Standex International Corp (SXI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Standex International Corporation earnings conference call. My name is Stacey and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, to Mr. David Calusdian, from Sharon Merrill. Please proceed.

Thank you, Stacey. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website, 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; adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time item; non-GAAP net income, which is 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 third-quarter news release.

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

And thank you, David, and good morning, everyone. Please turn to slide three. We reported year-over-year sales growth at four of our five business segments in the quarter, with double-digit increases at three. However, a very difficult comparison at Engineering Technologies offset a portion of this growth, as we reported an 8% overall year-over-year increase in sales.

Q3 last year included revenue from unusually large shipments related to our Teledyne Brown contract for NASA. Our topline sales growth included organic growth of 5.6%; growth due to acquisitions of 2.1%; and 0.6% due to favorable foreign exchange. We recorded double-digit year-over-year operating income growth at Food Service Equipment, Engraving, and Electronics and Hydraulics. These operating profit gains were partially offset by lower profit posed by lower sales volume recorded at engineering technologies, and an operating loss at [EAP].

Non-GAAP net income from continuing operations grew 20% to $5.6 million and non-GAAP EPS grew 22% to $0.45 per diluted share. We reported our fifth consecutive quarter of sales improvement and eighth consecutive quarter of operating income growth, and have now lapped all of our major restructuring cost efforts, which we initiated about 2.5 years ago.

For the past roughly nine months, the topline sales focus in our business units has been to drive organic growth initiative to achieve shared gains, as most of our end user markets begin to grow. These initiatives have begun to gain traction and we're well pleased with the progress we're making in this area. At the same time, we've been focusing our business development efforts on completing various synergistic bolt-on acquisitions that should accelerate the proper growth of our business units.

Please turn to slide four. We completed four such acquisitions during the past three quarters, and all of these have met or exceeded our expectations in terms of strategic synergies and financial performance. These acquisitions have broadened our geographic presence and filled critical product gaps. In line with our acquisition criteria, all are expected to be accretive on a GAAP basis in the first full year of ownership.

Acquisitions remain an important component of our growth strategy, and we continue to have enough dry powder on our balance sheet to execute on the strategy in the coming quarters. And finally, the leverage in our business model positions us very well to turn sales growth into strong profitability growth.

So with that as introduction, I'll turn the call over to Tom for a review of the financials for the quarter. Tom?

Thank you, Roger, and good morning, everyone. Please turn to slide five.

As Roger mentioned, the 8.3% sales increase was reported in Q3 as our fifth consecutive quarter of year-over-year sales improvement. So even though we had a very difficult comparison in Engineering Technology, and we've lapped our turnaround in sales last year, we still reported good sales growth.

If you turn to slide six, I'd like to point out the seasonal trends that are inherent in our business. We have provided each quarter sales as a percent of full-year sales. The chart shows each quarter's percent of the total for the last five years as a range. As you can see, the third quarter is historically the slowest quarter, with anywhere from 21.6% to 24.2% of annual sales. The first quarter is typically our strongest quarter.

Please turn to slide seven. Operating income for the third quarter, which includes $185,000 in pretax restructuring expenses [and] $878,000 in acquisition-related expenses was $7 million. Due to the volume leverage and the cost reduction efforts we have implemented, non-GAAP operating income, excluding restructuring expenses and one-time items for both quarters, was up 9% year-over-year to $8.1 million. Non-GAAP operating income margin was the same as the prior year at 5.5%.

The third-quarter fiscal 2011 EBITDA was $10.4 million. Excluding the previously mentioned items, adjusted EBITDA was $11.4 million, about 2% higher than the third quarter of fiscal 2010. Adjusted EBITDA margin declined by about 50 basis points from a year ago to 7.8%. Both our operating income and EBITDA margin percentages were negatively impacted by the change in sales mix, which occurred among our business units.

If you turn to slide eight, you can see the year-over-year operating income margin performance in each of our segments. Margins in Food Service, Engraving, ADP, and Electronics and Hydraulics have all continued to show meaningful year-over-year improvement. However, profit margin at Engineering Technologies was impacted by the non-recurrence of prior-year deliveries related to the Teledyne Brown NASA contract, and lower profit margin in the current quarter due to lower sales. The combination negatively impacted the overall operating and EBITDA margins of the Company.

