Standex International Corporation (SXI) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Standex International Earnings Conference Call. My name is Lisa, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David Calusdian from Sharon Merrill Associates. Please proceed.

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 onetime 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 achieved 7.9% revenue growth in the fourth quarter, which was due to the Meder acquisition combined with a slight negative foreign currency effect. On the bottom line, we reported non-GAAP EPS of $1.02 per share, flat with the prior year. Market headwinds across several end markets coupled with difficult comparisons in Engineering Technologies and Engraving, which both had record sales and earnings a year ago, combined to negatively affect our year-over-year growth and margin performance in the fourth quarter. Please turn to Slide 4. For the year, we achieved 10.5% increase in sales, organic sales growth of 2.3% and 8.7% coming from acquisitions. This is partially offset by 0.4% negative foreign currency exchange effect. We also reported a third consecutive record year for non-GAAP EPS, which came in at $3.70 a share, a 9.1% increase from fiscal 2012. We ended the year with a net cash position of $1 million, only the second time that we've ever been in a net cash position in the history of the company. We achieved this after spending $39.6 million to complete the Meder acquisition, completing $14.1 million of capital expenditures, distribution of $3.9 million of dividends to our shareholders and making a $3.3 million voluntary contribution to our defined benefit programs. This highlights the strong cash generation ability of our business. For the year, we generated $4.11 per share in free cash flow from continuing operations, excluding the pension contribution. Please turn to Slide 5, which provides an update on the transformation that we made on the bottom line during the past 4 years. Since 2009, we've grown earnings per share at a CAGR of 29.4%, demonstrating the impact of our lower cost structure and the success of our organic and acquisition growth initiatives. With that, Tom will discuss our fourth quarter results in some detail, after which I'll review the recent performance of each of the business segments. Tom?

Thank you, Roger, and good morning, everyone. Please turn to Slide 6, which summarizes our fourth quarter results. Net sales for the fourth quarter increased 7.9% to $183.3 million from $169.8 million in the fourth quarter last year. Excluding special items from both periods, non-GAAP operating income was $18.6 million compared with $19.2 million in the fourth quarter of fiscal 2012. Slide 7 is the quarterly bridge that illustrates the tax-effected impact of special items on net income from continuing operation. These items included tax-effected $0.3 million of restructuring charges in the fourth quarter of 2013. In 2012, there was $0.2 million of restructuring charges, $0.3 million of acquisition-related costs and $0.8 million of nonrecurring tax benefits. Excluding special items from both periods, non-GAAP net income from continuing operations was $13 million or $1.02 per diluted share compared with $13.2 million or $1.02 per diluted share in the fourth quarter of fiscal '12. Turning to Slide 8, you can see our full year 2013 performance. We recorded a 10.5% increase in sales. Non-GAAP operating income grew 10.7% to $68.6 million, and adjusted EBITDA grew 10.6% to $84 million. On Slide 9, we have a reconciliation of net income from continuing operations to non-GAAP net income from continuing operations for fiscal 2013. Excluding special items, non-GAAP net income from continuing operations grew 9.1% to $47.3 million or $3.70 per diluted share. Turning to Slide 10, net working capital at the end of the fourth quarter was $117.6 million compared with $138.3 million at the end of Q3 and $110.4 million at the end of Q4 last year. Working capital turns were 6.2 in the fourth quarter of fiscal 2013, near our historical high and above our target of 6 turns. Looking at Slide 11, we had free cash flow from continuing…

