Standex International Corp (SXI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Standex International earnings conference call. My name is Derek, and I'll be your operator for today. At this time all participants are in a listen-only mode. We shall facilitate a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. David Reichman from Sharon Merrill. Please proceed.

Thank you, Derek. 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 non-GAAP financial measures to the most directly comparable GAAP measures is available at Standex's fourth-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.

Thank you, David, and good morning, everyone. Please turn to slide 3.

We close out a good year with another solid financial performance in the fourth quarter. Revenue for the quarter was up 5% year over year, with an organic sales increase of 6.5%, partially offset by foreign exchange.

Four of our five groups reported year-over-year sales growth in Q4 with three reporting double-digit increases. On the bottom line we reported year-over-year operating income increases at all five of our segments with, double-digit increases in four.

Overall, non-GAAP operating income was up 16.5% and non-GAAP EPS from continuing operations was up 12.1% to $1.02 per share, a quarterly record for the Company. On slide 4 we identify highlights for our full-year fiscal 2012 results.

Sales for the year were up 9.2%, with an organic increase of 6.9%, and our acquisitions contributed an additional 2.4% of growth, offset slightly by a negative 0.2% foreign exchange effect. All five of our business segments demonstrated year-over-year top-line growth in fiscal 2012. Our sales growth continues to outpace the growth rates of our end-user markets, which is a direct result of our organic growth initiatives and successful bolt-on acquisitions.

Non-GAAP EPS of $3.39 a share is a 14.1% increase over prior year and represents a second consecutive record year of non-GAAP EPS for the Company. We exited the year in the strongest financial condition the Company has ever been in. Excluding a $6 million voluntary contribution to our US employee defined benefit pension plan, we generated approximately $3.40 per share of free cash flow from continuing operations for the year and finished fiscal 2013 in a net cash position of $4.7 million -- the first time in the Company's history that we have ever been in a net cash position.

To put this in perspective, 10 years ago our net debt position was roughly $145 million. So we're pleased about what we have achieved in terms of debt reduction and cash generation. More importantly, our balance sheet is very well positioned to continue to support our organic and acquisitive growth strategies.

We're also pleased with the progress we've made during the year on the ongoing execution of our focused diversity strategy, which is to focus on investing in businesses that allow us to add value and differentiate ourselves from competitors through the use of technology and new product development to provide engineered solutions to our customers.

Throughout the implementation of our focused diversity strategy, we have bolstered our strategic operating groups through the execution of bolt-on acquisitions, while at the same time divesting of underperforming and nonstrategic businesses. During the third quarter of fiscal 2012 we successfully divested our Air Distribution Products business, which fell into the latter category.

Our Metal Spinners acquisition has exceeded our expectations in the first full year of ownership. Metal Spinners, which we acquired in the third quarter of fiscal 2011, made significant contributions to both our top- and bottom-line performance in fiscal 2012.

Two additional acquisition investments that we've made since the third quarter of fiscal 2012 also show great promise. As discussed in our last call, we purchased a 20% equity stake in Giorik, an Italian manufacturer of combination ovens, early in the fourth quarter. And just after the close of the fiscal year, we acquired Meder Electronics, a German-based designer, manufacturer, and distributor of magnetic reed switches, reed relays and reed sensors.

Please turn to slide 5. On the next several slides we will provide you with an overview of Meder Electronics, what the addition of Meder will mean to our electronics reporting segment, and how the two companies fit together from a synergistic perspective.

Meder reported sales of EUR46 million for calendar 2011 and EBITDA margin in excess of 13%. The combined electronics businesses will have sales of roughly $104 million and EBITDA of $17 million. We expect Meder will be accretive to our earnings in the range of $0.08 to $0.12 per diluted share in fiscal 2013, which includes purchase accounting, and $0.26 to $0.31 per share in fiscal 2014.

Please turn to slide 6. Standex and Meder Electronics are highly complementary in terms of geography, products, and industry coverage. Geographically, about 40% of Meder's sales are in Germany, with the remaining 60% about equally split between Asia, North America, and other European countries.

