Standex International Corp (SXI) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the quarter one 2011 Standex International Corporation earnings conference call. My name is Kim, 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 today's conference. (Operator Instructions)

I will now turn the presentation over to your host for today's conference, Mr. David Calusdian, from Sharon Merrill Associates. Please proceed sir.

Thank you. Please note that the presentation accompanying management's remarks can be found on Standex's investor relations website, www.Standex.com. Please see Standex's Safe Harbor package 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 filing 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 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 would now like to turn the call over to Roger.

Thank you David, and good morning everyone.

Please turn to slide three.

We reported another solid quarter to begin fiscal 2011. While many of the end-user markets served by our business units are still affected by the recession, three of our five segments reported year over year growth resulting in an overall 3.3% increase in sales to $157 million for the quarter.

This is our third consecutive quarter of year-over-year sales growth. We continue to be encouraged by the positive trends we're seeing in most of our end markets, and our success in taking market share through organic growth initiatives.

Turning to the bottom line, this was the sixth consecutive quarter of operating margin expansion. Non-GAAP operating margin increased 29 basis points to 9.9%, and non-GAAP EPS per share climbed 6.7% to $0.80 per share, which is a record for the company.

Overall we continue to be pleased with the leverage we're getting from our cost reduction and productivity improvement initiatives.

This quarter however, the deleveraging effect of lower volume at cooking solutions, as well as lower pricing, higher material costs and product mix at refrigerated solutions substantially offset bottom-line gains in other businesses.

We believe positive trends in cooking solutions demand and pricing actions we're taking in refrigerated solutions will begin to have a positive impact on their results beginning in the second quarter.

Before I turn the call over to Tom for the financial review, I'd like to say a few words about our recent acquisitions the action our Board of Directors has taken to increase the dividend paid to our shareholders.

Please turn to slide four.

Earlier this week we announced the acquisition of the Tri-Star product line, which is squarely in line with our strategy to acquire companies that build on our strategic operating platforms.

As part of our routine strategic review of the company, we've identified a number of product and geographic gaps that we feel can best be addressed through strategic bolt-on acquisitions to our key strategic platforms. Acquiring Tri-Star is a very good example of how we intend to address these gaps through our acquisition program.

Tri-Star provides our food service equipment group with a more complete cooking solutions product offering, specifically, a primary cooking product line, including high-quality restaurant series and value series range platforms, along with important cooking equipment accessories.

We plan to continue to acquire companies like Tri-Star that build on our foodservice platform and reinforce our position as a leading supplier to food service equipment dealer buying groups, large chains and national accounts.

These acquired assets, which reported a profit on $5.5 million in sales during the trailing 12 months, are expected to be accretive to Standex's earnings on a GAAP basis in the first full year of ownership but will be nominally dilutive to earnings in the current fiscal year due to the impact of upfront purchase accounting and acquisition related expenses.

The acquisition of Tri-Star comes on the heels of last quarter's acquisition of MEIPL Engraving India, now called Mold-Tech India, which bolsters the engraving group by broadening its presence in the very strategic and rapidly growing Indian geographic market.

The integration is proceeding according to schedule with the technology transfer well underway.

I should note that Mold-Tech India has been accretive to earnings during the first quarter of ownership.

In addition, yesterday our Board of Directors took action to increase our quarterly dividend by 20% to $0.06 per share.

The increase in our dividend reinforces two important points.

First, the Standex Board of Directors is firmly committed to returning cash to our shareholders in the form of a dividend. The current dividend is the 185th consecutive quarterly cash dividend paid to our shareholders.

Second, the increase in the dividend reinforces the confidence that we have in our solid balance sheet and cash flow generation capability. The Board has confidence that the company has the ability to support both our acquisition strategy as well as returning cash to our shareholders.

With that as background, I would like to turn the call over to Tom for a review of our financials. Tom?

Thank you, Roger, and good morning everyone.

Please turn to slide five.

First-quarter net sales increased 3.3% year-over-year to $157.1 million.

More importantly, we achieved organic growth of 3.7%.

As you can see from this slide, this is our third consecutive quarter of year-over-year growth.

Please turn to slide six.

Operating income, which includes a $981,000 charge in pretax restructuring expenses and a $3.1 million pretax gain on real estate sales, was $17.6 million.

