Q3 2020 Earnings Call
[music].
Good morning welcome so.
And next international.
[laughter] corridor 2020 conference call.
All participants will be looks and all the low [laughter], placing no conference specialist I put us into Starkey followed by Daryl.
After todays presentation they'll be an opportunity to ask questions to ask a question you meant press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to Gary Farber affinity peak gross.
Advisors. Please go ahead.
Thank you Kate 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 Standex Dot com.
Please refer to standardize the safe Harbor statement on slide two matters that Standex management will discuss in 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.
Refer to standex. His most recent SEC 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 the non-GAAP measures of EBITDA, which is earnings before interest taxes, depreciation and amortization adjusted EBITDA, which is EBITDA, excluding restructuring purchase accounting acquisition related expenses in one time 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 to EBITDA.
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.
And next believes that such information provides an additional measurement and consistent historical comparison of the company's performance on the call. Today. It's their next is chairman President and Chief Executive of Chief Executive Officer, David Dunbar, Chief Financial Officer, and Treasurer at Ameristar sick with that I'll turn it over to David Thank you.
Gary.
Good morning, and welcome to our fiscal third quarter 2020 conference call.
I hope that everyone on the call and your families have been doing well coping with the challenges related to the covert 19 pandemic.
A lot has changed in the last three months since we last spoke on our second quarter call on todays call I will share with you. The actions we've taken in response to the impact of covert 19, with our highest priority being on the health and safety of our employees customers and suppliers.
Next we were very active in the third quarter in regard to financial and strategic initiatives that will provide an update on why I believe these actions position us well in this more challenging environment and ultimately when the environment to normalize.
From there I will discuss performance on segment trends, Adam I will then discuss our consolidated results and financial position in greater detail. Finally, I will conclude with some comments on our outlook and key takeaways from our results and initiatives.
Now if everyone can turn to slide three is key messages.
And regarding the impact of covert 19, we were fortunate to have been deemed an essential business and most of our plants and have had limited shutdowns and our facilities excluding our chinaplas.
We indicated on our second quarter earnings call that these plants would be close for part of the quarter, but all are now fully operational I am pleased with how we responded to the challenges associated with corporate nine team I've. So much gratitude for global leaders for collaborating at very high level and for all of our employees and their constructive response to this unfolding pandemic, we took immediate and.
Effective actions to support a healthy and safe operating environment for our employees on a companywide basis continuity effort to address the pandemics impact.
Our experience in China provided us with an effective playbook that has been shared with an implemented at all of our facilities overall our approach in executing globally has been highly collaborative and coordinated.
Besides working remotely from home where appropriate other actions have included changing workstation configurations and revising shipped schedules.
Sorry.
A cornerstone of our approach to supporting our business and growth strategy is maintaining a strong balance sheet. We continue to have substantial liquidity of approximately $220 million and limited leverage with net debt to adjusted EBITDA of under one times with no debt maturities until December 2023.
During the third quarter, we further strengthened our position.
We remain a consistent generator of cash with free cash flow a $7.3 million in our third quarter.
We swapped Oliver variable rate debt to fixed rate, which will decrease annual interest expense by $1 million or 50 basis point reduction.
In addition, our interest coverage ratio is approximately 10.
We also reduced our fiscal 2020 capital expenditure estimate to approximately $20 million $10 million lower than our previous estimate with a focus on maintenance safety and our highest priority growth initiatives.
Finally, we continue to repatriate cash from foreign subsidiaries with $20 million repatriated year to date and are on plan to reach $35 million in fiscal 2020.
Our continued focus on driving efficiency and productivity in our operations was evident in several initiatives.
We implement a cost reduction actions in response to the weaker economic environment that will result in approximately $4 million of savings in our fourth fiscal quarter.
We also announced the closing of our Procom pump rotor plant in Ireland in the quarter by outsourcing supply, we will save approximately $1 million annually.
Through changes in Reed switch production and material substitution, we are addressing materials inflation in our electronics segment, which will ultimately improve our cost position.
Besides these actions as we have previously indicated we hired VP of operations in February.
