Standex International Corporation (NYSE:SXI)
Q2 2016 Results Earnings Conference Call
February 02, 2016, 10:00 AM ET
David Calusdian - IR, Sharon Merrill Associates
David Dunbar - President and CEO
Tom DeByle - CFO
Jack O'Brien - CJS Securities
Schon Williams - BB&T Capital Markets
Liam Burke - Wunderlich
Good day and welcome to Standex International’s Second Quarter 2016 Earnings Call. At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions]
It is now my pleasure to turn the call over to David Calusdian to begin. 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 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 second quarter news release.
On the call today is Standex 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 and good morning. Overall we performed well in the second fiscal quarter reporting margin expansion in four of our businesses for strong bottom-line results. Revenues were down 3.9% from the prior year to $181.9 million with foreign exchange having a negative effect of 2.5% and acquisitions contributing positive 1%.
Second quarter EPS was up 5.2% year-over-year. We had a net debt position of $4.7 million at the end of Q2. We also closed the Northlake acquisition in the electronics group for $13.5 million.
In sum, our business has delivered solid performance despite the topline challenge. In the Food Service Equipment Group, our focus continues to be on operational improvement initiatives and lowering material cost.
The group generated a 7.4% EBIT margin in Q2, up from 7.0% last year despite a 7.7% decline in sales. Now that our operational initiatives are progressing, we're taking steps to improve the topline and food service by reviewing our commercial strategy.
Engraving we had another record quarter, while we maintain the positive momentum at electronics and hydraulics, Engineering Technologies continue to be affected by the decline in oil and gas markets.
That said, the positioning of that business to increase exposure to commercial aviation is moving along well and it has significant growth potential, primarily as a result of opportunities in aviation.
With that as an introduction, I'll turn the call over to Tom to discuss our results for the second quarter then I'll be back to review our five operating platforms in detail. Tom?
Thank you, David.
Slide 4 shows our historical trend of adjusted earnings per share and sales. On a trailing 12 month basis, adjusted earnings per diluted share were $4.70 through December 31, 2015, versus $4.39 in the 12 months ended December 31, 2014, a 7.1% increase.
Sales were $761 million on a trailing 12 month basis as of December 31, 2015, versus $763 million in the prior period.
Please turn to Slide 5. Two of our five segments reported organic growth for the quarter. On the chart, you can see the contributions from acquisitions and currency effect for each segment.
Overall, organic growth was down with acquisitions contributing 1% versus Q2 last year due to the Northlake acquisition in electronics. Currency had a negative effect of 2.5%, which resulted in an overall sales decline of 3.9% to $181.9 million for the quarter.
Please turn to Slide 6, which summarizes our second quarter results. Excluding special items, operating income grew 0.6% to $18 million from $17.9 million a year ago. Adjusted EBITDA grew 1.4% to $22.6 million or 12.5% of sales compared with $22.3 million or 11.8% of sales in Q2 last year.
Please turn to Slide 7, which is the bridge that illustrates the impact of special items on net income from continuing operations. For Q2 of fiscal 2016, these items included tax affected restructuring charges of approximately $1.1 million, $300,000 acquisition-related charges and $700,000 of tax benefits related to the retroactive extension of the R&D Tax credit and benefits related to the sale of an idle property.
Turning to Slide 8, net working capital at the end of the second quarter of fiscal 2016 was $144.2 million compared with $147.2 million a year earlier. The decrease in working capital is related to the lower overall sales volume. Working capital returns were 5% compared to 5.1% a year earlier.
Slide 9 illustrates our debt management. We ended Q2 in a net debt position of approximately $5 million, which includes borrowings of $13.5 million to fund the Northlake acquisition. This compares with net debt position of approximately $42 million a year earlier. We define net debt as funded debt less cash.
Our balance sheet leverage ratio of net debt to capital of 1.3% compares with the net debt to capital of 10.8% a year ago.
Slide 10 summarizes our capital spending, depreciation and amortization trends. During the quarter we made key investments in a panel blender for our Hudson Wisconsin facility, 3D scanning equipment in our Krefeld, Germany location and CMC equipment in our TianJin China facility.
To date we have spent approximately $1 million on the new Aviation facility in Wisconsin. We anticipate spending another $4 million to $5 million on this facility in the remainder of the fiscal year.