Thank you, Tom. Please turn to Slide 15, Food Service Equipment Group, and I'll begin our segment overview. Sales were up 2.4% at Food Service, with operating income increasing 0.2%. Let's start our discussion on the refrigeration side of the business. Strong sales to national quick-service restaurant chains were substantially offset by softness at drug retail stores, where new store openings continues to be down. We're also seeing a transition in the retail market away from walk-in refrigeration products toward upright merchandising cabinets. Because we believe these trends are long-term, we are taking actions to accelerate our end user market expansion and to introduce new products at lower price points. Penetrating the growing dollar store segment is an important component of our customer diversification efforts, and we've been successful thus far. During the quarter, we began recognizing revenue from the commitment we received last quarter for 50% of the business for endless merchandising cabinets for new stores of a large dollar store chain. This translates between $8 million and $10 million of incremental business during a 12-month period. Other dollar store chains are evaluating our products in test stores, and we're encouraged by our prospects in this market. As we discussed on past calls, we've also taken steps to lower the price point and add features to our merchandising cabinets to enable us to take market share, not only in our traditional retail and drugstore market but also in dollar stores, convenience stores and the dealer channel. Although historically, these products did well in retail drugstore applications, which demanded more robust designs and construction, we haven't been competitive with the cabinets in other end user markets in the past due to price. We're aggressively addressing this issue. For example, over the past several quarters, we completed a value engineering project…

[Operator Instructions] Your first question comes from the line of DeForest Hinman with Walthausen & Co. DeForest R. Hinman - Walthausen & Co., LLC: We had a few questions. Can you just describe to us what a lipskin is exactly?

Again, if you sit in the window seat of, say, the Bombardier regional jet and you look out at the engine, you'll see, I'll call it, a silverly, aluminum-colored component that sits at the very front of the cover around the engine. That silver-colored component is made out of aluminum, and we manufacture that product by taking a flat sheet of aluminum sheet stock into a series of spinning and turning operations to produce that part. So that upfront piece on the cover on the engine is a lipskin. DeForest R. Hinman - Walthausen & Co., LLC: Okay. And is that a wear part, or is that something that gets sold once and that's it?

It's not a wear part per se. There is damage on that due to bird strikes and other things that would impact that, so there is some replacement business. But it's predominantly driven by new aircraft construction. DeForest R. Hinman - Walthausen & Co., LLC: Okay. And we've started talking more about getting content on, specifically, this new Airbus, but you also mentioned some internal engine components that we're working on. Is there any way you can give us kind of a number in terms of content per plane that you're thinking about at this time?

Well, before we do that, let's talk a little bit about what we're doing and the value proposition because I think it's very exciting. Historically, a lot of the internal components that go into the, particularly, the exhaust side of a jet engine are made from forgings, which require that the forging, obviously, be purchased from a forge house. And then there is, typically, machining operations conducted on both the inside and outside diameters of the part to come up with the final configuration. Again, much like in a lipskin, where we start with a flat sheet of aluminum stock, in this case, we'll start with a flat sheet stock of high-temperature alloys and we'll then turn the part into a what I'll call near-net shape, which substantially reduces the amount of material that has to be purchased because typically, it will be well less than 50% of the weight of the forging and essentially eliminates most of the machining operations. So our value proposition here is very, very substantial. So as we think about our contribution, it's really more about being able to work with the aircraft OEMs because it does require some modifications as far as replacing the forging. Where our focus has been, there's a whole series of high-efficiency engines being developed and launched by Rolls-Royce, by General Electric and by Pratt & Whitney, the 3 major jet engine manufacturers, and they're, all 3, very, very intrigued by the value proposition that we're able to provide them. So as we think about it, it's going to be predominantly on the new engines that are being launched as we speak. We think this could be a $5 million to $10 million business in, say, 3 to 4 years. DeForest R. Hinman - Walthausen & Co., LLC: Okay. And in terms of what's going on in that segment right now, are you seeing any engineering programs that are kind of slowing down or winding up? Or is there kind of a runway in place with some of these newer programs, where we could see kind of a continued organic growth out of that segment?

We're seeing -- I kind of have to go segment by segment, but we're seeing substantial growth opportunities in the space side, both unmanned, or what we call satellite launch vehicles, as well as manned. United Launch Alliance, which, again, is the combination of Boeing and Lockheed's heavy launch programs, have a very aggressive flight launch program over the next 4 or 5 years. We're seeing good growth on that side. NASA continues to pursue their next-generation vehicles, which, unlike the space shuttle, will be traditional, looking much like the Delta IV and Atlas V programs, where, again, we have a dominant position. So on the manned side and the unmanned side, we see really good growth opportunities over the next several years. We've seen decent recovery in the land-based turbine side, which has been one of our largest segments historically. And we've talked about the jet engine opportunities, both internals of the engine and the lipskin. So yes, we don't really see a slowdown in that segment. These are typically longer lead programs, programs that have -- or typically, like a program where you have -- once you're on and qualified, you have a 10- to 15-year run, so to speak.

