David Dunbar - President and Chief Executive Officer Thomas DeByle - Chief Financial Officer.

Chris McGinnis - Sidoti & Company John Cummings - Copeland Capital.

Ladies and gentlemen, thank you for standing by, and welcome to Standex International’s First Quarter 2017 Earnings Conference 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 floor over to Matt Rhodes [ph] to begin..

Thank you, Laurie. 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 statement 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 first 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, Matt, and good morning. First quarter continuing sales were primarily affected by soft refrigeration and market conditions, as well as a difficult year-over-year comparison at Engraving, as we reported a record first quarter of 2016, when customers pushed demand from the fourth quarter of the prior year.

While these factors affected our overall profitability in the quarter, our focus on operational excellence resulted in margin improvements at our electronics, engineered technologies, and hydraulics groups, as well as in Cooking Solutions.

In the first quarter, overall revenues declined to 9.5% to $179.6 million, with the divestiture of the Roll, Plate and Machinery business contributing 2.2% to the decline. GAAP EPS was $1.09 per diluted share and adjusted EPS was $1.11. We continued to see softness in refrigeration and market conditions.

We communicated last quarter that refrigeration national account spending would remain sluggish through, at least, the new calendar year, and that is happening. However, we are experienced operators and we know how to handle a downturn in one of our businesses.

We are restructuring in refrigeration and taking costs out to protect margins while conditions are soft. At the same time, we are working with the national accounts that are planning projects for 2017 to position ourselves to get that business.

Our refrigeration business is a good business, with good brands, good management and good employees, because we have weathered similar storms before and other businesses, we know what to do and we will weather this rough patch in refrigeration. Our acquisition of Horizon Scientific also helps here.

It is a supplier of laboratory refrigerators and freezers, as well as cryogenic equipment for the scientific, bio-medical and pharmaceutical markets. Horizon Scientific strengthens our position in higher margin and growing life sciences market.

At the same time, we continue to drive our growth initiatives across our other businesses and our growth laneways are bringing in new business. Demand is healthy in Engraving, which recorded down sales in the year due to a divestiture of roll plate machining and project timing in the automotive market.

In Electronics, Engineering Technologies and Hydraulics and the markets remain solid and we increased profitability in all three. And finally, as a measure of confidence in the company’s direction, the Standex Board of Directors approved a 14% increase in our dividend yesterday to $0.16 per share.

I’ll touch more on our achievements in each business when I go through our segment review. First, Tom will review our first quarter results.

Tom?.

Please turn to Slide 4, which shows our historical trend of sales and earnings per share on a GAAP and an adjusted basis without U.S. Roll, Plate and Machinery business or RPM. The trailing 12-month sales on an adjusted basis were $720 million versus $753 million in the prior year period, a 4.4% decline.

Of the $33 million lower sales on a trailing 12-month basis, $32 million related to lower refrigeration sales. There are three components to the refrigeration sales decline.; dollar store, drug retail, and large chains. Dollar stores were approximately $13 million of the $32 million, and are not anticipated to come back in the near future.

The remaining $19 million relates to drug retail and large chains, and it’s projected to improve in the second-half of our fiscal year. Adjusted earnings per share on a trailing 12-month basis was $4.36 versus $4.65 in the prior year period, a 6.2% decrease. Please turn to Slide 5, which details our revenue changes by segment.

You can see that two of our five segments reported positive organic sales growth in the first quarter. The acquisition of Northlake contributed 1.4% to our sales growth, while the divestiture of RPM had a negative effect of 2.2%. Please turn to Slide 6, which summarizes our first quarter results.

On an adjusted basis, gross margin decreased 60 basis points against a 7.5% sales decline. Our adjustments from GAAP to non-GAAP operating income were $4.4 million this quarter, and are itemized on that bridge on the following slide.

Please turn to Slide 7, which is a bridge that illustrates the impact of special items on net income from continuing operations. Special items included tax affected restructuring charges of $0.3 million. GAAP net income was down 13.6% and adjusted net income was down 17.2%. Turn to Slide 8.

Net working capital at the end of the first quarter of fiscal 2017 was $146.6 million compared with $144.7 million a year ago, excluding RPM. Working capital turns were 4.9 compared with 5.4 a year earlier, excluding RPM. The decline in sales volume was a primary cause for the reduction of working capital turns year-over-year.

Slide 9 illustrates our debt management. We ended Q1 in a net cash position of approximately $17 million, compared with a net debt position of approximately $9 million a year earlier. We define net debt as funded debt less cash.

