Good morning, and welcome to the Standex International's Q1 2019 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Mr. Ryan Flaim of Sharon Merrill Associates. Please go ahead..

Thank you, Christie. 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, purchase accounting, acquisition-related expenses and one-time items.

We will also refer to 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's Chairman, 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. We began fiscal year 2019 taking big steps forward in our strategic journey to transform Standex into a world-class operating company.

We completed two key bolt-on acquisitions; Agile Magnetics in Electronics and Tenibac in Engraving which strengthened two of our strategic growth platforms, and as announced today, we are pursuing strategic alternatives for our Cooking Solutions Group which we believe will enhance our profitability, allow us to paydown debt, and provide flexibility to invest further in our core growth platforms.

Later in the presentation, we will also show the two bolt-on acquisitions deliver more combined EBITDA than the divested business. I will cover the strategic highlights in more detail in a moment; first, let me touch on Q1 performance highlights. Overall, revenues increased 2.1% to $193.1 million, with organic sales up 1.1% and acquisitions up 1.7%.

We had backlog growth of 13.8% and strength across several of our end markets. Operating income was up 190 basis points in Q1 and adjusted operating income increased 50 basis points. GAAP EPS was $1.12 per share while adjusted EPS of $1.21 was down 1.6%.

We delivered topline and organic growth across four of our five segments with high single-digit sales growth in electronics, engraving and hydraulics. As we advanced growth laneways, continue to capitalize on the Piazza Rosa and Standex Electronics Japan acquisitions, and leverage growth in several of our end-markets.

We also completed two bolt-on acquisitions in the electronics and engraving businesses. This morning we announced that we have engaged Baird to investigate strategic alternatives for the Cooking Solutions Group. The net effect on EBITDA on a pro forma basis is accretive.

Our Q1 profitability was more significantly impacted by Food Service Group margins which reflect market headwinds in the refrigeration business. Despite this we continue to expect to leverage the benefits of the refrigeration restructuring as we move through 2019.

We saw a year-over-year increase of 270 basis points in our engineering technologies margins in Q1.

We continue to believe this business will see further improvement during the second half of our 2019 fiscal year as the aviation ramp takes up speed and we start to capitalize on the mounting demand we are seeing and customer production schedules in the energy and space markets.

Please turn to Slide 4 to discuss our announcements that we are seeking strategic alternatives for the cooking business. As the cooking solutions business evolve, we determine that it is not aligned with our strategic vision and that selling the business will provide greater flexibility to invest in our more profitable growth platforms.

We intend to use the proceeds to paydown debt. The cooking portfolio included track of brands with a broad set of product lines that we believe will be a valuable strategic fit for a company that can provide the focus and capabilities needed to more effectively compete in the market.

We expect there will be significant interest in the marketplace and anticipated sale to be completed within the fiscal year. With this change in the portfolio, we improved the quality of our earnings and margins across the board, although earnings per share will decrease as we lose the earnings and favorable tax mix of the cooking business.

Specifically in Q1, the exclusion of cooking increased our adjusted operating income from 12% to 12.6%, and adjusted EBITDA from 15.3% to 15.9%. On a full year basis, in 2018, excluding cooking increases our adjusted EBITDA operating income from 11.3% to 11.8%, and adjusted EBITDA from 14.5% to 15.2%.

You will also see how we improve our ROIC metrics by over 80 basis points. Now, I will ask you to retain that EBITDA number of $126 million that Standex delivered in 2018 with cooking for a later comparison. Please turn to Slide 5.

We are committed to invest in where we see the greatest value creation opportunities; this includes our electronics and engraving businesses. And within our food service segment, the scientific, comp and merchandising businesses, the Tenibac and Agile acquisitions are two recent examples of actions we've taken to support this growth strategy.

In the case of hydraulics, our strategy is to defend our market position in order to capitalize our strong market momentum and good earnings potential. As shown in the middle column, we are focused on improving margins with our refrigeration and engineering technologies businesses.

