Standex International Corp (SXI) 2015 Q2 法說會逐字稿

Welcome to the Standex International second-quarter fiscal year 2015 earnings conference call. (Operator Instructions). Thank you. It is now my pleasure to turn the call over to David Calusdian to begin. Please go ahead, sir.

Thank you, Maria. 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 will 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 second-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. Good morning from snow-covered New Hampshire. I would like to welcome those listening to today's earnings call. We reported another strong quarter in Q2. Total sales grew 13.7% from Q2 last year. Netting out acquisitions we grew 6.5% organically. Foreign-exchange had a negative effect of 1.9%. Organic growth initiatives in all of our businesses contributed to this top-line result.

Growth was most robust in the North American markets, particularly in food service, space and construction. At the same time we saw a slowdown in energy-related markets, as you can imagine. And the rollout of new automobile models we had been growing leveled off.

On the bottom line, second-quarter non-GAAP operating income was up 12.3% and non-GAAP EPS increased 11.5%. Free operating cash flow for the quarter increased 8%.

During today's call I will be reviewing key drivers of each of our business segments and our primary focus areas for each going forward. Among the significant highlights this quarter include strong performances from both of our recent acquisitions, Ultrafryer in food service and Enginetics in engineering technologies. Both are meeting our expectations for earnings accretion.

Another priority is the progress that we continue to make in improving performance at our Cooking Solutions plants in Nogales, Mexico. Before I go into more details on those highlights and other segment developments, I will turn the call over to Tom to discuss our results for the second quarter. Tom?

Thank you, David, and good morning, everyone. Please turn to slide 4. Four of the five segments reported organic growth for the quarter and all five reported growth year to date. On the chart you can see the contributions from acquisitions and the currency effect for each segment.

Overall, organic growth was 9.1% with acquisitions contributing 6.5% versus Q2 last year due to the Enginetics in engineering technologies and Ultrafryer in food service. Currency had a negative effect of 1.9%, which results in an overall growth of 13.7% for the quarter. Year to date organic growth was 9.4%, acquisitions contributed 4.9%, and currency had a negative effect of 0.8% for total growth for the six-month period of 13.5%.

Please turn to slide 5. On a trailing 12-month basis adjusted earnings per share grew $4.39 through December 31, 2014 versus $3.78 in the 12 months ended December 31, 2013, a 16.1% increase. Sales were $716 million on a trailing 12-month basis as of December 31, 2014 versus $681 million in the prior year.

Please turn to slide 6 which summarizes our second-quarter results. Net sales for the second quarter increased 13.7% to $189.3 million from $166.5 million in the second quarter of fiscal 2014. Including special items operating income grew 12.3% to $17.9 million from $15.9 million a year ago. Adjusted EBITDA grew 13.6% to $22.3 million or 11.8% of sales compared with $19.7 million, also 11.8% of sales in Q2 of last year.

Please turn to slide 7, which is our quarterly bridge that illustrates the impact of special items on net income from continuing operations. For the second quarter of fiscal 2015 these items included tax affected $808,000 of restructuring charges primarily related to the move from a direct channel sales structure to a distribution model in the UK food service business and expenses related to the move of our Electronics Mexico business into a new facility; $672,000 of purchase accounting related to the step up of inventory from recent acquisitions; and $239,000 in discrete tax benefits.

In the comparable period of fiscal 2014 there were $462,000 of tax affected restructuring charges, $1.5 million from nonrecurring management transition expenses, and a tax affected gain related to insurance proceeds of $1.4 million.

Turning to slide 8, net working capital at the end of the second quarter of 2015 rose $147.2 million compared with $127.4 million a year earlier. The increase in working capital related to recent acquisitions, sales volume increase and a temporary inventory build to support consolidation efforts. Working capital turns were 5.1 compared with 5.2 a year earlier.

Slide 9 illustrates our debt management. We ended Q2 in the net debt position of approximately $43.3 million. This compares with a net cash position of $2 million a year earlier. We define net debt as funded debt less cash.