Your next question comes from the line of Jason Nacca with Sidoti & Company. Jason Nacca - Sidoti & Company, LLC: My first question is regarding the charge that you'll be taking in fiscal 2014. Will that be spread out evenly, or we'll be seeing concentrated in 1 quarter, that $7.5 million to $8 million?

It won't be spread evenly per se. It goes -- in the new world of restructuring charges, you take the charge as you crystallize the liability. So I think you'll begin to see us take some of that charge in the first quarter, but you'll see bits and pieces of it taken, really, every quarter through fiscal '14.

But the noncash charge of the $3 million for the building will be in the first quarter. Jason Nacca - Sidoti & Company, LLC: Okay, all right. And also, could you give me an idea of how much CapEx there will be in the first half of the fiscal '14? Just given also the opening of the new finished goods distribution in Dallas in the next couple of months, I'm wondering what kind of weight we'll be looking for in the first half.

I would say it's probably going to be about half. We have a fair amount of the CapEx spend that Tom talked to that's carryover from the prior year the point we're finishing up the building in Mexico for the Electronics Group. There's a fair amount of capital that we're spending this year that's associated with the Cheyenne consolidation, so that's heavily front end-loaded. So I think roughly speaking, I think half and half isn't a bad approximation. Jason Nacca - Sidoti & Company, LLC: Okay. And also going to the Engraving segment, as volume starts to return on fiscal '14, do you expect Engraving operating margins to kind of come back to the 18%, 19%?

Yes, we don't see any structural changes to the business in terms of pricing or margin deterioration, so I think you're exactly right. As volume comes back, there's no reason to believe that the margin won't come back appropriately because again, there's been no real change in the market. We've been on a very solid run in Engraving for the last, really, 2.5 to 3 years. If you were to go back prior to that time frame, we made a point that these platform launches are, again, lumpy. They can be strong in a given quarter then weak in the next quarter. And I think what we've seen over the last 3 years has probably been kind of consistent strength across the globe. Fourth quarter probably is more representative of kind of the typical, some quarters are stronger than others. Jason Nacca - Sidoti & Company, LLC: Okay. And now staying with the Engraving segment, I mean, I believe that you can see some visibility, knowing that fiscal '14 was going to be pretty strong. So I'm trying to get a better idea of how the orders will play out quarterly, like what kind of variability we'll be seeing in these orders just in the Engraving segment?

Well, that's extremely difficult because we track these orders or we track these projects, I should say, really, on a quarterly basis, and we're at the tail end of the process. In other words, the tooling that we are texturizing is typically completed within a matter of months before the actual platform is launched. So there's a lot of upstream variability in terms of what the OEM is doing and the design and finalizing the design, the finalization by the Tier 1 in terms of what they need for tools and in the toolmaker. So there's a lot of variability. But I would say that, as I mentioned in the script, we are beginning to see some strengthening here in North America in the first couple of months of Q1. So I'd expect us to be fairly strong in North America, really, throughout the year. Jason Nacca - Sidoti & Company, LLC: Okay. And going to the food tech -- Food segment, as lower drug retail sales continue to really weigh on margins on the Food Service Group, can you kind of conclude what kind of margins you'd be seeing in the first half of '14 before -- in the Food Service Group before we start seeing some cost savings derived from the consolidation of that Wyoming plant?

Again, what we said was that we really don't expect any of the savings to come through Wyoming until the early part of fiscal '15. We won't complete the move out of Cheyenne until late in the fourth quarter of fiscal '14. So what we're really signaling is that we don't expect to see any real significant cost savings coming out of the consolidation this year. But we expect, as we go into next year, that we'd begin to see a significant portion of that $4 million. We mentioned that our estimate is 75% of that $4 million to $4.5 million annual rate would be recognized in the first half of fiscal '15 and the full run rate in the second half of '15. Jason Nacca - Sidoti & Company, LLC: Okay. And my last question is on the glass door merchandising cabinet redesign. I'm just trying to get an idea of how long is that going to take to really roll out to customers and how quickly you see them really taking over using some of those lower-cost...