While it is still early innings implementation of has initiatives. We believe there is an opportunity to enhance our processes and further drive profitable organic growth and cash generation.
Next in March we announced the divestiture of the refrigerator solutions group and closed on the sale unable to sale of refrigeration continues the simplification of our portfolio that began with the divestiture of the cooking business. In early 2019, we believe the refrigeration transaction provides multiple benefits to us.
From a margin perspective, we have a stronger profile consolidated adjusted EBITDA margin is approximately 300 basis points higher excluding refrigeration on fiscal 2020 basis.
The divestiture of refrigeration leaves us with a portfolio of differentiated businesses with competitive advantages in these markets. We can now focus greater attention on nurturing and driving new business development opportunities, we have a growing pipeline of new technologies and to track of adjacent markets to further our growth, while providing customers with differentiated custom solution.
To their application needs.
As we further shape our portfolio toward building, our higher margin growth businesses into more significant platforms standex, a strengthening as competitive position.
The strengthening of our balance sheet and consistent cash generation will continue to provide us the opportunity to pursue attractive internal projects and inorganic growth opportunities and we will continue to allocate our capital with discipline.
I'll now provide a few high level takeaways regarding the third quarter performance first.
Despite the very challenging environment third quarter earnings improved year over year with increased operating margins in hydraulics engineering technologies and food service.
Our agreement segment performance was impacted by temporary shutdowns of our Asian plants, new to the Coke 19, pandemic and reduced demand from some of our European customers due to their own shutdowns the impact on our results in the quarter were approximately $7.4 million in sales and $4.7 million and EBIT.
Lastly, in addition to facing similar coated 19 challenges the electronic segment was negatively impacted by material cost increases however on a sequential basis revenue in the electronics segment increased and operating margin declined only slightly.
Please turn to slide four where I will discuss our segments beginning with electronics.
Total sales decreased 4.2% and operating income declined 14.9% year over year, although on a sequential basis revenue in the electronic segment increased 5% and operating margin declined only slightly.
The primary driver of the year over year sales decrease was the economic impact of coated 19, which reduced capacity in our China plants as well as shutdowns at some of our European customers and the automotive end market.
Despite the significant headwind some of our markets delivered positive sales trends, including our magnetics business in the military and appliance markets and a new sensor switch and really applications using electric vehicles security markets and the European heavy truck and market.
Our operating margin was 16.7% compared to 18.8 versus a year ago.
However, on a sequential basis for our second fiscal quarter. It was it with a 30 basis point decline.
Year over year operating margin decrease is primarily due to the impact of lower volumes and raw material price increases offset some by cost initiatives as well as incremental costs from the temporary shutdown of our China plant.
I'd now like into the fourth quarter electronics fiscal fourth quarter will be impacted by lower volumes and higher raw material costs in the release, which business as well as expenses associated with the temporary shutdown of our Mexico plant in the fourth quarter. As a result, so sequentially, we expect to slight decline in revenue, but more significant decrease in operating margin in the fiscal fourth quarter 2012.
Yes.
Longer term, we're excited to see continued strength in our new business opportunity funnel, which has grown 10% since the beginning of the fiscal year. The example on the left as a good illustration of how electronics works with customers to solve applications with new products.
In this case, we began developing a reed switch based solution, but discovered it was not the right technology for this specific application.
Our engineers proposed a new solution based on applying a new technology used in Formula. One race cars are testing show. This was effective we proceeded to development and are now selling the sensor. This process of followed customers unmet needs gave us a low risk path to develop a new technology and a strong relationship with the new customer who will have a stream of new Apple.
Patients in the future.
Please turn to slide five for discussion of engraving segment.
Sales decreased 4.6% with operating income flat year over year.
The sales decline reflected covered 19 related economic impact, which delayed both the receipt of customer tools from customers and shipments of our completed work with our China plants closed for nearly half a quarter.
Operating income was flat at $4.5 million, primarily related to the volume decline.
Despite these challenges leanly growth remained healthy with 15% year to date increased to $32 million driven by nickel shell laser and tool finishing.
