Standex International Corp (SXI) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Standex International's third-quarter fiscal-year 2015 earnings call. (Operator Instructions)

I would now like to turn the conference over to Mr. David Calusdian of Sharon Merrill. Sir, you may begin your conference.

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

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

In addition, I'd 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 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, and good morning. I would like to welcome those listening to today's earnings call. We reported a solid Q3, and overall we're pleased with the results, especially given the headwinds from foreign exchange and the oil and gas markets.

Total sales grew 3.9% from Q3 last year. Netting out acquisitions, we grew 1.5% organically. Foreign exchange had a negative effect of 3.7%. We saw good demand across most of our businesses, with the exception of engineering technologies, which was affected by the decline in oil and gas.

Food service, engraving, and hydraulics posted strong top lines, while sales in electronics were down as a result of a difficult year-over-year comparison in North America. On the bottom line, third-quarter non-GAAP EPS was a record $1.02 per share, or up 9.7% from the third quarter of 2014. Operating income was up 10%, and we had a net debt position of $45.8 million at the end of Q3.

During today's call, Tom will discuss our financial results for the third quarter, and I'll be reviewing the key drivers of our business segments and our primary focus areas for each. First, I would like to take a moment to provide a high-level overview of how we run the business through the Standex Value Creation System, a set of standard tools and processes to drive performance in the business, and a couple of operational plans with strategic priorities.

Our objective is to build strategic platforms by growing our business profitably and efficiently. Please turn to page 4 to describe how we operate to achieve our business objective. The first and oldest pillar is the Balanced Performance Plan process. This is our process to set annual goals, review progress, and manage our business throughout the year. It ensures alignment between corporate goals through each of our operating units. The Balanced Performance Plan process develops annual operating plans that support our long-term and short-term targets. It has been in place for years.

The second pillar, which we built in the past 12 months, is the Standex Growth Disciplines, and it's designed to make growth a result of skill and planning rather than a game of chance. It is a set of standard tools our businesses use to map their markets, prioritize growth opportunities, and define growth laneways. It starts with an understanding of how each business competes and wins and ends with investment plans to reinforce our competitive advantage with new products, channel strategies, and acquisition targets.

The third pillar of the Value Creation System is Standex Operational Excellence, which we launched this past quarter. It is based on deploying the standard Lean enterprise tools throughout the businesses to focus on customer value and eliminate waste to increase efficiency. After implementing the Growth Disciplines in the last 12 months, we always intended to add this important element. Together they form a powerful tandem to grow the top line on the one hand and continuously improve operating performance on the other.

We have rolled out a complete toolkit to all of our business teams. All of our businesses will have transformation plans for FY2016 and begin deploying the tools throughout the year. Though I have high expectations for the results of the program, I do not expect to see impacts in operating performance until the latter half of our FY2016.

The fourth element of our Value Creation System is talent management. As we execute our strategy to build significant strategic platforms, we need to develop our leaders, equipping them to grow their businesses profitably. Standex is a unique company with a unique culture, and we will be more successful as we grow our own talent from within. We have developed a leadership competency model and have deployed assessment tools to help create development plans for our leaders.

With this brief summary, you can see that the elements of the Value Creation System together give us the tools to lead Standex to achieve our vision. With that, I'll turn the call over to Tom to discuss our results for the third quarter. Tom?

Thank you, David, and good morning, everyone. Please turn to slide 5.

Three of our five segments reported organic growth for the quarter. On the chart you can see the contributions from acquisition and the currency effect of each segment. Overall organic growth was 1.5%, with acquisitions contributing 6.1% versus Q3 last year due to the Enginetics acquisition in engineering technologies and Ultrafryer in food service. Currency had a negative effect of 3.7%, which results in an overall growth of 3.9% for the quarter.

Year to date, organic growth was 6.8%. Acquisitions contributed 5.3%, and currency had a negative effect of 1.8%, for a total growth for the nine-month period of 10.3%.

