Standex International Corp (SXI) 2014 Q1 法說會逐字稿

Good morning. My name is Latricia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Standex International Q1 2014 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the conference over to Mr. David Reichman of Sharon Merrill. Please go ahead, sir.

Thank you. Please note that the presentation accompanying Management's remarks can be found on Standex's investor-relations website, www.standex.com.

Please see Standex's Safe Harbor 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 risks 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 were intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

Standex believes that such information provides an additional measurement and consistent, historical comparison of the Company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's first-quarter news release.

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

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

Our revenues in non-GAAP EPS for the first quarter of fiscal 2014 were both flat with Q1 last year. It was a disappointing quarter in food service, but our other four businesses performed well, especially given the economic conditions.

Slightly lower organic sales for the quarter were offset by a 0.5% positive foreign-currency-exchange effect. We ended the quarter with a modest net debt position of $4 million, and our balance sheet is very well positioned to support future investments in organic growth, as well as acquisitions.

We're continuing to see soft demand in several end-user segments, but overall our strategy for the business is working well. Our bottom-line results for the quarter reflected some non-recurring items in the food-service group that we're now putting behind us.

As you can see on slide 4, our trailing 12-months EPS is $3.70, up 9% from full-year fiscal 2012 and up 25% from full-year fiscal 2011.

Although market conditions in food service remains softer than we would like, we're continuing to take costs out of the business and launching a number of new products that we believe will be very successful in expanding our competitiveness in addressable market in the near term.

I'll have more to say about the performance and outlook in each of our business segments after Tom takes you through the financials. Tom?

Thank you, Roger, and good morning, everyone. Please turn to slide 5, which summarizes our first-quarter results.

As Roger mentioned, net sales for the first quarter of fiscal 2014 were essentially flat with the fiscal quarter last year at $183.6 million.

Excluding special items from both periods, non-GAAP operating income was $17.8 million, compared with $19.3 million for the first quarter of fiscal 2013.

Slide 6 is a quarterly bridge that illustrates the tax-effected impact of special items on net income from continuing operations. These items include tax-effected $2.7-million restructuring charges, $0.2 million of non-recurring tax benefits, and $0.1 million of non-recurring management-transition expense in the first quarter of fiscal 2014.

In the comparable period of fiscal 2013, there were $[0.2] million of tax-effected restructuring charges and $1 million of acquisition-related costs.

Excluding special items from both periods, non-GAAP net income from continuing operations was $13.1 million, or $1.02 per diluted share, compared with $13.1 million or $1.02 per diluted share in the first quarter of fiscal 2013.

Turning to slide 7, you can see our trailing 12-month performance. We recorded a 6.5% increase in sales. Non-GAAP operating income grew 3.8% to $67.1 million, and adjusted EBITDA grew 5.3% to $82.9 million.

On slide 8, we had a reconciliation of net income from continuing operations to non-GAAP net income from continuing operations for the trailing 12-month period. Excluding special items, non-GAAP net income from continuing operations was up 5.5% to $47.2 million, or $3.70 per diluted share.

Turning to slide 9, net working capital at the end of the first quarter was $132.5 million, compared with $117.4 million at the end of the fourth quarter of fiscal 2013, and $131.2 million at the end of Q1 last year. Working-capital turns were 5.5 in the first quarter of fiscal 2014.

Slide 10 illustrates our debt management. As Roger discussed earlier, we ended the first quarter in a net debt position of approximately $4 million. This compares with a net debt position of $35 million at the end of Q1 last year. We define net debt as funded debt less cash.

Our balance-sheet leverage ratio of net debt to capital was 1.3% at the end of the quarter, compared with 12.1% a year ago.

Our strong balance sheet is well positioned to meet our needs. We continue to have ample financial flexibility to fund growth, acquisitions, and other strategic initiatives.

One other item that happened during the quarter related to our previously discontinued ADP business. The company recorded a $1.2-million pretax expense as a result of obligations trigged under a guarantee provided to the buyers. The obligations related to a withdrawal from a multi-employer pension plan, in which the Company had previously participated.

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

Thank you, Tom. Please turn to slide 12, food-service-equipment group, and I'll begin our segment overview.

