Standex International Corporation (SXI) Q2 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Standex International Corporation's Second Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I'll now turn the call over to David Calusdian of Sharon Merrill. 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 two. 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 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 measure 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 second quarter news release. On the call today is Standex Chairman, Roger Fix; President and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle. I'd now like to turn the call over to Roger.

Thank you, David, and good morning, everyone. It's my pleasure to begin today's call by introducing my successor as CEO of Standex, David Dunbar. We issued a news release announcing David's appointment on December 18; and as planned, he took the reins of Standex on January 20. David brings to Standex a tremendous record of growth focused P&L leadership at Tyco, Emerson Electric, and Honeywell. In the interest of time, I'll simply say that we're delighted to welcome David to Standex. I'll now turn the call over to David so he can introduce himself, and then we'll return to our usual agenda. David?

Thank you, Roger, and hello, everyone. Thank you for listening in today. It's tremendously exciting to be part of the Standex team. This is a great news professionally and personally for me. I spent my carrier in large, complex manufacturing businesses. And for the most part, they focused on highly engineered industrial products, some of them similar to those in Standex portfolio. My experience in these businesses include sales, marketing, services and product development; and as Roger said, P&L management at the global divisional level. My goal is to put this experience to work for Standex. I've enjoyed getting a feel for the business and getting to know Roger, Tom and the rest of the management team during the past few months. This is clearly a company with strong capabilities and enormous growth opportunities. Working with the Board, management team and our employees around the world, it's my mission to leverage this potential and take Standex to the next level operationally and financially. I look forward to reporting progress on this mission when we hold our Q3 conference call this spring and to meeting as many of you as possible between now and then. Now, back to Roger.

As we announced in December, excuse me, I'll be working closely with David over the next couple of months to ensure a smooth leadership transition. We're making good headway as we speak, and Dave will be taking a lead with Tom on our next conference call. Now on to our second quarter results, and please turn to Slide three. This quarter was impacted by soft demand in Food Service, offset by solid performance in Engraving, Electronics and Hydraulics. Our growth and profitability were also negatively impacted by difficult year-over-year comparison at our Engineering Technologies segment. Revenue growth for the second quarter of fiscal 2014 was 2.1%, non-GAAP EPS decreased 4.3% year-over-year to $0.88 per diluted share. We closed the quarter with a net cash position of $2 million and our balance sheet is well positioned to support future investments in organic growth as well as acquisitions. In Food Service, we experienced soft demand at several of our largest Food Service chain accounts and in the U.S. convenience store and U.K. grocery store segments. However, given our recent restructurings in Food Service and our plans to take additional costs out of this part of the business, as well as the strength of new product pipeline of Food Service, we believe we will realize significant profit leverage as demand recovers. We continue to feel good about our overall strategy for the business. We had a challenging year-over-year comparative in Engineering Technologies, but all three of the other segments delivered solid growth in sales and operating income for the quarter led by a record performance in Engraving. Turning to Slide four and taking a long view, you can see that our trailing 12 month EPS is $3.66 a share, up 8% from full year of fiscal 2012, and up 23% from full year…

Thank you, Roger, and good morning, everyone. Please turn to Slide six, which is our quarterly bridge that illustrates the impact of special items on net income from continuing operations. These items include tax effect of $0.5 million of restructuring charges, $1.5 million of non-recurring management transition expense, and a tax affected non-recurring insurance proceed gain of $1.4 million. In the comparable period for fiscal 2013, there were $0.6 million of tax affected restructuring charges and $59,000 of tax affected acquisition related costs. Excluding special items from both periods, non-GAAP net income from continuing operations was $11.2 million or $0.88 per diluted share compared with $11.7 million or $0.92 per diluted share in the second quarter of fiscal 2013. A quick word on the special items this quarter. The charge for management transition expense includes search fees, relocation and other costs associated with David Dunbar's joining the company, as well as the acceleration of stock compensation for Roger Fix due to his retirement. In addition, during the quarter we recorded a pre-tax $2 million insurance gain resulting from a catastrophic failure of a large vertical machining center located at our engineering technology facility in Massachusetts. Insurance proceeds for our insurance claims during the quarter were $3 million, partially offset by the write-off of the net book value of the sale of machine of $1 million. We have a secured replacement machine for approximately $2.9 million, and it will be operational by May 2014. During the interim period, we have increased the production from a similar machine located at the same facility and secured an outsourcing solution, which in the combination will allow us to meet the needs of our customers. We expect the cost to acquire and install the replacement machine and the instrumental cost associated with subcontracting will be…

