Standex International Corp (SXI) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to Standex International's third-quarter 2016 earnings call. (Operator Instructions)

Thank you, I would now like to turn the conference over to Matt Roache. Please go ahead, sir.

Thank you, Paula. 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 third-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, Matt, and good morning. In our third quarter, the themes we have communicated in recent quarters continue to play out. We continue to make good progress operationally during the quarter as we faced challenges to the top line in certain of our markets.

Revenues declined 2%, principally due to continued softness in oil and gas markets and in our refrigeration end markets. Foreign exchange had a negative effect of 1.4% and acquisitions contributed positive 1.4%. Third-quarter non-GAAP operating income was down 3.7% and non-GAAP EPS declined 8.8% to $0.93. We had a net cash position of $7.4 million at the end of Q3.

I am also pleased to report that the Standex Board of Directors has approved a revision to its share repurchase plan under which the Company may now repurchase up to an aggregate of $100 million of its outstanding common stock. To date, we have used our existing stock repurchase program primarily to offset dilution caused by employee stock issuances. This revision enhances our capital allocation strategy by giving us the flexibility to repurchase shares opportunistically.

As you may recall, Standex has a disciplined capital allocation process with the following order of priorities: maintenance and growth capital; debt pay down, if levered; acquisitions; and return of cash to shareholders.

The Standex value creation system and capital allocation processes are beginning to show results and we are confident that over the coming years they will generate significant shareholder value. We are in the process of working through the details to implement the repurchase program and expect it to be in place in the fourth quarter.

There are a few key moving pieces within our reported numbers, so let me share some high-level observations to convey our confidence that the execution of our priorities remains intact and we will deliver our long-term objectives. Please turn to page 4.

First of all, things in our control are advancing well. Food service equipment margins are expanding nicely, as this has been the primary focus of the business. Engineering technologies' aviation ramp-up continues as expected. Electronics sales growth in European countries as well as recent new application awards in North America, engraving order book for new offerings, Architexture, nickel shell, and laser continue to grow. And hydraulics continues to excel with its new business opportunities playbook.

Finally, our corporate focus on OpEx is delivering operational improvements in our factories. On, the negative side, we were experiencing a rough patch with respect to some things out of our control. Our top customers in refrigeration continue their reduced spending levels and the decline in sales into oil and gas end markets for engineering technologies continued. As we'll discuss in a moment, we believe this to be at its bottom and expect this segment will return to growth in Q4 on the strength of aviation sales.

North American engraving has invested in new technologies and a design hub to emulate the success we've experienced in Europe. While these investments adversely impacted engraving margins in the quarter, these are proven offerings and we are confident in our opportunities in North America.

Finally, electronics sales in Asia declined in the quarter and we continue to see soft sales in North America. And we anticipate growth from new application awards.

Please turn to page 5. Let's take a look at how these factors combined to affect sales and EPS. First is sales. As you can see, the principal cause of sales decline is the market transition in engineering technologies as oil and gas markets remained soft. With growth in aviation awards, we expect engineering technologies will return to growth in Q4.

The secondary cause of the decline is sales to our large refrigeration customers. The slow spending of large refrigeration customers continues to drag food service equipment top-line results. Engraving and hydraulics delivered solid top-line growth in the quarter.

Now a look at EPS. You can see that the declines in engineering technologies from oil and gas were nearly offset by margin improvements in food service equipment. Secondly, sales for the new offerings of laser, nickel shell, and Architexture in North America ramped up more slowly than planned, and the start-up costs reduced margins in engraving.

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

Slide 6 shows historical trend of adjusted earnings per share and sales. On a trailing 12-month basis, adjusted earnings per share were $4.61 through March 31, 2016, versus $4.49 in the 12 months ended March 31, 2015, a 2.7% increase. Sales were $757.6 million on a trailing 12-month basis as of March 31, 2016, versus $769.7 million in the prior period.

