Standex International Corp (SXI) 2016 Q2 法說會逐字稿

Good day and welcome to Standex International's second-quarter 2016 earnings call. (Operator Instructions). It is now my pleasure to turn the call over to David Calusdian to begin. Please go ahead, sir.

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 the 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, and good morning.

Overall, we performed well in the second fiscal quarter, reporting margin expansion in four of our businesses for strong bottom-line results. Revenues were down 3.9% from the prior year to $181.9 million, with foreign exchange having a negative effect of 2.5% and acquisitions contributing positive 1%. Second-quarter EPS was up 5.2% year over year. We had a net debt position of $4.7 million at the end of Q2. We also closed the Northlake acquisition in the electronics group for $13.5 million.

In sum, our business has delivered solid performance despite the topline challenge. In the food service equipment group, our focus continues to be on operational improvement initiatives and lowering material costs. The group generated a 7.4% EBIT margin in Q2, up from 7.0% last year, despite a 7.7% decline in sales. Now that our operational initiatives are progressing, we are taking steps to improve the topline in food service by reviewing our commercial strategy.

Engraving had another record quarter, while we maintained the positive momentum at electronics and hydraulics. Engineering technologies continued to be affected by the decline in the oil and gas markets. That said, the repositioning of that business to increase exposure to commercial aviation is moving along well and it has significant growth potential, primarily as a result of opportunities in aviation.

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

Thank you, David.

Slide 4 shows our historical trend of adjusted earnings per share and sales. On a trailing 12-month basis, adjusted earnings per share -- per diluted share were $4.70 through December 31, 2015, versus $4.39 in the 12 months ended December 31, 2014, a 7.1% increase. Sales were $761 million on a trailing 12-month basis as of December 31, 2015, versus $763 million in the prior period.

Please turn to slide 5. Two of our five segments reported organic growth for the quarter. On the chart, you can see the contributions from acquisitions and currency effect for each segment. Overall, organic growth was down, with acquisitions contributing 1% versus Q2 last year, due to the Northlake acquisition in electronics. Currency had a negative effect of 2.5%, which resulted in an overall sales decline of 3.9% to $181.9 million for the quarter.

Please turn to slide 6, which summarizes our second-quarter results. Excluding special items, operating income grew 0.6% to $18 million from $17.9 million a year ago. Adjusted EBITDA grew 1.4% to $22.6 million or 12.5% of sales, compared with $22.3 million or 11.8% of sales in Q2 last year.

Please turn to slide 7, which is a bridge that illustrates the impact of special items on net income from continuing operations. For Q2 of fiscal 2016, these items included tax-affected restructuring charges of approximately $1.1 million, $300,000 of acquisition-related charges, and $700,000 of tax benefits related to the retroactive extension of the R&D tax credit and benefits related to the sale of an idled property.

Turning to slide 8, net working capital at the end of the second quarter of fiscal 2016 was $144.2 million, compared with $147.2 million a year earlier. The decrease in working capital is related to the lower overall sales volume. Working capital turns were 5 compared to 5.1 a year earlier.

Slide 9 illustrates our debt management. We ended Q2 in a net debt position of approximately $5 million, which includes borrowings of $13.5 million to fund the Northlake acquisition. This compares with net debt position of approximately $42 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net debt to capital of 1.3% compares with a net debt to capital of 10.8% a year ago.

Slide 10 summarizes our capital spending depreciation and amortization trends. During the quarter, we made key investments in a panel vendor for our Hudson, Wisconsin, facility; 3-D scanning equipment in our Krefeld, Germany, location; and C&C equipment in our Tianjin, China, facility. To date, we have spent approximately $1 million on the new aviation facility in Wisconsin. We anticipate spending another $4 million to $5 million on this facility in the remainder of the fiscal year. In 2016, we continue to expect our capital spending will be in the range of $26 million to $28 million.

Slide 11 details our free cash flow performance, which was $19.6 million for the second quarter. We generated $1.53 of free cash flow per share during the quarter, compared with $1.25 per share during the same quarter last year.