Approximately 85% of Standex's electronic sales are in North America. Further, we believe there are significant cross-selling opportunities between the two companies. We plan to introduce Standex's magnetic product line into Europe and accelerate sales of Meder's reed switches, sensors, and reed relays into North America.

The combined Company will also provide opportunity to accelerate sales growth in China and the Asia-Pacific region. Slide 7 illustrates the product mix of the two companies individually and then combined. Both companies have highly regarded brands. The combination of Meder's reed switches, reed relays, and reed sensors, coupled with Standex's reed switch, magnetics, and sensor product lines, provides a global sales force with a broader suite of products and technologies.

Slide 8 illustrates the served end-user markets for the two companies individually and then combined. The end markets of the two businesses are also complementary, as Meder has been successful in penetrating the test and measurement and household markets, while Standex has established a presence in medical as well as military and aerospace. Both companies have historically had significant market share in the automotive and general industrial markets.

Finally, the combination of Meder and Standex Electronics results in a global organization with the ability to provide engineering support and new product development close to our customer base around the world.

Before I turn the call over to Tom, I'll ask you to turn to slide 9, which identifies the transformation that we have made on the bottom line during the past four years. As the global economic recession impacted Standex in fiscal 2009, we initiated a major restructuring of the Company.

After completing this restructuring in early fiscal 2010, we have focused on both organic and acquisitive growth to allow us to leverage the new lower cost structure that we put in place. The Company's financial results for the last several years demonstrate the impact of lower cost structure and our ability to grow the top line.

Non-GAAP EPS of $3.39 a share reported in fiscal 2012 represents a 37% annual compounded growth rate in non-GAAP EPS in fiscal 2009, when we reported non-GAAP EPS of $1.32 a share. After completing the restructuring of the Company, we have focused our efforts in fiscal 2011 and fiscal 2012 on growing the top line through both organic initiatives and bolt-on acquisitions.

During the past two years we have been able to grow the top line at an annual compounded rate of 10% per year. Our strategy for fiscal 2013 and beyond is to continue to leverage our cost structure through both organic and acquisitive growth.

With that, Tom will discuss our fourth-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 10, which summarizes our fourth-quarter results. Net sales for the fourth quarter increased 5% to $169.8 million from $161.7 million in the fourth quarter last year.

Excluding special items, operating income grew 16.5% to $19.2 million from $16.5 million a year ago. Adjusted EBITDA grew 13.4% to $22.8 million.

As slide 11 illustrates, net income from continuing operations for the quarter includes, post-tax, $0.2 million of restructuring charges, $0.3 million of acquisition-related expenses, and $0.8 million in nonrecurring tax benefits. The fourth quarter of 2011 included $0.2 million of restructuring charges, $0.4 million of acquisition-related expenses.

Excluding these items from both periods, non-GAAP net income from continuing operations increased 13.9% to $13.2 million. Earnings per share from continuing operations, excluding special items, grew 12.1% year over year to $1.02 per share, which represents the first time in our history we have delivered more than $1 of EPS in a given quarter.

Slide 12 reviews our full-year performance. Operating income from continuing operations for the fiscal year includes special items -- including special items was $64.6 million compared with $55.3 million last year. Excluding special items, non-GAAP operating income increased 11.5% to $62 million.

Our full-year bridge outlining special items is on slide 13. Net income from continuing operations for fiscal year 2012 was $46.9 million or $3.67 per diluted share compared with $38 million or $2.98 per diluted share last year.

Net income from continuing operations excluding special items increased 14.8% to $43.4 million, or $3.39 per diluted share. Turning to slide 14, net working capital for the fourth quarter was $110.4 million compared with $115.1 million at the end of Q3 and $102 million at the end of Q4 last year. Working capital turns were 6.2 turns for the quarter, compared to 6.3 at the end of Q4 last year and 5.3 at Q3 fiscal 2012. Management continues to focus on execution in this area, with target working capital turns of 6.

