Q2 2023 Standex International Corp Earnings Call

And the Star key followed by zero.

Speaker 1: presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Howe, Director of Investor Relations. Please go ahead.

Speaker 2: Thank you, operator, and good morning. Please note that the presentation accompanying management's remarks can be found on the Investor Relations portion of the company's website at www.standex.com. Please refer to StandEx's Safe Harbor Statement on Slide 2. Matters that StandEx management will discuss on today's conference call include predictions, estimates,

Speaker 3: expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 4: You should refer to Standex's most recent annual report on Form 10-K as well as other SEC filings and public announcements.

Speaker 5: for a detailed list of risk factors.

Speaker 6: In addition, I'd like to remind you that today's discussion will include references to the non-GAAP measures of EBIT, which is Earnings Before Interest and Taxes.

Speaker 7: Adjusted EBIT, which is EBIT excluding restructuring, purchase accounting, acquisition related expenses, and one-time items.

Speaker 8: EBITDA, which is Earnings Before Interest, Taxes, Depreciation, and Amortization.

Speaker 9: Adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses and one-time items.

Speaker 10: EBITDA margin.

Speaker 11: and adjusted EBITDA margin.

Speaker 12: We will also refer to other non-GAAP measures, including adjusted net income, adjusted operating income, adjusted net income from continuing operations,

Speaker 13: 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.

Speaker 14: Dandex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance.

Speaker 15: On the call today, the stand-ex is chairman, president, and chief executive officer David Dunbar, and chief financial officer and treasurer Adamir Sarchivick.

Speaker 16: Thank you, Chris. Good morning and welcome to our fiscal second quarter of 2023 conference call. Yesterday, prior to our earnings release, we announced a signed agreement to divest our pro-con pumps business to invest in industrial for $75 million, subject to customary post-closing adjustments.

Speaker 17: We expect the closing of this transaction to occur during the month of February . The Procon Investiture supports continued simplification of our portfolio and enables us to further focus on our larger businesses and fast growth end-to-market opportunities. We plan to use the proceeds to fund attractive organic growth and acquisition opportunities consistent with our capital allocation model.

Speaker 18: I would like to thank our Procon colleagues for their contributions to Standex and wish them much success as they start a new chapter for the business.

Speaker 19: Shifting to our second quarter performance.

Speaker 20: We are proud of our results which came in better than our expectations. We were able to continue our trend of sequential margin improvement with double digit organic growth in three of our segments. The execution by our global management teams and strong demand in our fast growth markets position us to continue growing organically while sustaining and improving upon our growth.

Speaker 21: our other key financial metrics. We continue to be optimistic about our new product and applications development across our businesses.

Speaker 22: I want to thank our employees, our executives, and board of directors for their continued dedication and support.

Speaker 23: Now if everyone can turn to slide three, key messages.

Speaker 24: We are very pleased with our sales performance and another record margin in the quarter. We reported 5.5% organic revenue growth year on year as three of our five business segments exhibited organic revenue growth greater than 10%.

Speaker 25: Electric vehicles, renewable energy, commercial aviation, and defense end markets remain strong, while the scientific segment, as expected, 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, have been affected by lower demand for COVID vaccine storage.

Speaker 26: increased approximately 35% year on year to $19 million in fiscal second quarter of 2023. We anticipate this revenue stream to grow by approximately 40% in FY23.

Speaker 27: Order trends remain healthy and backlog realizable in under one year, group 2% year on year, to approximately $269 million.

Speaker 28: The continued effectiveness of our price and productivity actions improved our margin profile in the quarter and produced our seventh consecutive quarter of record adjusted operating margin.

Speaker 29: Consolidated adjusted operating margin, the 15.2 percent in fiscal second quarter 23, was a 160 basis point increase year on year and a 20 basis point improvement sequentially.

Speaker 30: despite a challenging global environment.

Speaker 31: Fourth, Standex's five business segments expanded margin year on year, with three segments showing margin expansion of 270 basis points or more.

Speaker 32: All five of our segments reported operating margin over 15%.

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 GMA structure. As a result, we are seeing continued improvement in our ROIC metric with Q2FI23 annualized ROIC at 12.3%.

and the impact of the pro-coron divestiture.

We expect slightly lower to similar adjusted operating margin compared to fiscal second quarter 23 as price and productivity actions mostly offset lower sales.