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. As I mentioned at the outset of the call, margin improvement continues to be a key area of focus for us within food service. Operating income margins increased 40 basis points to 7.4% on a sales decrease of 7.7% from Q2 last year. The decrease in sales was driven primarily by lower volume at refrigeration. Cooking solution sales also declined during the quarter.

In refrigeration, sales to large national chains remained sluggish in Q2 and were the primary cause of the year-over-year revenue decline. Dollar-store sales also continue to be soft as a result of the merger of Family Dollar and Dollar Tree. C stores and other small-footprint retail performed well.

In cooking solutions, the decline in sales was mostly driven by international sales, as well as a focus on operational improvements, reduction in past-due backlog, and some product rationalization. Our Ultrafryer acquisition remains on track and we continue to actively invest in its line of products. Our BKI business performed well, with sales up double digits for the quarter. The display merchandising business also performed well, while the Procon specialty pumps business was down in the quarter.

In Q2, we lowered material costs by approximately $1.8 million across the segment. The transitional costs from last year's plant move, including price concessions and freight and distribution costs, continued to trend down. Plant productivity is also improving. We are taking the necessary steps to leverage our operational footprint to increase productivity.

During the quarter, we moved production of a line of field ranges from our Simpsonville, South Carolina, facility to our Ultrafryer plant in Texas to help drive efficiencies and improve on-time delivery. We are also focused on improving production efficiencies through focused factories, as we produce our commodity products at the Nogales, Mexico, facility and more complex products at our plants in the US.

We are encouraged that our operational excellence initiatives are achieving the intended results, both in the short and long term. With these operational excellence initiatives in place and performance headed in the right direction, the team is currently reviewing its commercial strategic initiatives, ensuring that the business remains aligned with the Standex 2020 vision.

Turning to slide 14, the engraving group had another excellent quarter, achieving record sales and operating income. Sales growth of 19.9% was primarily driven by a double-digit increase in our Mold-Tech business across all of our regions, as demand for automotive molds remained strong. Organic sales were up 29.8% and currency had a 9.9% negative impact. Operating margin was 23.3%, with operating profit up 25.2%.

In addition to the strong performance at Mold-Tech, sales also increased at our rolled plate and machinery business due to large orders. Our Innovent business also had a strong quarter, as a result of an increase in diaper drum sales. As I've mentioned before, several global auto OEMs are beginning to require textures that can only be produced with the newer technologies of laser engraving and nickel shell slush molding.

We have begun the installation of four new lasers in North America and China, as well as ramping up our nickel shell production in North America and in Europe.

We remain encouraged with the progress of our design centers. This quarter, we are investing in our design center in Detroit and also expanding other design hubs in North America. The picture here shows our design center promotion at the recent Detroit Auto Show.

The demand trends and momentum in engraving are strong and we expect this to continue throughout calendar 2016. Going forward, we will ramp up production of nickel shell molds over the next 12 months to increase capacity and meet demand. We are also focusing on increasing penetration in non-automotive Mold-Tech sales.

Please turn to slide 15, engineering technologies group. Organic sales were down 21.7% year over year, primarily due to lower energy sales, partially offset by increased sales in aviation. We have put cost reductions in place to offset the lower demand in the oil and gas markets, and we have shifted our focus at the aviation market, where we are seeing very good demand.

Aviation continues to grow and we are creating the capacity to fulfill customer needs. For example, we signed our first agreement for a plant in the UK to supply aviation engine parts, which we will use to further penetrate the market in Europe. Also, the construction of our new Wisconsin plant is on track and we expect to be in production at the facility by the end of the fiscal year.

Our Enginetics acquisition performed well, up 11.2% for the quarter. The operational improvement initiatives that we have in place in this business are paying off, as we are seeing better performance and an increase in demand. We continue to look for opportunities to drive further value out of that business through operational initiatives.

Looking forward, we anticipate exiting the fourth quarter of 2016 with margin improvements generated from sales and margin growth in aviation and an easier year-over-year comparison in the oil and gas market. Operating margins should be in the midteens for Q4. We continue to be excited about our Enginetics acquisition and aviation opportunities as we ramp up capacity to support our long-term awards, and we continue to be encouraged by the number of new business opportunities.