Sales in food service decreased 3.6% from Q1 last year, and operating income was down 34%. Overall, the lower sales year over year reflect a soft demand in several large chains, including several quick-serve restaurants and drugstores, as well as a tough comparison with Q1 of fiscal 2013, when we had several large product roll-outs.

The year-over-year decrease in profitability of $4.6 million was due to two issues. First, lower volume of $4 million resulting in roughly a $1-million reduction in profit. And second, we incurred a number of operational issues at the custom-products business which had a negative impact on profitability of $3.6 million.

The operational issues at the custom-products business revolved around unfavorable sales mix, machine down-time associated with a laser-cutting machine, and an inventory write-down. We believe these are one-time issues at our custom-products business and will not repeat going forward.

We have put in place a number of corrective actions at the custom-products business, which we believe will address the performance issues incurred during the first quarter. We've installed a state-of-the-art CNC laser-powered metal-cutting machine that is now up and running.

In addition, we're working to migrate this part of the business away from its heavy reliance on a customization model, which relies on producing very complex, customized serving and merchandising counters and displays for one-off projects, and towards a business model that relies more on standard products that are modified for specific applications and chain work, which are more repeatable and more standard in nature.

We believe this transition in the business will improve our ability to execute on a profitable basis. As we implement this strategy, we should see steady sequential margin improvement from quarter to quarter through the rest of fiscal 2014.

Turning to slide 13, we're also making progress on our longer-term margin-improvement initiatives in food service. The consolidation of our Cheyenne, Wyoming, Cooking Solutions facility is moving ahead on schedule.

We expect to substantially complete the production transfer to Mexico, South Carolina, and Tennessee by the end of fiscal 2014 and to begin to realize $4 million of annualized cost savings at the beginning of fiscal 2015.

We expect to record restructuring charges in fiscal 2014 in the range of $7.5 million to $8 million, about $3 million of which was a noncash impairment on the Cheyenne building, recorded as planned during Q1.

At the same time, our work on the new finished distribution center for Cooking Solutions in Dallas also remains on track. We're fitting up the building as we speak, and we expect the facility to be open in the second quarter of fiscal 2014.

On the [top-line] food service, the bright spots this quarter were the dollar-store segment and the dealer channel in our refrigeration business. Sales in these segments are up from Q1 last year. However, margins are typically a bit lower in these segments as compared to those in the QSR drugstore and convenience-store segments, so product mix was a negative factor for us in refrigeration this quarter.

Looking at the refrigeration business longer term, retail market is putting a heavier emphasis on the use of upright merchandising and endless display cabinets. Our key growth strategy in refrigeration is aimed at capitalizing on these opportunities.

As we discussed on past calls, our current merchandising-cabinet strategy is aimed at expanding our business into more cost-sensitive dollar-store and convenience-store segments, as well as the dealer channel.

We're doing this by lowering our product price points through [value-engineering] designs and using lean-manufacturing techniques on the shop floor, and by adding features and capabilities that are attractive to customers in these markets.

We continue to be successful in executing on this strategy in Q1. We've had good response to our upright glass-door merchandising cabinet line in both the dollar-store and drugstore chains.

It takes time for the chains to go through the necessary testing and evaluation of new products, but we're encouraged by the early positive response that we're seeing in the marketplace.

Looking forward, we're working to be more competitive in the refrigerated cabinet products we sell into the QSR, drugstore, and convenience-store segments by value-engineering those lines, as well.

In Cooking Solutions, the floor sales this quarter year over year again were due in part to the comparison with Q1 of fiscal 2013, when we had a large product roll-out in this part of the business that did not repeat this past quarter.

Sales of cooking equipment to the US government were also slow this quarter. And although we continue to see early signs of strengthening in the US retail or grocery store segment, this improvement was offset by quarterly retail segment deterioration in the UK.

In our Procon pumps business, we're also continuing to be affected by the soft economy, particularly in Europe; but net sales in that business have stabilized at a level comparable to last year.

We're making progress on our strategy to drive revenue growth on the cooking side of the business by rolling out a number of great new products. We've launched a new line of countertop griddles and charbroilers in Q1 that has been well received. We're also introducing a new Value Line deck oven in the current quarter, which we think will be a good addition to our overall line.