We expect higher adjusted operating margin compared to the same period a year ago.

Now, please turn to slide 4, and I will begin to discuss our segment performance and outlook, beginning with electronics.

Segment revenue of $73 million decreased 5% year on year as an organic decline of 0.2% and a 6.1% negative impact from foreign exchange more than offset a 1% contribution from acquisitions.

Most of the end market trends remain favorable, particularly for industrial applications, power management, renewable energy technologies, and EV-related markets.

Operating margin of 23.4 percent increased 100 basis points versus the year-ago period, primarily due to productivity initiatives offsetting lower volume and the currency impact. The pictures on slide four highlight the electronic segments focus on growth markets, such as the expansion and modernization of the electrical grid. In this example, you can see we provide the mission-critical transformers and inductors essential to monitor performance in utility substations.

The company expects similar to slightly lower operating margin due to unfavorable product mix and plant moves in China and Germany, which were completed in early January . Please turn to slide 5 for a discussion of the engraving segment. Revenue increased 3% to $38 million as strong organic growth of 12% more than offset a 9.2% headwind from foreign exchange. Organic margin of 16.9% in fiscal second quarter 23 increased 270 basis points year on year due to realization of previously announced productivity actions in North America.

allowed a coordinated and seamless simultaneous delivery to meet the customer's launch schedules.

In our next fiscal quarter on a sequential basis, we expect revenue to decrease slightly and operating margin to decrease moderately due to untraverable project mix.

We expect more favorable mix in fiscal 4-25-23 as well as continued growth in soft-cream 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 22% year on year to $19 million, primarily driven by lower demand associated with COVID-19 vaccine storage.

Operating margin of 21.6% decreased 70 basis points year on year due to lower volume more than offsetting price productivity actions and lower freight cost.

The picture on slide 6 illustrates a newly designed flammable material and hazardous location storage cabinet that meets required regulatory standards.

This differentiated product is primarily used in academic research and industrial settings.

On a sequential basis in the fiscal second quarter of 23, we expect slightly lower revenue and a similar operating margin as productivity actions and lower freight costs are projected to offset volume decline. Now turn to the Engineering Technology segment page on slide 7. Revenue of $24 million increased 34% year on year, reflecting strong growth across all markets.

Operating margin of 15.5% increased to 270 basis points year on year due to higher volume and the impact of productivity and efficiency initiatives.

As pictured on slide 7, our engineering team is leveraging its advanced metal forming capability to enable the world's first zero-emission aircraft.

We recently announced a contract to manufacture prototype hardware for the Airbus 0E Hydrogen Powered Aircraft.

In fiscal 3rd, quarter 23 on a sequential basis, we expect a significant decrease in revenue due to project timing and a slight decrease in operating margin as productivity actions offset a volume decline.

We do expect more favorable timing of projects on the fiscal fourth quarter of 2023, which is supported by a healthy backlog.

Please turn to slide 8, Specialty Solution Segment.

Specialty Solutions revenue of $34 million increased 15% year on year due to healthy organic growth in hydraulics and display merchandising businesses.

Operating margin increased 420 basis points to 16.8%, reflecting price and volume increases and realization of productivity actions.

As pictured on slide 8, our display merchandising business has continued to enhance its offering through redesigns of existing products, which is fueling growth and represents about a quarter of business sales.

In the fiscal third quarter, 23, on a sequential basis, we expect revenue to decrease moderately to significantly, primarily due to the pro-con divestiture.

Operating margin is expected to increase slightly to moderately due to ongoing pricing and productivity actions in the hydraulics and display merchandising businesses.

I will now turn the call over to Adamir 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 second quarter 2020 results, which came in ahead of our expectations.

Our operating performance and related earnings strength reflected the continued effectiveness of our pricing actions and productivity initiatives.

As a result, we achieved our seventh consecutive quarter of record consolidated adjusted operating margin with adjusted earnings per share of $1.74. In addition, our end market demand trends remain stable as we enter the second quarter with an overall book to bill ratio around 1.

Now, let's turn to slide 9, second quarter, 2023 summary. On a consolidated basis, total revenue increased 1.1% year-on-year to $187.8 million. This has left an organic revenue growth of 5.5%, and a 0.4% contribution from the transfer solution acquisition.

partially offset by 4.8% impact from foreign exchange.