In refrigeration, operationally we are pleased with the restructuring program as our team has done an excellent job driving improvements at our plants. The bottom-line benefits however, not flowing through due to the national account volume declines referenced earlier.

There are however sizeable NVOs in the pipeline and we remain focused on controlling the items we can control in order to achieve our targeted margins rates overtime. Our refrigeration brands are strong in their segments and we believe our teams have the plans to align the business to it's market needs.

In engineering technologies, we're focused on leveraging the operational improvements we have made in capitalizing on the eminent aviation ramp, as well as key development programs, and new NVOs in energy and space in order to deliver bottom-line improvements.

The third category is portfolio rationalization for businesses we determine are no longer in line with our strategy. Turn to Slide 6; you can see how our earnings have evolved for five years.

Consolidated adjusted EBITDA has increased from 12.1% to 15.9% as our investments in electronics and engraving have more than doubled those businesses and expanded their margins. I also must point out that the 2018 pro forma EBITDA of $129 million includes the effect of the two recent acquisitions.

This compares to the $126 million Standex delivered in 2018 with cooking but without our two recent acquisitions. Tenibac and Agile together delivered more EBITDA at a higher rate than the cooking business. Turning now Slide 7; here you can see how our mix has changed.

The bottom pie chart restates FY18 results by adding the new Tenibac and Agile acquisitions on a pro forma trailing 12 month basis and excluding cooking. With these changes you can see the significant mix shift on our portfolio to drive more sales and profits from our growth platforms.

This is a result of organic growth focus on market test in laneways, as well as eight bolt-on acquisitions to reinforce our growth platforms. This shift is a key consequence of our strategy to transform Standex into a world-class operating company.

We have made progress in the past five years, so we believe we are entering the middle innings of our journey to become a world-class operating company. With that, Tom will review our first quarter results.

Tom?.

Thank you, David, and good morning, everyone.

Before I review our performance for the quarter, I would like to note that the results of the Cooking Solutions Group have been classified as discontinued operations and as such are not included in our Q1 fiscal 2019 financial results from continuing operations and are excluded from the year-over-year comparisons to our Q1 fiscal 2018 results.

Turning to Slide 8 which shows our historical trend of adjusted earnings per share and sales on a GAAP basis, as well as an adjusted basis. For the first quarter, adjusted earnings per share were $1.21 through September 30, 2018 versus $1.23 through September 30, 2017, down 1.6%.

This was impacted by food service operating performance, higher interest expense and increased tax expense. As David noted, sales in Q1 were up 2.1% with year-over-year to $193.1 million versus $189.1 million in the prior year period.

As shown on the bottom of the slide, our revenue and earnings performance this quarter were consistent with historical trends. Please turn to Slide 9 which details our revenue changes by segment.

Overall, organic growth was 1.1% in Q1 with four of the five businesses reporting organic growth, namely; Engraving, Electronics, Engineering Technologies and Hydraulics. The acquisitions of Tenibac and Piazza Rosa contributed 1.7% to our overall sales growth.

As expected, foreign exchange had a negative 0.7% impact, we continue to expect FX to be a headwind in 2019 due to the strong U.S. dollar. Please turn to Slide 10, which summarizes our first quarter results on a GAAP and adjusted basis. Q1 operating margin was up 190 basis points on a GAAP basis and up 50 basis points on a non-GAAP basis.

Earnings per share was up 13.1% on a GAAP basis. On a non-GAAP basis EPS was down 1.6% due primarily to the weakness in the food service segment, higher interest expense and higher tax expense. Please turn to Slide 11, which is a bridge that illustrates the impact of special items on net income from continuing operations for the quarter.

Tax-affected special items included restructuring charges of $0.3 million, purchase accounting-related costs of $0.3 million, and acquisition related cost of $0.5 million. GAAP net income was up 13.1%, and adjusted net income was down 2.1%.

Turning to Slide 12, net working capital at the end of the first quarter of fiscal 2019 was $172.5 million compared with $151.5 million in the prior year. Working capital turns decreased to 4.6 from 5 turns in the year ago period.