Please turn to slide 6. On a trailing 12-month basis, adjusted earnings per share were $4.49 through March 31, 2015, versus $3.99 in the 12 months ended March 31, 2014 -- a 12.5% increase. Sales were $770 million on a trailing 12-month basis as of March 31, 2015, which was versus $695 million in the prior year.

Please turn to slide 7, which summarizes our third-quarter results. Net sales increased 3.9% to $181 million from $174.2 million in the third quarter of fiscal 2014. Excluding special items, operating income grew 6% to $18.2 million from $17.2 million a year ago. Adjusted EBITDA grew 8% to $22.6 million or 12.5% of sales compared with $20.9 million, 12% of sales, in Q3 last year.

Please turn to slide 8, which is our quarterly bridge that illustrates the impact of special items on net income from continuing operations. For the third quarter of fiscal 2015 these items included tax-affected $292,000 of restructuring charges, primarily related to facility closure and cleanup expenses in our electronics Mexico and UK food service businesses. In the comparable period of fiscal 2014 there were $983,000 of tax-affected restructuring charges, $976,000 in nonrecurrent management transition expenses, and a tax-affected gain related to the life insurance benefit of $3.4 million.

Turning to Slide 9, net working capital at the end of the third quarter of fiscal 2015 was $149.5 million compared with $128.2 million a year earlier. The increase in working capital related to the recent acquisitions of Ultrafryer and Enginetics. Working capital turns were 4.8 compared with 5.4 a year earlier.

Slide 10 illustrates our debt management. We ended Q3 in a net debt position of approximately $45.8 million. This compares with a net cash position of $12.4 million a year earlier. We define net debt as funded debt plus cash. The increase in debt was primarily related to the acquisitions of Ultrafryer and Enginetics during the calendar year 2014. Our balance sheet leverage ratio of net debt to capital of 11.7% compares with a net cash to capital of 3.9% a year ago.

Please turn to slide 11. Capital spending for the quarter was $4.8 million. Spending is in line with our fiscal 2015 estimate and supports our growth initiatives and current factory automation efforts. Slide 11 illustrates some of our recent capital equipment purchases. The new equipment is one way that we are driving productivity, safety, quality, and efficiencies in our factories.

The fiber laser increases production capacity by improving throughput, reducing scrap, and decreasing maintenance costs. The water jet machine reduces subcontracting work and provides for additional in-house capabilities. The automated welding stall, pictured here, allows for improved welds and lower cycle time. The panel bender is designed to increase capacity, reduce scrap, and improve safety.

These capital improvements are spread across our segments and are examples of capital spending to support organic growth programs, lower costs, drive productivity, and improve quality. We continue to expect our capital spend to be in the range of $25 million to $27 million for all of fiscal 2015, including recent acquisitions.

Slide 12 details our free cash flow performance for the third quarter. Net cash provided by operating activities was $23.1 million. On a year-to-date basis free cash flow was impacted by increases in working capital associated with higher organic sales volume, inventory builds to support backlog from factory consolidations, and increased capital spending for our sales growth programs and factory automation.

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

Thank you, Tom. Please turn to slide 14, and I'll begin our segment overview with the food service equipment group. Sales in food service increased 8.1% from Q3 last year. We saw strength in all of our businesses in this group, with the exception of the decline in our specialty pumps business, which we expect to improve in Q4. Operating income was down 13.1% due to continued operational inefficiencies in cooking solutions, reduced sales to national chains in refrigeration, and lower volume at the specialty pumps business.

In refrigeration, high single-digit year-over-year growth was driven by drug retail and dollar stores as well as sales through dealers. Small-footprint retail customers continued to perform well, providing positive momentum into Q4.

Scientific and industrial refrigeration products also had a very good quarter. We did see declines in sales to national chains, which was offset by growth in lower-margin sales to our dealer networks. We have been focused on enhancing cross-selling between our food service businesses and are beginning to see the fruits of those efforts.

