Standex International Corp (SXI) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Standex Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. (Operator Instructions)

I will now turn the conference over to Mr. David Calusdian. Please go ahead.

Thank you, Crystal. 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 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'd 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, purchase accounting, acquisition-related expenses and onetime items.

We will also refer to 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 fourth quarter news release.

On the call today is Standex's Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle.

Please turn to Slide 3 as I turn the call over to David.

Thank you, David. We ended the fiscal year with a strong fourth quarter, and I first want to be sure to thank the hardworking, innovative and agile employees of Standex around the world. It's a pleasure to come to work every morning and face our world together.

Overall revenues increased 4.8% to $227.5 million, with organic sales up 1.2% and acquisitions up 1.8%. We had backlog growth of 10.3% and strength across our end markets. Operating income was up 28.2% in Q4, and adjusted operating income increased 11%. GAAP EPS was $0.99 per share, while adjusted EPS grew 14.3% to $1.60 a share.

We had a net debt position of $84.2 million at the end of Q4. We delivered top line organic growth in Electronics, Engraving and Hydraulics businesses as we advanced growth laneways, capitalized on Piazza Rosa and Standex Electronics Japan acquisitions, and supported broad-based growth in our end markets.

We continue to advance our restructuring initiatives in the Cooking and Refrigeration businesses, which helps deliver a 70 basis point improvement to Food Service margins in Q4 even with a softer top line growth in the segment. Although Engineering Technologies sales and margins were challenged in Q4 as expected due to the anticipated aviation ramp delay, we are optimistic that the operational improvements we made in the business are beginning to yield results and positions Standex to capitalize on the long-term growth potential in the business. And finally, Hydraulics, as expected, had another solid quarter, as we leveraged our strong backlog and capitalized on improving market conditions in all sectors.

Please turn to Slide 4. On a full year basis, sales were up 15%, reflecting double-digit organic growth for the Engraving, Electronics and Hydraulics business, and strong contributions from acquisitions as we benefited from a full year of Standex Electronics Japan and nearly a full year of Piazza Rosa. As our business mixed to higher-margin businesses and we improved performance in lower-margin businesses, our adjusted operating income grew 17.8% and adjusted EPS grew 13.6%.

We are entering 2019 with great momentum, with visibility into a diverse set of growing end markets, strong performance across our growth businesses and restructuring improvements that are beginning to read through.

Our team is making excellent progress deploying the Standex Value Creation System across the organizations, and we are confident that we are on the right path to deliver on our long-term financial targets. We are fulfilling our mission for Standex to be a best-in-class operating company that delivers sustainable shareholder value.

With that, Tom will review our fourth quarter results. Tom?

Thank you, David, and good morning, everyone. Slide 5 shows our historical trend of adjusted earnings per share and sales on a GAAP basis as well as on adjusted basis. On a full year basis, GAAP earnings per share were $2.86 for fiscal 2018, which compares with $3.65 for fiscal 2017. Our adjusted earnings per share for fiscal 2018 were $5.17 versus $4.55 in the prior year, which is a 13.6% increase. It's worth noting that this is the first time in Standex's history that the company's adjusted EPS had been greater than $5.

As shown at the bottom of the slide, our revenue and earnings performance this quarter were consistent with our historical seasonal trends.

Please turn to Slide 6, which details our revenue changes by segment. Overall, organic growth was up 4.8% in Q4 with 3 of our 5 businesses demonstrating organic growth, namely Engraving, Electronics and Hydraulics. On a full year basis, 4 of the segments demonstrated organic growth. The acquisitions of Horizon Scientific, Standex Electronics Japan and Piazza Rosa contributed 7.9% to our full year sales growth. Although foreign exchange had a positive impact of 1.9% contribution in fiscal 2018, we expect FX to be a headwind in 2019 given the strength of the U.S. dollar.