Our balance sheet leverage ratio of net debt to capital of a negative 4.7% compares with net debt to capital of 2.5% a year ago. Slide 10 summarizes our capital spending, depreciation, and amortization trends.

Key capital spending in Q1 related to an automated panel vendor in our food service merchandising business, lasers in our engraving business, and a capital to support our aviation business and engineering technologies.

In 2017, we expect that our capital spending will be in the range of $26 million to $28 million, which includes an $8 million carryover from spending from fiscal 2016. Approximately $19 million of our CapEx in fiscal 2017 will be to drive sales and improve productivity, the remainder will be maintenance capital.

Slide 11 details our reconciliation of operating cash to free cash flow. Free cash flow conversion was lower year-over-year due to lower income from operations primarily in food service along with higher capital spending this 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 Food Service Equipment Group. A disappointing sales decline of 13.6% was driven by continued softness in refrigeration demand, as well as a large grocery chain roll out in the prior year at Cooking Solutions.

In refrigeration, sales were lower by nearly 20% in the quarter, as Quick Serve Restaurants, Dollar Store and Drug Stores remain sluggish. We’ve implemented a profit improvement plan to align a cost structure to lower – to the lower demand environment and protect this marginal rate.

At the same time, we positioned the business to capture the planned investment spending that we anticipate from a large national accounts in calendar 2017.

Moving onto Cooking Solutions, sales were down approximately a 11%, primarily due to a large grocery store roll out in Q1 last year that did not repeat this year, and the ongoing elimination of lower margin commodity products.

Cooking Solutions remains on track with its product roll out strategy, including the most recent launches of the mini combi oven to conveyor oven and the speed oven. On the operations front, the group continues its positive momentum and has recently returned deliveries to historic performance.

Despite the sales decline in the quarter, it delivered 200 basis points of margin improvement. Specialty Solutions was flat versus the comparable quarter last year, as the beverage pump business offset soft display merchandising sales.

We remain excited by new pump products that will provide our customers with opportunities to offer innovative carbonated beverages, enhance CO2 safety and lower maintenance costs. Looking forward in food service, our near-term focus is to lowering the cost structure in the refrigeration to lower market activity.

We anticipate, at least, one more quarter of headwinds and believe, we’re the trough in a small footprint retail and large national chain markets. We do expect improvement in 2017, as a number of our customers will begin to invest in new roll outs.

In addition, we will also be focusing on the integration of Horizon Scientific and exploring sales synergies with our NorLake Scientific brand. Lastly, we will pursue an innovative sales opportunities and continue with our OpEx initiatives.

After the close of the quarter, we acquired South Carolina-based Horizon Scientific, which you will see in Slide 14. This acquisition enhances our penetration of the higher margin refrigeration markets, represented by the growing scientific, bio-medical and pharmaceutical sectors.

We look forward to offering Horizon Scientific’s well-respected products in working with its customer base and channel partners to expand sales of our NorLake Scientific brand into these markets. Horizon Scientific brings us an experienced management team and we welcome the opportunity to build a strong position in these markets.

Turn to Slide 15, Engraving. Adjusted sales, excluding Roll, Plate and Machinery were down 8.6%, largely due to a difficult comparison with the first quarter of 2016, when we reported record quarter, partially due to timing issues.

We also had a sales interruption in July of this year at our plant in China due to a lightning strike that damaged the central equipment. Our new growth laneways demonstrated good progress in the quarter. Nickel shells, our sales are tracking well in North America and China, while laser sales continue to ramp in all regions.

Our architecture design services are growing and delivering tremendous value to our OEMs. A special thank you to those going to attend our Investor Day at the architectural design studio in Detroit. I hope you’re all able to gain a better understanding of our Engraving business and see firsthand the type of value and expertise we offer to customers.

So despite the perfect storm of events that negatively impacted the Engraving top line in the quarter, we remain bullish going forward. We anticipate a strong Q2 across all regions, as we focus on expanding sales in traditional and to new offerings. Please turn to Slide 16, our Engineering Technologies Group. Overall, sales were flat year-over-year.

Organic sales grew 2.4%, accounted by 2.3% of negative currency. Aviation sales grew 7.6%, despite delivery pushouts by a major engine supplier. Oil and gas and energy shipments were flat, as that market has reached its bottom.

Partially offsetting the aviation growth, we experienced lower demand in the medical and industrial markets and delayed shipment on space programs. Segment operating income increased due to a favorable mix of sales in the quarter, as well as margin improvement and it’s counted by production inefficiencies in the space sector.

