Standex International Corp (SXI) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Standex International's first-quarter 2017 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following the presentation. (Operator instructions)

It is now my pleasure to turn the floor over to Matt Roche to begin.

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

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

In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation, and amortization; adjusted EBITDA, which is EBITDA excluding restructuring expenses and one-time items; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations; and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

Standex believes that such information provides an additional measurement and consistent historical comparison of the Company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's first-quarter new 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. First-quarter continuing sales were primarily affected by soft refrigeration end market conditions as well as a difficult year-over-year comparison in engraving as we reported a record first quarter of 2016 when customers pushed demand from the fourth quarter of the prior year.

While these factors affected our overall profitability in the quarter, our focus on operational excellence resulted in margin improvements in our electronics, engineered technologies, and hydraulics groups as well as in cooking solutions.

In the first quarter, overall revenues declines 9.5% to $179.6 million with the divestiture of the roll plate machinery business contributing 2.2% to the decline. GAAP EPS was $1.09 per diluted share and adjusted EPS was $1.11.

We continued to see softness in refrigeration end market conditions. We communicated last quarter that refrigeration national account spending would remain sluggish through at least the new calendar year, and that is happening.

However, we are experienced operators and we know how to handle a downturn in one of our businesses. We are restructuring in refrigeration and taking costs out to protect margins while conditions are soft. At the same time, we are working with the national accounts that are planning projects for 2017 to position ourselves to get that business.

Our refrigeration business is a good business with good brands, good management, and good employees. Because we have weathered similar storms before in other businesses, we know what to do, and we will weather this rough patch in refrigeration.

Our acquisition of Horizon Scientific also helps here. It is a supplier of laboratory refrigerators and freezers as well as cryogenic equipment for the scientific, biomedical, and pharmaceutical markets. Horizon Scientific strengthens our position in the higher-margin and growing life sciences market.

At the same time, we continued to drive our growth initiatives across our other businesses, and our growth laneways are bringing in new business. Demand is healthy in engraving, which recorded down sales in the year due to a divestiture of roll plate machining and project timing in the automotive market.

In the electronics, engineering, technologies, and hydraulics, end markets remained solid, and we increased profitability in all three.

And finally, as a measure of confidence in the Company's direction, the Standex Board of Directors approved a 14% increase in our dividend yesterday to $0.16 per share. I'll touch more on our achievements in each business when I go through our segment review.

First, Tom will review our first-quarter results. Tom?

Please turn to slide 4, which shows our historical trend of sales and earnings per share on a GAAP and an adjusted basis without US roll plate machinery business or our RPM. The trailing 12-month sales on an adjusted basis were $720 million versus $753 million in the prior-year period, a 4.4% decline.

Of the $33 million lower sales on a trailing 12-month basis, $32 million related to lower refrigeration sales. There are three components to the refrigeration sales decline: dollar store, drug retail, and large chains. Dollar stores were approximately $13 million of the $32 million and are not anticipated to come back in the near future. The remaining $19 million relates to drug retail and large chains and is projected to improve in the second half of our fiscal year.

Adjusted earnings per share on a trailing 12-month basis was $4.36 versus $4.65 in the prior-year period, a 6.2% decrease.

Please turn to slide 5, which details our revenue changes by segment. You can see that two of our five segments reported positive organic sales growth in the first quarter. The acquisition of Northlake contributed 1.4% to our sales growth, while the divestiture of RPM had a negative effect of 2.2%.

Please turn to slide 6, which summarizes our first-quarter results. On an adjusted basis, gross margin decreased 60 basis points against a 7.5% sales decline. Adjustments from GAAP to non-GAAP operating income were $4.4 million this quarter and are itemized on the bridge on the following slide.

Please turn to slide 7, which is a bridge that illustrates the impact of special items on net income from continuing operations. Special items included tax-effected restructuring charges of $0.3 million. GAAP net income was down 13.6%, and adjusted net income was down 17.2%.

Turn to slide 8. Net working capital at the end of the first quarter of fiscal 2017 was $146.6 million compared with $144.7 million a year ago, excluding RPM. Working capital turns were 4.9 compared with 5.4 a year earlier, excluding RPM. The decline in sales volume was a primary cause for the reduction of working capital turns year over year.