Please turn to slide 7. Three of our 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 down, with acquisitions contributing 1.4% versus Q3 last year due to the Northlake acquisition and electronics. Currency had a negative effect of 1.4%, which resulted in an overall sales decline of 2% to $177.5 million for the quarter.

Please turn to slide 8, which summarizes our third-quarter results. Excluding special items, operating income declined 3.7% to $17.6 million from $18.2 million a year ago. Adjusted EBITDA declined 3% to $21.9 million or 12.4% of sales compared with $22.6 million or 12.5% of sales in Q3 last year.

SG&A expenses for the quarter were up from the prior year, primarily due to employee medical costs and expenses associated with recent acquisitions, which were not a component of prior-year results.

Please turn to slide 9, which is a bridge that illustrates the impact of special items on net income from continuing operations. For Q3 of fiscal 2016, these items included tax-affected restructuring charges of approximately $287,000. The restructuring charges in the quarter primarily related to the closure of our Canadian electronics facility.

Turning to slide 10, net working capital at the end of the third quarter of fiscal 2016 was $144.6 million compared with $149.5 million a year earlier. The decrease in working capital is related to the overall lower sales volume. Working capital turns improved during the quarter to 4.9 compared to 4.8 a year earlier.

Slide 11 illustrates our debt management. We ended Q3 in a net cash position of approximately $7.4 million. This compares with a net debt position of approximately $44.4 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net debt to capital was a negative 2%. It compares with net debt to capital of 11.4% a year ago.

Slide 12 summarizes our capital spending, depreciation, and amortization trends. Year to date, we have spent $13.3 million on capital spending. We anticipate spending another $10 million to $12 million on capital in the fourth quarter and for the full year, $23 million to $25 million. We've adjusted our previous guidance down as cash outlays on capital spending will carry over to Q1 in fiscal 2017.

Slide 13 details our free cash flow performance, which was $11.9 million for the third quarter. We generated $0.93 of free cash flow per share during the quarter compared with $0.50 per share during the same quarter last year.

On a year-to-date basis, free cash flow was $34 million versus $4.2 million in the prior year or $2.66 per share versus $0.33 per share in the prior year. The improvement on a year-to-date basis was driven by income from operations, working capital improvements, and lower capital spending.

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

All right. Thank you, Tom. Please turn to slide 15 and I'll begin our segment overview with the food service equipment group. As I mentioned at the outset of the call, margin improvement continues to be the key area of focus within food service equipment. And the focus is paying off.

Operating income margins increased 260 basis points to 9.6% on a sales decrease of 3.4% from Q3 last year. The overall decrease in sales was driven primarily by lower refrigeration sales as well as ongoing actions to eliminate less-profitable products. The refrigeration sales decline was the result of decreasing sales to large national chains due to a reduction in store expansion and the merger of Family Dollar and Dollar Tree, partially offset by sales through dealers.

In cooking solutions, sales increased approximately 2% year over year, primarily driven by strong growth in our supermarket sector and increased shipments in our fryer chain business. This growth was partially offset by actions to eliminate lower-margin commodity products. On-time shipments continue to improve and that should help fuel sales expansion during the remainder of the fiscal year.

Our Ultrafryer acquisition remains on track and we are actively investing in this product line. Specialty solutions was also up in Q3, driven by our pumps business, partially offset by exchange rate declines.

We're making significant progress in food service as we apply Standex's operational excellence initiatives to all of our production facilities. With these initiatives in place and demonstrating early results, the team is reviewing its commercial strategic initiatives, focusing on our product line, attractive adjacencies, and sales excellence to ensure that the business remains aligned with the Standex 2020 vision.

We anticipate top-line performance challenges to continue in the refrigeration group. On the bottom line, we expect that our operational excellence activities will continue to improve overall performance in food service. We will be at the National Restaurant Association tradeshow in May to present some of our new products. So if you will be in Chicago for the show, please stop by to check them out.

