Standex International Corp (SXI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Standex International Corp. earnings conference call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions.)

At this time, I would like to turn the presentation over to your host for today's call, Mr. David Calusdian of Sharon Merrill. Sir, you may proceed.

Thank you. Please note that the presentation accompanying management's remarks can be found on Standex's investor relations Web site at 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; adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time items; 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 to the company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's third-quarter news release.

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

Thank you, David. And good morning, everyone.

Please turn to Slide 3.

We're pleased with both our top and bottom line results this quarter. As a result of positive, organic growth and the impact of the significant cost reduction initiatives we have implemented over the past 18 months, we were able to generate earnings per share of $0.37 during the third quarter versus $0.08 of non-GAAP earnings per share for the year-ago period. This makes four consecutive quarters of earnings and margin improvement amidst a very challenging economic environment. Non-GAAP earnings for each quarter, shown on Slide 3, exclude any special charges and benefits.

By the end of the third quarter a year ago, the majority of our cost-reduction initiatives had been completed. In addition, the third and fourth quarters of last fiscal year were the low watermark for the impact of the recession on our top-line sales. Thus, our financial performance over the past 12 months demonstrate our earnings generation capability as a result of our new cost structure while the company was still operating under the impact of the worst global recession in the past 80 years. During that time of very difficult economic challenges, our top line contracted by nearly 13%. Despite that, we were able to grow adjusted EBIDTA by greater than 9%, increase non-GAAP operating income by more than 20%, generate $2.09 in non-GAAP earnings per share, a 32% year-on-year improvement, and continued to pay down debt, and strengthen our balance sheet.

We're proud of these accomplishments and our success on the bottom line gives us good reason for optimism now that we're starting to see a return to top-line growth.

Please turn to Slide 4.

For the first time since the recession began, we are reporting year-over-year revenue growth. In fact, the third quarter of 2010 represents the first quarter we have posted positive organic growth after five consecutive quarters of year-over year revenue decline. Standex generated 3.4% overall revenue growth during this period, including a 1.7% organic growth. Three out of five business segments posted positive organic growth this quarter and four out of five business segments grew sales overall. Although our markets remain challenging, we see increasing stabilization.

We believe that the top-line execution demonstrated this quarter in combination with our significantly improved cost structure positions us well for long-term profitable growth. In addition, we're excited to report that over the last several months, we have redirected our management focus from the massive cost reduction effort that has consumed our business unit management over the past year-and-a-half to a focus on top-line growth. Each of our business units have identified a series of strategic, organic growth initiatives to which they have dedicated resources and are aggressively pursuing. These organic growth initiatives are designed to capture market share on an opportunistic basis within our end-user market segments. We believe these initiatives will allow us to grow our top line faster than the respective market segments and we expect to see benefit from these efforts starting in fiscal 2011.

In addition, our strong balance sheet gives us the ability to pursue accretive acquisitions that complement and extend our strategic business unit platforms. Over the past 18 months, we have not actively pursued acquisitions as we have been more focused on cost reduction and cash generation initiatives. Right now, we are rebuilding our acquisition pipeline and hope to be able to begin to complete transactions over the next 6 to 12 months.

In short, after successfully navigating the recession and taking the difficult decisions required to establish our new cost structure and to strengthen our balance sheet, we are now turning our attention to driving both organic and acquisitive growth across our business units.

With those introductory remarks, I'll now turn the call over to Tom for the financial review. I'll then discuss each of our segments in detail.

Tom?

Thank you, Roger, and good morning, everyone.

First of all, I'd like to remind our listeners today that our third fiscal quarter is traditionally our weakest sales quarter and profit quarter due to the seasonality of several of our businesses, including food service equipment and Standex ADP. The quarter net sales increased by 3.4% year over year, 1.7% if you exclude FX benefits.

GAAP operating income, which includes $0.7 million in restructuring, was $6.7 million. Our GAAP operating income margin improved significantly to 5% for the quarter relative to a 15.2% negative margin for the third quarter of last year. Non-GAAP operating income, excluding restructuring expenses and one-time items for both quarters, was actually up 174.8% due to the successful cost reduction efforts we have implemented. In addition, non-GAAP operating income margins improved by 341 basis points year over year to 5.5%.

