Standex International Corp (SXI) 2014 Q4 法說會逐字稿

Good morning, my name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Standex International Q4 FY14 earnings call. (Operator Instructions). Thank you. I would now like to turn the conference over to David Reichman with Sharon Merrill Associates. Please go ahead, sir.

Thank you, Stephanie. Please note that the presentation and accompanying management remarks can be found on Standex's Investor Relations website, www.Standex.com. Please see Standex's Safe Harbor passage on slide 2.

Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's recent SEC filings and public announcements for a detailed list of risk factors.

In addition, I would like to remind you that today's discussion will include references to: EBITDA which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time items; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations and free operating cash flow.

These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the Company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's fourth-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 would like to welcome those listening to today's earnings call. Standex closed fiscal 2014 with a strong fourth quarter, resulting in double-digit growth in both sales and non-GAAP operating income. Total sales increased 12.2% from Q4 last year, organic sales were up 11.2% and foreign-exchange contributing 0.8%.

On the bottom line non-GAAP operating income increased 23.8% and non-GAAP EPS was up 25.3% to $1.24 per share. We ended the quarter with a net cash position of $29 million after the sale of American Foodservice and the acquisition of Ultrafryer.

Standex is starting a new fiscal year with strong momentum. Our top-line goal is to deliver long-term organic growth in excess of underlying market growth. Our end markets are growing, so execution will be critical to achieving this goal.

We are about three months into a thorough review of the market opportunities in all of our businesses to reset strategic priorities and select programs to accelerate sales growth. It's clear that we have good brands serving attractive markets with above average growth prospects. We're committed to finding the best investment opportunities to leverage our increasingly healthy balance sheet and drive profitable growth and create meaningful shareholder value.

Slide 4 gives an overview of our fiscal year 2014. Total sales increased to 6.4% from last year; organic sales were up 5.8%; and foreign-exchange contributed 0.6%. Non-GAAP operating income increased 14.7% and non-GAAP EPS was up 17.2% to $4.22 per share, a record for the Company. Free cash flow was over $4.00 a share.

There were a number of important milestones here at Standex in 2014. Roger Fix retired as CEO and became Chairman of the Board. I joined January 20 and there was a smooth transition between Roger and me.

From an operational standpoint we closed our Cheyenne facility moving the products into our strategic Mexico factory. We also began repositioning the Food Service portfolio by divesting a lower margin food custom fab business and adding an exciting fryer business. Our Engineering Technologies business won significant awards in the aviation markets which we are reinforcing with the recently announced agreement to acquire Enginetics.

Finally, Electronics, Engraving and Hydraulics hit their stride in the second half. With that Tom will discuss results for the fourth quarter. After that I will discuss the performance and outlook in each of our business segments. Tom?

Thank you, David, and good morning, everyone. Starting from a long-term perspective on slide 5 you can see the impact of our cost reduction and growth initiative, both acquisition driven and organic. Since fiscal 2010 adjusted earnings per share has grown from $2.42 per share to $4.22 per share, a compound annual growth rate of 14.9%. Sales have grown a compound annual growth rate of 9% during that same period.

Turning to slide 6, which summarizes our fourth-quarter results. Net sales for the fourth quarter increased 12.2% to $197.3 million from $175.8 million in the fourth quarter of last year. Excluding special items operating income grew 23.8% to $22.4 million from $18.1 million a year ago. Adjusted EBITDA grew 19.5% to $26.1 million or 13.2% of sales compared with $21.9 million or 12.4% of sales in the fourth quarter of fiscal 2013.

Please turn to slide 7 which is our quarterly bridge that illustrates the impact of special items on net income from continuing operations. These items included tax affected $3 million restructuring charges primarily related to that Cheyenne closure and approximately $0.3 million of nonrecurring management transition expense and acquisition-related costs partially offset by $1.1 million in nonmonetary conversion and $0.1 million in discrete tax items.

In the comparable period of fiscal 2013 there was $0.3 million of tax affected restructuring charges. Year over year, excluding special items, earnings per share increased 25.3% to $1.24.