For example, our refrigeration business has been successfully selling products from our specialty display case business. Cooking solutions was profitable in the quarter, and sales increased by approximately 20% year over year, including the Ultrafryer acquisition.

Our Ultrafryer integration and sales performance remain on-plan. Excluding the acquisition, cooking solution sales increased 4.3%. It is also important to note that we saw sequential margin improvement from Q2 to Q3, indicating that the business has begun to turn the corner in terms of profitability improvement. Pricing improved, freight costs are coming down, and plant productivity remained solid.

Performance improvement efforts at cooking solutions are now focusing on warranty costs and distribution-centered performance. We also took a step to better align our organization in the food service equipment group. As I have mentioned before, we have seven P&Ls in this business stemming from a history of acquisition without integration. This results in a number of inefficiencies from duplicative positions and also complicates collaboration across silos. We have streamlined the refrigeration and cooking solutions groups each into a single P&L, reducing by two the number of P&Ls.

Turning to Slide 15, engraving group sales grew organically 8.1%, but with 9.5% negative FX declined 1.4% year over year. Auto rollouts remained strong both in Europe and China.

Our Mold-Tech business through at a mid-double-digit rate in China, as we saw demand from both automotive and nonautomotive customers. We also grew sales in Europe despite the negative currency effect.

North America was down due to a difficult year-over-year comparison, but orders were strong. We obtained a new automotive account in North America which will provide us future growth opportunities.

On the nonautomotive side, we texturized molds for the charger shell, packaging, and logo for a new luxury watch model, demonstrating our position as the premier mold texturizing service leader. Sales generated by our design hub in Manchester, England, and the new hub in Detroit were solid. These hubs, recently branded as Architexture, provide auto OEM design teams with rapid prototyping of their future automotive interior textures. They are proving to be a differentiating concept in our business, and we are continuing with the global rollout.

In our roll, plate, and machinery business, sales increased year-over-year due to a large project win from a major tissue and towel maker. Market conditions continued to be weak in Brazil. North American backlog grew during the quarter as a result of improvement in the construction and consumer markets. Looking forward, we will continue to capitalize on the momentum that built late in the third quarter in the Mold-Tech; roll, plate, and machinery; and Innovent businesses. And our expectation is that Q4 will be strong. Also, we will continue to implement operational excellence initiatives in roll, plate, and machinery and actively market new design hubs in North America and Asia.

Please turn to slide 16, our engineering technologies group. Sales for the quarter were up 10% year over year or down 18.6% when you exclude the acquisition of Enginetics. The decline was due to significantly weaker sales for the oil and gas market, which also carries high margins. Oil and gas had a 14% and 30% negative impact on sales and earnings, respectively.

We have reduced our cost structures in response to market conditions. Medical sales also were weak, and defense was off compared with last year due to a major project that did not repeat. Space launch vehicles remain steady, and we continue to pursue new opportunities in that part of the business.

Aviation is trending in the right direction. But higher sales in that market are not enough to overcome the headwinds in other end markets. We continued to ramp up capacity to support recent awards in aviation. We are contracted to begin production on our Airbus award by the end of calendar 2015, and we are exploring various options to further expand capacity in either existing facilities or a greenfield site.

We continue to be very excited by our Enginetics acquisition, which remains on track in terms of both integration and performance. Enginetics will be our first focus within engineering technologies regarding the Operational Excellence program I spoke about at the outset of the call.

Profitability in engineering technologies was down 14.9%, excluding purchase accounting for the Enginetics acquisition. The decline in profitability was due to the weakness in the oil and gas markets and the medical market.

Looking forward, we remain concerned about the slowdown in oil and gas. We expect that this market will be soft for the foreseeable future, and we will continue to proactively adjust our cost structure to align with market conditions. At the same time, we are excited about our Enginetics acquisition and aviation business as we continue to invest capital and install capacity for the ramp-up of the aviation long-term agreement.