Slide 9 illustrates our debt management. We ended Q1 in a net cash position of approximately $17 million compared with a net debt position of approximately $9 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net dept to capital of a negative 4.7% compares with net debt to capital of 2.5% a year ago.

Slide 10 summarizes our capital spending, depreciation, and amortization trends. Key capital spending in Q1 related to an automated panel bender in our foodservice merchandising business, lasers in our engraving business, and a capital to support our aviation business and engineering technologies.

In 2017, we expect that our capital spending will be in the range of $26 million to $28 million, which includes an $8 million carryover from spending from fiscal 2016. Approximately $19 million of our CapEx in fiscal 2017 will be to drive sales and improve productivity. The remainder will be maintenance capital.

Slide 11 details our reconciliation of operating cash to free cash flow. Free cash flow conversion was lower year over year due to lower income from operations, primarily in foodservice, along with higher capital spending this year.

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

Thank you, Tom. Please turn to slide 13, and I'll begin our segment overview with the foodservice equipment group. A disappointing sales decline of 13.6% was driven by continued softness in refrigeration demand as well as a large grocery chain rollout in the prior year at cooking solutions.

In refrigeration, sales were lower by nearly 20% in the quarter as quick serve restaurants, dollar store, and drug stores were sluggish. We have implemented a profit improvement plan to align the cost structure to the lower demand environment and protect its margin rate. At the same time, we positioned the business to capture the planned investment spending that we anticipate from large national accounts in calendar 2017.

Moving on to cooking solutions, sales were down approximately 11% primarily due to a large grocery store rollout in Q1 last year that did not repeat this year and the ongoing elimination of lower-margin commodity products. Cooking solutions remains on track with its product rollout strategy, including the most recent launches of the mini combi oven, the conveyor oven, and the speed oven.

On the operations front, the group continues its positive momentum and has recently returned deliveries to historic performance. Despite the sales decline in the quarter, it delivered 200 basis points of margin improvement.

Specialty solutions was flat versus the comparable quarter last year as the beverage pump business offset soft display merchandising sales. We remain excited by new pump products that will provide our customers with opportunities to offer innovative carbonated beverages, enhanced CO2 safety, and lower maintenance costs.

Looking forward in foodservice, our new (inaudible) focus is to align the cost structure in refrigeration to the lower market activity. We anticipate at least one more quarter of headwinds and believe we are the trough in the small footprint retail and national chain markets.

We do expect improvement in 2017 as a number of our customers will begin to invest in new rollouts. In addition, we will also be focusing on the integration of Horizon Scientific and exploring sales synergies with our NorLake Scientific brand. Lastly, we will pursue innovative sales opportunities and continue with our OpEx initiatives.

After the close of the quarter, we acquired South Carolina based Horizon Scientific, which you will see on slide 14. This acquisition enhances our penetration of the higher-margin refrigeration markets represented by the growing scientific, biomedical, and pharmaceutical sectors. We look forward to offering Horizon Scientific's well-respected products and working with its customer base and channel partners to expand sales of our NorLake Scientific brand into these markets.

Horizon Scientific brings us an experienced management team and we welcome the opportunity to build a strong position in these markets.

Turn to slide 15, engraving. Adjusted sales, excluding roll plate machinery, were down 8.6% largely due to a difficult comparison with the first quarter of 2016 when we reported a record quarter partially due to timing issues. We also had a sales interruption in July of this year at our plant in China due to a lightening strike that damaged essential equipment.

Our new growth laneways demonstrated good progress in the quarter. Nickel shell's sales are tracking well in North America and China while laser sales continue to ramp in all regions. Our architecture design services are growing and delivering tremendous value to our OEMs.

A special thank you to those who could attend our investor day at the Architecture Design Studio in Detroit. I hope you were all able to gain a better understanding of our engraving business and see first hand the type of value and expertise we offer customers.

So despite the perfect storm of events that negatively impacted the engraving top line in the quarter, we remain bullish going forward. We anticipate a strong Q2 across all regions as we focus on expanding sales in traditional and new offerings.

Please turn to slide 16, our engineering technologies group. Overall sales were flat year over year. Organic sales grew 2.4% countered by 2.3% of negative currency. Aviation sales grew 7.6% despite delivering push-outs by a major engine supplier. Oil and gas and energy shipments were flat as that market has reached its bottom.