In 2016, we continue to expect our capital spending will be in the range of $26 million to $28 million.
Slide 11 details our free cash flow performance, which was $19.6 million for the second quarter. We generated $1.53 of free cash flow per share during the quarter compared with the $1.25 per share during the same quarter last year.
With that, I'll turn the call back to David.
Thank you, Tom.
Please turn to Slide 13, and I'll begin our segment overview with the Food Service Equipment Group. As I mentioned at the outset of the call, margin improvement continues to be a key area of focus for us within Food Service.
Operating income margins increased 40 basis points to 7.4% and sales decrease of 7.7% from Q2 last year. The decrease in sales was driven primarily by lower volume at refrigeration. Cooking solution sales also declined during the quarter.
In refrigeration, sales to large national chains remains sluggish in Q2 and with the primary cause of the year-over-year revenue decline. Dollars to our sales also continue to be soft as a result of the merger of Family Dollar and Dollar Tree. C-stores and other small footprints retail performed well.
In Cooking Solutions, the decline in sales was mostly driven by international sales as well as a focus on operational improvements, reduction in pass due backlog and some product rationalization.
Our Ultrafryer acquisition remains on track and we continue to actively invest in its line of products. Our BKI business performed well with sales up double digits for the quarter and display merchandising business also performed well, while the [full on] specially post business was down in the quarter.
In Q2, we lowered material cost by approximately $1.8 million across the segment. The transitional cost from last year's plant move, including price concessions and freights and distribution costs continue to trend down. Plant productivity is also improving. We're taking the necessary steps to leverage our operational footprint to increase productivity.
During the quarter, we moved production of the line of field ranges from our Simpsonville, South Carolina facility to our Ultrafryer plant in Texas to help drive efficiencies and improve on-time delivery.
We are also focused on improving production efficiencies through focused factories as we produce our commodity products at the Nogales, Mexico facility and more complex products at our plants in the U.S.
We're encouraged that operational excellence initiates are achieving the intended results both in the short and long term. With these operational excellence initiatives in place and performance heading in the right direction, the team is currently reviewing its commercial strategic initiatives, ensuring that the business remains aligned with the Standex 2020 vision.
Turning to Slide 14, the Engraving Group had another excellent quarter achieving record sales and operating income. Sales growth of 19.9% was primarily driven by a double digit increase in our Mold-Tech business across all of our regions, as demand for automotive mold remains strong.
Organic sales were up 29.8% and currency had a 9.9% negative impact. Operating margin was 23.3% with operating profit up 25.2%. In addition to the strong performance at Mold-Tech, sales also increased in our roll plate and machinery business due to large orders.
Our Innovent business also had a strong quarter as a result of an increase in diaper drum sales. As I've mentioned before, several global auto OEMs are beginning to require textures that can only be produced with a newer technologies of laser engraving and nickel shell/molding.
We have begun the installation of four new lasers in North America and China as well as ramping up our nickel shell production in North America and in Europe. We remain encouraged with the progress of our design centers.
This quarter we're investing in our design center in Detroit and also expanding other design hubs in North America. The picture here shows our design center promotion at the recent Detroit Auto Show.
The demand trends and momentum engraving are strong and we expect this to continue throughout calendar '16. Going forward, we will ramp up production of nickel shell moulds over the next 12 months to increase capacity and meet demand.
We're also focusing on increasing penetration in non-automotive mould-tech sales.
Please turn to Slide 15, Engineering Technologies Group. Organic sales were down 21.7% year-over-year primarily due to lower energy sales, partially offset by increased sales in aviation.
We have put cost reductions in place to offset the lower demand in oil and gas markets and we've shifted our focus at the aviation market where we're seeing very good demand. Aviation continues to grow and we're creating the capacity to fulfill customer needs.
For example, we signed our first agreement for a plant in the U.K. to supply aviation engine parts, which we will use to further penetrate the market in Europe.
Also, the construction of our new Wisconsin plant is on track and we expect to be in production at that facility by the end of the fiscal year.
Our Enginetics acquisition performed well, up 11.2% for the quarter. The operational improvement initiatives that we have in place in this business are paying off as we're seeing better performance and an increase in demand. We continue to look for opportunities to drive further value out of that business through operational initiatives.