Turning to slide 8 you can see our full-year 2014 performance. Sales were up 6.4% non-GAAP operating income grew 14.7% to $76.5 million. And adjusted EBITDA was up 12.4% to $91.9 million.

On slide 9 we have a reconciliation of GAAP to non-GAAP net income from continuing operations for the full fiscal year. In fiscal 2014, tax impacted restructuring expenses were $7 million primarily driven by the Cheyenne closure. Note that $7 million -- of the $7 million over half was related to a non-cash write-down of the building.

Other onetime tax impacted expenses included $3 million of management transition expenses and acquisition-related costs. Tax adjusted one-time benefits included $3.4 million of life insurance and $2.5 million in a non-monetary conversion related to insurance proceeds from a machine failure at Engineering Technologies. Excluding special items non-GAAP net income from continuing operations grew 17.2% to $4.22 per diluted share.

Turning to slide 10, net working capital at the end of the fourth quarter of fiscal 2014 was $119.5 million compared with $112.3 million a year earlier. Working capital turns improved to 6.6 from 6.3 in the fourth quarter of 2013. This reflects the working capital discipline we apply to the base business as well as acquisitions.

Slide 11 illustrates our debt management. We ended fiscal 2014 in a net cash position of approximately $29 million. This compares with a cash position of $1 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net cash to capital of 9.4% at the end of fiscal 2014 compares with net cash of 0.3% 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 strategic initiatives.

Slide 12 summarizes our capital spending, depreciation and amortization trends. For fiscal 2015 we expect our capital spend will be in the range of $24 million to $26 million, up from $18.8 million in fiscal 2014. David will discuss our fiscal 2015 capital initiative in his business segment commentary. But the common theme is automation and quality improvement with an eye towards driving organic growth.

Looking at slide 13, for the fourth quarter of fiscal 2014 we generated free cash flow from continuing operations of $33.8 million representing the conversion of free operating cash flow of nearly 248%. For the full fiscal year free cash flow from continuing operations was $53.2 million representing a conversion of free operating cash flow of 107%. With that I will turn the call back to David.

Thank you, Tom. Please turn to slide 15, Food Service Equipment group, and I will begin our segment overview. Sales in Food Service increased 11.1% from Q4 last year. Operating income was up 9%. In refrigeration our growth was largely driven by continued strength in our new line of engineered endless merchandising cabinets sold into the Dollar Store segment and the national rollout of a low temperature beer merchandising cooler.

In the Quick Service restaurant segment some of the pent-up demand due to weather in Q3 came in during Q4, and we expect more of it to come in during the first quarter. Our backlog in refrigerated solutions was up about 20% in the quarter.

In Cooking Solutions sales were down slightly from Q4 of fiscal 2013. We completed the closure of our Cheyenne facility on schedule in June, but the ramp-up in our new facility in Nogales has been slower than planned as we pursued an ambitious implementation plan and incoming orders remain strong. As a result our backlog in Cooking Solutions increased by double digits from the fourth quarter last year. Getting Nogales up to speed and reducing our backlog is our highest priority in Cooking Solutions.

In Specialty Solutions we announced the divestiture of a custom fabrication business. This was a low margin business that provided no synergies with our core Food Service Equipment business.

We are investing CapEx dollars in automated manufacturing in Nogales to improve throughput, quality and margins. We also have redeployed talented operations professionals from across our business to assist this ramp up. We continue to expect the consolidation to result in $4 million in annual cost savings. We'd begin realizing these savings in the second half of fiscal 2014 and we expect to achieve full run rate savings in fiscal year 2015.

In June we announced the acquisition of Ultrafryer Systems, a manufacturer of fryers for chain restaurants. Ultrafryer brings us a highly differentiated product, good customer relationships and an experienced management team. We are already seeing cost synergies by leveraging our supplier contracts in this business and we are pursuing cross-selling opportunities across our customer bases.