Please turn to slide 16, electronics. Sales increased 1.9%, primarily due to the Northlake acquisition at the beginning of Q2. Foreign exchange negatively affected sales by 5.2%. China and Europe grew, but were offset by softness and continued customer inventory adjustments in North America. Operating income increased 4.4%.

Sensors were slightly up from the prior year. We continue to see more opportunities in sensors and we are accelerating the growth laneways in sensor technologies through market tests. The capacitive sensor picture here is one example. We expect our new sensor programs to drive growth over the next 12 months. Magnetic sales were strong in the quarter, driven by military, aerospace, and our planar business. Industrial and medical sales were down.

As I mentioned on last quarter's call, we acquired Northlake Engineering early in the second quarter. Northlake directly supports our electronics group's 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 medical equipment and power generation markets.

Power generation and distribution is new for Standex and is an attractive growth opportunity. The integration process is on track and we are currently working on the sales team, operations, and supply management.

We remain optimistic about the electronics business long term. We are focused on new business opportunities, strategic laneways and market tests aimed at increased volumes, and on the consolidation of operations into our Northlake facility.

Our hydraulics group, as you can see on slide 17, had a good quarter. Sales were up 2.7% year over year, primarily related to the dump truck and trailer market, which is tied to the strong North American construction environment. We are gaining share in the US in mobile hydraulic cylinders by having quick turnaround to custom quotations and short delivery times. Production in China was up 20% in the quarter and backlog and order intake were up double digits. Operating margins were 15.2%.

On the operations front, our robotic welding machines at our Ohio facility are up and running and they are driving performance improvement and efficiencies. Looking ahead, we are focused on developing unique custom engineering to solve customer issues and utilizing our dual production capabilities in North America and China. We are also focused on our recently launched OpEx plan in hydraulics.

To wrap up and summarize our business performance in Q2, turn to slide 18. This shows the major contributors to the sales change. The decline in oil and gas and energy markets contributed 3% to the decline; FX, 2.5%; and reduced spending by our top four customers in refrigeration, another 3.5%. Growth in China, the Northlake acquisition, and strength in other businesses added back 5.3%.

So turn to page 19. In sum, the food service sales decline was concentrated in refrigeration's top customers. Engraving's momentum should continue into Q3. In engineering technologies, aviation continues to grow and oil and gas remains a headwind for the coming quarters, though somewhat less so than in Q2. Electronics expects North American sales to recover in the second half, and Europe remains strong, with less FX impact in the second half.

Finally, hydraulics' end markets -- dump truck and dump trailers -- remain strong, with residential construction and passage of the highway bill, as well as continued penetration into refuse vehicles.

Please turn to slide 20. In summary, we performed well from an operational standpoint, despite the decline in overall sales. We are taking the necessary steps to improve each of our businesses and are seeing the results of those efforts. Our Q2 margin performance was very strong, with improvement in four of our businesses. We were especially pleased with continued improvement in the food service EBIT margin, as well as the progress of repositioning engineering technologies. As you've seen, we continue to see momentum in engraving, electronics, and hydraulics.

While foreign exchange and oil and gas markets have been headwinds in recent quarters, our exposure to these areas into China is relatively low. Moving forward, we will continue to exercise caution around currency expectations, oil and gas markets, and regional economic conditions.

Across the organization, we are focused on executing on the four pillars of the Standex value creation system to drive performance in the business. These include the balanced performance plan process, the growth disciplines, operational excellence, and talent management. This is a long-term journey, but we are reaping the rewards from these initiatives and look forward to continued success in these areas.

With that, Tom and I will be happy to take your questions. Operator?

(Operator Instructions). Jack O'Brien, CJS Securities.

In food service, could you quantify how much of an impact sales deleveraging had on EBIT margin performance? And then, any color on how the food service sales are trending this quarter?