Slide 15 shows our historical progress in debt management. The quarter ended at negative 2% net debt to capital and is the first time showing a net cash position since the Company's inception. We believe we are well positioned to grow the business through organic initiatives, investing in productivity improvements, and bolt-on acquisitions. Please note that our cash position does not, however, include the $40 million we paid for the Meder acquisition, which was completed after the close of the quarter.

Looking at slide 16, we had free cash flow from continuing operations of $28.6 million during the quarter. Cash spent on capital expenditures during the year were $9.9 million.

I would also note that our net cash position included a voluntary contribution to our pension plan during the quarter in the amount of $6 million. Including this adjustment, cash conversion of free operating cash flow was 212% of net income for the quarter and 92.7% for the full year.

Turn to slide 17, and I'll review our priorities for capital spending in fiscal 2013. We project the CapEx to be $13 million to $16 million in fiscal 2013, amortization to be $4 million to $4.5 million, and depreciation to be $12 million to $13 million.

We increased our capital budget for this fiscal year to allow us to fund a number of top-line growth and productivity improvements. For example, in food service we have planned an investment to improve productivity in metalforming. In the Engraving Group we will be funding the startup of new mold texturizing plants in India and South Korea, along with further investments in globalizing the use of our digital technologies.

In electronics we have initiated the construction of a new and larger manufacturing plant in Mexico. We believe that many new customer products we are launching, coupled with the Meder acquisition, will necessitate more low-cost manufacturing capacity in North America for the Group. In addition, we will complete the investments to expand the production capacity of our reed switch factory in the UK.

In engineering technologies we will make significant investments by acquiring two large CNC-operated spin lathes, which we believe will provide us with both reduced cost and significantly enhanced production capabilities. Finally, in hydraulics we will be expanding the capacity of our Chinese manufacturing facility.

Going into 2013, we believe we face a couple of key challenges. First, we are projecting a $2.6 million increase in our pension expense in fiscal 2013 over fiscal 2012, or about $0.13 negative impact to our EPS.

Next, in addition to the soft European economy, if the euro stays at the current level, we expect that foreign exchange will have a negative effect on our results in fiscal 2013, with the most significant effect in the first fiscal quarter.

Also looking ahead to 2013, we anticipate being subject to a higher effective tax rate, resulting from an increased proportion of income coming from our US-based business. At this point we are expecting the tax rate for fiscal 2013 to return to a more normal range, in the range of 29% to 30%. Despite these challenges, we believe we are well positioned to continue our success, as Roger will discuss in a few minutes.

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

Thank you, Tom. Please turn to slide 19, Food Service Equipment Group, and I'll begin our segment overview.

Food Service Equipment sales were up 3.9% in the fourth quarter, and operating income increased by 11.2%. Our Refrigerated Solutions group performed well in the fourth quarter. Sales were strong in quick-serve and national chain restaurant markets, where we have broad penetration. We see strong demand in this segment continuing into Q1.

Our success in the Dollar Store segment is continuing as well, and we are gaining traction with a growing number of names in the marketplace. Our rack refrigeration product offering also continues to be very well received, with interest from the consultants, large retail drugstores, and some of the larger chains.

This product is used in convenience stores, restaurants, and other food service outlets that have refrigeration devices in multiple locations. Rather than a refrigeration system mounted on each device, the refrigerated merchandising cases and walk-ins are supported from a rack in one central location, which provides a more energy-efficient, cost effective, and easier-to-maintain alternative to supplying refrigeration to these stores. Our value line of upright cabinets and undercounter refrigeration products continue to be very well received by the dealer market, and sales in the line have grown very aggressively since its introduction nearly three years ago.

We are also very pleased with our bottom-line performance in refrigeration this quarter and expect continued improvement. As we discussed in our last call, the inefficiencies related to the Kool Star location into our new Albany, Mississippi, facility are substantially behind us, and we saw good sequential improvement in operating income in that business in Q4. We are achieving improved productivity and efficiency and expect continued improvement going forward.

Turning to cooking solutions, the headwinds that we faced in Q3 are continuing to affect our financial results. We are seeing lower sales at several of our quick-serve chain customers in the US, and we are also still seeing soft demand from the retail grocery segment in the UK as a result of the macroeconomic conditions there.