In our fiscal fourth quarter, we expected a slight decline in revenue and flat operating margin performance, primarily due to volume trends.
We continue to focus on the technology laneways as soft from tools laser engraving, a tool, finishing as well as continued operational efficiency initiatives.
The example, it left shows the new land Rover defender now released for sale in the U.S Standex engraving work with land Rovers design team to develop innovative textures for the interior and we delivered our full suite of Texturizing services. This also exemplifies our unique global presence and ability to consistently support the customers global supply chain.
Turning to slide six engineering technologies.
Sales decreased 2.7% year over year due to lower aviation related end markets sales, partially offset by increased sales in the space and market.
However, operating income increased 10.6% year over year as a result of cost control actions and manufacturing efficiencies.
In our fiscal fourth quarter, we expect a sequentially moderate revenue decline in aviation end markets due to cope with 19 related customer push out while we anticipate defense markets to remain stable.
In this environment, our cost actions, we focus around our aviation end markets under the spin craft brand Standex engineers working intensively with customer engineers engineering teams to develop next generation spacecraft missiles and single piece lipskins using our proprietary spin forming process.
Turning to hydraulics on slide seven sales decreased 10.3% year over year due to a slowdown in the dup market and customer inventory destocking at selected customers and the refuse market.
Despite the sales decrease operating margin increased 260 basis points year over year to 17.4%, reflecting increased contribution from aftermarket sales and solid expense management.
In hydraulics, we expect sequential revenue decline in the fiscal fourth quarter due to the economic impact of covert 19 on customer production levels, along with continued imposition of tariffs on rotce cylinders.
These tests will be partially offset by continued focus on expanding our aftermarket presence and operating efficiency initiatives.
I'm very proud of the hydraulics team for using our growth disciplined processes to identify the profit improvement opportunity by allocating more capacity to aftermarket sales. This project began last summer and began to have an impact on this past quarter, making a significant contribution to the margin improvement.
Now, let's move to slide eight the food service equipment group now restated without refrigeration.
Sales increased 3.7% in the third quarter year over year, reflecting growth in scientific particularly in the retail drug sector balanced with relatively flat demand and merchandising and lower sales in our pumps business.
Operating margin increased 60 basis points year over year to 18.1%, primarily due to increased margin at both scientific and display merchandising, reflecting product mix and expense control sequentially. We expect a significant sales decline in the fiscal fourth quarter for a few reasons.
The display merchandising a pumps business will reflect the economic impact of covert 19 in the restaurant sector due to closures and a reduced level of food services.
In the fourth quarter, we expect a scientific business to be moderately impacted by the near term customer focus on supplying personal protective equipment for healthcare workers in lieu of capital equipment expenditures like refrigerators for vaccines.
In response to these challenges foodservice segment has begun implementing rolling furloughs temporary plant shutdowns and headcount reductions.
The scientific business using our growth disciplined process brought to market and innovative small freezer with controlled auto defrost.
The first patent pending development of this business and provides a product that is ideal for the storage of frozen vaccines, Adam I will now discuss our quarterly results in greater detail.
Thank you David and good morning, everyone first let me provide a few key takeaways from up fiscal third quarter 2020 results.
We reported significant year on year, increasing adjusted EPS, our sales and margins were impacted by the economic effects of global 19, primarily within our degrading sentiment.
As David previously discussed we strengthened our financial flexibility on several fronts through continued cash flow generation, reducing interest expense continued to repatriate cash and lowering our capital expenditures for the year.
Finally, we implemented several cost saving assets in the quarter the cost actions announced today will generate approximately $4 million in cities in the fiscal fourth quarter and 7 million in annualized savings.
We plan to incur approximately 1.5 million in restructuring charges in the fiscal fourth quarter related to these actions.
We also announced closure of pumps facility, which will result in approximately $1 million of savings on an annualized basis.
Now, let's turn to slide nine third quarter 2020 financial summary.
On a consolidated basis total revenue declined 3.1% year on year for the fiscal third quarter.
This reflects organic weakness primarily in electronics and engraving due to the economic impact of coal with 19.
Acquisitions contributed 0.9% overall growth in a quarter, while foreign exchange remained a headwind we had a negative impact of 0.8%.
