Standex International Corp (SXI) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Standex International Corporation earnings conference call. My name is Jasmine, and I'll be your Operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the presentation over to your hosts for today's call, Roger Fix, President and CEO, and Tom DeByle, Chief Financial Officer. You may proceed.

Good morning. Thank you for joining us.

Please note that our first quarter financial results news release, which we issued earlier this morning, is available on Standex' website at Standex.com. Also available on our website is a presentation that accompanies our remarks this morning. Please go to the Presentation section of our Investor Relations website to view the slides.

On this morning's call, Tom will begin with a review of our first quarter financial results, and 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. Tom?

Good morning, everyone, and thank you for joining us today.

I will start by reviewing our Safe Harbor passage on slide two. 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.

In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation and amortization; non-GAAP income from operation; non-GAAP income from continuing operations; and free cash flow. These are non-GAAP financial measures, and are intended to serve as a compliment to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the Company's performance. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's first quarter news release.

Now, let's turn to slide three and our quarterly results. We performed well in the first quarter, delivering good top line growth and a substantial improvement in profitability. For the first quarter of fiscal 2009, net sales were up 2.9% to $180.7 million from $175.5 million last year. This increase was driven by growth at our Food Service, Engineered Products and Engraving groups.

Turn to slide four, please. First quarter income from operations on a GAAP basis was flat at $10.8 million compared with the same period last year. Our first quarter income from operations this year includes a $4.3 million pretax restructuring expense related to the closure of our Bartonville, Illinois ADP facility, and two engraving facilities that we discussed last quarter. The $4.3 million includes severance and other employee benefit termination costs, and expenses associated with relocation of production capacity to other Company facilities. Excluding the charge, non-GAAP income from operations grew 39% to $15.1 million in the first quarter of fiscal 2009. This represents an increase to 8.4% of sales compared to 6.2% of sales in the first quarter of fiscal 2008. Interest expense for the quarter was $1.7 million compared with $2.7 million in the prior year.

First quarter net income from continuing operations, as you can see on slide five, was $7.1 million or $0.57 per diluted share, up 33% as compared with $5.3 million or $0.43 per diluted share in Q1 of fiscal 2008. Net income from continuing operations, excluding the tax affected restructuring charge, as well as the $1.1 million benefit for a life insurance policy from a former executive, was $9 million or $0.72 per share. This compares with $5.3 million or $0.43 per diluted share in the first quarter of fiscal 2008.

Our 2009 first quarter net income from continuing operations reflects a tax rate of 27.6%. This compares with a tax rate of 36.1% in the corresponding quarter of last year. The difference in the tax rate primarily relates to the previously mentioned insurance benefit, which is non-taxable. Net income in the first quarter of fiscal 2009 was $5 million or $0.40 per diluted share. This compares with net income of $5.9 million or $0.48 per diluted share in the first quarter of fiscal 2008. Net income from discontinued operations -- or net loss from discontinued operations was $2.1 million for the quarter -- first quarter of 2009, versus a loss of $605,000 in the prior year.

Net income for the first quarter of fiscal 2009 includes a restructuring charge and insurance benefit I previously mentioned, as well as a $3 million expense charge to discontinued operations, related to the environmental remediation activity in Cleveland, Ohio. As a result of our Q3 results for fiscal 2008, we reported that the US EPA had demanded Standex's participation in a remediation activity at a site located in Cleveland, Ohio, where the Company leased a building and conducted operations from 1967 until 1979. This site is the former location of the club's products in Monarch Aluminum division. The Company sold these businesses in 1984, and as a result, they are considered discontinued operations.

I would like to provide you with a brief update on the environmental remediation activity. The project management firm hired by the Company, which is an expert in environmental remediation programs, has been at the Cleveland site for the past several months, and executing the remediation activities that Standex has agreed to with the US EPA. As a result, we know a lot more about the extent of contamination and the anticipated cost to complete the remediation than we did last quarter. Based on our latest estimates, we have increased our accrual for this remediation activity by an additional $3 million expense, bringing the total accrual to $5 million pretax. This is our best estimate of the costs anticipated to complete the remediation. However, the actual remediation activities will not be completed for approximately another two quarters, and therefore our estimate of costs cannot be considered final.

We mentioned last quarter that we had put several insurance companies on notice that have provided general product liability coverage to Standex during the years in question. During the first quarter, two of the insurance companies agreed to reimburse us for legal expenses incurred during the remediation process under the normal reservation of rights clause. Thus far, they have not agreed to indemnify Standex to cover the cost of remediation.

