Standex International Corp (SXI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Standex International Corp. earnings conference call. My name is Reggie, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. David Calusdian of Sharon Merrill. Please proceed, sir.

Thank you, Reggie.

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 passage on slide 2. Matters that 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 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 would like to turn the call over to Roger.

Thank you, David, and good morning, everyone.

Please turn to slide 3. When you review our positive results for the third quarter and then take a closer look at how we got there, it's a very nice demonstration of our growth strategy. Our sales continue to outpace the growth rates of our end-user markets and that is a direct result of our organic growth initiatives and successful bolt-on acquisitions. The significant leverage in our operating model has enabled us to boost profits, generate cash, and reposition our balance sheet for further organic and acquisition growth.

For the third quarter we reported strong year-over-year sales growth of 12.2%, which included organic growth of 10.4%, acquisition growth of 2.3%, and a negative foreign exchange effect of 0.5%. All five of our business units reported year-over-year sales increases.

Looking at the bottom line, non-GAAP operating income was up 19.8% with 4 of the 5 groups reporting double-digit year-over-year growth. And non-GAAP EPS from continuing operations increased 26%.

Slide 4 identifies the transformation that we've made on the bottom-line performance of Standex over the past 4 years. Our fiscal Q3 is now the 11th straight quarter of non-GAAP trailing-12-month EPS growth. As the chart illustrates, non-GAAP earnings for the trailing 12 months through the recent quarter were $3.28 per share. This EPS performance is 89% above our pre peak recession earnings of $1.74 a share recorded in the first quarter of fiscal 2009, while our trailing-12-months sales are now just slightly above our pre-recession sales peak. We're very pleased to see this continuing momentum.

Please turn to slide 5. Last week we announced an exciting new relationship that we have entered into with an Italian company by the name of Giorik. Giorik is a manufacturer of a wide range of cooking equipment for the European food service equipment market. Giorik is located in the region near Venice, Italy and has annual sales of approximately $17 million. Our new relationship with Giorik has two critical components.

First, the Standex Food Service Equipment Group has become the exclusive distributor of the Giorik Steambox combination steam and convection oven, or combi oven, as they are known in the industry, for North America and the United Kingdom. The combi oven is a very important cooking device in both restaurants and grocery stores. And the distributor relationship with Giorik fills this product gap in the Standex Cooking Solutions product lineup.

Secondly, we have exercised an option to acquire a 20% minority stake in Giorik and, as a result, we have cemented a long-term corporate relationship that we intend to expand in terms of both product offerings and ownership position over time. As such, we will also acquire a contractual right of first refusal to buy the remaining 80% of the ownership in Giorik. We expect to close on the acquisition of this minority position within the next few weeks.

Standex and Giorik plan to jointly introduce this new combi oven product offering at the FMI food retail show, which focuses on grocery stores, and the National Restaurant Association show, which focuses on restaurants. Both of these shows are being held this week, so we expect this relationship to quickly generate excitement.

On slide 6 we identify some of the product benefits and features of Giorik Steambox combi oven offerings. Giorik has designed patented features into the Steambox combi product line that provide the chef with exceptional ease of use and range of control over the cooking process, such as more rapid recovery during the cooking cycle and more precise humidity control. Our testing and analysis has also shown that Steambox technology provides reduced water and energy consumption, as well as faster cooking times, as compared to other competitive product offerings. These features provide performance and economic advantages to our customers which we believe will provide a very compelling value proposition.

The Giorik combi product offering is also very broad in its scope, as it offers a full complement of both electric and gas-fired units, as well as both touchscreen and programmable controllers which will allow us to address the breadth of applications that our customer base requires.

We're very excited about this partnership as we believe Giorik offers superior technology at a very competitive price in the combi oven market, which will lead to sales growth in this category going forward.

So with that, I'll turn the call over Tom, who will discuss our third-quarter results in some detail after which I'll discuss the recent performance of each of the business segments. Tom?

Thank you, Roger, and good morning, everyone.

Please turn to slide 7 where we describe two transactions completed during Q3 which had a significant impact on our results and therefore require some explanation.