The increase in net debt is primarily related to the acquisitions of Ultrafryer and Enginetics during the calendar year. Our balance sheet leverage ratio of net debt to capital of 11.1% compared to net cash to capital of 0.6% a year ago.

During the quarter we amended and extended our five-year credit facility to increase our borrowing amounts from $225 million to $400 million. The terms of this agreement provide us with increased flexibility to fund future growth, acquisitions and other strategic initiatives. In addition, to increase liquidity we locked in current credit borrowing spreads in a favorable credit market.

Slide 10 summarizes our capital spending, depreciation and amortization trends. Capital spending for the quarter was $6.7 million, spending is in line with our fiscal 2015 estimates and supports both our growth initiatives and current factory automation efforts. We expect that our capital spend will be in the range of $25 million to $27 million for all of fiscal 2015 including recent acquisitions.

Slide 11 details our strong free cash flow performance for the second quarter. Net cash divided by operating activities was $22.8 million. On a year-to-date basis free cash flow was impacted by increases to working capital associated with higher organic sales volume, inventory build and factory consolidations, as well as increased capital spend to support sales growth programs and factory automation.

With that I will turn the call back to David.

Thank you, Tom. Please turn to slide 13 and I will begin our segment overview with the Food Service Equipment Group. Sales in food service increased 12.8% from Q2 last year while adjusted operating income was down 3.5% excluding purchase accounting from the Ultrafryer acquisition.

In refrigeration, growth in general dealer sales, drug retail and dollar stores drove strong year-over-year increase.

In Cooking Solutions we reported double-digit top-line growth, even when you exclude the acquisition of Ultrafryer. Our Ultrafryer integration and sales performance are on plan. Cooking Solutions revenue was partially driven by catch up sales from the transfer of our Cheyenne facility to Nogales that we completed last quarter.

Our Specialty Solutions business also had a good quarter with high-single-digit sales growth driven by delicatessen and display case sales to convenience stores and QSR chains. Overall orders were also strong as a result of export sales.

On the bottom line we reported good profitability and improved efficiency at refrigeration. Profitability in refrigeration was more than offset by expenses related to earlier inefficiencies resulting from the transfer of our Cheyenne facility to our Cooking Solutions plant in Nogales, Mexico.

As we announced recently, we are excited to welcome Anne De Greff-Safft as our new President of Food Service. Anne joins us from Danaher and has significant experience driving innovation, integrating acquisitions, developing talent and driving efficiencies. We look forward to Anne's contributions in leading our food service segment forward.

Our operational priority has been to improve plant operations in Nogales to enhance efficiencies and get costs and margins back where they need to be. We pulled together a team consisting of the best people in Standex, lean experts, plant managers, engineers, IT and finance to improve plant performance. As a result plant production improved throughout the quarter and the plant exceeded December targets.

Our attention is now moving to reduce higher costs related to earlier plant performance. These include operating inefficiencies, freight costs from expedited and partial shipments and price concessions. We expect these costs will decline throughout the remainder of the fiscal year. We continue to expect the Cheyenne consolidation into Nogales to result in $4 million in annual cost savings.

In order to further improve margins on that side of the business, during the quarter we restructured our UK organization where volumes did not justify a direct sales model. We have therefore moved the business to a distribution model to reduce channel costs and enhance profitability.

We are also focused on new product rollouts. Our combi oven, which has now completed two years in the market, is performing quite well and we are working on continued market penetration. Our new speed oven is in test kitchens and is ready for production. New chains are evaluating the speed oven and interest continues to grow. We will show these products and the rest of our lineup at this month's NAFEM show in Anaheim, California.

As we've discussed previously, we see opportunities to better leverage cross-selling efforts between our various food service businesses. For example, we recently leveraged cross-selling between our refrigeration and Specialty Solutions businesses to great opportunities for the large national drug chain rollout.

Turning to slide 14, Engraving Group sales declined 6.2% year over year including a 4.6% negative foreign-exchange effect as global auto rollouts plateaued the excellent growth we saw last year.