Turning to slide 16, the engraving group had another strong quarter, with sales increasing 6.2% over Q3 of last year, including 11.6% organic sales growth and a 5.4% negative currency impact. The increase in sales was primarily driven by our Mold-Tech locations in Europe and China, as demand for automotive molds remains strong. Sales were slower in Southeast Asia.

In past calls, we have been discussing the expected future sales benefits from our new laser and nickel shell technologies as well as our design services. As a result of our investment in these areas during Q3, operating income declined to 18.6%. It's a testament to the strength of this business that we were still able to generate this impressive margin, given the level of investments we've made.

In addition to the strong performance at Mold-Tech, sales also increased at our roll plate and machinery business due to pricing and product mix. Our Innovent business also had a strong quarter as a result of customer product rollouts.

We remain encouraged with the progress of our Architexture Design Centers. During the quarter, we received an order from a large American OEM for a model year 2020 automotive rollout. This is the earliest point in a product development cycle we have received an award and is a great example of how we are changing the game with our sales approach through our Architexture Design Hubs.

The demand trends and momentum at engraving are strong and we expect this to continue in Q4. Going forward, we will ramp up production of nickel shell molds and laser engraving during the next 12 months to increase capacity and meet demand. We continue to monitor activity in China, as there have been indications that automotive OEMs are slowing production, although we have yet to see a decline in customer demand.

Please turn to slide 17, our engineering technologies group. Organic sales were down 22.7% year over year, primarily due to lower demand in oil and gas markets as well as contract timing in the space industry. This was partially offset by increased sales in aviation.

We have taken action to align operating costs with demand, given the ongoing oil and gas downturn. And we've shifted our focus to the aviation market. Aviation continues to grow. It is now over 50% of the segment volume and we are creating capacity to fulfill customer needs.

Construction of our Aluminum Center for Excellence in Wisconsin is on track and we expect to be in production at that facility in June. Enginetics performed well during the quarter as the longer-term aviation engine awards are beginning to ramp and operational improvement initiatives are benefiting the bottom line. We continue to look for opportunities to drive further value out of that business through operational initiatives.

Looking forward, we anticipate year-on-year growth in Q4 and fourth-quarter margins in double digits due to improvements from higher sales, margin growth in aviation, and an easier year-over-year comparison in the oil and gas market.

Please turn to slide 18, electronics. Electronics sales increased 6.8% to the Q2 2016 acquisition of Northlake as well as program launches in Europe, partially offset by softness in China and North America. Foreign exchange negatively affected sales by 2.3%. Operating income declined slightly as we integrated Northlake.

Sensors were up 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. We expect our new sensor programs to drive growth over the next 12 months.

Magnetics and industrial sales were also strong in the quarter, while medical sales were down. We received a number of new awards in the quarter that will deliver growth in the coming year as electronics growth initiatives bear fruit.

The integration of Northlake is on target and we are pleased with the progress. During the quarter, we consolidated a small Canadian magnetics business into Northlake, which we expect to result in savings in the next four quarters.

Finally, we have an active and attractive M&A pipeline for the electronics business. We remain optimistic about the electronics business long term to deliver organic and inorganic growth.

Our hydraulics group, as you can see on slide 19, had a very good quarter. Sales were up 12% year over year, primarily due to the continued strengthening in our traditional North American dump truck and trailer markets, which is tied to the strong North American construction environment.

Our customers are optimistic that the passage of a new five-year highway bill could provide further growth opportunities. We leveraged the 12% sales growth into a 16.5% increase in operating income, and operating margin was 17.2%.

We continue to capture new OEM platforms in the refuse space by providing custom telescopic hydraulic cylinders manufactured in North America combined with rod cylinders from China. We are also entering new markets such as the airline support equipment space.