The first transaction which we closed during the quarter was the previously announced sale of our Air Distribution Products business to subsidiaries of Blue Wolf Capital Partners. The total sales value for the transaction was $16.1 million, which included $13.1 million in cash and a note for $3 million, secured by the real estate sold as part of this transaction. As a result of the ADP divesture we recorded a loss of $0.19 per share in discontinued operations during the quarter. The total loss recorded for the ADP divesture in the second and third quarters was $1.28 per share.

In addition to the sale of ADP, we sold our Engraving facility located in a residential area in downtown Sao Paulo, Brazil during the quarter. We had previously announced the decision to discontinue our mold texturizing licensee relationship in Brazil and that we had opened our own Mold-Tech operation. In doing so we started up the Mold-Tech operation in the facility of our existing roll engraving and machinery business which we acquired in 2003 as part of a larger acquisition.

From a size, location, and operational standpoint, we determined that our existing facility was not well suited to accommodate the combined engraving operations over the long term. As a result, we decided to sell our existing facility, capture a gain on the appreciated real estate, and relocate to a larger and better equipped leased facility located on the outskirts of Sao Paulo in the industrial complex. We sold the building in March for $5.1 million of cash, which resulted in a gain of $0.26 per share in continuing operations. We will be relocating our operation over the next two quarters, which we anticipate will result in a $0.03 to $0.04 share of restructuring expense.

Slide 8 summarizes our third-quarter results. Net sales for the quarter were up 12.2% to $150.7 million from $134.3 million in the third quarter of last year. Including special items, operating income grew 19.8% to $11 million from $9.2 million a year ago. Adjusted EBITDA grew 17.8% to $14.4 million.

As slide 9 illustrates, net income from continuing operations for the quarter included post-tax $0.2 million of restructuring charges, a $3.1 million ( sic - see press release) gain on the sale of real estate in Brazil, and $0.3 million in nonrecurring tax benefits. The third quarter of 2011 included post-tax $0.1 million of restructuring charges, $0.6 million in acquisition-related expenses, and nonrecurring tax benefits of $0.2 million. Excluding these items from both periods, non-GAAP net income from continuing operations increased 27.2% to $8.1 million from $6.3 million in the third quarter of fiscal 2011.

Earnings per share from continuing operations excluding special items grew 26% year over year to $0.63 per share.

Slide 10 reviews our year-to-date performance. Operating income from continuing operations for the first nine months of fiscal year [included] special items was $46.1 million compared with $39.7 million in the same period of last year. Excluding special items, non-GAAP operating income increased 9.3% to $42.7 million.

Our year-over-year -- or year-to-date bridge outlining special items is on slide 11. Net income from continuing operations for the nine-month period in fiscal 2012 was $33.4 million, or $2.62 per diluted share compared with $27.1 million, or $2.13 per diluted share, in the same period last year. Net income from continuing operations, excluding special items, increased 15.2% to $30.2 million, or $2.36 per diluted share.

Turning to slide 12, net working capital at the end of the third quarter was $115.1 million compared with $116.4 million at the end of Q2 and $107.1 million at the end of Q3 last year. Working capital turns were 5.2 for Q3, up from 5 turns at the end of Q3 last year.

Looking at slide 13, we had free cash flow from continuing operations of $11 million during the quarter. Cash spent on capital expenditures year to date is now $8.2 million, in line with our expectations of capital spending being roughly in line with depreciation, or in the range of $10 million to $12 million for the full year.

Our net debt for the quarter was $21.1 million and our ratio of net debt to capital was 7.6% at March 31, 2012, which represents a record low for the Company.

One additional item before I turn the call back to Roger. During the quarter the sale of ADP necessitated the reevaluation of our reporting segments. As such, we are now breaking out Hydraulics and Electronics businesses, which have previously been combined as one reporting segment, as two separate reporting segments beginning with the third fiscal quarter. This is in line with SEC and GAAP criteria for segment reporting, which have quantitative thresholds for sales, profits, and total assets. We have restated historical results to the new presentation.