During our 2010 fiscal year end conference call, we reported that we sold an excess piece of real estate in our engraving operation that was located in Lyon, France, and would be reporting a gain in our fiscal year '11 first-quarter results.

Non-GAAP operating income, excluding restructuring expenses and one-time items from both quarters, outpaced sales growth and was up 6.4% to $15.5 million due to volume leverage and the cost reduction efforts we have implemented.

In addition, as Roger mentioned, non-GAAP operating income margin improved by 29 basis points year-over-year to 9.9%.

First quarter fiscal 2011 EBITDA came in at $21 million.

Excluding the previously mentioned items, adjusted EBITDA was $18.9 million or a 1.6% increase from the first quarter of fiscal 2010.

Adjusted EBITDA margin was down 19 basis points from a year ago to 12%.

As you can see on slide seven, we performed well on a trailing 12 month basis. On essentially flat sales, non-GAAP operating income increased 34.2% from the prior 12 months, and non-GAAP operating income margin grew by 198 basis points.

EBITDA excluding special items grew by 23.4%, and EBITDA margin increased by 192 basis points.

Please turn to slide eight.

For the first quarter, net income from continuing operations increased to $11.5 million or $0.90 per diluted share, versus $8.4 million or $0.67 per share a year ago. This represents a 34.3% year-over-year earnings per share improvement.

First-quarter 2011 net income from continuing operations includes a $643,000 post tax restructuring charge and a $2 million gain from real estate transactions.

The first quarter of 2010 included a $1 million post tax restructuring charge.

Excluding the previously mentioned items from both periods, non-GAAP net income from continuing operations increased 8% to $10.2 million or $0.80 per diluted share, from $9.4 million or $0.75 per diluted share in the same period last year.

If you turn to slide nine, you will see that we've achieved $2.45 of earnings per share during the trailing 12 months.

Excluding special items, we generated $2.33 of adjusted earnings per share from continuing operations.

Turning to slide 10, net working capital at the end of the first quarter of fiscal 2011 was $112.8 million, compared with $103.6 million at the end of Q4 2010 and $108.9 million at the end of Q1 of last year.

The increase both year-over-year and sequentially was primarily due to higher accounts receivable as a result of higher sales volume in the current year first quarter.

Working capital turns at 5.6 are flat with prior year. Inventory levels actually decreased from $76.8 million at the end of Q1 last year to $73.9 million, despite the increase in sales. As a result, our inventory turns year-over-year improved from 5.4 to 5.9 turns.

Slide 11 illustrates our net debt position for the quarter. As a reminder, we define net debt as short-term debt plus long-term debt of funded debt, less cash.

We reduced our net debt by $28.5 million year-over-year to $50.7 million.

On a sequential basis our net debt decreased from $59.7 million in the fourth quarter of 2010 to $50.7 million at the end of the first quarter 2011.

The company's balance sheet leverage ratio of net debt to total capital declined to 19.6% at the end of the first quarter, compared with 29.5% during the prior year quarter.

Our funded debt has decreased by $30 million in the first quarter 2011 from $93 million at June 30 to $63 million at September 30.

As a reminder, we carried higher than normal cash and funded debt balances at June 30 while we waited for existing interest rate swaps to expire. When these swaps expired in July, we repaid additional borrowings, and our quarter end cash position now has returned to a more normalized level of $12.6 million.

Finally, by entering into these interest rate swaps, we have fixed borrowing rates on approximately 50% of our funded debt outstanding at September 30 at a weighted average borrowing rate of 2.42%.

In addition, we have entered into two forward dated swaps totaling $10 million that will become effective September 2011. Once these forward dated swaps become affective, we will have a fixed borrowing rate on $40 million of funded debt, and our weighted average base borrowing rate on the fixed debt will be 2.17% through September 2013.

Please turn to slide 12.

During the first quarter of 2011 we generated approximately $6.7 million of 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 61.4% during this period.

We used $1.4 million in cash from capital spending in Q1 and continue to expect capital spending for all of fiscal 2011 to be in the range from $11 million to $13 million.

Our capital spending will focus on strategic initiatives to support organic growth initiatives as well as productivity improvements.

Going forward, our financial priorities remain the same. We will continue to focus on reducing expenses and maintaining a cost structure that will enable significant operating leverage as our markets continue to recover and we benefit from topline growth activity.

Second, we will -- we are maintaining a commitment to strong working capital management.

