Standex International Corp (SXI) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Standex International's fourth-quarter 2016 earnings call.

Today's call is being recorded.

(Operator Instructions)

It is now my pleasure to turn the floor over to [Matthew Roche]. Please go ahead.

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

Matters that Standex Management will discuss on today's conference call 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. The reconciliation of the non-GAAP financial measures to the most of the comparable GAAP measures is available in Standex's fourth-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 will turn the call over to David.

Thank you, Matt, and good morning. We made progress operationally during the quarter as we continued to save top-line challenges in food service and engineering technologies. Sales in engraving, electronics and hydraulics all increased.

For Q4, overall revenues declined 3% to $193.8 million, with foreign exchange having a negative effect of 0.5%. On the bottom line, while our operational improvement initiatives drove 180 point year-over-year gross margin improvement, operating income was down 41%, due to a $7.3 million pretax charge related to the divestiture of the US roll plate and machinery business. GAAP EPS was $0.94 per diluted share, and adjusted EPS grew slightly to $1.31 a share.

We had a net cash position of $29.9 million at the end of Q4. We achieved strong performance in engraving, electronics and hydraulics, and we expect the positive trends in these segments will continue. In each of these segments, we're capitalizing on demand from traditional markets, while driving growth in new markets.

In engineering technologies, top-line challenges are continuing from oil and gas and a market weakness, while we reposition the business to serve opportunities in the commercial aviation market. I'm pleased to report that business generated a 16% EBIT margin in the quarter, as we align expenses to near-term demand.

In food service equipment, small footprint retail and key chain accounts in refrigeration continued to be soft and had a negative effect on the group overall. Slide 4 gives a brief overview of our financial progress and key milestones in FY16. Despite lower sales, operationally we performed well. GAAP EPS was $4.09, down 5.1%, with adjusted EPS up 0.7% to $4.59 as a result of our operational improvement initiative. We delivered excellent free cash flow conversion of 121%.

Engraving, electronics and hydraulics all delivered strong years in sales and profitability. Food service delivered 130 basis point improvement, despite the top-line reduction. Our acquisition of Northlake is performing well, in support of the electronics business opportunity.

We deducted the US roll plate and machinery business to devote full focus on opportunities in our mold and surface texturizing business. Finally, we have begun production in our new Aluminum Center of Excellence in Wisconsin, delivering lipskins to Airbus. I'll touch more on our achievements in each business when I go through our segment review.

First, Tom will review our fourth quarter and year-end results. Tom?

Slide 5 shows our historical trend of earnings per share and sales. GAAP sales were down 2.7%, versus FY15. GAAP EPS was $4.09 versus $4.31 a year ago, due to the impact of the divestiture of the roll plate and machinery business, hereafter referred to as RPM.

On an adjusted basis, sales were down 3.1%, and we delivered EPS of $4.59, versus $4.56 in FY15, a 0.7% increase. We will continue to bridge out the divestiture of the RPM business going forward to help a reader understand the impact on the non-GAAP basis.

Please turn to slide 6, which details our revenue changes by segment. You can see that three of the five segments reported positive organic sales growth for the quarter and full year. The acquisition of Northlake contributed 1.5% to the sales growth for both the quarter and year, while foreign exchange was a headwind in those periods.

Please turn to slide 7. Which summarizes our fourth-quarter results on a GAAP and adjusted basis. During the fourth quarter, gross margin increased on a GAAP and a non-GAAP basis despite the drop in revenue. Adjustments from GAAP to non-operating GAAP operating income were $8 million and are itemized on the bridge on the following page. The GAAP tax rate of 13.9% in Q4 of FY16 is due to the impact of the RPM divesture, along with the charitable contribution of vacant real estate in the mix of US-to-foreign income.

Please turn to slide 8, which is a bridge that illustrates the impact of special items on net income from continuing operations. Special items included the impact of the RPM divestiture, restructuring charges and a pretax loss on sale of real estate to the charitable organization. GAAP net income was down 25.9% as the RPM divestiture resulted in a $0.35 charge. Excluding those items, adjusted net income was up 0.9%.