The key growth laneway in this business is aviation and our ramp up continues, as we create capacity to fulfill customer needs. Our new Aluminum Center for Excellence in Wisconsin is up and running and delivered product in Q1. We remain on track to meet Airbus’s production increase by the end of calendar 2017.

We continue to pursue new business opportunities. In fact, during the quarter, we were awarded a new aviation part in Europe for the A400 military fighters. This will be supplied out of our UK plant. In addition, we secured a long-term agreement for MRI heads from a prominent maker of medical equipment.

And looking ahead, we are continuing to reposition the business to capitalize on aviation demand and expand capacity to support existing contract. We expect the second quarter year-on-year sales comparison will continue to be impacted by lower medical and industrial sales. Please turn to Slide 17, Electronics.

Electronics sales increased 9.5%, primarily due to the Q2 2016 acquisition of Northlake. Legacy business sales were up in Europe, but partially offset by decreases in North America and Asia. In addition, growth laneways delivered $1 million in sales.

Operating margin was strong at 21%, due to cost savings activities, operating efficiencies, and labor improvements. Sensors were up from the prior year and we’re accelerating growth laneways on sensor technologies through market tests.

We see new business opportunities for sensor technologies in industrial, automotive and security markets, and for magnetics and power distribution, electric vehicles, and medical devices. We expect our new sensor programs to continue to drive growth in fiscal 2017.

We are also focused on executing Shanghai facility move due to a Chinese government mandate. Our Hydraulics Group, as you can see on Slide 18 slowed in Q1. Sales were down 1.1% year-over-year, primarily due to a flattening in the North American dump truck and trailer in refuse markets. The export market was also down approximately 20%.

Operating margins were 19.6% in the quarter due to better cost position from increased China shipments, productivity efforts, and improved mix as the aftermarket grew as a percent of sales. We completed our China expansion in September, as we installed the commission on major equipment.

Looking forward, although, our end markets are still strong, we anticipate a seasonal softening in the second quarter. We’re focused on selectively adding distribution partners for key market coverage, exploring hydraulic solution applications, and testing new cylinder designs.

And we continue to pursue new business opportunities in all markets, as we utilize our operational excellence toolkit throughout the business. Please turn to Slide 19. In summary, we experienced headwinds to the top line in our businesses in the first quarter, as a result of a combination of end market demand, difficult comparisons, and timing issues.

Refrigeration is a subject of intense near-term focus. We anticipate national account spending will remain soft, at least, through this quarter. We’re implementing cost actions and margin protection measures to follow the reduced volume.

Finally, we are excited by the acquisition of Horizon Scientific, which strengthens our position in a higher margin and faster-growing segment of the refrigeration market. We remain encouraged by new business opportunities and growth laneways across our businesses.

At the same time, three to five businesses showed improved profitability because of our aggressive actions to enhance our margin profile through lean and our operational excellence initiatives.

As we look to the future, our balance sheet is well-positioned to fund growth, CapEx and acquisitions, as we continue to deploy the Standex Value Creation System. With that, we would be pleased to take your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Chris McGinnis of Sidoti & Company..

Good morning. Thanks for taking the questions..

Good morning, Chris..

We start on the food side and on refrigeration and just….

Yes..

I guess, how you see this play out? I know we’ve got another quarter of this, but it sounded like maybe last year was a – you had a little bit stronger sales, so next quarter maybe the impact won’t be as bad.

But I guess, if you see the back-half of the year maybe positive in growth, or are we kind of maybe just modeling along outside of the acquisition of Horizon?.

Yes. Outside the acquisition of Horizon. So, as Tom stated, we’re at the trough of the spending of the national accounts. If you look year-on-year with this, this is the quarter we lapped at. The national accounts we have, I’m sure this coming quarter too..

Yes..

We were still spending from national accounts last year, so Q3 that’s lapped. But you’re talking out accounts and this is a public information. McDonald’s is planning and building 400 stores. Tim Hortons is going to build 20 stores in the U.S., CVS is ramping up their THH, Take High Higher program. Subway is rolling out the restaurant in the future.

Now, those are plans. We are the selected provider for those companies, but we haven’t got the orders yet. So the plan is to roll those out in 2017, if they do that will flow through as growth in refrigeration..

Okay.

And can you maybe discuss a little bit about the margin profile on Horizon, where it sits in and maybe the opportunity with Northlake and high cross-selling opportunities and just how it fits in a portfolio?.