Third-quarter fiscal 2010 EBITDA came in at $10.6 million. Excluding the previously-mentioned restructuring expenses, adjusted EBITDA was slightly higher at $11.2 million representing a 79.4% increase from Q3 2009. Adjusted EBITDA margin increased by 352 basis points to 8.3%.

Please turn to Slide 6.

For the third quarter, net income from continuing operations increased to $4.6 million or $0.37 per diluted share versus a loss of $18.2 million or $1.48 per share a year ago. Third quarter 2010 net income from continuing operations includes $0.4 million in post-tax restructuring expenses, and a $0.4 million discrete tax benefit.

Last year's third-quarter net income from continuing operations included $19.2 million in charges. These third-quarter 2009 items include post tax of $20 million non-cash goodwill and intangible impairment charge, a $2.3 million lower of cost-or-market inventory adjustment, a $0.9 million restructuring charge related to severance and facility consolidation, a benefit of $2.3 million from the reversal of accruals from the company's long-term incentive and bonus program, and a $1.7 million discrete tax benefit. Excluding the aforementioned items for both periods, non-GAAP net income from continuing operation increased to $4.7 million or $0.37 per diluted share from $1.0 million or $0.008 (sic - see Press Release) diluted share in the prior year.

Turning to Slide 7, working capital management continues to be a priority for us. We define working capital as accounts receivable, plus inventories, less accounts payable. Networking capital decreased sequentially and held steady year over year despite the sales (inaudible.) Net working capital at the end of the third quarter of fiscal 2010 was $102.6 million compared with $103.5 million at the end of Q2 2010 and $102.2 million at the end of Q3 of last year.

As you can see from the slide, our working capital turns improved during the same time from 5.1 turns at the end of the third quarter of fiscal 2009 to 5.3 turns at the end of Q3 2010. Improving working capital turns ratio signals that we have become more efficient in managing working capital during the past year.

If you turn to Slide 8, you can see that our improvement in working capital and working capital turns from last year is part of our successful effort during the past several years to become more efficient in working capital management. In fact, despite a challenging market where we posted negative revenue growth during the past year, our working capital turns meaningfully improved. As you can see from the chart, at 5.3, our working capital turns are the highest they have been for the third quarter since we've been tracking this metric.

Slide 9 illustrates our net debt reduction for the quarter. In the third quarter, we reduced our net debt by $3 million sequentially to $52.4 million. The company's balance sheet leverage ratio of net debt to total capital declined to 20.7% at the end of the quarter compared with 22% at the end of the second quarter of fiscal 2010, and 33.3% during the prior-year quarter. As a reminder, we define net debt as short-term debt plus long-term debt less cash.

As those of you who follow the company know, we have been sharply focused on generating cash flow and paying down debt. Even during the depths of the recession, in the third quarter, we generated $4.4 million in cash flow from operations. During the past 12 months, we have reduced our net debt position by $43 million and brought down our net debt to capital ratio. Standex has historically kept net debt to capital in the range of 20% to 50%. At the end of the third quarter, we reached one of our lowest levels of net debt to capital in the past 10 years.

Let's turn to Slide 10 and take a look at our success in generating strong, free cash flow for the fiscal year to date. In total, we generated $26.2 million in free operating cash flow during the past three quarters. 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 nearly 129% over this period. We used $1.3 million in cash for a CapEx in Q3 and $3 million in fiscal year to date. We continue to expect CapEx spending for all of fiscal 2010 to be in the range of $4.5 million to $5.5 million. Our CapEx will focus on strategic initiatives for new products, penetration into new markets, and productivity improvement.

As we shared with you last quarter, we are in the process of selling properties that have become excess as a result of our cost reduction and operational streamlining initiatives. We sold a facility in Norway during the quarter and we expect to sell three other excess properties by the end of the calendar year. We continue to expect that the after-tax proceeds in the total of the six properties that we will have sold by the end of the calendar 2010 to be in the neighborhood of $16 million. The real estate transactions that we have already competed generated $8.4 million of the $16 million we anticipate.

The move of our corporate headquarters in Salem, New Hampshire in the previous quarter went as planned.

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

Thank you, Tom.

Please turn to Slide 12.