As we discussed previously, the Engineering Technologies business inherently includes large projects sales, which can be very lumpy from a timing perspective, and can significantly impact year-over-year sales and profit margin and profit performance of this Group, and the overall Company in any given quarter.

Please turn to slide nine. Due to the seasonal factors within our Food Service and ADP segments, the third quarter is typically our lowest quarter for sales and gross margin perspective. This slide shows sales and gross margins for the third quarter in each of the last five years.

Gross margin in the third quarter of this year remains nearly 200 basis points higher than they were in Q3 of 2008, prior to the recession, while revenues are still down more than 10% from that time. As we discussed, the lower sales volume within Engineering Technologies business, and the non-recurrence of the deliveries related to the Teledyne Brown NASA contract, had a slightly negative impact on our gross margins during Q3.

Please turn to slide 10. For the third quarter, net income from continuing operations grew to $5.2 million or $0.41 per diluted share from $4.6 million or $0.37 per share a year ago. This represents a 10.8% year-over-year earnings per share improvement.

The third-quarter 2011 net income from continuing operations includes post-tax $121,000 restructuring charge; $575,000 of related to acquisition expenses; and $245,000 gain from nonrecurring tax items. The third quarter of 2010 included post-tax of $432,000 restructuring charge and $400,000 of nonrecurring tax items. Excluding the previously mentioned items for both periods, non-GAAP net income from continuing operations increased 20% to $5.6 million, or $0.45 per diluted share, from $4.7 million, or $0.37 per diluted share in the same period last year.

In line with our expectations, the acquisition of the Metal Spinners Group was dilutive to Standex earnings by $0.05 per diluted share in the third quarter of fiscal 2011. We now expect from $0.02 to $0.04 accretion in the fiscal fourth quarter of 2011, which still includes the impact of purchase accounting. We expect accretion of $0.14 to $0.17 per diluted share to earnings in fiscal 2012.

Turning to slide 11, networking capital at the end of the third quarter was $122.9 million compared with $114.8 million at the end of Q2 of 2011, and $102.6 million at the end of Q3 of last year. The increases both year-over-year and sequentially were primarily due to higher inventories as a result of four factors.

First, we were awarded two major projects on the refrigeration side of the Food Service business that were pushed out of Q3 but will begin shipping in Q4. Second, our Cooking Solutions Group won a large contract for a rollout from a national hamburger chain, for which we purchased inventory, but will not begin significant shipments until Q4. Third, our Engineering Technologies Group is carrying inventory related to long lead-time aerospace and marine projects, which will ship in Q4 and Q1 of next fiscal year. And fourth, the purchase of Metal Spinners also contributed to the increase.

Working capital turns were down to 4.9 from 5.4 in Q2 of 2011 and 5.3 in the year-ago period. Inventory turns were 4.9 compared with 5.0 a year ago.

Slide 12 illustrates our net debt position for the quarter. As a result of the acquisition activity, net debt increased to $68.3 million from $52.4 million a year ago, and $46.3 million at the end of the sequential second quarter. We define net debt as short-term debt plus long-term debt less cash.

Our balance sheet leverage ratio of net debt to total capital increased to 23.4% at the end of the third quarter, compared with 20.7% during the prior year quarter -- again, as a result of the Metal Spinners acquisition that was completed during Q3. At 23.4%, as Roger mentioned, we still have dry powder for additional strategic acquisitions. Our funded debt increased from $67.9 million in the second quarter 2011 to $92.4 million at the end of the third quarter.

Please turn to slide 13. As you can see from this slide, our free cash flow was significantly affected by the increase in inventory during the quarter, as the conversion of free operating cash flow dropped to 12.7%. We used $1.5 million in cash for capital spending in Q3, and our expectation for capital spending for all of fiscal 2011 continues to be in the range of $6 million to $8 million. We believe in the near-term, our available cash can best be deployed in supporting our acquisition strategy. We will continue to focus our capital spending on strategic, organic growth initiatives and productivity improvements.

