Q1 2020 Earnings Call

Good day, ladies and gentlemen, and welcome to be sending fiscal first quarter 2020 earnings teleconference.

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Thank you operator and good morning.

Please note that the presentation accompanying managements remarks can be found on the Investor relations portion of the company's website at Www Stantecs dotcom.

Please refer to stand exit Safe Harbor statement in flight to matters that state that the index matter. It will discuss on todays 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.

If you refer to <unk>, most recent FCC 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 non-GAAP measures of EBITDA, which is earnings before interest taxes, depreciation and amortization adjusted EBITDA, which is EBITDA excluding were.

Structuring purchase accounting accounting acquisition related expenses, and onetime items EBITDA margin and adjusted EBITDA margin.

We will also refer to other non-GAAP measures, including adjusted net income adjusted income from operations.

Adjusted net income from continuing operations adjusted earnings per share adjusted operating margin free operating cash flow and pro forma net debt [laughter] non-GAAP financial [laughter] complement belts provided in accordance with accounting principles generally accepted in the United States.

Then ex believes that such information provides an additional measurement and consistent historical comparison of the company's performance on the call. Today is standex is chairman President and CEO , David Dunbar, and Chief Financial Officer, and Treasurer at Ameristar SBIC.

I would like to point out that this month standing celebrates 50 years or the New York stock exchange. The number of companies that have been continuously listed for 50 years, a small and we're proud to achieve this milestone.

I'll begin with an overview of our fiscal quarter results and provide an update on our continued progress in executing on our strategic priorities Atomera will follow with a discussion of our financial performance in the quarter, then I will provide some additional thoughts on our outlook.

Please turn to slide three.

The quarter's results were in line with our overall expectations that are commentary on August 4th quarter Conference call, specifically performance in engineering technologies Hydraulics and scientific remains strong engraving segment reported a significant sequential margin increased from the fourth quarter of 2019 on a modest sales gain as we saw improvement in our North American and.

Graving operations.

We did continue to experience macroeconomic headwinds in or electronic segment, primarily in Asia, which is impacting our second quarter outlook to manage near term market conditions. Our overall restructuring efforts are proceeding as expected we are pursuing additional efficiency opportunities both at this segment and companywide.

Despite the macroeconomic headwinds, we're facing particularly in electronics, we continue to successfully position our portfolio for higher growth and profitability on several fronts in particular growth Laneways increased 12% over first quarter 29 team to $16.6 million. Our most recent acquisition G.S. engineering is now fully integrated into.

Off to a solid start.

We also continued to see very positive trends in our new business opportunity funnel, particularly in the high reliability magnetics business as we are successfully converting our funnel to revenue we are maintaining investment in our sales and technical teams to convert these opportunities into future sales.

If you add Foodservices scientific business continues to grow well in excess of GDP as we leverage our deep technical and application expertise against the backdrop of higher demand in pharmacy in retail markets.

Finally, our current restructuring program is on plan to generate $3.8 million in cost savings on a run rate basis as we exit the second quarter. In addition, we continue to have an active pipeline of other efficiency opportunities some of which we will discuss later in the call.

From a financial perspective, our position remains strong our net debt to adjusted EBITDA is under one times, we have approximately $250 million and available liquidity and we've made sustainable improvements in our working capital management.

From a liquidity perspective, I'm very pleased with how well we generated free cash flow in the first quarter, which historically has been a negative quarter for us as our working capital initiatives delivered improved results and all of our segments.

In addition, we continue to repatriate cash from international operations. These factors position us well to invest in our active pipeline of high return internal projects and attractive acquisition opportunities our capital allocation approach, we'll remain disciplined and balanced.

Adam I will walk through the quarterly financial results in greater detail later in the call now let US review the segments beginning with engraving on slide four.

Sales increased 6.8% year over year, largely reflecting the recent Gs engineering and tenant back acquisitions balanced with the lower level of overall, new automotive model introductions due to timing of rollouts as well as the impact of foreign currency.

On a sequential basis, we delivered a 300 basis point margin improvement to 17%, reflecting a sequential improvement in automotive related end market trends, primarily North America, and the restructuring actions announced in third quarter results.

Growth Laneways engraving grew 20% year over year to $11.4 million supported by growth in nickel shell laser and tool finishing.

We also have moved into a new larger facility in don't go in China, which will provide capacity to address further lean way growth expansion.

In the second quarter fiscal 2020, standex expects year over year improvement as new global automotive roll us increase the restructuring actions announced in the third COVID-19 are completed and we continue to focus on new technologies, such as soft trends laser engraving into finishing.

Please turn to slide five the electronics segment.

