Q1 2023 Standex International Corp Earnings Call
And taxes.
Adjusted EBIT, which is EBIT, excluding restructuring purchase accounting acquisition related expenses and onetime items, EBITDA, which is earnings before interest taxes depreciation and amortization.
Adjusted EBITDA, which is EBITDA, excluding restructuring purchase accounting acquisition related expenses and onetime items.
EBITDA margin.
And adjusted EBITDA margin, we will also refer to other non-GAAP measures, including adjusted net income adjusted operating income 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.
Standex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance.
On the call today is <unk>, Chairman, President and Chief Executive Officer, David Dunbar, and Chief Financial Officer, and Treasurer at Amir <unk>.
Thank you, Chris and welcome to <unk>, we're happy to have you join us.
Good morning, everyone and welcome to our first.
Quarter 2023 conference call, we're very pleased with our first quarter performance, which built on a highly successful fiscal 2022.
Our focus on fast growth markets pricing disciplined and nimble execution by our global management teams positioned us to continue delivering strong earnings and a dynamic macroeconomic environment.
We have an active pipeline of new business opportunities and productivity initiatives to continue our momentum I want to thank our employees our executives and the board of directors for their continued dedication and support.
Now if everyone can turn to slide three key messages.
The continued effectiveness of our price and productivity actions improved our margin profile in the quarter and produced our sixth consecutive quarter of record adjusted operating margin consolidated adjusted operating margin of 15% in fiscal first quarter 2023 was 160 basis point increase year on year, and 110 basis point improvement sequentially.
Despite external challenges such as high inflation and foreign currency headwinds.
Forrest <unk> five company business segments, each reported adjusted operating margin of at least 16% as we successfully executed companywide productivity and price realization actions.
We reported seven 3% organic revenue growth year on year as three of our five business segments exhibited organic revenue growth.
Electric vehicles renewable energy commercial aviation and defense end markets remained strong.
While scientific was impacted by lower demand for Covid vaccine storage.
Revenue contribution from high growth markets, such as electric vehicles Green energy and the commercialization of space increased approximately 30% year on year to $17 million in fiscal first quarter 2023, we anticipate this revenue stream to grow by over 35% in FY 'twenty three.
Our solar energy project with <unk> is progressing well and is now in the pilot plant design phase order trends remain healthy and our backlog realizable in under one year grew 12% year on year to $266 million.
As part of our value creation system. We continue to have an active focus on lean initiatives and in turn the standardization of operating disciplines across all business units.
Further leveraging our G&A structure.
As a result, we are seeing continued improvement in our ROIC.
With Q1, FY 'twenty, three annualized ROIC of 12% 160 basis points improvement year on year.
Adam will discuss our financial performance liquidity position and capital allocation in greater detail later in the call.
In fiscal second quarter 2023 on a sequential basis, we expect slightly higher revenue and similar operating margin on a year on year basis, We expect flat revenue comprised of mid to high single digit organic growth countered by an equivalent reduction from currency and moderate to significantly improving operating margin.
In fiscal 2023, and we anticipate the majority of our segments to exhibit solid organic growth now please turn to slide four and that will begin to discuss our segment performance and outlook beginning with electronics.
Segment revenue of $75 million decreased 1% year on year, and four 3% organic growth and one 5% contribution from acquisitions were more than offset by six 6% negative impact from foreign exchange and.
End market trends remain favorable, particularly for industrial applications medical power management and EV related markets.
Operating margin of 24, 1% in fiscal first quarter 2023 was flat versus the year ago period, primarily due to organic sales growth and productivity initiatives offsetting the inflationary and currency impact new business opportunities funnel remains strong and is currently at $62 million.
The pictures on slide four highlights the electronic segment's focus on growth markets, such as warehouse automation within magnetics, we are delivering components for smart conveyor systems in manufacturing and warehouse automation to improve precision and energy efficiency. This business will continue to grow as importantly overall electrification.
And in many markets within sensors and switching technologies are really are unique products meeting the isolation requirements and renewable energy applications as well as electric vehicles.
We continue to see strong growth coming from China, and Europe as renewables continue to expand in those markets.
Sequentially, we expect revenue in our second fiscal quarter to be similar as relay and magnetics components grow in North America is offset by softness in white good end markets in Asia and Europe .
The company expects a slight decrease in operating margin, mostly due to mix and higher growth investments, partially offset by continued price actions. Please turn to slide five for a discussion of the engraving segment.