Our financial priorities of disciplined working capital management and continuous improvement of our cost structure remain the same. We will continue to focus on cash generation in order to provide the flexibility to make strategic acquisitions. Going forward, we will continue to execute with these goals in mind.

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

Thank you, Tom. Please turn to slide 15 and I'll begin our segment overview, starting with our Food Service Equipment Group.

The Food Service Equipment Group posted solid topline growth and increased revenues by 10.2% during the quarter. The third quarter is typically the seasonally slowest for food service, because a significant percentage of our sales are tied to construction of new stores.

This quarter was slower than normal on the Refrigeration side of the business, partially because of the particularly harsh winter. It was also partly because retail customers had difficulty last year with new store coordination during the winter months, and decided to delay openings and remodeling until the weather was more favorable to site construction work and coordination.

Overall, our refrigeration sales were up modestly year-over-year in the quarter, due to the strength in the Quick Service Restaurant segment. We expect the next two quarters to be stronger than it ordinarily would be, as the outlook for the retail segment of our Refrigeration segment remains very positive.

One exciting new area of opportunity in Refrigeration is the Dollar Store segment, which is increasingly turning to food as a growth vehicle. Dollar Stores are increasing the shelf space they are dedicating to food, versus other categories because it's growing faster and delivering higher margins.

We've approached this market segment with a two-tier product strategy. First, Standex is offering a new product that is ideally suited to the Dollar Store need to maximize sales and profit from the sale of refrigerated and frozen foods. We developed a higher quality, more aesthetically attractive product with several design features that test store experience, has demonstrated improved sell-through versus the refrigerated cases that Dollar Stores have typically used.

Second, we have conducted a series of value engineering products with our existing Reach-in product line for this cost-conscious market segment, allowing us to further increase penetration. In fact, the nation's largest Dollar Store chain has committed to use our products in its new and remodeled stores, as well as for replacements beginning in late Q4 and ramping up in Q1.

Our Cooking Solutions Group produced a second consecutive quarter of double-digit, year-over-year sales growth as a result of strength in North America and internationally. Operating income was not as robust as we would have liked, as sales volume was more heavily weighted toward the dealer channel, which carries lower margins, as opposed to national accounts. We've been working aggressively to penetrate new national accounts and we have seen some progress on that initiative.

For example, we've previously announced that we were awarded the exclusive Hot Dog Roller business for 7-11 Convenience Stores. We began to see revenues from that account in the third quarter, but we expect it to be very strong in Q4 and going forward. We were also awarded a contract to supply griddles and other equipment for a prominent quick service hamburger chain related to their upcoming premium burger rollout. This should positively affect our results beginning in Q4 through Q2 of next fiscal year.

Our Procon pump business also reported double-digit sales growth, reflecting strength in the global beverage market, coupled with improving industrial demand.

Looking closer at the bottom line in Food Service, operating income grew 19.8% year-over-year. In addition to being affected by product mix in the Cooking segment, pricing has lagged increases in metal costs during the past few quarters. However, our near-term outlook indicates a period of stability in metal costs, as well as a more favorable Food Service Equipment pricing environment.

In addition, in Q3, we attended the North American Association of Food Equipment Manufacturers, or NAFEM, Exhibition. This show occurs every other year, so the sales and marketing expense in the quarter were higher than last year by approximately $600,000, which also had a negative impact on the year-over-year profit comparisons for the Group.

NAFEM was very positive for the Food Service Equipment Group. We continue to receive strong feedback from our customers that Standex is being recognized as one of the major players in the North American Food Service Equipment market, as a result of the breadth of our brands and products.

Secondly, our new products, particularly our new range line, was very well-received, and generated a significant amount of positive feedback from both existing as well as potential customers that visited our display at the show. Range sales have been very strong recently, demonstrating that the Tri-Star acquisition has been working very well for us.

