographic territories.

Operating income was about 13% of sales for the quarter, which we see as very positive, considering the very difficult market conditions that this business faces.

Before Chris and I take your questions, let me leave you with a few thoughts. First, we're quite optimistic about our food service equipment group. Our acquisitions are performing in line with our expectations and each one of our other food service businesses reported year-over-year growth in the first quarter. We look forward to further leveraging the sales synergies provided by APW Wyott, Can-American Food Service in the coming quarters.

We also look forward to capitalizing on many opportunities provided by our engineered products group. We see strong demand across all of Spincraft's end markets and anticipate solid top and bottom line performance from this group throughout the fiscal year. We expect to continue to face challenging market conditions at our ADP and hydraulic groups. With both of these businesses, we are aggressively taking every opportunity to enhance market share and implement cost reductions.

Visibility in the housing and off road heavy construction vehicle markets is not very clear, so we are cautious in predicting the timing of any recovery at ADP and hydraulics. We anticipate that our engraving group will report improved sales and profits when the delayed automotive programs finally come online.

With that, we'll now take your questions. Operator, can you assist us, please?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mark Cooper with Wells Capital. Please, proceed, sir.

Hi, good morning.

Good morning.

Good morning.

I'm wondering if you had the cash flow from operations number for the quarter.

It's about $13 million.

13? And I may have missed this on the call and we're fairly new shareholders of Standex but is there a reason why you only report these abbreviated financial statements on your release and not a more common full form?

Yes, what we are considering is in the future to make a change to that. We're considering to move back the earnings release by about a week and at that time, present a full balance sheet income statement. It has to do with our internal processes and compiling the 10Q and the review by the auditors relates to those [stocks] related control processes.

You reported that -- a net debt number. Can you give us the total debt and a cash number?

Cash is 26 million and total debt is, I think, 154 million.

154, so you paid down about 14 million in the quarter?

We paid down about 14 million in the quarter. Operating cash flow was a big contributor. We also entered into a sale and leaseback transaction for our Philadelphia facility and we sold a piece of property related to a discontinued operation, former set of publishing businesses that we owned. Those proceeds, pre-tax, were about $8 million to $8.5 million.

Okay and then lastly, on the air distribution products group, are the orders continuing to show that negative trend?

We believe we're outpacing the market. If you've looked at the housing starts over the past six-to-nine months, after a pretty dramatic deterioration of housing starts from April of 2006 through December of 2006 from about 2.2 million to about 1.4 million to 1.5 million, housing starts have been fairly stable for the December through June timeframe, again, bouncing between 1.4 million and 1.5 million.

In the July/August/September timeframe, we saw yet more deterioration. In fact, I believe the September number for housing starts was roughly 1.2 million. We believe there's a lead/lag phenomena. Housing starts clearly drives our business. We believe there's an offset from the point that the housing start is begun to the point that our product actually is physically purchased and put into the house of about three-to-four months.

To answer your question, we were trending favorable after a pretty dramatic deterioration in our sales through our third quarter of last year. We were trending fairly flat to actually up a bit. And that's really where we were at during the first quarter. We believe we outperformed the market. The real question going forward is what, if any, impact does this additional deterioration housing starts have on our incoming.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Gerry Heffernan with Lord Abbett. Please, proceed.

Good morning, gentlemen. Thank you for having the call here today.

Good morning, Gerry.

Good morning.

Hey, I might have some questions here that also reflect being somewhat new to the story and still trying to get my arms around everything. To begin with, is there any seasonal factors of your quarterly results here? Is the first quarter any -- should be any stronger or weaker in any particular segment of the business?

There is definitely some seasonality and to help you, Gerry, if you look at our long-term historicals, the seasonality is actually changing over time. With our current portfolio, the food service equipment business is obviously the largest piece. Most of the food service businesses tend to go with the building cycle. In other words, a lot of product go into new store fronts. A lot of those store fronts are obviously completed during the spring and summer/early fall timeframe.

So for food service, our fourth fiscal quarter and our first fiscal quarter tend to be the strongest. Again, if you go back and look at our historicals, we had different seasonality because of some of the discontinued operations. Most of the other businesses tend to be relatively non-cyclical, however -- particularly, you have business like Spincraft can be project driven. And so it can be lumpy. I should make the point that the ADP business can also be cyclic. It tends to be, again, spring/summer/early fall are our strongest periods there, as well.