Gross margin decreased 50 basis points year on year, reflecting volume decline and material inflation in the electronic segment.
Adjusted earnings per share were 96 cents, reflecting a decrease in interest expense due to lower borrowings and lower overall interest rate.
In addition, our tax rate was 470 basis points lower year on year due to the mix of us and non USA earnings.
Please turn to slide 10 fiscal third quarter 2020 free cash flow.
We reported free cash flow 7.3 million compared to 11.3 million into third quarter 2019.
A year on year decrease reflected increased tax payments on pension contribution payment and higher capital expenditures.
Working capital turns into quarter improved to 4.7, a 10 basis points improvement year on year with continued focus on collections and accounts payable management.
Now please turn to slide 11 summary of Standex is capitalization structure and liquidity statistics, which remained very strong.
Standex had net debt of approximately confident 2.8 million at the end of the third quarter compared to 88.1 million at the end of the second quarter of 2020.
The increase primarily reflect the impact of our share repurchase during the quarter and negative cash flow into quarter from now divested Odyssey group.
Leverage statistics remain strong the company's net debt to adjusted EBITDA leverage ratio was 0.95 with a net debt to capital ratio of 18% and interest coverage ratio of approximately 10 guys.
We also had approximately $220 million of available liquidity at the end of the fiscal third quarter.
From a capital allocation perspective, but it purchase shares in the quarter reduced our capital expansion outlook and continued to pay a dividend.
During the fiscal third quarter purchased approximately 129000 shares for $8.1 million.
There is approximately 44.7 million remaining under the board current authorization to repurchase authorization.
We are reducing the outlook for fiscal 2020 capital spending to between 19 90 million to 21 million compared to between 30 million to 32 million previously the focus of capital expenditures for the balance of fiscal 2020 will be a maintenance safety and our highest priority growth initiatives.
In addition in April we declared our 220 threerd consecutive dividend, a 10% year on year on year increase or 22 cents per share.
I'll now turn the call over to David for closing comments. Thank you Adam.
Everyone can please move to slide 15.
I'd like to take a brief moment you expressed a significant impacts the divestiture of our refrigeration business has had on stand X. I want to first thank the employees of the refrigeration group for their hard work and dedication over many years standex.
Origination business was largely standards product business.
This was also drove the cooking business, which we divested a year ago with these two divestitures will now possess a portfolio of businesses that have leading positions in niche markets and compete on a common basis through customer intimacy to deliver customized solutions and have competitive advantage in their spaces. They have track records of delivering good margin performance and the new staff.
Index has an operating margin 200 basis points higher than the business data with refrigeration in the portfolio. Our current businesses are big fish and small pond. So we can now focus much more management attention on feeding and growing them.
In closing I want to thank our employees for their dedication and efforts as well as our customers and suppliers for their ongoing support I'm very proud of our team.
Following our experience in China in regard to covert 19, we deployed an effective playbook.
Through a high degree of intercompany coordination and collaboration focusing on employee health and safety. This effort continues as we work our way through this situation out of necessity. This has created a deeper level of cooperation between our business than we've ever seen.
Well this remains an extremely challenging environment, we're confident in our ability to safely and successfully execute and progress on our strategic initiatives.
Based upon our segment discussion earlier in the call, let me summarize our expectations for the fourth quarter.
In the fiscal fourth quarter 2020, the company expects that each of US segments will experienced some sequential revenue decline as a result in the economic impact of the Coke in 19 pandemic. The electronics engraving engineering technologies segments are expected to have slight to moderate sequential revenue declines in the fourth quarter Foodservice segment is likely to have the most.
A significant sequential decrease in revenue as restaurants around the United States remained close are focused slow solely a takeout sales. In addition, the scientific business will be impacted by the current market shift toward consumable protective equipment due to covert 19 with less near term emphasis of capital equipment expenditures.
Lastly on several fronts, we made substantial progress in the third quarter further preparing stantecs for the challenges ahead in this unprecedented operating environment as well as for the resumption of a more normalized environment.
