Standex International Corp (SXI) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Standex International first quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) I will now turn the call over to David Calusdian from Sharon Merrill Associates to begin.

Thank you, [Laurie]. 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 David.

Thank you, David, and good morning. We executed well in the first quarter of the fiscal year, reporting solid margins and a strong EPS performance. For Q1, overall revenues were down 1.8% to $198.4 million with foreign exchange having a negative effect of 3% and acquisitions contributing positive 2%.

As a result of our aggressive efforts to improve the bottom line, even with the year-over-year decline in sales, non-GAAP operating income was up 7.6% and first quarter EPS was up 7.2%. We had a net debt position of $9 million at the end of Q1.

Our focus on improving the operating performance in the food service business is paying off as we generated a 13.1% EBIT margin in Q1. We're continuing the transformation of that business and we're encouraged by the progress.

Engraving, electronics and hydraulics also performed well during the quarter, while engineering technologies continued to be effected by the decline in oil and gas markets. That said, we see great growth potential in that business, primarily as a result of opportunities in aviation.

At our Investor Day last month we discussed our new value-creation system and provided more detail about how we're executing against each of its four pillars. We've made significant investments in the system in order to capitalize on the opportunities we see to drive significant value out of each of our five operating platforms.

Much of our investment has been in the form of human capital, hiring the right people to affect positive change across the organization. At the Investor Day, you heard from our new VP of Operational Excellence, [Don Clark], who was brought in to deploy [lean tools] across the company to improve capital efficiency and eliminate waste in order to drive value to the customer and to our shareholders.

We also brought in Paul Burns as VP of Business Development to head both M&A and the Standex growth disciplines, which is the way we identify growth opportunities, test them efficiently and invest in the best opportunities to grow profitably.

We've also hired a new HR leader, Ross McGovern, to run our talent management program to attract, retain and develop the best employees. In January, we brought in [Ann Degraves Soft] to lead our food-service equipment group. So we've been taking the necessary steps to strategically align our resources at the corporate level, and we're already starting to see the benefits of those investments in our operating platforms.

With that as an introduction, I'll turn the call over to Tom to discuss our results for the first quarter, and then I'll be back to review our five operating platforms in detail. Tom.

Thank you, David, and good morning everyone. Slide 4 shows our historical trend of adjusted earnings per share and sales. On a trailing 12-month basis, adjusted earnings per share was $4.65 through September 30, 2015, versus prior year of $4.27, an 8.9% increase.

Sales were $769 million on a trailing 12-month basis as of September 30, 2015, versus $740 million in the prior period.

Please turn to Slide 5. Three of the five segments reported organic growth for the quarter. On the chart, you can see the contributions from acquisitions and the currency effect for each segment. Overall, organic growth was slightly down with acquisitions contributing2% versus Q1 last year due to the Enginetics acquisition. Currency had a negative effect of 3%, which resulted in an overall sales decline of 1.8% to $198.4 million for the quarter.

Please turn to Slide 6, which summarizes our first-quarter results. Excluding special items, operating income grew 7.6% to $24.6 million from $22.9 million a year ago. Adjusted EBITDA grew 7.6% to $29.2 million or 14.7% of sales, compared with $27.2 million or 13.4% of sales in Q1 last year.

Within our earnings release, you'll note that corporate expenses were up for the quarter. This was primarily the result of realignment of corporate functions and investments made in the value-creation system. As we transform Standex into a true operating company, we are making more of these strategic investments at the corporate level. We see resulting tangible sales and profit-improvement benefits at the segment.

Please turn to Slide 7, which is our trailing 12-month bridge that illustrates the impact of special items on net income from continuing operations. For Q1 of fiscal 2016, these items included tax-affected restructuring charges of approximately $3 million and $0.7 million of acquisition-related charges.

Turning to Slide 8, networking capital at the end of the first quarter of fiscal 2016 was $148.7 million compared with $155 million a year earlier. The decrease in working capital is primarily related to the impact of currency year over year. Overall, working capital [turns] are trending at historical norm.