Please turn to slide 17, electronics. Electronics sales decreased organically 1.2% and, including FX, declined 8.7% year over year. Sales in Q3 were negatively affected by foreign exchange in a difficult year-over-year comparison due to large project shipment timing in North America. Electronics, like engraving, had a strong quarter in local currency. However, foreign exchange had a significant impact on the results.

Europe grew due to shipments of new sensor programs with key customers. This is an indication of the strength of our business model and the fact that we have been able to grow as a niche player in larger markets. Operating income was essentially flat despite the decline in revenue as a result of successful operational improvement and cost reduction programs.

While we are disappointed that we didn't see more top-line growth in Q3, we see it as a function of project timing and remain confident about electronics going forward. We also have a mature Operational Excellence program within electronics, as evidenced by the operating margin improvement.

Looking forward in electronics, we plan to continue to deliver an increased backlog in Q4 relating to Europe and Asia, and we plan to capitalize on new business opportunities to drive sales growth and profitability. In addition, we will be at the EDS show in Las Vegas in May and the Sensors show in Long Beach in June.

Finally, our hydraulics group -- as you can see on slide 18 -- continues to perform very well. Sales were up 8.4% year over year and operating income was up 16.7%.

We experienced strong demand across our dump truck, dump trailer, and refuse markets. Our share of the refuse market continues to grow, and we recently one contracts for new OEM applications on garbage trucks, container rolloff, and compactor platform.

Our facility in China is helping to strengthen our global competitive advantage by enabling us to bundle telescopic cylinders from North America with rod cylinders from China. We are shipping and booking orders at record levels at the China plant, leading to continue strength across the business. In fact, we're seeing double-digit production increases at both our US and China locations.

Looking ahead, we are focused on capitalizing on strong customer demand in our end markets and leveraging operational excellence in kaizen events to increase throughput. We're also focused on turning customer product designs around rapidly in our core markets and exploring opportunities for expansion in new markets.

Please turn to slide 19. In summary, we're pleased with our performance in Q3 on the top and bottom lines. Looking ahead, we are well positioned. Although we have some cautions over the macroeconomic environments in oil and gas, the eurozone, and foreign exchange, our markets for the most part remain firm.

We have initiated the Standex Value Creation System across all segments to drive sales and operating efficiencies. And we are executing on our planned investments to support increased demand. The financial performance of our recent acquisitions is demonstrating the success of our acquisition strategy. And we have a healthy, active pipeline of additional prospects.

To support both organic and acquisition growth, we have a strong balance sheet. We will continue to execute against our strategic plan, control costs, and focus on our Operational Excellence initiatives as we move business forward.

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

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

Hi, good morning, David and Tom. I wonder if we can just start with the Value Creation System. Can you just talk about who is actually going to be leading that initiative? Is that something that essentially each of the unit presidents will be driving? Is there one individual that's maybe coordinating that effort across the business? Could you just talk about that?

And maybe also address -- what are the standards that managers will be measured against, to some extent? Will compensation be tied to the Value Creation System?

Yes, great questions. First of all, the ownership -- if you think of the four components, each one has a different owner. So the BPP process is really owned by Tom. Tom runs that.

The Growth Disciplines process is owned by the VP of Business Development, a gentleman named Steve Brown, who reports to me. The Operational Excellence program is owned by Don Clark, a new hire who joined the Company in January, who brings with him a complete toolkit of processes and great experience as a consultant and employee of large industrial firms in deploying a Lean program. And the fourth element, talent, is owned by Mike Pattison, our Corporate HR leader.

In terms of targets and how we'll measure, these are all embedded -- the output of these process is embedded in our annual budget, and the budget determines the bonus. So for the Standex Growth Disciplines, every business will have at least two growth laneways identified that have been developed using the Growth Disciplines; will be tracked and managed separately; and will be in the sales bridges of every business and part of their bonus plan.

The Operational Excellence program -- at the beginning of every year, they assessed the transformation plan site by site. We'll embed material savings, nonmaterial productivity savings in their operating plan, reflecting the gross margin -- which will, of course, be -- you know, the bonuses are paid in part on their margin performance.