Partially offsetting the aviation growth, we experienced lower demand in the medical industrial markets and delayed shipments on space programs. Segment operating income increased due to a favorable mix of sales in the quarter as well as margin improvement initiatives countered by production inefficiencies in the space sector.

The key growth laneway in this business is aviation, and our ramp-up continues as we create capacity to fulfill customer needs. Our new Aluminum Center for Excellence in Wisconsin is up and running and delivered product in Q1. We remain on track to meet Airbus' production increase by the end of calendar 2017.

We continue to pursue new business opportunities. In fact, during the quarter, we were awarded a new aviation part in Europe for the A400 military fighter. This will be supplied out of our UK plant. In addition, we secured a long-term agreement for MRI [heads] from a prominent maker of medical equipment.

And looking ahead, we are continuing to reposition the business to capitalize on aviation demand and expand capacity to support existing contracts. We expect the second quarter year-on-year sales comparison will continue to be impacted by lower medical and industrial sales.

Please turn to slide 17, electronics. Electronics sales increased 9.5% primarily due to the Q2 2016 acquisition of Northlake. Legacy business sales were up in Europe, but partially offset by decreases in North America and Asia.

In addition, growth laneways delivered $1 million in sales. Operating margin was strong at 21% due to cost savings activities, operating efficiencies, and labor improvements. Censors were up from the prior year and we're accelerating growth laneways on censor technologies through market tests.

We see new business opportunities for censor technologies in industrial, automotive, and security markets, and for magnetics in power distribution, electric vehicles, and medical devices. We expect our new censor programs to continue to drive growth in fiscal 2017. We are also focused on executing a Shanghai facility move due to a Chinese government mandate.

Our hydraulics group, as you can see on slide 18, slowed in Q1. Sales were down 1.1% year over year primarily due to a flattening in the North American dump truck, dump trailer, and refuse markets. The export market was also down approximately 20%.

Operating margins were 19.6% in the quarter due to better cost position from increased China shipments, productivity efforts, and improved mix as the aftermarket grew as a percent of sales. We completed our China expansion in September as we installed and commissioned all major equipment.

Looking forward, although our end markets are still strong, we anticipate a seasonal softening in the second quarter. We are focused on selectively adding distribution partners for key market coverage, exploring hydraulic solution applications, and testing new cylinder designs. And we continue to pursue new business opportunities in all markets as we utilize our operational excellence toolkit throughout the business.

Please turn to slide 19. In summary, we experienced headwinds to the top line in our businesses in the first quarter as a result of a combination of end market demand, difficult comparisons, and timing issues. Refrigeration is a subject of intense near-term focus. We anticipate national account spending will remain soft at least through this quarter. We are implementing cost actions and margin protection measures to follow the reduced volume.

Finally, we are excited by the acquisition of Horizon Scientific, which strengthens our position in a higher-margin and faster growing segment of the refrigeration market. We remain encouraged by new business opportunities and growth laneways across our businesses. At the same time, three of five businesses showed improved profitability because of our aggressive actions to enhance our margin profile through lean and our operational excellence initiatives.

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.

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

(Operator instructions)

Chris McGinnis, Sidoti & Company.

Good morning. Thanks for taking the questions. Could we start on the food side and on refrigeration? And just, I guess, how do you see this play out? I know we've got another quarter of this, but it sounded like maybe last year you had a little bit stronger sales, so next quarter maybe the impact won't be as bad. But I guess, do you see the back half of the year maybe positive in growth, or are we kind of maybe just muddling along outside of the acquisition of Horizon?

Yes, okay, outside the acquisition of Horizon. So as Tom stated, we're at the trough on the spending of the national accounts. You look year on year, this is the quarter we lap that. The national accounts we have -- I'm sorry, this coming quarter too. We were still spending from the national accounts last year. So Q3, that's lapped.

But you talk about our accounts -- and this is public information -- McDonald's is planning building 400 stores. Tim Hortons is going to build 20 stores in the US. CVS is ramping up their THH, take high higher program. Subway's rolling out their restaurant of the future. Now, those are plans -- we are the selected provider for those companies. But we haven't got the orders yet. So their plan is to roll those out in 2017. If they do, that will flow through as growth in refrigeration.