Turn to slide six, please. First quarter fiscal 2009 EBITDA included the restructuring expenses and life insurance benefit I previously mentioned, was $15.7 million in the first quarter of fiscal 2009. Excluding these expenses and benefits, adjusted EBITDA increased 24% to $18.9 million. We have provided a reconciliation of EBITDA to net income in our press release.

On slide seven, you can see that our free cash flow was $2.5 million for the quarter. Excluding the pretax $4.3 million restructuring charge, and the $1.1 million life insurance benefit, cash flow was $5.8 million compared with $14.6 million in the prior year. The working capital use of funds on the free cash flow chart of $12.5 million primarily relates to increases in our working capital during the current quarter. As you recall, we drove our networking capital to very low levels at June 30, 2008. The normal replenishment of inventory and subsequent payments to our vendors is the primary cause for the increase during the quarter.

Turning to the balance sheet, and slide eight, networking capital was $135.8 million at September 30, 2008 compared to $129.3 million at September 30, 2007. We define working capital as accounts receivable plus inventories less accounts payable. Working capital terms decreased slightly to 5.3 terms from 5.4 terms in the prior year quarter. Our net debt, which we define as short-term debt plus long-term debt less cash, increased to $115.3 million at September 30, 2008, up from $106 million at June 30, 2008. The Company's balance sheet leverage ratio of net debt to capital was 34.4% at the end of the quarter, compared with 32.2% at June 30, 2008. For the first quarter, depreciation and amortization expense was $4.2 million, essentially flat with the prior year. Capital expenditures during Q1 totaled $1.9 million.

Before I turn the call over to Roger, considering the current status with the financial markets, I would like to say just a few words about our liquidity. Please turn to slide nine. We have spoken with all of our banks in our revolving credit facility, as well as all of our private placement holders, to assess their current financial condition. Every firm in our bank group, and our entire private placement holders, are rated investment grade. In mid-October, $29 million related to our private debt came due, and we have refinanced the debt into our revolving credit facility. We have approximately $29 million of capacity under our $150 million revolver, as well as two lines of credit of $10 million, which the Company believes provides adequate liquidity in the near term. Historically, we have placed approximately $40 million to $50 million of our total debt in private placement debt instruments. Our current plans are to continue to monitor the debt markets, in order to allow the pricing environment to potentially become more favorable to the Company.

So with that, I will turn the call back to Roger, and you can turn to slide ten.

Thanks, Tom.

We began fiscal 2009 on a very positive note, with solid performance in the first quarter. We are particularly proud of our 69% increase in non-GAAP net income from continuing operations. We believe these results represent very solid execution on the part of our business units in the face of some very challenging market conditions, particularly in the US housing and off-road heavy construction equipment market. The increase in operating income was a result of implementation of price increases, the successful completion of several plant consolidations, cost reductions and productivity improvements achieved throughout the organization.

We have also been able to consistently grow organic sales. Our operating groups, even those in the throes of a down market, have done a good job of entering new markets and driving market share gains. Our success for the past several years is a testament to the strength and resiliency of our business model. Our goal is to rely on this resiliency to outperform the market in what promises to be a challenging year from a macroeconomic perspective.

Let me take you through how each of our operating groups performed in the quarter, and discuss what we see ahead of us. Let's start with food service, and you can turn to slide 11.

Food service equipment first quarter revenues increased 4.9% year-over-year. The growth was driven primarily by sales of our walk-in coolers and freezers. First quarter operating income was essentially flat, lagging sales growth as a result of a number of sales mix issues. First, as I mentioned, we had good sales of our walk-in coolers and freezers. However, we saw less volume in our food service reach-in cabinets and sales into scientific markets, which carry a higher margin. In the first quarter a year ago, we completed a large project with the USDA for refrigerated walk-in enclosures which did not repeat in the current quarter, and as a result, negatively impacted our scientific sales volume.

In addition, we had a lower proportion of sales at our Cooking Solutions group compared with the Refrigerated Solutions group. The hot side typically carries higher margins than the cold side. On the hot side, we saw some weakness in the casual dining and independent pizzeria markets. In addition, some orders were pushed out from the first quarter to the remainder of the fiscal year from a major quick-service restaurant chain customer on the hot side of the business.

I would like to note that we have completed transition of management in the Cooking Solutions group from the previous owners to Standex management, and we have appointed a new group President. We are quite pleased that we have been able to recruit several talented and experienced individuals from other blue chip organizations in the industry to lead the Cooking Solutions group.

On previous calls, I have mentioned our strategy to expand the presence of the food service business internationally. During the first quarter, we experienced good growth in our food service equipment international sales, achieved through both exports and sales from our international sales and manufacturing locations. In fact, our international sales grew 29% over the prior year. Most of the gain came from the success of the Refrigeration group in Canada that we have discussed in prior calls. Our Cooking Solutions group also was successful expanding internationally, with improvement in Latin America and EMEA.