Slide 9 illustrates our debt management. We ended Q1 in a net-debt position of approximately $9 million. This compares with a net-debt position of $52.8 million a year earlier. We define net debt as funded debt less cash. Our balance-sheet leverage ratio of net debt to capital of 2.5% compares with net debt to capital of 13.3% a year ago.

Slide 10 summarizes our capital spending, depreciation and amortization trends. In 2016, we expect that our capital spending will be in the range of $26 million to $28 million. Approximately $6 million relates to our aviation facility expansion in Wisconsin. The remainder of the capital spending will continue to support our growth initiatives, factory automation and ongoing maintenance.

Slide 11 details our free cash flow performance, which was $2.5 million for the first quarter. We generated $0.20 of free cash flow per share during the quarter, compared with the use of cash of $1.41 per share during the same quarter last year. Free cash flow conversion is seasonally lower in Q1.

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

Thank you, Tom. Please turn to Slide 13, and I'll begin our segment overview with the Food Service Equipment Group. As I mentioned at the outset of the call, we reported strong improvement in food service equipment operating income margins to 13.1%. Margin improvement continues to be a key area of focus for us within food service.

Sales decreased 5.8% from Q1 last year driven by lower volume at refrigeration. Cooking solutions was up during the quarter and our display merchandising business continued to perform well.

In refrigeration, sales to large national chains continued to be soft in Q1 and was a primary cause of the year-over-year revenue decline. Dollars toward sales also continue to be soft as a result of the merger in that sector, but we expect this to be temporary. Sales through dealers as well as scientific and industrial increased year over year. C-stores and other small footprints retail remain steady.

Specialty solutions decreased by 2.2%. In cooking solutions, sales increased by approximately 4% year over year, driven by grocery. Our Ultrafryer acquisition remains on track and is performing well, and we're actively investing in its line of products.

In Q1, we lowered material costs by 190 basis points across the segment. The transitional costs from last year's plant move, warranty, price concessions and freight and distribution costs continued to trend down, and plant productivity is improving. We are encouraged that our operational excellence initiatives [as] cooking solutions are achieving the intended results.

With these operational excellence initiatives in place and performance heading in the right direction, the cooking solutions team is now beginning to review its strategic initiatives by product line, ensuring that the whole team remains aligned with the Standex 2020 vision.

To sum up, our focus continues to be a margin of improvement within food services equipment. As a reminder, Q4 and Q1 are the seasonally strongest quarters for this business. So as we move along in fiscal 2016, while we do not expect to exit each quarter at a 13% margin, we are taking great strides in transforming this business and we are working to achieve our longer-term EBIT target of 15%. We are investing in our plants to make them more automated and efficient, and we are focused on driving costs out of the business.

Turning to Slide 14, the engraving group had a strong quarter, achieving record orders, sales and EBIT. Sales grew up of 19.3% was primarily driven by Multech North America and China. Organic sales were up 30.8% and currency had an 11.5% negative impact. Operating margin was 29.6% with operating profit up 42.7%. Our Multech business in China reported volume up approximately 50%. Sales volume also increased in Europe which was masked by the negative currency effect.

North America sales improved during the first quarter of 2016, driven by new-model launches. In addition, some automotive projects were pushed out from the fourth quarter into Q1 and other rollouts that were scheduled for Q2 were pulled into Q1.

Sales were up at our roll plate machinery business. Our Inovent business also had a good quarter. During the quarter, we also learned that some new platforms from several global auto OEMs will require textures that can only be produced with laser engraving technology. I have communicated that we are watching this market evolution closely and as our customers' needs change, we will invest to support them. With these new customer plans, we intend to increase our capital investments to increase our laser engraving capacity.

The demand trends and (inaudible) engraving are certainly strong. At the same time, we saw a perfect storm of positive factors in Q1, so we don't expect this level of performance to be sustainable. Going forward, we will continue to focus on delivering new model launches, leveraging sales from our Architexture design center hubs and capitalizing on demand for new technologies, such as nickel, shell and laser. We also continue to ramp up our new location in Sweden.