So on the -- I think we called out the major causes of the margin improvement. The margin improvement in food service, we had -- I think last quarter we talked about a focus on strategic sourcing across food service. We are getting good benefits from the sourcing improvement.

We are actually seeing -- we've seen gross margin improvement in the quarter largely driven by the operational excellence improvements. So, we didn't bridge that. Of course, there was some volume deleverage impact, but the underlying operational improvement and the materials improvement drove the margin rate improvement. So, the bottom line, we are happy with what we are seeing at the gross margin level. That is a sustainable operational improvement.

Understood. And any color on how sales are trending coming into the new year?

I am going to look at Tom on this, not that I don't know, but we just haven't typically given (multiple speakers)

Yes, we just generally don't give guidance. And generally for, let's say, food service, you are going into a very slow quarter because a lot of our food service is tied to the construction industry. So, we are (multiple speakers)

But here's how I would answer that. I would point to industry indicators. If you look at other players in the industry, you are seeing some softness in commercial refrigeration in other companies.

Our softness was concentrated in four customers. If we take those four customers out, we grew across the board in the smaller customers and in dealers. Our cooking business was affected by some export business, which is compromised by FX. And we also rationalized some products out of there. The market indicators for the cooking industries, from the market watchers, are -- you know, remain positive for the remainder of this year. And so, I would just set expectations kind of along those lines that we we'll more or less track the market.

Got it, that is helpful. And then shifting over to engraving, another excellent quarter there, driven by Mold-Tech. And you indicate that these trends are expected to continue through 2016. Can you give us some color on your medium-term outlook for engraving and what needs to happen there to drive meaningful growth in 2017?

Yes, great question, and I have to say we were kind of surprised on the upside this quarter, which is better than being surprised on the downside.

But we also have better data now. In the last year, the team has been working on collecting data to give us a little more visibility about upcoming product launches in not just North America, but around the world, as well as new product refreshes. The data we have says -- as I mentioned in the call, we expect the strength we saw in the last couple quarters to continue. Visibility falls off towards the end of the year. We have a pretty good idea for the next couple quarters.

And as I've said before and I continue to say, beyond that a reasonable expectation would be to say that this business will follow the projection for auto unit sales, although we know it is driven by new models. But over time, if you think of that 5% growth rate, that's probably safe.

Now to your question, second question, about growth, we've got very creative, innovative, and effective leaders in this business. And we included the pictures of that promotion, the black swan dress, and if you look closely, the pictures -- the individual pieces on that dress came from our advanced, rapid prototyping, texturizing service in our design hub, which is what we use to work with the design teams in auto OEMs. It was very well received, and you can see that team has got a real commercial sense and is very creative.

So, we see potential growth opportunities in nickel shell, if we are able to accelerate nickel shell sales in the future. Laser engraving is a growth opportunity in that each laser pattern is going to be at a higher price than the chemical etch pattern it replaces. And the team is also exploring some additional growth opportunities.

So, I think quarter to quarter we continue to communicate our progress in identifying -- in quantifying the best we can what these growth opportunities are.

Understood. Okay, thank you very much for taking my questions.

Schon Williams, BB&T Capital Markets.

Let me just say I do find it slightly amusing that you put a black swan in your investor (laughter) (multiple speakers) down 260 points here.

Yes, you know, I'd like to take credit for being so clever, but that was just coincidence. (laughter)

Well, good results in engraving, either way.

I wanted to talk a little bit about electronics. There has been some softness in that North American piece there for at least the last quarter or two. I think last time we talked, you thought maybe some of that was kind of more destocking, more temporary. Can you give a little bit more color on what you're seeing there, maybe especially around the white goods?

Yes, so, as you know, for the fourth month in a row, the ISM index showed contraction in North American manufacturing.

So we -- the electronics business in Standex serves the broadest range of end markets. So the way we think of the last few quarters is there has been some destocking with our customers who have been maybe a little cautious as they watch the market. The decline in -- the softness in North American manufacturing, as indicated in the index, is certainly having an impact. And the NBO opportunities, the new business opportunities, which are there and we continue to be very encouraged by, are taking a little slower to ramp up.

