Standex International Corp (SXI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Standex International Conference Call. My name is Letrese. I will be your coordinator for today's Conference. (Operator instructions)

At this time, I would like to turn the call over to your host for today's Conference, Mr. David Calusdian, of Sharon Merrill. As a reminder, this Conference Call is being recorded for replay purposes. Mr. Calusdian, please proceed.

Thank you.

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 two.

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 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 three.

As an introduction to our call this morning, let me start off with several key points. First, we reported another solid quarter of profitability and margin improvement in a sales environment that remains very difficult. In fact, this was our third consecutive quarter of bottom-line margin improvement.

Due to the cost reduction initiatives we have put in place during the past 12 months, we were able to increase our net income from continuing operations by 84% and report earnings per diluted share from continuing ops of $0.51, compared with $0.28 in the second quarter of fiscal 2009. This was accomplished in a quarter where our sales were down 11% versus the prior-year quarter.

If you look at the past three quarters, we have generated $1.72 per diluted share in earnings from continuing operations, excluding special items, despite a year-over-year sales decline of nearly 17% during the same timeframe. We believe this level of earnings is indicative of what the Company can deliver at our current sales volume. We'd expect to see earnings improve even more when we begin to see a recovery in our end user markets. Keep in mind, however, that our fiscal third quarter is typically our weakest quarter of the year from a sales perspective, given the seasonality of several of our businesses.

Turn to slide four, please. In the second quarter, we continued to generate cash and pay down debt. Free operating cash flow of $16.4 million, coupled with roughly $10.6 million in cash proceeds from the sale of real estate and insurance reimbursement for the Trinity Environmental cleanup, enabled us to pay down net debt by $23.9 million in the second quarter.

At quarter end, our net debt was $55 million, and our net debt-to-cap ratio was 22%. The same ratio was more than 35% a year ago, so we believe we've made great progress in strengthening our balance sheet and improving liquidity of the Company.

We're continuing to invest in organic growth initiatives at each one of our operating units. We believe that our success in taking market share through these initiatives will lead to accelerated profitable growth when our markets rebound and will enable us to truly leverage our new cost structure.

The last point relates to our acquisition strategy. Our strong cash-generation capability and significantly improved debt level has allowed us to reenergize our acquisition efforts to build out our three strategic platforms -- namely, Food Service, Engraving, and Engineering Technologies. Currently we're seeking strategic acquisitions with a purchase price less than $20 million that will be accretive in the first year of operations.

With that, I'll turn the call over to Tom. I'll be back to review each of our business segments later.

Thanks, Roger, and good morning, everyone. Thanks for joining us today. Let's turn to slide five and get right into our results.

Second quarter net sales were down 10.7% year-over-year. GAAP operating income -- which includes $1.5 million in restructuring expenses and a $1.4 million gain on the sale of property in the second quarter of fiscal 1020, and a $1.1 million charge last year -- was up 71.5% to $10.3 million. Our GAAP operating income margin improved by almost 360 basis points to $7.4 million, compared with Q2 last year. However, operating income, excluding restructuring expenses and one-time items for both quarters, was actually up 46.2% due to the cost reduction measures we have implemented.

Our bottom-line performance demonstrates the success of our cost reduction initiative. In fact, our non-GAAP operating income margin improved by 290 basis points year-over-year.

Second quarter fiscal 2010 EBITDA rose 37.7% to $13.9 million. Excluding previously mentioned restructuring expenses and real estate gains, adjusted EBITDA was slightly higher but still rounds to $13.9 million, representing a 24.9% increase from Q2 2009. Adjusted EBITDA margin increased by nearly 290 basis points to 10%.

Please turn to slide six. For the second quarter, net income from continuing operations increased by 84% to $6.4 million, or $0.51 per diluted share. I should note that last year's second quarter net income from continuing operations benefitted from a lower tax rate of 20.8%, compared with 32.1% in the second quarter of this year. Excluding the aforementioned items, non-GAAP net income from continuing operations increased 78% to $6.4 million, or $0.52 per diluted share.

