Standex International Corporation (SXI) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Standex International Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] We shall facilitate a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. David Reichman from Sharon Merrill. Please proceed.

Thank you, Derek. 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'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 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 fourth quarter news release. On the call today is Standex Chief Executive Officer, Roger Fix; and Chief Financial Officer, Tom DeByle. I'd now like to turn the call over to Roger.

Thank you, David, and good morning, everyone. Please turn to Slide 3. We closed out a good year with another solid financial performance in the fourth quarter. Revenue for the quarter was up 5% year-over-year, with our organic sales increase of 6.5%, partially offset by foreign exchange. 4 of our 5 groups reported year-over-year sales growth in Q4, with 3 reporting double-digit increases. On the bottom line, we reported year-over-year operating income increases at all 5 of our segments with double-digit increases in 4. Overall, non-GAAP operating income was up 16.5% and non-GAAP EPS from continuing operations was up 12.1% to $1.02 per share, a quarterly record for the company. On Slide 4, we identified highlights for our full year fiscal 2012 results. Sales for the year were up 9.2%, with an organic increase of 6.9% and our acquisitions contributed an additional 2.4% of growth, offset slightly by a negative 0.2% foreign exchange effect. All 5 of our business segments demonstrated year-over-year top line growth in fiscal 2012. Our sales growth continues to outpace the growth rates of our end-user markets, which is a direct result of our organic growth initiatives and successful bolt-on acquisitions. Non-GAAP EPS of $3.39 a share is a 14.1% increase over prior year and represents a second consecutive record year of non-GAAP EPS for the company. We exited the year in the strongest financial condition the company has ever been in. Excluding a $6 million voluntary contribution to our U.S. employee defined benefit pension plan, we generated approximately $3.40 per share of free cash flow from continuing operations for the year and finished fiscal 2013 (sic) [2012] in a net cash position of $4.7 million, the first time in the company's history that we've ever been in a net cash position. To put this in…

Thank you, Roger, and good morning, everyone. Please turn to Slide 10, which summarizes our fourth quarter results. Net sales for the fourth quarter increased 5% to $169.8 million from $161.7 million in the fourth quarter last year. Excluding special items, operating income grew 16.5% to $19.2 million from $16.5 million a year ago. Adjusted EBITDA grew 13.4% to $22.8 million. As Slide 11 illustrates, net income from continuing operations for the quarter includes post-tax $0.2 million of restructuring charges, $0.3 million of acquisition-related expenses and $0.8 million in nonrecurring tax benefits. The fourth quarter of 2011 included $0.2 million of restructuring charges, $0.4 million of acquisition-related expenses. Excluding these items from both periods, non-GAAP net income from continuing operations increased 13.9% to $13.2 million. Earnings per share from continuing operations, excluding special items, grew 12.1% year-over-year to $1.02 per share, which represent the first time in our history we've delivered more than $1 of EPS in a given quarter. Slide 12 reviews our full year performance. Operating income from continuing operations for the fiscal year includes special items -- including special items was $64.6 million compared with $55.3 million last year. Excluding special items, non-GAAP operating income increased 11.5% to $62 million. Our full year bridge outlining special items is on Slide 13. Net income from continuing operations for fiscal year 2012 was $46.9 million or $3.67 per diluted share compared with $38 million or $2.98 per diluted share last year. Net income from continuing operations, excluding special items, increased 14.8% to $43.4 million or $3.39 per diluted share. Turning to Slide 14. Net working capital for the fourth quarter was $110.4 million compared with $115.1 million at the end of Q3 and $102 million at the end of Q4 last year. Working capital turns were 6.2 turns for…

Thank you, Tom. Please turn to Slide 19, Food Service Equipment Group, and I'll begin our segment overview. Food Service Equipment sales were up 3.9% in the fourth quarter and operating income increased by 11.2%. Our Refrigerated Solutions group performed well in the fourth quarter. Sales were strong at Quick Serve and national chain restaurant markets where we have broad penetration. We see strong demand in this segment continuing into Q1. Our success in the Dollar Store segment is continuing as well and we are gaining traction with a growing number of names in that marketplace. Our rack refrigeration product offering also continues to be very well received with interest from the consultants, large retail drug stores and some of the larger chains. This product is used in convenience stores, restaurants and other food service outlets that have refrigeration devices in multiple locations. Rather than a refrigeration system mounted on each device, the refrigerated merchandising cases and walk-ins are supported from a rack in one central location, which provides a more energy-efficient, cost-effective and easier to maintain alternative to supplying refrigeration to these stores. Our value line of upright cabinets and under-counter refrigeration products continue to be very well received by the dealer market and sales online have grown very aggressively since its introduction nearly 3 years ago. We're also very pleased with our bottom line performance in Refrigeration this quarter and expect continued improvement. As we discussed in our last call, the inefficiencies related to the Kool Star relocation into our New Albany, Mississippi facility are substantially behind us and we saw a good sequential improvement in operating income in that business in Q4. We're achieving improved productivity and efficiency and expect continued improvement going forward. Turning to Cooking Solutions, the headwinds that we faced in Q3 are continuing…