There continues to be improvement in domestic sales through our representative and dealer channels, but those are lower-margin sales. Our focus is on broadening our penetration of major chains in an effort similar to what we have done successfully on the refrigeration side of the business.

On the bottom line in Cooking Solutions, in addition to the volume deleveraging and product mix weighted toward the lower-margin dealer channel, Cooking Solutions margins were affected by higher warranty costs. Last quarter I mentioned that we are working on a number of cost reduction and other initiatives to improve profitability.

The first phase of that effort has been to improve a number of customer-facing metrics. In June we began to see some improvement in certain areas, and we're optimistic that this momentum will continue.

In addition, our new Giorik Steambox combination steam and convection ovens, or combi ovens, that we are now selling through our exclusive distributor relationship with Giorik has been well received thus far. Our beverage dispensing pump business is also being affected by a soft economy in southern Europe, where we are a major component of both cold beverage dispensing and espresso machines. On the positive side, our custom merchandizing businesses are reporting solid demand, which we expect to continue.

Please turn to slide 20, the Engraving Group. Standex Engraving Group sales were up 13.5% in the fourth quarter year over year, while operating income was up 48%. Once again we saw broad-based customer demand at our mold texturizing business from new automotive platforms in all three of our key geographic markets, mainly North America, Europe, and China.

Our global infrastructure, technology, and product management capabilities are yielding market share gains at key automotive OEMs around the world. Our Innovent business also performed well as a result of our efforts to expand geographically and is gaining traction in China, the Asia-Pacific region, and Latin America.

The Roehlen Engraving and machinery businesses, which have been soft for quite some time due to the US housing market as well as continued economic-related weakness in Brazil and Europe, were essentially flat. We believe this business has stabilized, and we are beginning to see more quotation activity from our customer base.

Overall in Engraving, we continue to move forward with our emerging economies strategy, with a particular focus on the Asia-Pacific region, China, and South America. The move of our Brazilian engraving operation into a bigger and better-equipped facility is underway, and we expect it to be completed in the first quarter.

As such, we will be taking a charge related to the move during the first and second quarters. We also have investments planned to add a fourth mold texturizing facility in India and to open our first facility in South Korea in fiscal 2013.

Our fourth-quarter results capped the second consecutive full year of record sales and profit for our mold texturizing businesses. Based on expected car launches in fiscal 2013, we do not expect that our automotive mold texturizing sales in the current fiscal year will be at the level of our record sales in 2012, and we expect to face negative currency headwinds, particularly in Europe.

On the positive side, based on current launch plans, fiscal 2014 should be an even better year than our record 2012. Please turn to slide 21 and our Engineering Technologies Group.

Engineering Technologies sales were down 5.7% year over year in the fourth quarter, while operating income was up 2.9%. As we've discussed before, the Engineering Technologies business is highly project-based and inherently lumpy.

In the year-ago quarter we reported exceptionally high levels of revenue in the aerospace and nuclear naval markets. This was partially offset by higher oil and gas sales in fiscal 2012 as result of our Metal Spinners acquisition.

The product being produced at Metal Spinners for the oil and gas segment is used in offshore floating production platforms used in deep water subsea fields located offshore in Brazil and Africa. Due to project timing, sales of oil and gas will be softer in the first half of fiscal 2013. However, we expect to resume robust sales in this market throughout calendar 2013.

In Aerospace we've already secured long-term orders through 2015 from the United Launch Alliance, or ULA, for unmanned spaceflight opportunities, and we expect related shipments to be steady through fiscal 2013. We have less visibility into the manned spaceflight side, given the government's continued resolution funding of NASA, although we are seeing a good amount of quotation activity. At our legacy Spincraft business demand in the land-based turbine market is steady, but we are not seeing a significant rebound from the current sales level to pre-2010 levels.

Please turn to slide 22, electronics. Electronics posted an 11.5% increase in sales and a 34.8% growth in operating income. During our last call we discussed our plans to launch a series of new customer programs that should contribute to revenue in the quarters and years to come.