Yes, [let me take the] [ph] last question first. So Horizon Scientific and Northlake, Northlake does have a segment, we sometimes talk about itself into this – into that end market. We select cabinets and freezers. And it’s a small part of the overall business. We try to grow it. But we didn’t really have the focus in the business.

Horizon Scientific is entirely focused on that segment. And over the last few years, they’ve grown double digits consistently. Their margins are they will mix up the margins of their refrigeration business. This is a higher margin segment and faster growing. It’s more dynamic. Every year, there’s a need for new design and new concepts.

So we think the strengths that Horizon has on the channels creates a pull through opportunities for NorLake and ours. On hypothesis, we believe this, NorLake is a higher rent offering. So this completes a product family for the scientific end markets..

Great. I’ll ask one more and then I’ll jump in queue. Just on the Engraving decline, how much of that was, the first-half of last year was really, really strong, slowed in the back-half of the year.

Should we see some more sales trends in Q2, and then improve in the back-half of fiscal 2017?.

Well, we stated, we expect Q2 to be strong and we do continue it this next year. If you look at the industry data for auto roll outs, I mean, the new model roll outs are expected to continue to grow through 2019, globally. So, we remain bullish about the end market we serve.

If you walk this market for – this business for a while and it can be kind of lumpy from quarter-to-quarter. So we look at this last quarter, it was primarily just the lumpiness and the timing of the projects. We did have a little interruption in China.

We had a lightning strike that took down one of our machines for four to six weeks, and so that impacted us a bit too..

Great. Thanks for that. I missed your comment. I appreciate it..

Okay. Yes, thank you..

Your next question comes from the line of John Cummings of Copeland Capital..

Hi, good morning, guys..

Good morning, John..

Hi, John..

Hey, I just wanted to know or I was just wondering if you could comment on the competitive environment in food service.

And then just curious if you guys have any data or sense of any market share losses that you guys may have taken this year?.

Yes. So, yes, it’s correct. We – when we look at it, we split it by segment. So we look at sort of day-to-day business that goes through dealers and buying groups, and we’re trending with the market maybe slightly above the market there.

And then we look at our – look at the large national accounts with the list of accounts we’ve gone through McDonald’s, CVS, Walgreens, and Subways. We haven’t lost share there, but there – they were just in the spending drought in the last 18 months.

The Family Dollar acquisition by Dollar Tree, the Dollar Tree incumbent is getting that business, we’re not. So that’s the one area, where there was a share loss..

Okay..

So our anticipation with that is, there’s – those two businesses are still integrating, still coming together. We think it’s probably maybe this time next year that they go out for bid and trying to create some competitive tension in that refrigeration category..

Okay.

And also on food serve, I was just curious if you guys comment on any just on nice progress you’ve made on the factory move in the Dallas, and if they’re starting inefficiencies or issues, there are things running smoothly at this point?.

That’s right. If everyone in the Dallas area, which is – you wouldn’t go there unless you’re visiting us. I love you to visit the plant. We’re very proud the way the plant is performing. I mentioned that they’re at the historic performance of delivery levels. So that they have – they’re through that transition.

They’re operating as well or better than they did in China. So it was a rough 18 months to two years. But there are – of course, as Tom was pointing out, there’s room to improve here, always room to improve..

Yes, of course..

There’s always room to improve. But now we think, we’re back, at least, to where we were and that team is starting to become more aggressive about recapturing some of that business they probably lost during that move..

Okay. And then just curious on the Horizon acquisition and maybe just in the Scientific refrigeration space in general.

Can you quantify the growth that they’ve been seeing there?.

Well, I mentioned double-digit. So they’ve been growing double-digits for the last three, four years..

Okay, that’s helpful. And then in – on the Engraving side, I think last quarter you mentioned that you’re sort of expecting flat to slightly down for the auto piece this quarter. And then it seems like things maybe little worse than you’re expecting.

Is that accurate and then just maybe can you talk about why or what happened?.

Well, maybe slightly worse, but sort of kind of within the margin there, I would say, it’s just based on project timing, and then the China impact. If you were to look at the Engraving performance over the last year’s quarter by quarter by quarter, you do see occasional quarters, where it peaks on occasional, where there’s a little dip.

And that is just a function of customer schedules and roll outs and project timing. So we’re – we don’t have any concerns about that quarter. I would point out that in the quarter, we saw growth in all of our new offerings; laser, nickel shell, architecture, welding and polishing. And the traditional chemical etching is – was the decline.

So we remain encouraged about the new offerings, and we think the chemical etching tradition was just simply a project timing issue..