On the operations front, our robotic welding machines at our Ohio facility are up and running and they are driving performance improvement and efficiencies. To support this growth, we've also approved another expansion of our Tianjin, China, plant. March was a record month for cylinder production and we are looking forward to meeting increased demand in the fourth quarter.

Please turn to slide 20. In summary, we continue to perform well from an operational standpoint, despite softness in certain of our markets. We're taking the necessary steps to improve each of our segments and our business leaders are reporting excellent momentum in the execution of our strategy.

The operational transformation in food service is proceeding quite well. We exited the third quarter with a 9.6% operating margin, despite the challenges on the top line that we expect will continue in the near term. The transformation of our engineering technologies business is also progressing as we ramp up our aviation contracts.

Our fourth-quarter focus will be to continue our operational excellence and top-line initiatives across the business. And of course across the organization, we will be aggressively 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. Finally, we continue to work an active M&A pipeline.

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

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

I wanted to start off on food equipment. Can you just talk a little bit about -- I think you called out $1.5 million of product rationalization. Was that -- I think that was within cooking, but is that the extent of the product rationalization or was there anything else within other segments?

And maybe kind of talk about what we should expect over the next several quarters? Is there more to be done there?

The two major contributors to that were the sale of the sale of the BevLes product line last summer. That was in June. And the exit of their UK direct-sale presence. So just over $1.5 million in the quarter.

Now, the product rationalization work continues in the business. So as we've said before, the food service equipment business, our sales could get smaller before they get larger as we focus on the more profitable core products.

Just size-wise, though, David, is there something -- are there bigger chunks we should be thinking about as we move forward?

No. No, I don't think so.

Okay. So more kind of around the fringes you'll do some additional chopping here and there. And then what about just in terms of the growth prospects for that segment? I know -- could you just talk a little bit about kind of what you're seeing from an industry perspective?

I know refrigeration obviously has been a headwind for several quarters now. Hopefully, some of that starts to anniversary as we move into kind of next quarter. But I mean, can you just talk a little bit about maybe kind of what the trends are within the industry as a whole? Once we anniversary some of these headwinds on refrigeration, do you think getting back to kind of, I don't know, mid- to low-single-digit organic growth? Is that plausible?

Yes. Let's cut it into pieces. So in the cooking business, market indicators are that that market trends continue to be in a 4% growth rate. And we saw growth in cooking in the quarter. We also believe that with the length of time we have been performing better out of the cooking solutions group that we expect that that cooking business will join market growth trends. In the specialty business, the 4% to 5% growth is a reasonable expectation there.

The big question mark for us is refrigeration, these top customers. The biggest issue for us has been the ability I guess of our sales organization to communicate to us what customer spending plans are. I think we have room to improve our key account management, and our sales excellence programs have better visibility to this. But when customers will start increasing their spending in North America in refrigeration, a little hard to predict.

So I think we mentioned that we expect that softness to continue in the quarter. But I do want to point out that the refrigeration isn't just sitting on their hands either. They are very active in adjusting their cost structure. They actually increased their EBITDA margin rate in the quarter despite the declines.

Okay. And does -- I don't know, does the continued weakness in refrigeration, does that change your perspective on kind of the long-term opportunity for the food equipment segment?

I'd have to answer that no today. The history of the refrigeration business, if you go back over several years, within -- and to follow Standex, the refrigeration business has had these cycles kind of trending upwards. But it has been cyclical. As national chains have launched rollouts, we benefit from those, then they slowdown.

Gosh, back in 2011, Walgreens was building 600 stores. That was a chief source of growth for the business. That declined. Subway grew. And these other customers we've referred to have created this sort of lumpiness on the top line.

So our expectation of long-term growth hasn't changed. You know, we'll continue to communicate as we get closer to our customers and understand where the market is going. But we just see this as kind of a combination of timing and the natural cyclicality in national rollouts.