Couple of comments on working capital; first, our operational excellence teams are focused on improving inventory turns and days payable outstanding. Second, we have incorporated working capital turns measured on a quarterly basis in the annual bonus program in order to provide consistency across quarters and improve this metric.

Slide 13 illustrates our debt management. We ended Q1 in a net debt position of approximately $190.2 million, an increase of $106 million since the fourth quarter. We defined net debt as funded debt less cash. Our ratio of net debt to capital was 29.2% compared with net debt to capital of 15.7% last quarter.

Our acquisitions of Tenibac and Agile in Q1 represent the primary drivers for this increase. We anticipate repay trading over $50 million of foreign cash during fiscal '19. The repatriation process in many locations involves approvals from foreign governments, statutory audits, and other approvals that lengthen the repatriation cycle.

We are currently working through requirements in multiple jurisdictions in order to achieve our repatriation targets. Please turn to Slide 14. Capital spending in Q1 came in at $8.1 million versus $7.9 million in the prior year. Engraving continue to add laser capacity and electronics spending increased related to the new Cincinnati headquarters.

Looking ahead, we are projecting our capital spending in 2019 in the range of $35 million to $36 million to support our growth opportunities and offer a small excellence initiative. We expect depreciation to be about $23 million and amortization to be about $9 million. Slide 15 details the reconciliation of free operating cash.

Free operating cash flow was negative for the quarter as it was in the prior year. Free operating cash flow is generally negative in the first quarter and improves throughout the remainder of the fiscal year. With that, I'll turn the call back to David..

Thank you, Tom. Please turn to Slide 17 and I'll begin our segment overview with the Food Service Equipment Group. Revenues for the segment decreased 7.1% in Q1. Scientific sales growth of 11.8% and merchandising growth of 4% were offset by a double-digit decline in refrigeration sales.

This was due primarily through a decline in drug retail, dollar stores and quick service restaurants in line with national spending levels industry-wide. The market with specialty pumps also was soft during the quarter. As a result of the topline decline, operating income decreased to 19.9%.

Looking ahead, we remain focused on continuing to grow differentiated products through the introduction of new offerings in the scientific, merchandising and specialty pumps businesses.

In addition, we're focused on taking additional actions to realign the refrigeration business with current market conditions, and leverage our well-known brands to generate value. Turning to Slide 18, Engraving.

Sales increased 9.6% and operating income was up 2.6% with an adjusted operating margin of 22% as we capitalize from automotive demand in sales of our new technologies including laser, tool finishing, and nickel shell which were over $10 million in aggregate for the quarter.

The Piazza Rosa integration continues to be a key catalyst for growth as we accelerate tool finishing across our footprint. The Tenibac acquisition that was completed in August looks to be an excellent cultural fit and we'll remain very excited about the added value that we now are able to bring to our automotive and to non-automotive customers.

By bringing on Tenibac-Graphion, we gain access to highly skilled workforce that will be essential to our rollout of new offerings in North America.

Looking ahead, we continue to focus on capitalizing on robust automotive rollouts, as well as leveraging our recent acquisitions and driving growth from laser, tool finishing, and nickel shell technologies. Please turn to Slide 19; engineering technologies. In line with our expectations, sales were up 2.6%.

Aviation and energy sales growth were partially offset by softness in space sales due to contract timing and development programs in the main segment of the market.

Operating income was up 50.2% and operating income margin of 8.5%, shorter improvement year-over-year, in part due to a profitable quarter for the Enginetics business as it's realized improvements in operating efficiencies.

Going forward, we are focused on leveraging the investments we have made to support the upcoming aviation ramp delivering on our growing backlog for critical engine parts, [indiscernible] and capitalizing on the mounting demand we are seeing in customer production schedules in the energy and space markets.

We continue to expect significant sales and margins improvement during the second half of our fiscal year. Please turn to Slide 20, Electronics. Sales increased to 9.9% with double-digit growth in all regions and solid performance across several end-markets. Operating income was up 24.4% and we reported a margin of 24.9%.

