Standex International Corp (SXI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal 2010 Standex International Corporation Earnings Conference Call. My name is Fab, and I'll be your coordinator 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 today's conference. (OPERATOR INSTRUCTIONS.)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. David Calusdian from Sharon Merrill. Please proceed.

Thank you and good morning. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website at www.standex.com. Please see Standex's Safe Harbor passage on Slide 2.

Matters Standex management will discuss on today's 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 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 operating 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 first 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. Please turn to Slide 3. As the introduction to our call this morning, let me start off with three key points. First, we reported another excellent bottom-line performance in a very difficult sales environment. After reporting impressive bottom-line results in Q4 of fiscal 2009, we delivered another quarter of strong profitability and margin improvement. We believe that this trend underscores that the cost reduction initiatives that we completed over the past 12 months are real and sustainable.

While we reported a 16% decline in sales, non-GAAP net income from continuing operations, excluding restructuring charges and a life insurance benefit reported in Q1 of fiscal 2009, increased by 6.4%. We also reported a 174-basis-point improvement in non-GAAP EBITDA margin.

Second, we continued to do a good job of managing working capital, generating cash and paying down debt. In the first quarter, we reduced net debt by $6.1 million, and during the past 12 months, we've reduced net debt by approximately $36 million. At the same time, we've improved our net debt to capital ratio from 34.4% to 29.5%.

And third, we're cautiously optimistic about our top-line performance. We've recently seen an increase in basic quoting and booking activity at several of our business units. In addition, if you turn to Slide 4, you can see that our year-over-year revenue decline in the first quarter of about 16% was not as large as the roughly 22% declines we experienced in the third and fourth quarters of fiscal 2009.

It's important to note that in the comparable first quarter of last year, only a few business units had begun to see the impact of the recession on our top line. As a result, we see the lower sales decline reported in the first quarter as an indication that we are beginning to see improvement in our top-line performance.

Slide 5 summarizes our fiscal 2009 and 2010 cost reduction and restructuring initiatives. As we reported last quarter, during fiscal 2009, we took action to deliver $36 million in sustainable annual cost reductions. These cost reductions came as a result of permanent headcount reductions in the salaried and indirect labor ranks, material and productivity cost improvements, and plant consolidations.

During fiscal 2010, we plan to spend an additional $4 million to $5 million in restructuring expense on two primary initiatives that will deliver an incremental $4 million in annual cost savings. These restructuring initiatives include the relocation of the Dallas APW Wyott Foodservice manufacturing operation to our Nogales, Mexico, facility.

In addition, we have initiated a series of headcount reductions in our European engraving operations. The European restructuring initiatives began during Q1 and will continue throughout the fiscal year. The combination of the cost reduction actions for fiscal 2009 and 2010 will deliver $40 million in sustainable cost reductions.

Due to the cost reduction actions that we've implemented, we have repositioned the cost structure of the entire Company. Over the past two quarters, we have delivered significant margin improvement despite double-digit reductions in sales volume. This margin improvement is a direct result of the cost reduction initiatives we have completed.

As a result, we believe that Standex will continue to perform well in the near term, even in the face of the recession's impact on our served end-user markets. And, when the recession ends and our end-user markets begin to grow, we'll be extremely well positioned for accelerated profitable growth, with a leaner organization poised to capitalize on a number of organic growth initiatives.

So with that, I'll turn it over to Tom. I'll be back to review each of our business segments a bit later. Tom?

Thanks, Roger, and good morning, everyone. Thanks for joining us today. Let's turn to Slide 6 and get right into the results. As Roger mentioned, first quarter net sales were down 16% year over year. However, operating income, excluding restructuring expenses for both quarters, was down only 3% due to our aggressive and ongoing work to reduce costs and increase productivity.

Our non-GAAP operating income margin improved by 127 basis points year over year. GAAP operating income, which includes $1.6 million restructuring expenses in the first quarter of fiscal 2010, as well as $4.3 million in restructuring expenses in the first quarter of fiscal 2009, was up 21.5% year over year. Our GAAP operating income margin improved by 263 basis points to 8.58% from 5.95% a year ago.

First quarter fiscal 2010 EBITDA was $17 million. This compares with EBITDA of $15.7 million in the first quarter of fiscal 2009. Excluding the previously mentioned restructuring expenses and a $1.1 million life insurance benefit in Q1 of 2009, adjusted EBITDA was $18.6 million in Q1 of fiscal 2010 compared with $18.9 million in Q1 of fiscal 2009. Adjusted EBITDA margin increased by 174 basis points to 12.2%.

