Standex International Corp (SXI) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Standex International Corporation Earnings Conference Call. My name is Michelle and I will be your coordinator for today. At this time, all participants are in a listen-one mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the call over to your host for today, Mr. David Calusdian, Executive Vice President with Sharon Merrill Associates. Please proceed.

Thank you Michelle. Please see Standex's Safe Harbor passage on Slide 2. Matters that Standex management will discuss on today's conference call include predications, 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 Standex's 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 net income, non-GAAP income from operations, non-GAAP net income from continuing operations, and free cash flow. These non-GAAP financial measures are intended to serve as a complement 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 the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's second quarter news release.

On the call today is Standex Chief Executive Officer, Roger Fix, and Chief Financial Officer, Tom DeByle. I'd now like to turn the call over to Roger.

Thanks David and good morning everyone. I'd like to start by providing a brief look at our revenue and profit performance in Q2 and then review the actions we're taking to address the global economic recession that had such a sudden and significant effect on our financial performance in the quarter. After Tom reviews the financials, I'll be back on to provide some perspective on each business segment.

Please turn to Slide 3. In terms of revenues, we were down 9.7% compared with a year ago, reporting $155.5 million in sales. Our Engineered Products Group reported a marginal year-over-year gain in sales while Hydraulics and ADP continue to be affected by industry slowdowns. Food Service sales were affected by lower demand for our products related to economic conditions. And Engraving was affected by the general downturn as well as automotive platform cyclicality.

GAAP operating income was $6 million in the quarter compared to $11.3 million a year ago. Non-GAAP operating income, excluding a $1.1 million charge, was $7.1 million. ADP was up year over year while the other operating groups had negative comparisons. I'll discuss each group in more detail after Tom reviews our financial results for the quarter.

Consistent with our historical focus on working capital management, we succeeded in generating $17.4 million in free cash flow during the quarter.

Now to outline the actions we're taking to respond to the economic slowdown that we're all dealing with right now. Turn to Slide 4.

Right now, there's obviously a great deal of uncertainty about the global economy. And companies like ours are trying to understand how our end markets will react to the economic downturn in 2009 and the impact it will have on our businesses. With this uncertainty, we are focused on the two things that we can control, cost and cash.

So when we started seeing the initial but significant effects of the economic downturn in early November, we acted very quickly and aggressively to cut costs. While we were certainly not immune to the economy this quarter and our financial results are definitely not where we want them to be, we've taken the necessary steps to maximize near-term profitability and enhance liquidity as weak economic conditions persist.

We're focused on five areas in order to align our cost structure with the downturn in market demand. These include workforce reductions, plant consolidations, material cost reductions, and working capital management. I'd like to note that the lean manufacturing journey that we've been on over the past several years have given us the tools and flexibility to implement these actions.

First let me address our workforce reductions. Since the beginning of this fiscal year, we have reduced our US-based salaried staffing levels by more than 190 positions or 20% of the salaried workforce. About 75% of these reductions took place in December. We expect annualized savings of approximately $11 million from the reduction in our salaried workforce. At the same time, we've reduced the size of our direct labor by a similar percentage to align the size of the production workforce with the lower sales volumes we are experiencing. In addition, we've announced a general hiring freeze and all non-union employee salaries will be frozen for at least 12 months. Several businesses have also implemented alternative work schedules.

In our last call, we discussed the consolidation of our Bartonville, Illinois plant into other ADP locations. Since then, we've taken further actions to improve our utilization of our manufacturing infrastructure. During the second quarter, we closed our Bessemer, Alabama Hydraulics Group facility, consolidated these operations into our Hayesville, Ohio plant. After the close of the second quarter, we announced the consolidation of three additional manufacturing locations. In our Food Service Group, we'll be closing a Cooking Solutions facility located in New York and moving production to our operations in Mexico and Wyoming. In our Engraving group, we have consolidated the mold texturizing production from our Detroit facility into our plant located in Canada. In our Engineered Products Group, we are consolidating the production from our remaining Canadian operation into existing facilities in Mexico and China. We expect to complete the relocation and the production for these consolidations during the second half of this fiscal year.

The annualized savings from these consolidations will be in the range of $3.8 to $4.5 million. We expect to fully realize the benefit from these savings beginning with the first quarter of fiscal 2010.