Right or it goes with the construction cycle, which is now out of cycle.

Yeah, exactly.

Okay, for -- since we're on ADP there -- we had a small profit in the quarter. Although we had a loss in the fourth quarter, so moving sequentially, that's a nice improvement. On relatively similar sales level, actually 26.3 versus 27.3, so a million more in this quarter. But you also said that this quarter in ADP had some costs associated with shutting down the Mexican facility. Can you give us any insight as to how much that would have been? I would imagine that is not something that would repeat in future periods.

I'm not in the position to give you exact numbers but if you look at our sequential fourth quarter '07 to first quarter '08, there was about a $1 million change in real unit volume between the two quarters. We previously announced we implemented a cost -- a price increase, which began to roll out. It was in a stage fashion, so there's no one specific effectivity date but that began in the late fourth quarter and was completed early first quarter. So we got some positive price in our first quarter, as compared to the fourth quarter.

There was some increase to our metal cost also, quarter to quarter.

Okay, how much was the price increase, just in general terms?

Let's say in the order of [$600,000/$700,000].

Okay.

And then in Nogales, we actually saw a benefit, although we saw -- our comment on Nogales was that our closure costs in the first quarter caused that to be a bigger loss than the previous first quarter. We actually saw some gain or some reduction in loss between the fourth and the first. We incurred about $1 million loss. We indicated in our fourth quarter call in Nogales. That was reduced to about three quarters of a million. In the first quarter, we did incur those shutdown costs. We expect that to be much better going forward.

The shutdown cost is -- that's all included in that 750 net operating loss?

That's correct. That's included -- there's shutdown costs, as well as some operating losses in that timeframe.

Okay and that's a done deal now?

That's correct. That operation was completely shut down by September timeframe.

Okay, great. Moving on into engineered, you have a nice move up in the operating income sequentially, about 10%, a little bit of a step up in the operating margin there. Is this an area operating at what you would consider to be the appropriate return levels? Is this the operating income margin that you would expect to get from this business?

There are actually two very different businesses inside the engineered products group.

Right, there's Spincraft and--

And electronics.

--and electronics.

We believe the Spincraft business is operating at a very nice EBIT margin and very sustainable. It does, obviously, vary a bit, quarter to quarter, depending on product mix. The area in which we believe there's still room to improve is in our electronics business and we're kind of midway, Gerry, though a process of plant consolidations here in North America and relocation into both Mexico and China. We closed one facility in the United States in the prior year and look forward to other consolidations in North America over the next 12-to-18 months.

Okay and the final area question, if you would. In food service, certainly, the commentary of the new acquisitions is positive. One of the areas of difficulty in the past year was Master-Bilt. We have some new people in there. Can you just review a little bit more detail, your satisfaction with the new people, the pace at which the changes they are implementing is occurring at and from a "Hey, they were performing poorly and unsatisfactorily in the fourth quarter, they should be performing at X." How far along that timeline are we getting to X?

Okay, correct, the problems that we incurred occurred roughly a year ago, a little over a year ago. We did make some changes shortly thereafter. The problems we had were pretty fundamentally operation -- some quality issues, some delivery issues. It takes time to, number one, correct those and then number two, more importantly, for our customers to realize that.

So we suffered, frankly, for three quarters through really early into our fiscal fourth quarter. We began to see some momentum pick up at that point in time. It didn't really come through in the numbers. We began, in terms of the operating profit, we began to see that in the outgoing products and obviously, one quarter does not a trend make but we saw a very, very significant improvement in Master-Bilt in our first quarter.

As I mentioned, their sales were up actually 10% year over year and that wasn't -- that was actually -- the year-over-year comparison was really before a lot of the problems hit us. So that was not a low hurdle, so to speak, over which we had to step.

To answer your question directly, I think we're sort of in the 85% of our way back. Clearly, customers have a long memory and we need to continue to work with them to show what Master-Bilt can do, going forward.

Do you have any tangible evidence of customers who, I mean, basically, had been long-running customers that had shut you off and returned him to make orders in this first quarter?

