Standex International Corp (SXI) 2015 Q1 法說會逐字稿

Good morning. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the Standex International first quarter fiscal year 2015 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. Mr. David Calusdian from Sharon Merrill, you may begin your conference.

Thank you, Hope. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website, www.standex.com. Please see Standex's Safe Harbor passage on slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's recent SEC filings and public announcements for a detailed list of risk factors.

In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time items; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations; and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

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

Thank you, David. I'd like to welcome those listening to today's earnings call. Standex is off to a strong start in fiscal 2015 especially on the topline. Total sales increased 13.4% from Q1 last year with growth in all segments and organic sales growth of 9.8% [in our] product line. Our key objectives for Dallas were to improve customer satisfaction and working capital management. These objectives are being realized as shipping out of Dallas versus direct from our plants has cut two days off our average freight time. Finally, the integration of the Ultrafryer Systems business is going very well. Shipments and profitability for the first quarter were strong and we're successfully leveraging Standex supplier contracts to drive cost synergies. In addition, we've identified new opportunities to cross sell Standex products to Ultrafryer core customers as well as Ultrafryer products to certain Standex customers.

Please turn to slide 14. The Standex Engraving Group posted its third consecutive quarter of record sales and profitability in Q1. Operating income grew 45.4% year-over-year on 12.2% sales growth. Our results in Engraving continue to be driven by strong demand in our Mold-Tech business in North America, Europe, and Asia. Quotation activity at Mold-Tech was strong during the quarter in North America and Europe. And we remain very optimistic about our potential in China and we opened our fifth manufacturing facility there during the first quarter. We are continuing to leverage the worldwide presence provided by our 29 sites and soon to be 31 sites around the world, which enables us to stay close to our customers as their markets and businesses evolve geographically.

This global footprint along our advanced digital technology positions us as the only company in the mold texturizing space that can provide a customer with the same texture on a worldwide basis. In our roll, plate, and machinery business; market conditions remained weak both North America and Brazil. As a result, our sales and margins in this part of the business were down from the first quarter last year. The design hub we recently opened in Manchester, England is proving to be a differentiating concept in our business. Manchester did projects for several additional major OEMs during the first quarter providing their design teams with rapid prototyping of their future automotive interior textures. We're working to replicate our success in Manchester by opening a new design hub this quarter in Detroit to service North American OEMs.

Our plans for the second quarter also includes a grand opening, open house, and customer day in Detroit to demonstrate our new slush moldings and laser engraving capabilities; start-up activities in Mold-Tech's new facilities in Asia and Eastern Europe; and further efforts to secure large OEM orders in the roll, plate, and machinery business. Please turn to slide 15, our Engineering Technologies Group. Sales for the quarter were up 16.5% year-over-year, of which 13% came from the acquisition of Enginetics as Tom showed earlier, and operating income increased 22.4% excluding Enginetics purchase accounting. Sales growth in the base business this quarter was largely driven by shipments into the space market. Our lower margin on the base business sales growth reflected unfavorable mix due to higher levels of low margin aviation and space development work and slower sales in the oil and gas business.

We're working to capitalize on new opportunities in aviation now aided by Enginetics, which we've acquired during the quarter. Aviation is attractive to us due to its long-term growth potential and steady production volume and Enginetics significantly improves both our scale and our competitive position in this growing market. They brought us a great management team with deep experience in energy efficient engine technology, which complements our leadership position in spin forming. Our Engineering Technologies' CapEx plan for fiscal 2015 include investments in additional machining capacity, including new spin lathes and CNC machines to support our growth in commercial aviation and to streamline our supply chain for space. We plan to start-up our new vertical machining center early in calendar 2015.

Please turn to slide 16, Electronics. Electronics sales increased 4.7% year-over-year to $29.5 million while operating income increased 7.9%. Strong sales across the Standex metal product line in North America and modest growth in Europe were partially offset by slightly lower sales in Asia reflecting softer demand in China. Our growth in Electronics has been driven primarily by increased demand for reed switches and reed-based sensors in the automotive and appliance sectors. The acquisition of Planar Quality Corporation during the fourth quarter of 2014 reinforces our high reliability magnetics offerings in the specialized, but growing area of compact high current high density transformers. This type of transformer is typically found in military, medical, space, and electric vehicle applications. The Planar Quality business is off to a good start with quotes and bookings both on track.