Okay. And can maybe you just discuss a little bit about the margin profile on Horizon, where it sits, and maybe the opportunity with Northlake, and cross-selling opportunities, and just how it fits in the portfolio?

Yes, let me start with the last question first. So Horizon Scientific and NorLake, normally it does have a segment we sometimes talk about that sells into that end market with select cabinets and freezers. And it's a small part of the overall business. And we've tried to grow it, but we didn't really have the focus in the business. Horizon Scientific is entirely focused on that segment. And over the last few years, they've grown double digits consistently. Their margins are -- they will mix up the margins of the refrigeration business.

This is a higher-margin segment, a little faster growing. It's more dynamic. I mean, every year there's a need for new designs and new concepts. So we think the strength that Horizon has in the channels creates pull-through opportunities for NorLake. And our hypothesis, we believe, is NorLake is a higher-end offering, so this completes a product family for the scientific end markets.

Great. And I'll ask one more, then I'll jump in queue. Just on the engraving decline, how much of that was -- the first half of last year was really, really strong; slowed in the back half of the year. Should we see similar sales trends in Q2, and then improve in the back half of fiscal 2017?

Well, we stated we expect Q2 to be strong and we do, and continue into next year. If you look at industry data for auto rollouts, I mean, the new model rollouts are expected to continue to grow through 2019 globally. So we remain bullish about the end market we serve.

And in fact, if you watch this market, this business for a while, it can be kind of lumpy from quarter to quarter. So we look at this last quarter, it was primarily just the lumpiness and the timing of the projects. We did have a little interruption in China. We had a lightening strike that took down one of our machines for four to six weeks, and so that impacted us a bit too.

Great. Thanks for that. I missed your comment. Appreciate it.

John Cummings, Copeland Capital.

Hi. Good morning, guys. I just wanted to know -- or I was just wondering if you could comment on the competitive environment in foodservice? And then just curious if you guys have any data or sense of any market share losses that you guys might have taken this year?

Yes, so when we look at it, we split it by segment. So we look at sort of day-to-day business that goes through dealers and buying groups, and we're trending with the market; maybe slightly above market there. And then we look at the large national accounts. With the list of accounts that we've gone through, McDonald's, Walgreen's, CVS, Subway, we haven't lost share there, but they were just in a spending drought in the last year to 18 months.

The Family Dollar acquisition by Dollar Tree, the Dollar Tree incumbent is getting that business; we're not. So that's the one area where there was a share loss. And so our anticipation of that is those two business are still integrating, still coming together. We think it's probably maybe this time next year that they go out for bid and try to create some competitive tension in the refrigeration category.

Okay. And also on foodservice, I was just curious if you guys [could] comment on any, I guess, progress you've made on the factory move in Nogales, and if there still are any inefficiencies or issues there, or are things running smoothly at this point?

If ever you were in the Nogales area, which you wouldn't go there unless you were visiting us -- would love you to visit the plant. We're very proud of the way the plant is performing. I mentioned that they were at their historic performance and delivery levels, so they have -- they're through that transition. They are operating as well or better than they did in Cheyenne. So it was a rough 18 months, two years.

Of course -- Tom's pointing out there's room to improve. There's always room to improve. There's always room to improve. But no, we think we're back at least to where we were, and that team's starting to become more aggressive about recapturing some of the business they probably lost during that move.

Okay. And then I'm just curious on the Horizon acquisition, and maybe just in the scientific refrigeration space in general, can you quantify the growth that they've been seeing there?

Well, I mentioned double digits. So they've been growing double digits for the last three, four years.

Okay. That's helpful. And then on the engraving side, I think last quarter, you mentioned that you were sort of expecting flat to slightly down for the auto piece this quarter. And then it seems like things maybe were worse than you were expecting. Is that accurate? And then just maybe can you talk about why or what happened?

Well, maybe slightly worse, but sort of within margin of error, I would say. It's just based on project timing. And then the China impact, if you were to look out at the engraving performance over the last few years quarter by quarter by quarter, you do see occasional quarters where it peaks and occasional quarters where there's a little dip. And that is just a function of customer schedules and rollouts and project timing. So we don't have any concerns about that quarter.