Please turn to Slide 7. For the first quarter, we've reported net income from continuing operations of $8.4 million, or $0.67 per diluted share compared with $7.1 million, or $0.57 per diluted share, in Q1 of fiscal 2009. Excluding the aforementioned items, non-GAAP net income from continuing operations increased by 6.4% to $9.4 million, or $0.75 per diluted share compared with $8.8 million, or $0.71 per diluted share, in the year-ago quarter.

Our 2010 first quarter net income from continuing operations reflects a tax rate of 32%. This compares with a tax rate of 28% in the corresponding quarter of last year. The difference in the tax rate is the result of the non-taxable life insurance benefit recorded in Q1 of 2009.

Turning to Slide 8, our net working capital increased by $10.2 million in the first quarter compared with year end. Consistent with our sequential top-line growth, the increase in working capital included an $8 million increase in receivables, a $1.2 million increase in inventories, and a $1 million decrease in accounts payable. It's important to note that the DSO was essentially constant at 54 days for the first quarter of 2010, and 53 days a year ago.

We continue to focus on working capital. We define working capital as accounts receivable plus inventories less accounts payable. On a year-over-year basis, we have reduced working capital by $26.9 million from Q1 of 2009.

Please turn to Slide 9. Working capital turns were 5.6 in the first quarter of 2010 compared with 5.7 in the fourth quarter and 5.3 turns in the first quarter a year ago. We are pleased with this performance given the significant decline in year-over-year sales volume. In addition, our working capital turns typically decrease by 0.5 turn in our first fiscal quarter from the sequential fourth quarter. So we are pleased with the 0.1 turn decrease.

Please turn to Slide 10. As Roger mentioned in the introduction, we continue to focus on reducing our debt during the recession. In the first quarter, we reduced our debt by $6.1 million to $79.2 million. Over the past year, we have achieved reductions of $36 million in net debt and $49.9 million in funded debt, as we define net debt as short-term debt plus long-term debt, or funded debt less cash.

The Company's balance sheet leverage ratio of net debt to total capital declined to 29.5% at the end of the quarter compared with 32.6% at June 30, 2009, and 34.4% in the year-ago quarter. Again, this demonstrates our focus on reducing debt.

Turn to Slide 11 and take a look at our success in generating free cash flow, which we define as cash from operating activities less cash paid for capital expenditures. In total, we generated $6.7 million in free operating cash flow for the quarter. Cash generated from operating activities was $7.4 million for the quarter. Capital expenditures were $739,000. Free cash flow from continuing operations was $7.9 million, and our conversion of free operating cash flow from continuing operations was 94.2%.

Before I turn the call back to Roger, I'd like to provide an update on the remediation activities at the Cleveland site. We are in the final phases of negotiating a settlement with our insurance carriers related to the site. As a result, we are recording an estimated pre-tax recovery of $2.3 million to discontinued operations. This is a partial recovery related to past expenses. We also have negotiated a partial recovery related to any future potential expenses.

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

Thanks, Tom. Let's get right into our segment review, beginning with Food Service. You can turn to Slide 13, please.

For the second consecutive quarter, our Food Service Equipment group reported excellent bottom-line results, demonstrating the real and significant effect that our cost reduction and productivity improvement initiatives are having in this segment.

Two important financial metrics to note about the performance of our Food Service group in the first quarter. As you can see from the graph on the slide, revenue was down by 9.8% year over year in the first quarter, which compares favorably with a 12.4% year-over-year decline in Q4 and an 18.2% decline in Q3. We believe this improvement in the quarterly sales trend is a good indication that we're experiencing top-line recovery in this business.

However, the real story for our Food Service group is a 37.5% increase in operating income, and an operating margin improvement of 500 basis points to 14.5% from 9.5% a year ago. We continue to benefit from our aggressive actions to streamline our manufacturing operations, reduce headcount, achieve procurement cost savings, and significantly enhance productivity. We saw bottom-line improvement across both the hot and cold sides of the business.

The relocation of our Dallas APW Wyott facility into our Nogales, Mexico, operation is on schedule to be completed by the end of the current quarter. The integration is proceeding smoothly, and we expect to realize annualized savings of about $2.5 million from the consolidation. When the Dallas APW Wyott move is complete, we will have approximately 260 salaried and shop floor food service equipment employees working in Nogales.