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

Thank you, Tom.

Please turn to slide 14, Food Service Equipment Group, and I'll begin our segment overview. Food Service sales were up 5.6% in the third quarter, year over year. Operating income, however, declined by 5.5% as a result of several issues at Cooking Solutions that I'll discuss in a moment.

In the Refrigerated Solutions Group, demand remained strong in both the quick-serve and national chain restaurant markets and the dollar store segment continues to grow. During the quarter we experienced an ongoing decline in sales to the retail drug store segment as the result of a significant reduction in store openings.

We're excited by several new product introductions that demonstrate the innovative refrigeration technology we bring to bear to develop solutions for our customers. First, during the quarter we launched a new line of ultra-low refrigeration equipment that achieves temperature as low as minus 80 degrees centigrade. Ultra-low refrigeration is used for a number of laboratory and scientific applications at research hospitals and labs for the storage of items such as DNA samples, bone marrow, cell samples and human, animal and plant tissue. This advanced technology line has been very well received and our customers are actively placing orders.

Second, we continue to expand and invest in our rack refrigeration product offering, which is used in convenience and grocery stores that have refrigeration devices in multiple locations. Rather than have a refrigeration compressor on each device, compressors are all on a rack in one central location, which provides a more energy-efficient and cost-effective alternative to supplying refrigeration to these stores.

And finally, we have substantially redesigned our endless glass door merchandiser to be more cost effective, which we believe will allow us to be more competitive in penetrating the small footprint retailers, such as dollar stores, drug stores, and convenience stores, that are looking for a modular expandable solution for their refrigerated reach-in display cases.

We're pleased with our bottom-line performance on the refrigeration side and are optimistic about continuing improvement going forward. The inefficiencies related to the Kool Star relocation into our New Albany, Mississippi facility were substantially behind us as of the end of the third quarter, and we should realize a full quarter of benefits beginning in Q4.

Turning to Cooking Solutions, there are a few factors that are tempering our sales and profit growth. From a top-line perspective, we're still seeing soft demand from the retail grocery segment in the UK as a result of the macroeconomic conditions there. In addition, sales are down at several of our quick-serve chain customers in the US. Part of the issue with this channel is the continued delay of a premium burger rollout by our prominent quick-service hamburger chain customer and reduced capital spending at others.

On the positive side, there has been some improvement in domestic sales through our representative and dealer channels. In addition, I'd like to note that the bookings picture improved at the end of the quarter as compared to the beginning of the period, and thus far we've seen that trend continue in the early part of Q4.

On the bottom line, in addition to the volume deleveraging, Cooking Solutions margins were affected by higher warranty costs, pricing pressure in some segments of the cooking line, and sales weighted toward the lower-margin dealer channel.

We continue to work on a number of cost reduction and other initiatives to improve margins at Food Service. In addition, as we closed out the third quarter, the inefficiencies created by the Tri-Star move into the Nogales, Mexico facility are substantially behind us and we should now benefit from the resulting cost savings. We expect an annualized run rate of about $1.5 million in savings from the combination of the Kool Star and Tri-Star consolidations.

Please turn to slide 15, the Engraving Group. Standex Engraving Group sales were up 9.3% in the third quarter year over year, while operating income was up 32.5%. Our Engraving Group reported record Mold-Tech sales as a result of broad-based customer demand from new automotive platforms in all three of our key geographies -- North America, China, and Europe. Our global infrastructure, technology, and project management capabilities are yielding market share gains in key automotive OEMs around the world.

Partially offsetting the Mold-Tech performance was a continued year-over-year decline in sales in our roll engraving machinery business due to the ongoing recession in the US housing market, as well as continued economic-related weakness in Brazil and Europe.

We continue to move forward with our emerging economy strategy, with a particular focus on Asia-Pacific, China, and South America. As part of that initiative, as we discussed earlier in this conference call, we initiated relocation of our Brazilian engraving operation into a bigger and better equipped facility in Sao Paulo. Growth in the automotive sector and other key markets for engraving services is, and will continue to come, from the emerging economies. So you can expect to see us continue to invest in these growing markets.