Revenue remained nearly flat at $35 million as an eight 3% headwind from exchange rate changes overshadowed seven 9% organic growth.
Operating margin of 16, 7% in fiscal first quarter 2023 increased 280 basis points year on year due to the realization of previously announced productivity actions in North America and Europe .
<unk> sales of $15 million grew approximately 5% year on year with positive trends in software and tools laser engraving and tool finishing.
The picture on slide five illustrates our innovative texture services for customers like Ford using our advanced laser technology, which can be engineered to create colored surfaces without paint.
And our next fiscal quarter on a sequential basis, we expect revenue to be similar and operating margin to decrease slightly due to project mix.
In fiscal 2023, we also expect continued growth in soft trim demand, reflecting auto manufacturers, increasing move to higher quality interior surfaces and textures.
Please turn to slide six scientific segment.
As expected scientific revenue decreased 14% year on year to $18 5 million.
Primarily driven by lower demand associated with COVID-19 vaccine storage.
Operating margin of 22% decreased 70 basis points year on year due to the lower volume, which was mostly offset by price and productivity actions.
As highlighted on slide six the pace of new product introductions at scientific is accelerating further broadening our product line and capabilities. We were the first to release products compliant with the new NSF Naft vaccine storage standard and continue to expand the product family with new sizes.
As new vaccines and treatments continue to be introduced scientific as a favorable market position to meet the growing demand.
On a sequential basis in the fiscal second quarter of 'twenty, three we expect slightly higher revenue increase and slightly lower to similar operating margin, primarily due to R&D investments and higher anticipated spend on advertising and trade shows.
Turning to the engineering technologies segment page on slide seven revenue of $17 million decreased 3% year on year, reflecting project timing and the impact of foreign currency.
Operating margin of 11% increased 590 basis points year on year due to productivity and efficiency initiatives and the impact of a onetime project related charge in fiscal first quarter 'twenty two that did not repeat.
As pictured on slide seven our advanced engineering team is developing products for a large number of customers from established market leaders to innovative startups to applications like the picture core fuel tank dome as well as adjacent rocket engine and structural components.
In the next fiscal quarter on a sequential basis, we expect a moderate to significant increase in revenue and operating margin reflecting project phasing.
Please turn to slide eight specialty solutions segment.
<unk> solutions revenue of $35 million increased nearly 37% year on year due to price realization strong market demand in the hydraulics business unit and the favorable year over year comparison due to a labor work stoppage in two plants during fiscal first quarter 'twenty to operating.
Operating margin increased 640 basis points to 17, 4%, reflecting the price and volume increases.
Pictured on slide eight we've continued to expand our procon product line with our helical gear pumps for professional espresso shots and milk, forming which requires 40% less energy than competitive products.
In the fiscal second quarter 'twenty three on a sequential basis, we expect revenue to decrease slightly primarily due to seasonality and foodservice equipment end markets.
Operating margin is expected to be similar as volume decline is offset by pricing and productivity actions.
I will now turn the call over to Adam here to discuss our financial performance in greater detail.
Thank you David and good morning, everyone.
First I will provide a few key takeaways from our first quarter 2023 results.
Despite continued inflationary pressures and foreign currency headwinds.
They need to drive organic growth and margin expansion.
Earnings strength reflect the successful implementation of our pricing actions and realization of our productivity initiatives.
As a result, we achieved our sixth consecutive quarter of record consolidated adjusted operating margin.
In addition, our end market demand plans remain healthy as the end of the first quarter with an overall book to bill ratio of slightly over one.
Now, let's turn to slide nine first quarter of 2023 summary.
On a consolidated basis total revenue increased two 8% year on year to $186 million.
This reflected organic revenue growth of seven 3% and 6% contribution from the sensor solution acquisition, partially offset by a five 1% impact from foreign exchange.
Quarter two plants, we adjusted operating margin increased 160 basis points year on year to 15% are highest in the history of the company as our adjusted operating income grew approximately 15, 7% on a two 8% consolidated revenue increase year on year.
Our first quarter 2023 tax rate decreased 140 basis points year on year.
Actually we expect a similar tax rate in the fiscal second quarter of 'twenty, three with our full year tax rate between 23 and 24%.
Adjusted earnings per share were $1 60 in the first quarter of fiscal 2023 compared to $1 34, a year ago, approximately 19% growth year on year.
Net cash used in operating activities was $2 7 million in the first quarter of 2023 compared to net cash provided by operating activities of $13 1 million a year ago.
