Standex International Corporation (SXI) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Standex International Third Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to David Calusdian, from Sharon Merrill Associates. Please go ahead, sir.

Thank you. 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 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 comparable GAAP measures is available in Standex's third quarter news release. On the call today is Standex's 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. I'd like to welcome everybody listening to today's earnings call. This is my first solo [ph] call and I look forward to sharing our performance with you. We reported record results in the third quarter. Overall sales increased 7.7%, organic sales were up 7.2%, and foreign exchange contributed about 0.5%. Looking at the bottom line, non-GAAP operating income was up 27.5%, non-GAAP EPS was up 25.7%, to $0.93 a share. We ended the quarter with a net cash position of $12.4 million on the balance sheet. All of our businesses contributed to these results. We were pleased with the strengthening of demand in food service, and with the operational improvements in that segment, although we have work to do on our margin improvement initiatives there. Our other 4 segments reported double-digit sales increases and are growing at faster rates than the markets they serve. I've spent the past few months visiting Standex's facilities around the world, and meeting with key customers and shareholders. I'd first like to thank Roger Fix, our recently retired CEO, for an intensive and effective leadership transition. Roger made tremendous contributions to Standex during his tenure as CEO and we wish him well in his retirement. I would also like to mark the recent passing of Ted Trainer, who is Standex's CEO from 1996 to 2001, whose influence on our management systems and the leadership style of the company can still be felt. In my time here, I found that at the core, our businesses thrive by building close customer relationships to deliver differentiated engineered solutions. We have a passionate workforce, regardless of where they are around the globe, and we're serving very good markets with above GDP prospects. In a few segments where growth is not above GDP, we're generating growth through market share gains. The company has made tremendous progress in the development of the portfolio and improved operating disciplines during the past several years. Now we're focusing on profitable growth. As I mentioned, we have good brands and attractive markets, with excellent investment opportunities. It's our mission now to find the best investment opportunities to leverage our strong balance sheet to create meaningful shareholder value. With that, Tom will discuss our results for the third quarter. After that, I'll discuss the performance and outlook in each of our business segments. Tom?

Thank you, David, and good morning, everyone. Please turn to Slide 4. In taking a long view, you can see that our trailing 12-month EPS is $3.85, up 4% from the full year fiscal 2013. This demonstrates the impact of our lower cost structure and the success of our growth initiative, both through acquisition and organic growth. Slide 5 summarizes our third quarter results. As David mentioned, net sales for the third quarter increased 7.7%, to $178.8 million, from $166 million in the third quarter last year. Excluding special items, operating income grew 27.5%, to $17 million, from $13.3 million a year ago. Adjusted EBITDA grew 22.7%, to $20.8 million, or $0.93 per diluted share, compared with $17 million or $0.74 per diluted share in the third quarter of fiscal 2013. Please turn to Slide 6, which is a quarterly bridge that illustrates the impact of special items on the net income from continuing operations. These items included tax effected $1 million of restructuring charges; $1 million of nonrecurring management transition expense; and life insurance proceeds of $3.4 million. In the comparable period of fiscal 2013, there was $0.8 million of tax effected restructuring charges, $2 million expense related to a legal assessment; a $1.6 million life insurance benefit; and $1.4 million benefit from discrete tax items. Turning to Slide 7, net working capital at the end of the third quarter was $131 million, compared with $117.4 million at the end of the fourth quarter of fiscal 2013, and $138.3 million at the end of Q3 last year. Working capital turns were 5.5 in third quarter of fiscal 2014. Slide 8 illustrates our debt management. We ended the third quarter in a net cash position of approximately $12.4 million. This compares with a net debt of $40.7 million a year earlier. We define net debt as funded debt less cash. Our balance sheet leverage ratio of net cash to capital of 3.9% at the end of the quarter, compares with the net debt of 13% a year ago. Our strong balance sheet is well positioned to meet our need. We continue to have ample financial flexibility to fund future growth, acquisitions and other strategic initiatives. Turning to Slide 9, capital spending for Q3 was $8.3 million, in line with our expectations for the quarter. Capital spending on a year-to-date basis was $16.3 million, versus $12.4 million in the prior year, and we expect capital spend to be in the range of $23 million to $24 million for the year. We are investing in a number of organic growth initiative across all of our operating groups. David will discuss a few of these initiatives in his operating group commentary. During our last release, we reported a machine failure at our Engineering Technologies plant in Billerica, Massachusetts. As we see it now, we have a replacement machine in place in the September to October timeframe. The cost of the replacement machine is being reimbursed by the insurance company and we anticipate no customer disruption. As a result, gross capital spending will be approximately $5 million higher than our historical run rate. However, the increased capital spending will be covered by insurance reimbursements. Looking at Slide 10, we generated on a year-to-date basis, free operating cash flow from continuing operations of $19.5 million, representing a conversion of free operating cash flow of 57.4%. With that, I'll turn the call back to David.