Turning to slide seven -- we continue to focus on improving working capital. We define working capital as accounts receivable plus inventories plus accounts payable. Networking capital decreased both sequentially and year-over-year. Networking capital at the end of the second quarter of fiscal 2010 was $103.5 million, compared to $108.9 million at the end of the Q1 2010 and $126.3 million at the end of Q2 of last year. Over the past 12 months, we have reduced working capital by $22.7 million, as our top line was impacted by the global recession.

As you can see from the slide, our working capital turns actually improved during the same time, from 5.0 turns at December 31st, 2008 to 5.4 turns at December 31, 2009. This means we actually became more efficient in managing working capital, despite the significant decline in our sales volume.

If you turn to slide eight, you can see the $22.8 million year-over-year improvement in our working capital. And an 8% increase in working capital turns from last year is part of our successful effort during the past several years to become more efficient in our working capital management.

Slide nine illustrates our net reduction for the quarter. In the second quarter, we reduced our net debt by $23.9 million to $55.4 million. The Company's balance sheet leverage ratio of net debt to capital declined to 22% at the end of the quarter, compared to 29.5% at the end of the first quarter of fiscal 2010. As a reminder, we define net debt as short-term debt plus long-term debt less cash.

We have categorized the net debt reduction during the quarter into two groups -- namely, routine and non-routine cash items. Routine cash items are the normal operating cash items. Non-routine cash items were the one-off events that affected our cash in the quarter. In Q2, net debt reduction from routine cash items was $13.3 million. Net debt reduction from non-routine cash items was $10.6 million.

The consolidation and restructuring activities we completed during the past year have created excess or idle facilities, which we plan to sell and reinvest in acquisitions. During the second quarter, we received the proceeds from the sale of our corporate headquarters and the Bakers Pride facility in New York. These two transactions generated approximately $8.1 million in cash proceeds.

I also want to give you a bit more detail on the sale of our corporate headquarters in Salem, New Hampshire. Our headquarters pose as our corporate offices, which includes roughly 35 people. We do not manufacture anything here in Salem.

When we implemented our cost reduction initiative, we decided that another way that we could streamline our cost structure was by selling our corporate headquarters and moving to a smaller, nearby location. With the office relocation, we have downsized our square footage by more than 50%. We are relocating from our current location in early February, and we expect to lower our annual building operating expenses by approximately $140,000. We are also in the process of selling four additional excess properties which we expect to complete at the end of the calendar year. We anticipate that total after-tax proceeds from all six transactions will be in the neighborhood of $16 million. In addition, during the quarter, we received reimbursement from our insurance company for the Trinity Environmental cleanup.

Please turn to slide 10. This slide shows two charts. The top chart shows funded debt, net debt, and net debt to capital. Standex has historically capped net debt to capital between 20% to 46%, as indicated by the red lines on the graph. At the end of the second quarter, we reached one of our lowest levels of net debt to capital in the past 10 years.

The chart in the lower left-hand corner highlights how we have decreased net debt over the past year. Our net debt has declined by $59 million, and net debt to capital has decreased by 13 percentage points. Overall, we're very pleased at the net debt reduction during the past year as we have strengthened our balance sheet.

Let's turn to slide 11 and take a look at our success in generating strong free cash flow for the quarter. In total, we've generated $16.4 million in free operating cash flow. We define free operating cash flow as cash from operating activities less cash paid for capital expenditures. Conversion of free operating cash flow from net income was 275.9% for the quarter.

We used $900,000 in cash for the CapEx in Q2. CapEx spend for all of fiscal 2010 is expected to be in the range of $5 million to $6 million. Our CapEx will focus on strategic initiatives for new products and productivity improvements.

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.

Each of our three largest platforms -- namely, Food Service Equipment, Engraving, and our Engineering Technologies Group -- turned in solid performances in the second quarter. Our Food Service Equipment Group reported another quarter of excellent bottom-line results and the third consecutive quarter of significant margin improvement.

