Standex International Corp (SXI) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Standex International third quarter fiscal year 2014 earnings conference call. (Operator Instructions). Thank you.

I will now turn the call over to David Calusdian from Sharon Merrill Associates. 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. [Factors] 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 net income from operations, non-GAAP net income from continuing operations and free 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 in consistent historical comparison of the Company's performance. A reconciliation of the non-GAAP financial measures to the most comparable GAAP measures is available in Standex's third quarter news release. On the call today is Standex President and Chief Executive Officer, David Dunbar and Chief Financial Officer, Tom DeByle. Please turn to Slide 3 as I turn the call over to David.

Thank you, David. I'd like to welcome everybody listening to today's earnings call. This is my first solo earnings call and I look forward to sharing our performance with you. We reported record results in the third quarter. Overall sales increased 7.7%, organic sales were up 7.2%, and foreign exchange contributed about 0.5%. Looking at the bottom line, non-GAAP operating income was up 27.5%, non-GAAP EPS was up 25.7%, to $0.93 a share. We ended the quarter with a net cash position of $12.4 million on the balance sheet. All of our businesses contributed to these results.

We were pleased with the strengthening of demand in food service and with the operational improvements in that segment, although we have work to do on our margin improvements initiatives there. Our other four segments report double-digit sales increases and are growing at faster rates than the markets they serve. I spent the past few months visiting Standex facilities around the world and meeting with key customers and shareholders. I'd first like to thank Roger Fix, our recently retired CEO for an intensive and effective leadership transition. Roger made tremendous contributions to Standex during his tenure as CEO and we wish him well in his retirement.

I would also like to mark the recent passing of Ted Trainor, who was Standex CEO from 1996 to 2001, whose influence on our management systems and the leadership style of the Company can still be felt. In my time here I found that at the core our businesses thrive by building close customer relationships to deliver differentiated engineered solutions. We have a passionate workforce, regardless of where they are around the globe and we're serving very good markets with above GDP prospects.

In those few segments where growth is not above GDP we're generating growth through market share gains. The Company that made tremendous progress in the development of the portfolio and improved operating disciplines during the past several years. Now we're focusing on profitable growth. As I mentioned, we have good brands and attractive markets, with excellent investment opportunities. It's our mission now to find the best investment opportunities to leverage our strong balance sheet to create meaningful shareholder value. With that, Tom will discuss our results for the third quarter, After that I'll discuss the performance and outlook in each of our business segments. Tom?

Thank you, David and good morning, everyone. Please turn to Slide 4. In taking a long view, you can see that our trailing 12-month EPS is $3.85, up 4% from the full year fiscal 2013. This demonstrates the impact of our lower cost structure and the success of our growth initiative, both through acquisition and organic growth. Slide 5 summarizes our third quarter results. As David mentioned, net sales for the third quarter increased 7.7% to $178.8 million from $166 million in the third quarter last year. Excluding special items, operating income grew 27.5%, to $17 million from $13.3 million a year ago. Adjusted EBITDA grew 22.7% to $20.8 million or $0.93 per diluted share, compared with $17 million or $0.74 per diluted share in the third quarter of fiscal 2013.

Please turn to Slide 6, which is a quarterly bridge that illustrates the impact of special items on the net income from continuing operations. These items included tax affected $1 million of restructuring charges, $1 million of non-recurring management transition expense, and life insurance proceeds of $3.4 million. In the comparable period of fiscal 2013, there was $0.8 million of tax affected restructuring changes, $2 million expense related to a legal settlement, a $1.6 million life insurance benefit, and $1.4 million benefit from discrete tax items. Turning to Slide 7, networking capital at the end want third quarter was $131 million compared with $117.4 million at the end of the fourth quarter of fiscal 2013, and $138.3 million at the end of Q3 last year.

Working capital turns were 5.5 in the third quarter of fiscal 2014. Slide 8 illustrates our debt management. We ended the third quarter in a net cash position of approximately $12.4 million. This compares with the net debt of $40.7 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net cash to capital of 3.9% at the end of the quarter compares with the net debt of 13% a year ago. Our strong balance sheet is well positioned to meet our needs. We continue to have ample financial flexibility to fund future growth, acquisitions, and other strategic initiatives.