Our Mold-Tech business grew at a mid-double-digit rate in China where we opened our fifth manufacturing facility during the first quarter of the fiscal year. We remain very optimistic about our long-term potential in that region.

We also grew sales in Europe despite the negative currency effect. Nearly offsetting the lower level of auto rollouts were sales generated by our design ops in Manchester, England and the new hub in Detroit that we opened during the quarter to service North American OEMs. These hubs, which provide auto OEM design teams with rapid prototyping of their future automotive interior textures, are proving to be a real differentiated concept in our business.

In our roll plate and machinery business market conditions were weak in both North America and Brazil. However, our North American backlog grew significantly during the quarter as a result of improvements in the construction and consumer markets. So we expect to manage a high order backlog and delivering schedule in that business during the second half of the year.

We also recorded sales from large projects from a major tissue and towel maker. Even though sales were down year over year we face significant currency headwinds. Profitability in the segment was up 2.2% and we did a good job driving margins and we recorded a greater amount of higher margin sales in China.

Looking forward we will continue to focus on driving new sales growth through nickel shell and laser engraving in Detroit and the design hub in the UK. We also will leverage continued momentum in China that capitalizes on new manufacturing sites in Asia and Eastern Europe.

Please turn to slide 15, our Engineering Technologies Group. Sales for the quarter were up 53.6% year over year, are up 14.2% when you exclude the acquisition of Enginetics. Strong developmental and production sales to [space] customers in the launch vehicle and defense segments were primarily responsible for the double-digit organic increase.

The launch vehicle segment is particularly active with a number of development programs. In addition, legacy sales in the aviation segment were up by double digits as development programs moved into production phase.

In aviation we recently received a new long-term contract to produce single piece lip skins for the nacelles on one of the largest selling commercial aircraft in the world. The contract represents a $4.5 million run rate at full production. In addition, we continue to be very excited by our Enginetics acquisition which remains on track in terms of both integration and performance.

(Inaudible) to the oil and gas market were down significantly and the medical market was also soft. Profitability in Engineering Technologies was up 62.9% excluding purchase accounting for the Enginetics acquisition. Profitability growth was due to volume leverage and margin improvement initiatives across the organization, partially offset by a lower mix of high-margin oil and gas and medical segment sales.

At the same time we are ramping up capacity to support growth opportunities in aviation as well as the new vertical machining center in Massachusetts. We are contracted to begin production on our Airbus award at the end of calendar 2015. And we are exploring various options to further expand machining capacity in either existing facilities or at a greenfield site.

Looking forward we are concerned about the slowdown in oil and gas. We expect that this market will be down for the foreseeable future and we will take actions to align costs with the demand.

Please turn to slide 16. Electronics sales increased 5.1% year over year while operating income increased 7.9%. Growth in Electronics was driven by the transportation sector in North America. Sale of reed based sensors were very strong during the quarter. Sensor sales represented 43% of our total Electronics segment revenues.

We also saw broad market growth during the quarter in auto, appliance, metering, military and aerospace, medical, security and HVAC. Automotive programs and solar energy market demand in Europe drove single-digit growth in local currency but foreign-exchange resulted in a year-over-year decline in that geography.

In addition to leveraging the top line, planned consolidation in China, including moving some volume to Mexico, contributed to the year-over-year operating income growth.

Looking forward in Electronics, we plan to continue to capitalize on the solid new business development process this business has in place to move up the value chain and provide complete value added solutions. Our new product focus is on planar transformers, stainless steel sensors, relays and alternative technologies. We are very pleased with the recent introduction of a new 10 millimeter reed switch.

Our Hydraulics group, as you can see on slide 17, continues to perform very well, turning a 39.3% increase in sales and 37.1% growth in profitability. Growth across all of our end markets were due to the recovery in housing, aging equipment replacements and the general economy.