Please turn to Slide 15. Our engineering technologies group. Organic sales were down 27% year over year, primarily due to lower energy sales, as well as software demand from the space and medical markets. The aviation market continues to be strong. The Enginetics acquisition added 20.6%, and currency was negative by 1.0%. Profitability was impacted by lower volume and overhead absorption in (inaudible) and UK factories.

We are repositioning the business because of the ongoing severe oil and gas market headwinds, and we've shifted our focus to the aviation market where we're seeing very good demand and opportunity. You can see from the bar chart that our exposure to commercial aviation continues to [rev] compared with last year, while our exposure to oil and gas has declined.

Moving forward, our focus is on pursuing and winning new awards in aviation, which we see as a growth opportunity. We're expanding our capacity in Wisconsin in order to meet the demands of our current contracts and future opportunities in aviation.

At Enginetics, demand is good and we see opportunities to drive further value out of that business through operational improvement. This business is one of the first focus areas for Don Clark, our new VP of Operational Excellence. We've hired a new plant manager to oversee the operation, and we've assigned one of Don's Operational Excellence Rangers to the facility.

Looking forward, we remain concerned about the slowdown in oil and gas, but we're proactively adjusting our cost structure to align with market conditions and putting in place additional cost controls to regain a quarterly operating margin of 15% by the time we exit the fiscal year.

At the same time, we are excited about our Enginetics acquisition and aviation opportunities as we continue to invest capital and install capacity for the ramp-up of our long-term awards.

Please turn to Slide 16, electronics. Electronic sales increased organically 1.5%, but including FX, declined 5% year over year. China and Europe grew, but were offset by a slowdown in North America, as a number of large accounts were destocking.

However, we expect this is temporary and North American sales should improve in the second half of the fiscal year. Backlog was up slightly in all regions. Operating income was flat year over year, despite the sales shortfall as supply chain cost savings and spending controls offset lower volume.

Looking at our markets, industrial and medical were down, while transportation was up. Sensors were flat from the prior year. We continue to see more opportunities in sensors and we're accelerating the growth laneways in sensor technologies through market tests.

Magnetic sales were up in the quarter driven by military, aerospace and our Planar business. After the close of the quarter, we acquired Wisconsin-based Northlake Engineering. Northlake directly supports our electronics group strategy to expand our high-reliability magnetics business into adjacent markets to drive growth and profitability. This acquisition positions us to provide a wider array of solutions to customers in the power-generation and medical-equipment markets.

The integration process is on track, and we are currently working on the sales team operations and supply management. Already, the team has identified $300,000 of material savings from Northlake. We remain optimistic about the electronics business long term.

Going forward, we are focused on integrating Northlake, continuing to roll out the operational excellence playbook in Europe and China and pursuing new applications in adjacencies to drive sales growth and profitability.

Our hydraulics group, as you can see on Slide 17, had another solid quarter. Sales were up 4.3% year over year, primarily related to the dump truck and trailer market, which is tied to the strong North American construction environment. We are also continuing to see strong demand from the refuse market. Operating margins were 18%.

On the operations front, we installed robotic welding machines in our Ohio facility and added machining capacity in China to improve quality and throughput.

Looking ahead, we're focused on pursuing new business opportunities that require robust custom engineering designs and completing the field test of our new press-and-pack 4000 series cylinders for the refuse market.

Please turn to Slide 18. In summary, with record first-quarter results, we're off to a strong start to the fiscal year. We're taking the necessary steps to improve each of our businesses and we're beginning to see the results of these efforts. Our margin net performance was very strong with improvement in four of our businesses. We were especially pleased to see the improvement in the food-service equipment group.

In engineering technologies, we're repositioning the business to capitalize on growth prospects in aviation amid the slowdown in oil and gas. As we invest in capacity for the aviation market, we've aligned the business to near-term demand and expect to reach an operating margin of 15% in this business by the end of the fiscal year, and we look forward to carrying the momentum we've generated in engraving, electronics and hydraulics into Q2.

Across the organization, we are focused on executing on the four pillars of the Standex value-creation system to drive performance in the business and combine operational plans with strategic priorities.