In presentations last quarter I said we will improve margins by 200 basis points in the next 18 to 24 months in this business. This past quarter we took significant steps to support that goal. The $4 million from the Cheyenne consolidation will result in about half of that. We expect the AFS divestiture and Ultrafryer acquisition to deliver another 100 basis points.

Taken together Cheyenne, Ultrafryer and AFS lay the groundwork for improved profitability and also demonstrate how we are reshaping the Food Service segment to drive growth and profitability.

Please turn to slide 16, the Standex Engraving group, which posted its second record quarter in a row. Sales increased 26.8% and operating income was up 74.7% year over year driven by strong demand in our Mold-Tech business. Mold-Tech is continuing to ride the wave of record automotive model launch activity in all three of our regions: North America, Europe and Asia.

We opened our fifth manufacturing facility in China this month ahead of schedule and we approved two new sites in Europe and Asia in emerging markets. Engraving segment sales in China were up more than 30% in fiscal 2014 and we are committed to providing our Chinese customers with the world's most advanced mold texturizing capabilities.

Finally our roll, plate and machinery business was flat year on year. Worldwide presence is key to our growth because it allows us to closely follow our customers as their markets and businesses evolve geographically. We're the only player in the mold texturizing space that can provide an OEM with the same texture in any of our 29 sites, soon-to-be 31 sites, around the world using our advanced digital technology, in many cases on the same day.

The new design hub in Manchester, England we opened last quarter will reinforce this competitive advantage. Leveraging the design hub resource we've already established partnerships with a number of OEM design teams to provide them with rapid prototyping of textures as they develop automotive interior concepts for the future.

In addition to the emerging market site openings I mentioned, we continue to expand our offering with capital investments in laser engraving machines and nickel shell molding. We are currently installing a new laser in the USA and signing another in China later in the year.

Finally we continue to grow mold texturizing applications in non-automotive applications such as electronics, consumer products, medical and aviation.

Please turn to slide 17, our Engineering Technologies group. Sales for the quarter were up 5.6% year over year. Operating income was down 14.5% reflecting a tough comparison due to large volume of oil and gas business in the fourth quarter of fiscal 2013 as well as higher levels of development work in Q4 2014.

The growth we experienced in Q4 was largely driven by shipments into the space market. Spincraft is now shipping under a multi-year contract with Boeing and Lockheed Martin's United Launch Alliance joint venture to produce one piece fuel and oxygen tank domes for the Atlas V and Delta IV launch vehicle programs. In addition, we recently began shipping to Virgin Galactic for their next generation space ship program.

We continue to deepen our penetration into the aviation market with the receipt of our first orders from hot side engine components in our European business. We are now delivering [lip skins] out of our Wisconsin factory for the Airbus A320 Neo, one of the largest selling commercial airplanes in the world.

In addition, we delivered our first A320 nacelle exhaust plug and nozzle assembly and it is now at Airbus for testing. As we mentioned on a call last quarter, we expect these contracts to ramp up to $13 million in annual sales at full volume.

To further our penetration into aviation programs, last week we announced the agreement to acquire Enginetics, which I will speak about in just a moment. Our Engineering Technologies CapEx plan for fiscal 2015 includes significant investments in additional machining capacity including new spin labs and [CNC] machines to support the growth we are seeing in both commercial aviation and space.

In addition, we are on schedule to complete our new vertical machining center this fall following the catastrophic machine failure we experienced last year. We've been successful in managing this transition over the past year with minimal customer impact and we look forward to bringing this new capacity online.

Please turn to page 18. On August 19 we announced an agreement to acquire

the stock of Enginetics, an Ohio-based Company with broad metal forming capabilities serving US aviation market. We like the aviation exposure we have been gaining in Engineering Technologies for its long-term growth prospect and steady production volumes. Enginetics enhances and complements this presence.

The company has been awarded a number of long-term agreements with US-based engine OEMs to support the next generation of energy efficient engines. They bring an experienced management team with deep industry expertise.

We see opportunities to jointly leverage the presence each of our businesses have in the US and in Europe to expand our relationship with these important OEMs. As you can see, this deal will expand Engineering Technologies' sales into aviation from 6% of total to 32%.