Looking forward, we anticipate exiting the fourth quarter of 2016 with margin improvements generated from sales and margin growth in aviation and an easier year-over-year comparison in the oil and gas market.
Operating margins should be in the mid teens for Q4. We continue to be excited about our Enginetics acquisition and aviation opportunities as we ramp up capacity to support our long-term awards and we continue to be encouraged by the number of new business opportunities.
Please turn to Slide 16, Electronics. Sales increased 1.9%, primarily due to the Northlake acquisition at the beginning of Q2. Foreign exchange negatively affected sales by 5.2%. China and Europe grew, but were offset by softness and continued customer inventory adjustments in North America. Operating income increased 4.4%.
Sensors were slightly up from the prior year. We continue to see more opportunities in sensors and we're accelerating the growth laneways in sensor technologies through market tests.
The capacitive sensor picture here is one example. We expect our new sensor programs to drive growth over the next 12 months. Magnetic sales were strong in the quarter, driven by military, aerospace and our Planar business. Industrial and medical sales were down.
As I mentioned on the last quarter's call, we acquired Northlake Engineering early in the second quarter. Northlake directly supports our Electronics Group strategy to expand our high reliability magnetics business into adjacent markets to drive growth and profitability.
This acquisition positions us to provide a wider array of solutions to customers in the medical equipment and power generation markets. Power generation and distribution is new for Standex and is an attractive growth opportunity.
The integration process is on track and we are currently working on the sales team operations and supply management. We remain optimistic about the electronics business long term. We are focused on new business opportunities, strategic lane ways and market tests aimed at increased volumes and then the consolidation of operation into our Northlake facility.
Our Hydraulics Group, as you can see on Slide 17, had a good quarter. Sales were up 2.7% year-over-year primarily related to the dump truck and trailer market, which is tied to the strong North American construction environment.
We're gaining share in the U.S. and mobile hydraulic cylinders by having quick turnaround and custom quotations and short delivery times. Production in China was up 20% in the quarter and backlog and order intake were up double digits. Operating margins were 15.2%.
On the operations front, our robotic welding machines at our Ohio facility are up and running and they're driving performance improvements and efficiencies.
Looking ahead, we're focused on developing unique customer engineering to solve customer issues and utilizing our dual production capabilities in North America and China. We're also focused on our recently launched OpEx plant in hydraulics.
To wrap up and summarize our business performance in Q2, turn to Slide 18. This shows the major contributors to the sales change. The decline in oil and gas and energy markets contributed 3% to the decline, FX 2.5% and reduced spending buy our top four customers in refrigeration another 3.5%; growth in China, the Northlake acquisition and strength in other businesses added back 5.3%.
Let's turn to Page 19. In sum, Food Service sales decline was concentrated in refrigeration's top customers. Engravings momentum should continue in the Q3. In Engineering Technologies, aviation continues to grow and oil and gas remains a headwind for the coming quarters. They're somewhat less so than in Q2.
Electronics expects North American sales to recover in the second half and Europe remains strong with less FX impact in the second half. Finally, Hydraulics end markets dump truck and dump trailers remain strong with residential construction and passage of the highway bill as well as continued penetration in the refuse vehicles.
Please turn to Slide 20. In summary, we performed well from an operational standpoint despite the decline in overall sales. We're taking the necessary steps to improve each of our businesses and are seeing the results of those efforts.
Our Q2 margin and performance was very strong with improvement in four of our businesses. We were especially pleased with continued improvement in the Food Service EBIT margin as well as the progress of repositioning engineering technologies. As you've seen we continue to see momentum in engraving, electronics and hydraulics.
While foreign exchange and oil and gas markets have been headwind into the recent quarters, our exposure to these areas into China is relatively low. Moving forward we'll continue to exercise caution around currency expectations, oil and gas markets and the regional economic conditions.
Across the organization, we're focused on executing on the four pillars of the Standex value creation system to drive performance in the business. These include the balanced performance plan process, the growth disciplines, operational excellence and talent management.
This is a long term journey, but we're reaping the rewards from these initiatives and look forward to continued success in these areas.