This decrease reflected annual bonus payments, one time legal settlement payment accrued in the prior period and the impact of supply chain inefficiencies.
In addition capital expenditures were $5 3 million compared to $5 million a year ago.
As a result free cash flow was negative $8 million in fiscal first quarter 2023, compared to free cash flow of approximately $8 $1 million in the fiscal first quarter of 2022.
We anticipate a return to a more normalized level of free cash flow conversion in the second quarter of 2023.
Further improvements in the second half of fiscal 2023, as we continue to target free cash flow conversion at or above 100% of GAAP net income.
Our balance sheet continues to provide substantial flexibility to support an active pipeline of organic and inorganic opportunities as well as increased investment in R&D and growth capital.
Please turn to slide 10, FY 'twenty three segments snapshots.
From a segment perspective, three of our five segments exhibited organic growth year on year highlighted by specialty at 39, 3% and engraving at seven 9%.
As expected San Thanks, Vic scientific segment sales declined organically 14, 3% due to lower demand for Covid vaccine storage.
Foreign currency was a headwind to revenue growth, primarily in the electronics and engraving segments.
It represented a $6 six and eight 3% headwind respectively.
From an operating margin standpoint, part of our five segments posted operating margin above 60% and three of our five segments significantly expanded operating margin year on year led by specialty contributing 640 basis point increase.
Scientific segment maintained operating margins over 20%, despite a 14% organic revenue decline due to read out the pricing and productivity actions.
Next please turn to slide 11 for a summary of standards as liquidity statistics and the capitalization structure. It should remain strong.
And our index ended fiscal first quarter of 2023 at $294 million of available liquidity, an increase of approximately $27 million from the prior year.
At the end of the first quarter Standex had net debt of $95 5 million compared to $70 million at the end of fourth quarter and $68 9 million at the end of fiscal first quarter of 2022.
<unk> net debt at the end of the fiscal first quarter 'twenty. Three consisted primarily of long term debt of $198 9 million cash.
Cash and cash equivalents totaled $103 4 million with approximately $94 million held by foreign subs.
That was not effectively Asian portfolio subs in the first quarter, we still expect propensity of between 30 and $35 million in cash in fiscal 2023.
With regards to capital allocation, we repurchased approximately 90000 shares for $8 4 million in the quarter and $82 $3 million is still remaining under the current authorization.
We also declared last week or 230, <unk> third quarterly cash dividend of 28 per share and approximately seven 7% increase year on year.
In fiscal 2023, we still expect capital expenditures to be between 35 and $40 million.
<unk> to approximately $24 million of fiscal 2022.
Increased investment year on year includes additional capital for capacity expansion productivity actions and growth for our efforts as we deepen our presence in high growth markets.
I will now turn the call over to David for key takeaways from our first quarter results. Thank you Ed.
Let's turn to slide 12.
<unk> is well positioned to deliver sustainable profitable growth as we have progressed from a portfolio company to an operating company comprised of a stronger mix of high quality businesses with attractive growth rates and higher margin profiles.
As such we anticipate continued improvements across our financial metrics in fiscal year 2023, our.
Our segments are favorably aligned with emerging and sustainable global trends in areas, such as renewable energy electric vehicles defence human health and the commercialization of space with much of these opportunities only in the early innings. We are excited about their evolution and potential for further contribution to our financial metrics.
Our strong pricing discipline and Opex actions are offsetting the challenging inflation and supply chain environment.
The financial flexibility from our strong balance sheet positions us to execute on an active pipeline of internal investments as well as to pursue an active funnel of inorganic candidates.
I am confident we are positioned to perform well in these uncertain market conditions. Our businesses are leaders in their markets. They have demonstrated an ability to adapt to dynamic market conditions and focus on attractive sales and margin opportunities. We will now open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone for.
We are using a speakerphone please pick up your handset before pressing the keys.
Draw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Chris Moore from CJS Securities. Please go ahead.
Yes, hi, good morning, it's Pete Lucas for Chris.
Good morning.
Morning.
How should we think about the mix between volume and price for year 'twenty three revenue growth.
Alright, I should think about Q1 I think.
The bits and pieces are in there.
About it's about half and half volume and price and then.
Yes.
FX.
Yes.
Good afternoon, I'll, just expand on that historically around about two thirds volume one third price Q1, we were about 50 50 price and volume and we think you know for the remainder of the year will be somewhere in that range between 50, 50, and two thirds one third as we move forward through the rest of the fiscal year.