As you can see from the slide, the Food Service Equipment Group delivered operating income growth of 86% year-over-year, despite a 6.8% decline in revenue. This strong bottom-line growth demonstrates the significant effect that our cost reduction and productivity improvement initiatives are having in this segment. In fact, operating income margin doubled over the prior quarter, improving by 600 basis points to 12% in the current quarter.

As you may recall, in Q4 of fiscal 2009, we completed the transfer of Bakers Pride production from the New York facility to our operations in Nogales, Mexico. This quarter, we neared completion of the consolidation of another Food Service Equipment Group facility to Mexico. The relocation of our APW Wyott facility in Dallas was essentially completed by the end of the second quarter, and only a handful of employees are still onsite in Dallas. The remaining production in Dallas will be transferred to Mexico during the third quarter.

Today, we have more than 250 employees at our Nogales facility and have been very pleased with the integration process. Our customers have experienced no significant disruption as a result of the move, and our customer service and product quality have remained at the same high levels. We continue to expect to realize annualized savings of about $2.5 million from the consolidation of the Dallas operation into Nogales.

Let's take a look at the trends we're seeing in Food Service Equipment. We believe the hot side of our business has found a bottom and is starting to recover, while the cold side -- which lagged the hot side in terms of the downturn -- is still softening. The bulk of our customers on the cold side are mostly larger, late-cycle, quick-service food chains which weathered the recession fairly well during the past year and have now begun to slow their capital expenditures. One bright spot in this market assessment is that we do not expect the decline on the cold side to be as significant as it was on the hot side.

Looking ahead, we see three key growth areas for this group. First, we continue to successfully penetrate strategic dealer buying groups. Right now, there's a significant amount of realignment taking place in these groups in the US, and two new, very large groups are being formed. This is important, because it is our first opportunity to present Standex to new buying groups as a full-service food service equipment group, with a wide variety of products on both the hot and cold side of the business. Thus far, we're being well-received by these new organizations, and we see great opportunities to increase share among strategic buying groups.

Second, we're continuing to focus on product innovation and enhancement. One new product that we've just rolled out is a thermal drawer for the convenience store market segment. The thermal drawer enables fast food operators to better manage the flow of cooked meat products in the busy lunch and dinner periods.

The introduction of new products for the convenience store segment is part of a broader strategy, whereby we are presenting to convenience store operators the extensive product offering that Standex has in place for this type of application. Historically, we've not placed as much emphasis on penetrating the C-store segment and have identified this market as an opportunity to grow share.

Finally, our third initiative is to continue to increase our market share at large, quick-service restaurant chains such as the Yum! Brands restaurants. We have significant refrigeration and merchandizing projects in the pipeline at Yum! which are the result of an aggressive cross-selling effort and leveraging of AAI's historically strong relationship with this important restaurant group.

Turning to slide 14 -- Engraving Group sales were flat year-over-year, and this is the second quarter of sequential top-line growth. We believe the sequential sales improvement is a sign that this business has bottomed out and that Engraving's end user markets are beginning a slow, steady recovery.

Last quarter, we had mentioned that our international operation drove sales at our Engraving Group. And we saw this trend continue in Q2. Our international business experienced double-digit growth due to robust sales in Turkey, the Czech Republic and China; as well as some more modest growth in Western Europe. We also saw strong performance turned in by [Innovene] in emerging countries and through new product innovations.

Turning to the bottom line -- operating income grew significantly in the quarter, up 48.8% year-over-year; and operating income margin was 400 basis points higher than in the second quarter of fiscal 2009. Operating income growth was due to several plant consolidations and significant headcount and cost reductions in North America, as well as productivity improvements in Europe.

We're continuing to restructure our operations in Europe, and we're on track to spend approximately $1.5 million in fiscal 2010 on restructuring initiatives. We expect these initiatives will result in annualized cost savings of about $1.6 million, to be phased in throughout the year.