Turning to Slide 9, capital spending for Q3 was $8.3 million in line with our expectations for the quarter. Capital spending on a year-to-date basis was $16.3 million versus $12.4 million in the prior year, and we expect capital expense to be in the range of $23 million to $24 million for the year. We're investing in a number of organic growth initiatives across all of our operating groups. David will discuss a few of these initiatives in his operating group commentary. During our last release, we reported a machine failure at our engineering technology plant in Billerica, Massachusetts. As we see it now, we have a replacement machine in place in the September to October time frame. The cost of the replacement machine is being reimbursed by the insurance company and we anticipate no customer disruption.

As a result, gross capital spending will be approximately $5 million higher than our historical run rate, however, the increased capital spending will be covered by insurance reimbursement. Looking at Slide 10, we generated on a year-to-date basis free operating cash flow from continuing operations of $19.5 million, representing a conversion of free operating cash flow of 57.4%. With that, I'll turn the call back to David.

Thank you, Tom. Please turn to Slide 12, Food Service Equipment Group. Sales in Food Service increased 2.6% from Q3 last year. Operating income was up 35.6% as a result of volume leverage, operational improvements, and an easier year-over-year comparison due to non-recurring expenses in Q3 a year ago. On the Refrigeration side of the business, we continued to see good growth in the dollar store segment, and we've been successful with our new line of value engineered endless merchandising cabinets. We also have strength in the dealer channel during the quarter, after some sluggishness in Q2. This growth was partially offset by weakness in the Quick Service Restaurant segment, as a result of weather-related store opening delays, and continuing softness at retail drugstores.

It's important to note that growth at the Dollar Store segment is now more than offsetting the sustained weakness at the Retail Drug segment, though at lower margins. Our backlog in Refrigerated Solutions was up by about 30% in the quarter due to strong orders and weather-related delays. In Cooking Solutions, we have strong sales in the US Grocery Store segment and the project pipeline continues to improve. Sales to the dealer channel and the Convenience Store segment also reported year-over-year gains in the quarter. Our new products continue to be well received by customers and backlog of this group increased by 69% due to strong order intake.

At our Customer Solutions business, sales were down in the dealer channel partially as a result of weather-related construction delays. Sales and profitability increased on a year-over-year basis and our Procon pump businesses as conditions improved in Europe. We continued to focus on improving our bottom line performance at the Food Services group. I look at the Food Service segment as one where shareholder value creation over the next few years is largely under our control. We're taking a number of actions to improve operations and improve our margins. For example, the consolidation of our Cheyenne Cooking Solutions facility in Nogales, Mexico is going well, and is on track to be completed by the end of the fiscal year. We continue to expect to generate $4 million in annual cost savings beginning in FY 2015 from this consolidation.

Our new distribution center in Dallas is an important component of the Cheyenne to Nogales consolidation, and we begin shipping product out of that location in the third quarter. In addition to tightening our supply chain through the use of the Dallas facility and reducing labor costs by moving more production to Mexico, we are investing in the automation of our US-based Food Services manufacturing facilities. Our procurement and lean initiatives are also proceeding well. In total, we expect these initiatives to have long-term impact on this group's profitability. Finally, I would like to invite you to visit us at the upcoming National Restaurant Association show in Chicago, May 17 through the 20th in our new booth.

Please turn to Slide 13, the Standex Engraving Group. Sales were up 14.5% and we reported a record level of operating income which was up 77% for the quarter. This was driven by another record performance by our Molds Tech business. New automotive launches in all three of our regions, North America, Europe, and Asia, as well as market share gains, drove our excellent results this quarter. We continued to see softness in the Roll Plate and Machinery business driven by a continued slow recovery in the building project markets. Well be opening our fifth manufacturing facility in China in Q1 2015 which we see as a continued growth opportunity. We are very well positioned with the 52 domestic automotive manufacturers operating in China as they compete with Western Auto companies for domestic market share and improve the quality of their interior textures.