And third, we will continue to lower our debt level to provide the flexibility to execute on our acquisition strategy.

With that, I will turn the call back to Roger.

Thank you Tom. Please turn to slide 14, and I will begin our segment overview, starting with our food service equipment group.

The food service equipment group generated 1.7% sales growth during the quarter, driven by another strong performance at our Procon pump business and improved sales performance at refrigerated solutions, which was partially offset by weakness at our cooking solutions group.

Procon posted another quarter of double-digit growth as we saw strong volume from beverage accounts and continuing improvement on the industrial side of the business.

Looking closer at refrigerated solutions, volume was up significantly, and we reported a very strong bookings quarter.

Last quarter we mentioned our belief that we had found the bottom of the market, and the strong first quarter year-over-year sales growth is a positive indication that we have begun to see a sustainable growth trajectory in refrigeration.

Based on quotation activity and a more positive sentiment we're hearing for the marketplace, we're optimistic that we will see good topline growth in refrigeration in Q2.

On our last call we discussed our new value line of upright, reach-in refrigeration products. These new products have been extremely well received in the market. In fact, we've booked more than 3 million of orders in the first four months post-launch, with about half of that having shipped in the first quarter.

On the cooking solutions side, sales were down by double digits for Q1 of last year. The weakness was concentrated at our national accounts, including large retail and quick service restaurant chains, primarily as a result of a timing for their program rollouts.

On the positive side, we received recent awards from newly penetrated national convenience store and quick service restaurants that will begin shipping in Q2.

For example, we recently announced that our A.B.W. Wyatt brand had been selected as the preferred supplier for roller grills and bun warmers by 7-Eleven. We expect to begin shipping equipment to 7-Eleven in the current second quarter.

These new wins demonstrate our success in penetrating large national accounts in both the convenience store and quick service restaurant market segments.

We're confident that we can continue to take share on both the cold and hot sides of the market by offering a compelling value proposition to our customers.

Looking at the bottom line, the first quarter foodservice operating income was down 15.9% year-over-year.

In the cooking side, the decline was driven by the deleveraging effect of lower volume.

On the refrigeration side, we reported a decline in operating income as a result of lower pricing and higher metal costs as compared to Q1 of 2010 and an unfavorable product versus service and install mix.

We continue to work aggressively to improve the pricing environment in this market and to drive additional cost reductions throughout the organization.

Please turn to slide 15.

Engraving segment sales increased 7.6% compared with the prior-year quarter, driven by very strong mold texturizing demand in North America.

Asia-Pacific mold texturizing demand was also robust, although that region is a much smaller part of our business.

Europe also performed well this quarter.

We had expected good momentum in demand for mold texturing throughout the first half of fiscal 2011, and we still believe that will be the case.

New technology such as slush molding and laser engraving for automotive applications are becoming an increasingly important factor in our program wins, along with our unparalleled international presence and comprehensive technical capabilities.

Innovent performed well, but not at the levels that we saw in the sequential Q4.

Innovent is a relatively lumpy business, as we ship -- typically ship systems in large quantities, and timing of those shipments can be unpredictable.

We're very optimistic about this business and expect it to remain on pace for a record year in the aviation and aerospace markets.

We're also seeing strong order activity for systems in emerging countries.

Our roll engraving and machinery business are still soft, although we believe they have begun to stabilize. We're seeing early signs of increased quotation activity. We're not ready to call the bottom of the market given the continuing soft conditions in housing.

Last quarter we discussed our strategy to invest and expand our presence in emerging markets, including our acquisition of Melco Engraving India and our plan to open our third Chinese facility. The integration of our India acquisition is proceeding on schedule, and although it is still early, the first quarter of combined operations has exceeded our expectations from a profitability standpoint, as the acquisition was accretive to our overall earnings.

This operation services the rapidly growing Indian automotive market through both Indian and non-Indian automotive OEMs located throughout the country.

We anticipate a strong automotive platform launch schedule for new OEMs in India for the next 12 months, which should benefit our new Indian operation.

Our Chinese facilities also performed well in Q1. We expect that our new Tianjin engraving plant will be open on schedule in the current second fiscal quarter. In addition to generating sales growth from these operations, we also have started a low-cost sourcing program for our roll engraving business. We're beginning to source unfinished rollers from China for operations in North America, Brazil and Western Europe. This is the next major phase of our cost reduction plan for engraving, which we expect will enable the group to be both more competitive and profitable.