Now I'd like to share with you how we expect to drive growth at the segment going forward. For several quarters now, you've heard me discuss the two new patented engraving processes we have developed to expand our automotive mold texturizing business. Many OEMs in North America and in Europe are sampling these processes, and we are hearing very positive feedback from our customers. While the entire process from sampling to production can take some time, and is largely dependent upon when the OEMs roll out new platforms, we are bullish about the long-term opportunities from these technologies.

Standex's technological leadership and global manufacturing footprint is continuing to set it apart from the competition. We've been awarded several major platforms that will begin to contribute to our sales in late fiscal 2010 and into fiscal 2011 and fiscal 2012, that will capitalize on our global manufacturing infrastructure and presence.

Let me give you some more detail on several recent wins. First, some time ago, we were awarded the mold texturizing for the Ford Focus program on a worldwide basis. Most of you have probably noted the trade press coming out of Ford very recently, where they announced that they would be simultaneously launching the new Focus as a common platform on a global basis. We expect that this $5 million project will begin to impact our sales late in fiscal 2010 and during the first half of fiscal 2011.

Second, very recently, we were awarded the Ford T6 program, which is a $5 million project that will hit our revenue line in the latter part of fiscal 2011 and early into the first half of fiscal 2012. The Ford T6 is a small truck, which will be manufactured according to the same exact specifications from multiple locations worldwide, including sites in Asia-Pacific, North America and Europe.

There are more than 1,000 molds on the Ford T6 program. And what's even more impressive is that this is one of the largest and most complex projects that has ever been texturized. We know that our extensive global footprint and our technological innovation were instrumental in winning this project.

Another program that we just won is for the US launch of Fiat's very popular 500 model. This is a very popular car in Europe, and is the first small car platform that Fiat is introducing into the US through their new relationship with Chrysler. Standex test-drives the Fiat 500 in Europe. And because we have operations in North America as well, we're able to bid and win the US project.

Very recently, Fiat announced a very aggressive new platform launch whereby they plan to introduce more than 17 new platforms in Europe over the next several model years. Although none of this program work has yet been awarded, Standex has a very strong position with Fiat in Europe. As a result, we would expect to secure more business from Fiat and Chrysler in both Europe and North America, as the combined company revitalizes their new program launches.

Clearly, we're very optimistic about what the future holds for Standex Engravings Group and look forward to updating you on our progress.

Please turn to slide 15, as we discuss our Engineering Technologies Group. In the second quarter, this group reported operating income growth of 35.4% year-over-year on marginally lower sales. Operating margin improved 540 basis points. Those of you who follow Standex know that this is a very lumpy, project-driven business, and year-over-year sales comparisons can swing wildly from quarter to quarter, depending on when large projects are delivered.

The bottom-line increase is due to improved productivity at our Wisconsin Spincraft facility. As you may recall, in early fiscal 2009, we completed the installation of new capital equipment to support the anticipated growth at this facility in the energy sector. This facility is hitting its stride, and efficiency levels are much improved since the installation.

As you recall, our contract with Teledyne Brown to develop domes and hardware for the shuttle replacement program was temporarily delayed, but had been taken off hold in Q2, setting the stage to begin shipping product. We expect to ship the remaining domes in our current third quarter.

Looking ahead, we continue to be optimistic about the Spincraft business as we develop and introduce new applications for each of Spincraft's end markets. For example, we're in the midst of two development contracts where we are manufacturing the fuel tanks for a new line of very large unmanned aerial vehicles, or UAVs. These new UAVs boast a wingspan of several hundred feet and can remain in flight for one to two weeks. As you can imagine, the size of these fuel tanks is massive, and we're proud to have been chosen for this significant technological undertaking.

Please turn to slide 16. Our Electronics and Hydraulics Group reported a 25.4% decline in revenues, and only a 10.4% decrease in operating income year-over-year.