Several factors affected electronics results, particularly in Asia total sales decreased 9.4% and operating income declined 36.7% on a year over year basis, the sales and operating decline largely reflected volume decline in the Reed switch markets, primarily in Asia as well as the impact of ongoing material inflation, our Asian rates, which are.

Operation This highly profitable in our operating income decline is largely due to its de leverage on double digit declines due to current market slowdowns. This is a cyclical decline in our end markets and we remain committed to this business 10 enthused about as prospects.

This decline was countered by growth in our magnetics business driven by strength in military and aerospace end markets next quarter, we expect electronic sales volume to decline year over year, although be sequentially similar to last quarter as these headwinds continue.

Previously announced restructuring in Q3 will deliver $1.1 million of annualized savings.

Despite the near term challenges, we're very well positioned in this segment for longer term in particular, we are addressing material inflation through changes in our reed switch production process to permanently improve our cost position as we communicated last quarter, our new business opportunity pipeline includes over $50 million of new opportunities. This is the result of several years of development in our.

Sales and engineering organization and positions us well for future sales growth.

Despite the current softness in this end markets Standex electronics has a strong market position, it's sort of good markets a strong customer relationships in our investments in sales and engineering are paying off with significant new business opportunities that position at well for long term growth.

Turn to slide six engineering technologies.

Engineering technologies results remained strong with revenues, increasing 18.6% and operating income growing at 89.2% year over year.

The result reflects higher margin new applications volume leverage associated with growth in our core markets of aviation space and defense as well as continued improvements in our manufacturing processes and efficiency initiatives, we expect revenue and operating income growth year over year to continue in the second quarter with backlog to be delivered under one year and.

Leasing 7% year over year in first quarter 2020.

Aviation programs, such as the Athree 20, and Athree hundred 50.

Continued to ramp I am pleased to communicate we recently received a new award to produce the Lipskin for the scene 919 equipped with GE leap Onesy engines.

In addition, our new business opportunity pipeline is also solid in this business.

From an efficiency perspective, the actions that benefited our first quarter results will continue as such as reducing the level of scrap and we work and increasing machine utilization.

Turn to hydraulics on slide seven.

The 9.7% increase in sales reflected continued strong OEM demand, particularly in the north American refuse market, including a new applications such as the new packaging cylinder front end loading of trucks, which continue to ramp to full volume.

First quarter operating margin of 18.4% increased from 12.6% of a year ago, the margin increase reflecting the higher volumes slightly lower material costs and ongoing efficiency initiatives, while we expect improved financial performance year over year for the fifth fiscal year 2020 in the second quarter, we expect hydraulics revenue and operating income to be relatively.

Flat year over year.

We're also pursuing initiatives to deploy capacity to higher margin market opportunities as well as expansion in our traditional offerings such as in roll offs and dump trailer applications now, let's move to slide eight foodservice equipment group.

Sales increased 1% year over year, reflecting scientific double digit revenue growth and strengthen merchandising revenue balanced with the refrigeration business, which was flat compared to prior year.

The 25.6% increase in operating income was due to higher volume and scientific and favorable margin product mix at merchandising.

In the coming quarter, we expect sales in the food service group to declined slightly year over year, primarily due to declines in refrigeration group sales due to fire related customer order cancellations. We also anticipate continued momentum in scientific and merchandising sales.

Finally, we continue to pursue productivity improvements in commercial refrigeration with a focus on lean related efficiencies with that I will turn the call over to add America to discuss the financial results in more detail adamant, while thank you David Dan Good morning, everyone and now let me provide an overview of our first quarter results from both revenue and EPS standpoint.

Well stay in line with our previously communicated expectations.

We experienced continuous strength in EPG hydraulics, unscientific as well as sequential improvement and engraving margin.

This was ballasted weakness in our electronics business.

Our financial position continues to be very strong as evidenced by our liquidity and leverage statistics. In addition, our working capital initiatives drove improved cash flow performance year on year with all segments reporting improvement to key metrics.

Finally, we don't plan to achieve annualized cost savings run rate of 3.8 million by the end of the second quarter from our prior restructuring announcement in Q3 last year.

Now turning to slide nine which provides the financial summary of our results.

Total revenue increased 1.7% year on year. This reflects organic sales decline of 1.7%.

Mainly due to engraving and electronic segments, which has balanced with strong growth at EPG and hydraulics.

Position us added 4.4% of growth from our recent acquisitions of Gs engineering, agile and tenant back.

FX remained a headwind we had a negative impact of 1%.

Gross margin declined on a GAAP and non-GAAP basis year on year hundred 10 basis points and hundred 30 basis points to 34.8% gross margin into quarter.