Looking at the bottom line for Q1, we reported strong performance with operating income up 67% over the prior year.

We run the engraving products group as a high fixed cost business, so we have significant leverage on the upside and the downside. The leverage benefited the group in Q1, as did the cost reductions we have implemented over the last 12 to 18 months.

Please turn to slide 16.

Although we remain very bullish about our engineering technology segment, year-over-year sales were down 14% as a result of lower sales in the aerospace segment and softness in the energy market.

As we've discussed before, this business also tends to be lumpy, and lower sales in the aerospace segment were caused by project schedule timing in the quarter.

In energy, customer forecasts indicate that demand could be soft for the near term.

Strength in the aviation segment partially offset the Q1 weakness in aerospace and energy.

While decisions regarding the federal government's funding for heavy lift launch vehicles are still in flux, recent developments in Washington have made us cautiously optimistic that there will be opportunities for Standex on rocket systems designed to support resupply of the International Space Station and on NASA's next-generation high orbit and deep space exploration systems.

In addition, we will continue to focus on our diversification strategy outside of this area.

Operating income growth of 5.3% year over year, despite the decline in revenues, reflects strong product mix, cost reductions and productivity improvements.

Please turn to 17.

The electronics and hydraulic segments turned in an excellent performance in Q1, producing 38% year-on-year topline growth with exceptionally strong operating leverage, resulting in operating income growth of 212%.

Both electronics and hydraulics continue to benefit from prior restructuring and cost reduction efforts. For example, our electronics cost structure is significantly lower now that products produced by this business are substantially coming from our low-cost facilities in China and Mexico. We expect to achieve record shipments out of our China facility in the current fiscal year.

Looking closer at the first quarter sales performance, electronics topline growth was a result of strengthening end-user markets and market share gains achieved via new products, penetration into new geographic areas, and the application of existing technologies into new applications and customers.

The demand we're seeing is broad-based both from a geographic, end market, and user perspective.

Our efforts to grow sales in Europe and Asia-Pacific region continue to gain traction.

Like electronics, hydraulics reported a double-digit increase in sales year over year, and this was the second straight quarter where we reported a double-digit year over year increase in bookings. We see increasing signs that the North American hydraulics market for custom hoist shows the early signs of recovery. At the same time, there is still very limited visibility beyond the immediate near term.

We're pleased with our progress in expanding our hydraulics business internationally. Customers in the Asia-Pacific region, China and Australia have made purchase commitments and have placed orders out of our China facility. We expect customers in this geography could be a meaningful contributor to revenues in this segment in the second half of fiscal 2011.

Please turn to slide 18.

Air distribution segment sales were down 3.8%, with an operating loss of $435,000 in Q1.

As we discussed last quarter, our strategy is to drive market share gains through our traditional products and customers and to add new business through new products and penetrating new wholesaler accounts and leveraging our new facility in Dallas to increase our market share in Texas and Oklahoma.

We're pleased with the progress of this strategy thus far, despite the continued weakness in the housing market.

On the plus side, we expect sales pricing and metal costs to be relatively stable for the near term.

Please turn to slide 19, and I will conclude with a few points before we go to questions.

First, we continue to see positive sales momentum in most of our end markets, and we reported topline growth in three of our five business segments.

We're pleased with the results of our topline initiatives. Coupled with improvement in end-user markets, these initiatives contributed to our third consecutive quarter of year-over-year sales growth.

Looking at the segments that had a negative year-over-year effect on volume, the sales decline in engineering technologies was due primarily to project timing, and we're encouraged by the recent strength of both sales and bookings in our refrigerated solutions businesses.

Second, we continue to be pleased with the results of the cost reduction and productivity improvement initiatives we've implemented during the past two years. We've now achieved the sixth consecutive quarter of year-over-year growth in non-GAAP operating margins, while delivering a 6.7% increase in non-GAAP earnings per diluted share to $0.80.

We're optimistic that we will be able to report further earnings growth as our markets continue to recover and our topline initiatives gain increased traction.

Third, our recent acquisition of Tri-Star at our foodservice segment, coupled with the Q1 acquisition of MEIPL Engraving India, demonstrates the progress we're making on our acquisition strategy.