Slide 9 illustrates our full-year financial results. Gross margin on a GAAP and non-GAAP basis increased, despite the decline in sales year over year. GAAP operating margin declined to 9.4% from 10.2%, while non-GAAP operating margin increased slightly to 11.1%, versus 11% a year ago. Adjusted EBITDA increased year over year by 40 basis points to 13.6% of revenue. We anticipate our tax rate to normalize at 29% in FY17, as there is a shift to US income from foreign.

Slide 10 is a full-year bridge that illustrates special items on net income from continuing operations. GAAP EPS was down 5.3%, versus FY15, while non-GAAP EPS was up slightly at 0.7% from prior year.

Please turn to slide 11. Net working capital at the end of the fourth quarter of FY16 was $132.3 million, compared with $138 million a year earlier. The decrease in working capital is primarily related to lower overall sales volume in food service and engineering technology segments in the fourth quarter. Working capital turns were 5.9 versus 5.8 a year earlier.

Slide 12 illustrates our debt management. We ended Q4 in a net cash position of approximately $29.9 million, as compared to a net debt position of $5.6 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net debt to capital of negative 8.8% compares with net debt to capital of 1.6% a year ago.

Slide 13 summarizes our capital spending depreciation and amortization trends. In 2017, we expect our capital spending to be in the range of $26 million to $28 million, which includes an $8 million carryover of spending from FY16. Approximately $19 million of CapEx in FY17 will be to drive sales and improve productivity. The remainder will be maintenance capital. Depreciation and amortization is projected to be in the range of $21 million to $23 million in FY17.

Slide 14 details our reconciliation of operating cash to free cash flow. Our free cash flow conversion averages approximately 100% over the past five years. Note that $7.3 million charge taken for the divestiture of RPM was primarily a non-cash item.

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

Thank you, Tom. Please turn to slide 16, and we'll begin our segment review with the food service equipment group. Sales decreased 9% from Q4 last year, driven primarily by the continued softness in refrigeration demand, as well as ongoing actions to eliminate less profitable products.

We continue to make significant progress operationally, as gross margin increased 250 basis points, and operating margin was 11.4%. Refrigeration sales decreased about 20% in the quarter as a result of continued soft sales to large national chains, dollar stores and drug retail stores. Strong sales through dealers partially offset the overall revenue decline.

On the positive side, we're beginning to see some of the large national chains ramp up their investment plans for projects set to commence in 2017. In light of customers' reduced spending, we are aggressively driving lean in our refrigeration plans and managing its cost structure. I have to commend the refrigeration management team for giving the best efforts to protect the business's profitability during the sales downturn.

In cooking solutions, revenue increased mid single digits year over year, primarily driven by sales through dealers. We saw good growth from Ultrafryer in traditional cooking equipment, and slower growth in grocery store retail. This was partially offset by actions to eliminate lower margin commodity products.

What is particularly noteworthy is the 500 basis point year-over-year increase in cooking operating margins, despite about $1 million in lost sales from the product rationalization strategy. The margin improvement was aided by improved operating performance, stabilization in the plants, and select price increases on lower margin products.

Specialty solutions was up in Q4, driven by our espresso pumps business, partially offset by exchange rate declines. We are particularly excited by new pump products that will provide our customers with opportunities to offer innovative carbonated beverages, enhanced CO2 safety and lower maintenance costs. Display merchandising is showing good momentum as orders increased high-single digits.

We are 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 adding focus to its commercial strategic initiatives, focusing on a [prong line], attractive adjacencies and sales force effectiveness.

Please turn to slide 17. Looking ahead, we anticipate two more quarters with headwinds in refrigeration. We believe we are at the bottom of the trough in small footprint retail and the large chain rate of decline has slowed. We do expect some improvement in 2017 as a number of our customers will begin to invest in new rollouts. I'm also encouraged by top-line growth laneways and new business opportunities in each of the cooking and food service businesses.