With that Tom and I will be happy to take your questions. Operator?
Thank you. [Operator Instructions] Our first question comes from the line of Jack O'Brien of CJS Securities.
Good morning and thanks for taking my questions.
Good morning, Jack.
Good morning, Jack.
In food service, could you quantify how much of an impact sales and leveraging had on EBIT margin performance? And then any color on how the food service sales are trending this quarter?
So on the -- I think we called out the major causes of the margin improvement. The margin improvement in food service we had -- I think last quarter we talked about the focus on strategic sourcing across food service. We’re getting good benefits from the sourcing improvement.
We’re actually seeing -- we’re seeing gross margin improvement in the quarter largely driven by the operational excellence improvement. So, we didn’t bridge that of course with some volume deleverage impact, but the underlying operational improvement and the materials improvement drove the margin rate improvements.
So bottom line that we’re happy with what we’re seeing at the gross margin level that you've got some sustainable operational improvement.
Understand. And any color on how sales are trending coming into the New Year?
Well I’m going to look at Tom on this -- don’t know but we just haven't typically given…
We generally don’t give guidance and generally for let’s say food service, you're going into a very slow quarter because a lot of our food services drive to the construction industry so we're…
But here I would answer -- I’d point to industry indicators, if you look at other players in the industry, you are seeing some softness in commercial refrigeration in other companies.
Our softness was concentrated in four customers. If you take those four customers out, we grew across the Board, and in smaller customers and then dealers. Our cooking business was affected by some export business which is compromised by FX and we also rationalize some products out of there.
The market indicators for the cooking industries from the market watchers remain positive for the remainder of this year and so I would just set expectations kind of along those lines that were more or less attract the market.
Got it, that’s helpful. And then shifting over to engraving, another excellent quarter there driven by Mold Tech and you indicate that these trends are expected to continue through 2016. Can you give us some color on your medium term outlook for engraving and what needs to happen there to drive meaningful growth in '17?
Yeah, well great question and I have to say we were surprised on the upside of this quarter, which is better than being surprised on the downside, but we also better data now. In the last year, the team has been working on collecting data to give us a little more visibility about upcoming product launches, not just North America, but around the world as well as new product refreshes.
The data we have as I mentioned in the call that we expect the strength which are unless couple quarters to continue and visibility falls off towards the end of the year, we have pretty good idea for the next couple of quarters.
And as I’ve said before and I continue to say, beyond that a reasonable expectation would be to say that this business will follow the projection for auto unit sales, although we know its driven by new models, but over time if you think that 5% growth rate as probably say.
Now to your question second question about growth, we’ve got very creative, innovative and effective leaders in this business and we included the pictures of that promotion that the Black Swan dress and if you look closely the pictures, the individuals pieces on that dress came from our advanced rapid prototyping texturizing service in our design hub, which is what we use to work with the design teams and auto OEMs that was very well received and you can see that that team has got a real commercial sense and very creative.
So we see potential growth opportunities in nickel shell, if we’re able to accelerate nickel shell sales in the future. Laser engraving is a growth opportunity and the each laser pattern would be at higher price than the chemical ex pattern it replaces and the team is also exploring some additional growth opportunities.
So I think quarter-to-quarter we continue to communicate our progress in identifying and quantifying the best we can what these growth opportunities are.
Understood. Okay. Thank very much for taking my questions.
Yes. Thank you.
Our next question comes from the line of Schon Williams of BB&T Capital Markets.
Hi good morning.
Good morning, Schon.
Good morning, Schon.
Let me just say, I do find it slightly amusing they put a Black Swan in your -- down 260 points there.
Yes we're -- I would like to take credit for being so clever, but there was just…
Well good results in engraving either way. I wanted to talk a little bit about electronics, there has been some softness in that North American piece there for I think for at least the last quarter or two.
I think last time we talked to you, you thought maybe some of that was kind of destocking, more temporary. Just to give you a little bit more color on what you’re seeing there maybe especially around the white goods.
Yes. So as you know for the fourth month in a row, the ISM Index showed contraction North American manufacturing. So we -- the electronics business in Standex serves the broadest range of end markets. So the way we think over the last few quarters is there is -- there has been some destocking with our customers who have been maybe a little -- a little cautious as they watch the market.