Looking ahead, we plan to expand our portfolio of combi-oven products by introducing a new Value Line combi-oven and a mini combi in Q3 and the speed oven in Q4.

Overall, we continue to expect that the cost savings and growth initiatives that we're implementing in fiscal 2014 will have a significant long-term effect on our growth and profitability in the food-service segment.

Please turn to slide 14, the Standex engraving group, where sales were up 7.2% and operating income grew 4.9% from Q1 last year.

We continue to see some profit drag from Brazil, which affected our profit leverage during the quarter, but we are encouraged that we are seeing sequential improvement in the performance of this business.

Engraving reported improved top-line performance year over year for the first time since the second quarter of fiscal 2013, driven by double-digit growth in mold-texturizing sales on a global basis.

We did experience softness on the roll-and-plate engraving-and-machinery businesses, particularly in North America. Last quarter, we said there were signs of improvement in this part of the business, as a result of the housing rebound here in the US. But product demand for building applications seems to have softened again.

Based on current bookings and backlog, we anticipate that the roll-engraving business will remain soft, at least through Q3 of fiscal 2014. On the other hand, we continue to believe that our mold-texturizing business is very well positioned for continued growth the rest of fiscal 2014, not only in North America, but in Europe and China, as well.

In particular, we saw the expected improvement in North American mold-texturizing bookings and backlog through the quarter, and we are very encouraged about the pipeline of future mold-texturizing work in North America.

We're making good progress in ramping up the new mold-texturizing facilities we opened the last several quarters in Mexico and India. We're also seeing increased customer activity at our facilities in Korea and Brazil.

At this early stage, most of this activity remains focused on running samples through the QA and acceptance process at the automotive OEMs, but we're beginning to see a ramp-up in production work at both locations. We continue to be very optimistic about our opportunities in both South Korea and Brazil going forward.

Strategically, we're continuing to invest in developing new mold-texturizing technologies and production capabilities that expand our addressable market and differentiate Standex from our competitors.

A prime example of the work we're doing to penetrate the slush-molding tooling segment, an important advance versus injection molding in plastic-parts manufacturing for the automotive market.

On the technology side, during the past couple of years, we've introduced next-generation [nickel-shell] engraving methods for slush molding. This makes these techniques especially effective for producing the soft-touch plastics that have recently become more popular in automotive interior design.

We're also developing advanced techniques to use lasers to directly engrave very large, complex metal molds, versus the traditional acid-etching techniques. From a production-capability standpoint, although some of the other players in the mold-texturizing business are working to develop comparable laser-engraving techniques, the size of the molds we're able to texture and the quality and precision we're delivering for our customers are clearly superior to anything that our competitors can currently offer.

We currently have two laser-engraving machines in Germany that we've been using for the past year and are generating some very good traction in the European marketplace. We have three similar new machines on order. One will go into Germany, while the others will be located in North America and China.

Please turn to slide 15, our engineering-technologies group. Engineering-technology sales for the quarter grew 9.8% year over year, driven by strong sales in all of our end-user segments, with the exception of the space-flight sector.

Operating income was up 23%, reflecting stronger shipments and the result of cost reductions and improved productivity. The softness in the space sector reflected the lumpy nature of shipments in this part of the business.

We have excellent prospects for growth on the manned-space-flight side in our development work for both NASA and our commercial customers, given the levels of quotation activity and the forward-looking signals we're seeing in those markets.

In addition, given the positive outlook for future reconnaissance and geographic-positioning-satellite launches, we expect to see good growth on the unmanned-flight side, with the Delta 4 and Atlas 5 programs.

We had a strong quarter in the land-based turbine business, primarily due to very strong sales to one of our large OEM customers. We've been working to diversify our customer base in this part of the business.

As a result, we saw a modest growth in shipments to a couple of other OEMs this quarter, as well. Nonetheless, our visibility in the land-based-turbine market is fairly limited, so we remain cautious in our outlook for this part of the business.