Well, thank you, Tom. Please turn to slide 12, Food Service Equipment Group. Sales in food service increased to 2.6% from Q3 last year. Operating income was up 35.6% as a result of volume leverage, operational improvement and an easier year-over-year comparison due to nonrecurring expenses in Q3 a year ago. On the Refrigeration side of the business, we continued to see good growth in the dollar store segment, where we've been successful with our new line of value-engineered endless merchandising cabinets. We also had strength in the dealer channel during the quarter after some sluggishness in Q2. This growth was partially offset by weakness in the quick service restaurant segment as a result of weather-related store opening delays and continuing softness at retail drugstores. It's important to note the growth at the dollar store segment is now more than offsetting the sustained weakness at the retail drug segment to lower margins. Our backlog in Refrigerated Solutions was up by about 30% in the quarter due to slow orders and weather-related delays. In Cooking Solutions, we have strong sales in the U.S. grocery store segment, and the project pipeline continues to improve. Sales at the dealer channel and the convenience store segment also reported year-over-year gains in the quarter. Our new products continue to be well received by customers and backlog at this group increased by 69% due to strong order intake. At our Customer Solutions business, sales were down in the dealer channel, partially as a result of weather-related construction delays. Sales and profitability increased on a year-over-year basis, and our Procon Pump business, conditions improved in Europe. We continue to focus on improving our bottom line performance at Food Services Group. I look at the Food Service segment is one where shareholder value creation over the next few years is largely under our control. We're taking a number of actions to improve operations and improve our margins. For example, the consolidation of our Cheyenne Cooking Solutions facility in Nogales, Mexico is going well, and is on track to be completed by the end of the fiscal year. We continue to expect to generate $4 million in annual cost savings beginning in FY 2015 from this consolidation. Our new distribution center in Dallas is an important component of the Cheyenne to Nogales consolidation, and we began shipping product out of that location in the third quarter. In addition to tightening our supply chain to the use of the Dallas facility and reducing our labor costs by moving more production in Mexico, we are investing in the automation of our U.S.-based food service manufacturing facilities. Our procurement and lean initiatives are also proceeding well. In total, we expect these initiatives to have long-term impact in this group's profitability. Finally, I would like to invite you to visit us at the upcoming National Restaurant Association show in Chicago, May 17 to 20, in our new booth. Please turn to Slide 13, the Standex Engraving Group. Sales were up 14.5%, and we reported a record level of operating income, which was up 77% for the quarter. This was driven by another record performance by our Mold-Tech business. New automotive launches in all 3 of our regions: North America, Europe and Asia; as well as market share gains, drove our excellent results this quarter. We continue to see softness in the role played in machinery business driven by a continued slow recovery in the building project markets. We will be opening our fifth manufacturing facility in China in Q1 2015, which we see as a continued growth opportunity. We are very well positioned with the 52 domestic automotive manufacturers operating at China, as they compete with Western auto companies for domestic market share and improve the quality of their interior textures. We expect that the strong automotive model launches globally will continue to have a positive effect on our results in the fourth quarter. As we've discussed before, our worldwide presence is a significant competitive advantage. When automotive OEMs are in the initial phase of a new model design, they know that they can come to Standex for texturizing and we will be able to provide a solution for them regardless of the global location they decide to manufacture. We have an innovative management team that continues to find new ways to work with customers. This last quarter, we opened our design hub, a center of excellence, to partner with auto OEM's own design teams and provide rapid prototyping of textures as they develop new model concepts. Please turn to slide 14, our Engineering Technologies Group. Sales for the quarter were up 14.1% from Q3 last year, and operating income was up 25.9%. Sales in operating income were up with the strong aerospace, energy and oil and gas sales partially offset by weakness on the medical segment. Keep in mind, however, that this business is project-driven and therefore, inherently lumpy. Soft quarterly sales in any one segment may not be indicative of the demand trends in that segment. We're seeing strong order trends across substantially all of our end markets right now, and the excellent quarter we're