The third area we've been attacking is achieving cost reductions from our major suppliers, including those who provide inventory items as well as MRO and services. We're continuing to work with our supplier base and expect these resulting savings will begin during the current third quarter and will continue to ramp up throughout the fourth quarter. We are targeting to achieve a minimum run rate of $5 to $6 million of annual savings by the end of the fourth quarter of fiscal 2009 compared with our cost structure that was in place during the first half of the fiscal year.

Fourth, we're continuing to focus on lean manufacturing as an important tool to drive cost reductions and productivity across our ongoing operations.

Our final initiative is to continue our strong focus on working capital management and cash flow generation. Our goal is to improve liquidity and make additional payments to our revolving credit facility. The additional borrowing capacity provides a financial flexibility we need in the event of a prolonged economic downturn.

As part of this initiative, we are restricting capital expenditures as appropriate. But it's very important to note that these restrictions are not at the expense of driving innovation. We see innovation as a way to both improve efficiency as well as accelerate growth in each of our businesses. We're also taking advantage of new ways to repatriate foreign cash.

So as you can, we're very serious about getting our costs aligned with the economic realities we're facing in the near term. We expect approximately $20 million in annual cost reductions to be in place by the beginning of fiscal year 2010.

With that, I'll turn the call over to Tom. I'll be back to review each of the operating segments in more detail later.

Good morning everyone and thanks for joining us today. Let's turn to Slide 5 and our quarterly results.

As Roger discussed, overall economic and market conditions posed a challenge to our businesses this quarter. For the second quarter of fiscal 2009, net sales were down 9.7% to $155.5 million from $172.2 million last year. This includes a negative foreign exchange impact of 2% or $3.5 million.

Turn to Slide 6 please. Second quarter income from operations on a GAAP basis was $6 million compared with $11.3 million in the same period last year. Our second quarter income from operations this year includes a $1.1 million pretax restructuring expense primarily related to severance expenses and facility closure.

Excluding the second quarter charge, non-GAAP income from operations was $7.1 million in the second quarter of fiscal 2009 compared with $11.3 million in the second quarter of fiscal 2008. Due to the lower borrowings and a lower effective interest rate, interest expense for the quarter was $1.8 million compared with $2.7 million in the prior year.

Second quarter net income from continuing operations, as you can see on Slide 7, was $3.5 million or $0.28 per diluted share. Net income from continuing operations, excluding tax affected restructuring charge of $708,000, was $4.2 million or $0.34 per share. This compares with $5.5 million or $0.45 per diluted share in the second quarter of fiscal 2008.

Our 2009 second quarter net income from continuing operations reflects a tax rate of 20.8%. This compares with a tax rate of 33.5% in the corresponding quarter of last year. Second quarter fiscal 2009 net income from continuing operations benefited from a lower tax rate due to our retroactive extension of the US research and development tax credit.

Net income for the second quarter of fiscal 2009 was $2.1 million or $0.17 per diluted share. This compares with net income of $5.5 million or $0.45 per diluted share a year ago. Net income for the second quarter of fiscal 2009 includes the aforementioned restructuring charge as well as a $1.3 million net of tax expense charge for discontinued operations.

Included in the discontinued operations is a charge associated with leases to the divestiture of the Berean Christian bookstores. This was partially offset by a benefit from the latest remediation estimate for the cleanup site in Cleveland.

You may remember that we divested Berean Christian bookstores in 2006 as part of our focused diversity strategy. We sold Berean to a private equity group. And as part of the divestiture, Standex remained as guarantor of the original leases for the stores. During the quarter, we determined that Berean is in financial distress. Although Berean continues to operate, we have decided to book an accrual for the exposure on those eight leases because we have sufficient concerns regarding their financial condition.

As of today, the total exposure to the eight leases is about $8.2 million. However, the leases have a sublease provision whereby Standex can sublease the property. Based upon our analysis of market conditions at each of the locations, the impairment of those leases would be approximately $2.9 million.

Partially offsetting the charge for Berean leases, we had-- was a benefit related to our estimate of Standex participation in remediation activities at the Cleveland site. You may remember that our estimate last quarter put the cost of cleanup at $5 million. As we are nearly complete with the remediation of this site, we are in much better position to provide a cost estimate and, as a result, have reduced our estimate to $3.9 million.