What I would say to you is that we go through pretty traditional channels for food service, including manufacturers, reps and dealers. We have dealer councils, rep councils where we quickly engaged their evaluation, brought them into our facilities several times, first of all, to identify the issues, to make sure we concretely understood the issues and the problems that we were creating and then as we made those corrections, brought them in to evaluate where we're at. And I think I can safely say that the feedback recently has been pretty positive in that respect.

Obviously, we ship or service many, many, many customers and so our ability to kind of reflect that across our customer group will take some time.

Okay, and you talked about the 10% organic revenue growth but that was across all three of the existing food service lines. Was Master-Bilt any stronger or weaker than the Kool Star and the other names?

Let me clarify the point. We made two statements. There was an 8% organic growth rate across all of the food service businesses, excluding the acquisitions, which would include Master-Bilt, BKI, (inaudible)( all the other businesses we have. The 10% number we mentioned was specifically for Master-Bilt.

Okay, great. Great. Thank you very much. I'll get back in queue.

Thanks, Gerry.

Your next question comes from the line of Alex Limion with Sprucegrove Investments. Please, proceed.

Good morning. Thanks for taking my question.

Good morning, Alex. How are you?

Good morning.

Very good. Very good, thank you. Congratulations on the improvement at food service. It looks like these investments are really paying off. And I'm sort of wondering what the -- I mean, I don't know -- I don't think you provide guidance for your segments but do you think we're going to hit a 10% operating margin this year in food service? Can we predict that at this point or is that something I'll just have to--?

You're right. We don't give forecasts. I think we've shared though in our investor presentations that 10% for an operating unit on an ongoing basis is, in fact, kind of our minimum goal. So I'm not going to give you a timeframe but to be at 10% or above in food service is clearly a goal that we have.

Okay, that's great. And then I think (inaudible) Master-Bilt but I think you've really address that in the last answer. So it looks like, yeah, everything looks -- I mean, I'm sure you have issues to take care of but I think you've answered all my questions, to be quite honest. I guess, what's your -- in terms of your debt, where would you like to see the debt go in the next year or two? Do you have a forecast for that?

Well, we don't have a specific number but here's our kind of perspective on debt and on our balance sheet. We've, again, in our investor presentations that we've posted on the web in the past, we've made it very clear that we feel that we need to fund growth but organically, as well as through acquisitions on an ongoing basis. We think that using the balance sheet and the available debt capacity is critical to helping us fund that growth. If you look, historically, at our net debt to cap, I think it's kind of peaked somewhere in the mid 50s. I believe a couple of quarters ago, we got it down into the low -- or excuse me -- high 20s, 27%, 28% net debt to cap. And I think what you'll see going forward is that we'll continue to leverage up, pay down, leverage up, pay down and be opportunistic about potentially add on, bolt on kind of acquisitions to add to our portfolio.

I think the other thing we've said pretty consistently is that we want to build on our existing platforms, expand them out either from a geographic standpoint, from a product line standpoint. You won't see us go out into new un-chartered waters from a product line or from a technology standpoint. And I think we've been pretty consistent. Obviously, the two acquisitions that we did earlier this year in food service, again, were very strategic to us and that's the kind of acquisition you'll see us use or go after going forward and you'll see us use that balance sheet to help fund those acquisitions.

Right and then I guess like return on investment capitals are the important metrics that we think about and I assume that you're also looking at returns on invested capital in all your businesses. What sort of a timeframe do you give these businesses? Like how far along do you plan or do you look when you make your investments?

When we -- we have a fairly disciplined acquisition business case justification process that we go through with management and then obviously, present to our board of directors. As a minimum, we typically look over three, sometimes as long as five-year horizon in those projections. Typically, pretty traditional, do a base case standalone, what would the acquisition perform on its own to give us some sense of where value should be. We go through a pretty detailed analysis of the synergies that we can generate, be they sales synergies, be they cost synergies, be they leverage on the balance sheet, in terms of working capital management.