Turning to slide 18, the engraving group had another good quarter, with sales increasing 3.2% over Q4 of last year, with double-digit organic growth in orders and backlog. Sales were driven by auto mold texturizing in Asia and Europe. In North America, Q4 subwork was shifted from Q4 to Q1, due to customers' requests. Operating income was up 23.6%. We are encouraged with the progress of our design hubs as we change the game with our sales approach through these centers of excellence. We've opened our newly-renovated Architects For Design Studio in Detroit in the second quarter of FY17, and we will be hosting an Investor Day at that location on Wednesday, September 21.

During the quarter, we sold our roll plate and machinery business to enable us to devote full focus and resources on higher growth and better return businesses. As you will recall, last quarter we mentioned that our engraving segment margins were down, because of startup costs associated with nickel shell, laser and other applications. Nickel shell tanks are now at capacity, and our laser machine has also been productive in delivering results.

We anticipate that the momentum in engraving will continue in the new fiscal year, as we focus on meeting automotive mold-tech demand. We expect moderate growth in FY17 in Europe, Asia and North America. Near term, automotive customer schedules are indicating a flat to slightly down Q1. With the divestiture of roll plate and machinery, the Management Team is now devoting their energies to exploring growth opportunities with market tests.

Please turn to slide 19. Our engineering technologies group. Sales were down 8.7% year over year, primarily due to lower demand in the oil and gas markets, contract timing in the space industry, and lower medical and general industrial markets. This was partially offset by 14% growth in aviation sales.

Our ramp up in aviation continues, and we are creating the capacity to fulfill customer needs. Our new Aluminum Center of Excellence in Wisconsin is now up and operational. The longer term aviation awards are beginning to ramp, and operational improvements initiatives are benefiting the bottom line as evidenced by 16% operating income during the quarter.

Looking ahead, we are continuing to reposition the business to capitalize on aviation demand and expand capacity to support existing contracts. This includes the ramp-up of the new Wisconsin plant. The first half of 2017 year-in-year sales comparison will continue to be impacted by the oil and gas and medical sales.

Slide 20 clarifies the movement of sales to different end-markets. For the quarter, oil and gas sales declined 8.9%, while aviation sales grew 4.9%. In the full year, oil and gas declined 18.3%, and aviation grew 9%. As we described last quarter, our sales in the oil and gas end-markets have hit bottom. For 2017, the continued ramp of aviation sales will provide net growth for the business.

Please turn to slide 21, electronics. Electronics sales increased 11% due to the Q2 2016 acquisition of Northlake, as well as program launches in Europe. Partially offset by softness in China. Orders and backlog were up due to growth in industrial, automotive and security markets, and the contribution from Northlake. We won some attractive new applications in the North American market, and we will begin to drive growth in FY17. Operating margin was strong at 18%, due to cost savings activities from manufacturing moves in China and Mexico, and improving efficiencies.

Sensors were up modestly from the prior year, and we're accelerating growth laneways in sensor technologies through market tests. We see new business opportunities for sensor technologies in industrial, automotive and security markets, and for magnetics, in power distribution, electric vehicles and medical devices. We expect our new sensor programs to continue to drive growth over the next 12 months.

Our hydraulics group, as you can see on slide 22 had a very strong quarter. Sales were up 15.3% year over year, primarily due to the continued strengthening in our traditional North American dump truck and trailer markets. Which are tied to the North American construction environment. Operating margin was 19.8%. We continue to capture new OEM platforms in the refuse space, through product line expansion and sales efforts. Looking forward, we are seeking new business outside of our traditional markets and the refuse space.

We're working progress in the airline support equipment space, and look forward to capitalizing on additional growth opportunities in other markets. We also are expanding production in China to meet increased demand, and utilizing our operational excellence toolkit throughout the business, and leveraging recent capital investments in technology.