Let's start with Electronics, where we continue to see a pickup in demand in select end markets. But the decline in housing and auto sectors continues to pressure sales growth. We have completed a very significant restructuring in this business, whereby the vast majority of the production is now in Mexico and China. At the same time, we've developed several new, innovative products and are now focusing on leveraging the Electronics Group world-class manufacturing infrastructure to introduce and market innovative new products.

Turning to Hydraulics -- we're not seeing any improvement in our base business, which continues to be affected by extreme weakness in both North America and export markets, caused by the continued downturn in our end markets. This quarter, our bottom-line performance is also negatively affected by a number of one-time expenses associated with the introduction of new marketing initiatives in China. We still have a very limited visibility, and we do not expect any near-term improvement for this unit.

Turning to slide 17 -- Air Distribution Products Group reported an operating loss on a 33.2% decline in sales. The primary factors that affected ADP's year-over-year profitability for the quarter were lower sales volume leverage, higher metal prices, and sales price deterioration. We'll continue to focus on driving incremental market share gains that we expect will translate into real volume growth when the market does finally rebound.

Let's turn to our summary, on slide 18. Let me leave you with four key points regarding our Q2 performance and our expectations going forward.

First, we're pleased with our financial results for the quarter, which demonstrates that the cost reductions we're put in place are real and sustainable. Second, we remain cautiously optimistic about the sales environment going forward. We are continuing to see stabilization across our markets, and the demand environment in some of those markets is still improving. Note that many of our businesses, even within operating groups, are at different points in the cycle.

Third, we remain sharply focused on enhancing our balance sheet through strong working capital management and cash-generation initiatives. These efforts have enabled us to substantially reduce debt levels and improve our balance sheet leverage.

And finally, with our success in generating cash flow, our significantly lower debt levels and the cash we're generating from operations, and the sale of excess properties, we expect to be more aggressive in the market for small, bolt-on acquisitions for our strategic operating platforms in the coming quarters.

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

Operator?

(Operator instructions) Dan Bandi, Integrity Asset Management.

Hey, guys, thanks for taking my question. And nice quarter, and good execution again in a tough environment.

Morning, Dan, how are you?

Doing okay.

Hey, just two questions for you. One on the working capital management -- what inning do you think you are there, in terms of wringing out improvement? Do you have a lot more you can do there? Or is it -- are we on a sort of slower improvement trajectory from here, or have we peaked?

I would say we're on a slower trajectory of improvement. What I do expect is that as our volume comes back, we've actually achieved a higher level of performance as compared to where we were at, say, a year ago. So if you look at -- that was the point that Tom made in his part of the script. We went from 5.0 turns a year ago to 5.4 turns now. What that tells me -- as our volume comes back, we're going to need to increase working capital, but at a rate less than what we would have in the past. And I really expect our working capital turns will go up a bit. I would like to see them get up to the 6.0 level, perhaps.

Okay.

And the last question for you -- and if you covered this in the beginning, I apologize; I was a few minutes late getting to the call, with some overlap -- in terms of the acquisitions, can you just talk a little bit about the pricing environment, and what you're seeing out there in terms of -- are sellers any more willing to sell today? And then finally, on that front, the state of the company that you're looking to buy, in terms of somebody in good shape? Or are you looking for somebody maybe with some problems that you guys can lend some expertise to and get some good improvement out of?

Okay. To be honest, we're just getting back into the market. So my comments about how the market compares today versus, say, a year and a half ago, are fairly high-level. But I think in general, obviously, multiples have come down somewhat. We're relying more on input that we're getting from investment of bankers. But maybe one to as much as two turns on EBITDA basis, as compared to what we had before. Clearly, we have also trailing-12 EBITDAs that are less than what they were. So I think, the general thought -- I think the pricing environment is a bit more favorable for buyers.

As far as our direction -- we're being very strategic. We've identified for each of our business units either product or geographic gaps, as we call them, that we want to fill. A good example would be, for example, in our Food Service business, where on the hot side, we've identified a couple of specific product categories that we think are important for us to have in our portfolio. And so we're being very targeted in going out and filling those gaps. There's also some geographic issues. We're predominantly a US-based company. So expanding outside the US would also be interesting for us.