There is no hard fast rules as to what we accept or don't accept from accretion standpoint. It has a lot to do with how strategically important or how strong a fit is the business for us. Frankly, the acquisition we just completed in January were probably -- they were obviously accretive in the first 12 months. They were [diluted] the first six months. That's an indication of how important or strategic we felt those acquisitions were. Historically, I guess all the acquisitions we've done in the last five years have all been accretive within the first 12 months and that's kind of the way we look at life.

Great, that's great. And do you -- I don't know how you're going to answer this question but do you look at the risk of your different divisions? Like when you make investments, do you say, "Well, food service is obviously a much safer investment, compared to something like the ADP or engraving, so therefore, we'll make [pure] focus on these food service groups." Do you do that at some point? Is that--?

Yes, we not only look at risk but we look at -- I'd say it this way. We look at the demographics of the market, the end market, to your point, how stable is it or not? What is the relative growth rate? What does the competitive landscape look like? Is it a pretty segmented market? What's our brand position, in terms of size and recognition, the customer base? Again, a fairly comprehensive view so that as we, gain, develop our three-to-five-year business plan and project, particularly, the sales side of that plan, try to be as realistic as we can in terms of both what we think the business can do and how we can add to it, from a synergies standpoint.

Great, thank you. And sorry, one final question. I'm wondering on acquisition good will, I think this is probably a question more for Christian but I think he has mentioned in the past that he was willing to take it up to say 100% of equity. Is that still -- would you still be comfortable with that sort of number? You know, it's like 200 million of good will.

I didn't really follow that. I don't recall that statement. I mean, currently, all good will is at about 120 million.

Yeah.

So in equity is around 220 million in that [neighborhood]. So I think what we have said in the past is that if we find the right acquisitions, we're not afraid to make acquisitions. And as a result, we inherit good will. I don't think there is a ratio that we have in mind that says, you know, we cannot exceed -- good will cannot exceed a certain percentage of equity.

Okay, maybe that was just the way I look at it but you would be -- would you be comfortable adding, say, another 75 million of good will on the balance sheet over the next year or two?

I think it has, again, as [Chris replied] (inaudible) to do it with a strategic fit. You know, obviously, the accounting rules have changed in your ability advertise good will off, so it's going to be there. The key is that you, obviously, have a profit strain going forward that justifies having that good will on the balance sheet. And I think inherent to -- if we think it's a good acquisition, a good strategic fit, obviously, inherent to that is we feel it's going to generate the profits necessary to protect the good will and the balance sheet.

Right. That's great. Thank you very much for everything and congratulations.

Thank you, Alex, appreciate it very much.

Thank you, Roger.

Your next question comes from the line of Ryan [Levinson] with PFM. Please, proceed.

Hi, good morning, thanks for taking my question.

Good morning.

On the sale leaseback, I guess there's an 8.5 million of total proceeds. That was a facility and then a piece of property and then one other thing?

There were actually two transactions. We sold and that was on a sale leaseback transaction. We sold an idle facility that was related to a discontinued operation of standard publishing. Those proceeds were somewhere in the neighborhood of 1.5 million/1.7 million, in that range. And then additionally, a second transaction, we entered into a sale and leaseback transaction for a property in Philadelphia, which relates to our ADP operation. The proceeds from that pre-tax was some $7.8 million net of fees, probably $7.3 million.

We did not recognize a gain, by the way, on that transaction, under accounting rules. That gain is being deferred and amortized against future lease expenses. Okay and what is the lease obligation on that piece of property? It's a ten-year lease with renewal options.

One point to make about that, as well, because I don't want people to get the idea we're selling off assets just to generate cash, that's not the point here. The Philly facility is part of our air distribution products facility where, over the last couple of years, we've implemented a pretty significant lien initiative. We actually were able to vacate about 40% of that facility. So it was sitting empty and we said to ourselves, "Do we relocate the facility or our operation to an adjacent facility, which is smaller and incur, obviously, less expense, or do we do a sale and leaseback to be able to leverage the empty space"? And over the last year and a half, we actually looked at relocating and it was, in our mind, disruptive. It didn't offer the same economic value, so the sale and leaseback offered us the opportunity to generate cash effectively move into a smaller facility without moving and then take advantage of the lien work that we've done over the last couple of years. So we felt it was a win/win for the operation, as well as for our shareholders.