Please turn to slide 23. In summary, we had very solid finish to the quarter and to the year. And we are well-positioned in our markets as we enter FY17. In the fourth quarter, we grew sales by double digits in three of our five businesses, and reported at least 15% EBIT margin in four of the five businesses. In FY17, we're focused on sales and margin expansion in all of our businesses, addressing top-line growth challenges in food service equipment and capitalizing on aviation opportunities in engineering technologies.

As we look to the future, our balance sheet is well-positioned to fund growth, CapEx and acquisitions, as we continue to deploy the Standex value creation system. We have an active and healthy acquisition pipeline, with companies that support our business's strategies, and meet our value creation criteria.

Finally, we would like to invite you to our third Investor Day to be held at our Architects for Design Center in Detroit on Wednesday, September 1. Please contact our Investor Relations for more information.

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

(Operator Instructions)

Chris McGinnis, Sidoti & Company.

Good morning, thanks for taking my question.

Good morning, Chris.

Can you just maybe start a little bit, maybe dive a little deeper into the decline on the refrigeration and maybe a little bit of the sense of a couple more quarters here of softness then maybe comes back in the back half of the year. If you could maybe give a couple clues around bridging us to that return to positive growth. Is it more the customer base or is it a combination of maybe new product offerings?

The short answer to that last question is it is the customer base. This is the same markets (inaudible) we've been talking about it the last few quarters, and if we just take these product end-market customers by category, drugstores small footprint retail, CVS, Walgreens, Rite Aid, which have been so important to the refrigeration business over the years, have really reduced their capital spending in the last quarters, we think largely due to the imminent acquisition, Walgreens of Rite Aid.

Once that acquisition is completed, Walgreens will know which stores they will have in Rite Aid, which ones they will need to shed, presuming there will be some changes, and maybe then we will begin their investment plans. We see other drugstores holding off on their CapEx. We believe that's also waiting to see what happens with that investment.

We are talking with all of these companies about rollout plans, they do plan to invest, and timing will be a question we think of these -- of the M&A activity. For the national QSRs last year we talked about McDonald's and Subway, Dairy Queen, Dunkin, Tom DeByle and I have been out in the last few quarters meeting with our business, meeting with customers, and I can tell you that those customers are preparing plans to begin spending in North America, we think that will start in 2017.

McDonald's a year ago was more concerned with increasing their same-store sales, they've had some success, they're ramping up their investment plans. As is Subway and our other national chains. I am confident that will begin to ramp up again in 2017, and the final big element for us was the Dollar Store M&A front.

Family Dollar was a big account for one of our brands. We have not -- we have had very little business in the last few quarters. The contract for the combined entity will be competitively bid in the coming months.

We are competing for it, and that will be 2017 volume. So, of those, the first two categories are really market phenomena and declines in customer spending, the third is the M&A space has affected our relationship and we are working to get back into the Corporation.

Sure. And then, it has been a little while now, can you maybe just talk a little bit about maybe your new product rollout helps stimulate demand, do you think that could be a driver in 2017 or is that maybe a little bit more dated?

New product rollouts in the other cooking, in the other food service businesses, for sure. Cooking and a couple of others, we have got a good momentum of the combi oven, our speed oven is out and ramping up now. Our specialty solutions business rolled out a new Italian style display case, which was well received at the NRA show.

Our specialty pump business has a couple of new applications that I mentioned we had an image in the presentation, so on all those fronts, new products will drive growth. In refrigeration, the biggest impact is the customers turning on their spending again.

Sure. And the maybe just on the engineering, I think last quarter you were thinking that this quarter would be positive. Can you maybe just talk about the disconnect there over what transpired?

If you can follow the Company for a while, you know that the space business that we serve is pretty steady year-on-year business, but it is quite lumpy from quarter to quarter. We had some large domes that were scheduled to ship in Q4, and due to customer schedules and work with our customers, those moved out. Had those shipped, we would have seen the upside. Our aviation shipments were where we thought they would be, oil and gas was about where we thought it would be, and it was the timing of the space shipments.

Okay. Then I guess thinking a little bit about the margin profile for next year, obviously some improvement. I guess just thinking about the gross margin for next year. Should it be in line with the sales pressure you are going to see next year, or should it be -- should we still see some positive momentum in 2017?