We're not specifically looking for turnaround situations, but obviously we are looking for opportunities to improve cost position of the targets as well. And our ability to do that by leveraging some of our group-wide procurement programs, say, in the areas of metal or freight, also give us opportunity in addition to the top-line opportunities.

Okay, that sounds good.

And just a quick question for you -- I don't know if you guys have seen any of these new machines that Coke is having built -- the dispensers, on the drink side. I'm just wondering if there's any concern there on the cold side, whether on your front, or just what you're hearing in the marketplace about this.

No, actually, we're participating in that new product development with our PROCON business. And our pumps are actually being used on those new Coke dispensing units. So we see that as really just an opportunity to continue to improve and solidify our position with them.

Well, good, okay.

Well, thanks, Roger, I appreciate it. And again, good quarter.

Thanks, Dan. Appreciate it.

(Operator instructions) John Walthausen, with Walthausen & Co.

Yes, good morning.

Morning, John.

Excellent quarter.

You mentioned that the third quarter is seasonally a weaker one. Can you remind me of which sectors that's in? It looks to me as those it's Air Distribution and Food Service. But is that correct?

That's generally correct. I would say Engraving can also historically be a bit weaker. But those elements of our business that are related to construction would be ones that would be seasonally affected. But definitely Food Service, ADP and a little bit of Engraving.

Okay. And the Air Distribution business obviously continues to deteriorate in terms of demand. Are we in a position where we need to make further additional cost reductions there to right that?

Well, we believe -- we continue to look at the cost structure of all of our businesses. And certainly, in the case of ADP, it's very accurate. We're managing our workforce to the volumes that we have in front of us. The guys there have been very creative. We not only have reduced headcount, but we [use] shortened work weeks, different shift requirements, et cetera, that type of thing, to control costs. So I don't think we're in a position where we need to make massive, across-the-board cost reductions. But clearly, we are trying to manage our costs very prudently, very timely.

Okay, that's helpful.

And then, you gave a lot of information. But could you summarize which parts of the business you're actually seeing some signs of an improving economy in?

Well, within, say, the Electronics business, our reed switch business -- which is associated with computers and toys; some light goods -- we're seeing some pickup in that side of the business, as an example. Within the Engraving business, we mentioned that on the international side, there's been some uptake on that side, although in North America, it's remained pretty slow. Within Food Service, our -- some of the hot-side segments have begun to show some improvement. Yet, we mentioned, on the cold side, that that was continuing to weaken.

The comment I made at the end there was even within a group, you can see markets in different points of the cycle. I roughly did an analysis. There's at least 13 major end user markets. That's the portfolio of Standex services. And you can imagine, with that diversity -- all the way from, say, automotive to housing, to aerospace to energy -- it's a pretty complex picture to try to paint in terms of where each unit's at in this recovery process.

Okay. Okay, that's helpful. So it sounds like even though there's some renewed interest in acquisitions, the emphasis still is on cost control as probably the major thrust of what you're doing these days.

Absolutely. Again, we expect this is going to be a slow recovery. Our hope is that, like most of the forecasters, that we are at a bottom. We're not expecting any rapid improvement. So, if you will, we've hunkered down, in terms of maintaining that lower cost structure. We've tried to shift from these kind of massive, across-the-board, sweeping reductions in employment levels and in plants, et cetera, to more of a continuous improvement, looking to continue to maintain and improve where we can both the cost structure and working capital.

But also wanted to take management attention at the operating unit level, to also begin to drive for top-line gains. We believe that a lot of our competitors are either weakened or have had to internalize their management focus, and gives us the opportunity to go out and try to drive share in this difficult market.

Okay, that's very helpful. Thanks a lot.

Jamie Wyland, Wyland Management.

Yes, hang a gold star in the quarter for me, too.