Going forward, we are continuing to focus on achieving market share gains as we face a softening market for food service equipment in fiscal 2009. We'll continue to focus on international expansion, including geographies such as South America, Latin America, Canada and the Middle East. We also plan to introduce innovative new equipment and launch product adaptations for new applications during the year.

Looking at the bottom line, we are taking every opportunity to cut costs and enhance margins. For example, we are in the process of rebidding our entire freight program, which we believe should realize savings in the range of $1.5 million to $2 million across the entire Standex organization. We also hope to benefit from the recent reduction in the costs of commodity materials such as carbon steel, stainless steel and aluminum, used by the Food Service group.

Turn to slide 12, please. Engraving group sales grew by 5.7% year-over-year, driven by sales growth in our North American operations. Our aggressive efforts to consolidate facilities, enhance productivity and reduce costs resulted in operating profit growth of 91.2% for the first quarter. Specifically, we successfully completed the consolidation of two smaller roll engraving facilities in North America into our Richmond, Virginia plant. We accelerated the introduction of lean manufacturing and other management techniques to dramatically improve productivity and reduce overtime.

We have also taken every opportunity to decrease costs throughout the organization. Management in the Engraving Group really pushed the cost side of the equation this quarter to achieve this very impressive bottom line growth. We saw a steady sales volume in North America and exited the quarter with good backlog of orders, giving us reason for optimism about the near-term prospects for the business. While we have begun to see some platform delays from our international OEM customers, we are continuing to execute on our strategy to secure growth in non-automotive applications in emerging markets such as in Turkey and China.

Turn to slide 13, please. Our Engineered Products group led top line growth in the quarter with revenues increasing 15.8% year-over-year, primarily due to a very strong growth at Spincraft. Operating income increased by 6.6% year-over-year. Operating income lagged sales growth due to two factors. First, each quarter in fiscal 2008 included milestone payments related to a long-term contract with an aerospace customer. These payments have been completed, resulting in a difficult comparison in the first quarter of 2009, and will similarly affect each subsequent quarter for the remainder of the fiscal year. To a lesser extent, our year-over-year operating income was affected by an unusually high level of low-margin product sales. During the quarter, we also secured new contracts for the Boeing Delta 4 and Lockheed Martin Atlas 5 heavy-lift rocket programs, for hardware to be shipped through calendar year 2012.

Looking at the electronics business, revenues were essentially flat. We continue to capitalize on good demand from the industrial and aviation and aerospace markets, and we benefited from sales from our BG acquisition. On the other hand, we also continued to see softness in the housing sector and experienced accelerating weakness from the automotive sector. We do not expect the order flow from the automotive sector to pick up in the near term, as many OEMs are shutting down factories for extended periods of time for inventory corrections. We saw a good operating income growth from electronics, despite the flat sales due to our cost reduction initiatives such as material substitutions, the increased use of low-cost manufacturing in Mexico and China, and plant consolidations.

On slide 14 we discuss the Hydraulics Group. Hydraulic Products group revenues for the quarter declined by 7.5% year-over-year, and operating income declined by 1.9%. The downturn in the US off-road heavy construction vehicle market continued during the quarter. During this period we are seeking opportunities for growth, especially in international markets. For example, on our last call, we discussed our decision to create a new manufacturing capability in northern Tianjin, China, to produce telescopic hoists for sale in China and for export to other Asia Pacific markets and to Europe. The initial prototype runs will begin in the current quarter, and we are on track to begin early production in the second half of the fiscal year. We expect to ship our first order from China in Q3 to Europe, and anticipate profitability resulting from this facility in fiscal 2010 and beyond. On the costs side, over the past several quarters we have made significant investments in automation equipment that will be installed during Q2. We expect this initiative will contribute to margin improvement beginning in the second half of the year.

Turn to slide 15, please. Air Distribution Product Group sales were down by 13%, as a result of the continued severe downturn in the residential construction market. Looking at the top line, we believe that we are achieving market share gains, even in this very difficult environment. We are outperforming the market, and we know that we penetrated new major HVAC wholesalers in targeted geographies. The very good story on ADP this quarter is the 683.9% year-over-year increase in operating income. This dramatic improvement in profitability was primarily the result of price increases totaling about 32%, which were implemented in the past few quarters, that had not yet been offset by higher material costs.