Please turn to Slide 7, which summarizes our fourth quarter results on a GAAP and adjusted basis. Q4 operating margin was up 210 basis points on a GAAP basis, and up 70 basis points on a non-GAAP basis. Earnings per share was down 10.8% on a GAAP basis. This is primarily driven by the impact of the new tax law relating to foreign withholding taxes on repatriation of foreign cash. On a non-GAAP basis, EPS was up 14.3%.

Please turn to Slide 8, which is a bridge that illustrates the impact of special items on net income from continuing operations for the quarter. Tax-effected special items included restructuring charges of $1 million, acquisition-related costs of $0.6 million and discrete tax item of $6.3 million related to the new tax law as mentioned on the previous slide. GAAP net income was down 10.7% and adjusted net income was up 14.4%.

Please turn to Slide 9, which summarizes our fiscal 2018 results on a GAAP and adjusted basis. 2018 operating margin was up 110 basis points on a GAAP basis, and up 30 basis points on a non-GAAP basis. Earnings per share was down 21.6% on a GAAP basis, driven by the effect of the new tax law. Adjusted earnings per share was up 13.6% on a GAAP basis.

The next slide is Slide 10, which is a bridge that illustrates the impact of special items on net income from continuing operations for the full year. Tax-effected special items include restructuring charges of $5.7 million, acquisition-related costs of $2.8 million, discrete tax items of $20.8 million related to the new tax law and $0.2 million of purchase accounting. GAAP net income for fiscal 2018 was down 21.3% and adjusted net income was up 13.9%.

Turning to Slide 11. Net working capital at the end of the fourth quarter of fiscal 2018 was $171.7 million compared with $150 million in the prior year. Working capital turns decreased to 5.3 from 5.8 in the year-ago period due to working capital needs from sales growth and changes in business mix.

Slide 12 illustrates our debt management. We ended Q4 in a net debt position of approximately $84.2 million, a decrease of $24.2 million since the third quarter. We define net debt as funded debt, less cash. Our ratio of net debt to capital was 15.7% compared to net debt to capital of 19.5% last quarter.

Please turn to Slide 13. Overall capital spending in 2018 came in at $26 million, slightly below our expectations of $28 million due to the timing of projects. Looking ahead, we are committed to increasing our capital spending in 2019 to the range of $35 million to $36 million to support our strategic priorities, including $5 million for the new Electronics plant in Cincinnati. We expect our depreciation in the range of $22 million to $23 million, and amortization in the range of $8 million to $9 million.

Slide 14 details a reconciliation of our operating cash to free cash flow on a non-GAAP basis. Conversion of free operating cash flow was 198% for the quarter and 77.1% for the fiscal year. The adjustment of free operating cash flow for the quarter and year was $5.5 million for a voluntary pension contribution made during the quarter at a higher tax rate to take advantage of the benefits available during the transition to the new tax rates. The adjustments to net income included a $6.3 million for the quarter and a $20.8 million for the year related to the new tax law.

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

Thank you, Tom. Please turn to Slide 16, and I'll begin our segment overview with Food Service Equipment Group, which, as a reminder, includes 5 independently run P&Ls that each address unique markets, customers, buyers and competitors.

Revenues for the segment decreased 2.4% (sic - see slide 16, "2.2%") in Q4. Our Scientific and Specialty Solutions businesses achieved double-digit growth as we capitalized on new product rollouts and new business opportunities. However, this growth was more than offset by lighter Refrigeration order volumes from dollar stores and chain customers as well as lower customer rollouts in our Cooking business and a slower-than-expected ramp of sales to dealers from our Nogales plant. Despite the top line decline, operating income grew 70 basis points as we began to realize the benefits from the restructuring efforts in our Cooking and Refrigeration businesses.

Looking ahead, we remain focused on factors that we can control. These include growing differentiated products through expanded market tests, NBOs, growth laneways and capitalizing on the improved productivity in our Refrigeration and Nogales plants to deliver continued margin improvements.

We anticipate continued growth in the Specialty Solutions business, led by strong new business opportunities for espresso and display merchandising. The Scientific Refrigeration outlook is also strong due to new product rollouts, backlog, and order intake. Note that the tariffs could have accelerated demand in the fourth quarter, and we are closely monitoring those dynamics.