So we think we have it all tied together. Clear leadership for each of these elements, with standard work, clear expectations that are embedded in our annual plan for every business.

All right. That's helpful. And then I wondered if we could just focus a bit on food equipment and the restructuring going on there within cooking solutions. I know Anne's only been on a few months at this point, but can you talk about -- what are maybe some of the early wins that you are seeing? And where do we stand in terms of the Nogales turnaround?

Yes. The early wins -- I'd say the continued progress in Nogales, as I mentioned -- well, first of all, the business was profitable in the quarter, which is a change from previous quarter. And we continue to see a decline in those -- you know, as you recall the story, we closed Cheyenne, moved to Nogales, and in the course of that move got behind in our orders. We discovered that in moving the production we had a lot of knowledge in operators' heads -- that impacted quality and performance in Nogales, which resulted in the need for premium freight to expedite shipments to catch up on past-dues and also some quality issues, some inefficiencies.

Well, we're seeing all of those things trend in the right direction. And bringing in Don Clark to run our Operational Excellence, coupled with Anne and her experience -- in the quarter we've already conducted value stream mapping in our distribution center and in Nogales. We're driving kaizens in both those sites.

So we're definitely on the right track -- we're executing proven process improvement activities in both of those areas. I would say, too, an early win for me -- although you don't see it in the results yet -- but over time, I think the streamlining of the organization, which we've worked through with Anne, is also an important move and will create an organization that is faster, more agile, and has less friction between the different silos.

That's helpful. And then maybe just in terms of the demand picture, kind of Q4 versus Q3, it sounds like possibly in engraving and maybe electronics, you're talking about some possible acceleration in deliveries or some backlog that's built. Is it reasonable to assume that we would see sequential improvement in those two units, based off of your commentary?

Yes. I think I mentioned -- we saw momentum. We have seen momentum in all the businesses except engineering technologies, where the softness in oil and gas and medical is holding them back. So in the other four, yes, sequential improvement.

Okay. Perfect. I'll get back in the queue. Thanks, guys.

Jason Ursaner, CJS Securities.

First, outside of the business operations, your corporate expense came down significantly. Just wondering if there were any reversals of accruals or anything atypical in that? Kind of assuming we probably shouldn't be thinking about it at as a run rate going forward, but I'd like to hear some thoughts.

Jason, good question. As we saw in the bridge, the management transition expenses from Roger to David and from the change in CEO -- that was a large expense in that reported result. We backed that out on the bridge in the adjusted operating income.

From last year or this year?

From last year. So I mean last year's should be higher than this year. And that's why it sequentially decreased by that -- what was it, $983,000.

Okay. So would this be an okay run rate in terms of --?

Yes. This is a reasonable run rate. Yes.

Okay. And in food service, you mentioned declines to sales of national chains. Just wondering -- was there any pressure on market share in that vertical? Or was it just more of an overall challenging period, given issues with store openings and weather --?

A very good question. It's not a question of share loss. It's more a question of slower activity and expansion plans at some of the larger chains -- there are fewer store openings and retrofit.

Okay. And on organic growth, it slowed down a little bit from the past couple of quarters and was fairly balanced between the duration of the cooking solutions business. Maybe just talk about future growth expectations for each line. And do you see them continuing on a similar trajectory going forward?

Our expectations for growth are -- for the moment we are tied to market there. We've got our business focused on fixing some internal issues, getting margin rates up, improving efficiencies. So the expectation we'd set would be -- the North American Food Equipment Manufacturing Association said the market is a 4% to 5% growth market. And we'd say that's a reasonable expectation for both refrigeration and the cooking solutions business.

Okay. And on margin it kind of sounds like this could be the trough period, with flushing through kind of some of the final changes there with Cheyenne and everything. Just when you look at the 7% margin for this quarter, maybe where do you see that trending over the next few quarters in a seasonally stronger environment? And possibly reconcile it with some of the longer-term targets and the 200 basis point improvement in terms of what base that is off of.