So you're only occupying 60% of the facility and you were able to lease to a third party the remaining 40% or you--?

No, we sold it to another entity, to a REIT, is my understanding.

And they're going to lease it.

And they're going to lease it out. So we generate the cash, which we can redeploy into other businesses. The other entity will obviously lease that piece out and then we'll pay lease on the smaller piece to the new owner.

Okay, what is that capitalized lease obligation?

Oh, I don't have that number in front of me.

Okay.

We'll have to get back to you.

All right. I'm sure it'll be in the queue.

It's not a capital lease. It's an operating lease. So the net present value of the lease obligation -- I don't have the number. It will be in the queue.

Okay. And what's the magnitude of the seasonality in food service?

Oh, boy. Hang on just a second. It can swing 10% plus or minus from a nominal value. And the reason I say that, it varies by business but the refrigerated cold side businesses are much more cyclic than the hot side. So it depends on the mix of the hot sales to cold sales as well.

Okay, so the hot sales are pretty consistent throughout the year and then it's the cold sales that are more heavily skewed to Q -- to your fiscal Q4 and Q1?

That's correct. That's at least true for our portfolio. That's correct.

Okay and so and it's that side of the business that can say, you know, you can see a sequential increase or decrease of roughly 10 percentage points from yield--?

I'm saying it can swing the overall group that much.

Oh, the overall group, okay. So then the cold side is obviously much more cyclical -- excuse me -- much more seasonal than--?

That's correct.

Okay, and is that driven by your institutional exposure as sort of your exposure to, I guess, to schools?

No, no, it's pretty much just, again, strictly, all aspects of construction and that construction cycle is not unique to schools. It's applicable to schools, certainly, but if you think about it, the restaurant chains are very much driven off of the "good weather" construction. We have a pretty significant exposure to drugstores. If you just look at the annual reports for Walgreen's and CVS, you'll see that their new store openings are very, very much weighted towards that construction cycle.

So again, it's really all aspects of construction and it's really into most of our end user markets -- institutions, what we call food service chains, into retail or drugstore [side]. Convenience stores, certainly, the same way.

Okay. Okay, then my last question is what were Spincraft's sales in the quarter?

We don't reveal that level of detail.

Oh, okay, I thought you had disclosed something about that in the last quarter.

No.

No? Okay.

No.

You know what? I actually had one other question. In the third quarter, you talked about a number of -- I think the phrase was "Several major accounts were committing $15 million to $20 million of additional volume to the air distribution products group over the next few quarters." And then in the fourth quarter, I saw no mention of that and I don't see any mention of it again in the first quarter. I was just wondering if that's changed in some way or if the performance in the air distribution group is inclusive of kind of these new accounts that are coming online and that the, I guess, the organic growth, if you think of that as separate, is that much worse.

No, let me clarify what we said. What we said is we were negotiating with accounts that represented annual volume of up to 10 to 15 and there was a number of accounts within that number. What we also said is that if we were successful in bringing them across, it would take us a number of quarters to actually ramp that business up, that those businesses just don't stop on a dime and start ordering products.

Having said that, back to the earlier question I answered about how we're trending to the market. We are, again, if you look at our year-over-year sales in the quarter, the market, we believe, is down around 23%. We're down around, again, 15%. We think that's indicative that we have taken market share gains and that market share gains are really coming out of, again, that series of accounts that we had discussed earlier.

Okay, so there were new account additions, the things that you had referred to a few quarters ago or I guess in the third quarter.

Definitely. Definitely. In fact, very specifically, we have several new accounts in the Denver, Salt Lake City area that are coming on board for us.

Okay, how much are the volume in the quarter was them kind of stocking up?

I really don't have a number there.

Okay, I mean, can you give--?

They don't really stock up. These are wholesalers and wholesalers, as you well know, are running on inventory turns, so what they'll do is they have a portfolio is SKUs that they'll carry on their shelves. Each SKU will have its own stocking plan and depending on the -- whether it's low-volume/high-volume user, they'll replenish. We'll get orders typically at least once a week from a large wholesaler, so there's quite a bit of turn, I guess, is the point. So there's not, per say, a stocking up. It's an ongoing stocking program.