Finally, we continue to be cautious about currency expectations, oil and gas markets and regional economic conditions.

With that, Tom and I will take your questions.

(Operator instructions) Your first question comes from the line of Jack O'Brien of CJS Securities.

Good morning, and thanks for taking my questions.

First off, nice job on the food service group margin expansion. I'm hoping you can give some additional details on what accounted for the sequential margin expansion from Q4 to 15, and, more specifically, in regard to issues stemming from the Nogales transition.

Well, you would call -- material margins are expanding. In Q4, you may recall we put in place a group-wide strategic sourcing leader to drive material programs across food services. We're starting to see some benefit there.

In refrigeration, last year, we put some automation in one of our plants, which is driving productivity improvements in that plant. Our OPEX initiatives are driving productivity across all the lines in refrigeration.

And on the Nogales front, all of those things we talked about in Q2 and Q3, the price concessions, frayed material, warranty, those all continued to trend down, and those are the contributors to the margin improvement.

Okay. Thank you. And then switching over to the [engineering tech] group, obviously, a lot of changes going on in terms of end market and the concentration shift to aerospace, aviation, can you give us an update on what the next 12 to 24 months looks like in that business, some of the puts and takes regarding program ramps and when you expect, you know, margins to stabilize a bit there?

Well, so we did communicate today that we believe at Q4 we get back to a 15% margin.

Right.

Either this quarter or next are the most difficult quarters the business will face, there's a dramatic ramp going on at Enginetics. When we acquired Enginetics, they had a number of long-term agreements that were scheduled to ramp now, and the primary issue that business is facing is operationally to be able to support that increase in volume. That's why we've got a dedicated obsoleter there. We put in -- one of our lean rangers is spending their time there, Don Clark, as well.

I'm thinking about your question about expectations about growth, and I think what we said about this business is we see good single-digit growth, long term, driven by the growth in aviation.

You know, once we -- I'd say -- you'll start to see that in the second half of the year, once the comps on the oil and gas become more flat year to year. Yes.

Do you expect sequential margin improvement in the segment in the next quarter or is it going to be a very quick step up in the back half of the year?

Well, maybe some margin improvement in the second quarter, but it'll be a Q3, Q4 margin improvement.

Understood.

[To get to that] 15%.

And last question from me, just regarding Northlake. Nice job on the acquisition. In the release you mentioned it would be [break even] in this year and then $0.04 to $0.06 accretive in 2017. You mentioned that there were plenty of cross-selling opportunities with that business. Are any of those included in the initial accretion guidance that you've given? And if you could expand on some of those, that'd be great.

We had modest sales synergies in the initial guidance, so the references we made today are things that we're discovering as we meet with customers as part of the integration. So we think that's up side to our original communication.

But the volume, because of the time -- the time it takes to develop samples and prototypes, it's probably more a fiscal 2017 volume opportunity for us.

Okay. Thank you very much.

Thank you, Jack.

Your next question comes from the line of Schon Williams of BB&T Capital Markets.

Hi. Good morning. Congrats on the quarter.

Hi, Schon.

Just a lot of moving pieces here. Electronics, can you talk about why you think the stocking in North America, why you think that's temporary and what, you know, what's driving that?

The North American performance came as somewhat of a surprise to our team, and as they checked with their customers, the response they got was the programs were still on track, and it just had to do with phasing of their stock and the -- I guess the timing in which they place orders with us.

Is there any particular end mark that was highlighted?

With the white goods, basically, the appliances.

Okay.

[Wait.] Just within that, Schon, we did mention -- this is something encouraging that -- the business is pursuing the same kind of approach to the market in Europe and North America. Europe, you know, the base market is softer. We grew 5% in Europe. So, you know, so I tend to -- I give credence to what our customers have told the business in North America, and, as we communicated, we think second half, you know, Q2 and beyond, will -- we see growth in North America.

Okay. And then maybe coming back to the engineering tech, it is a bit surprising to talk about, you know, going from, you know, kind of a 3.5% margin back up to a 15% margin, which was essentially the margins you were at last year, despite the fact that you had energy, you know, as more of a benefit, at least in the first half of last fiscal year.