For Cooking in the coming quarters, we expect to see growth from our speed oven as well as several BKI offerings. We have also been pleased with the early traction for our recently introduced 14-inch fryer, where orders are already tracking ahead of plan.

A key focus for Cooking is to recapture business lost during the operational performance problems stemming from the plant relocation. These new product rollouts are expected to improve our year-over-year comparisons in the first half of FY '19. The softness in Refrigerator dollar stores, however, is anticipated to continue to impact Q1 with a recovery expected in the second half of fiscal year 2019.

Turning to Slide 17, Engraving. Sales increased 28.6%, driven by demand for new technologies, including laser, tool finishing and nickel shell. Sales in new technologies grew 169% and contributed $6.1 million of the $8 million year-over-year sales increase. We reported strong growth across all geographies with sales from new automotive platforms from major OEMs. Finally, our Piazza Rosa acquisition also contributed to sales growth as we spread their technology across all our geographic regions.

Operating income in Engraving was up 36.1% with a margin of 21.6%. Looking ahead, we continue to focus on capitalizing on growth from laser, tool finishing and nickel shell technologies, and expect to spend approximately $10 million on capital investments to support these new technologies. New model rollouts should remain robust for the foreseeable future.

Earlier this month, we closed on the acquisition of Michigan-based Tenibac-Graphion, a provider of chemical and laser texturing services, tool repair services and prototype parts, primarily for automotive customers. By bringing on Tenibac-Graphion's suite of mold and tool texturing services, we are expanding our offerings and accessing a highly skilled workforce that will be essential to our rollout of new offerings in North America.

Please turn to Slide 18, Engineering Technologies. Sales were down 14.9% with softness as expected across most end markets. Space sales were down $2.8 million or 29.5% due to customer delayed shipments into the first month of the fiscal year, common in this business. Aviation was down slightly as programs have been delayed as anticipated. Aviation volume should increase in the second half of fiscal 2019, though we anticipate another soft quarter.

Operating income was down 32% with margins of 10.4% as a result of market mix and lower volume leverage. On the positive side, as we exited the quarter, we saw early signs of improved profitability. Our backlog was up 21% from the prior year. Demand is building in this business. Going forward, we are focused on leveraging the investments we have made to support the upcoming aviation ramp, delivering on the growing backlog for critical engine parts and lip-skins, and executing on our operational excellence initiatives to improve operating efficiencies.

Please turn to Slide 19, Electronics. Electronics sales increased 15.4% and backlog is up 13.1% with double-digit growth in all regions and solid performance across all end markets and in all product categories.

Standex Electronics Japan continues to perform exceptionally well and contributed to the strong performance this quarter. Operating income was up 29.1%, and we reported a margin of 26.2%. We have improved reed switch profitability through the sharing of best practices across our plants in driving process efficiencies.

Looking ahead, we expect strong growth to continue across all regions; and our total backlog billable under 1 year is up $7.4 million or 13.1%. Request for quotations are increasing, and there is a solid funnel of new business opportunities. At the same time, component and material lead times continue to stretch out and remain a challenge. We anticipate a $13 million capital investments in Electronics, including $5 million for a new plant and headquarters in Cincinnati.

Please turn to Slide 20, Hydraulics. The 19.5% sales increase in the Hydraulics was driven by a strength across all sectors, including major Refuse customers, new applications and Dump Trailer cylinders. Orders were strong, and we exited the quarter with backlog that was more than double the prior year period.

In addition, overall operating margins were back to normal levels at 17%. And operating income increased by 16% as we began to realize the benefits from proactive pricing actions and capital investments earlier in the year.

We remain optimistic about the future of this segment as we continue to leverage the strong market environment and pursue market tests to grow the business. We expect robust demand for the remainder of calendar 2018 in the Refuse, Dump Trailer and Aftermarket as conditions in construction, housing and infrastructure remain strong.