A good question. The product was launched in sort of the late May, June time frame, so it's out in the market. And the take-up to the point that you raised really comes in 2 forms. One is in the dollar store segment, in particular, even in convenience stores, typically, there's a request for quote that's put out from time to time by these large chains, and then we will have the opportunity to quote a new product, which we have already quoted on several opportunities already. They have not all been awarded yet. So that will be -- it will driven by, again, RFQs coming out of the large chains. And the other avenue is through the dealer channel, which will take, I would think, several quarters before they begin to really recognize the value proposition that our product offers.

Your next question comes from the line of Jamie Wilen with Wilen Management.

Further on the plant consolidation, you're obviously taking one plant off and moving it into Mexico. What percentage of capacity had you been running in the Food Service Group, and where will you be next -- where will you be subsequent to the Wyoming close?

In the Mexico facility, Jamie, in particular, or across...

Overall, within that group. Or do you have room, if the market grows, to still add capacity within your existing footprint?

Oh, yes, absolutely. Again, it varies. Each of our plants is very product-specific, so it's not useful to generalize because you can't move products, typically, between plants. But for example, the 2 refrigeration plants are working basically 1.5 shifts, pushing to 2 shifts during the busy season, or down to about a shift during the winter season. The cooking area right now in Mexico, we're probably -- we're on 2 shifts in fabrication, 1 shift in assembly. But we're adding laser capacity in fabrication that will give us more capacity there. So I don't see a footprint issue in any of our facilities. What we are doing is spending capital. I mentioned we're adding a laser to Mexico. We're adding another laser to our fabrication business. We're adding a form press and other forming equipment to our Nor-Lake refrigeration business. So inside the current footprint, we're adding capital equipment to increase capacity and reduce costs, so we feel pretty comfortable about our ability to stay up with it.

Perfect. And the Meder synergies that are coming through, you say we're going to -- in the first quarter of this fiscal year, we'll be close to running that $4 million annual run rate. Where were we in the fourth quarter of the fiscal just ended? How much of a jump up is there in the first quarter? It this fully gradual?

Well, here's what's difficult about it, Jamie. The plant savings are incremental and will occur in the quarter following the closure. There will be some productivity improvements that'll occur over time, so it will be a small ramp. But where we really have difficulty predicting is on the purchasing savings because the way our purchasing works, we put the purchase price variance on the balance sheet, and it's allocated out over time. So long story short, we're probably at 60%-plus as we go into the first quarter. That's a really rough guess on my part. And then ramping up. Pretty good purchasing savings take about 3 to 4 months to roll out through the balance sheet onto the P&L, so that would carry well into the second half of this fiscal year.

Okay, perfect. Obviously, we've got a balance sheet to make any acquisition you could possibly dream of. First, are you looking in all your various businesses for acquisitions? And secondly, where are the EBITDA multiples that you can purchase things at most favorable, so where could we be more likely to look for acquisitions?

We are looking across the board. And I think you have a very perceptive question. I'll just add to it. Not only are there issues about varying multiples by segment, but there's also an issue of availability of potential targets. So although we're looking across the board, what we find is that the multiples and availability of targets is probably the best in our Electronics Group, where the market is still very, very fragmented. Multiples in the Food Service side, and I'm sure you're well aware, have been bid up pretty high over the last couple of years. The other area that probably has moderate multiples but we think there's probably a more rich environment of targets is in the Engineering Technologies area. So I think to kind of back into answering your question, although we're looking across the board, the Engineering Technologies and Electronics areas are probably the more likely scenario just because of multiples and target availability.

There are no additional questions. I would now like to turn the presentation back over to Mr. Roger Fix for closing remarks.

We thank everyone for their attendance to the conference call and for your questions, and we look forward to talking to you next quarter. Thank you very much.

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