So just -- I don't know. Help me understand exactly, you know, how many people are we taking out? Is there -- you know, has everything already been put in place and it's essentially kind of manufacturing variances that are going to drive that? I mean, just a little bit more detail, because it is quite a substantial step up that we're talking about here to get back to that 15%.

Yes, we tend to move from -- I would tell you that compared to our internal expectations, the business performed slightly better. The drop in oil and gas was a very high-margin business. The year-on-year comp this quarter is the toughest in the entire year. The aviation [ramp] from Q1 through the end of the year, just in Enginetics, will be closer to a $10 million volume increase year on year. So the aviation really starts to kick in strong in the second half, Schon. So that's the primary drivers that comes in.

(Inaudible) largely overtaken some additional heads out this quarter in the businesses that support oil and gas, in the energy business, and that will help, to some extent, but it's the second half [falling] from aviation that we're really driving.

Okay. Now, that's helpful. And then maybe just help me on the engraving. You know, seems like a lot of things kind of went your way in the quarter, just in terms of some things shifted from Q4 into Q1. You pulled some orders from, maybe from Q2 into Q1. You know, dramatic improvement in the margin on the year-over-year basis.

Just so we don't get too far out over our skis here, I mean, should I be expecting a pull back as we go into fiscal Q2 and Q3 or just help me think about, you know, how much of the volumes ended up in Q1 and maybe are displaced, you know, from the other quarters. Just -- you know, how should I be thinking about the rest of the year?

Yes, we just [stepped back] -- You know, from a macro standpoint, we've communicated longer -- longer-term expectation about this business, we think, is 5% to 7% through-the-cycle growth. This quarter, obviously, was a perfect storm of elements (inaudible) above that. Last quarter in our earnings release, we did comment on last quarter sales, that some programs had been pushed out. You know, they did show up this quarter.

And then, today, I mentioned that we still expect momentum into Q2, not as much as this -- we won't see as much growth in Q2 as we saw in Q1, but you'll see growth returning to that historic line as our expectation.

So you still think, as we move into the next few quarters, I guess, organic growth in kind of Q2, Q3 can still be in that mid- to high-single-digit level? Is that what you're saying?

No, no. What I'm saying is we return to that long-term guidance with the 5% to 7%.

Okay. Okay. No, that's helpful. And then maybe just one more, if I may -- you know, it sounds like refrigeration is a bit of a headwind within food service right now. Can you just talk about, you know, what is driving that in your customer base? Is that weaker, you know, customer, you know -- I'm just trying to get a sense of is it a timing issue? Is it weaker customer -- you know, is it their underlying customers are seeing weaker demand that's pushing off, you know, CapEx expansion? What -- you know, what is driving --

I think there are two elements. One is weaker demand from some large national chains like McDonald's, Subway's, Tim Horton's, who are spending less this year than they did last year. If you look at -- other refrigeration companies are seeing softness in commercial refrigeration. So there is softness in some sectors of the market.

The other half of our decline comes from, you know, our Dollar store sales. Last year, we had great growth at Family Dollar. We have a very good position with Family Dollar, but with the tie ups in Family Dollar and Dollar Tree, that spending has slowed. We see that as a pause. We believe it comes back, maybe not Q2, but, you know, second half of the year we expect that to start picking up again.

All right, guys. That's helpful. I hop back in the queue here.

Thank you, Schon.

The next question comes from the line of Liam Burke of Wunderlich.

Dave, outside of Ultrafryer, how have some of your other brands done on the cooking-solution side of the business?

Boy, our BKI brand is doing great. Baker's Pride brand is doing very well. The brand that we have been struggling with last year, the source of most of the challenge that we had is the APW brand, the Tri-Star brands. That's where the transfer from Cheyanne to Nogales was the most challenging.

So those -- I would say those are -- we're still kind of in a catch-up mode on those, the customers of those brands they had the most difficult year last year. But the growth we're seeing in the cooking solutions, strong BKI sales into groceries, and Baker's Pride, kind of across the board in the sales of their ovens.