And I'll begin our segment overview beginning with our food service equipment group. The food service equipment group generated 2% sales growth during the third quarter, of which 1.2% was organic growth largely driven by the strong performance of our Cooking Solutions Group and Procon pumps. We continue to see a recovery on the cooking side of the business and this quarter marks five consecutive months of positive, organic growth for this group.

The Cooking Solutions end markets were the first to decline going through last year's recession and they're now the first to show some growth. The double-digit, top-line growth that the Cooking Solutions Group reported in Q3 was a result of some market recovery, but was also driven by market share gains.

Sales for the Refrigeration Solution side of the business declined on a year-over-year basis primarily due to a slowdown in new construction experienced at several major, quick-service chains. The prior-year quarter operating income for the Food Service Equipment Group benefited from the reversal of accruals totaling $2 million related to both bonuses and volume-related sales rebates. Excluding a $21.3 million goodwill impairment write-off in the year-ago quarter, and the $2 million reversal of accruals, operating income improved by 54.5% and operating margin by 255 basis points. This operating margin improvement was a result of the cost reduction initiatives completed over the past year that were partially offset by negative price effects that we're seeing in the Refrigeration Solutions Group.

Our competitive position continues to strengthen across both the cooking and refrigeration sides of the group. For example, we have been discussing our strategy to leverage our relationships with large chains across our cooking and refrigeration businesses. We achieved a very important milestone this quarter when we were awarded Qualified Supplier Status to all of the Yum Brands chains on the refrigerated side of our business. We had already been qualified across the Yum Brands chains on the hot side.

We've also been recently awarded preferred suppliers status for two, very important Yum brands, namely Pizza Hut and Taco Bell. Our Cooking Solutions Group relationships were key in allowing us to develop these opportunities and cross-sell our products, which also led to our elevated status with Yum.

Procon, our fluid pump and dispensing business, was another strong performer in Q3 as it continues to emerge from the recession, posting strong double-digit growth as large beverage customers stepped up orders. We expect continued strength from Procon as we begin to see a recovery from industrial applications as well.

Looking ahead, we expect to continue to take market share in both the cold and hot sides of the market. We are successfully penetrating strategic dealer buying groups. Our new innovative products are being well-received in the market. We continue to see significant opportunities in the convenience store market. And we're making significant headway in penetrating large, quick-service, national accounts as evidenced by Yum. We're very optimistic about the prospects for continued growth and profitability within this segment.

Please turn to Slide 13.

Sales within our Engraving Group increased 1.5% versus the prior-year quarter helped by positive foreign exchange as it continues along its path to recovery. Excluding the impact of foreign currency exchange our organic sales growth was a negative 4.4%. Machinery and roll engraving sales continued to be weak as the recession has affected customer demand. However, we experienced good automotive program mold texturizing work in both North America and Europe during the quarter. We expect this trend to continue through the fourth quarter.

We're also seeing substantial evidence that the new mold texturing technology that I highlighted in our prior quarterly calls, specifically the slush molding and laser roll engraving techniques are being enthusiastically accepted by our customer base on a global-wide basis. With the adoption of our innovative technology, customers can reduce the number of tooling suppliers with which they work, accelerate time to market, provide superior fit and finish for the interiors of the car platforms they produce, and drive further costs and production efficiencies through their processes. While the entire process from sampling to production for these new technologies can take some time, it is largely dependent upon when the OEMs roll out new platforms. We are bullish about the long-term opportunities from these technologies.

Operating income grew by 2.2% during the period despite the year-over-year decline in organic sales volume as we generated favorable operating leverage from the business due to the cost reductions that have been implemented over the past 18 months. When we exclude the $400,000 bonus-related accrual reversal taken during Q3 of 2009 from the operating results of this group, our non-GAAP operating income increased 32% year over year while the non-GAAP operating margin grew by 227 basis points. We continue to be very enthusiastic about the prospects for the Engraving Business segment.

Please turn to Slide 14.

The Engineering Technologies segment generated very strong results during the third quarter with top-line growth of nearly 14%. This was driven in part by the final delivery of the hardware for the Shuttle replacement program as part of our contract with Teledyne Brown, and strong overall demand in the aerospace segment of the business.