Apologies -- I missed the first question, and you might have addressed this. The efficiencies you're going to gain in Mexico and in the Engraving business -- are they now in and ready to go, or they're going to be kind of phased in as the year goes along?

It's in between. That's what we were trying to signal with our comments. The transfer of the operation out of New Rochelle, the Bakers Pride unit, into Nogales was completed end of Q4. And so as we got into Q1, and certainly Q2, the full impact of the savings from that piece are in the numbers, so to speak.

And then, if you turn your attention to the next one, which is the move of Dallas, again, that was just finished at the end of Q2. I say "finished" -- we have, again, a handful of folks still in Q3. So the savings from that consolidation are not in the numbers. As I mentioned in my piece, we expect full-year savings from the Dallas relocation to be about $2.5 million.

The other restructuring activities in Europe, in our Engraving operation -- some started to occur in Q2, but we're really not seeing, certainly, the full benefit of that. Wouldn't expect to see the full benefit of the European restructuring until the second half of this fiscal year. And again, we mentioned that the savings there should be about a little over $1.5 million on an annualized basis.

So the incremental savings moving forward -- in total, about $4 million between these two?

Correct.

Okay.

A couple other areas -- we're now cycling to the tough time of the world of last year. When would you expect to have your first quarter where you could actually have a positive top line?

I had to fall back. We don't give forecasts. But let me try to help you a little bit with that.

The recession hit our businesses all at -- a little bit at different times. But nominally, let's say midway through the current quarter is when we really started to feel the impact across the board. And then, if you look at our results, we were 22.5% down in Q3, 22.5% down in Q4. So our Q3, we figure that we were fully affected by the recession. So this quarter, we were lapping kind of the quarter that was half affected by recession, half not affected by recession. Next quarter, we'll be lapping, for the first time, a quarter where we had the full impact of the recession.

So that's where you should start to see do we have any organic growth, or are we flat, to prior-year. And on top of that, obviously, you have the cost reductions that now are in place in the P&L.

Okay. Under normal seasonality patterns, how does the fourth fiscal quarter compare to your first fiscal quarter?

The fourth is not quite as good as the first.

But better than the second?

It really depends on the quarter. And the reason I -- or the year. Because the reason I hedge a little bit there is that the Spincraft business, depending on when they have a big quarter, can distort that. But generally, I would say Q1 is our strongest, Q4 is the next strongest, Q3 is the next, and Q2 -- excuse me, Q2 is the next, and Q3 is the weakest.

Okay. And obviously, Q3's still going to be profitable?

Again, we don't give forecasts.

Okay.

Lastly, could you talk about the material cost and pricing within your markets? Any impact there?

Hard to generalize, but I'll try. We have begun to see some increase in metal costs. We actually have been -- we lock metal prices either for a three- or six-month basis, depending on the commodity. So we've not seen a lot of impact to our P&L, and it then has [a] flow through inventory. So start to see some increase; it hasn't been huge. We're working with our vendors to offset some of those cost increases. So at this point, it hasn't been a material issue for us.

Okay. Well, let me slide in last two -- the real estate you're going to sell in the back half of the year -- will there be a gain on that? And what would your -- I know you don't forecast, but what would your forecast be for debt levels at the end of the year? (inaudible)

Well, again, we mentioned that we received about $8 million thus far from the proceeds of the real estate that we sold. We figured the total will be 16, so there's roughly another $8 million from real estate to come.

What's that on the books for? Is that -- any gain on that, or loss on those sales?

Generally there would be a gain.

Okay. And any idea of where -- the ballpark of where your debt levels, therefore, will be at the end of the year?

We haven't given that as a forecast.

Okay.

All right, great job, fellows. Thank you.

Thank you.

There are no further questions in queue at this time. I would like to turn the call over to Mr. Roger Fix for any closing remarks.

Thank you for attending the Conference Call, and 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 the presentation. You may now disconnect, and everyone have a wonderful day.