The year on year decrease was driven by weakness in our electronics business, particularly in Asia as well as long as that lower level of new model automotive rollouts at our engraving settlement.

GAAP operating margin decreased 230 basis points to 9.4% and non-GAAP basis operating margin decreased 260 basis points to 10%.

This decrease primarily reflected the gross margin decline as well as as well as year on year increase in corporate expense.

The corporate expense increased primarily relates to increase the crude stock based compensation and benefits expense and physical 20, along with management transition cost.

We expect corporate expense year on year comparisons to improve as we move to the balance of the year.

Earnings per share with 97 cents on an adjusted basis, a decrease of 19.8% year on year.

A slide down provides greater detail on the drivers of revenue by segment and on a consolidated basis.

Now please turn to slide 11, which provides a reconciliation between first quarter reported GAAP EPS and adjusted EPS with a net defense of three cents.

The items in the quarter, which created a bridge from one dollar and GAAP EPS. The 97 cents in adjusted EPS include.

Going back restructuring charges of 1.5 million and acquisition related expenses 1.7 million, which had a net EPS impact of 13 cents.

This is balanced with a taxpayer life insurance benefit the 1.3 million and approximately 1 million of fire related insurance proceeds related to our new Albany facility for an EPS impact of 16 cents.

All this resulted in on that Esa adoption of three cents from GAAP to non-GAAP EPS.

Now please turn to slide flood 12 free cash flow.

Our free to actually improved year on year from a negative 10 million into first COVID-19 deposit the 1.3 million into first quarter 20.

Three key takeaways from our free free cash flow results.

We had positive free cash flow into first quarter of 2020 compared to prior historical kind of negative free cash flow into fourth quarter results.

Key working capital metrics, all showed year on year improvement at each of our five segments.

Our initiatives that are focused collection efforts improved inventory turns and accounts payable supply management all contributed to the improvement in year on year free cash flow.

Now turning to slide 13, working capital trends.

Key working capital metrics, all showed year on year improvement and our working capital turns increased from 4.5, a year ago to 5.4 into first quarter of 2020, specifically.

DSO has improved by four days inventory Thats increased by a full turn to 5.4 times and depot has increased by two days.

Slide 14 summarizes our capitalization structure liquidity statistics and capital expenditure plants.

Standex had net debt of 98.7 million at the end of September 19, compared to handle that 4.5 million at the end of June 2019.

Ill address statistics as strong the company net debt to adjusted EBITDA leverage ratio was 0.9 at the end of the first quarter sequentially flat with the fourth quarter of 2019.

The net debt to capital ratio was 17.3% compared to 18.4% at fourth quarter fiscal 19.

In addition, we have approximately $250 million available liquidity.

All this places us in a very favorable position to invest internal growth initiatives or so strategically sound that financially attractive acquisitions as well as return capital to shareholders.

In October we declared our 220 fiveth consecutive dividend at 10% year on year increase.

And first quarter fiscal 20, Repass, we added 9.2 million from foreign subsidiaries and plan to repatriate a total of 35 million during the fiscal year.

Total capital expenditures were approximately 7 million compared to approximately seven and a half million into first quarter of last year.

We have also find so in the range of our capital expenditure forecast of between 31 million to 34 million compared to the prior outlook of between 33 and $34 million for physical 20.

With that I'll turn it back to David.

Thank you Adam and our formal remarks conclude with slide 15, we expect second quarter financial performance to be similar to first quarter results followed by strengthening in the second half.

This assumes continued weakness in the electronic segment, particularly in Asia improved engraving segment performance and continued growth in the engineering technologies and scientific businesses as our previously announced restructuring contribute to that is full run rate, we expect to further leverage our cost structure.

We will continue to drive efficiency and productivity initiatives throughout our businesses our improvements in free cash metrics is a good example of power initiatives are benefiting results in driving value throughout the company.

We expect execution on our higher growth and return opportunities to continue to gain traction as evidenced by the trends and growth rates discuss today.

Finally, we are pursuing our strategic priorities from a position of financial strength, given our liquidity and leverage metrics as well as consistent free cash flow generation with that we will open up to questions operator.

Thank you very much.

Ladies and gentlemen, we will now begin accretion Reynolds decision to ask a question you made pretty star and the one on the Touchtone phone.

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Our first question is from Chris from C.J. Muse. Please go ahead.

Hey, good morning, guys learning credible and good morning, maybe just focused on electronics a little bit.

You can talk.

Little bit kind of a rough breakdown in in terms of.

End markets, both geographically and.

And then how much auto et cetera, just to get a kind of better understanding of where some of the near term difficult is coming from.