During the quarter, we continued to make good progress in increasing our penetration of key dealer buying groups on the hot side of the business. We've been taking share in a strategically important sales channel and expect to continue to make progress throughout the year.

We're also making good progress in increasing our market share at Yum! Brands restaurants. We have significant refrigeration and merchandising projects in the pipeline, which are the result of cross-selling efforts and by leveraging AAI's historically strong relationship with this important restaurant group.

Looking ahead, we believe that our cost reduction efforts will continue to yield very positive returns for the Food Service group. Our focus now is to continue to increase market share and penetrate new markets through cross-selling and cross-branding across the hot and cold sides, enhancing our presence in strategic channels, and introducing new products. When the market fully recovers, we'll be in excellent position to leverage stronger sales volume across a much leaner organization.

Turning to Slide 14, Engraving group sales decreased by 11% year over year. This sales performance is a good improvement over Q4, when sales were down 26.7% year over year. While Engraving continues to be affected by lower overall demand, we began to see some strengthening of sales in Europe in the first quarter.

On our fourth quarter call, we had expressed some optimism that international sales would begin to grow sequentially, and we did in fact see an overall 9.7% sequential increase for the segment from Q4 to Q1.

In addition, while we're still seeing delays in some of the major automotive mold texturizing projects in North America, we expect to see some of these projects come online in the second half of the fiscal year.

Although sales for the Engraving group were down 11%, operating income was down only 2.8%, and operating income margin increased by 104 basis points, for two reasons. First, in North America, we benefited from three plant consolidations as well as significant headcount and cost reductions and productivity improvements that we implemented over the past year. And in Europe, we benefited from productivity improvements and favorable product mix associated with the stronger sales volume to automotive customers.

We've begun the restructuring process in Europe that should further drive bottom-line improvements. We plan to spend approximately $1.5 million in fiscal 2010 on restructuring initiatives that we expect to result in annualized cost savings of about $1.6 million, to be phased in throughout the year.

On our past few conference calls, we've discussed two new patented engraving processes that we recently launched to expand the capabilities of our global engraving business. We are making good progress in bringing these technologies to market as we get approved by customers and we see preliminary orders for small pilot programs. We're receiving very positive feedback from our customers on these new technologies.

Please turn to Slide 15. Just as a reminder, due to accounting rules that were triggered as a result of the impairment charge we took in the third quarter of fiscal 2009, we were required to reorganize our external reporting groups. As of the fourth quarter of 2009, the Spincraft business that was previously part of the Engineered Products group now comprises the new Engineering Technologies group. For external reporting purposes, we've also combined our Electronics and Hydraulics businesses.

We're very pleased with the performance of our Engineering Technologies group this quarter, as they reported a 48% year-over-year increase in operating income on 12.2% sales growth. Operating income margin increased by 470 basis points from the prior year. The bottom-line improvement was due to volume leverage as well as improved productivity at our Wisconsin Spincraft facility.

As you may remember, approximately a year ago we completed the installation of new capital equipment to support the anticipated growth at this facility. In the ensuing year, we've achieved increased productivity on the shop floor and refined our manufacturing processes.

Sales for the turbine market segment were particularly strong during the quarter, as Rolls Royce accelerated their build schedules. On our last call, we mentioned that our contract with Teledyne Brown to develop domes and hardware for the shuttle replacement program was temporarily delayed as a result of a technical issue with NASA. The program has been taken off hold, and we expect related shipments to be completed by our third fiscal quarter.

Looking ahead, we're optimistic about the Spincraft business. End market demand continues to be strong, and we expect to report solid top- and bottom-line results for this segment in the fiscal year.

Please turn to Slide 16. Our Electronics and Hydraulics group reported a 40.7% decline in revenues and a 67.1% decrease in operating income year over year, but still maintained profitability in both businesses.

Let's start with Electronics. While year-over-year sales comparisons continue to be significantly impacted by weakness in the automotive and housing sectors, we are seeing some sequential strengthening in demand across most end markets. Despite the year-over-year sales decline, the Electronics business stayed profitable as a result of the cost reductions and plant consolidations that we've implemented.

Turning to Hydraulics, we're being affected by extreme weakness in both the North America and export markets, caused by the continued downturn in our end markets. We still have very limited visibility, and we do not expect any near-term improvement.