So first off, with kind of a longer-term picture, you know -- and I think the anyone who's been following Standex knows -- that we believe that this business has the profit potential to, over the course of years, get to the upper teens. In the short term we have put out an indication that we can exit this year 200 basis points above where we were a year ago. And the trends that I discussed earlier are critical in making that this quarter.

But the longer-term story -- there are five basic pieces to getting to those upper teens. And first is consolidating capacity, which is largely done. Those Cheyenne savings are in our business. They were masked by some of these transition costs that we talked about before -- the premium freight, and the inefficiencies, and the warranty.

The second is pure operational improvement. And we're seeing improvement down in Nogales. We've brought Don Clark in to drive a common, standard way of improving process with Lean tools.

Third element is looking at the organization -- both the leadership and structure -- so we mentioned important moves on that front this quarter. Now that new leadership team needs to sit back and look at some of the longer-term questions, and look at the pockets of strength, and decide: who are we going to be? Where are we going to compete and win? Where do we invest? And then take another look at some portfolio positioning.

Last year we sold AFS, which was a business that was losing money for us. We acquired Ultrafryer. That was a great combination of moves. There are probably some other products we'll be exiting. And future acquisitions longer-term in food service. That analysis will also result in some new product development. And as those get launched, in the outer years you start to see that reposition us in the right segments.

So the longer-term picture truly is a question of years, not months. But the actions we've taken this year position us to show that year-on-year improvement we've been talking about the last few quarters.

Okay. Appreciate all those details and as well in the prepared remarks. I'll give others a chance to ask questions, though. Thanks, David. Thanks, Tom.

(Operator Instructions) Chris McGinnis, Sidoti & Company.

I guess just to kind of follow up on Jason's question on Nogales and maybe the prior target of actually exiting at 12% -- is that still on board, do you think? Or is that being pushed out maybe to the midpoint of next year?

Here is what I would say right now. The primary issue to the year has been to cooking solutions. And the problems we've been talking about for the last few quarters -- we really do see that we are kind of beginning to turn the corner. The plant is performing well. Price is firming up. Premium freight is coming down.

The warranty is still high, and that can be stubborn and a longer tail. So that's the cost that will take a little more time to come down. We did see a positive trend in the business from Q2 to Q3.

Coupled with that, though, the refrigeration mix -- to have more dealer sales than national chain -- that's a mix down in margin. Dealer sales are lower margin than national chains. And then the pump slow was also a mix down.

So what I'd say is if the trends in the cooking solutions continue, and we expect they will -- i.e., the price, premium freight, and plant performance -- and the refrigeration mix moves back to more national chains, which is typical in the fourth quarter, it will get there in the quarter. But it will be a photo finish. So maybe it will slip a bit, but we have our sites on the right issues to get there.

Sure. All right. So maybe you do get the full benefit next year. And I guess the additional cost savings from David's implementation could be more so on the back half of 2016, from what you were saying? From, like, the Lean initiatives?

Oh, yes. Absolutely. Right. The size of my experience is you start the Lean; you do the kaizen to put in place compounded -- whatever process improvements. It takes a few quarters for the cumulative effect to roll through.

I think -- we are going through our budget process now. And as we set those budgets, we will start to have better expectations of what we will see this next year. But I think that's safe to say that the back half of the year is when we will see impact.

Sure. And then, I guess, just with the decline in the oil -- the pressure there -- have you seen a steeper decline following Q3 or in line?

No, I think it's kind of bottomed out and is bubbling along at a very low level.

All right. Thank you very much for your time.

(Operator Instructions) Jason Ursaner, CJS Securities.

Thanks for taking the follow-up. Just in the electronics business -- wondering if there was any noticeable difference in growth between the standard products -- the basic reed switches versus some of the value-add assemblies and more complex transformer products? Just the higher-value strategy. I'm wondering if that was still positive growth in the quarter?

Yes. We just did more growth in the sensors -- I mentioned that with European. Europe actually grew 5% in local currency, and that was almost all of the higher-value sensors. And that continues to be globally a higher percent of the business.