At the end of the quarter, we completed the acquisition of Agile Magnetics enhancing our ability to service the high reliability, mission critical custom designed magnetics market.

Standex Electronics Japan continues to perform exceptionally well and we delivered strong sales across the portfolio including growth in relays, sensors, switches and magnetics. Orders in backlog increased with backlog shippable within one year of 24.8%.

While we believe this is indicative of positive momentum going forward, some customers have indicated in their joint corrections with forecasts and we are monitoring this closely.

Looking ahead, we are focused on advancing the integration of Agile Magnetics and capitalizing on new business opportunities in the funnel which we anticipate will offset any potential inventory corrections or slowdown in the coming months.

And we continue to anticipate $13.5 million of capital investments in electronics, including $5 million for our new plant in headquarters in Cincinnati. Please turn to Slide 21, Hydraulics. The 9.9% sales increase in hydraulics was driven by strength across all sectors, notably construction, housing and infrastructure. Orders in backlog were strong.

Operating income decreased 15.4% as profitability was impacted by material price increases, tariffs and machine downtime. We remain optimistic about the future of this segment as we continue to leverage the strong market environment and pursue market tests to grow the business.

New pack eject cylinders have been well received by customers and order are on the rise. We closely monitoring OEM concerns about a potential slowdown in calendar 2019. Before we go to questions, let me leave you with a few key thoughts as shown on Slide 22.

First, despite the market headwind we faced in food service, we delivered topline growth of 2.1% in Q1 with very strong performances in engraving, electronics and hydraulics, and year-over-year growth by engineering technologies for the first time in several quarters.

Second, we made significant progress with our actions to deliver improved bottom-line growth. Our efforts to improve the profitability of our legacy engine parts for aviation is now reading through, and lifting margins in engineering technologies.

We remain focused on margins improvements in refrigeration and are committed to making further costs adjustments in that business to align with the software market conditions. Additionally, the announcement that we are seeking strategic alternatives for the Cooking Solution Group increases corporate margins.

Third, our recent acquisitions are performing well and we're very excited about the two bolt-on acquisitions that we have completed during the quarter in engraving and electronics. At a corporate level, the cumulative impact of these two acquisitions with a divestiture of cooking increases the EBITDA dollars and increases our margin rate.

With the expectation of paying down debt with proceeds of the divestiture, as well as the cash we are repatriating from overseas, we expect to improve our leverage ratio versus prior year, adding more dry color to our balance sheet. And finally, our growth laneways and acquisition pipeline remains robust.

With a strong balance sheet we remain well positioned to invest in the platforms where we see the greatest growth opportunities. The Standex team continues to work hard with a relentless focus on executing the Standex value creation system to position Standex to fulfill our mission of becoming best-in-class operating company.

We began 2019 with strong momentum as we executed on several important strategic initiatives and delivered growth across several businesses. We thank our employees, customers and shareholders. We're excited for the opportunities ahead and look forward to keeping you updated. Now with that, we will take your questions..

[Operator Instructions] And your first question is from Chris Moore of CJS..

Maybe we can start with the Cooking Solutions; just get a better feel in terms of where you are in that process. Is it just getting going right now or have you been working through for the last month or so, just kind of get a sense there..

We obviously have been preparing for this for some time.

From here now the expectation is that we will -- we're actively beginning the marketing of their business, we expect the process through November and December to get to a shortlist of candidates with the final offers in early January and we would expect this fairly aggressive schedule but we'd like to close sometime in February..

I know you're just getting into it, it sounds like -- from -- kind of an evaluation range, any thoughts on that?.

Well, you can see pretty easily with the way we split out cooking sales and EBITDA of the business. I guess I would just refer to recent comps in that market anywhere from 9x to even 14x EBITDA, and we expect quite a bit of interest in the process. I wouldn't go any farther than that until we get further along..

And in terms of looking on the other side; so, if someone's out there considering purchasing the cooking solutions, just -- you've talked about just a little bit -- maybe a little bit further in terms of why it might be more valuable to them, why they might be able to generate higher margins?.