Now our electronics team believes in the second half they have enough new business opportunities and new products, and we showed a picture of the capacitive sensor, which is a brand-new idea for us. It is a non-magnetic sensor. It's a first and is getting good response from customers. So the growth initiatives are taking a little bit longer than the team had thought, but they remain optimistic about growing in the second half.

All right, that's helpful. And then, was there -- there was some mention of maybe some consolidation with the Northlake acquisition, over at electronics. Just a little more detail there (multiple speakers)

Yes, good points. Well, first of all, the Northlake -- I don't think we call it the savings, do we, in the numbers? It's not big enough to be material, but it's a contributor to the electronics numbers.

So with the Northlake acquisition, it is a high-reliability magnetic site. And we had acquired a business years ago. I think -- did Roger know or was it before Roger?

Before Roger.

Before Roger, outside Toronto, and so we saw an opportunity to leverage the equipment and the knowledge base of the operators in Northlake. So we closed that facility and moved its production into Northlake.

All right, that is helpful.

And then one more question, if I may. Just as engineering -- Enginetics seems like it has been ramping. Assuming that oil and gas stays stable at low levels, would you still expect engineering tech to continue to ramp sequentially in terms of volumes? Or do we need to wait until Wisconsin is fully done and then we could start to see some additional ramp? I am just trying to get a sense of how the back half of this fiscal year might look compared to this quarter.

Yes, so aviation is certainly continuing to ramp. We'll definitely -- it will clearly be even stronger in Q4. But aviation continues to ramp.

Oil and gas, I think in the bridge, we showed -- if you do the math there, that's about -- it was about a $6 million year on year hit in the comp quarter to quarter. That will lessen the next couple quarters, you know, take it out to $4 million, $3 million, along those lines, with aviation continuing to ramp up. So sequentially, you will see that.

Okay. Thanks, guys.

(Operator Instructions). Liam Burke, Wunderlich.

David, you highlighted, I know on the food service equipment group, the four top customers having year-over-year decline in revenues. Is that a slowing of store openings? Or has it been slow on the renovation side? Or how do you explain all four of them showing decline? Or is it just bad timing?

It's a good question. The story is a little different for each of them. Two quarters ago, and last quarter, I believe, we talked about softness in our top customers and we listed customers -- Dairy Queen, Subway, Tim Horton's, McDonald's. And McDonald's is starting to pick up. So we've kind of taken McDonald's off that list and for reasons that you all know.

With Tim Horton's, their investment is more into other regions of the country where we don't support them. Subway's expansion is more overseas. There is less North America investment. The Family Dollar/Dollar Tree merger has slowed down their -- the ramp-up of their new combined program.

So, because every business has a different explanation, coupled with the fact that the remainder of the business showed growth year on year, I do think it is more of a customer-specific issue. However, we obviously are watching it very closely and other commercial refrigeration suppliers have shown some softness. So that's -- so those are the data points we're looking at to try to guess where the (multiple speakers) is coming.

Would that translate into some of the other areas that you are seeing strength, like drug chains?

Drug chains, convenience stores have been good. What translate?

Some of the weakness you've seen in the top four customers.

We haven't seen that.

Okay, fine. And on the engineering -- excuse me, on electronics, you mentioned the Northlake acquisition. Did that create -- that integration create any drag on margin? This quarter?

Well, with purchase accounting (multiple speakers)

Yes, it was $423,000 in purchase accounting.

Okay, so you had to step up an account, okay, great. And Tom, do you anticipate any one-time benefits or negatives on taxes for the second half of the year?

No, just -- we reinstituted the R&D credit, so year on year, it will be -- it shouldn't have an impact because it was implemented.

Great, thank you (multiple speakers)

At this time, I am showing no further questions. I would like to turn the floor back over to David Dunbar for any additional or closing remarks.

All right, thank you. First, let me thank the employees and leaders of Standex who I think are executing very well. We are very pleased with the progress and the performance of the businesses. And thank everybody on the call for their interest in Standex. We look forward to updating you on our next quarter's performance. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.