Please turn to slide 16. Our Engraving segment continued to turn in excellent performance with an 18% increase in sales in Q3. [In] the third quarter, historically one of our slowest quarters, the sales were actually up nearly 6% sequentially. On the bottom line, we reported a 94% increase in operating income, demonstrating the significant leverage in this business as a result of our ongoing cost reduction program. This is a high fixed-cost business, so there may be some lumpiness in our bottom line as sales vary quarter-to-quarter, due to large automotive texturizing projects whose timing will vary throughout the year.

Our two acquisitions, one in South Africa and the other in India, continue to perform above our expectations, both in terms of sales and profit contribution. Our plants in China also had an outstanding quarter. While Europe and the US did not experience the same rate of growth as in emerging markets, we're still pleased with our performance in those regions.

Although [overall] demand for engraved rollers and machines was relatively flat, we continue to see improving quotation activity and several good opportunities for growth coming forward. For example, in the US, as of January 1, 2012, 60% of the cartoon surface area of a cigarette package must contain warnings about the health effects of smoking. This requires new packaging for all cigarettes sold in the US, increased demand for our rolling engraving equipment. This should benefit our revenues in late fiscal Q4 and into Q1 and Q2 of fiscal 2012.

Engineering Technologies revenue -- please turn to slide 17. Engineering Technologies revenue was down 30.4% year-over-year, while operating income decreased by 67% due to the effect of the lower volume. As I mentioned earlier, the revenue decline was the result of a difficult comparison due to very large shipments for an order related to our Teledyne Brown contract for NASA in the third quarter last year, and lower sales in the energy sector in the current quarter.

Our acquisition of Metal Spinners Group, Ltd. in the UK was the key development for our Engineering Technologies Group in the third quarter. Metal Spinners is an exceptionally strong, synergistic fit with our Spincraft business, because it has enabled us to establish a presence in end use markets in Europe and the United States that we've been targeting for some time.

The early response from existing and potential customers to our adding Metal Spinners Group to the Spincraft family has been very favorable. We're particularly excited by the growth opportunities the transaction has generated in the oil and gas sector, which is a brand-new end user market for this Group.

In addition, we've begun to incorporate the more efficient spinning capability that Metal Spinners provides us into our efforts to penetrate the aviation jet engine market. For several years, we've been working with a prominent manufacturer of aviation jet engines to replace machined-forged components with near-net-shaped spun components. This change in manufacturing process offers a significant cost reduction to jet engine manufacturers, and the same time is a very significant potential growth opportunity for this Group.

We continue to expect that calendar 2011 sales in the traditional or legacy energy and aerospace market for Spincraft will be flat year-over-year, but that growth will resume in these markets in calendar 2012. Further, because of the long lead-time nature of most of the sales that flow through the legacy Spincraft business, we have reasonable near-term visibility for this business. Based upon our current backlog, we expect a much stronger Q4 performance from this business. At the same time, we expect growth in the Metal Spinners acquisition to impact our results positively in Q4 and throughout fiscal 2012. We continue to be very bullish about the long-term growth prospects for this business.

Please turn to slide 18. The Electronics and Hydraulic segment reported another quarter of excellent results, including 28% year-on-year topline growth. We continue to have very strong operating leverage in this Group, resulting in the operating income growth of 69% in the third quarter.

Electronics posted its fifth consecutive quarter of double-digit sales increases. This was led by record shipments of reed switches in the quarter, as we continue to see the positive effects of our focus on key strategic accounts.

We have significant product engineering capability and intellectual property as it relates to many applications in aerospace, automotive, industrial, and medical applications, coupled with low-cost manufacturing in Mexico and China. So we're in the sweet spot for customers who want high-level engineering capabilities and intellectual property, but also need low-cost. We also have invested in our sales infrastructure over the past year, adding both direct sales personnel and distributors on a global basis. As a result, we have been consistently taking business away from smaller suppliers and blue-chip OEM customers.

For example, we built a strong presence at GE Medical, GE Appliance, and Eaton. We continue to be encouraged by our prospects in Electronics, as we execute our strategy to gain market share by introducing new products, penetrating new geographies, and applying existing technologies into new applications and customers.