Well, you've been following the company for some time, you know, the last couple of years we've put quite a bit of investment into restructuring; and in our standards part of that business, investing in the plant and in our supply chain, and couple of years ago we announced that the expectation was with improvement in plant performance which we are seeing, we would expect the day-to-day business from the dealers and the buying groups to begin flowing through and that has been slower to come back.

So we think one of the advantages another buyer brings to desk is stronger counter relationships, better end customer relationships to create more pull.

And within our business we have three cooking businesses, two differentiated business and the standard business, and each of them individually -- they are of somewhat modest scale, either a smaller sharing team in each of them; there are three plants.

Depending on who you match up with this business, you can synergies from your energy, from engineering, sales, operations..

Let me just switch gears on the electronic side; the potential inventory corrections -- what area that's specifically in that we're talking about?.

We saw a little slowdown coming out of Asia; so a slowdown in the growth rate from Asia. So some shipments into some end-markets like semiconductors, semiconductors seems to be taking a little bit pause, there is some language from customers in Asia, some uncertainty related tariffs and how that will affect trade.

We see these as transitory effects, and as I mentioned in the scripts, we have announced the new business opportunities, new projects coming through that we believe that those will overcome any pause in the -- from the inventory effects..

Our next question is from George Godfrey of CLK..

On the sale of cooking solutions, any thought on selling refrigeration with it to exit that business or do you think the refrigeration is still attractive and that's the business you want to stay in? And then I have one follow-up..

The way we look at our uses of cash, everything goes to a returns filter and you know, we've made significant investments in refrigeration, we think those investments are taking hold, we're seeing the improvements in our operations, there is a slowdown in the marketplace and you see other companies that have refrigeration groups seeing the same thing.

Our assessment of where the market is going is; there is long-term modest growth trend here, some of the large customers that we serve had dips in their spending in this last quarter.

Our refrigeration brands are pretty strong in the segments that they serve, and we still believe that there is a good return on the investments we've made in the refrigeration business, we have a good team in place with strong brands in those markets, and our assessment is that there is value creation opportunity..

If the food service equipment business operates as expected, what do you think the target EBIT margin is for the new business as it's configured today?.

You know what's interesting about that -- back in our Investor Day in May, we updated that and we continue to communicate that getting our business to 15% was our target, it was dependent now on volume and refrigeration; so we were communicating year-on-year improvement but towards 15%.

Within that model George, the mix of the cooking business where we have a couple of differentiated businesses with margins above 15% and the standards business we projected to be below, it actually in our forecast we deliver something just under 15%.

So removing cooking actually doesn't change the answer to the margin evolution in the food service group..

[Operator Instructions] Your next question is from [indiscernible]..

Just a few different questions, first on the cooking side.

I think in the past and you've alluded to this in one of the earlier questions, you were preparing for this on the cooking side and you've stated previously to investors that the go-forward stand actually look different than it does today, and hiring Baird is kind of making that official that cooking is for sale.

But having said all that, you know, were we approached by a third-party or more than one and then it became apparent that we had to make this official and that lead us to have kind of that accelerated timeline on the transaction? So the short question is, was the phone ringing?.

I would say because we buy and sell businesses, we regularly get calls about nearly all of our businesses and we also get people pitching other businesses, that did not enter at all into our planning related to cooking.

It really had to do at us stepping back looking at how we want these to cash till we anticipate generating where are the best returns, what can we do with each of our businesses, and it really fell out of that analysis quite [indiscernible] process..

So since we took a look at it, the strategic view, I would guess we know what the tax basis of that business is now Can you share that with us?.

Yes, we've looked at it, it's a U.S. based business, so we're -- we think it will -- we show that it impacted us year-over-year by $0.38 and we have about $150 million in assets and $100 million in stock, so we will….

Well, of course we don't have the number with us, we can follow-up with that. Let's give you the right -- make sure we give you the right answer for those assets that are part of this sale..

And then on engineered, it's been kind of a swag [ph] trend to get things to improve and you stated that.