I would point out that in the quarter, we saw growth in all of our new offerings: laser, nickel shell, architecture, welding and polishing. And the traditional chemical etching was the decline. So we remained encouraged about the new offerings and we think the chemical etching tradition was just simply a project timing issue.

Okay. And then one question on the aviation side in the engineering technologies segment. I'm just curious how much of your business there is aftermarket versus new builds? And then just how hard is it to win new business there given all the regulation and --?

Yes, that's a great point. First of all, little to no aftermarket. I mean, the parts that we make, we make parts in Enginetics that go in the hot side of the engine. If there's potentially an engine overhaul, there might be a part they'd look at, but it's not really a part that wears. And then the lip skins that we make, they'd have to be hit by a ground vehicle or something and cracked to be replaced. So it happens, but it's rare.

And the other part of the question was just how hard is it to win new business given all the regulation about safety and whatnot?

Well, there's two things. On new platforms, most of our business is in the new platforms. That's out for bid, and it's just a normal competitive environment. And we think for parts where we are bringing our formed process, we have a competitive advantage over traditional forged machine parts.

It is somewhat more difficult to displace an incumbent supplier on legacy platforms. But we do succeed in doing that because the -- especially the Enginetics process. Also the recent wins we just announced today in the UK, our forming technology allows us to deliver the same part with the same specs at lower cost. And Rolls-Royce, for example, we've talked in the last year about Rolls-Royce -- our wins with Rolls-Royce are all displacing incumbents because we bring a cost advantage. So it is somewhat more difficult, but we are succeeding.

Okay, great. Thanks. And then just lastly, can you just give us an update on capital allocation? I know -- maybe just talk about your dividend versus buyback versus further acquisitions.

Well, we have our playbook. And basically, the number one is our capital. I mean, our internal capital spending is the least risk. And then we do have -- we're out actively looking for acquisitions and we have an active pipeline where we can have bolt-ons. And then we did increase the dividend. Every year in October, the Board looks at our payback ratio, our dividend yield. And we looked, and we increased it the $0.02 or the 14% yesterday.

And with the buyback, we announced a buyback a couple quarters ago that we were authorized. And we bought back about 37,000 shares. And this past quarter, we just wanted that as part of our toolkit, and we have an opportunity, should we not have other opportunities with capital or acquisitions, to employ a buyback or a disruption of the market price.

All right. Thanks, guys, for taking the questions.

Chris McGinnis, Sidoti & Company.

So just, I guess, following up on the engineering real quick. Obviously nice to see positive momentum come out of the quarter here and that turning around. Would you expect that to ramp throughout the year as you start to see more, I guess, the pace of deliveries pick up?

Yes. Yes, that's clearly the expectation. The current schedules we have from the aviation customers in particular reflect that. Although you know that we have parts on the geared turbofan, and there's a lot of news about the geared turbofan and some delays in that production. That will affect us a little bit.

We've had some pull-in from other parts from GE that, for the moment, kind of balance for the year. But there's somewhat of a ramp-up through Q3, Q4. We will still show growth and progress year on year through Q3, Q4 from that aviation ramp-up. And we're just -- the different platforms that drive that, the mix will be maybe a little bit different than we forecast because of some slowdowns in the geared turbofan.

Sure. And then I guess just lastly, obviously I know you have an EBITDA margin target out there, and you're doing a great job in terms of increasing the margin profile of the Company.

Can you just maybe talk about some of the initiatives you're working on in terms of lean? And it's obviously paying dividends, but how much is left in that? And I guess, maybe how far along in the program of lean and sigma initiatives are you -- 50%? Or can you maybe just give us some detail behind that?

Yes, that's a great -- I'd say we're in the second inning in general. We've got some businesses that are a little farther ahead, some that are a bit behind. I think foodservice is probably in the second inning. There's probably plenty of room to go and to grow. If you were to go to the Nogales plant, you'd see tremendous improvement over the last couple of years. We're very pleased with the team. But they've got aggressive targets, and they see a lot of improvement ahead of them.

So yes, for lean aficionados, there is never an end to the journey. And being in the second inning, I think we've got plenty of room to grow.

Great. Thanks for taking the questions today.

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

All right, thank you, operator, and thank you, everyone, for joining us this morning. We look forward to updating you on our business next quarter.

Thank you for participating in Standex International's first-quarter 2017 earnings conference call. You may now disconnect.