reporting reflects that overall group demand environment. We're particularly encouraged right now about the prospects for this group in the aviation market, where we've proven ourselves to be a valuable partner to support the A320. Commercial aviation has been a relatively small component of Engineering Technologies and is becoming a larger part of the business. The long cycles of these programs will help smooth out the lumpiness of the group due to the long-term nature of aviation contracts. During the quarter, we received a life program award from Senior Aerospace, to produce exhaust plug and nozzle components for the Nacelle and the Airbus A320 NEO, one of the largest-selling commercial aircraft in the world, which will ramp to $7 million in annual sales. This contract marks our second major contract win on large-body, single-aisle commercial aircraft, and demonstrates the exciting prospects in aviation for the Engineering Technologies Group. In the space segment, during the quarter, we received a multi-year contract from Boeing and Lockheed Martin's United Launch Alliance joint venture to produce 1-piece fuel and oxygen tank domes for the Atlas V and Delta IV launch vehicle programs. The new contract, which begins in 2014, builds on Spincraft's current tank dome contract with ULA and reflects the critical importance of our products, to both Atlas V and Delta IV launch vehicles. Please turn to Slide 15, Electronics. Electronics sales for the quarter were up 10.4% year-over-year and operating income increased to 10.5%. We reported record sales and profitability in Electronics, due to new sensor program launches in the white goods, HVAC and recreational markets. These launches were from our combined StandexMeder product line. We had a strong order intake during the quarter, with backlog increasing, particularly in Europe and North America. The Electronics Group is doing a very nice job moving up the value chain from being a component supplier to offering more sensor solutions. The investments we're making in this business right now are primarily to build our technical resources to support our customers as they find the right solutions. We continue to have a solid pipeline of customer programs, and we expect it to launch during the rest of this fiscal year and into next. We're also continuing to make good progress in our developmental work on new products and customer programs for the domestic market in China. In addition to our focus on the top line, we're taking a number of aggressive steps to best leverage our sales growth into profitability. First, we're executing on the robust set of lean enterprise cost-reduction initiatives that should benefit the business in the future. As we continue to integrate the Meder and legacy Electronics businesses, we will further consolidate our China facilities and leverage our supply base for savings. Finally, the completion of our new facility in Mexico is on schedule, and we expect to be relocated from the existing facility and fully operational in the current fourth quarter. Please turn to the Hydraulics Group on Slide 16. Q3 hydraulic segment sales were up 17.8% year-over-year, and operating income was up 2.8%. Operating income was moderated due to competitive pressures in new markets and investments to win new business. Strong Hydraulics Group sales were primarily driven by greater penetration into the refuse market. Our focus on diversifying our Hydraulics business into the refuse market has gone well and should help to smooth out the cyclicality of this business. The refuse market historically has been relatively steady, while the dump truck and dump trailer markets are reliant on a highly cyclical construction markets. In the third quarter, we saw a continued recovery in our traditional North American dump truck market, which was up by double digits in the quarter, primarily due to improvements in the overall construction industry. Internationally, market share gains in the South American dump trailer and dump truck market also contributed to the strong top line growth. And finally, shipments out of China continue to be positive for this business and we anticipate a good demand for production out of our new facility in Tianjin throughout the fiscal year. Looking ahead, we're enthusiastic about the near-term prospects for this group with backlog up significantly over last year. Please turn to Slide 17. In summary, we performed very well in the third quarter, and with all of our businesses reporting year-over-year improvements in sales and operating income. Backlog is up in the third quarter, on a year-over-year basis, in all of our businesses, and we're optimistic about our near- and longer-term growth prospects. Our markets are sound, our bookings and good and we're seeing a great deal of customer activity. We're actively pursuing multiple avenues to increase shareholder value and leverage our balance sheet. Finally, we look forward to seeing many -- meeting many of you at upcoming trade shows, investor conferences and our own Standex Investor Day. With that, we would be pleased to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Chris McGinnis of Sidoti & Company.