All right, that's helpful. And then I wanted to switch gears a little bit to the share repurchase. Looking back at kind of 15, 16 years of history, it doesn't look like you guys have done a material repurchase here. And at least thinking on modern history. Can you just talk a little bit about what's changed the perspective on kind of share repurchases?

And then is there any concern that maybe the M&A pipeline is slowing down a little bit? So maybe that's causing some of the shift to repurchase? And then maybe if Tom could maybe just address kind of like maybe the pace of how we should expect that repurchase: kind of in line with free cash flows or kind of more opportunistic? Just some thoughts about the pace of that deployment.

Great questions. So let me first take -- in general, the capital allocation story, we've been pretty clear about how we prioritize our capital allocation. First, to maintenance capital, then growth capital. If we are highly levered, then we want to manage our debt, we pay down our debt. The next priority is acquisitions, and then finally returning cash to shareholders in the form of dividends.

And in the past, it was potentially a buyback. But Schon, we didn't really have a tool to buy shares from the market. Our authorization was focused on countering the dilution from executive comp.

So I think the first thing to understand is this completes our capital allocation toolkit, if you will. And our intent here is really just to use this opportunistically. We believe in the long-term prospects and the long-term value creation of the business. And we think the market will present us with opportunities to purchase shares opportunistically.

You also mentioned the M&A pipeline. That -- it is getting busier. I am personally spending more of my time on M&A activities now than I did a year ago. I'd say the first couple years I was here, focused a lot on putting in place OpEx, the growth disciplines, getting the organic management processes in place.

And as I visualize the pie chart in my time, there is a much bigger slice going to M&A. I'll tell you, that pipeline is more active. So please don't read into the buyback that there is any dampening of our expectations on the M&A side.

I'll let Tom handle your last question.

Schon, like David said, in the priority list it's at the bottom. We want first to have the maintenance capital, the growth capital. If we are levered, pay down debt. And then look at acquisitions and then finally return cash to shareholders through either dividends or share buybacks.

So I wouldn't anticipate a large purchase of shares. We have nothing planned right now. We are just doing it opportunistically when the market disconnects from our price.

All right. That's helpful, guys. I'll get back in the queue.

(Operator Instructions) Chris McGinnis, Sidoti & Company.

Thanks for taking my question. Can you just maybe dig a little bit into the kind of new product development on the food service side? And maybe where you are at compared to historically and where you think you need to be to kind of change the volume -- or the growth trend in that division?

I'll tell you, Chris, that is a work in process. As you know, in -- let's separate again the three parts of the business: cooking, specialty, and refrigeration.

Refrigeration has continued to churn out new products in the sense that there are sort of variations on platforms and there's continuous evolution of the product line. That has continued more or less on pace in refrigeration.

Cooking, I'd say new product development really went on the back burner as we were going through the consolidation. And especially the last move that got so much attention a year ago, the move to Nogales. And our new product development is beginning to ramp up. We have some market tests going on in cooking solutions to explore what opportunities are out there, where we want to develop.

A little early for me to communicate what our expectation is about how extensive that will be. Although at NRA, you will see some new products coming from our different business. Our BKI brand has a new gas rotisserie, for example. Our Combi Oven; we have a mini Combi we'll be presenting. And we also have a conveyor oven that's a new product from the Bakers Pride brand. So maybe one way to answer it is we are probably in kind of the second inning of that game and just starting to ramp up our new product development engine.

The third thing -- and the specialty side probably continues on pace, certainly in federal. Although we are starting to see some pretty attractive opportunities in the pump business that could result in some growth this next year. So I'd say if I'm not overly confusing you here, cooking needs to ramp it up. And they?ve started the market tests to identify the opportunities.

And I guess just to follow-up on that with the innovation. Is the innovation more important to drive growth in that segment? Or is it more about demand trends and being opportunistic on where you put your attention?

I think it's kind of a combination of both. We are not the biggest player out there. And where we succeed is where we can enter into a relationship with a customer who has an -- a change initiative, a change plan, we can work with them to develop equipment that fits their new kitchen concept. Or in the case of a Combi Oven, to help them develop their menu around it.