We're bullish on this business and believe that it represents exciting long-term prospects for Standex.

Please turn to slide 16, Engineering Technologies Group. Engineering Technologies sales were up 70.7% year over year in the third quarter, with operating income up 97.2%. Once again the Metal Spinners business we acquired at the end of Q3 2011 contributed significantly to both the top- and bottom-line growth of this group. We're seeing continued strong demand from the oil and gas market.

The product being produced at Metal Spinners for the oil and gas segment is used in offshore floating production platforms used in deepwater subsea fields located offshore of Brazil and the Congo. The long-term demand for this product, particularly for Brazil, is very strong and, as a result, we expect that Metal Spinners will continue to benefit from strong demand from this segment for the foreseeable future.

At our legacy Spincraft business we began to see improved demand in the land-based gas turbine market. Sales in this market segment have been down for roughly 12 months as a result of reduced sales to one of our major land-based gas turbine OEM customers. We had expected some level of improvement in the second half of the year, but visibility remains cloudy.

Aerospace sales were up year over year for the quarter and we expect strong revenues from this segment for the foreseeable future. We're very excited right now about our prospects in the space sector for both unmanned and manned exploration programs. As a reminder we already have secured long-term orders through 2015 from the United Launch Alliance, or ULA, for unmanned space flight opportunities.

Please turn to slide 17, Electronics. Electronics posted a 3% increase in sales and a 19.7% growth in operating income. For the past few quarters we've discussed our efforts to implement cost reduction initiatives to mitigate the effect of relatively flat sales on profitability. This quarter you can see the positive results of these efforts as we demonstrated very strong operating leverage.

What is particularly exciting right now is that toward the end of the quarter bookings for reed switches for sale to customers in China and Asia-Pacific began to rebound. In fact we recently returned our UK reed switch facility to a three-shift operation, after having been on two shifts for a few quarters. While this did not contribute to Q3 sales, we do expect the increase in reed switch bookings to have a positive effect on sales in Q4 and on into fiscal 2013.

In addition to the rebound in the reed switch business, we began to launch in Q3, and will continue to launch through the rest of calendar 2012, a series of new customer programs that should contribute to revenue in the quarters and years to come. For example, following the HVAC volt sensor that we launched in Q3, we plan to launch a new magnetic device for a medical application, and a [pliant] sensor program for GE Medical and GE Appliance, respectively, in Q4 of this year and continuing into Q1. The new sensor we've developed for GE Appliance will be going into all new dishwashers and will regulate water flow and temperature.

Each one of the programs that we are launching is the result of a customer need for an engineered solution to solve a particular application requirement. Our customers receive a best-of-both-worlds solution when they work with Standex Electronics. In addition to our excellent engineering capabilities, they also benefit from our low-cost manufacturing position that we've established in Mexico and China.

With anticipated increase in revenues in fiscal 2013 we expect to leverage our lower-cost structure to accelerate profitable growth in the Electronics Group.

Please turn to the Hydraulics Group on slide 18. Our Hydraulics segment reported a stellar quarter, achieving a 124.1% increase in operating income on 24.2% sales growth. We continue to see a strong recovery in North America for dump trailer systems and sales for refuse handling applications were also robust as a result of our focused efforts to penetrate that market. Our initiatives to capitalizing growth in emerging markets paid off as well, as we experienced good sales in Mexico, South America, Thailand, Australia and the Middle East.

We also continue to ramp up our China facility to export telescopic and rod cylinders to all the major geographic markets we participate in. Aftermarket sales were also up substantially, as were sales of our new rod cylinder products. So it was a very solid quarter for Hydraulics across the board.

On the bottom line, we've leveraged our low-cost structure into triple-digit increase in operating income. And we have significant opportunities for top- and bottom-line growth as we continue to execute on our growth initiatives.