Yes.

The last couple of quarters, we shared that down.

Shipments into auto or about 20, 525% to 30% of the business. Some of that goes through distribution total unclear exactly where the growth of 25% to 30% as a good.

It is a good indicator.

From a geographic standpoint, it's the business has been about 30% North America, Europe and Asia, because with this last quarter decline Asia is going to be kind of ticked down slightly but you balanced global revenues.

You are fairly fairly soon.

And exposure to auto in the past will show the industry break down those is quite wide I mean were military arrow in the industrial consumer products.

Communications power.

With auto.

Being the largest.

Gotcha helpful and.

From specifically on on the Reed switches is it sounds like you're the cost structures changing a little bit there.

Moving to talk about that a little bit.

It was two things one is the the operational itself is a is a highly automated cost structure with high fixed cost and that's one of the reasons that a year ago, I think one quarter electronics posted a 26% EBIT when that when that when that goes with the sales go up it levers beautifully when it comes down you will you get a little more significant.

Decremental, which we've seen.

In addition to that.

We use rhodium on the majority of our own.

Yeah.

Our reed switches and the material actions. We described our there's a series of actions that our team is putting in place to it to significantly reduce our use of rhodium so that in the future as that.

That does a volatile volatile market for really will have a much smaller impact as a result.

Got it and.

Finally, maybe more kind of medium term you talked about that $50 million pipeline and other things that you're looking at anything specific you could talk about there.

Well this is very very broad theres opportunities in there in this industry telecommunications smart grid Theres some auto.

Applications.

Just one number that I guess, we didnt include today as we had expected that that list of new business opportunities would generate about $9 million of sales for us this year.

The first quarter sales were stronger than expected as those new products ramp. So we now think that'll be the 11 or more for the year, which provide some upside to counter the downdraft in.

In the core markets, we talked about.

In the is.

Typical cycle for in new business opportunity for us.

Maybe takes a year or year to two in the in the pre sales cycle. Once it begins to ramp it can take a year to two years to ramp to full volume. So we see that that $50 million plus funnel as that thats, our growth opportunity for a little bit this year, but 2021 and 2022.

Got it it's helpful. Appreciate ill jump back in line. Thanks, guys.

Thank you next question is from George Good free Obscenely King. Please go ahead.

Thank you and good morning, Thanks for taking my question George.

Two questions one is in engineering technologies, the organic growth.

18%, how much of that is.

Temporary buildup or pent up demand, perhaps an easy compare versus existing type move.

Organic growth rate.

Hi team that can be sustainable and then the second part in food service equipment.

Margins significantly improve there was it more that the restructuring and changes that you made led to the margin mix what was that you.

While loaded troubled cooking businesses in that lots of revenue mix there was much more favorable thanks.

Yes, yes, let's first how the engineering technologies.

Can you at that same question about engineering technology last quarter I would have said Q4 19 was definitely kind of a one off we had some final buyers and some last term completion of orders in our energy business.

That drove those sales like $32 million in Q4 19. This quarter. This really represents just a ramp of the of the new applications were on and just underlying strength of the business.

The eight I wouldn't I wouldn't build into your model, an 18% annual growth rate.

I think what we've communicated in the past for this business is that in the coming years as these new applications ramp like a athree 20, neo and our new up our lives on the Athree hundred 50, where this is our mid single digit growth business, 5% to 7% growth long term and the EBIT as dosing.

Let's get to full volume will be over over 15%.

Those are those are still fair fair expectations.

On your food service question.

The the cooking business, which we divested in April is actually has been taken out of both years results of the year on year compares not muddied by inclusion of cooking last year.

The margin improvement. This year was was largely due to a mix shift within within their business. You know we've got for PNM was in foodservice scientific merchandising pumps and commercial refrigeration scientific continues to grow in double digits. It has a very high profit business and our merchandising business had a very good quarter.

And with very high profits so the mix effect of those businesses as we move to more differentiated.

Business mix drove that drove that EBIT to 11%.

Thank you Dave I.

Thank you George.

Thank you, ladies and gentlemen, just to remind infusion asking a question is pretty strong ending one now.

All right well, let me let me conclude as there is a busy day a lot of companies are announcing today. So thank those of you do who.

Listen in today for your participation.

Thank you for your interest in Standex living share our results in accomplishments and vision with you.

Especially want to thank our employees, who have fueled us to 50 years on the New York stock exchange and our shareholders for their continued support we look forward to speaking with you again on our next quarter call. Thank you.

Thank you Sir.

It is determined that completes this conference call. Thank you for TD. Today's presentation. You may now disconnect your lines.