In addition to sales volume leverage, operating income growth of 77% year over year reflected cost reduction and process improvement initiatives as well as continued efficiency gains from capital equipment we have invested in this business. We are continuing to make investments in Lean initiatives to improve productivity at our Engineering Technologies facilities even further.

We continue to see strength across all market segments for this business. As I have stated on previous calls, we are executing two development contracts for unmanned aerial vehicles where we are building large fuel tanks, the next generation of super-size UAVs capable of remaining airborne for extended periods of time.

I'm also pleased to note that Spincraft's Massachusetts division was recently awarded Supplier Gold Status by United Technology Corporation for its work with UTC's Pratt & Whitney division. Only 87 of UTC's 50,000 suppliers have achieved Supplier Gold Status, which is re-evaluated annually.

Please turn to Slide 15.

The Electronics and Hydraulics segment generated strong 8.4% year-on-year, top-line growth during the third quarter. Electronics is seeing a broad-based recovery across most of its end markets including aerospace, medical devices, automotive, and general industrial applications. Electronics business posted strong double-digit, year-on-year revenue growth during the third quarter and more than offset continued end-market weakness in Hydraulics.

One of the key products manufactured by Electronics business is our line of reed switches, which are very small on-off switches primarily used in a broad cross section of markets, including sensors for automotive applications, white goods, toys, computers, medical devices, and electronic devices to name just a few. We're currently producing nearly 70 million units annually, the highest level we've ever seen for that business and are driving to increase our production beyond this level.

Operating income of $1.5 million was a substantial improvement over the $100,000 generated during the third quarter last year. And both Hydraulics and Electronics contributed to that achievement. Despite weaker year-on-year sales, Hydraulics was successful at generating positive operating income as opposed to last year's operating loss, reflecting significant cost reduction actions and efficiency improvements in the face of continuing end-market weakness. We remain focused on product and geographic diversification within Hydraulics.

Please turn to Slide 16.

Sales in the Air Distribution Product segment declined by 2.8% for the prior-year quarter as conditions in the residential home construction market remained weak. The segment lost $1.6 million during the quarter as compared to the prior year quarterly loss of $4.8 million. But we aim to run this business at breakeven on an annual basis given current market conditions. The significant loss in the quarter was due to sales deleveraging and unfavorable product mix. The year-over-year comparison was also affected by a lower cost-or-market write-down of approximately $3.5 million in the prior-year quarter.

During the quarter, we moved our Southwest operations from our Hattiesburg, Mississippi facility to the Dallas, Texas plant that had formerly housed APW Wyatt's food service manufacturing operations. As you may remember, we had previously moved the food service manufacturing from Dallas to Nogales, Mexico. Locating an ADP facility in Dallas better positions us geographically to benefit from regional construction opportunities. From Dallas, we'll be very well positioned to serve the Texas and Oklahoma markets, which historically represent a very significant percentage of housing starts in the US.

Please turn to Slide 17 and I'll leave you with several key points before we go to questions.

First, Q3 of 2009 was the first quarter of positive organic growth in five consecutive quarters. Standex generated 3.4% top-line performance with 1.7% organic growth. We're encouraged by the recovery that we're seeing across most of our operating segments and end markets. End markets across Engineering Technology and Electronics are showing broad-based strength while our Cooking Solutions Group continues to gain momentum. We expect the refrigerated side of the Food Service Equipment segment to improve as well but more gradually. We're also enthusiastic about the Engraving Group's mold texturizing business as we have been awarded contracts by automotive OEMs for some very significant programs. And we're very bullish about our new engraving technologies.

Second, we continue to make good strides in operational improvements. The third quarter represented a fourth consecutive quarter of improving non-GAAP operating margins. Likewise, our third-quarter diluted earnings per share of $0.37 was a significant improvement over the non-GAAP $0.08 per diluted share reported during the third quarter last year and represented four consecutive quarters of bottom-line improvement. Growing adjusted EBITDA by more than 9% and generating non-GAAP diluted earnings per share of $2.09 in the face of a nearly 13% revenue decline during the past 12 months, demonstrates the earnings potential of the new cost structure that we have created over the past 18 months.

Third, we're pleased to have shifted our focus from aggressive cost-reduction efforts to efforts aimed at top-line sales growth through both organic and acquisitive initiatives. We are pursuing strategic avenues to take market share on an opportunistic basis within our end-user markets and we expect these initiatives to yield results on the top line beginning in fiscal 2011.