Turn to Slide 8 please. Second quarter fiscal 2009 EBITDA, including restructuring charges I mentioned, was $10.1 million. Excluding the charges, EBITDA was $11.2 million. This compares with EBITDA of $15.2 million in the second quarter of fiscal 2008.

We demonstrated strong free cash flow generation this quarter. On Slide 9, you can see that free cash flow was $17.4 million in the quarter. Excluding the pretax $1.1 million restructuring charge, cash flow was $18.5 million compared with $6.5 million in Q2 of last year.

Turning to Slide 10, you can see that we decreased working capital in the second quarter versus the first quarter of fiscal 2009. Net working capital was $126.3 million at December 31, 2008, compared with [$135.8] (corrected by company after the call) million at September 30, 2008; the decrease primarily due to DSO as a result of aggressive management of our accounts receivable. We define working capital as accounts receivable plus inventories less accounts payable. Working capital turns decreased to 4.9 turns from 5.1 turns in the prior quarter primarily due to lower sales volume.

Turn to Slide 11. Our net debt, which we define as short-term debt plus long-term debt less cash, increased slightly to $114.5 million at December 31, 2008, from $106 million at June 30, 2008. The Company's balance sheet leverage ratio of net debt to capital was 35.1% at the end of the quarter compared with 32.2% at June 30, 2008. For the first half of the year, depreciation and amortization expense was $8.1 million, essentially flat with the prior year.

Reflecting our efforts to restrict capital expenditures going forward, we anticipate our CapEx for the second half of the year to range from $2 million to $2.5 million.

As Roger mentioned in his introduction, we continue to focus on working capital management and cash flow generation with a goal of improving liquidity and making additional payments on our Company's revolving credit facility. For example, as part of our ongoing working capital management efforts, we are taking actions such as setting up routine working capital calls with our division managers to analyze actions that they are taking to improve DSO and inventory turns at each manufacturing location. We will also be restricting capital expenditures throughout the second half of fiscal 2009 while being very careful to maintain our investment in innovation that will be so critical to the future growth of our company. We are also working on repatriating foreign cash by taking advantage of the new IRS rule.

Operationally and financially, we are doing everything we can to ensure that Standex continues to generate cash and maintain strong liquidity.

So with that, I'll turn the call back to Roger and you can turn to Slide 12.

Thanks Tom. 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 13 please.

Food Service Equipment's second quarter revenues fell by 7.3% year over year as the economic downturn led to cutbacks in industry spending on new food service equipment, especially on the hot side of the business. Operating income was down 35.7% year over year primarily due to lower sales volume and an unfavorable sales mix.

Two factors caused the unfavorable sales mix. First we saw lower sales of our higher margin Cooking Solutions Group products. Second, on the cold side, we had fewer sales of our higher margin Food Service reach-in cabinets and scientific sales as during the prior year quarter we shipped a very large scientific walk-in project that did not repeat in the current quarter.

The economy affected our end user market segments to very different extents. For example, our Cooking Solutions business, which includes the APW Wyott, Bakers Pride, BevLes and BKI brands, felt the impact more so than our Refrigerated Solutions Group because a significant percentage of the sales in the hot side of our Food Service Group are to individual restaurant operators such as pizza houses, single-store restaurants, and also to smaller stocking dealers. As you can expect, these businesses tend to cut back more quickly at the sign of an economic downturn.

On the other side of the spectrum from the smaller mom-and-pop type restaurants are the large chains that we sell to. These include well-known quick service restaurants such as Yum!Brands and McDonalds. Another example of where we have not experienced significant sales slowdowns is in the retail chains such as drugstores. These type of chains have more financial flexibility and their expansion plans tend to be more consistent over time although not immune to modification.

We're continuing to see good sales volume in the quick serve restaurant business. For example, we have an ongoing contract to modify the grills on a large number of Taco Bell restaurants, which we expect to be a 9 to 12-month project for us.

One highlight for the quarter in Food Service is the growth we're seeing in the institutional side of our business. As we've shared with you on past calls, one market we sell into is the large institutional food service providers that sell to stadiums, as well as university and hospital cafeterias. These institutions have long-term plans and budgets. And as a result, their expansion plans are not as exposed to the economy as some others are. We've recently secured a few large deals in this area such as the new Twins baseball stadium, the new Dallas Cowboy stadium and a large cafeteria project at Brigham Young University.