So our sweet spot tends to be maybe smaller regional chains, higher-end chains, where there's some level of customization and customer intimacy possible. So I'd say the challenge is more finding the right customers in the marketplace. And our innovation follows those customer needs.

Okay. Thank you very much. And then one just last question on the engineering. You talked about growth in Q4. Could you just maybe -- is there a platform that's coming online that should drive that? You know, reverse that trend?

Yes. It's a growth in aviation. There was a chart on the bottom of the page that shows how the mix of the market served has changed over time. Aviation continues to ramp up.

Oil and gas -- if we look where it is now, we think it's probably going to bounce along the bottom where it is now in the future. So we've lapped oil and gas decline, and aviation growth will provide that Q4 growth. And we've got this new plant in Wisconsin to support Airbus, which will be producing in June.

Great. Thank you very much for the time today.

Liam Burke, Wunderlich.

David, could you give us a sense on the electronics side of the business where the new product pipeline is coming from? And how strong it is and balance that off against how the M&A opportunities are?

How to answer that? I guess first, from a macro standpoint, our long-term expectation in this electronics business we've communicated we think it's a 4% to 5% growth business. And I'd say that the magnitude of the opportunities that we're being awarded and that we are developing in the marketplace support that level of business.

As I mentioned in the script, some of our recent awards have been with our traditional sensors. We also are expanding into adjacent spaces with new technology. Last quarter, we communicated a new capacitive level sensor, which is a new technology for us.

We showed a picture in -- of a product that actually is a Northlake product, which is for a sort of an intelligent circuit breaker that's being rolled out at Florida Power & Light to help them more efficiently manage their grid. So this high reliability magnetic space in supporting electrical grid, electrical distribution, is a growth area for us as well.

Okay. And back on engineering. You mentioned -- well, space is typically lumpy. Is there any change -- do you see any change over time on how that business is growing?

You know what? I was -- if anyone on the line ever wants to go to a very interesting tradeshow, the Space Symposium in Colorado Springs. I was there a few weeks ago. And I view the space business -- there was some turbulence in the space business with the emergence of, call it, Space 2.0, the commercialization of space. That will change the way the dollars are spent in space.

But our view is that the market continues along with sort of a slow growth; maybe 2% growth. And our participation in that we believe will continue to be lumpy, as it has been in the past. But our long-term expectation is that it remains about where it's been for us with slight growth.

Good. Thank you, David.

(Operator Instructions) Beth Lilly, GAMCO.

I have two questions. The first one is I just want to drill down into the refrigeration side of your food equipment business. So can you -- so what is the trend that's going on that there's no indication what the spending will be? Is it there is consolidation among the chains? Is it there is uncertainty in terms of new store openings? Can you give us some qualitative perspective on that?

Yes, that is a great question and one that's got us preoccupied. I'd say every chain has a slightly different story, but the variation on the theme is there is uncertainty to us when national programs will be rolled out.

We are participating in bids and RFQs. We are working with customers on prospective rollouts, with drug stores and with some of our supermarkets. But when they will pull the plug on these new programs is unclear to us.

Okay. So it's not that they are consolidating stores and closing stores. It's that they don't know when they are going to rollout their new spending plans.

Well, yes, I guess I'd comment to focus on those growth opportunities we do see. There are companies like Walgreens is building fewer stores. Subway is investing outside of North America. So there are some -- some of the national chains that have been big customers in the recent past don't seem to have anything on the horizon.

However, there are others that do have opportunities. We are pursuing those. It's the timing of those opportunities that's unclear.

Got it. Okay, okay. All right, that's helpful. And then I wanted to just drill down a little bit more on the hydraulics business. You talked about entering new markets --.

Thank you for asking about hydraulics. Our hydraulics president will be appreciative of the interest.