Lastly, we're cautiously optimistic about our end markets, believing we have turned the corner from last year's recessionary environment. Standex's competitive strengths along with our leaner cost structure will enable us to meet the needs of our customers while profitably growing our business.

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

Thanks you very much, sir. (Operator instructions.)

And, ladies and gentlemen, your first question comes from the line of DeForest Hinman with Walthausen & Company. You may proceed.

Hi. I have two questions. Can you give us a little bit more color on the pricing pressure that we experienced in the refrigerated business?

Yes. The third quarter, the first-quarter calendar year, is always the weakest quarter for our walk-in business and historically pricing from some of our competition will deteriorate during that quarter as they attempt to fill their factories and maintain full absorption. Historically, that's been a seasonal trend so we wouldn't expect that part of it to be a permanent change in pricing. There have been some situations where we've had to lower our prices in order to maintain share, but that's not the majority of our issue.

So, well you -- I guess on the call you make it sound like the pricing pressure was greater than it would have been last year. Is that the case or not?

Not particularly. I think the comment we're trying to make there is, if you look at the business on a sequential quarterly basis, you'll see negative pricing that would have caused the margins sequentially to not have been as good as they had been, say, in the second quarter.

All right. So the pricing pressure in the refrigerated business, is that, to some extent, any of it in the first quarter related to the preferred status from Yum?

No. No, no. It's really a general statement, again, just looking across the end markets, the customer base that we serve.

Okay. And I think in the past, maybe you've said it or at least other people in the industry have said it, that product innovation and new menu offerings at restaurants can sometimes drive sales. We have Wendy's is looking at breakfast rollout and Subway's in the process of doing that. Is there any sales opportunities for us from those programs?

Absolutely. A good case in point is a program that we're just in the final phases of with Taco Bell. Over the last couple of years, we've been involved with a program whereby we went in and totally replaced the griddle and cooking heating area for their taco assemblies. We've actually in that rollout modified a couple of thousand stores. That particular rollout was driven by the opportunity for them to improve the energy efficiencies associated with their cooking process. So we're quite routinely involved with rollouts of that nature.

Okay. And then it looks like we shipped a lot of products to Teledyne. We recognize those revenues. Is there more revenues from Teledyne that we should expect over future quarters? Or is that kind of a one-time deal and it's done at this point?

That particular project is done. We obviously have ongoing business. As we've shared in past calls, the engineering technology of the Spincraft business is a lumpy business where we'll get large contracts that ship over a 9 to 12-month timeframe, for example. And so the sales can be lumpy from a quarterly standpoint. We've actually had, over the last several years, two large contracts with Teledyne Brown, for example.

All right. So I guess as we look forward when we're doing our models, what kind of, I guess, more annualized revenue growth do you guys kind of think about what that business can achieve going forward, especially with your commentary that the customers there are really looking to do more business with us?

Well, we really haven't given forward-looking statements about top-line growth. But I think if you look historically at that segment, you would see that it's been in the mid to higher single-digit range. And I don't think that's an unusual expectation going forward. Again, it will vary by year.

Okay. And on this operating loss that we reported on the air distribution business, can you give some more color on that? Is there any facility closure costs in there? Is there any severance in there? Or is that kind of a clean number that we're seeing on the operating profit line? And then that being said, your commentary on breakeven for the full year, how do we get such a big turnaround in the fourth quarter?

Okay. The number -- the operating income reported in that quarter was clean, using your words, not -- the restructuring expense associated with closing down the Hattiesburg facility is outside the segment under restructuring. The third quarter, as you can imagine, because of the connection that we have to home construction, is always seasonally the weakest quarter for ADP. So volume is down. And so clearly, you would expect to deleverage as a result of that.

In addition, we mentioned in our commentary that there was an unfavorable product mix. And again, that's really associated with the seasonalities. It turns out that just due to the way our products are priced in the margins by various product categories, we ship typically an unfavorable mix during the third quarter.

So those two things impacted the quarter. So we expect that as we go through the stronger parts of our season, namely the fourth quarter and first quarter, that you'd see recovery on the volume line and food product margins that would return us to breakeven, a little bit better performance.