[Operator Instructions] And our first question is coming from the line of Mark Tobin, Roth Capital Partners.

This is Joe Bess, filling in for Mark. First, I'd like to kind of dive into the Meder acquisition a little bit more and kind of understand if there is any operating margin expansion opportunities here given your guys' more mature distribution channel, and just to get a little bit better understanding of the charges that are expected to hit in the first couple of quarters this coming year.

Well, we definitely think there are margin improvement opportunities. We have not communicated anything specifically, so I'd like to stay away from the specifics, but clearly, as we bring the 2 organizations together, the opportunity to leverage some of our fixed overhead, I think, is there. I think the other side, as we mentioned in our script, the global purchasing requirements for the combined 2 companies give us leverage on that side as well. So I think both from the fixed overhead side, as well as in the purchasing side, there's clearly opportunities to improve margins as we bring the 2 units together. We haven't given any specific guidance on restructuring charges associated with the integration, so we'd prefer to stay away from that.

Okay. And then has there been any discussions revolving -- involving potentially needing to downsize the capacity of the German facilities and just using your current footprint, or are you guys planning on keeping all of their facilities right now?

Yes, we very much want and need the German facilities. Our business is very much about being able to provide local support from a engineering and manufacturing standpoint. These products are typically not standard catalog product items, so we're typically working very closely with a particular OEM, be it in automotive, or be it in custom measurement, be it in medical, working closely with their engineers to design a product, and then we're basically -- I won't say line-to-line, but the ability to then service that account with local manufacturing infrastructure is very important to us. So the bottom line is we see that as one of the real keys for us because we've struggled, frankly, trying to penetrate Europe with our magnetics product line because we simply didn't have on-the-ground support and we think this acquisition obviously provides this in a pretty big way.

And then with your discussions with them so far, how is the German region doing compared to the rest of Europe?

Interesting enough, they've not seen really any particular slowdown. The German side of their business remains good, the other parts of Europe remain good at this point in time. It's still very early days, but we're cautiously optimistic about where they're at.

Okay, and then just last question. Given the landscape of their revenue, are you guys expecting a contraction in fiscal '13 from their fiscal '12 year, or are you expecting it to be kind of flat?

We don't expect a contraction. I don't really want to go beyond that. I mean, again, this is early days for us and they've been growing for the last several years, and our expectation is there's opportunities for future growth. We can't control the macroeconomic conditions and that's something we'll just have to deal with.

Your next question is coming from the line of Jim Casagrande, Brant Point.

I wanted to follow up, you did talk about some uses of cash, I wanted to hear a little bit more about the M&A pipeline, how does that look and any particular areas you're looking. And just a follow-on then is, are you guys -- would you consider a buyback at some point, given all your cash flow generation or where would that kind of rank among your priorities?

Okay. Well, a number of questions there. Let's take the cash usage question first. I think that the company has a pretty consistent track record of using cash for really 3 primary purposes. One is to drive organic growth, and we talked about an increased magnitude of capital spending this year designed in a lot of ways on top line growth. That would really be our first priority. The next priority would be our dividend, and we see that we have historically been very consistent with supporting our dividend, trying to increase our dividend on a regular basis. Third would be in our area of acquisitions and we'll come back and visit that in terms of where we see the opportunities. And fourthly would be share buyback. Historically, our share buyback has been limited to offsetting management dilution from incentive compensation, and for the moment, so long as we have solid opportunities to grow the business both organically and through acquisitions, our priority is to grow rather than to do a share buyback. As far as acquisitions, we're really looking across the board. I think the Meder acquisition is a good example. If we see the opportunity to make a sizable bolt-on acquisition that bulks up one of our segments, we're very excited about doing that. I kind of use $100 million of volume as kind of a benchmark that gives us the ability to compete globally, particularly if we have, as we did with Meder, an increased or enhanced global presence. So we're really looking across the board at all the business units and we're looking globally. 5 out of the last 6 acquisitions we've done in the last 24 months have been outside the U.S. We've been in India and South Africa and now in Germany, et cetera, so looking pretty broadly and we're excited about what's out there in front of us.