The decline in -- softness in North American manufacturing as indicated in the index is certainly having an impact and the NBO opportunities, the new business opportunities, which are there we continue to be very encouraged by are taking a little slower to ramp up.
Now our Electronics team believes in the second half. They have enough new business opportunities and new products and we showed a picture of the capacitive sensor, which is a brand new idea for us. It is a non-magnetic sensor. It’s the first and is getting good response from customers.
So growth -- the growth initiatives are taking little bit longer than the team had thought but they remain optimistic about growing in the second half.
All right, that’s helpful and then was there -- there was some mention on maybe some consolidation with the Northlake acquisition of Electronics, just little more detail there?
Okay, yes good point. Well first of all the Northlake, I don’t think we call it savings in the numbers, it’s not big enough to be material, but it’s attributed to the electronics numbers. So with the Northlake acquisition, it’s a high reliability magnetic side and we had -- we had acquired the business years ago, I think Roger or was it before Roger…
Before Roger and outside Toronto and so we saw an opportunity to leverage the equipment and the knowledge base of the operators in the Northlake. So we closed the facility and moved its production into Northlake.
All right. That's helpful and then one more question if I may, just as engineering, Enginetics seems like it’s been ramping, assuming that oil and gas stays stable at low levels, would you still expect Engineering Tech to continue to ramp sequentially in terms of volumes or do we need to wait until Wisconsin is fully done and then we could start to see some additional ramp? I’m just trying to get a sense of how the back half of this fiscal year might look compared to this quarter?
Yes, so aviation is certainly continuing to ramp and will definitely -- it will clearly be even stronger in Q4, but aviation continues to ramp. Oil and gas, I think in the bridge we showed if you do the math there it was about $6 million year-on-year hit in the comp quarter-to-quarter.
That will lessen the next couple of quarters. You will figure out $4 million, $3 million along those lines with aviation continuing to ramp up. So sequentially you’ll see that.
Okay. Thanks guys.
[Operator Instructions] Our next question comes from the line of Liam Burke of Wunderlich.
Thank you. Good morning Dave. Good morning, Tom.
Good morning, Liam.
Good morning, Liam.
David you highlighted on the Food Service Equipment Group the four top customers having year-over-year decline in revenues. Is that a slowing of store openings or is has been slow in the renovation side or how do you explain all four of them showing decline or is it just bad timing?
No it’s a good question. The story is little different for each of them. Two quarters ago and last quarter I believe we talked about softness in our top customers and we listed customers Dairy Queen, Subway, Tim Hortons, McDonald’s and McDonald’s starting to pick up. So we've taken McDonald’s off that list and for reasons that you all know.
With Tim Hortons their investment is more into other regions of the country where we don’t support them. Subway’s expansion is more overseas. It's less North America investment.
The Family Dollar, Dollar Tree merger has slowed down the ramp up of their new combined program. So because every business has a different explanation, coupled with the fact that the remainder of the business showed growth year-on-year, I do think it’s more of a customer-specific issue.
However, we obviously are watching it very closely -- other refrigeration, commercial refrigeration suppliers have shown some softness. So that’s -- those are the data points we're looking at to try to guess what it was going.
Okay. Would that translate into some of the other areas that you've seen strength like drug chains?
Drug chains convenient stores have been good, what translate?
Some of the weakness you've seen in the top four customers…
We haven’t seen that.
Okay, fine. And on engineering, excuse me, on electronics you mentioned the North Lake acquisition, did that cerate, that integration create any drag on margin this quarter?
Purchase was certainly…
423,000 on purchase accounting.
Okay. So you had to step up in accounting, okay, great. And Tom do you anticipate any one-time benefits or negatives on taxes for the second half of the year?
No, just we reinstituted the R&D credit and so year-on-year it will be -- it shouldn’t have an impact because it was implemented.
Great. Thank you.
At this time, I’m showing no further questions. I would like to turn the floor back over to David Dunbar for any additional or closing remarks.
All right. Thank you. First let me thank the employees and leaders of Standex who I think are executing very well. I am very pleased with the progress and performance of the businesses. And I thank everybody on the call for their interest in Standex. We look forward to updating you on our next quarter’s performance. Thank you.
Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.
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