We expect that the strong automotive model launches globally will continue to have a positive effect on our results in the fourth quarter. As we've discussed before, our worldwide presence is a significant competitive advantage. When automotive OEMs are in the initial phase of a new model design they know they can come to Standex for texturizing and we will be able to provide a solution for them regardless of the global location they decide to manufacture. We have an innovative management team that continues to find new ways to work with customers. This last quarter we opened our design hub, a center of excellence, to partner with auto OEMs own design types and provide rapid prototyping of textures as they develop new model concepts.

Please turn to Slide 14, our Engineering Technologies group. Sales for the quarter were up 14.1% from Q3 last year, and operating income was up 25.9%. Sales and operating income were up due to strong aerospace, energy, and oil and gas sales, partially offset by weakness in the medical segment. Keep in mind, however, that this business is project driven and therefore inherently lumpy. Soft quarterly sales in any one segment may not be indicative of the demand trends in that segment. We're seeing strong order trends across substantially all of our end markets right now, and the excellent quarter we're reporting reflects that overall robust demand environment.

We're particularly encouraged right now about the prospects for this group in the aviation market where we've proven ourselves to be a value partner to support the A320. Commercial aviation has been a relatively small component of Engineering Technologies, and is becoming a larger part of the business. The long cycles of these programs will help smooth out the lumpiness of the group due to the long-term nature of aviation contracts. During the quarter we received a life program award from Senior Aerospace to produce exhaust plug and nozzle components for the nacelle on the airbus A320 Neo, one of the largest selling commercial aircrafts in the world, which will ramp to $7 million in annual sales.

This contract marks our second major contract win on large body single aisle commercial aircraft, and demonstrates the exciting prospects in aviation for the Engineering Technologies Group. In the Space segment, during the quarter we received a multi year contract from Boeing and Lockheed Martin's United Launch Alliance joint venture to produce one-piece fuel and oxygen tank domes for the Atlas 5 and Delta 4 launch vehicle programs. The new contract, which begins in 2014, builds on Spincraft's current tank dome contract with ULA and reflects the critical importance of our products to both Atlas 5 and Delta 4 launch vehicles.

Please turn to Slide 15, Electronics. Electronics sales for the quarter were up 10.4% year-over-year and operating income increased 10.5%. We've reported record sales and profitability in electronics due to new sensor program launches in the white goods, HVAC, and recreational markets. These launches were from our combined Standex-Meder product lines. We had a strong order intake during the quarter with backlog increasing, particularly in Europe and North America. The Electronics Group is doing a very nice job, moving up the value chain from being a component supplier to offering more sensor solutions. The investments we're making in this business right now are primarily to build our technical resources to support our customers as they find the right solutions.

We continue to have a solid pipeline of customer programs that we expect to launch during the rest of this fiscal year and into next. We're also continuing to make good progress in our developmental work on new products and customer programs for the domestic market in China. In addition to our focus on the top line, we're taking a number of aggressive steps to best leverage our sales growth into profitability. First we're executing on the robust set of lean enterprise, cost reduction initiatives that should benefit the business in the future. As we continue to integrate the Meder and legacy electronics businesses, we will further consolidate our China facilities and leverage our supply base for savings. Finally, the completion of our facility in Mexico is on schedule and we expect to be relocated from the existing facility and fully operational in the current fourth quarter.

Please turn to the Hydraulics Group on Slide 16. Q3 hydraulic segment sales were up 17.8% year-over-year and operating income was up 2.8%. Operating income was moderated due to competitive pressures in new markets and investments to win new business. Strong Hydraulics Group sales were primarily driven by greater penetration into the refuse market. Our focus on diversifying our Hydraulics business into the refuse market has gone well and should hope to smooth out the cyclicality of this business.