Great. Thank you. And on the refrigeration side, how have the drug-chains sales been? I understand there might be some pick up on the end-aisle refrigeration with the need to displace cigarette sales, but, in general, how have the drugs been doing?

You know, we saw a pickup in the quarter. I don't know if it was in the script or not, but we did see a pick up in the quarter from drug retail.

Okay. And, lastly, Tom, on the cash-flow side, you did point out it's seasonally weak, but compared to last year it was very strong. Have there been any changes in the working-capital management or is it just seasonality here or how has the improvement been -- I mean, what has been driving that improvement year over year?

Well, the working capital's down year over year, and it was driven by currency, about $8 million, and then partially offset by some inventory adjustments. But, no, I mean, I think, from a cash-flow standpoint, we spent more on CapEx last year first quarter than we did this year. That contributed to it, and it is seasonally lower in Q1.

Great. Thank you, Dave. Thanks, Tom.

(Operator instructions) Your next question comes from the line of Chris McGinnis of Sidoti.

I guess, just to revisit the Dollar store, does the consolidation, does that pose maybe a, you know, a benefit to you once the integration is kind of complete?

Yes, we do see it as a benefit. We have a good position at Family Dollar. We have no position in Dollar Tree, and so we think that opens up opportunities for us.

Great. And this is the seasonally-weakest quarter for food service? Is that -- did I hear --

No, the seasonally-weakest quarter is our third quarter, which is January to March.

All right. Sorry about that. And just to follow up on -- it'll be the last time I'll bring it up for you guys. I know it's been a headache, but just on the Nogales, are we past everything now or are there still some kind of operating inefficiencies?

There's still operating inefficiencies. We're about back to where we were maybe 18 months ago. Warranty's still a bit high, but we've communicated before, there's a long tail to that, but it's trending in the right direction.

But I would say even getting back to where we were a couple of years ago is not good enough in that business. I mean, look at the way it performed two years ago. We still have operational improvement beyond that. So we're spending a lot of our OPEX. Rangers' times are being spent in Nogales to drive continuing improvement there. So, you know, we're on a journey in that business. We like the progress we've seen in the last couple of quarters, but we've got a few more years to go.

Great. And then last question, just on maybe can you talk a little bit about the pipeline within food service for some new products coming out? I know you kind of touched on it on the analyst -- and just kind of want to revisit that.

Yes, on the BKI side, we have some exciting new products come out that's driving some of the growth now, and we hope through the year we'll be able to communicate other programs from BKI. Ultrafryer has some new products they're developing and are in test with customers now. Our scientific and industrial refrigeration have some new products.

I would say we have a pretty good pipeline, but the focus of that business continues to be on margin and operational excellence. Although with the momentum and the confidence we have we're on the right track, Ann and her team are starting to devote more energy to strategic questions about product strategies and new product development, and I would imagine through the course of the year you'll start to hear more and more discussion of new products from us.

Great. Thanks for answering my questions.

Thank you, Chris.

Your next question comes from the line of John Cummings of Copeland Capital Management.

Hey, we saw you raised your dividend yesterday by 17%. Can you tell us a little bit more about your philosophy there and do you have any targets in terms of payout ratio? And, also, should we expect the dividend to just continue to grow on a yearly basis?

So good question. Well, we did raise our dividend, like you said, 17% yesterday, and each year at our Board meeting, our annual Board meeting, right before our shareholder meeting, we do review our dividend, and, of course, we review it on a quarter basis.

We haven't announced a target for our dividend, but, you know, we're at a 0.6% yield, and, you know, we feel that that's adequate going forward. We want a return -- this was our 205th consistent dividend over the years, and we have a philosophy of increasing the dividend each year, but we're balancing it with capital spending, of course, and with acquisition opportunities.

All right. Thank you.

At this time, there are no further questions. I'll now return the call to David Dunbar for any additional or closing remarks.

I want to thank everybody for joining us today. Goodbye.

Thank you. That does conclude the Standex International's first quarter 2016 earnings conference call. You may now disconnect.