Please turn to slide 19, Electronics. Sales increased 7.4% year over year to a record $29.6 million while operating income increased 17.7%, marking another quarterly record for the group. Electronics continues to manage the evolution of its end markets, addressing new applications and winning new customers.

New sensor program launches in the white goods, HVAC and recreational markets together with reed switch wins improved our sales mix and operating income leverage in the quarter. We are continuing to see strong demand across the combined Standex-Meder product line particularly in North America and Europe.

Our Electronics product pipeline strongly positions the business to capitalize on the secular shift to a smarter more connected world which requires sensors on the front end. To capture this opportunity we are positioning Standex as a global partner in next generation sensor design and manufacturing.

Our recent acquisition of Planar Quality Corporation will reinforce this positioning. PQC is a leader in the field of high-frequency planar power magnetics designing, producing and marketing state-of-the-art planar transformers and inductors for customers around the world. PQC will accelerate our penetration in the specialized but growing area of compact, high current, high density transformers typically found in military, medical, space and electric vehicle applications.

This is just the latest example of the Electronics group moving up the value chain from being a component supplier to offering more advanced and comprehensive sensors solutions.

Our fiscal 2015 CapEx plan for Electronics supports this strategy from both the operational and customer perspective. It is an ambitious plan because as we focus on sensors and move up the value chain in that market we were in a business that requires a higher level of capital investment than simpler components.

We have important investments in manufacturing capacity planned for the year to improve throughput and quality in our sensor program. And we deployed a new CRM system in the Electronics business to more effectively manage our sales funnel.

In addition, we expect our new facility in Mexico to be fully operational this quarter. Relocating from our existing facility to this new location will help us realize cost savings and efficiencies as fiscal 2015 progresses while also delivering faster time-to-market. Performance in our Mexico plant has allowed us to [resource] select products for North American based customers, shortening supply chains and improving customer service.

Please turn to the Hydraulics group on slide 20. Q4 Hydraulics segment sales increased 18.4% year over year. Operating income was up 29.6% reflecting both sales leverage and productivity improvement. As these results demonstrate, everything came together for the Hydraulics business this quarter.

As you know, Hydraulics responded to the fall off in the North American construction market and with it a decline in dump truck and dump trailer demand during the recession by penetrating the solid waste and refuse market with a range of well received new products.

Now driven by steady improvement in North American construction activity our traditional dump truck and dump trailer markets are recovering. As a result we are experiencing stronger customer demand in both the refuse and dump truck sectors.

At the same time our ability to leverage our new Tianjin, China facility has strengthened our competitive position in Hydraulics while substantially improving margins. A major factor is that we can now deliver shipments from both Tianjin and our plant in Ohio.

Tianjin achieved record volumes and the fourth quarter and we are working to increase capacity at that plant with investments in CNC machining and welding automation planned for fiscal 2015. Looking forward, given our higher opening backlog year over year, we remain optimistic about prospects in Hydraulics.

Please turn to slide 21. In summary, we concluded a record year for Standex in the fourth quarter with double-digit growth in four of the five businesses and continued improvement in our operating leverage. Our opening backlog is higher on the year-over-year basis in all of our businesses and we are optimistic about our prospects for fiscal 2015.

End market conditions are improving across the board. Customer activity continues to increase and incoming orders are coming at a healthy rate. At the same time we are actively pursuing multiple avenues to capitalize on the strength of our markets and our balance sheet to deliver greater shareholder value. We look forward to reporting our progress next quarter.

And with that we would be pleased to take your questions. Operator?

(Operator Instructions). Chris McGinnis, Sidoti & Company.

Just to start off I guess on the Food Service side. The improvement in quick service, is that more an easier comp due to the weather or you're actually seeing also an improvement kind of in that end market demand?

It little of both, Chris. Some of the demand from the winter was pushed into the spring quarter and we also saw some pickup in demand.

All right. And then just on the Ultrafryer acquisition, how is that still accretive? Is that just the margin profile of that operation is that much better or is it the synergies or a combination of the two?