Tariffs are a key concern, however; and if in effect for the full year, will increase costs in the range of $2 million to $3 million in FY 2019. We believe we will be able to pass through much of this cost. In addition, steel pricing continues to rise and could be a bit of a headwind, which we will mitigate with capital investments, operating efficiencies and pricing actions.

Before we go to questions, let me leave you with a few key thoughts as shown on Slide 21. First, we reported organic growth of 1.2% for the fourth quarter and 5.2% for the year, with double-digit organic growth in Engraving, Electronics and Hydraulics for the fiscal year.

Second, we are taking actions to continue improving margins. Food Service margins have improved during the fourth quarter, and we expect positive momentum as we progress in fiscal 2019. The emerging new platform ramp in aviation will grow volume of higher margin parts in Engineering Technologies.

Third, our recent acquisitions are performing well, including a nice contribution from Piazza Rosa in Q4, and we are excited about our recent addition of Tenibac-Graphion to the Engraving group.

And finally, with a strong balance sheet, we are well positioned to invest in both organic and M&A growth.

We are proud of the hard work of the Standex team across the organization and appreciative of our shareholders. We look forward to keeping you updated as we continue to execute against the Standex Value Creation System and position Standex to fulfill our mission to become the best-in-class operating company. We are entering 2019 with strong momentum at our backs, and we remain excited for the opportunities ahead at Standex.

And with that, we'd be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Chris Moore with CJS Securities.

Maybe we can start just with the acquisition just -- can you talk maybe a little bit further about how it's complementary to the existing Engraving business, is there much customer overlap, those types of things?

[The views of] the auto industry, they have some different relationships than we do, although we serve different programs in different customers and we serve different programs in some of the same customers. Our primary interest in this business is really long term, having access to the skilled workforce they bring so we can train them in these new rollouts we've been talking about for the last year, nickel shell or laser engraving; tool finishing, in particular. So I think, this positions us to increase share of wallet in the Detroit-based OEMs.

Got it. And I'm not sure if I missed. Have you given -- what was the purchase price at this point?

We're going to file an 8-K today. So it's about $58 million.

Got you. Okay. And staying on Electronics just for a second. I mean, looking at the sales mix with switches and sensors being in the high 30s, magnetics in the mid-teens, and relays the balance. What -- looking out maybe 2 to 3 years, do you see that mix changing significantly and what is the margin implication on that?

Yes, that's a great question. We see similar -- if you just think about organically, if you just locked on the business we have today, we think the sensor and the reed switch businesses slightly higher growth end markets, but you were talking about 0.5 point or 1 point faster than the magnetics business. So over time, I wouldn't expect organically for that mix to change.

Now we have communicated in the past, though, that we're quite interested in working an acquisition funnel to build up on magnetics business. We think there's an opportunity to make that a more global business and expand our reach into other industries. So if there is a change in the mix, it would come from acquisitions in more magnetics businesses.

Got it. And with that -- if, assuming it was on the magnetics side, does that have a significant impact on the overall margin for the segment?

Well, first of all, this quarter was fantastic for this business, a 26% EBIT...

No, absolutely.

Yes. So we are very pleased with that. But in the past, we've communicated that we think long-term expectation for this is kind of in the low 20s: 21%, 22%, 23%, 24% is what we'd expect this business to be over time. And that would include growth in our magnetics as well as our sensor and switch business.

Got it. Okay. Let me just switch to the Engineering for a second. So given where you are from kind of platform standpoint, what would have to happen for Engineering margins in fiscal '19 to be in that 12% to 13% range? Is that too aggressive from where you're sitting today or is that possible?

Well, I'd zoom out a little farther and say what we have communicated, we believe, and we see this in this business that as aviation ramps up, this business can deliver consistently EBITs above 15%. And much of that is dependent on the pace of the ramp of the aviation of these new parts for aviation; some of the new engine parts. So with the -- so fiscal year '19 will be a step in that direction, but we'll have to be at a full volume in the ramp for those new parts, which is probably into calendar '19 to '20.