We saw double-digit growth in the dump truck, dump trailer, refuse and aftermarket segments during the quarter. We have been highly successful in executing on our strategy to win new applications one after another through customized engineering led sales. For example, our recent market share gains in the refuse space are the result of wins for new OEM applications with garbage trucks, container roll off and compactor platforms.

The factory expansion to add capacity at our Tianjin China plant is now complete. We strengthen our global competitive advantage by enabling us to bundle telescopic cylinders from North America with rod cylinders from China. We continue to ship (inaudible) quarters at record levels in the China plant.

Looking ahead, we are focused on working to expand our addressable market by pursuing new opportunities and completing the installation and operation of new equipment.

In summary, we have performed well through the first half of fiscal 2015. Organic growth initiatives across all segments contributed to sales and operating income and our backlog is solid. Our markets for the most part are firm.

Oil and gas are the most obvious exception to the positive end market dynamics we're seeing. We have about 5% exposure to this market across all of our businesses. We do expect the growth in auto sales and food service expenditures as a result of oil and gas prices could offset some of the negative impact we expect to see from our oil and gas exposure.

Additional headwinds could come from weakening in the Eurozone and China as well as the strong dollar. We estimate that the effect of the stronger US dollar will adversely impact year-over-year net sales by approximately 2% using current foreign-exchange rates.

The financial performance of our recent acquisitions is demonstrated in the success of our acquisition strategy and we have a healthy active pipeline of additional prospects. We will continue to execute on our planned investments to support increased demand and we have a strong balance sheet that allows us to pursue both organic and acquisition growth.

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

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

Maybe if we could just start with food equipment margins. Could you talk about the results in the quarter, kind of what you were expecting given some of the headwinds in Nogales?

And then maybe if you could talk about expectations in the back half of the fiscal year. Are you guys still targeting kind of low-double-digits for operating margins in that unit going forward?

Yes, let's start with that second part of your question, Schon. We still expect to exit the year at -- you said low-double-digit margin, I think we said 12% operating income for the Food Service Group. So last quarter I did expect more of a linear path to that 12%. But let me explain what is going on there.

I referred to it in the comments. Last quarter we deployed a tiger team of experts to improve plant performance in Nogales, and they did. The plant performance in Nogales is improving, we have a new general manager there, they are driving kaizens and improvements cell by cell, they are getting their daily production up, they were able to right size their headcount, they reduced overtime and they're holding those gains.

We saw increased costs primarily in two areas, freight and -- well, not costs but margin compression in pricing. And those things relate to plant performance and sort of are a ripple effect as a result of the plant performance and we are still working down some pass through backlog. There's a higher than average level of expedited freight and partial shipments that we are incurring to meet customer demand.

And you can also imagine that in compensation for some of the plant performance issues our sales team had negotiated various price concessions with different parties, whether end-users or dealers. And we expect both of these things, the price impact and freight, to wind down as the improvements in the plant ripple through the system.

All right, that is helpful. And maybe if we could turn to Engraving. Obviously some of the new platform rollouts, that seems to be kind of -- I guess kind of stabilizing at this point. I am just wondering as you look out over the next kind of 12 to 18 months what do we need to do in order to get that segment growing again?

Is it the new design hubs that you talked about? Is it the roll and plate business starting to perk back up? But what is it going to take if we assume that the new platform rollout is going to be kind of steady to maybe even a bit soft over the next couple of quarters, what is it going to take to get that business kind of growing again?

Yes there is a few elements there. If you look at the history of the business over several -- you go back several years you will see there is a certain lumpiness in that business based on the timing of projects and rollouts.

In either last call or previous call we talked about growth prospects. We have had several quarters of teens/double-digit growth in that business as we work on riding the golden era of new model rollouts and, frankly, increase the market share because we have got really compelling competitive advantage there.

And we communicated that we expected the growth of this business to more align with its historic growth which is 5% to 7%. And I think the base growth potential of the business is it is in line with that, the 5% to 7%. And in compensation -- and there is a few elements of that.