Okay, all right, well thank you very much.

Thank you.

Your next question comes from the line of Gerry Heffernan with Lord Abbett. Please, proceed.

Hello, again.

Good morning, Gerry, again.

Engineering products, the year-over-year comparison on the operating income, as far as margin goes, is a very nice step up. I calculate 8.9 operating income the first quarter fiscal '07 to 13.4. That was done, despite a 2.6% drop in the revenue. I know that we were looking at both Spincraft and electronics here. Can you just point us in the direction of what accounted for the substantial improvement in the operating income there?

A series of things and there's no one thing that would account for all of it. First of all, we mentioned that, on the sales line, there was a $1.2 million low margin business that didn't repeat. So you can kind of factor that out of -- and say that it obviously enhanced margins, year over year, by not repeating. But beyond that, again, we've gone through the plant consolidations, the relocation of manufacturing into China, some price reductions on the electronics side, and with the elimination of that low-margin business on the Spincraft side and some favorable product mix, we saw margin improvement on both sides, on both the Spincraft and on the electronic side of that business.

Okay, moving to engraving, we spoke, in the fourth quarter and subsequent to the fourth quarter results that a little bit stymied the --particularly in regards to your large classification of customers, which is the North American auto makers, that it is a sale that corresponds with new platforms. Despite all the negative press, they are going along with new platforms. I mean, they have to if they have any chance to keep their business going.

Correct.

And you guys, as per their ordering requirements, and staying abreast of the changes, know that new platforms are coming out and things have to be eventually ordered.

Right.

That said, the revenues were about flat with the last quarter. The operating income did step up a bit but nowhere near where we have been. Have these orders gone out the door or the orders associated with those new platforms still kind of sitting on your side of the house and you know, the phones are just quiet from the customers?

Well, you're talking about engraving, correct?

Yes.

A couple things that are going on there. There are -- you recall there are at least two business segments inside of engraving. One is what we call mold texturizing, which, again, is predominantly texturizing and molds for automotive applications. The other side of the business is what we call the role and plate engraving and machinery business. Totally different in the sense that these are products roles or machinery that are used in the production of continuous length materials such as tissue and tile, flooring materials, artificial leather materials, that type of thing.

If you look inside the numbers, what happened this quarter was much like it happened last quarter and that is the mold texturizing business was down substantially more than what the overall top line was down. That was somewhat compensated by increase in sales and the role of plate engraving and machinery business. The problem is, is that mold texturizing has inherently a much higher gross business, probably in the high 40s. Traditionally, you know, machinery business, you can imagine, capital goods, it's in sort of the lower 30% range. So quite a probably a mixed change that affected the operating income in that group substantially more than the top line would indicate.

Okay, so that certainly explains the margin, big change in margin, despite seemingly smaller move in the top line but then just sticking with mold texturing business, the auto business, what is your insight to the customer set here? You know, I mean, they're not going to not introduce those platforms, right?

The explanation you gave is exactly what I would give is, again, its' very frustrating because particularly for the North American and European OEMs, they tend to make what we call project awards or program awards, which it's not in the form of a purchase order but it's in the form of a letter of commitment from the OEM, say, "You have been awarded the interior, all the interior parts for this given platform. Congratulations, we'll be working with you." And typically -- and that varies, depending on the OEM -- we'll get that award 12-to-24 months in advance and we'll then begin to work very closely with the program managers at the OEM level because they're the ones that are responsible for launching purchase orders to the tool manufacturers. They're the ones that interact with us regarding the type of texture, etc. that we're going to be using.

So we have a pretty good idea where things are at. Having said that, we believe that there's some level of cash crunch going on at most all the OEMs and I think that they've slowed some things down and frankly, the question is, to what extend they've been slowed down. I believe you're correct in saying that, ultimately, those platforms are going to come through because at this point in time, with a flat to declining overall count, bill count across the world, it's a tough market out for them. The only way they can differentiate is through their ability to attract consumers to new models or updated models and all that requires new tooling.

Okay. Great, great, thank you very much.

There are no further questions in the queue.

Well, thank you very much. A very spirited session. We appreciate the questions and we look forward to talking to you, again, next quarter. Thank you very much.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a good day.