Those launches begin with a new HVAC float sensor in Q3 and will continue through the end of calendar 2012. In Q4 we began the launch of new magnetic devices for medical applications and sensor products for GE Medical and GE Appliance, respectively.

The new sensor we've developed for GE appliance will be going in all of their new dishwashers and will regulate water flow and temperature. As a result of these and other smaller programs and the recovery of the reed switch business that we discussed on last quarter's call, we're able to report a double-digit increase in sales for the quarter.

We are also seeing a robust pipeline of sales opportunities in front of us. Looking at the bottom line, we continue to capitalize our cost reduction initiatives, and we've demonstrated strong operating leverage once again.

I discussed the Meder acquisition at the beginning of the call. I'd like to add that we spoke with a number of Meder's larger customers, and they are enthusiastic about the opportunity to purchase a comprehensive suite of products from one Company. We're also impressed with their distribution channel and plan to leverage the opportunity to sell more Standex products through that organization.

The integration of Meder is proceeding well, and we are currently focused on completing the finance and IT integration, identifying and beginning to implement specific sales synergies, and exporting economies of scale in materials purchasing and infrastructure costs.

Please turn to the Hydraulics Group on slide 23. Our Hydraulics segment reported a 19.9% increase in sales and 74.4% growth in operating income. We continue to benefit from the strengthening in the North American market for dump trailer systems and our efforts to increase our market share in refuse handling applications.

We are seeing good activity with new products designed specifically for garbage trucks. We also saw growth in the quarter from increased sales of telescopic and rod cylinders made in our China facility to export to all of our major geographic markets. Our China facility is contributing to both sales and profit growth, and we are currently expanding the capacity of that operation to capitalize on growth opportunities. On the bottom line we continue to leverage our low cost structure and reported a double-digit increase in operating income.

Please turn to the summary on slide 24. Let me leave you with a few key thoughts as we begin fiscal 2013. We ended a record year with a record quarterly non-GAAP EPS of $1.02 per share in Q4.

Four of five segments reported year-over-year top-line growth, and all five reported bottom-line growth. This financial performance is a result of our successful organic growth and acquisition initiatives, as well as our focus on operational excellence. We have been successful in generating operating leverage across most of our businesses during the past few years, and we'll continue to drive cost reductions and productivity improvements across the Company during fiscal 2013.

We exited the year in the best financial condition the Company has ever been in. In fiscal 2012 all five of our business segments demonstrated year-over-year top-line growth, and our sales continue to outpace the growth rates of our end-user markets. Non-GAAP EPS of $3.39 represents a second consecutive record year for non-GAAP EPS for the Company, and we ended the year in a net cash position for the first time in the Company's history.

We have a few headwinds that we will be facing in 2013 -- namely, the soft European economy; negative foreign exchange; and increased pension plan expense. We remain optimistic about fiscal 2013 for a number of reasons, and we have a number of initiatives that will counterbalance these items.

First, our organic growth initiatives have been working well, and we have exciting new customer programs and new products being launched across many of our businesses. We can point to specific growth initiatives that are in place in every group that contributed positively to sales in fiscal 2012, and we expect this success to continue to build in fiscal 2013. We are also broadening our presence geographically in each and every business segment, and many of these global initiatives are already yielding results.

In addition to our organic initiatives, we are in excellent position to use our balance sheet to make further strategic acquisitions which will drive earnings accretion, such as the successful acquisition of Metal Spinners and our recent purchase of Meder Electronics.

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

(Operator instructions) Mark Tobin, ROTH Capital Partners.

Good morning, gentlemen. This is Joe Bess filling in for Mark. First I'd like to dive into the Meder acquisition a little bit more and understand if there's any operating margin expansion opportunities here, given your guys' more mature distribution channel -- just to get a little bit better understanding of the charges that are expected to hit in the first couple of quarters for this coming year.

Well, we definitely think there are margin improvement opportunities. We have not communicated anything specifically, so I'd like to stay away from specifics.