This was also a strong quarter in aviation, where our shipments of single-piece lipskins for engine nacelles and other engine components were up from Q1 last year. Although historically our lipskin business has been focused on regional jets, in recent quarters we've been pursuing new opportunities in wide-body aircraft.

We reported last quarter on the progress we're making on signing a long-term lipskin contract for the new version of the Airbus a320 passenger jet, which is scheduled for a production ramp over the next couple of years. We continue to make progress on that contract in the first quarter.

On the internal-engine-component side of the business, we received production orders through sub-suppliers for components on a new GE aircraft engine, which we're moving into the early stages of production.

In addition, we're well along in reviewing development efforts for engine-component opportunities with Rolls-Royce in Europe, and we're optimistic about being able to move into production on products for those engines early next calendar year.

Our oil-and-gas business and engineering technologies was also up substantially on a year-over-year basis in quarter one. This growth reflects the project focus and lumpy nature of this part of the business, which is largely driven by the timing and funding of large, off-shore oil-and-gas production floating platforms.

Looking forward, we're aware of a number of oil-and-gas projects that we believe will have a positive effect on our sales line through fiscal 2014 and into fiscal 2015, although the precise timing is difficult to pinpoint this far in advance.

Please turn to slide 16, electronics. Electronics sales for the first quarter were negatively affected by softness in Europe and up only 1.1% year over year, with all the increase due to foreign-currency effect. Operating income increased 66% from Q1 last year.

Note that operating income in the prior year included approximately $1.5 million of purchase accounting. Excluding this amount, Q1 electronics-operating income was up 13%.

We're enthusiastic about a number of significant customer-specific new-product platforms that we're launching beginning in the current second quarter and continuing through the rest of fiscal 2014.

These new-product launches are for magnetic device in the medical end-user market, as well as sensors for appliance and automotive applications in both the US and in Europe.

We're also pleased that we're beginning to see traction on new-product customer programs for sales into the domestic Chinese market. This is a result of previous investments we made in adding sales and engineering resources in China to accelerate sales growth in the region.

During the first quarter, we began to see cost savings resulting from our fourth-quarter consolidation of the Standex electronics facility in Tianjin, China, and the Meder Electronics sales office in Hong Kong into the Meder manufacturing facility located in Shanghai.

We continue to expect to see the savings from facility consolidations as well as purchasing savings ramp up to a $4-million annual run rate by the end of this fiscal year.

Please turn to the hydraulics group on slide 17. Hydraulic-segment sales were up 9.2%, and operating income was up 20.9% in the first quarter.

We are continuing to see good success as we work to penetrate the roll-off container truck-refuse market. During the first quarter, we began to see modest signs of improvement in our traditional dump-truck and dump-trailer end-user segments in North America.

Some of its growth was related to market-share gains on our part, and some was due to increased demand in line with the recovery in housing and strength in the North American oil-and-gas market.

In addition, we're beginning to see some traction from our new products in the garbage-truck market, and we're optimistic about future growth there, as well.

We completed the capacity expansion in our Tianjin, China, facility during the first quarter, as planned for hydraulics. This enables us to continue our efforts to gain market share by exploiting our low-cost position in China for both telescopic and rod cylinders. We have a solid backlog in place with the China operation, which bodes well for sales in that business as fiscal 2014 progresses.

Please turn to slide 18. In summary, market conditions and one-time items in our food-service business significantly affected our first-quarter results. These one-time issues are now, for the most part, behind us. And although market conditions in food service are not as favorable as we would like, we're making progress in driving growth and margin improvement, not only in food service but in all of our businesses.

In addition to driving organic growth to new products and new end markets and geographies, our strong balance sheet and liquidity position allow us to pursue acquisition-driven growth, as well.

Highlighted by Meder, we have demonstrated a pattern of success in executing our acquisition strategy over the past several years. We're optimistic about the status of our acquisition pipeline as we begin fiscal 2014.

We look forward to reporting further progress in these initiatives next quarter. Despite continuing end-market challenges, we believe that Standex is well positioned to leverage future sales growth into stronger profitability.

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

(Operator instructions) Beth Lilly with Gabelli.

Good morning.

Good morning, Beth. How are you?

Just terrific. How are you this morning?

How are things in Minneapolis?