As we look to the second half of the year and beyond, we're focusing on achieving market share gains and cost reductions across our Food Service Group, even as the economy continues to have effect on this business.

Turning to Slide 14, you can see that the Engraving Group sales decreased by 15.8% year over year and operating income was off 38.1%. But we're actually feeling more positive about this business than our numbers might indicate. During the quarter we saw significantly less mold texturizing automotive work internationally and a decrease in North American automotive OEM sales as well. Most of the reduced automotive sales we experienced during the second quarter are associated with the normal cyclicality we have historically experienced in this market segment. Although we have seen several automotive projects delayed as well.

The turmoil in that industry right now should lead to a reorganization of product lines including revamping of older models and the introduction of new models. Over the long term, this will drive demand for the mold texturizing we provide for tooling necessary to support the new platform launches by our automotive OEM customers.

One bright prospect for our Engraving Group is the work we have been doing in developing new technologies for our premium automotive customers in Europe. We recently introduced two new technologies that enable Standex Engraving to offer our customers the ability to texturize all of the exposed surfaces in the interior of their premium models, from the dashboards and upholstery to the instrument panel and synthetic leather passenger seats. Instead of going to three or more different suppliers, OEMs can now have all their engraving needs met through Standex. These premium processes create superior finishes to the interiors of automobiles and should create solid, long-term growth opportunities for the Engraving Group.

Looking ahead, we have a good backlog in the North American part of the Engraving Group going into the second half of the year. However, we expect international sales to continue to be weak due to the lack of automotive platform work in the second half of fiscal 2009.

Although the non-automotive markets will continue to struggle due to the economy, we are pleased with the progress we've been making in taking market share in diverse markets. For example, we've recently started work on two contracts, both of which will ship in the second half of fiscal 2009. The first is from a leading US residential flooring manufacturer and the second is a contract for machinery and rolls for a consumer goods packaging company in Mexico.

On a related note, our Engraving Group's Innovent business performed very well in the second quarter due to a success in diversifying its product line and expanding its geographic sales penetration into emerging countries.

So while there's definitely uncertainty regarding the economic and market conditions that our Engraving business units will face in the second half of the fiscal year, we expect that our expansions to new markets and geographies along with the introduction of new technologies will be strong growth drivers in the future.

Turn to Slide 15 please. Our Engineered Products Group reported a 15% year-over-year decline in operating profitability on flat sales. Spincraft reported steady revenue growth in the quarter as we continue to see good demand from our energy, aerospace and aviation end markets. However, year-over-year operating income comparisons continue to be challenged by contract milestone payments related to two non-recurring contracts that were recorded in the second quarter of fiscal 2008.

During the second quarter, we continued work on the aerospace contracts we secured last quarter with the Boeing Lockheed ULA joint venture for the Delta IV and Atlas V rockets. Hardware will be shipped over the next several years.

Turning to Electronics business, sales were down year over year as softness in the housing and automotive sectors offset any gains we've made in the industrial and aviation aerospace markets. Despite lower year-over-year sales, we reported double digit operating income growth from Electronics as a result of plant consolidations, material substitutions, favorable commodity pricing and favorable currency exchange rates in the quarter.

On Slide 16, we discuss the Hydraulics Group. Hydraulics Products Group revenues in the quarter declined by 32% year over year and we posted an operating loss in Q2.

The downturn in the US off-road heavy construction vehicle market was exacerbated by liquidity and capital constraints in the second quarter. As available capital dried up, manufacturing activities stalled for both our traditional truck-building OEMs and export sales as well. In response to the difficult economic environment, we've streamlined our workforce across the Hydraulics operation by closing one manufacturing facility in Alabama, consolidating its operations into our main Hydraulics Product Group plant in Hayesville, Ohio.

During the quarter, we continue to make progress in opening our new manufacturing facility in Tianjin, China, and expect to export our first shipments of telescopic hoists to Europe and Korea in the current third quarter. This facility should be profitable in fiscal 2010 and beyond.

In addition to broadening our geographic presence, we've been more aggressive in diversifying sales beyond our established stronghold in the dump truck and dump trailer construction equipment market. We've just begun to sell product into a number of applications for our high-performing cylinders. For example, our mobile hydraulic cylinders can be used to raise and lower turbines during maintenance operations in metal chip compactors or for raising and lowering oil derricks.