Thank you, Tom. Please turn to Slide 11, Food Service Equipment Group, and I'll begin our segment overview. Sales in Food Service decreased 2.9% from Q2 last year and operating income was down 23.4%. In the refrigeration side of business we were encouraged by continued growth in the dollar store segment and double-digit growth in small quick service restaurant chains. It was also encouraging to see stabilization in our sales to drug retail accounts, which have been trending downward. However, similar to our experience in the last quarter, refrigeration sales at several large quick service chains were down as the chains temporarily diverted capital investment away from new store openings. Based on our discussions with the chains, we don’t see this slowdown as an ongoing trend. There was also some weakness this quarter in refrigeration sales of the small dealer channel. We're making good progress in penetrating the dollar store segment with our new line of value engineered upright merchandising cabinets. These segments are highly cost sensitive, so our sales with dollar stores are coming through at lower margins. This is due in part to the dollar stores segment being more cost sensitive than the QSR and drug store segments. It's also due in part to the productivity issues and the inefficiencies associated with rolling out new products which we expect to see improve during the next several quarters. We've had good success with our upright glass door merchandizing and endless display cabinet lines in the dollar stores segment, and I've seen early signs of approval in the drug store segment. We're now working with value engineer and lower our price points to be more competitive in refrigerated cabinet price we sell in to the ice-cream and other end markets where we apply these products. It takes time for change…

[Operator Instructions] The first question comes from the line of Beth Lilly of Gamco Investors.

Good morning.

Good morning, Beth. How are you?

Just terrific. How are you this morning?

Well, it's cold here in New England. Not as cold out there I guess.

It's a high of -- I think it's going to be a high of 15 today.

There you go. It's a warm spell in Minneapolis then…

Exactly, exactly. I wanted to dig into what's going on in your Food Service equipment group and the decline in margins. And you've set this long-term target to get margins I believe to double digit, maybe even to 12% to 13%. So can you talk about the decline this quarter, which was disappointing, and then also what steps you are taking to get to that 12% to 13% level?

Okay. The year-over-year were negatively impacted by a couple of things. We mentioned that we've grown our sales in the Dollar Store segment and that's coming in at lower margins and what the sales are that we've replaced basically that the drug store sales that are down and the second is really the mix, the large chains we do go to direct. As a result, our sales channel expenses are less and our margins are higher. So we had a shift change -- or a mix change, I should say, away from the large accounts to smaller chains, which go through the rep and dealer organization. To address our long term plans, I bring your attention to Slide 12, which we are going to use as a bit of a mantra as to what we want to do in our Food Service Group and you can see from that slide, there is really two basic avenues. One is to drive profitable growth in segments where we can generate higher margins and what we really are saying here is that we have not enough growth in the high margin segments of Food Service and we want to over time, reduce our exposure to some of the lower margins. Not all customers, not all products, not all end user segments have the same margin opportunities. So as we think about our organic growth initiatives, our focus is on products and categories where we can generate higher margin. So the new products for example, the combi speed oven, the combi oven, the speed oven, ultra-low refrigeration, all reflect higher margin opportunities. Same time we know that we have to continue to participate in a lot of our traditional marketplaces. So our focus there is on value engineering and so the upright glass merchandizing…

So the problem is, if I remember correctly, the problem is on the heating, the hot side of your business, right? That's where you are really challenged.

I think we have opportunities on both the hot and the cold side. On the cold side, that's the one that's being impacted the most by the decline in new drug store openings. So we are transitioning that business to be less dependent on drug stores into these new markets like the dollar store side. So there is opportunities on both sides.

Okay. Great. Thank you very much.

Thank you, Beth.

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

All right. Thank you, operator. This is David Dunbar and thank you, everyone for joining us this morning. I would like to close by thanking Roger and the Board for the opportunity to lead Standex. We put together what I believe is a thoughtful plan to ensure smooth transition. Roger and I will be off this afternoon to being a six-week campaign to visit our key sites, conduct quarterly business reviews and meet with customers. As I said at the start of the call, one of my top priorities of getting to know you, our shareholders, and we schedule a number of meetings for that purpose as well. Standex is well positioned to execute on an ambitious growth agenda. I look forward to reporting back on our progress at our next earnings call. Thank you again. This concludes our call.

Thank you for participating in the Standex International Corporation second quarter 2014 earnings conference call. You may now disconnect.