I guess, just the overall -- I mean, maybe just a starting point, just in the food service, has that strengthened for us? I guess, exiting the quarter, as the weather got better. Maybe just talk about that a little bit.

Yes, I think, if you look at the demand profile through the quarter, January and February, relatively slow largely related to weather. We did see strengthening through the end of the quarter, which is continuing.

So that comp is getting better as we exit the quarter and is kind of -- is holding tight right now in the turn quarter?

Yes.

And then, I guess, just on the overall profitability improvement, on a year-over-year basis, how much of that is sustainable and how much of it is maybe just due to the strength in the current quarter, when you look out going forward, just how sustainable is that?

Well, if you look across the 5 segments -- is your question Food Service or all the segments?

I'd say, in all, across-the-board, I guess.

Yes, I'll tell you -- I think -- let's deal with Food Service separately. The other 4 segments are all operating at very solid levels of profitability and margin. We like them in that region and we just want them to grow and give us more of that good margin. On Food Service, our priorities right now are to steadily increase the margin. And over the next 2 years, our expectation is Cheyenne consolidation, some other internal actions we have planned, can add 200 basis points to that business. So whether you say that the specific progress this quarter, year-over-year, is sustainable, we do see steady increase in our margin.

Great. And then just a follow-up on the Cheyenne. Did that start day 1 or how does that progress through fiscal '15 in that cost-reduction initiative?

We'll start to see some of the savings this quarter. Product lines are being moved as we speak. We've had some early lines already moved, and the program is on track and going well. The project will be complete in June. And the full savings of roughly $4 million will begin to flow in July.

Great. And then, maybe just -- can you just maybe touch on the acquisition, your strategy and just where you're at and how you feel about the environment?

Well, yes. Standex as a company is -- have made a lot of acquisitions over the past. And we have a sweet spot of companies, privately held companies, when acquired by Standex, we can bring them some operating discipline, similar experience, help make them stronger, better-performing companies. And recently we did that with Meder, and with the Master Spinners, both part of Engineering Technologies. Both of these businesses are helping drive our growth. So we still believe there are many attractive opportunities out there like that. Our focus in the short-term will vary business-by-business. Food Service primarily focuses internally on the operating improvement. But you can't choose the timing of a deal. So if an attractive opportunity comes up in food service that brings complementary products or customers, somehow enhances our business, I would look at it. I would say, we'll be more, probably more proactive in investing more energy and looking at opportunities in other segments, particularly Electronics and the Engineering Technology.

[Operator Instructions] At this time, there are no further questions. I will now turn the call over to David Dunbar for any additional or closing remarks.

All right. Thank you, thank you all for listening in today. I'd like to note that we'll be hosting an Investor Tour at our Engineering Technologies Spincraft facility in Billerica, Massachusetts on May 14. Please email sxi@investorrelations.com, if you are interested in attending. I hope to see you there. Otherwise, we look forward to speaking with you during our full year fiscal 2014 results conference in the summer. Thank you.

Thank you for participating in today's conference call. You may now disconnect.