You know what? They're a little bit chilly. We had a little snow. But it's supposed to melt, so all is well. I wanted to get a little more insight to what's going on in your food-service-equipment group. Your revenues were down; and Middleby reported the other day, and they're revenues were up on an organic basis close to 12%. So the decline -- can you talk about the custom-products group as -- the business generated about $105 million in revenues this quarter. What amount of that is custom? And then, as you look going forward, you've talked about getting your food-service-equipment margins, I think to -- 12%, 13%. So where are you on that path, and how long do you think it'll take you to get there?

Okay, a number of questions. On the top line, the custom business represents on the order of, say, 20% of our total revenues. But in general, our revenue issue in the first quarter was really related to what chains are we on versus what chains are we not on.

And it was very, we'll call, spotty, as we look at it. For example, McDonald's was down about 25%, and we've confirmed through the channel that just about everybody that supplies them was down.

US Foods, which is one of our larger accounts, was also down double digits. Yet people like Tim Horton's and Subway were up, again double digits. So we're seeing some what I call spottiness as we look across particularly the QSR side of the business.

We reported over the last several quarters that the drugstore chains -- and here we're servicing Walgreens, CVS in particular -- they fairly significantly reduced the number of new-store openings. So the focus there has been on acquisitions in the case of Walgreens, where they'll go over and take over a smaller regional chain and then will be involved in retrofitting those businesses, or remodels. And again, that activity is just not as robust.

So what you're seeing as you [particularly] food services to try to enhance our penetration in some of the other segments where we've been less penetrated, if you will, over the years. And we've identified both the convenience-store channel as well as the dollar-store segment as good opportunities.

But it takes time. As I mentioned in the script there, we have a situation where the product portfolio and the cost position of those markets is different than our traditional markets. So we're really going through an evolution, if you will. And I think as we compare, then, our top-line performance versus others in the market segment, we have some, I think, rather unique challenges that we have to address.

So would you say, then -- I mean, if you look at your competitors, and the one in particular I was referencing -- do they have such a dominant share that as the chains grow, their business grows until they have this hand-in-glove relationship? Is that why you're unable to grow your revenues at that same rate?

I think -- no, that it's more that we have -- some of our other competitors are more exclusively focused on the QSR chains. And over the last several years, certainly that's been where the largest growth has been.

Traditionally, we have exposure to other segments, particularly the drugstore segment, where we have a very dominant position, where a lot of our competitors traditionally haven't played.

And again, you look just at Walgreens. Historically over the last ten years, in the time frame ten to five years ago, they were building 400 to, say, 450 stores a year. They're down to 200.

So we're having to transition away -- not away from them, but to transition to other new segments and, again, this takes time. So that's where the introduction of new products, putting these new products into test stores and getting that kind of experience with these new segments is really where we've tried to focus over the last year, or so.

Okay. And then, what about your operating margin?

Well, again, we haven't made any specific statements about any of our segments. But if you look at our online materials, we're saying that we need to get all of our business units north of 12%, and that would apply, certainly, to food service, as well.

Okay. And so, how long do you think it'll take you to get there?

Well, again, we haven't made any prediction in that regard. But what we are trying to do, though, is to help people understand where we're at and where we want to go.

So, again, we've said that the $3.6 million -- and do the math; it's a little over 3% of operating margin in the quarter, is a one-off, and we've got that behind us.

We've said that the Cheyenne-operation consolidation is going generate around $4 million of cost savings, which is about another point of margin. And again, we've given you a time frame on that.

So I'd just kind of have you think about what happened in the quarter. Again, we lost 3.5 points of margin, roughly. We've got another point on margin coming through the Cheyenne facility. We're saying that that will be complete by the end of fiscal 2015.

And then, again, we've got to get some growth out of that business, as well, which will give us some volume leverage and margin improvement as a result.

Okay. Perfect. Thank you very much.

Thank you, Beth.

(Operator instructions) There are no further questions at this time. We'll turn the conference back over to Mr. Roger Fix for any closing remarks.

We thank everyone for participating in the call this morning. We look forward to giving you an update again next quarter. Thanks very much.

Thank you for participating in today's conference call. You may now disconnect.