In purchasing this business, we acquired unique pre-existing Planar product designs along with a set of powerful proprietary design tools rapidly accelerating our sales efforts in these applications. We also made operational progress in Electronics during the quarter by completing the move to our new facility in Mexico. We also expect it to result in cost savings and efficiencies as the plant ramps up, which will allow us to continue reducing the inventory we built prior to the move. Our focus on Electronics is to keep doing what has been working for this business, continue to pursue a healthy list of new business opportunities on one hand and drive operating improvements in our plants. Please turn to the Hydraulics Group on slide 17. This was another strong quarter for the group. Sales increased 35% year-over-year in Q1 driven by sales leverage and productivity improvements.

Operating income was up 46.7%. In addition to the continued growth of sales into the waste and refuse markets, we are seeing a recovery in our traditional North American dump truck and dump trailer markets as well. We've been able to service this demand with our global supply chain and plants in both Tianjin China and Ohio. Volumes shipped out of Tianjin hit another record in the first quarter while we exited the quarter with total hydraulics backlog up 50% year-over-year. To support this demand, we will execute investments in CNC machining and welding automation in Tianjin. Looking ahead, we're working to expand our addressable market by pursuing new opportunities primarily in oil and gas and airport markets. Please turn to slide 18.

In summary and although it's still early, fiscal 2015 is shaping up to be another strong year for Standex. Conditions in our end markets are continuing to improve and we're making good progress on strategic growth initiatives in each of our businesses. We delivered double-digit growth in Q1 while continuing to improve the Company's operating performance overall. Incoming orders are strong and backlogs are up from a year ago across the board. We have a keen focus on improving performance in Nogales. Our businesses are executing their planned investments to support increased demand. Our recent acquisitions are performing well and we have a healthy active pipeline of additional prospects. Finally, our balance sheet remains strong allowing us to pursue multiple paths to grow shareholder value. We look forward to reporting on our progress next quarter.

With that, we'd be pleased to take your questions. Operator?

(Operator Instructions). Schon Williams, BB&T Capital Markets.

Congrats on the quarter. I wondered if maybe we could just take a high level view. You guys serve a lot of different end markets on a global basis. I wonder if you could just give your outlook on kind of what geographies are particularly strong or particularly weak and maybe also by end markets, can you talk about what seems to be picking up, what seems to be slowing down? I mean there was obviously some commentary at the end there about maybe some softness in Europe and China. If you could just kind of address what you're seeing on kind of a total basis, that would be helpful.

Let me start with the watchouts first, that may be easier, it's a shorter list actually. As all other industrial companies, we're watching Europe closely. We had good sales in Europe in the quarter although we started to see some softening in quotation activity so we'll see how that plays out, that could soften demand in Europe. China, we had a good quarter in Engraving although Electronics started to show some softening in China. So there again, just keeping an eye on it for the quarter. And I think I also mentioned exchange rates, we do about 30% of our business in non-dollar denominated transactions so the strong dollar would impact that. It's not a market effect, but obviously we translate everything back to dollars. In North America our biggest markets, food service markets are healthy. The food service industry groups reported this year volumes are projected to grow depending on [if you listen 4% to 5%] for the market and you see the other players are announcing growth as well there. Auto rollouts and refreshes, we're at the tailwind of a period of significant activity there.

We expect that to taper through the year so our Engraving team is focusing on more consumer goods, electronics and things like that to fill the gap. They think they can maintain their long-term growth rate with that transition. In engineering projects, the space activity was strong this last quarter. Our other businesses tend to be more project based. So for example, our land-based turbines in energy and our sales to oil and gas were softer in the quarter we think largely because of timing of projects and we expect those to be relatively stable this year, relatively flat. Electronics, no dramatic change there, just a steady upward tick in that business as our customers want more measurement points in their products and we're able to deliver them. I think I mentioned that our mix of product in Electronics has ticked up, I think last quarter was about 43.5% sensors -- I mean Q4, in Q1 that ticked up to 45%. So, we've continued to see an ongoing evolution to higher level solutions.