Our stated goal has been to build on our strategic platforms through acquisitions, and we have a solid pipeline of acquisition targets for our foodservice, engraving and engineering technology segments.

With a net debt to capital ratio of 19.6%, we have a significant amount of dry power to enable us to make strategic, accretive acquisitions during the current fiscal year.

Fourth, the recently announced increase in the dividend paid to our shareholders is a very positive indication that our Board has confidence in the company's ability to maintain both a strong balance sheet and cash flow generation while continuing to invest in our business units through both organic and acquisitive initiatives and returning cash to our shareholders.

And finally, we remain cautiously optimistic about our end markets and expect continued growth as we move forward through fiscal 2011.

With that, Tom and I'd be happy to take your questions.

(Operator Instructions) Michael Saloio, Sidoti & Company.

First question is on engineering tech. It was down 14%, and you're stating lumpiness. If we don't get anything out of Washington, I guess can you just give us a little bit more color on how that business looks through the rest of the year without anything out of Washington?

The issues in -- as far as the NASA funding and what goes on with the compromise bill that the House and Senate have struck regarding NASA, is really not a current fiscal 2011 issue. That is really an issue for 2012, 2013 and 2014. We had very little expectations of anything coming out of that for the current fiscal year.

So the issues that we have, the lumpiness, was really the result of the long-term projects we've had at United Launch Alliance consortium of Boeing and Lockheed, and those launches have been pretty flat, if you will, over the last three or four years.

So it's really more project lumpiness, and the NASA funding is not really a current fiscal '11 issue.

Okay. Can you give us a sense of end market mix in that business, as far as what percent was coming from energy versus aviation, etc.?

It varies year-to-year, but you can say that the energy side is roughly 35% to 40%, and the aerospace is roughly the equivalent. But again, it will vary 5 points up or down year-to-year.

Okay. Second question, on food service equipment, can you talk a little bit about where the pricing pressure is coming from? Is it coming from your publicly traded peers? Or why is pricing down so much?

It's really a combination of both price as well as material costs. If you look at what has happened to material costs over the past 12 months, we have seen some strengthening in particularly the steel and stainless steel costs. So that is roughly half of the issue. And the other is pricing pressure.

That has occurred more on the refrigerated side, which has more exposure to small, private businesses. Our cooking side is more -- our competitors are more public's, and the market is pretty rational. But there has been some pricing pressure on the refrigerated side.

Okay. Any guidance on how sustainable the growth in electronics and hydraulics is going to be through the rest of the year?

We don't give guidance. I think there's been three or four pretty strong quarters that we've reported out of electronics. This is the second strong quarter out of hydraulics.

I think if you look at the general hydraulics market, there has been pretty significant strength really by all of the large hydraulic conglomerates that are out there. They seem to be relatively positive about those markets, so we're cautiously optimistic.

Okay. And last question for now would just be on acquisitions throughout the remainder of the year, what segments you think they're going to come in, and how the pricing environment is looking right now.

Okay. Again, our focus predominantly has been in the engraving, engineering technologies, and food service businesses. That isn't to say that's the only place that we're looking, but those are our three primary target areas.

We have I think momentum that has been developing over the last three or four months, as more targets are being identified and we're in the process of engaging with.

Pricing environment is I would say stable at this point in time. Clearly the multiples are down from what they were a couple of years ago and thus far I think have been relatively stable, at least at the levels or the type of companies that we've been looking at.

Okay, thanks.

Joe Bess, ROTH Capital Partners.

I was wondering if you could talk a little about your sales mix in food services equipment and if you're expecting a larger contribution from refrigeration for 2011?

Refrigeration solution has for a number of years been the largest piece, probably on the order of 45% to 50% of what we do in the total food service group. That is been the case for a couple of years. We expect that trend to continue.

Obviously as we now have made the one acquisition of Tri-Star, which we reported is about a $5.5 million deal, that would go into the hot side and we'd begin to increase that side of our business, which is really one of our strategic objectives is to broaden particularly the product offering and therefore the sales volume on the hot side of the business.

Great. And then in engraving it seems as though the last time you guys were able to hit a 19% operating margin it was about four years ago. I was wondering if you think that's a margin we can expect going forward? Or do you think that will come back down to more historical levels?