At our Hydraulics business, this was the third consecutive quarter of double-digit year-over-year growth. All indications are that the North American market for hydraulically-operated telescopic hoists has stabilized and has begun to grow again. In addition, the market is now increasing prices in the mid-single digits. Looking internationally, we are seeing greater opportunities for telescopic cylinders in Central and South America, Australia, and Southeast Asia, as well as early signs of recovery in the European hydraulics market.

At the same time, our China strategy is beginning to get traction. We continue to increase our penetration as a supplier to the Chinese hydraulics market, while introducing products such as rod cylinders that we manufacture in China to markets around the world. We continue to be encouraged by the prospects for top and bottom line growth in this segment.

Please turn to slide 15. Air Distribution segment sales were up 8.3% in Q3. Our volume increased, although housing starts remain relatively flat year-over-year. This continues to demonstrate that the efforts we've made on new products and channel pull-through are paying off. Our operating loss for the quarter was about $1.1 million. The market has pushed through price increases in the range of 12% to 15% very recently, which should begin to help us close the profitability gap beginning in Q4 and extending into Q1 fiscal 2012.

Please turn to slide 16 for our summary highlights. First, we're very pleased with the double-digit top and bottom line growth at our Engraving, and Electronics and Hydraulic segments. Food Service Equipment reported double-digit top and bottom line growth as well, but encountered some headwinds during the quarter.

Second, we are increasingly optimistic about the recovery in our end user market. ADP is the only segment where market conditions have not shown any improvement. Further, based upon our current backlog, we expect a much stronger Q4 performance from Engineering Technologies. Overall, we're quite bullish about our ability to capitalize on solid growth opportunities in the near-term.

In addition to organic growth, our recent acquisitions have been performing above our expectation on both the top and bottom lines, and in terms of strategic fit. We continue to have a low net debt to cap ratio of 23.4%, which gives us the ability to make additional strategic accretive acquisitions in the near-term.

Tom and I'll be pleased to take your questions. Operator?

(Operator Instructions). Rick Hoss, ROTH Capital Markets.

This is Joe Bess for Rick. (multiple speakers) So just a little bit more on the Dollar Store opportunity here. I was just curious as to how new this opportunity is, because I'm just trying to quantify what it could be versus your previous sales breakdown by market.

Well, this is a new segment for us. So if you look at our historical sales, we would have minimal sales that we would experience over the last, say, 12 to 18 months. It is a segment that we have been focusing on from a new product and value engineering standpoint for the last 18 months. And our recent contract that we expect to sign here shortly is really our first major victory, if you will, in that segment.

Okay. And you were expecting this to begin in Q4, or is that Q1?

Late Q4 and then ramping up to a fuller run rate Q1.

Okay, great. And then some of the opportunities you're seeing in the oil and gas market for Engineering Technologies, could you talk a little bit more about that? Is that more greenfields? Or are these upgrades or domestic versus international?

Surely. The specific application is related to offshore drilling and production platforms. We're being used in basically a spring damper system that connects both risers as well as tendons that connect the platforms to the seabed. So these applications would be predominantly international, exclusively for offshore, and represent both new platform opportunity as well as replacements.

Okay, great. What are you expecting in terms of your operating margins for Engineering Technologies going forward? I mean, it was in the teens this quarter, and previously, it was pretty high due to the Teledyne Brown thing. Was there any -- can you give us any color on that?

Well, again, this quarter, unfortunately, showed both the highs and the lows. The 30% margin that we showed last year was, obviously, a very usual unusual one-off situation. And the significant volume downturn obviously impacted margins this year.

I think we said in prior calls that in the 22% to 24% range is more typical of what we expect to see in this business in the long-term. And as we just saw this quarter, it can vary quite a bit, depending on the mix and the volume that we see going through.

Okay. And then just a little bit on the pricing environment. What are you seeing there in terms of your Food Service Equipment?

