Q2 2020 Earnings Call

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Good day and welcome to the Standex Internationals second quarter 2020 earnings Conference call.

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Please note. This about is being recorded I would now like to turn the conference over to Gary Farber. Please go ahead.

Thank you Sarah and good morning. Please note that the presentation accompanying managements remarks can be found on the Investor relations portion of the company's website Www Standex Dot com.

Please refer to Standex is safe Harbor statement on slide two matters that state Standex management will discuss on todays conference call include predictions estimates expectations and other forward looking statements.

These statements are subject to risks and uncertainties that could cause actual results to differ materially you should refer to standex. His most recent FCC filings in 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 position related expenses and onetime items EBITDA margin.

And adjusted EBITDA margin.

We will also refer to other non-GAAP measures included 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 an update.

<unk> with accounting principles generally accepted the United States Standex believes that such information provides an additional measurement and consistent <unk> historical comparison of the company's performance on the call. Today. It's stand eggs is chairman President and Chief Executive Officer, David Dunbar, and Chief Financial Officer, and Treasurer, Adam Your source.

Civic and I'll turn it over to them.

And Gary I.

I will begin with an overview of our fiscal second quarter results and provide an update on our continued progress in executing our strategic priorities.

Adam Your will follow with a discussion of our financial performance in the quarter and I will provide some additional thoughts on our outlook.

Now with everyone can turn to slide three.

Let's move into a discussion of second quarter results in key saying.

We're pleased with second quarter results as quarterly performance continues to trend inline with our expectations results were consistent with our commentary on the first quarter conference call in November as we made further progress driving stand exit strategy.

Specifically on a consolidated level, we reported $190.6 million in sales, a two and half percent year over year increase decrease and adjusted EPS of <unk> dollar three 5.1% year over year increase.

For the third consecutive quarter, the ingredient business demonstrated sequential margin improvement on flat sales growth. In addition, operating margin improved on a year over year basis for the first time in several quarters.

Results at the electronic segment were sequentially similar to the first quarter as expected as macroeconomic headwinds continue to impact results, primarily in Asia that said, the north American funnel of new business opportunities is growing.

Also engineering technologies trends remain strong.

We also have an attractive pipeline of opportunities further positioning the company for higher growth and margin.

Growth Laneways increased 17% over second quarter, 2019 propelled by offerings and nickel shell laser and tool finishing.

We continue to see very positive trends in Envios electronics, particularly in North America, where the funnel has increased to 6% year to date in fiscal 2020.

The most recently closed acquisition G.S. engineering is performing very well with many opportunities across the global standex engraving multek footprint.

In December we announced a definitive agreement to acquire Torah tell which specializes in the custom design manufacture and sale of precision magnetic components. The tour until acquisition is a strong strategic fit adding expertise and attractive end markets, including aerospace and defense that will strengthen our customer value proposition.

We continue to expect the transaction to close in the first calendar quarter of 2020.

The cost savings in restructuring actions announced in engraving electronics are complete and flowing through the piano. These initiatives are complemented by a companywide focus on increased productivity. We also continue to address materials inflation than the electronic segment through changes in Reed switch production and material substitution.

And the engineering technology segment ongoing productivity improvements are further magnifying the benefits of volume leverage and expanding operating income growth.

To further drive operational execution and productivity, we expect to have an experienced VP of operations join stand Exelate February further positioning us to achieve the company's long term goal for growth and profitability by more fully leveraging the standex value creation system.

From a liquidity perspective, our emphasis on working capital management initiatives and free cash flow generation delivered improved results year over year and the balance sheet remains strong.

Net debt to adjusted EBITDA is under one time, and we will have approximately $195 million in available liquidity post the closing of Toronto. We also continued to repatriate cash from international markets and are on plan to repatriate $35 million this year.

Now, let's review the segments beginning on page four with engraving, where we continue to make operating margin progress sales decreased 0.6% year over year. This largely reflected the timing of customer automotive programs balance with growth Laneways, which increased 22% to approximately $22.4 million with growth in.

Nickel shell laser and tool, finishing as well as the contribution from the G.S. Engineering acquisition.

Operating margin of 18.1% represented 100 basis points sequential increase from the first quarter and a 20 basis point margin improvement year over year, reflecting improved operational execution and leverage associated with prior restructuring actions.

Next quarter, we expect year over year improvement due to several top line and operating leverage drivers.

From a sales perspective, there will be an increased level of new automotive modeled rollouts contribution from new technology system, such a soft trends laser engraving and tool, finishing as well as the G.S. engineering contribution.

Margins will benefit from volume leverage combined with cost savings from recent restructuring activity over the past few quarters.

Our focus on operating discipline is gaining momentum as we have fully staffed the regional operations teams and our rolling off standardize ERP tools to support them.

Please turn to slide five electronics segment.