Is first quarter an inflection point for that business in terms of revenues and margins or is it still really going to be more second half weighted or are we seeing that activity already starting to pick up has really given us that confidence in the -- for the remainder of the year?.

I would say the first quarter was an inflection point from a margin standpoint because last year -- the real struggle in that business was with legacy parts and our engine parts business, and that team has just threw a thousand of small actions and some -- a few big actions has really moved that -- the needle in that business; so that is turning to re-threw [ph] it, that's what's driving the margin improvement.

The sales improvement; that's going to be more of a second half story. You know, looking at the -- it is -- it's growing but the sales projections from our customers with their current published schedules presented -- present a significant pickup in the second half for that business..

And then on the engraving business, we're seeing a lot of headlines and production rates in auto, but we've done some yields and it sounds like we've got some new platform wins and some new technologies we're bringing to the market; do you still see this as an organic grower in fiscal year '19 where we stand today?.

Yes, we do. You know, when we've talked in the past about the two finishing investment in particular, that allows us to dramatically expand the share of wallet from our customers, so that gives us a means to grow even if our traditional markets for chemical engraving begin to soften.

And if you look at what happened in the quarter, I mean our new technologies which is tool finishing, nickel shell and laser delivered $10 million of sales, that was up 75% from last year; so -- whereas as the chemical engraving which was efficient [ph] business was actually down about 1% from the prior year.

So we do think these new technologies and the new offerings give us an opportunity to continue organic growth.

I would point out though that the data we have from the auto OEMs globally is that, we're looking at a few years where there will still be a growth in the number of new models and model refreshments in the market which is the underlying driver at our business as opposed to SAR [ph]..

And then, now that I think we're going to have a little bit -- maybe not too long but Graphion integrated; any help that you can give us in terms of understanding the margin profile of that business versus kind of the historic operating profit margin within engraving or they were the same [ph]?.

Same..

And then in terms of -- just to wrap a ribbon around everything, so -- just so everyone understands, we paid about $97 million for the two deals, the net EBITDA contribution from those deals is the same or less than the EBITDA we lose from the discontinuation of the cooking business?.

This is a very important point, I'm glad you got [ph], I didn't put the text in my comments. The EBITDA from the two companies we've acquired is greater than the EBITDA we lose with the cooking business sale.

And your numbers are right, we pay for the acquisition and you can estimate for yourself what divestiture proceeds will be but our quick math would say that the round trip through these transactions is we end up with more EBITDA and a stronger balance sheet with lower leverage than when we began..

And -- it's kind of roundabout, I keep bouncing around and I apologize. On a cash proceeds basis from that -- that business would all the -- that cooking business revenue or proceeds be U.S.

based cash so we won't have to deal with any repatriation or anything like that?.

Yes..

We have been -- different periods of time when we're active buying the stock, have a decent amount of weakness in the share price even with the results today, outlook seemingly pretty good.

From a capital management perspective, is share repurchase kind of become potentially higher priority going forward?.

When we talk about capital allocation, we always look at the buyback -- the value of a buyback, that's the lowest risk use of cash and compare other adjustment alternatives to that. Two years ago we got an authorization from the board to do buybacks, and we use that opportunistically.

And we're a multi-platform, small cap; sometimes we believe the market doesn't appreciate the long-term value of the corporation and we have dipped in to buyback share. So, we don't have an expectation of how many shares or how much money we would devote to a buyback but if the market presents attractive buying opportunities for us, we will jump in..

Is there an authorization of any, currently, dollar-wise?.

$100 million..

So I guess since [indiscernible] are you to be buying the stock in a couple of days?.

Yes..

Thank you. There are no further questions at this time. I will turn the call back over David Dunbar for any additional or closing remarks..

Alright, thank you operator and thank you everyone for joining us this morning. We also look forward to speaking with many of you at the upcoming Baird Industrial Conference, and of course, returning to report on our second quarter earnings. Thank you..

Thank you. This does conclude today's conference call. You may now disconnect..