Your next question is coming from the line of Beth Lilly, GAMCO Investor.

I wanted to just drill down a little bit on your Food Service Equipment business and particularly, just the dynamics on the hot side and what you're seeing in the competitive environment and just the weakness and what's your -- where you see the opportunity in terms of improving the margins and what you're doing to improve the returns on that piece of your business.

Okay. Well, there really hasn't been a significant change in the competitive landscape. The situation is really all about the key customer accounts that you've historically had your largest penetrations at and what are they doing in terms of their growth. Candidly, the Yum! Brands has been a significant part of what we have historically relied on for growth in our Cooking Solutions area, Taco Bell and Pizza Hut, KFC being really the 3 strongest contributors. As you know, they've really deemphasized, to some extent, their growth in the U.S. to preference of growth outside the U.S., particularly in China. So that's one of the biggest impacts that we have on the growth that we've seen there. Having said that, the products that we have, the technology that we have are very applicable in a broad cross section of chains, and as we mentioned in the script, in the refrigeration side, we've been much more spread in terms of our exposure, having pretty significant opportunities for the top 20 largest chains on the refrigeration side. So our direction on Cooking is to do much the same, to spread our exposure and our involvement amongst the largest food service chains. And the other side of it is, that particularly on the hot side, because we have a fairly significant countertop product offering. Nontraditional retail outlets, such as convenience stores -- as you know, convenience stores over the last 4 or 5 years, the 7-Elevens of the world have expanded pretty dramatically their prepared food offering, and if you think about it, most of that equipment is what we call countertop, hotdog rollers, toasters, bun warmers, things of that nature. And we have a very, very solid offering. So we're also looking and have been successful. We're penetrating 7-Eleven, example, pretty heavily right now. But we think there's other opportunities, particularly as the convenience stores adopt more and more of these food programs.

So if you look at the opportunities on the Food Service side in terms of the margins overall, you saw an increase this quarter. Where do you see this business getting to?

We haven't given any real specific guidance on that, but the average for the industry is sort of in that 13% OI margin. Depending on the mix of hot and cold, you could hear expectations you can use above that or below that, but again, if the average is in that 13% range, you can see that we have opportunities for improvement.

Okay. And so it's not unreasonable to expect you to be able to get to 13% eventually?

I guess so. We're trying to improve our margins.

Your next question is coming from the line of Jason Nacca from Sidoti.

My first question is regarding the last quarter, we saw some weakness in drugstores. Could you update us on the status of these venues?

The drugstore trend has been in place for probably the better part of 12 to 18 months. If you -- the 3 biggies that we work with is Walgreens, CVS and Rite-Aid. Walgreens, if you go back 10 years and looked at what they were doing, they would typically build between 400 and 450 stores a year. About 2, 3 years ago, they took a change in approach, and rather than driving their top line through as many new stores, their focus has been more about driving increased sales out of their existing stores. So they've reduced their number of stores down in the 200 to 250 range roughly. But that's been in our run rate for the better part of 12, maybe 18 months. CVS has really taken a more aggressive approach towards new store sales and again, we've benefited from that. We're basically sole-sourced at both Walgreens and CVS as it relates to their refrigeration products, be it a walk-in cooler with merchandising front-end at Walgreens or uprights and walk-ins at CVS. So the other thing I can say about that channel, it's not unlike the convenience store comment I made on the Cooking side. Again, a retailer that's trying to improve product sales and margins from their footprint and you'll see innovation at the drugstore side as they bring in different kinds of food products that they sell alongside of the pharmacy items and dry goods that they're selling. So there's opportunities to add cooking -- or excuse me, Food Service devices in those stores. More recently, as an example, Walgreens is announcing a new concept, a healthy store idea they're rolling out on a limited basis, and we're selling quite a large number of rack refrigeration units into those stores as well. So those are the opportunities, even in the existing stores, where we can come back in and add more product and more value.

Now regarding the Hydraulics Group, due to your plans to further expand your Chinese facility there, are you beginning to see any additional penetration in the local Chinese market for these telescopic products?