Please turn to the summary on slide 19. Let me leave you with a few key thoughts as we enter the final quarter of the fiscal year and begin to look to fiscal 2013. First, we performed well in the third quarter, with all 5 segments reporting year-over-year growth and 4 of 5 reporting double-digit bottom-line growth. We continue to remain cautiously optimistic about the majority of our end use markets as we approach the beginning of the new fiscal year.

Second, our organic growth initiatives are working. And we have exciting new customer programs and new products being launched across many of our businesses that should benefit the top line throughout fiscal 2013 and beyond.

Third, we've made significant progress in paying down debt and are in excellent position to use our balance sheet to make further bolt-on strategic acquisitions. Our Metal Spinners acquisition has been a great success for the Engineering Technologies Group. And we look forward to executing on our acquisition strategy in the coming year.

And, finally, we're generating excellent operating leverage across most of our businesses and we expect increased volumes to continue to drive earnings in 2013.

With that, Tom and I will now be pleased to take your questions. Operator?

(Operator Instructions) Michael Saloio.

My first question is on the Giorik -- is that how you pronounce it?

Giorik.

Giorik 20% stake and possibly an acquisition in the future. Does that product, the combi oven, get you into any new clients within QSRs or any new types of clients? Or does it bolster your ability to service existing clients?

It definitely gets us into a new segment. Historically we've had a brand label relationship on a combi oven that was primarily designed for grocery store applications. What was missing in that product offering was gas-fired. Most of the restaurants here in North America use gas-fired versus electric-fired. And so the addition of a gas-fired product line definitely will open up the restaurant side of the business where we really hadn't had a competitive product either in terms of the type of firing or, frankly, in the cost point that we had.

Okay. And --

John Walthausen; Walthausen & Company.

Congratulations. When I'm looking at the numbers, looks like corporate expenses are on the high side. Was there anything particular in there, or should we anticipate that that's a new level we'll be at?

That was a catch-up on primarily management incentive compensation.

Okay, fine. And then, on a broader question, you've got your organic growth initiatives well in place. Can you talk a little bit about what you think organic growth should be for the different parts of the business over the next few years, assuming the type of economic environment we're in of relatively slow growth?

Well, we haven't given specific guidance for the specific business segments, but what we've said is as follows, that if you look at our businesses across the breadth of the Company, that we serve at least 12 major end user segments. And it varies all the way from automotive to electronics to food service equipment to automotive, et cetera, et cetera. And so we've said that to try to follow market data for each of those segments isn't practical. In fact, in many cases there isn't published data. So we've said consider our market growth to be roughly equivalent to GDP here in the US, and that from an organic standpoint our expectation is that we should grow 2 to 3 points above GDP on average over the cycle.

And then, in addition, we've said that we're going to be acquisitive. Our acquisitions are going to be lumpy, so there's not a per se annual number we should look at. But on average, say over a 4- or 5-year period, an expectation of acquisition growth that would add another 3 to 4 points isn't unrealistic. So that kind of lines up, frankly, with what we did this particular quarter, GDP plus 3 or 4, plus a couple points of acquisition growth gets you to 10 or a little more. And we had some negative currency to go along with that.

Good, that's helpful. And then, the final question is it looks to me as though you'll probably get something in the vicinity of an operating margin of 9% this year, which shows it's very good progress that you've made over the past half dozen years or so. Is there a target above that 9%, or are we reaching what's reasonable, given the types of businesses that you're in?

Well, we also said that we need to get the entirety of the Company above 10% on an EBIT basis. So that's clearly our goal. And I think we're going to be approaching that even close -- tickling it this year and hopefully then moving towards that over the next couple of years.

Okay. Thank you very much.

Michael Saloio; Sidoti.

Hi. Sorry about that. I got cut off there for a second. I guess I'll ask on Metal Spinners, can you give us the revenue contribution from the acquisition in the quarter?

No. We don't disclose that level of detail. Again, I refer you back to when we made the announcement. And then we're growing double digit on that number probably right now.

Okay. What would you say the biggest long-term driver for the Electronics segment is going forward? At some point you're going to have the cost structure to where you want it. What drives growth in that segment over the next 2 to 5 years? And I'm curious on your thoughts on that same question on Hydraulics.