Longer term, we plan to build on our current small base of nontraditional business outside the dump truck and dump trailer market, such as applications requiring the lifting of large and heavy industrial equipment. We also plan to continue to expand geographically, particularly in Asia-Pacific and Europe. And our new plant in Tianjin, China, is on track to achieve profitability in the fiscal year.

Turning to Slide 17, Air Distribution Products group reported another profitable quarter on a 39.8% decline in sales. Needless to say, the steep year-over-year decline in housing starts again significantly affected our top-line results. However, we're quite pleased that we've been able to maintain profitability amid these severe market conditions.

We also remain hopeful that we've seen the bottom of the market, based on the recent positive signs in the housing market and the relative stability in the level of housing starts since the beginning of calendar 2009. In the meantime, we'll continue to focus on driving incremental market share gains that will translate into real volume growth when the market does finally rebound.

One way that we are taking market share is through the introduction of new products such as our flex duct product. We're seeing some wholesalers switch over to us as a result of this new product, which provides them with a broader offering than many of our competitors.

Let's turn to our summary on Slide 18. Let me leave you with several key points regarding our Q1 performance and our expectations going forward. First, as I said from the outset of the call, we're pleased with our financial results for the quarter. Our bottom-line performance demonstrates the sustainability of our cost reduction and productivity enhancement initiatives.

Second, we're cautiously optimistic about the demand environment. We believe we may have begun to see the very early signs of an improvement in our top-line performance.

Third, we continue to take actions to reduce costs, streamline our operations, and increase productivity. We currently anticipate spending $4 million to $5 million in restructuring projects in fiscal 2010, which we expect will generate incremental annual savings of approximately $4 million. Collectively, our fiscal 2009 and 2010 cost reduction initiatives will deliver $40 million in sustainable annual savings.

Fourth, we remain sharply focused on enhancing our balance sheet through strong working capital management and cash conservation initiatives that will enable us to substantially reduce debt levels.

And finally, we'll continue to invest in growth initiatives in each of our operating groups, which we believe will enable us to take market share and accelerate profitable growth when our end markets rebound.

With that, Tom and I are available to take questions.

Thank you. (OPERATOR INSTRUCTIONS.) And our first question will come from the line of John Walthausen from Walthausen & Co.

Yes, good morning, and first of all, congratulations.

Thanks, John, and good morning to you.

Good job. In the press release, when you're talking about the Food Service segment, you talk about three near-term initiatives to organically grow the business. Can you talk a little bit in more detail about what those are and what kind of results those could bring?

Well, it's a continuous effort on our part to drive market share gains, and we're doing a number of things. As we mentioned in the press release and in the conference call, leveraging the key national account relationships that each of our business units have, bringing the entirety of the Standex product line to some of those is an important part of what we're doing to grow sales.

We have a number of new products from the various divisions that we're introducing, again, to help drive market share gains. We're also continuing to look at some of the key sales channels. The dealer buying groups are an important part of driving sales into Food Service. And so expanding our presence, providing more products to the dealer channels is a very important part of what we're doing as well.

When you talk about new products, is this extending the range of what you're able to do, or these are better products to the existing market?

Again, a broad cross-section, but both categories would apply, depending on the business unit. In some cases, we're making, as you would call it, enhancements or extensions to product lines, adding new features and benefits, differentiating better-than-good type differentiations. In other cases, actually introducing new products that have not been in our line before.

And what are you bringing to the party that should enable you to grow your distribution more?

I think the, if you look at what's happened with Standex over the last six or seven years--for example, in 2001, our sales were roughly $135 million. We had some four brands in the portfolio, primarily on the refrigerated side or cold side. Over time, we've made a number of acquisitions that added more products and brands to our portfolio. We've significantly extended our hot side. And so, as you look at the, particularly the North American market, we're now considered one of the, or I would consider, full product line portfolio companies.

You take that fuller product line and think about what's going on in the end user markets where many of our larger accounts are trying to consolidate their vendor base, trying to align themselves more strategically with their suppliers in order to capitalize their ability to develop new products, that type of thing, we think we're very well positioned, as compared to where we have been historically, to play with the national accounts with our broad offering.

Okay, great, great. And then just a quick shift to Spincraft. In the Rolls Royce business, which engines are you on, and can you help us understand what the impact of some of the newer engines that they have might be on the business?