Several factors weighed on electronics results, particularly in Asia total sales decreased 13% and operating income declined 25% year over year. The sales decline largely reflected weaker end markets in Asia and continued to distributor destocking, although these trends appear to be moderating.

There were pockets of positive trends, including market strength in aerospace and defense and new applications for smart grid products in utilities.

Despite the impact of volume de leveraging a material inflation in the Asia Reed switch operation on operating income year over year operating margin of 17% was sequentially similar to the first quarter as efficiency actions implemented in fiscal year 20 supported margins.

Next year, we expect electronic sales volume to increase slightly sequentially and decline on a year over year basis.

Well there are some near term challenges were successfully pursuing several initiatives.

The new business opportunity funnel strengthened, particularly in North America, where it has increased 6% year to date in fiscal 2020 positioning the business for future growth.

Applications recently awarded from this funnel will deliver an estimated incremental $11 million in sales in our fiscal year 21.

And ongoing focus on productivity and cost initiatives, including addressing material inflation through changes in the Reed switch production process.

Turning to slide six engineering technologies.

As generic technologies results remain strong with revenues, increasing 12.4% and operating income growing more than five times that rate at 66% year over year.

The results reflect strength in core markets aviation space and defense as well as momentum in manufacturing productivity improvements.

Backlog to be delivered under one year grew 17% year over year due to project timing, we expect revenue in the fiscal third quarter to decrease year over year. However, we expect operating income in the third quarter to increase year over year, driven by growth of new aerospace platform parks productivity and cost efficiency initiatives.

Turning to hydraulics on slide seven.

The 6.6% decrease in sales reflected customers, reducing existing inventory levels as well as a slowdown in the dump truck market, partially offset by positive refuse market trends.

Second quarter operating margin of 16.1% increased slightly from 15.9% year ago.

The margin increase year over year reflected solid expense management and a favorable product mix.

We expect revenue and operating income to decrease next quarter year over year, reflecting customer destocking as well as the end of tariff relief on select products from our China plant.

Our focus remains on positioning standex for higher growth and margin improvement for example in the case of the hydraulic segment, we are realigning capacity towards providing greater support for aftermarket sales growth in additional new business opportunities.

Now, let's move to slide eight foodservice equipment group.

Sales were flat year over year, reflecting a mix of trends, including growth in pumps pellets with relatively flat demand and scientific in refrigeration and lower sales and merchandising year over year.

The 30% increase in operating income was largely reflective of the scientific profit contribution impact as well as a positive contribution from refrigeration.

Next quarter, we expect foodservice group sales to be relatively flat year over year, reflecting growth in scientific with refrigeration group and pump sales decreasing slightly.

We expect an increase in operating income year over year, driven by productivity improvements and favorable mix trends as some of the higher margin businesses.

Now with that I will turn the call over to add adherence to discuss the financial results in more detail adamant. Thank you. David then and good morning, everyone. First I will provide a few key takeaways from our second quarter results overall quarterly financial performance continues to be in line with our expectation.

Brands Engineering technologies remained solid in grading segment improved its operating margin both sequentially and year on year on relatively flat sales electronics, which has faced a challenging market for the past few quarters held his margins sequentially into 17% range by leveraging productivity initiatives.

We also continued to execute on t. initiatives to maintain our strong balance sheet position working capital on cash flow metrics. Both improved year on year, we continue to successfully repatriate cash from international markets and finally, we have remained discipline in managing our cost structure the cost restructuring actions in engraving and electronics are complete fairly about three point.

8 million in annualized savings.

And if we will implement additional productivity programs across the company.

Now, let's turn to slide nine second quarter 2020 financial summary.

On a consolidated basis total revenue declined 2.5% year on year. This reflects organic speaking that's in electronics strengthen our engineering technologies and contribution from Geos engineering and engraving segment.

FX remained a headwind but to a lesser extent than in prior quarters, we had a negative impact of 0.4%.

Second quarter gross margin improved 70 basis points on a GAAP basis, and 60 basis points on an adjusted basis compared to second quarter 2019.

This year on year increase reflected sales mix and productivity improvements in several businesses, including engineering technologies and engraving.

Adjusted operating margin declined 80 basis points to tap from 10.9% into second quarter 2019, the 10.1% at the second quarter 2020.

This is primarily due to a 2.2 million increase year on year and corporate expenses.

Similar to last quarter, the corporate FX headwind to reflect increased accrued stock based compensation and benefit expense in 2020, as we indicated on our call in November we expect that year on year corporate expense comparisons will improve as they move to the rest of the fiscal year.

Diluted earnings per share of our dollar on a GAAP basis, and one dollar and three cents on adjusted basis, representing an increase of 2% at 5.1% respectively year on year.

This reflected both lower interest expense and tax rate as compared to last year.