From a financial perspective, we further strengthened our position in the quarter continued free cash flow generation, reducing our interest expense cost structure and capital expenditure and continuing to repatriate cash.
Operationally with our recent VP of ops higher now in place we are in the early innings of further driving process improvement.
Lastly, strategically with the divestiture of refrigerated solutions, our focus will further intensify in our pipeline of organic and inorganic opportunities, which are well funded.
To opportunistically pursue with that I will turn it over to the operator to take questions.
We will now begin the question and answer session, who asked the question you May Press Star then one on your Touchtone phone.
Hey, Paul Please go ahead.
The key.
Throughout your question Press Star then too.
Well, we will pause momentarily to assemble our Ross.
Our first question is from Chris more.
Okay.
Okay.
Hey, good morning, guys.
Hey, good morning.
Maybe we could just I wanted to focus on electronics, but perhaps a little I was.
Future growth, maybe you build a little more retirement.
I'll talk about some of the variables.
That ultimately.
<unk> electronics, you recall we.
Hi, reliability magnetics business and.
Read switch and related sensor business that read switch business service about a billion and a half dollar global market.
And it's applications evolve with technology. For example, we have a lot of new applications and electric vehicles and new technologies, so that that that space will naturally evolved to the growth areas in the in the economy.
When we talk a lot about our new business opportunity final the N.B.O. fun on which is grilling throughout this year.
We're we're actively working quite a large funnel and our estimate is that there's $55 million in there that will convert to sales.
This year.
Punishing isn't last call, but not not this call will have between 11 or $12 million of sales in these new applications that will be in our sales in this fiscal year 20.
From you know see one two Q4 so on.
160 million dollar business, you know 10 12 million dollar business that that's enough grills to overcome any turn you know core business and help us grow bit faster the market as we try to inch out our market share.
Million and a half segment, so wrong, we think a seven gross slightly faster than G.D.P. because.
The growth in a in central markets and we can we can grow so much faster than that as we take share.
Magnetics business. This is a steady your business and <unk> is the key marks that we serve our you know aerospace military defense medical devices products for the smart grid and power again, so maybe a little slower growing and market by just a very steady long term markup.
Visibility, so I hope that helps frame the growth expectations.
Okay. Thanks.
You know from <unk>.
<unk> prospective RBC going strong balance sheet, what's the flexibility I would yeah I would guess the next couple of quarters, you know I I don't know much is happening on that end, but he talk a little bit about the pipeline and is it is it really is in electronics, any <unk>, where where the focuses on <unk>.
Yeah, <unk>, we have an action pipeline, we all working some opportunities.
And U.S.S.L.U. sat in the past the the highest number of opportunities or any electronic space because that is the biggest and market with the the large number of the smaller and these players there are some opportunities in agreement or some in the scientific space.
But as you say in general activities, a little a little slower, although we're keeping our eyes and ears open for any opportunities that might appear from companies that become stressed in this downturn and we're we're we're prepared to take advantage.
Oh.
<unk> last one from me just from you know kind of a competitive landscape perspective.
Do you see any any of your businesses that actually will be in a better competitive position on the other scientists or potentially better on the other side to cope with.
[noise] Oh, Yeah, we think nearly all of them will be you know.
In a better position, we could go business by business, but but all of them have.
Growth initiatives, we have some new products that are in development to help three announcing later this year working closely with customers on new applications.
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Although we've taken significant <unk> to to reduce our costs position or protecting our engineers for protecting our applications people. So we can continue to do that work, which which will position as for the other side.
That's helpful. Thanks, guys.
Again, if you have a question please.
And one.
Question is from Chris <unk> again, it some said nobody and company.
Go ahead.
Good morning, Thanks to take my question <unk>, you know doing well.
For a little bit I, a little surprised <unk> on a good quarter and you know I think the business, whom up a little bit more was only going to work for you just maybe talking engravings and maybe also <unk> around the electronics in the auto exposure and just how that's playing out for you just given those decline with them that.
Segment.
Yeah, then you know they they each have a they're supposed to auto in different ways.