Our next question comes from the line of Chris McGinnis with Sidoti & Company.

Can you maybe just talk a little bit about the improvement in Food Service on the margin side, what you did specifically and where you expect the rest of the margin profile to come from over time?

Yes; you may remember, I think, last year -- in this call, last year -- we announced like $3.5 million restructuring in Food Service. So we've -- if you were to -- I don't think you've been to our Nogales plant, but if you were to walk through the Nogales plant a year ago and today, you'd see the layout has completely changed. We've got Kanban inventory in almost all the work cells. We have much less work in process, less raw material. We've improved the flow through that plant, and we did that with a series of very aggressive improvement events that we leveraged an external facilitator to help us do that.

On the Refrigeration side, we did -- we conducted similar events in both our New Albany and our Hudson plant; but we also moved our cabinet production from our Hudson, Wisconsin, plant to New Albany. So our New Albany plant now does all of our cabinets for the Refrigeration business. Our Hudson plant is a walk-in focused plant.

And so that was significant restructuring in this past year. So we -- in -- on both of those fronts, despite the fact that volume was down, we saw margin flow through as we expected.

Okay. And I guess, just thinking about that business overall the next year, is there an opportunity maybe on the Scientific side more so than, obviously, the other components, but -- on the acquisition side? Is there some healthy opportunities within that to grow that piece of the business?

Well, we have been investigating and looking at related businesses in that Scientific business. We like that Scientific space. It's very dynamic. There's a lot of opportunity for innovation. Our own Scientific Refrigeration businesses continues to roll out new products. So we are looking at -- not necessarily other Scientific Refrigeration businesses, but other scientific product or component businesses that maybe we can leverage our channel relationships and increase our exposure to that market.

(Operator Instructions) And our next question comes from the line of Liam Burke with B. Riley FBR.

David, staying on FSEG, could you give us a sense as to the progress you're making on adjusting the product line in terms of eliminating unprofitable product and coming out with the -- strategically, the best margin product to the market?

Yes, I think, there actually was -- we didn't call it out. There was this sense of -- this last year, there still was some rationalization in Cooking as we continued to trim that product line. We're nearing the end of that. There maybe a few million dollars more left in that. We did call out that in Cooking, we've got this new 14-inch fryer from Ultrafryer that's really off to a good start. The speed oven, there's some promising opportunities with speed oven with the new products. And the improvements in the Nogales-based products have more to do with the operational improvements in the factory, improving delivery and there -- our throughput there.

So to answer your question about retooling the product line in Cooking, I think, we're about there. Now it's about sales and volume. And getting the new products into new -- out of the test kitchens into rollouts, and also getting that volume back from the dealers into the Nogales business; that plant is operating well.

The Scientific business is rolling out a new product line from the Nor-Lake Scientific business, our legacy scientific business, in September. We're very excited about that. And so it's really in the standard businesses, the Refrigeration and Cooking, where that's been an issue. So I think, I covered the key product categories there.

And on Engineering, how has the Energy business been? I mean, I know you pretty much outlined it as it's hit critical mass; it's where it should be in relation to the rest of the revenues. But are you seeing any lift there?

I'd say modestly. We are getting some more inquiries, but we'll stick -- we're still sticking with the expectation that it will kind of ride about at the level it's at in the Engineering Technologies business. Despite the fact price of oil is like nearly $70 here in the U.S., we are not seeing a corresponding pickup in that Energy business.

Okay. And then Tom, real quick, very quickly. I know you have a maximum debt-to-EBITDA ratio of 3.5, you're well below that. You have plenty of liquidity for acquisitions. But, all things being equal, what is a comfortable leverage ratio for you on the balance sheet?

Well, it varies. But we don't want to go up above 3, basically. That would be getting a little bit over our skis but -- so between 2 and 3, we're comfortable with.

(Operator Instructions) And our next question comes from the line of DeForest Hinman with Walthausen & Company.