More and more, we're seeing price increases being implemented really pretty broadly throughout the market. I think I mentioned in our last quarter's call that there is a publicly accessible list price program online called Auto Quotes, where most, if not all, of the major competitors in the Food Service Equipment market in North America do post list prices. Those are summarized on a monthly basis. And really, for the last three or four months, we've seen a pretty consistent, across-the-board announcement of price increases really throughout both the hot and the cold side of the business.

Great. And then, Tom, what's the tax rate we could expect for the year?

32% to 33%. I know we were low this quarter because of a nonrecurring tax item that we had, but 32% to 33% is what we anticipate.

All right. Thank you, gentlemen.

Michael Saloio, Sidoti & Company.

I appreciate your comments on metal costs, but just a follow-up from that last question -- did you start to see benefit from price decreases on your Food Service equipment this past quarter? Or are you anticipating that to kick in over the next few?

I would say both. We've been implementing price increases really over the last, say, 90 to 120 days. We typically are doing that based on product lines. And so, not all product lines get price increases at the same time. Not all product lines get the same amount of price increase, because obviously, the metal content, the type of metal that we're using in the various products, will vary.

For example, on the cooking side, you'll see a much more predominance of stainless steel being used. And it has its own particular cost escalation that we've seen. And on the walk inside, you seem more carbon steel galvanized carbon steel being used. So we have been implementing and will continue to implement. So we see some of it in our run rate, to answer your question, and we'll see more going forward.

Okay. And the demand side of the equation at Food Service appears to be good and getting better. Tom, could you just kind of re-clarify your questions on some large projects that you said were due to hit this quarter, and when you'll be expecting them to hit?

Are you talking about Food Service, Mike?

Yes.

Right. Again, we mentioned really two components on the hot side. We specifically called out that we were making progress on the national account side, and two, specifically, that we're pretty encouraged about because they are sizable.

One is a 7-11 convenience store rollout for hot dog rollers, which started in Q3, but we didn't get a full run rate in Q3. We expect essentially a full run rate of that business in Q4. The other one was for a large -- grills for a large burger chain, which won't start until basically Q4 and will be impacting our Q4 through Q2 of next fiscal year. And again, both of those are a reflection of our efforts to improve our penetration on the national account side.

And then on the refrigerated side, again, we saw less than our historical run rate on the retail side due to weather-related issues. That, we expect to turn around pretty dramatically in Q4 and Q1. Most of our retail customers are saying that they plan to open and remodel roughly the same amount of stores as last year, but we'll be doing it in a much compressed timeframe just simply because of weather constraints.

At the same time, laid over our historical sales in retail would be this Dollar Store segment, which would be incremental to our historic run rate. Again, we don't expect that start significantly in Q4 -- a little bit late Q4, but then ramping pretty dramatically in Q1.

Okay. This is likely going to be a difficult question to answer, but I'm wondering what your thoughts are on the automotive side at Engraving, as Toyota and some of the Japanese auto makers are struggling here? Do you have any antidotal comments on what the impact could possibly be on build count next year?

Well, that is a difficult question, and it's one that we're obviously very interested in. And as we meet with our contacts with the Japanese plants both here in the US as well as in Japan through our licensee, it's a question that we have. And I really can't say that there's significant visibility yet.

The one point I would make is that, again, recall that our business in Mold-Tech rising is not related to build count. In other words, the fact that the build count is down, per se, should not have any impact on our near-term business. Our business is driven by the number of new models or refreshed models that are launched in any quarter in any given year.

And the model count -- or excuse me, the build count really doesn't influence that. Except for if the OE is dramatically impacted from a financial standpoint and needs to pull in their horns from a capital deployment, that could cause them to impact their new model lineup or schedules. And as a result, that, in turn, could impact our business. That typically is a much longer response time. Because they have -- the OEs on the short side probably are on an 18-month release program upwards of 2.5 years, so that the near-term 12 months, they're pretty well locked and loaded and committed from a capital standpoint for launching vehicles.

So, a long-winded answer is, if there is a response or an impact, it won't be because of build count, it will be because of new launches. And that typically is a longer lead type of response. Again, we just don't -- because of that, more like an 18-month-plus kind of visibility. We just don't have any clarity as to if there will be any impact on our business.