All right, that's helpful. And then if I could dive into some of the segments here. Obviously very good growth out of the food equipment business, double-digit organic growth that's compared to double-digit last quarter. That type of growth rate, is that sustainable or was there anything? I know there's been a little bit of catch up maybe from Nogales and some rollouts as well. I'm just trying to get a sense of should we expect that type of growth rate over the near term?

No. What we've communicated is we thought long term it's a good food equipment market and International Association of Food Equipment Manufacturers says it's 4% to 5% growth in market year-over-year. And I think in earlier calls, my communication about that was we're focused internally on the transfer to Nogales, which is now complete and through the course of the year we thought we can return to the market growth rates. Well, obviously we've exceeded that in the last two quarters. I would not change my expectation though so I think a reasonable expectation would be a growth rate closer to the market growth.

Okay. And then just following up on that, could we talk about Nogales still some startup issues there? Could you talk about what's a reasonable time frame for you guys to get that behind you? Are we talking about by the end of the year? And then if you could also maybe address the speed oven is now out and you're taking orders, maybe just talk about what you're seeing in terms of opportunities there?

Let's first talk about Nogales. In Nogales we're one step farther along the path of getting our especially the cooking solutions business that we wanted to get. There was a (inaudible) of consolidation, elimination of excess capacity, that's done. Now we've got all our eggs in one basket so to speak in Nogales. And we had a very aggressive plan, we moved a lot of product this year and as I mentioned before, the ramp up didn't track with our incoming orders for the activity they had so we may be pushing a little hard and a little fast. But the good news is that we've got the demand, we've got the topline, everything is focused in Nogales.

So what we've done, Schon, and this actually kind of an exciting first I think for Standex. We looked across the business and said who are the best people we've got in lean, who are the best plant managers, IT, finance. We look to get them in Nogales, that's the number one issue, and drive performance improvement. Through the quarter, our volumes increased so that as we exited the quarter, our volumes are about where we need them. Now that team is working on improving efficiencies and I would say that my expectation is we will exit the year with the margins that we've communicated. And in terms of Nogales, our expectation is that this quarter will start to stabilize in Nogales and will just progressively improve the margins and efficiencies Q3 and Q4.

Okay. And then just any commentary on the speed oven?

I'll switch gears on speed oven. So the speed oven, (inaudible) doesn't involve customers who have been working with the speed ovens in their test kitchen, developing new menus for some concept rollouts they have. And our expectation is that -- I don't know if we've communicated a sales number for the speed oven. But we think that will result in some sales in this year, it'd be less than $1 million, say $0.5 million maybe for the year as these programs roll out before the end of our fiscal year. And the sales side, you probably know this, Schon, you track the industry. So as these national chains revise their menu and develop some of the concepts, it will go into test market. It's a fairly long process so the share of sales from new products in a business will take some years for that to really provide a significant growth engine, but obviously the sooner we start, the sooner we get there. So, the feedback from the customers is speed oven is easy to use, they like the interface and we're just anxious to hurry them along in their new concept development.

Okay. And then maybe just one more if I may. Margins in Engraving ahead of my expectations. Should we think of kind of the mid 20%s, is that a sustainable margin for this business and was there a mix effect? Can you maybe just talk about what were the puts and takes there?

This business as you know leverages tremendously when it grows, but I would not say mid 20%s is a reasonable expectation of margins long term. I think we've communicated upper teens long term as we continue to grow this business.

Okay. And I mean this quarter was just more volumes then?

Yes, more volume and we worked some extra shifts. We didn't have to make significant investments to support that volume and with that, you see the results in the leverage.

Alright, thanks. That's helpful. I'll get back in the queue here.

(Operator Instructions) Chris McGinnis, Sidoti & Company

I guess just a follow-up on Nogales. Just looking at the margin comparison last year and the cost savings you expect this year from that change, where would you have been if you're on point in Nogales in terms of a margin differential for the quarter?

What I would do, Chris, is I would go back to that food service page, page 13, and if you assume that we were just producing at the same margins we were last year and just leveraged with our volumes; that will be another $1.3 million of operating income in the quarter. I think that kind of gets you close to the order of magnitude.