And longer-term, the strategy is to keep growing in that value-add part?

Yes.

Or are they niche products where you kind of need to acquire a small provider of it? Or you could do that internally?

That's complementary. We have organic growth programs to continue to go after new applications and develop and deliver higher-end sensors. But we've also identified adjacent sensing technologies that we could add to these sensors.

I think we've spoken in the past about many of our customers beginning to ask us in a sensor assembly now, that maybe just measures one parameter, can we begin to start measuring other things, like speed, or temperature, or pressure? So we are looking at additional technologies to expand it horizontally, if you will.

Okay. And for engineered technologies, just following up on Chris's question about the oil and gas with the platform shims -- the impact on margin -- are those products that much higher-margin than the segment average? Or is some of the EBIT decline versus sales just general underabsorption that might look similar, if any product line had that kind of abrupt decline?

It's both. The gross margins are higher in that business; and in those plants that ship those products, there has been an absorption.

Okay. And just long-term segment margin profile there -- how does that look? Maybe after Enginetics begins to produce some of their parts for next fiscal year?

You know, we'd stick with what we've said in the past: that -- we said 16%, 17% margin long term as aviation ramps up and we get into full production. That's a reasonable expectation in this business.

Okay. Thanks, guys. Appreciate it.

Schon Williams, BB&T Capital Markets.

I wonder if we could just address uses of cash here. Balance sheet is still fairly flexible. Can you maybe just talk about where your priorities are?

And also, I know it may be a bit early, but I just wanted to see if you may give some guidance around CapEx for next year. I would anticipate that maybe some of the CapEx dollars have actually dialed back, given that Nogales is kind of behind you at this point. Just maybe some early thoughts on CapEx for the next fiscal year?

Okay. So your first question is for the uses of cash for the remaining part of the year? Is that it, Schon?

Yes. Just where is the priority for this year? And then certainly maybe talking about what the acquisition pipeline -- I'd like to get an update there. And then as we move into next year, what does CapEx look like? And certainly, if you want to address other opportunities, I'd be open to that as well.

So the priority for cash -- our working capital turns were down for this past quarter, and that's based on basically an inventory build. But we see that improving to more of a fixed term by the end of our fiscal year in June.

So primarily we -- you know, the third quarter is our lowest quarter. So what we can do is we level-loaded production in them to support fourth-quarter shipments so that we don't have to run as much overtime, hire as many temps, and improve quality. So that's kind of embedded in that lower working capital turn.

Our capital spending for the -- we still say that we are going to spend $25 million to $27 million this year. And we're on track to do that with additional capital we plan on spending in the fourth quarter. And for next year we're just going through the process of putting together our capital plans together, and I'd imagine it's going to be [about] 2% plus to support our growth initiatives.

So we don't really give guidance on that right now. As we get through the budget process, and the Board has to approve it, we'll give further guidance. Regarding acquisitions, David, do you want to talk about that?

Well, we have an active pipeline. And if you referred back to the previous presentations we've shown of our capital allocation over the past three years, the split between acquisitions, CapEx, and share buybacks, dividends -- we've said as a rough guide, we think that is probably a fair assessment or expectation for the coming year. We still think that's the case given the acquisition pipeline and our activity there.

Okay. And is working capital improvement -- is that a goal as part of the new Value Creation System?

Yes, absolutely.

Okay.

You just look at -- yes, Lean tools are all about taking waste out of the system. And anything that's waiting, and sitting and waiting, whether it's raw material or what, is waste. And the first kaizens that are being done are focusing on improving the flow. And one of the consequences is reducing inventory.

Okay. Thanks, guys.

This concludes the questions-and-answer session of today's conference. I would now like to turn the floor back over to Mr. David Dunbar for any closing remarks.

All right. I want to thank everybody for joining the call and for your interest in Standex. And we look forward to continuing to communicate with you about the business.

Thank you. This concludes your conference. You may now disconnect.