Well, at least, everybody has talked about every other segment so I figured --. And you know I'm not going to drill down on food service because that's doing terrific and you are doing a great job.

I wanted to just better understand -- you talked about getting into new markets and specifically you mentioned airline support equipment. Can you talk more about that and who are the competitors that you see in that market?

It's somewhat fragmented because there are a lot of smaller players in custom hydraulics. And if you imagine the kinds of specialty vehicles with, say, scissor lifts to bring food and concessions up to -- to raise them to door during the plane changeover. We'll provide the hydraulics to those scissor lifts, so a customer like a JBT that makes equipment like that.

Okay. So you'll supply the hydraulics to John Bean?

Yes.

Yes.

Yes.

Got it. Okay. And right now, they are probably sourcing those from somebody else, correct?

That's right.

Got it. Okay, okay, that's helpful. Good. All right, those are all my questions. Thank you.

Schon Williams, BB&T Capital Markets.

Thanks for getting me back in the queue here, guys. Just I wanted to make sure we are not mincing words on the engineering tech outlook as we move into the next quarter here. So just so I'm crystal-clear here, you are looking for midteens margins in that segment and you are talking about year-over-year growth on an absolute basis.

Yes.

Yes. So let me elaborate on that. So the midteens margins, the one caveat I would put out there is the potential timing of some of the space shipments, these large domes. And you've seen them. They can ship a quarter or two.

We have shipments scheduled in May and June. If those go out, midteens. I think the last time we talked, about 15% in the quarter that it will be highly dependent on the shipments of the space domes. However, we are confident that double-digit margins in any case and absolute growth year on year.

And so absolute growth year on year, I mean, that implies -- I mean, you know, a $5 million to $6 million ramp in June versus March. And I just want to make sure -- I mean, that seems quite extraordinary to me. I mean, is that more tied to the startup in Wisconsin? Is that more tied to these rocket deliveries? Just kind of help me out there.

It's those two things. It's space shipments and the aviation ramp. So yes, the Wisconsin plant will make some contribution, but they will really be making their first shipments in June. So this has more to do with the ramp-up of the existing aviation contracts, ramp-up in Enginetics, and the space projects.

Okay, that's helpful. And then is there any risk in your mind on that ramp-up within Wisconsin? I mean, everything is kind of as planned as we sit here today?

Well, I'll tell you what. We have a backup plan. So if we have troubles with our plant, we have outsourcing partners we can continue to meet customer needs. So we've got customers protected, and of course, that means that our top line will -- commitments will be met, but that the outsourcing would be a higher cost.

So from that standpoint, we've got our deliveries well scheduled. We are confident in that. For the moment, the ramp-up is going well. We think it's being well managed and we are on track to produce in June.

Okay. And then coming back to engraving, I know that the organic growth there is still quite good, although it is decelerating quite a bit. 30% organic last quarter, now closer to kind of double-digit, kind of low double-digit.

And I just want to make sure I understand -- is there anything -- is that just kind of the law of large numbers? You are kind of coming up against tough comps there? I just want to make sure -- you did kind of highlight some slowing in Southeast Asia as well as kind of watching the Chinese automotive market. I just want to make sure that there's nothing that we should be maybe keeping an eye on that's decelerating within that business.

No. No would be the short answer to that question. You know in the past, Schon, we communicated our expectations of the growth for this business is 5% to 7%. And they have continually exceeded that in the past. So we look at the market indicators of new model rollouts and refreshes, which support that 5% to 7%. And I think that's -- we think that's a reasonable number.

Now, we do have some growth initiatives out there. To the extent we are able to grow with nickel shell, that's a new source of revenue for us. Laser engravings are at a higher price point than chemical etching. So as that becomes a bigger part of the market, there is maybe some growth from there. It's a little early for us to revise our expectations based on those initiatives. So that 5% to 7% number is a safe range.