Just help us with the big picture understanding of the Electronics, the reed switches. I mean, just really fantastic results there. I know you said the margins potentially moderate over time. But maybe help us understand, well, why were margins so good in the fourth quarter?

Well, volume was great. We certainly leveraged our plants. We had a good product mix with switches and sensors and high-margin rates. It is a historically high EBIT rate for us in the quarter. So we just think it was a combination of several things: great mix and rapid top line growth that we leverage.

And can you help us understand those end markets? I know you broke down the different components products. But is it auto, is it appliances, is it something else, is it all of those? Why is the organic growth so good?

Well, it's all of it. The reed switches and the sensors we're making go into auto, they go into new appliance, go into consumer goods, into defense, aviation, medical, toys. You find them everywhere. And so actually for that business, we think, kind of GDP plus 1 or 2 is a good proxy for the overall market growth because it literally does go into -- nearly all end markets.

Well, you're clearly growing faster than that. So are we taking share through innovation? How are we getting those above-market growth rates?

There's 2 things. One is, we're moving up the value chain. So where in the past we would sell, say, every switch for $0.10, where we've been able to win the sensor, we're able to sell a sensor for $1. It's going into the same application, we just get a larger share of the wallet.

Secondly, there is -- the global reed switch market is very close to capacity. So we have been selling into the most-attractive opportunities. So there's a little bit of a mix up to the higher-priced opportunities because we're filtering the new business opportunities that we are recording.

In that, can you give us a little bit more color about the capacity addition, Cincinnati? How fast can that facility be completed? And what type of return hurdle are you using on that investment?

The return hurdle for all of our investments, whether acquisition or CapEx, is 15% IRR. We look at the cash on cash returns with conservative assumptions.

Now the Cincinnati investment -- the Cincinnati plant actually is basically, it's a magnetics business. We do high-value, mission-critical magnetic parts there, and it's also the headquarters for our global Electronics business. The capacity discussion is more to do with the reed switch, and there, we're adding capacity in our reed switch plants around the world in, principally, in Japan and also in Germany.

Okay. So it'd be $15 million, total?

$13 million.

You're talking about the CapEx? Yes, we said $13 million CapEx for the business, $5 million of which is the Cincinnati plant and new headquarters.

Okay. And then on the acquisition front. I think, you touched on it a little bit, but just to make sure we're clear on it. Where is the focus from a segment perspective on the M&A front? And what type of multiples are we seeing? And what are we willing to pay?

Yes, so I'll start with the segments. So last year -- I think last year in the same call, we announced that we took a different approach to acquisitions, whereas Standex has always made -- steadily made acquisitions. We, in the past -- we, I would say, responded to opportunities in the market. A year ago, we dedicated a small team to look at Electronics, first magnetics, then sensors; to go to the trade shows, get the trade association membership rosters, profile the companies; create a universe of opportunities; reach out to the owners, proactively create opportunities. So in magnetics, in particular, there are a lot of opportunities. There are a fewer number of opportunities in sensors, in Electronics. But Electronics is an area where there really are a large number of opportunities.

In Engraving, it's such a unique business and a unique niche, there are relatively few opportunities. There are a few out there, and we're pursuing a fairly active funnel in Engraving as well. We earlier got a question about the Scientific business. We have looked at acquisition opportunities in Scientific as well as around our Procon pump business, which is a custom-engineered pump.

So in that order, that's where our internal activity is in building up the funnel: in Electronics, both magnetics and sensors; Engraving; and then Scientific and pumps.

Okay. That's helpful. That's the first part of the question. Second part, what are the multiples looking like across those?

Okay, multiples. One or two calls ago, for our investor presentation, we showed that the last 6 deals we've done -- our average multiple, we paid 7.6x trailing 12, and that ranged from a little 7 to, I think, as high as 10. And depending on the specific deal we're looking at, they come in 2 categories. There are many opportunities we're pursuing, where they're a privately held businesses, where the owner is reaching an exit point, interested in finding a buyer. We have a great track record of buying businesses, giving them access to capital and channels, and helping them grow. And that's kind of a typical acquisition. I would say, those are traditional valuation metrics and multiple is a good expectation.