Yeah, the electronics business. It is <unk>, so sensors that go into level of measurement applications brake fluid levels are different liquid reservoirs in fact, even <unk> an interesting fact within a an electrical vehicle. There are many more liquid rather reservoirs for cooling purpose about electric vehicles, <unk>, hey combustion vehicle.
So the electronics business.
Going to follow Sars more and.
Their exposure to.
Auto is low 20% of their other telesales.
The engraving business however.
Is exposed to auto through the schedule of new platform releases.
And that it you know predicting how that won't behave in this downturn is it's a little tricky because in past downturns in some cases, Oh, we m.'s, even accelerated new product releases, which was good for us to compete for share in a type of market.
Cases, they delayed those new platforms to conserve cash in a in a deep downturn for the moment our visibility over the next quarter or so are only hands are telling us they're maintaining the the releases that pace foresee this year. There's some there's some delays because it's hard to get people together to do the collaborative.
Markup sessions that that that are typical in this business because people are working from home and they can't they can't get together, but the the the platform schedules themselves.
For the moment to the best from our knowledge remain on track.
Right. Okay. Thanks for that color just.
With everything that's happening within the market place.
How does this.
Opportunity for you maybe to go out and get some more growth how do you see things changing where you can really capitalize on you know you're kinda needs positioning marketplaces that you play within go out and maybe see share in the south to me on C. ever really from balance sheet. So yeah that may be an opportunity, but what about even also on the organic like maybe yeah.
Well that's that's that's a great question you first have to remember how you how we how we compete when and work with our customers. So we.
Well, what can the customers to design, a a product and assembly for a new product that they have new application. They need once it is you know approved in in.
And it goes into production and well they usually sole source and we supply that customer for the life of their products. The engineering process can be long can be six months to 12 months or or more.
And that's why the competition takes place the competition takes place in in getting the right to just sit down and collaborate with the customers Engineers you do the work and that results in revenue in sales that will appear 16 to 18 months. Later, we are really well positioned right. Now are are M.B. A list is because it is it's very.
Healthy our engineering teams their biggest challenges you're supporting all of the the opportunities they have in front of them.
Because we compete with many smaller companies I can only assume that there are at least some of them better struggling. So we are.
Yeah, we're positioning ourselves well for that quote, but there's there's a lag time to it because we first design goes into production and then wraps up.
I appreciate thanks for that and then just too quick ones just on the cost savings.
I think you said for 4 million into for 7 million annually is that on top of the pro Con savings and also the interest expense.
Savings or is that configured into that 7 million annual.
The <unk> you know did not take us a little while to get those seems to read out so in that they they're probably going after leaving out the with the latter part of next fiscal year. So there will be on top of seven but we don't snap to see that 1 million will eat out in fiscal 21.
And then say six months or the interest expense is going to be just a quarterly basically would be a moment my $5 million into chart is not in that 7 million, if my 7 million or structural changes to okay.
Yeah.
9 million a little over 9 million of coffin, that's pretty pretty so.
And then a last question I know, it's probably not on your radar at the moment just given on what's happening in the marketplace quick but now that you within the food service segment you know.
Exactly dramatically over the last year and a half.
Any thoughts around maybe changing that that segment named just given that you know now it's maybe a little less food service and you know now you've got the scientific in there that's doing really well.
Yeah, I think that's a that's a legitimate question I'd say no leave this quarter behind US work business kind of know whether you stand was taken the actions <unk>. It was it was quite busy corridor for us, but I'd say well yeah, well, we'll began examining that question here in the next quarter and you know our fiscal year engines, you and that would be inappropriate time to take a look at it.
Thanks for taking the questions good luck to four and they say.
Thank you Chris <unk>.
That's fine there's no more questions like concludes that question and answer that's awesome.
No [laughter] conference back over to David on Bar for closing Vermont.
Alright. Thank you I want to think everyone today for their interest in stand action letting a share our results accomplishments and vision.
So I want to take our employees and shareholders for their continued support we look forward to speaking with you again on the fourth quarter fiscal 2020 call. Later this summer. Thank you.
[laughter] conclude that thanks again in today's presentation, you may now <unk>.
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