The compensation for plateauing auto new model rollouts, trend packages in models now are increasing. So if you order -- if you get a new car you can sit down and choose what kind of pattern you want in your dashboard or in your interior panel on more and more vehicles. We expect that to provide some growth opportunity.

We have opened new sites in the last six months. In fact, we just had a grand opening for a new site here in Malaysia. The Malaysia site will focus on electronics and consumer products. And it is a good region surrounded by large level manufacturers and we will drive some growth.

China grew 16% last quarter in this business. We have our eyes on another -- potentially another opening in China to grow there. And finally, roll plate machining, as I mentioned, the backlog in this last quarter grew significantly and we expect those rollouts in the next couple quarters to bring those results. So I hope that gives you some of the pieces in the overall expectation of that 5% to 7%.

And I mean just to maybe press you a little bit more. Again, the timeframe that we should be thinking about to get back to that 5% to 7%? I mean we are talking about quarters, not years, is that reasonable?

Yes well, recognize that the currency impact in the first half, I guess when we -- back three to six months ago I was really talking about this organic growth impact. In the first half -- growth just in the five, right, in the greater organic (inaudible)?

Yes, you got it.

At 5% growth prior to currency through the first half, if you look at first half the second half phase in -- typically this business second half is about 5% to 6% higher than the first half. Our current view is we would see that same kind of split first half to second half. There is a little mix change going on. But we would expect that 5% first half growth to continue in the second half.

Okay that is helpful. And then one more if I may. Just with the increased flexibility on the balance sheet now with the new facility, can you just talk about -- obviously you have done transactions within food equipment, within aerospace. Can you talk about just what are -- what are the areas that you are targeting going forward? And then where is -- I guess where is the pipeline most robust at this point in terms of opportunities?

Yes, early -- last year at our Investor Day and one other earnings calls we mentioned zero prospects in all of our businesses. And depending on the timing of the deal we could potentially do a deal in any of the segments. However, the areas with the highest number of prospects and where we just like the underlying characteristics of the business, a combination of those two factors are in Electronics and the Engineering Technologies related businesses.

And I would say in both of those the pipeline is healthy. And if you think of the electronic space globally, as you can imagine, there are a very large number of businesses that are in the sweet spot of what makes a good Standex acquisition to fall well within our ability to execute. So I would handicap them kind of in that order, Electronics, Engineering Technologies followed by the others with continued good prospects.

All right, perfect, guys. I will get back in the queue. Thank you.

Liam Burke, Wunderlich Securities.

David, Enginetics has become a much bigger part of the Engineering Technologies. Obviously Engineering Technologies is one of your growth engines. Could you give us a little more detail on how that business is rolling in and what the benefits are now that you have it in-house?

Yes well, a couple things. First of all, it has really improved the mix of businesses in Engineering Technologies. Where aviation last year was 6%, now it is over 30% and with the growth prospects in the coming years it will be 50% of our business just based on the expansion of the long-term agreements we have both in our legacy Spincraft business and Engineering Technologies.

And that is important because, as you know, the Engineering Technologies legacy business has been very lumpy, a project -- very project related. So being on those large commercial programs has been very good.

Secondly, Enginetics, when we acquired it we had a certain expectation of revenue and margins in our valuation model. They are tracking to that model, we are pleased with the progress. And we had an expectation that between Enginetics and our Spincraft business we could leverage contacts and open up new opportunities for cross-selling and we are starting to see that (inaudible) cycle to that sales opportunity, but promising nonetheless.

Okay. Thank you, David. Tom, you were cash flow negative for the first half of the year. You highlighted some of the initiatives that created that negative cash flow, most of them driven by growth initiatives. I am looking into the second half of the year, do you anticipate generating positive free cash for the year?

Yes, we do (inaudible). Generally our fourth quarter is our best quarter where our working capital is at its lowest point and that contributes to it. I know we're having a little bit higher capital spending this year, but we should have a positive cash flow.

Great. Thank you, David. Thank you, Tom.

Chris McGinnis, Sidoti & Company.