The local Chinese market has been a real disappointment, really, over the last 2 or 3 quarters. When China began to tighten the credit controls and lending standards, our customer base in China was pretty significantly affected. Our customer base is what they call refitting factories that basically take a truck chassis, mount a dump body to it and the Hydraulics and the equivalent of a small business here in the U.S. and -- although they're quite large in many cases. So they've been impacted by the credit crunch over there. So our growth has really been in the export market out of China, going into Asia Pacific. We've got quite a nice penetration into Thailand, into Australia. We've done reasonably well in the Northern part of South America, Peru. Certainly, Mexico has been strong for us, as well as a different product line. Our traditional product line is what is known as a telescopic hoist. We're making rod cylinders, engineered rod cylinders, not the kind of commodity items that you would see in mining and agriculture, but engineered rod cylinders that are used in more broad applications, refuse and material handling, compacting and applications of that nature. So our success there has really been in the export, as well as in new products.

Okay. And my last question is regarding Europe. Now that you are beginning to become more entrenched in the region from the Meder acquisition, are you seeing any other pockets of strength or any outlook on Europe regarding other product lines? Or you could also comment on Electronics as well.

Well, again, our strategy is one -- or part of our strategy, I should say, is to enhance the geographic footprint of all of our businesses and Europe is just one part of that strategy. So again, we're looking broadly at not only in Europe, but the emerging economies. If you think about it, we did Metal Spinners a year ago, a little over a year ago. They were in the U.K. or they are in the U.K. They give us exposure into the European applications for Engineering Technologies. We did Meder Electronics, which gives us exposure into Europe. So we're looking farther [ph]. Europe is not an exclusive focus by any stretch, but we do think there are opportunities there as well as, we mentioned, Engraving is more of an emerging market focus. So you'll see us there in Asia Pacific, Brazil, China.

[Operator Instructions] Your next question is coming from the line of John Walthausen from Walthausen & Co.

Yes, a couple of questions. On pensions, could you tell me how much more the expense is this year than last year and what's your level of contributions that you expect to make this year?

The pension expense is going to go up about $0.13 year-over-year. We'll see it in our K. We made a $6 million contribution in June, we made another $3.3 million contribution this month and we're good, Tom, through fiscal…

2016.

And we're good through fiscal 2016. I think you're familiar under the Highway Bill there were some new rules providers that relates to funding requirements and under those rules, and this is in our K, we're good now through 2016.

Okay, great. And on acquisitions, are all the segments, I guess, except perhaps Electronics, in position as far as where their strategy is and where their management teams are to do meaningful acquisitions if they -- you can find them this year?

I think they are. I think the point you're making there is our capacity from a management standpoint to absorb an acquisition and we've been, hopefully, I think systematic about that. Again, we did the Metal Spinners one, which is in the Engineering Technologies Group, a little over a year ago. We've let them, if you will digest and work the synergies that we identified pre-acquisition. I think they've done a nice job of doing that. We've been looking for some time. We've done little ones, little bolt-ons, in the metal area for Electronics several years ago, but we haven't done anything significant. So we now have done Meder which is going to, again, require some time for them to digest and do the integration. So the point you're making is well put, and that is, we want to look at all of our business units and we look at the capacities of the teams. They're all capable of doing acquisitions. We've basically done acquisitions in every area except for Hydraulics, but again, we think we have the capabilities to do those acquisitions. It's more a matter of what have we thrown at them lately in terms of both organic initiatives and as well as acquisitions. We want to make sure that we provide sufficient management time and resource to do those things properly.

Great. And I guess with regard to Hydraulics, you made an interesting point that $100 million was kind of a good size for a company to be, or a product line to be competitive or a product area. Does Hydraulics have enough strength to take themselves to $100 million with some acquisitions? It would make sense?

I think they do. Yes, I think they do. We have a nice solid team in that business and they're -- again, they've done a nice job in China, expanding that facility I think demonstrates their ability to think globally. Again, a lot of the penetration that we've seen has been international in Hydraulics. I mentioned Australia, I mentioned Thailand, I mentioned South America. So yes, it's more a matter of where would you go. The European market and the U.S. market are pretty mature in Hydraulics. So again, we think, particularly the fact that telescopic hoists are kind of our core, they typically go in dump trucks, dump trailers. That speaks to the infrastructure build, highways, bridges, that kind of stuff, dams, and infrastructure build tends to go towards emerging economies, and that's why we went in China in the first place. We have a keen interest in Brazil and again, we have to figure out what's the best way to grow that business beyond where we're at.

At this time, I'm showing no further questions in queue. I would like to turn the back call over to Mr. Roger Fix for any closing remarks.

Well, we appreciate everyone's interest and all the questions. Thank you very much, and we look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.