I would say it is primarily the first, but there are also synergies. It is a business that operates at a healthy margin and, as I said before, we have got some immediate cost synergies by leveraging our greater purchase volume both in materials and in our logistics.

Great. And just on the cadence of the $4 million of cost savings for the year. Is that all -- is that $1 million a quarter, is that the best way to think about it?

More in the second half, Chris.

So -- all right, so you are -- all right, (multiple speakers) $3 million for the next two quarters and then you are flat for the prior year?

Yes.

All right. And then just on the Nogales, it sounds like -- how much longer could that be a headwind for you?

I think through the end of the year as we stabilize and get our backlog to where it ought to be.

All right. Just moving on to the auto platforms and talking about the strength in the Engraving. Is that -- how much of that is market share gains compared to actually the strength of the model being introduced --.

Well, this last year it was clearly both. I mean we did take share because of our worldwide presence and it was a record year for new model introductions around the world?

Sure. And that is directly related to the expansion of your geographic presence just on those market share gains?

Yes, it is a combination of two things one is that we have a common central technical database for all our designs that feed all of our sites around the world. So we can work with the OEM as they design a texture and we do design ones we can deliver at the multiple sites. And then over the years, as we've expanded geographically, we put our sites close to the toolmakers at the auto -- that the auto manufacturers use.

Sure. And then just two quick ones, just CapEx for the year?

We gave guidance of $24 million to $26 million.

All right. Sorry I didn't see that. Thank you. And then just lastly, just as you're starting to make acquisitions again what is your comfort on the leverage ratio if you did see such an acquisition?

We want to stay investment grade, so we want to stay in the 2 to 3 times EBITDA leverage ratio, so probably closer to 2.

Great. And I know there were smaller acquisitions, but does that change your approach in terms of timing of additional acquisitions? Do you need to take time to really kind of integrate these or do you feel ready to move on pretty quickly?

Well, it depends which business segment. I think it is going to take a little time for Engineering Technologies to digest Enginetics. But we will still be actively looking for bolt-on acquisitions in that group.

Great. Thanks for taking my question. I will jump back in queue.

Beth Lilly, GAMCO Investors.

I wanted to drill down in the Food Service business. Roger, during his tenure, talked about getting the margins up and now you are very explicit about getting your operating margins up 200 basis points.

And so, can you just drill down -- it seems to me the real issue continues to be on the cooking side. And can you just help us understand exactly what the problems are there? And am I incorrect in that statement that the problems are on the cooking side? And so what -- and then ultimately I guess where do you think the margins can go on the Food Service side?

Yes, let me start with that and then get to the specifics. If you look at all the large food -- publicly traded companies that either are entirely in food service or have reported segments in food service, the margin rates they report are in the last two years between 13% and the low 20%s and we are below that.

We believe this market, this business will allow us to deliver margins in that range and we are not going to get there overnight. My statement about the 200 basis points was something we thought was achievable in the next 18 to 24 months, the comment I made last quarter. And pretty explicit about how we would deliver those gross margins.

You are right to say that our primary challenge right now is in Cooking Solutions. And so, the way I look at Cooking Solutions is the demand is good, we had good growth in the quarter, good top-line growth. We didn't leverage the bottom line primarily because of the ramp up in our Nogales plant didn't track with the wind down in Cheyenne.

And that is back to me telling you it is a self-help story. It is a problem that we can solve. We have the orders in-house, we know we can make decent margins on those orders, we have just got to get the right people [aligned], give them the right tools and support them with systems and structure.

Okay, so the demand is good. So you've got the right products and it sounds like it is simply then an operational issue?

In the short term -- in the short term, yes, operational issue. I would say long-term we still have to introduce new products, we have our speed oven out, we didn't talk much about that today. We are getting a lot of interest in our speed oven, we hope to see that grow in the next couple years. We've launched new products. Continue to look at our portfolio like we did with Ultrafryer.

So part of the longer-term story to get to the target margins that are representative of the industry will include some of those actions. But in the short term you are entirely right, it is getting the right people around your operational issues and getting that performance where it needs to be.