Oh very helpful. Thanks, and then just looking at the segments, where do you see the biggest opportunity going forward and then on the flipside, which do you think would be most impacted by the current rising rate environment.
Well the biggest opportunity is the businesses that are growing the best in the last few years. They are serving very strong end markets.
Electronics has got a lot of momentum in electric vehicles and renewables.
Engineering technology as commercialization of space continues to ramp up their military defense business is strong good good good runway there.
Those most affected by I don't know if its almost a high rate environment. The current the current economy. We have a couple of product lines out of electronics that go into like residential products, we're seeing a little softness there. So for example, we sell switches and sensors that go into appliances. So we expect a little softness there.
<unk> that's about.
Okay, 15%.
Both tactical question I've got a lot of mechanics.
And some of the food the food equipment.
Businesses that are in specialty we expect them to be.
Sorry, but the others are all serving markets that we think are relatively.
Unaffected.
Yeah, and if I can just add to that one thing. We are really really excited about is our growth rate and what we call fast growth markets, which was 30% year on year in Q1, and we continue to see strength in those end markets and we expect that to get even better as we progress through the rest of the rest of the fiscal year.
That's great. Thank you very much I'll jump back into the queue.
Thank you.
Okay and for your question. Please press Star then one the next question is from Nicholas <unk> from William Blair. Please go ahead.
Good morning.
I really thought that first quarter Youre came out pretty well given everything that's going on but.
Just curious first on electronics.
I believe there was a $6 million of deferred revenue and electronics in China.
The last quarter and I was curious how much you realized.
Of that $6 million and then secondly.
How you see China evolving here as the market given all the ongoing pandemic, lockdowns, which I guess hopefully you're going to end soon.
Yes, yes. So first of all yes, you are right about the a good memory of the $6 million was what was held over from the Lockdowns of Shanghai in Q4.
About $4 million of that shipped in the quarter.
In terms of where China is going I guess your guess is good as mine.
Our China orders continued to be strong, although we see some softness in the out of appliances in China.
Okay, and then the only thing I would add to that if you kind of look at sequentially. The sales bridge between Q4, and Q1, we had about $3 million to $4 million unfavorable FX headwinds on the top line and in a lot of that is absolutely an area of electronics and engraving and actually all of it is in electronics and engraving businesses that would have impacted some of that sequential.
Sequential compare pursuit.
Okay. Thanks.
Thanks, very very much that's helpful.
You mentioned in the somewhere.
Intentions to expand engraving into Asia.
Size that market.
Relative to the U S and Europe , and where you think your penetration rates.
Evolve over time, and how big an opportunity is this.
So yes.
Yeah, I can handle that so globally are our engraving business is about a third a third a third.
America, Europe and Asia.
In our traditional businesses.
Where we see the growth opportunities in soft trim in Asia, you may recall, a few years ago, we acquired the Gs engineering in the U S and they have a particular technology for a kind of soft trim.
And that type of soft cream is very popular and growing rapidly in China. So we are in the process of doing a technology transfer taking that competitive advantage to our China, China business.
And we think in the next few years, we can grow that from.
Got you well a year ago was nothing we think we can grow that to close to $10 million in the coming years.
Okay.
Okay. That's good to know thank you.
In engineering technologies, and I'll see if I can ask one more here can you provide more insight.
On the project timing.
Four.
The rest of the year for this business and.
Give us some idea as to whether or not that's just a.
Step up as we go through the rest of 2003 or that's something that you can visibly see extending beyond 'twenty three.
Yes, Nick it's Adam and I'll handle this one and our Q1 of this fiscal year from project timing standpoint is the law.
Quarter four the engineered technologies business. So we expect as we go and as we enter as we ended the second quarter now that we will see a significant ramp in sales model with a significant ramp in sales as well as operating margin and we.
Have no reason to believe that that type of performance would not continue to the second half of this fiscal year and then into into 'twenty. Four I mean, I think you are now at the end markets for this business are pretty healthy.
Space Defense commercial aviation Sylvia we are pretty optimistic what atg business can do over the next 12 to 18 months.
That's great. Thank you very much I'll step back for a second let's see if anything else that he has questions.
Thank you Nick.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference conference back over to David Dunbar for any closing remarks.
Alright, I want to thank everybody for joining us for the call we enjoy reporting on our progress at <unk> and finally again I want to thank our employees and shareholders for your continued support and contributions we look forward to speaking with you again in our fiscal second quarter call.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
[music].
Sure.
Okay.
Yes.