Our continuing action to reduce costs also contributed to the operating income increase this quarter. During the quarter, we successfully consolidated the sales and production activities of our Bartonville, Illinois facility into our Minnesota and Georgia ADP locations, with minimal customer disruption. We are on track to begin realizing annualized cost savings of approximately $2.2 million pretax in the current second fiscal quarter.

We are pleased with our bottom line results this quarter at ADP. This is obviously not sustainable throughout the year. We expect the group to operate profitably in the second quarter, as we continue to consume the lower cost metal we currently have in inventory. However, we expect to be focused on maintaining break-even profitability in the second half of fiscal 2009, as we begin to consume the higher cost metal that we currently have on order.

Let's turn to our summary on slide 16. For some time now, we have faced protracted and severe headwinds from the housing and off-road heavy construction equipment markets. During this time, we have been able to grow sales and profitability in the overall business. Our recent successes, especially our ability to enhance margins and drive EBIT growth, demonstrate the strength and resiliency of our business model. And certainly our ability to generate cash and reduce debt demonstrates the type of performance we can expect from our portfolio over the long term.

Going forward in fiscal 2009, we expect to face challenges from a softening economy. We are not in a position to make specific forecasts on each of the markets that we serve. Standex, like most companies in the US, is faced with a very dynamic set of market conditions. What I can tell you is that in light of this market uncertainty, we are taking prudent and aggressive action towards the management of our costs and cash.

I won't repeat myself by going through each business. In general, however, there are several actions we are taking that cut across most of our operating groups. On the cost side, we have a keen eye on improving our cost position through lean manufacturing, low-cost sourcing and manufacturing, plant consolidations and investments in automation. Each one of our operating groups is making targeted work force reductions. We also plan to drive market share gains at each of our operating groups through the introduction of innovative new products, and by expanding our geographic presence. In most cases, this includes penetrating new international markets.

We look forward to updating you on our progress as we move through the year, and we will now turn over to your questions. Operator, please?

(Operator Instructions).

You have a question on the line of Gerry Heffernan of Lord Abbett. You may proceed.

It is Gerry Heffernan. Could you -- I know that you addressed this a little bit, but if we could just, in the aggregate, address free cash flow. And I appreciate the liquidity page that you had in the presentation, but it's a little smaller this quarter; certainly working capital needs took away from that somewhat. But what are your plans for free cash flow? How do you foresee the fiscal year '09 playing out in that regards? Is this just a harvesting cash paying down debt period or do you work other things in there?

Right now we don't have a very aggressive position towards acquisitions. As you know from our press releases, we completed a small acquisition, BG Labs, during the quarter, took a couple million dollars of cash. I don't think you will see us take on large acquisitions. There may be some small, bolt-on tuck-in type acquisitions. So from a cash utilization standpoint, I think predominantly we will be using free cash flow to pay down debt, point one. Point two, our first quarter is typically our weakest quarter from a cash flow standpoint. We come off of high sales, inactivity in our Q4, and tend to restock and put more money back on the balance sheet from an inventory and receivables standpoint.

There is nothing in our inventories that would suggest that there is an aging problem or anything like that, just a normal, if you will, restocking where that cash will ultimately come back off the balance sheet as well. So again, I think you will see us predominantly in a debt payment standpoint.

I think the other point I would make is that our Q4 from free cash flow was exceptional. We really made a significant move in reducing working capital. That kind of performance can't be repeated year-over-year. So I would look at our normal EBITDA type of performance as an indication of where our operating cash would be going forward.

Okay. Thank you for that. In regards to inventory -- I'm thinking of raw materials and work in process stuff here -- the air distribution products, I know that you have been trying to raise prices there, and I know that some competitors have fallen by the wayside. I guess it appears that competitors have followed with you now on the price increases, is that correct?

Yes, the market in a general statement put in a series of price increases starting more in the March timeframe and continuing through the June/July timeframe. Most competitors actually put in at least two, if not more, price increases during that timeframe as they saw their -- the cost of their metal purchases accelerate very, very dramatically. At this point in time, the market has basically maintained those kinds of prices.

Okay. Now, certainly the steel companies have come out and they are talking about dramatic drops in the price of steel products. Certainly you guys use a specific grade of metal or aluminum for what you are doing. But it is a little bit surprising, you commented here that you have to go through higher cost raws, in the second half. I would have thought you were doing that now and that we would be looking ahead to the second half for a lower price. Why am I --

A good question. There are really two issues that we need to discuss to explain that. First of all, the general statement, we order or procure all of our galvanized steel that we use in ADP from international mills. We are a large enough user of galvanized steel that we can go direct to mills. Most of our production, for example, is actually purchased in India, China and a little bit from Japan. Because we go to the mill, the lead times on that product are very long, anywhere from 3.5 to as much as 5 months.