And just to be clear, is it breakeven from an operating profit perspective or breakeven from a cash perspective?

Both.

All right. And then can you talk about any new vehicle platforms? I know you gave it some color. We talked about before the Ford Focus and I think a T6. Is there any other opportunities there?

Yes. And they're probably too numerous to mention. For example, this past couple of months, we've been processing the new Jeep Cherokee platform. There's a new Honda program that we're processing currently. So there are continuous platforms that are being processed in both our North American and European mold texturizing units. And those are just to name a few.

As we mentioned in our commentary, we see a pretty good lineup of platforms that are going to keep those facilities busy, certainly through the fourth quarter.

All right. And we talked briefly about acquisitions. Is there any segments we're looking at to add to or are we looking at new lines of business? Why don't we start there?

Okay. Well, the first point to make there is that the acquisitions would all be very strategically aligned, bolt on for existing groups. There would not be any "new legs" or new segments that we'd be looking to go into.

We look across our platform, but the three in particular that have greatest interest to us are the Food Service Equipment, the Engraving side, and the Engineering Technology or Spincraft side. And again, it really varies by unit. In the Food Service side, we've identified some product gaps in the hot side of our business. And so in that area, we're looking predominantly at acquiring product technologies that would help fill out that line. In the case of Engraving, I think we're looking at both geographic opportunities to broaden our geographic reach, particularly in the emerging country areas where we see opportunities to, rather than do a greenfield operation, perhaps buy one or more of our competition that would give us a leg up in those emerging country areas. And similarly, in our Engineering Technologies, I think you'll see us look for complementary technologies and manufacturing processes to go along with our core strength of metal spinning and fabrication.

All right. And then from a size perspective, historically we've done, it looks like I guess the last real big acquisition was almost $100 million, or at least spending wise. Would we look to do acquisitions of that magnitude in the future?

Certainly, if the right acquisition presented itself, I think the board and management would be comfortable doing large acquisitions. Currently though, we're really focused more on the $20 million to $25 million range. The list of targets that we've identified or more in that range or smaller.

Okay. And then my last question is, what kind of multiples are you seeing in the market?

I'm not -- I'd rather not go there as far as disclosure for obvious reasons. But clearly, we think that multiples are down as compared to where they were, say, two to three years ago. And I think your information is probably as good as ours, at least one to two turns from they might be historically. So we think it's a good time to look to be a buyer.

All right. Thank you.

Thank you.

And your next question will be from the line of Michael Gardner with Wedge Capital Management. Go ahead.

Good morning, fellows.

Good morning, Mike.

Terrific performance. Congratulations.

Thank you.

I just want to circle back to a couple of items that you touched on with the previous caller, just to make sure I'm clear. In the Food Service Equipment area -- so revenues sequentially were down from the last couple of quarters. That's completely, seasonally normal as I understand it.

Absolutely.

And then on the margin side, you cited some price cuts from competitors. But I just want to get a sense. It sounded like the margin's being lower than the prior couple of quarters was also seasonally within the normal range of what you see.

The bulk of it was, yes.

And what part was not in that normal kind of range that you saw?

Well, I'd say 60 -- let's say, around two-thirds of it.

But what I mean is, so what were the items that were more -- that applied greater pressure to Food Service margins in this third quarter versus what you typically see in the third quarter?

Well, I'm sorry. Again, I think, as we mentioned, the pressure was predominantly in the refrigerated side of the business, predominantly at some of the large chains where we were required to lower pricing in order to maintain share.

Okay. And how does that look going forward? Is that something you think will ease as volumes return? Or what's your assessment as to that?

Well, we think certainly the seasonal part should lessen as we go forward. It's really hard to predict exactly where pricing in general the marketplace is going to go. We expect that if commodity prices will most likely increase over time requiring the market, the competition base really in general to increase price as a result of that. So it's hard to predict, but with commodity inflation, we would expect pricing to improve.

Is there anything you know about a particular competitor that makes you fear that they're getting into a crazy, desperate phase, or perhaps the reverse that gives you confidence that it is just temporary?

Well, you have to be a little careful there. But let's just say historically, the pricing in Food Service has been fairly well disciplined in the sense that if you look at the published pricing, as commodity would hit published pricing has typically trended upwards with commodity inflation.