Now in Electronics, in particular, we've had a good track record integrating acquisitions, making estimates of synergies, both sales and cost. And we're looking at some opportunities where there is a process. Now the multiples in -- for deals, [one of our] process, of course, are higher, and now are running at 9 to 12 and above. And so our guideline there is we've got to show a 15% IRR on the acquisition with conservative assumptions. And especially in Electronics, we've got a track record that -- we're looking at some deals like that, whereas in the past, we -- Standex didn't go there.

Are you willing to walk away if it's below the 15% or will you go lower?

We've walked away just a couple of times in the last few months.

Our next question comes from the line of George Godfrey with CL King.

Wanted to ask specifically about the Cooking. I apologize if you already covered this, I've been jumping forth on other calls. The Cooking sales declined 13% due to lower rollouts. How much of that is the product mix or new products that you were bringing out now or before versus now? And how much of that is CapEx-related or spending plans by customers? Just want to understand what is the slowdown there.

Well, I put it in a few categories. The first is in grocery store rollouts, that's more CapEx-related. That's simply end markets that the customer is not having the rollouts. The second category, which is significant, is we had an expectation that we'd start to see volumes ramping up in Nogales now that our plant is -- plant performance is really improving. That's been a little slower to come back and is another cause for the decline. There was some remaining product rationalization of low-margin ovens in particular that we're competing against Asian imports, and we exited that segment.

Our next question comes from the line of John Cummings with Copeland Capital.

Just a follow-up question on the Electronics segment. I know you said the strong volume and the mix both helped the margin this quarter. Are you expecting the volume growth or the mix to kind of change going forward? I'm just trying to understand why you think the margins are not sustainable at this level.

Well, this is the first quarter we ever had margins like that. So I wouldn't put ourselves out there. If you look historically at the margins of the business, we think 22%, 23% of that range, in the low 20s, is a solid predictable range. We are increasing investments in this business. We're doing market tests, we're doing laneways. And so we do want to put some of that growth and some of that margin back into furthering future growth for the business. So a combination of those things would lead us to guide you to the low 20s.

Okay. And then I know you already talked a little bit about the tariff impacts for Hydraulics, but could you walk us through the effect of the tariffs in the other segments, I guess, particularly Food Service and Engineering Technologies?

Really, the only business that we are directly impacted by tariffs so far are Hydraulics and Scientific Refrigeration, which imports cabinets from Asia, and many of their cabinets fall into tariff category. In Engineering Technologies, our suppliers are U.S.-based. And in some cases, we actually -- we purchase materials under the contract of our OEM, and it's just a pure pass-through. So Engineering Technologies, we see no impact.

And in Food Service, our -- we've not had tariff impact because we're not importing final product. We've seen some lift on steel prices simply from price increases, both from just the industry trend they increase prices, and I suppose also domestic manufacturers are increasing their prices as a result of the tariffs.

But as we've announced in prior calls, we're passing those prices along. And there's a little bit of more kind of bread-and-butter approach to handling material increases in the Food Service business. So we really only called it out in those 2 business that are directly affected by tariffs: the Hydraulics and the Scientific.

Okay. And then last question on Engineering Technologies. I'm just curious of your view or your outlook on the ramp there has changed at all since kind of -- since your Investor Day?

No, it hasn't. In fact, we're seeing -- well, I think, we announced the backlog with 21% growth in the backlog. So no, what we announced at the Investor Day, we are seeing that the orders are being placed, the OEMs continue to communicate that they are on track for their ramps.

At this time, there are no further questions. I will now turn the conference back to Mr. David Dunbar for closing remarks.

All right. Again, thank you all for your interest in Standex. It's our pleasure to run this business. We look forward to coming back to you in a quarter to report on our Q1 FY '19 results. Thank you.

This concludes today's conference call. You may now disconnect.