But clearly, as we bring the two organizations together, the opportunity to leverage some of our fixed overhead, I think, is there. I think the other side, as we mentioned in our script -- the global purchasing requirements for the combined two companies give us leverage on that side as well.

So I think both from the fixed overhead side as well as in the purchasing side, there's clearly opportunities to improve margins as we bring the two units together. We haven't given any specific guidance on restructuring charges associated with integration, so we prefer to stay away from that.

Okay. Have there been any discussions involving potentially needing to downsize the capacity of the German facilities and just using your current footprint, or are you guys planning on keeping all of their facilities right now?

Yes, we very much want and need the German facilities. Our business is very much about being able to provide local support from an engineering and manufacturing standpoint. These products are typically not standard catalog product items, so we are typically working very closely with a particular OEM, be it in automotive, or be it in test and measurement, be it in medical -- working closely with their engineers to design a product.

And then we are basically -- I won't say line to line, but the ability to then service that account with local manufacturing infrastructure is very important to us. So the bottom line is we see that is one of the real keys for us, because we've struggled, frankly, trying to penetrate Europe with our magnetics product line, because we simply didn't have on-the-ground support, and we think this acquisition obviously provides us in a pretty big way.

And with your discussions with them so far, how is the German region doing compared to the rest of Europe?

Interesting enough, they have not seen really any particular slowdown. The German side of their business remains good. The other parts of Europe remain good at this point in time. It's still very early days, but we are cautiously optimistic about where they are at.

And then just the last question -- given the landscape of their revenue, are you guys expecting a contraction in fiscal 2013 from their fiscal 2012 year, or are you expecting to be kind of flat?

We don't expect a contraction. I'd really don't want to go beyond that. Again, this is early days for us. They have been growing for the last several years, and our expectation is there is opportunities for future growth. We can't control the macroeconomic conditions, and that's something we'll just have to deal with.

Okay. Great. Thank you, guys.

Jim Casagrande, Brant Point.

Good morning and congratulations on the quarter. I wanted to follow up -- you did talk about some uses of cash. I wanted to hear a little bit more about the M&A pipeline. How does that look? And any particular areas you're looking? And just to follow on that is, are you guys -- would you consider a buyback at some point, given all your cash flow generation, or where would that rank among your priorities?

Okay, well, a number of questions there. Let's take the cash usage question first.

I think the Company has a pretty consistent track record of using cash for, really, three primary purposes. One is to drive organic growth, and we talked about an increased magnitude of capital spending this year designed in a lot of ways on top-line growth. That would really be our first priority.

The next priority would be our dividend, and we see that we have historically been very consistent with supporting our dividend and trying to increase our dividend on a regular basis. Third would be in our area of acquisitions, and we will come back and visit that in terms of where we see the opportunities.

Fourthly would be share buyback. Historically, our share buyback has been limited to offsetting management dilution from incentive compensation. And for the moment, so long as we have solid opportunities to grow the business both organically and through acquisitions, our priority is to grow rather than to do a share buyback.

As far as acquisitions, we are really looking across the board. I think the Meder acquisition is a good example. If we see the opportunity to make a sizable bolt-on acquisition that bulks up one of our segments, we are very excited about doing that.

I kind of use $100 million of volume as kind of a benchmark that gives us the ability to compete globally, particularly if we have, as we did with Meder, an increased or enhanced global presence. So we are really looking across the board at all the business units, and we're looking globally.

Five out of the last six acquisitions we've done in the last 24 months have been outside the US. We have been in India and South Africa, and now Germany, etc., so looking pretty broadly, and we are excited about what's out there in front of us.

Beth Lilly, GAMCO Investors.

I wanted to just drill down a little bit on your Food Service Equipment business, and particularly just the dynamics on the hot side, and what you are seeing in the competitive environment, and just the weakness, and where you see the opportunity in terms of improving the margins and what you are doing to improve the returns on that piece of your business.

Well, there really hasn't been a significant change in the competitive landscape. The situation is really all about the key customer accounts that you've historically had your largest penetrations at, and what are they doing in terms of their growth?