Is the competitive dynamics different on the hot side of the market versus the cold side?

Yes, it is, but if you look -- you can look at it a couple different ways. In general on the hot side there tends to be more innovation, more churn in products and in technology as end-users change their formulas, change their recipes and things.

On the cold side the technology is not as -- doesn't evolve as quickly. Our wins on that side have had more to do with designing products around ease-of-use, ease of installation, energy efficiency. And competing on the service level. So a little less technology, more service level ease-of-use.

Okay. Have you broken out the -- if you look at your revenues of let's call it give or take 400 -- a little over $400 million on the Food Service side, what is the breakdown between refrigeration and cooking?

The last time we did that was that was part of the investor presentation.

Yes, 50% is what $200 million in refrigeration and 25% in basically cooking, a little over 25% in cooking. Maybe 30% (inaudible).

You probably have it, Beth, it is on our website. Is it the investor presentation from last quarter?

Yes, and we've got it in a number of presentations.

Okay, okay good. All right. And so just one more question about this. So the refrigeration side you are happy with the margins, things are tracking, but the real issue is on the cooking side, right?

I would say pleased with progress, never happy, always room for improvement. The biggest issue is on the cooking side, yes.

Yes, okay. All right. And then my other question is I wanted to ask you about that capital spending. So you can give us a breakdown, you are going to spend $24 million to $26 million this coming year, what is the breakdown on that?

Let me give you some overall comments and I can ask Tom to provide some additional detail. If you look at comps of other industrial products companies you'd see a CapEx level of, depending on the industry, say 2% to 2.5%, in some cases 3% of sales. And I view that as the cost of doing business to maintain competitiveness to stay in the business.

Now in our business in the five years, you look at that five-year trend that Tom showed, coming out of the recession we were very cautious in our spending and spent below depreciation. So there is -- so now as we are growing we have got a couple things going on. One is we are reinvesting in some of the basic competitiveness enabling technologies in the plants like auto forming machines and laser machines. But we are also growing.

And what we said in the past is to leverage our cash position we will look at capital investment above that run rate if there are good growth prospects. We've got four businesses that are really firing on all cylinders, we have good growth opportunities and we fundamentally see that investments in internal growth opportunities are lower risk and higher return than say acquisitions.

And our business leaders, as they come to us and request acquisitions or internal capital investment, they are competing for the same dollars. So I would say wherever you think our comps ought to be for CapEx in that 2% to 3% range, the $24 million to $26 million, part of that is above that 2% to 3% that is growth oriented, aviation, Engraving and Electronics in particular.

Okay. So aviation -- what I was trying to understand is just which divisions are you spending more money in than others?

Well, in this next year it will be Engineering Technologies to support the aviation contracts, engraving as we bring some laser machines online and our nickel shell molding online which are emerging technologies in those markets. And Electronics as they move more to sensors.

Okay. Terrific. Very helpful. Thank you.

Jamie Wilen, Wilen Management.

Hi, most of my questions have been answered, but as far as Engineering Technologies, the developmental spending that you are doing, is that for near-term projects or long-term projects and the pay off on that type of spending?

I would say the majority long-term projects, a lot of activities you can imagine how -- we are very excited about the aviation news we announced earlier in the year, you can bet we are pursuing others. And that is long-term, long-term work, as you know, with the build schedules of these new engines.

And lastly, just one commentary. I've been following you guys for a lot of years. And I look at every metric to judge a Company whether it is sales, operating margins, consolidation of plants and improving the balance sheet making accretive acquisitions. You guys have been just on point and making progress on every single metric. And well done and just hope you don't lose focus and can continue to make that same progress. Well done, fellas.

Yes, thank you, Jamie, we really appreciate that. And we hope we don't lose focus either and appreciate your support.

Thanks. Nice job.

At this time there are no additional questions. I will turn it back over to David Dunbar for closing remarks.

All right, thank you, operator, and thank you, everybody, who joined us this morning. This concludes our call.

Goodbye.

Thank you. This concludes today's conference call. You may now disconnect.