The refuse market historically as been relatively steady while the dump truck and dump trailer markets are reliant on a highly cyclical construction markets. In the third quarter we saw a continued recovery in our traditional North American dump truck market which was up by double digits in the quarter, primarily due to improvements in the overall construction industry. Internationally market share gains in the South American dump trailer and dump truck market also contributed to the strong top line growth. And finally, shipments out of China continue to be positive for this business, and we anticipate a good demand for production out of our new facility in Tianjin throughout the fiscal year. Looking ahead, we're enthusiastic about the near term prospects for this group with backlog up significantly over last year.

Please turn to Slide 17. In summary, we performed very well in the third quarter, and with all of our businesses reporting year-over-year improvements in sales and operating income. Backlog is up in the third quarter on a year-over-year business in all of our businesses and we're optimistic about our near and longer term growth prospects. Our markets are sound, our bookings are good, and we're seeing a great deal of customer activity. We're actively pursuing multiple avenues to increase shareholder value and leverage our balance sheet. Finally, we look forward to seeing many -- meeting many of you at you up coming trade shows, investor conferences and our own Standex investor day. With that, we would be pleased to take your questions. Operator?

(Operator Instructions). Your first question comes from the line of Chris McGinnis of Sidoti and Company.

Good morning, thanks for taking my questions.

Good morning, Chris.

I guess just, overall, I mean, maybe just a starting point, just in the Food Service, is that strengthened -- I guess exiting the quarter, as the weather got better, maybe just talk about that a little?

Yes. If you look at the demand profile through the quarter, January and February, relatively slow, largely related to weather, we did see strengthening through the end of the quarter, which is continuing.

So that comp is getting better as we exit the quarter and is -- is holding tight right now in the current quarter?

Yes. Yes.

Then I guess just on the overall profitability of the -- improvement on a year-over-year basis, how much of that is sustainable and how much of it is maybe just due to the strength in the current quarter, you know, when you look space outgoing forward, how sustainable is that?

If you look across the five segments -- is your question on Food Service or all the segments?

In all, across the board, I guess.

I tell you, I think let's deal with Food Service separately. The other four segments are all operating at very solid levels of profitability and margin and we like them in that region, and we just want them to grow and give us more of that good margin. On Food Service, our priorities right now are to just steadily increase the margin and over the next -- over the next two years, our expectation is, Cheyenne consolidation, some other internal actions we have planned, can add 200 basis points to that -- to that business. So whether you say that the specific progress in this quarter, year-over-year is sustainable, you know, we do see steady increase in our margin.

Great. And then just a follow-up on the Cheyenne, is that start date one or how does that progress through fiscal 2015 in that cost reduction initiative?

We'll start to see some of the savings this quarter. Product lines are being moved as we speak. We've had some early lines already moved and the program is on track and going well. The project will be complete in June, and the full savings of roughly $4 million a year will begin to flow in July.

Great. And maybe just could you touch on the acquisition -- your strategy and just where you're at and how you feel about the environment?

Well, yes, Standex as a company has made a lot of acquisitions over the past and we have a sweet spot of companies, privately-held companies, when acquired by Standex, we can bring them some operating discipline, some of our experience, help to make them stronger, better performing companies. Recently we did that with Meder and with Master Spinners, part of Engineering Technologies. Both of these businesses are helping to drive our growth. So we still believe there are many attractive opportunities out there like that. Our focus in the short-term will vary business by business.

Food Service, primarily focus is internally on the operating improvements, but you can't choose the timing of a deal, so if an attractive opportunity comes up in Food Service that brings complimentary products or customers, somehow enhances our business, I would look at it. I would say we're being more -- probably more proactive and investing more energy in looking at opportunities in other segments, particularly Electronics and the Engineering Technologies.

Great. Thank you for the time today. I appreciate it.

Thank you, Chris.

(Operator Instructions) At this time there are no further questions, and I will now return the call to David Dunbar for any additional or closing remarks.

All right. Thank you. Thank you all for listening in today. I'd like to note that we'll be hosting an investor tour at our Engineering Technologies Spincraft facility Billerica, Massachusetts on May 14. Please e-mail SXI@investorsrelations.com if you are interested in attending. I hope to see you there. Otherwise, we look forward to speaking with you during our full year fiscal 2014 results conference in the summer. Thank you.

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