Okay. Okay. Thanks, Roger.

And then my other question is on, in the Engineering Technologies, the terrific margin performance, and you cited sales leverage and efficiency gains, but I just want to ask specifically on the conclusion of the shuttle project, sometimes there are incentive payments or something that often hit as a project concludes. So was there any part of the $4.8 million of operating profit that was sort of a one-time reward of that nature?

Not a one-time reward, but clearly, we saw a margin pick up because that was a product that was shipped over a period of time. I think where you're going is, what is a more normal expectation of operating income margin? And I think if you look again historically, 20% is more of a historical operating margin for that business.

Okay. Thanks, Roger.

Thank you, Mike.

And your next question will be from the line of Jamie Wyland with Wyland Management. You may proceed.

Hi, fellows. Nice quarter. A couple of questions on some raw material costs. What do you see out there and your impact on your business moving forward?

Well, yes, early days, Jamie. We have steel that we use really in a number of our business units. Certainly in our Food Service Group, steel, stainless steel, aluminum are the primary metals that we purchase in basically blank or roll form. We're also impacted by copper in our refrigeration-related items. In ADP, for example, obviously, we're buying galvanized, hot-rolled steel.

Right now, we're just beginning to see mills have announced price increases in the low, single-digit range. Whether or not those are going to stick, whether or not demand is there is a little hard to say. We're typically protected depending on the commodity for three to six months. We historically will lock in with our suppliers for that period of time. So we really haven't got higher metal costs that are actually rolling through our P&L as we speak. But looking out beyond that three to six months, we would expect there'd be some potential inflation.

You mentioned that we just got approved for Yum Brands. Have we ever sold them before on the refrigerated side of the business?

Not in significant quantities. We've actually started selling them, let's say, roughly 12 months ago on a limited basis, mostly test stores, things of that nature. So this milestone of actually becoming an approved supplier is a significant event for us.

Okay. And you are just one of several? And how large is that business on that side for them?

Again, our estimate, and we can only kind of understand from Yum what their volume is and it varies, again, depending on their store build count, but I think historically they've been total purchases of [lock] into the $7 million to $10 million range. We would be one of a couple of suppliers. So we would expect obviously to have to compete for that business. But the fact that we are preferred at Taco Bell and Pizza Hut, I think gives us a bit of a leg up as we try to service that very important account.

You talked about gaining market share on both the cold and the hot sides of the business. But how is the overall market doing onto itself? Are we gaining share in a growing market or gaining share in a stagnate market?

I think we're gaining share in a market that's stabilizing. The data -- [MAFSI] is one of the food service organizations that does in fact publish their estimates of what the market is doing. And if you would go and look at their most recent report, they would say that the market has stabilized sort of down 12% to 14% year over year. And I say that because it's a range depending on whether you're in the equipment side of the business or, say, in some of the supply side. But their graph would say that we've stabilized in the last couple of quarters and are beginning to recover. So I think if you look certainly back over the last six months, the last nine months, we were taking share in a declining and then a stabilizing market.

Okay. On the efficiency side of the equation, how are we doing with the plants that are now relatively seasoned? And are there more efficiency gains to come?

Well, I'd tell you the two comments I would make to that. First of all, our initial concern or interest is making sure as we shut down plants in North America and either consolidate into other plants in North America or not. In case of food service, we've gone into Nogales, Mexico, pretty impressively. The good news is, those moves have gone extremely well with very, very few hiccups, so to speak, or problems with delivery or quality. So that part, I think, is well stabilized. I think there will be some minor productivity pickups as we see those plants become more experienced with processing the products. But I don't think that's going to be a huge number.

Okay. And lastly, you're selling I think between here and the end of the calendar year another $8 million of properties. Could you tell us what they're on the books for?

I don't have that number. They will be sold for a gain.

Okay. Very good. Nice job, fellows. Thanks.

Thank you.

And with no further questions, I'd like to turn the call back to the speakers for any final comments.

Well again, we really appreciate the interest in the call. And we look forward to speaking to you again next quarter. Thanks very much for your time.

Thank you for your time, ladies and gentlemen. This concludes the presentation. And you may now disconnect. Have a great day.