The second issue is, is that over the last year, we have been faced with a declining sales volume. We have not adjusted our procurement activities as rapidly as our sales have declined. So what happened was in the last six months we find ourselves in a situation where we had some significant quantities of metal, and the good news is we had purchased that prior to when the cost of galvanized had run up. So we had a relatively high level of pretty low cost material as compared to what current market prices are.

Again, as we look forward, we are faced with that same 4 to 5-month lead time. So as the metal ran up, we had to make some purchases at those higher levels. Those materials are still in the mill or on the water headed towards us. So because of that 4 to 5-month lag, we will see those materials hit us and go through our P&L, so to speak, through our plants in the second half.

Now, you are correct in saying that as a general rule, we are seeing beyond that next four or five months of deliveries softening of demand, and we think we have done a reasonable job of being able to buy selectively so that we're not going to experience the very peaks that the steel -- galvanized steel went through over the last several months. And obviously then as we look into the first part of fiscal '10, we would see the benefits of what now appears to be a pretty softening market for galvanized steel.

I apologize for the long-winded response, but it is all about the length of lead time of our steel purchases and the fact that we had a good quantity of low-cost material on hand currently.

Okay. Now, you've put through the price increases, and the customers saw the news items about the rising cost of steel. Why aren't they going to look at the papers and say hey, steel price is falling. Give me some of that price increase back? It's kind of bind for you guys because you haven't had that higher-priced stuff delivered yet.

I would say two things there. First of all, the market price is up because our competitors are, in fact, faced with using higher-cost material. So I think at least in the near term, you can expect that the competitors and the market prices will stay up. Secondly, I mean, obviously it will be a point of discussion with our customers, but we'll also have to point out to the fact that over the last 12 months, the business has basically been at break-even. So I don't think we need to make apologies for the fact that we made money in one quarter.

Okay. From this point on, would you be willing to continue to accept lower volumes to maintain price?

We are really not taking on lower volume. We've actually -- if you compare our real unit volume, which excludes price, our real unit volume was down around 27% or 28% in the first quarter. The market housing starts were down around 33%. So the way we look at both our sales in aggregate, which is the numbers that I just mentioned to you, and also look at the specifics of where we know we penetrated new accounts, we believe we are actually performing better than market and taking market share.

Okay. In the food service equipment, I was wondering if you could just give us a little more discussion on the softening food service equipment market that you speak of? What did you see as you were talking to customers through the -- month-to-month through this last quarter? And then of course any discussions that you can relate to us regarding the fourth month, being October? What's going on there?

It is really a mixed bag, Gerry, and I don't mean to be evasive, but it runs the gamut. We -- first of all, our large customer business, as you know, runs the gamut from drugstore business, where we are heavily engaged with, say, customers like Walgreens and CVS. The latest I have seen on Walgreens in their public filings is that they are maintaining a pretty steady projection for new store openings in that sort of 450 stores-a-year range. So that seems to be reasonably steady. Some of the smaller chains, Panera, for example, has indicated they plan to reduce their new store openings. But that is a relatively small piece of what we do.

As a general statement, I think the large chains which have goals and objectives that require them to open a certain number of new stores, they have a pretty long pipeline where they have their real estate people, for example, out doing the frontier work, looking for new sites, either purchasing property and/or leasing properties, and then they turn that over to their operations folks that do the start-ups. If you go back into the 2001-2002 timeframe, which is the last downturn in food service, I think you can see that the large chains were the last to go soft and the last to come back out. The smaller chains, the mom and pop, one or two single-store locations tend to react more quickly.

I think that's what we saw in that pizzeria segment, which tends to be outside of say young, where, obviously, Pizza Hut is a large player. A lot of that market is still, if you will, mom and pop proprietary kind of folks, and they obviously react more quickly. So again, it is really mixed right now, all the way from some chains actually saying they're going to continue or actually increase, to other chains saying, yes, in the long term here or the medium term we are going to be turning down our build count.

Okay. Just for clarification, is that decidedly more cautious than the way you read into your customers when we spoke last in July?

Not really. No. I think we have seen a more cautionary trend developing over the last nine or 12 months perhaps, as people were looking at the general economy. But if you are referring to the liquidity crisis, et cetera, that we have seen in the last few weeks, I think it is too early for our customers to be making any general statements about that. But obviously we are concerned and going to be monitoring that going forward.

Okay. I will get off now. Thank you.

Thanks, Gerry.

(Operator Instructions).

You have no further questions at this time. I would like to turn the call back to Mr. Roger Fix for closing remarks.

We thank you all for your participation and we look forward to talking to you again next quarter. Thank you.

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