Exactly..

Okay. And then one more question on the aviation side and the Engineering Technology segment.

I’m just curious how much of your business there is aftermarket versus new builds? And then just how hard is it to win new business there, given all like the regulation and yes?.

Yes, it’s a great point. Well, first of all, little to no aftermarket. I mean, the parts that we make, we make parts of the engine that has to go in the hot side of the engine. If there’s potentially an engine overhaul that might be a part we look at, but it’s not really a part that wares.

And then the lipskins that we make – they have to be hit by a ground vehicle or something and craft to be replaced. So it happens, but it’s rare..

And the other part of question is just how hard is it to win new business, given all the regulation about safety and what not?.

Well, as – there’s two things. On new platforms it’s – most of our businesses is in the new platforms, that’s up a bit, and there’s – it’s just a normal competitive environment. And we think for parts, where we’re bringing our formed processes, we have a competitive advantage over traditional forged machine parts.

It is somewhat more difficult to displace a – an incumbent supplier on legacy platforms. But we do succeed in doing that, because the – especially in genetics process, also the recent wins we announced just today in the UK. Our forming technology allows us to deliver same part with the same materials with the same specs at a lower cost.

And your Rolls-Royce, for example, we’ve talked in the last year about Rolls-Royce. Our wins with Rolls-Royce are all displacing incumbents, because we bring a cost advantage. So it is somewhat more difficult, but we’re succeeding..

Okay, great. Thanks.

And then just lastly, can you just give us an update on capital allocation, I know and we just talked about your dividend versus buyback versus further acquisitions?.

Well, I mean, we have our playbook and basically the number one is our capital. I mean, – our internal capital spending is both polish [ph] risk, and then we do have – we’re all actively looking for acquisitions. We have an active pipeline, where we can have bolt-on. And then we did increase the dividend every year in October.

The Board looks at our payback ratio, our dividend yield, and we looked and we increased it to $0.02 of a 14% yesterday. And with the buyback, this – we announced the buyback couple of quarters ago that we’re authorized and we bought back about 37,000 shares.

And this past quarter, we just wanted that as part of our toolkit and we have an opportunities should we not have other opportunities with capital or acquisitions to play a buyback, or disruption of market price..

Okay. All right. Thanks, guys, for taking the questions..

All right. Thanks, John..

Your next question is a follow-up from Chris McGinnis of Sidoti & Company..

So, I guess, following up on the Engineering a real quick, obviously, nice to see positive momentum come out of the quarter here and that turning around.

Would you expect that just as – to ramp throughout the year, as you start to see more, I guess, the pace of delivery spectrum?.

Yes. That disclosed the expectation. The current schedules we have from the aviation customers, in particular, reflect that. Although we have parts on the geared turbo fan and there has been a lot of news about the geared turbo fan and some delays in that production, that will affect us a little bit.

We’ve had some pull-in from other parts from GE that for the moment is going to balance for the year. But there’s somewhat of a ramp up to Q3, Q4. We will still show growth in progress year-on-year, the Q3, Q4 from that aviation to ramp up. We’re the just – the different platforms that drive.

The mix will be maybe a little different than we forecast because of some slowdowns in geared turbo fan..

Sure. And then, I guess, just lastly, obviously, I know you have an EBITDA margin target out there and you’re doing a great job in terms of increasing the margin profile of the company. Can you just maybe talk about some of the initiatives you’re working on in terms of lean and it’s obviously paying dividends.

But how much is left in there, and how – I guess, maybe how far along in the program of lean and sigma initiatives are you, 50%, or can you maybe just give us some detail down there?.

Yes, it’s a great point. I’d say, we’re in the second inning. In general, we’ve got some businesses that are a little farther ahead, some that are a bit high. I think food service probably in the second inning has plenty of room to go and to grow.

Even if you got – if you were to go to the Nogales plant, you’d see tremendous improvement over the last couple years. We’re very pleased with the team. But they’ve got aggressive targets and we they see a lot of improvement ahead of them.

So well, for lean aficionado, there’s never an end to the journey being in the second inning, I think, we’ve got plenty of room to grow..

Great. Thanks for taking the questions today..

Thank you, Chris. At this time, there are no further questions. I’d now like to turn the call to David Dunbar for any additional or closing remarks..

All right. Thank you, operator, and thank you, everyone, for joining us this morning. We look forward to updating you our business next quarter..

Thank you for participating in Standex International’s first quarter 2017 earnings conference call. You may now disconnect..