I think, again, as we reported today -- and that's why we made the comment -- it's a lumpy business with high fixed costs. What we mean by that is the technicians that are involved, particularly on the mold texturizing side and role engraving, are very highly skilled, and so we tend not to adjust our -- the size of our workforce based on quarter to quarter lumpiness.

So when we have a very strong sales quarter, as we do this time, we will leverage up pretty dramatically, and then vice versa, as the lumpiness goes against us, you will see some deleveraging.

I think if you look historically at the results in our Q, you will see the EBIT margin, that 13% to 15% range, is not -- it's kind of typical. I would expect that over the long term we -- again, we're working towards those middle teen digit numbers.

Okay, great. And then back to food services equipment, do you expect this year that the Tri-Star acquisition will change your revenue mix? Or is that, the function of it being equal or back to normal levels because of the Tri-Star?

Again, it will definitely add to the hot side. The historic run rate of $5.5 million is in the base. We would expect to be able to build on that during the course of the year and then obviously into next year.

Okay, great. Thank you guys.

(Operator Instructions) John Walthausen, Walthausen & Co.

Congratulations. Good quarter there.

You've given a lot of information, so if some of this is redundant, please excuse. But with the Tri-Star, could you talk a little bit specifically about where the strength in that product line is, whether there is anything -- where the strength in distribution in your customer base is, and where specifically think you might be able to leverage that?

Surely. Again, primary -- the Tri-Star had a -- has a series of hot side product offerings, the range -- what we call freestanding range -- being the biggest piece. They also have some countertop equipment. They also have some convection oven equipment.

The most attractive piece, the piece that we were most interested in, is that primary, freestanding range. It is really kind of the heart, if you will, of a commercial equipment --commercial kitchen.

We did not have, prior to this acquisition, the freestanding range as part of our portfolio. It is one of the larger segments, if you will. If you look at the total hot side market, the freestanding range is one of the larger segments. It's also one of the more important segments, because again it is the heart of the kitchen. So that was one of the big attractions that we had for this acquisition.

In addition, Tri-Star has a pretty broad product offering. Within ranges there's multiplicity of styles, sizes as well -- all as price points. We think there is the opportunity to enter the market on a couple of different price points, both the value end as well as the higher end, which would give us again a more broad opening into the marketplace.

Finally, because it is a relatively small company, only $5.5 million in sales, we don't think they've been able to attract the proper attention from some of the larger buying groups where Standex is much better positioned. So we think one of the strong synergies that we do bring to that acquisition is access to channels, access to buying groups that otherwise they would not have had exposure to.

Coincidently, we've actually -- there's a couple of large buying group meetings going on this week, and the reaction from both of those have been very, very positive to the acquisition.

In terms of the actual product offering that they have now, since clearly (inaudible) in freestanding ranges they are not a big player. Technically and in value, a per-price type thing, how does it stand against the leaders? And do you need to do some reengineering too if you really want to ramp up the scale of manufacturing there?

Great question. Surprisingly, they -- that was one of the things that really attracted us to the business is that they had invested a significant amount in product development and as a result have a very wide product offering. Not to say that there aren't things we're going to want to do in terms of enhancements and further expansions, but to answer one of your questions, a very broad product offering that, again, we think has been underdeveloped, if you will, from a market penetration standpoint.

Secondly, their operations are in Southern California and Mexico. They have I think established a reputation as being very cost effective in the marketplace, which we think is -- we can actually further leverage, and one of the things we're doing, for example, is immediately making Tri-Star part of some of our large buying contracts that we have, say for example in metal, as well as in transportation freight, where we think we can further enhance our cost position.

Okay, good. In terms of getting the additional distribution, I'm not sure that I fully understand the food service business. In the distributors that make a difference to you on your existing Standex business, is it relatively easy to pull their product line in with it? Or do you have to replace some existing vendors? Do you have to justify that in order to get that distribution?

Another great question, and it really -- the answer is, it depends. Certain -- some buying groups, there is a more involved process to go through to get your products qualified, and other cases, not so much.

Again, the reaction that we've gotten thus far has been very positive in -- at least in those cases. Two of the larger buying groups that we're involved with, we think we will be able to move almost immediately into offering that product through their group.

Okay, great. Excellent. I appreciate it.

There no further questions in the queue. I would now like to turn the call over to Mr. Roger Fix for closing remarks.

Well, once again we thank you for your interest, and we look forward to speaking to you again next quarter. Thanks very much.

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