Okay. And then you called out some startup costs in that unit. I don't know, can you quantify maybe how much that impacted the margins? Because on a year-over-year basis, margins were down 130 basis points. I don't know, is all of that 130 basis points the startup? Is it some portion of it?

Yes, it's just shy of $300,000, $400,000 of startup costs. And what these are is, as I mentioned: the laser engraving. And in fact, in recent earnings release, we talked about the investments we're making in laser in North America and China. And the laser sales this last quarter in North America were just very, very slow. We are still commissioning the machine. We had all the cost in the revenue.

We put in place nickel shell in Detroit. And the revenue will start this quarter. And we also have fully staffed a design hub in Detroit. So these are all North American investments where we are taking the growth initiatives that have been successful in Europe and building them in North America.

So our view is based on the success we've had in Europe, based on the discussions we are having with customers in North America, that this is a timing issue of the ramp of these new offerings.

All right.

But let me comment on the margin, too, because we often get asked about the margins: what's the margin expectation for engraving? And they have quarters in the 20%s and mid-20%s. And I think over time, we've said reasonable expectations: upper teens to low 20%s depending on the quarter and the phasing of the projects we get.

All right, that's very helpful, guys. I was wondering do you happen to have the backlog numbers? Are you able to give those to us today?

They'll be in the Q, right, Tom?

Yes. They are going to be in the Q later today. So food service: $38 million basically in backlog. And that's to be delivered in both a year and beyond a year, right?

Yes, that's correct.

Engraving is $18.5 million, engineering technologies is $86 million, electronics is $43 million, and hydraulics is $5.7 million. So it's $192 million versus $204 million last year. But there's some lumpiness in there that, again, we even say in our Q that this is not a quote unquote leading indicator. This is backlog can be very lumpy.

Yes, understandable. I just for housekeeping purposes like to have that here.

You'll get it later today.

All right, thanks guys. I appreciate the update.

John Cummings, Copeland Capital.

I have two more questions on the engineering technology segment. First, can you guys just give us a sense of the potential size of your aviation business in that segment in terms of revenue maybe over the next few years as these new contracts ramp up?

And then the second question is just on the oil and gas part. What gives you the confidence that that part of the segment has bottomed? And it would be great if you could remind us specifically which end market inside oil and gas you are dependent on and what has to happen there for that business to turn around.

One thing (inaudible) aviation. I guess what I would do is I'd just refer back to previous communications we've had about the size of some of the awards that we won in the last couple years. The lipskin, the plug-in nozzle and the two lipskin awards all total -- with the press release, if you add the value we put in the press release is it's $13 million to $15 million if you add all those together.

We have -- in the last earnings release, we said that we believe the market we serve has into the 2020 is a CAGR of 7% growth. But we haven't put a number out there of what we think this aviation business can grow to. Obviously, we have planning assumptions internally, but we haven't communicated that.

I guess we'll have to -- I'm looking at Tom. We'll think about it in the future how we set expectations. Because we remain very bullish about the segment and it becoming a more important supplier to those key customers.

On oil and gas, whether I'm confident or not -- what was it, $800,000 or something in the quarter? So it doesn't have much farther to drop. So I think there is some MRO business. There's some parts for -- to support installed products in the field. And we anticipate continuing to get some of that. So that's why -- that's where I come from in saying it will bounce along the bottom.

So the products that we deliver, we have two applications. Out of our UK plant, we deliver shims that are part of the mooring system on offshore platforms. That business, you know, we are skeptical -- if that comes back, that will be longer term because that's more expensive -- is a more expensive source of oil.

In North America, we serve the energy markets by selling parts that going to land-based turbines that you find in oil and gas compression and distribution. So it's kind of midstream investments.

Okay, that's very helpful. Thank you.

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

I thank everybody for their interest in Standex. We continue to be confident we are working on the right priorities and pleased with the operational progress we see in our business. We look forward to following up with you next quarter. Thank you.

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