And I guess there was a little bit of pent-up demand, are you still seeing that in the food service side from last quarter I think if I remember your commentary right?

Backlogs are up, order entry strong, and then the market itself, the industry group support is strong.

On the opening of the Detroit plant on the Engraving side, when you think about an opening of a facility, is there a revenue I guess per site that you have or is it more about the opportunity of just having that worldwide network?

I said grand opening, the site exists. So, the opening is kind of an event. We just put in place a new laser machine so we could do laser engraving there. We have nickel shell molding, which is a new investment we've just made there. And we're also replicating the Manchester design hub there so we're expanding our offerings there so we've invited our customers. We actually already had this last week, I think we had over 200 customers come to visit us. So I would say we do have some growth expectations from nickel shell molding and from the laser and the design hub as we've experienced in Manchester, at the very least it strengthens our relationship with our existing customers and does result in some service billings for the design services.

And then you talked about obviously you're coming off a record number on the auto side, how confident are you to offset -- you talked about some consumer electronic business. How confident do you feel that you can kind of keep a solid growth rate in that business with that? How likely a slowdown on the auto side?

I think what we said there is if you take a five year topline CAGR for that business has been about 7% and we think we can stay within that range by modifying our focus and changing the mix of industries we serve. So more focus on electronics and consumer goods when orders are slow. We're not going to get the teens growth that we've seen in the last few quarters, but it will revert to the mean.

And then just lastly, you talked about a little bit of margin pressure in your Engineering side, it sounded like a little bit of a mix. Should that improve over time in terms of just stronger pricing I guess?

It will improve for a couple of things. First of all, it was up from last year in the base business, we reported 12.7% and this is a business that long term we expect to be in the upper teens. So, there was significant development of some new space quotes and models or prototypes we developed as well as support of these aviation wins we've communicated earlier. So there's more revenue flowing, very insignificant revenue for the development work and we paid for that in the quarter so that depressed the earnings there. The other minor effect in there was with the exception the aviation, most of the business we do in Engineering Technologies is largely projects driven and it's fairly lumpy. So last quarter was a big quarter for space, but in our UK business we saw less oil and gas business and the margin mix of oil and gas and energy put some downward pressure on the margins. But that is just kind of a one quarter point in time and we would say is not indicative of long-term prospects of the business.

Thank you for taking my questions.

Jamie Wilen, Wilen Management.

Nice quarter on all fronts. On the Nogales cost savings, what is the ultimate amount of annual cost savings once we are operating officially?

Well, I'll tell you the cost we are taking other the system with the closure of Cheyenne is $4 million annualized. Now I would tell you I would have an expectation that once we are running and gunning in Nogales that we'd expect to see some productivity improvements beyond that, but those are not built in. We haven't communicated anything there.

And with the $4 million, how far along are we in that in that nine inning game?

I think majority of that cost is out and I mentioned earlier that we'll exit the year at the margin rates we've communicated in that business. So, you'd start to see that second half of the year. It's being kind of overwhelmed by the inefficiencies in production right now.

The open air merchandiser that you're rolling out looks like an incredible product. Can you talk about the potential volumes and kind of what national change are you rolling it out with?

So, we do open air merchandisers and out of that business, we do for Einstein. This was a convenience store through a buying group, SESCO right. I can't answer the total market opportunity for this, Jamie. This business can't come out of business our brand is Federal and Federal is I'd say almost a niche player. We do customized merchandising for small format food outlets like an Einstein Bagels, we also do convenience stores and do custom design of merchandisers for the new concepts and the new rollouts. And that business has been growing well and it's somewhat above the food service market rate. We don't report it on individual product lines, but it's a good opportunity, it's good growth.

Okay. Thanks, fellows. Great quarter.

Thank you. That does conclude today's question-and-answer session. I would now like to turn the floor back to management.

I want to thank everybody who dialed in and listened. Especially I want to thank the employees of Standex who really have welcomed me as the new CEO and in the nearly year of working with them come to appreciate their commitment to customer satisfaction and to delivering results. It's a great team to work with and I want to thank them all for the string of good quarters they've put together. So, thank you all.

Thank you. This does conclude today's conference call, you may now disconnect.