Well, growth is going to be given by technology, by new products and applying technology against new programs for customers. If you look historically at the business, go back 10 years ago, we were highly concentrated on, say, 4 or 5 market segments, automotive being the biggest. We've expanded the markets served, to now we're well over a dozen specific market segments that Electronics participates in, which gives us more ponds to fish in, so to speak. Our focus within those segments is to seek out customers that need customer solutions, that have application issues, that have problems that we can apply our technology to.

So it's either new products that are launched of a general nature -- Planar Transformers is a good example. We launched Planar Transformers about a year ago. And that's a generic product line used in a lot of applications where they need high-efficiency, small-footprint, compact magnetics such as in solar applications, electric hybrid vehicles, that type of thing. Or, as we talked about this quarter, specific programs for specific customers.

So GE Appliance was a good example. If you recall, GE here about two years ago committed to a complete retooling of their appliance technology area down in Louisville, I think, as I recall, roughly a $15 million investment launching a new product of dishwashers. We'd been working with GE Appliance for the better part of two years to come up with this particular float sensor. And as a result of being successful in that application we'll be launching with them as they launch their new platform.

So those are the kind of things that will be growing the Electronic business.

In Hydraulics, again, what we've talked about there is that we have a relatively large market share in our traditional markets of dump truck and dump trailers. So it's about diversification outside of that historical strength. And we've looked at that both geographically, also from a end-user segment, and also from a product portfolio. So geographically, again, with our facility in China achieving a low-cost position that gave us access not only to the domestic Chinese market, but also into Southeast Asia where we've got a very good customer in Thailand, a very good customer in Australia, and we're penetrating South America.

In terms of market segments here in the US, here again traditionally we're in this dump truck, dump trailer. But the refuse area, both garbage trucks as well as roll-offs used for hauling containers around, both have a lot of hydraulic cylinders, both telescopic as well as rod cylinders. And we made a major effort to penetrate into that segment. And we're just making good headway. There's a big market [segment.] In fact, our management team is literally in Las Vegas today and tomorrow at a refuse show, showing our new products to that market segment, which we're pretty excited about.

And then from a product standpoint, we've added rod cylinders to the telescopics. Kind of unique thing there; we're bringing them out of China, engineered in the US, for very specific applications. And we're finding the combination of having telescopics along with rod cylinders that are engineered for specific applications is giving us a strong product position, particularly in the garbage truck segment.

Okay. And is the demand more a function of a turnaround, or I guess a bounce in commercial construction overall? Obviously we have the international growth. But is there also somewhat of a share gain story at Hydraulics? And who are your biggest competitors in Hydraulics right now?

Well, the two biggest in the North American market are a division of Parker Hannifin and a company called Hyco.

To answer your question about market, definitely we're seeing recovery in that traditional dump trailer business, which is cyclic over time. Tends to go up 3, 4 years and then down for a couple years. So we are seeing strength there, but by no means is all the growth coming from that market cyclicality. Those diversification efforts I mentioned, products, geographic, as well as end markets are definitely contributing significantly to our growth.

Okay, that's great. And I'll ask one more question. As we build towards a net cash position, assuming no acquisitions are made over the next 2 to 3 years, what's your next biggest use of cash? Is there a chance that we could potentially see a dividend hike at some point?

Definitely. We've stated that historically the Company is very committed to the dividend. I think we're up to 175 or 176 consecutive quarters. We've increased the dividend once a year for the last 3 years. Although we don't have a stated dividend policy, we've made it known publicly that we're committed to returning cash to our shareholders through a dividend. And certainly I wouldn't be surprised if the Board over time continues to improve or increase the dividend.

All right, excellent. Thanks for answering all my questions.

Sir, you have no questions at this time. (Operator Instructions)

Well, if there's no more questions we appreciate everybody's attention and we look forward to speaking to you again next quarter. Thank you.

At this time there are no further questions. I would now like to turn the call over to Roger Fix for closing remarks.

Thank you for your attention. We look forward to speaking to you again next quarter. Thank you.

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