I think positive momentum sequentially, because we think with the refrigeration national accounts sequentially we are close to bottom on the spending of those national accounts. The year-on-year comparison, however, will see some pressure on the margins from that, so depends on which way you model it sequentially or year on year. Tom, do you have anything to add to that?

The first two quarters, as we mentioned in the presentation, are going to be a little bit of a struggle.

Then I guess just on the SG&A was a little higher than I expected for the quarter itself. Can you maybe just talk a little bit, dig a little bit into that up year over year, is that largely due to the acquisition?

As healthcare and the acquisition, primarily.

Okay. I will jump back in the queue. Thank you

Thanks, Chris.

David Cohen, Midwood Capital.

Hi. I was wondering if you could reiterate the commentary you had about the tax rate, what led to the relative decline for Q4 versus prior year and what your expectations are going forward?

Yes, we had a 13.9% GAAP tax rate, and our base rate is basically 35%, but with the mix of foreign, our foreign rate is around 23% and then we had the loss on the impact of the roll plate machinery business, which has caused the negative 8.2%, and then the charitable contribution land sale was 2%. We expect, as we said in the Release, to get back to historic norms of about a 29% next year.

And your add back and your adjusted EPS were at that marginal rate, is that fair?

Yes.

Okay. All right, thank you.

You bet.

(Operator Instructions)

Chris McGinnis, Sidoti & Company.

Thanks. Just quickly, you divested something in the quarter on the plate side.

Just looking across the business lines, obviously you have a lot here. Is there need to prune the portfolio as you see it and maybe the opportunity there? Can you just maybe talk about that a little bit more?

Yes. Chris, the history of the Company, if you go back several years, we were 12 different business, we are down to 5 that we see good potential in these businesses, our focus is to build these businesses into more significant platforms. The Board is -- and we're we are constantly looking at our portfolio to see that we have the right businesses and we are able to put capital to its best use.

The projection over the next few years we see growth opportunities in all the businesses. And when we get asked about different businesses, one of the important considerations related to the value creation of potentially divesting some of these is the tax base that we have, which is quite low. The returns we are getting on the business. So, what I would tell you is that the businesses are performing well, we see good future for the businesses. We are not actively seeking to shrink the portfolio for the moment, however, the Board is always evaluating the portfolio. I call it an evolving story.

I guess just on the flip side of that, do you mind talking a little bit about the acquisition prospects that you have in place that are in the works or that [you think is] exciting. In what areas would that be in to expand either geographically or just product offering?

Sure. We are quite active, a very active funnel, active and dynamic funnel, and I would describe it the way I have in previous calls. We see, based on the markets we serve and the fragmentation and the different players in the markets, within electronics, we see a high number of opportunities.

We see some opportunities in engraving. Opportunities in engineering technologies. There are a couple opportunities even in hydraulics, and in food service, we are confident the food service business operationally has turned a corner.

Not a lot we can do about the customer spending in refrigeration, but we're managing our costs, we are managing our margin there. Since we are confident now we have got our hands on the operational performance in food service, we are beginning to look at acquisitions, acquisition candidates both here in North America and abroad. I had to cap them in that order, the order I just went through.

All right. Thank you for taking my questions today. I appreciate it

Right, Chris.

(Operator Instructions)

At this time, I'm showing no further questions. I'd like to turn the floor back over to Management for any additional or closing remarks.

Thank you for everybody dialing in and listening in on our call. As we look at the Business with eight P&Ls in the Business, seven of the P&Ls did well to very well, they'll carry that momentum into next year. In refrigeration, we talked at some length about the end market phenomena they're facing, we've got a couple more quarters of that.

But the work in the margins has been good, you see that reading through. So, we are very confident about all our businesses and prospects, and as we look into this next year, outside the tough comparison we have with the refrigeration and the national customers, we anticipate the momentum in the other businesses will carry through.

We look forward to reporting to you after this next quarter. Thank you.

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