Just a quick question. I guess just with your talk about kind of end market demand, are you worried about kind of a slowdown in possibly Europe and China? Are you starting to see that or is it more of just being cautious because of kind of the economic condition?

We are being cautious, but we haven't seen it. Our China business is up 16%, our European business is growing. In Engraving it is largely due to new growth initiatives through the Standex growth disciplines, the design hub increased their buildings to compensate for other softness. And our Electronics business remains strong in Europe. So I would say on that front it is more a function of just an abundance of caution, we are keeping alert to signs of slowdown in our business.

Sure. And then just to dig into Nogales a little bit more. How much of the two components that you talk about, the freight and the pricing, were kind of part of the margin? How much does that add? And you are past that now, so I think you said you will be at 12% by the end of the year?

Right, for the group as a whole.

Yes.

Freight and price, the year-on-year impact were the two biggest components and together really account for the entirety of the decline.

And are you past that now? Like that is over with and you (multiple speakers) through that?

Well, as I described, it will take some time to work its way through the system. The plant is still shipping out some pass-through backlog, rapidly catching up. Some of that pass-through will need to be expedited, so we will still see some freight and partial shipments for a time. And price concessions are something that we will live through for the next few months because these were negotiated last quarter and the quarter before in compensation for the plant performance.

So the plant -- first the plant improves, then the freight will improve and then the price will make its way through the system. And you would expect through the next couple quarters these will -- these will get back to normal levels.

Sure. And can you maybe just dig a little bit more onto some of the food service side, the continued strength? Do you still feel confident kind of entering the back half of the year with where the order positions are?

Top line continues to look strong.

Great, thank you.

(Operator Instructions). Jamie Wilen, Wilen Management.

Yes, just wanted to clarify, you are reaching 12% as an operating margin in the food service division end of the fiscal year or the calendar year?

End of our fiscal year.

Your fiscal year.

Yes.

And with that all the cost savings will be fully implemented by then?

The cost saving we previously announced, $4 million will be in the run rate, yes. But long-term -- I think we've told you there are a few things in the food service story. In the short term we're actually (inaudible) $4 million we have announced. But long-term we know where our peers are and there will be continued improvement after that.

What is your objective long-term for the operating margin in food service? What can you really get to when you are operating efficiently?

Well, what I have said in the past is, and I am talking longer-term here, we expect we can continue in the upper teens like the other reported -- publicly reported food service companies.

Okay. And the previous question was, the organic growth rate in food service, do you expect to maintain that base?

Well, what I said before and, frankly, (inaudible) the business has exceeded my expectations, I promise you that. We will grow at market. We think this is a 4% to 5% growth market and we have been exceeding that. But I wouldn't commit to above market growth.

We are so focused on operating improvements that I don't want to drive the business to be too aggressive on the top-line side. Fortunately they are exceeding, but 4% to 5% would be the expectation I would give you.

Okay. And lastly, Engineering Technologies, you are running at capacity in your facilities and you are going to have to add locations moving forward?

We, like so much at Standex here, there are several components to this. As you know, we serve -- two of our plants serve oil and gas and energy-related businesses. They have -- and those machines and those lines are in excess capacity and probably will for some time we'll need to take some cost out.

We have a rapidly growing aviation component with Airbus when we went live almost a year ago. And then this new award we haven't -- I mentioned it today, we will get a press release out as soon as we work this through with the customer. We will be expanding capacity to support aviation in our -- related to our Wisconsin plant. So that is where the investments are. In the (inaudible) Massachusetts plant we are in sourcing a machine and starting that vertical machining center up this quarter.

Excellent. Great job, fellas, thanks.

And that was our final question. I would now like to turn the floor back over to David Dunbar for any closing or additional remarks.

All right, I want to thank you all for joining us and taking an interest in Standex. We are pleased with our top-line growth, we know where our priorities are and we have our best people working on that and we look forward to following up with you after the next quarter. Thank you.

Thank you. This concludes today's Standex International second-quarter fiscal year 2015 earnings conference call. You may now disconnect and have a wonderful day.