Very helpful. And on the same token, are you seeing any impact on the Electronics side of the business from the autos?

No. No, we -- again, we were exposed a little bit to the transplants but as well to the North American side. So, really it's a relatively small part of our business. It's around 20% all in, and that includes both Japanese as well as North American OEs. So at this point in time, we don't expect a significant impact and we haven't seen much at all so far.

Okay. And I guess if I have time for one more -- what are some of the low-cost sourcing initiatives at Engraving?

A lot of what we're doing there is the sourcing of roll blanks as well as forgings as well as some basic components for our machine building side. So the low-cost sourcing is focused on roll and plate engraving on the machinery business, where we're, again, taking advantage of lower-cost sources for either basic materials or semi-finished components.

Okay. Thanks, guys.

(Operator Instructions). John Walthausen, John Walthausen and Company.

A couple of questions. You made a comment that Metal Spinners was helping position you to get on aircraft engines. Could you flesh out a little bit more what they bring to the party? And whether they do have any parts on with the aircraft engine manufactures, where perhaps it might be an advantageous part, whether this is something we would need to wait until there was a new generation of engines to see any impact from?

All very good questions. Let me take them one at a time. I think it's important to establish the basic benefit proposal that we offer to the jet engine manufacturers.

If you look inside of a jet engine, there are many cylindrical casing-like components, both in the air intake as well as in the exhaust portions of the engine. Heretofore, those parts are made by, first of all, procuring a forging, which requires extensive investment in tooling -- each casing to have its own tooling.

And then once you get the forged component, you essentially have the machine both the ID and OD complete. The result is, is that that machine is expensive and the machine hours that are required, you end up creating chips, if you will, from the forging and you end up throwing those away. So there's a very high expense as it relates to material; there's a very high expense as it relates to machine time. And then the one-off costs associated with the tooling to create the forging.

The value proposition that we're offering to the manufacturers is that we can, rather than create a forging, we can take essentially flat sheet material, and through our spinning process, come up with a semi-finished part that is what we call near-net shape. In other words, most of these surfaces are -- can be used as spun or, in some cases, we'll have to do some minimal machining.

The net effect is that there's significant reductions in costs due to using much less material; the tooling is much less expensive; and typically, our machine times are much less, as well. So that's the value proposition.

To answer your question -- what Metal Spinners brings to us is they use exclusively C&C-operated spin lathes, whereas our legacy Spincraft business uses more manual. The result is they're more efficient, particularly on more medium or higher volume applications. Our Spincraft business typically are using relatively small lot sizes -- one, two, three, four lot sizes that we produce parts. In Metal Spinners, the lot sizes are greater and so it's more adaptable, if you will, to C&C-driven or operated lathes.

I think the final thing is, is we've been working with this particular European jet engine manufacturer for a couple of years. And they're quite -- they were quite pleased by the fact that we're now in Europe. Also that this particular Metal Spinners brings us a more automated approach to creating these spinnings. And again, we're very pleased with the fit that this provides us.

Your other question, will this be on new generation engines or possibly on existing? I'd have to say that's still under question with this particular manufacturer, but it's looking more and more like we might actually be retrofitted into existing engines. The value proposition is compelling enough that, as they go through various rev levels to their legacy engines are prepared to potentially introduce some of these parts to existing engines. And certainly, we're looking very extensively at next-generation jet engines as well.

Okay. Good. That's very helpful. Second question, on the Electronics business, it seems like sequentially, December quarter to March quarter continued to grow nicely, which that's a lot better than mostly what we're seeing from electronic component manufacturers. Am I interpreting your comments correctly? And -- or are you gaining share in the reed switches? Or could you give a little more light on that?

Sure. We believe we're taking share really across the board, not just in reed switches but in the magnetics area as well. In the reed switch area, we have specific customer accounts where we know we've taken share from some of our competitors. And that has helped, if you will, the sequential improvement in sales.