Candidly, the Young brands has been a significant part of what we have historically relied on for growth in our Cooking Solutions area -- Taco Bell and Pizza Hut, KFC being really the three strongest contributors. And as you know, they have really deemphasized to some extent their growth in the US to preference of growth outside the US, particularly in China. So that's one of the biggest impacts that we have on the growth that we've seen there.

Having said that, the products that we have, the technology that we have are very applicable in a broad cross-section of chains. As we mentioned in the script, in our refrigeration side we have been much more spread in terms of our exposure, having pretty significant opportunities with the top 20 largest chains on refrigeration side.

So our direction on Cooking is to do much the same, to spread our exposure and our involvement amongst the largest food service chains. And the other side of it is that, particularly on the hot side, because we have a fairly significant countertop product offering, nontraditional retail outlets such as convenience stores -- as you know, convenience stores over the last four or five years, the 7-Elevens of the world have expanded pretty dramatically their prepared food offering.

And if you think about it, most of the equipment is what we call countertop -- hot dog rollers, toasters, bum warmers, things of that nature, and we have a very, very solid offering. So we are also looking and have been successful -- we are penetrating 7-Eleven, as an example, pretty heavily right now. But we think there's other opportunities, particularly as the convenience stores adopt more and more of these food programs.

So as you look at opportunities on the Food Service side in terms of the margins overall, you saw an increase this quarter. Where do you see this business getting to?

We haven't given any real specific guidance on that, but the average for the industry is in that 13% OI margin. Depending on the mix of hot and cold, you get your expectations -- you could be above that or below that. But again, the average is in that 13% range. You can see that we have opportunities for improvement.

So it's not unreasonable to expect you to be able to get to 13% eventually?

Like I said, we're trying to improve our margins.

Jason Nacca, Sidoti.

First, congratulations on the excellent quarter. My first question is, regarding the last quarter, we saw some weakness in drugstores. Could you update us on the status of these venues?

The drugstore trend has been in place for probably the better part of 12 to 18 months. The three biggies that we work with are Walgreens, CVS, and Rite Aid. Walgreens, if you go back 10 years and look at what they were doing, they would typically build between 400 and 450 stores a year. About 2, 3 years ago they took a change in approach, and rather than driving their top line through as many new stores, their focus has been more about driving increased sales out of their existing stores. So they have reduced their number of stores down in the 200 to 250 range, roughly. But that has been in our run rate for the better part of 12, maybe 18 months.

CVS has really taken a more aggressive approach towards new store sales. And again, we benefited from that. We're basically sole-sourced at both Walgreens and CVS as it relates to their refrigeration products, be it a walk-in cooler with merchandising front-end at Walgreens, or uprights and walk-ins at CVS.

So the other thing you can say about that channel is it's not unlike the convenience store comment I made on the Cooking side. Again, a retailer that is trying to improve sales and margins from their footprint, and you'll see innovation at the drugstore side as they bring in different kinds of food products that they sell alongside of the pharmacy items and dry goods that they are selling.

So there's opportunities to add Cooking or, excuse me, Food Service devices in their stores. More recently, as an example, Walgreens is announcing a new concept of a healthy store idea that they are rolling out on a limited basis, and we are selling quite a large number of rack refrigeration units into those stores as well. So those are the opportunities even in existing stores where we can come back in and add more product and more value.

Regarding the Hydraulics group, due to your plans to further expand your Chinese facility there, are you beginning to see any additional penetration in the local Chinese market for these telescopic products?

The local Chinese market has been a real disappointment, really, over the last two or three quarters. When China begin to tighten the credit controls and lending standards, our customer base in China was pretty significantly affected. Our customer base is what we call refitting factories that basically take a truck chassis, mount a dump body to it and the hydraulics, and they're the equivalent of a small business here in the US, although they are quite large, in many cases.

So they have been impacted by the credit crunch over there. So our growth has really been in the export market out of China, going into Asia-Pacific. We've got quite a nice penetration into Thailand, into Australia. We've done reasonably well in the northern part of South America, Peru. Certainly Mexico has been strong for us, as well as a different product line.