Turn to Slide 17 please. Air Distribution Products Group sales were down by 15.5% as a result of the continued severe downturn in the residential construction market. We are outperforming the market and we continue to penetrate new, major HVAC wholesalers in targeted geographies. During the second quarter, we began selling product to several new HVAC customers in the southeastern portion of the US.

We're pleased with the operating profitability that ADP demonstrated this quarter. Price increases, favorable material costs, and a savings from plant consolidations very favorably impacted our bottom line. However, we know that this trend is not sustainable throughout the year.

As we look to the second half of fiscal 2009, we're cautious about our outlook for ADP as a result of three trends we are seeing in the market. First, competitors are starting to drop with price. Second, we've started to consume the higher cost metal that we currently have on hand. And third, housing starts have continued to trend downward over the past several months.

Let's turn to our summary on Slide 18. I will leave you with three thoughts. First, our second quarter results were significantly affected by the worldwide economic downturn. Second, we took swift and aggressive action to reduce our cost structure and focus on cash generation and maximizing profitability. We've reduced our US-based salaried workforce by 20%, saving $11 million on an annualized basis. We've consolidated one facility in the second quarter and will complete three additional plant consolidations in the second half of fiscal 2009, generating annual savings between $3.8 and $4.5 million. We continue to make progress in reducing the cost of the materials and services we procure which should give us an annualized savings between $5 and $6 million. Along with these initiatives, we will continue to aggressively focus on working capital management and cash flow generation with the intent of enhancing our liquidity. And third, while visibility remains difficult, we expect that the worldwide economic slowdown will continue to have an effect on our financial results in the second half of the year. We anticipate this will be especially true in the third quarter which is historically seasonally slow for us. We also will record restructuring expenses in the third quarter associated with the plant consolidations we discussed today.

The cost reductions we have implemented will begin to take effect in the current third quarter. And we expect to have approximately $20 million of cost savings in place by the beginning of fiscal 2010.

As we manage Standex to maximize short-term profitability, we'll be innovating each of our businesses to expand our leadership position and capitalize on growth opportunities in each of our markets.

With that, we're available to take your questions. Operator, please.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Walthausen with [Standex]. Please proceed.

Yes, good morning.

Hi John. How are you?

Real good, good. A couple quick questions. You've done a good job on the working capital but it appears that inventory is a little bit on the high side. You mentioned with regard to the air distribution business that you have some high-cost inventory. Are there other segments where you have some high-cost inventory that you have to work through? And can you talk about what you think a reasonable, total level of inventory should be given these levels of business?

Sure the issue on the inventory is really related to the suddenness with which our sales declined. We have really across our business units lead times on materials that may vary from anywhere from 3 or 4 weeks to as much as 12 weeks or more. And with the suddenness in the downturn, we had a lot of material on order that began to, continued to flow into our inventories that frankly we don't need at this current point in time. So the increase in inventories is almost exclusively in the raw area, about $6 to $7 million of increase in raw. That's really an opportunity as we go forward. One of the things that we're doing is obviously changing our procurement activities to reflect the lower sales volume. And we would expect to burn that inventory off in the next couple of quarters and get our inventory more in line with our-- the volumes that we're currently seeing.

To your other question about the high-cost materials, we really don't have high-cost materials in inventory in the other divisions. The reason for that is our ADP business buys direct from mills, most of which are international with lead times that may be anywhere from three to five months. So again we have a lead-lag phenomena as far as inventory in that business. All of our other units are basically buying from domestic suppliers that are relatively local where we can make more rapid changes to our procurement patterns.

Okay and my other question was in the Food Service business in your release, you talk about the objective of both improving pricing and gaining market share. That almost seems like the unachievable objective for this environment. Can you talk about why you think that might be achievable?

Well we have more recently implemented price increases that haven't fully gone through our P&L. So what we're referring to there is that as we go through the next 12 months and we lap our quarterly performance, we should see the favorable benefit from pricing.

And you feel that it's sticky in that industry?

At this point in time, it's sticky.

Good. Thanks.

Thank you John.

(OPERATOR INSTRUCTIONS) Gentlemen, you appear to have no further questions at this time.

With no further questions, thanks for your attention and we look forward to talking to you next quarter. Thank you.

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