We'll not get all the model numbers exactly correct, but the base engine unit, of course, is the Trent Engine Series. We have been on the Trent from a legacy standpoint for a number of years. We're also on their new platforms. The background, there, John, to our relationship is we've been doing business with Rolls Royce for well over 10 years. Started off, really, as a kind of a selective supplier of machined components, machined and spun components, mostly on the aft end or exhaust side.

About three or four years ago, Rolls Royce made the decision that they wanted to change their manufacturing approach, and essentially got out of machining components and limited their manufacturing activities to final assembly test, and as a result of that, they outsourced all their machining components, and we actually were able to take on most of that outsource work. So we're now, if you will, very, very strategically aligned with them in terms of providing a very broad array of spun parts as well as machined parts.

Okay, good, thanks very much.

Thanks, John.

(OPERATOR INSTRUCTIONS.) And our next question will come from the line of Jamie Wyland from Wyland Management.

Hi. Great quarter, fellows. How much seasonality is there within all your businesses?

Our Food Service is our most seasonal business because a fair amount of their business is aligned with new construction. Typically, our fourth and first quarters are our strongest quarters. Our third quarter is the weakest because, again, that would be the quarter most impacted by construction.

And within that seasonality, do you get 30% of your revenues in the fourth and first quarters and 20% in the second and third?

That's roughly correct. The second quarter isn't typically as weak as the third quarter, but it would be weaker than the fourth and the first, correct.

Okay. And the seasonality within the other businesses, not so much?

Not so much, and it tends to be, some of the other businesses are--like Spincraft is a good example. They have large projects which will affect their quarterly performance, sometimes pretty dramatically. For example, our fourth quarter that we just completed in June was down fairly substantially from the prior year, again because of some large orders that were sold in the prior quarter. So not a seasonality, but it can vary pretty significantly quarter to quarter, depending on how the projects are aligned.

You've done an incredible job of cutting your costs and gearing down your business to a lower level, but how much flexibility do you have? You've consolidated a plant, you've gotten rid of a lot of people. But if your revenues were up 10% to 20%, how much would come back? And would you have the capabilities, even though you've consolidated plants, do you have the capabilities to increase sales a bunch without having to add new facilities?

Let's start with that latter question. The answer to that is absolutely yes. Although we've consolidated facilities, with our revenue declines, we're still running, as far as the number of shifts, at a level well below where we had been prior to the recession kicking in. So from a capital equipment standpoint, from a facilities standpoint, I'd see absolutely no problem in terms of taking on a 15%, 20% increase in sales. In fact, obviously, it would give us the opportunity to add second shifts and do things that would significantly improve absorption.

In terms of people, obviously, on the direct labor side, as volume increases, we'll bring direct labor back. But what I would say is we're very careful that the cost savings we've identified do not include direct labor savings. So direct labor, obviously, has to, unfortunately, come and go as volume comes and goes. So hiring those people, I don't think, would be a significant problem, certainly given the unemployment levels. And again, that would not affect the sustainable cost savings numbers that we've given you.

The other piece of the indirect and salaried staff--again, we believe that in that 10% to 15% range that we would be able to take on that kind of volume increase without any kind of material change to our salaried and indirect labor staff.

Okay. And lastly, on the acquisition front, are you looking at all? And if so, what are you looking at?

In fact, we've actually started to peek out from underneath the covers a bit, if you will, having seen our business stabilize, seeing the strong cash generation and the debt reduction. We think it is an opportune time for us to begin to look.

Our, we don't identify targets ahead of time, but what I can tell you is that they would be all very strategically aligned, bolt-on acquisitions. There would be no new legs, so to speak. If you look at our history, we've done a series of acquisitions on the Food Service side to fill in either geographic or product line gaps. There's still some gaps out there that we think could be filled through acquisition. You know, our Spincraft business is very much a strategically important business to us, and it's grown nicely organically. We'd like to do some things from a strategic standpoint.

But having said that, it takes a willing buyer and a willing seller. So, yes, we're peeking out from underneath the tent but have nothing in the near-term plan.

Okay. Thanks, fellows.

Thank you.

There are no further questions in the queue. That does conclude the question-and-answer session. I would now like to turn the call back over to Mr. Roger Fix for closing comments.

Well, we thank you all for attending our conference call, and we look forward to talking with you again next quarter. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.