On the magnetic side, we stress that we've targeted certain key national accounts. And I can't suggest to you that that's driving sequential quarter-to-quarter sales gains, but I can assure you that over several quarters, these large blue-chip OEMs are diverting or taking business away from other competitors. We go through a prove-out qualification process, which will take several quarters, and then we'll begin to ramp up production for those.

And that's kind of an ongoing process, not one that I can track from this particular quarter last quarter, but one that we expect has been happening over the last 12 months or so, and certainly we expect to continue into the near-term.

Great. Thanks an awful lot, and again, congratulations on a really great quarter.

Jamie Wilen, Wilen Management.

On the opportunity within Dollar Stores, how much per store could there actually be in the number of cases we put in there? And in addition, you have one chain that you are targeting some sort of rollout for new stores and remodels. Could you quantify how much they're indeed looking to doing the next year or two?

Okay. I certainly can address the first of those questions. The range is pretty wide. The reason being that there's three segments that we will participate in. One is just the pure replacement of existing upright refrigerators and freezers in existing stores. And the per-store value there obviously depend on the number of units that are being replaced. But it's probably a couple of thousand dollars on the low end for that kind of opportunity.

But the bigger opportunities are in what we call store remodels and new stores. And on the store remodel side, what some of these retail Dollar Store chains are doing is going in and introducing a significant change in their food lineup that will actually replace or add a complete lineup of product. And again, depending on the size of the store, the number of units that they put in could be anywhere from, say, on the 5,000, 6,000 on the low end to upwards of, say, 15,000 on the high end.

The new stores -- again, very size-dependent. Dollar Stores tend to have similar formats, but will actually vary their footprint depending on the kind of traffic that they anticipate. But again, probably on a 10,000 to 20,000 range would be more typical of, say, a new store and particularly a large store format.

Okay. And is this a trend throughout the entire Dollar Store industry, that they're all kind of looking to somewhat copycat each other and adding (multiple speakers) --?

I can't say every one of them, but I can definitely say that's a trend. And just in retail, in general, think about what's happened in the convenience store market, say, over the last four or five years. You've seen, I think, two very specific trends.

One is the co-location where a brand chain -- McDonald's, for example -- go in and co-locate with a mobile on their own. In other cases, rather than co-locate with a brand, they'll actually bring in their own chain for their own offering, they'll bring in a hot dog program or they'll bring in a heated pizza program.

We're seeing similar kinds of things, particularly on the frozen food side in a Dollar Store, where they're bringing in refrigerated as well as frozen product that can be picked up by the consumer as they go through the store and take home with them.

Within the quarter, you spent $600,000 on a trade show. I realize it's a big one, but it sounds like an incredible amount of money. Was it just a one-time shot? Or did you readjust your budgets and take it from somewhere else, and we won't see a $600,000 savings next year?

Well, again, NAFEM is an every-other-year show, and that's why we highlighted the impact. So, there will be no NAFEM next year. There will be other trade shows, but we would not be spending anything on NAFEM next year. We called it out because it was substantial for the quarter.

NAFEM is the single largest Food Service Equipment Show in North America. That spend will be pretty typical of the kind of spend that we'll have on NAFEM -- what we call NAFEM years, every other year. It was important to have the breadth of our product line presented. And again, we felt the investment was worth it, because the response from both existing and potential customers was quite positive.

Did you have a larger presence in this year's show than you did two years ago?

Roughly the same size.

And lastly, on the engraving business, you talked about that -- it's usually a seasonally slow quarter but you were up sequentially this quarter. Is the seasonality changing? OR you reaching a new plateau in the business?

I think a little bit of both. I think you're seeing us take share on the Mold-Tech's rising side, particularly in automotive. I think that the work that we've done in China, the work in India and South Africa, demonstrate momentum in terms of ongoing market penetration. I think also there's some recovery aspect going on in the marketplace in general, which benefits us sequentially as well.

Excellent. Nice quarter, fellows. Thanks.

And at this time, I'd like to turn the presentation back to Mr. Roger Fix for closing remarks.

Well, we appreciate very much everyone attending. The questions were great, we particularly appreciate that. And we look forward to speaking to you again at the end of our Q4. Thanks very much.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.