Our traditional product line is what is known as a telescopic hoist. We are making rod cylinders -- engineered rod cylinders, not the kind of commodity items that you would see in mining and agriculture, but engineered rod cylinders that are used in more broad applications, refuse and material handling, compacting, and applications of that nature. So our success there has really been in the export as well as in new products.

Okay. My last question is regarding Europe. Now that you're beginning to become more entrenched in the region from the Meder acquisition, are you seeing any other pockets of strength, or any outlook on Europe regarding other product lines? You could also comment on electronics as well.

Again, our strategy is one -- well, part of our strategy, I should say, is to enhance the geographic footprint of all of our businesses, and Europe is just one part of that strategy. So again, we are looking broadly at not only Europe, but the emerging economies.

If you think about it, we did Metal Spinners a year ago -- a little over a year ago. They were in the UK. Or they are in the UK. They give us exposure into the European applications for engineering technologies. We did Meder Electronics, which gives us exposure into Europe.

So we're looking probably -- Europe is not an exclusive focus, by any stretch, but we do think there are opportunities as well. As we mentioned, Engraving is more of an emerging market focus. So you'll see us there in Asia-Pacific, Brazil, China.

Great. That's all I've got for today.

(Operator Instructions). John Walthausen, Walthausen & Co.

Good morning. Congratulations. A couple of questions -- on pensions, could you tell me how much more of the expense is this year than last year, and what your level of contributions that you expect to make this year?

The pension expense is going to go up about $0.13 year over year. You'll see it in our K. We made a $6 million contribution in June. We made another $3.3 million contribution this month.

And we are good, Tom, through -- ?

2016.

And we're good through fiscal 2016. I think you are familiar with the highway bill; there were some new rules provided as it relates to funding requirements, and under those rules -- and this is in our K -- we're good now through 2016.

Okay, great. On acquisitions, are all the segments, I guess except perhaps electronics, positioned as far as where their strategy is and where their management teams are to do meaningful acquisitions, if you can find them this year?

I think they are. I think what you're making there is our capacity from a management standpoint to absorb an acquisition. We've been hopefully, I think, systematic about that.

Again, we did the Metal Spinners one, which is in the Engineering Technologies Group, a little over a year ago. We've let them, if you will, digest and work the synergies that we identified pre-acquisition. I think they've done a nice job of doing that.

We've been looking for some time. We've done little ones, little bolt-ons in the middle Aero area for electronics several years ago. But we hadn't done anything significant. So we now have done Meder, which is going to require some time for them to digest and do the integration.

So the point you're making is well put, and that is we want to look at all of our business units, and we look at the capacities of the teams. They are all capable of doing acquisitions. We've basically done acquisitions in every area except for Hydraulics, but again, we think we have the capabilities to do those acquisitions.

It's more a matter of what have we thrown at them lately, in terms of both organic initiatives as well as acquisitions. We want to make sure that we provide sufficient management time and resource to do those things properly.

Good. With regard to hydraulics, you made an interesting point that $100 million was a good size for a company to be -- product line to be competitive for a product area. Does Hydraulics have enough strength to take themselves to $100 million with some acquisitions?

I think they do. Yes, I think they do. We have a nice solid team in that business. There again, they've done a nice job in China expanding that facility. I think it demonstrates their ability to think globally.

Again, a lot of the penetration that we've seen has been international in hydraulics. I mentioned Australia, I mentioned Thailand, I mentioned South America. So yes, it's more a matter of where would you go? The European market and US market are pretty mature in hydraulics.

So again, we think -- particularly the fact that telescopic hoists are kind of our core. They typically go in dump trucks, dump trailers. That speaks to infrastructure build -- highways, bridges, that kind of stuff, dams.

Infrastructure build tends to go towards emerging economies. That's why we went in China in the first place. We have a keen interest in Brazil. Again, we have to figure out what's the best way to grow that business beyond where we are at.

Excellent. Congratulations again.

At this time I'm showing no further questions in queue. I would like to turn the call back over to Mr. Roger Fix for any closing remarks.

Well, we appreciate everyone's interest and all the questions. Thank you very much, and we look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.