Second quarter 2023 adjusted operating margin increased 160 basis points year-on-year to 15.2% or highest in the history of the company as our adjusted operating income grew approximately 13.3% on a 1.1% consolidated revenue increase year-on-year.

Our second quarter 2023 tax rate decreased 100 basis points year on year. Sequentially, we expect a similar tax rate in the fiscal third quarter of 2023 with a full tax rate between 23.5 and 24%. Earnings per share were $1.74 in the second quarter of fiscal 2023.

compared to $1.45 a year ago, approximately 20% growth year on year.

Net cash provided by operating activities was 29.8 million in the second quarter of 2023 compared to 23.6 million a year ago.

The improvement reflects a more linear distribution of sales with a continued focus around inventory management and the impact of our shared services implementation.

Capital expenditures for 5.8 million compared to 4.7 million a year ago. As a result, free cash flow was $24 million in fiscal second quarter 2023 compared to free cash flow of approximately $18.9 million in fiscal second quarter 2022. Our free cash flow conversion level was approximately 120%.

in R&D and growth capital. Please turn to slide 10, FY23 segment snapshot.

From a segment perspective, three of our five segments exhibited organic growth year-on-year above 10%, highlighted by engineering technologies at 36.2%.

As expected, scientific segment sales declined organically 21.7% due to lower demand for COVID vaccine storage.

Foreign currency was a headwind to revenue growth primarily in the electronics and the grain segments as it represented a 6.1% and 9.2% headwind respectively.

From an operating margin standpoint, four of our five segments expanded operating margins year on year, led by specialty improving 420 basis points, while the engraving and engineering technology segments each improved by 270 basis points.

The scientific segment maintained operating margins over 20%, despite 22% organic revenue declined due to pricing and productivity actions and favorable freight costs.

Next, please turn to slide 11 for a summary of Standex's liquidity statistics and the capitalization structure which remains strong.

Standex ended fiscal second quarter 2023 with $324 million of available liquidity and an increase of approximately $43 million from the prior year. At the end of the second quarter, Standex had net debt of $74 million compared to $70 million at the end of fiscal 2022.

and $52.5 million at the end of fiscal second quarter 2022.

Stantec's long-term net debt at the end of fiscal second quarter 2023 was $187.5 million.

Cash and cash accrualence totaled $113.5 million with approximately $107 million held by foreign sellers.

We appear to be at a 4.3 million from foreign subbed in the second quarter. We now expect for a factory to be between 25 and 30 million in cash in fiscal 2023.

With regards to capital allocation, we purchased approximately 50,000 shares for $5.1 million in the second quarter and $77.1 million is remaining under the current repurchase authorization.

We also declared out 234 quarterly cash dividend of 28 cents per share and approximately 7.7 percent increase year-on-year.

In fiscal 2023, we now expect capital expenditures to be between 30 and 35 million compared to approximately 24 million in fiscal 2022.

The increased investment year-on-year includes additional capital for capacity expansion, productivity actions, and growth efforts as we deepen our presence in high-growth markets.

I will now turn the call over to David to discuss our longer-term outlook and key takeaways from our second quarter results. Thank you, Adamir. Please turn to slide 12.

Over the past few years, we have demonstrated track record of improving our operating performance and key financial metrics, delivering consistent and predictable results and transitioning to a growth-focused operating company. We have recently revised the strategic plans with all of our businesses and would like to share the updated view on our long-term financial outlook, starting with our fast growth markets.

As part of this long-term view, we believe our fast growth market sales will reach 20% or greater of total sales within the next five years, which would represent $200 million plus in sales by fiscal year 2028. Our fast growth market sales grew 35% year on year to $60 million in fiscal year 2022.

and are expected to grow another 40% to more than 80 million in fiscal year 23. Beyond 2023, we expect fast growth market sales to grow at an approximate 20% cager through fiscal year 2028.

We believe the secular trends will continue under different economic scenarios, and we will continue to focus our strategic investments to align new products and applications with these trends and expand upon our strong customer relationships.

Please turn to slide 13, our updated logarterm financial targets.

We target continued organic revenue growth at a high single-digit compounded annual rate over the next five years, reaching greater than 1 billion dollars in sales by fiscal year 2028.

This growth target excludes the impact of potential acquisitions.

We target adjusted operating margin of higher than 19% by fiscal year 2028, from 15.1% margin year to date to fiscal 23, or an approximate 400 basis point improvement.

We have replaced our previous adjusted EBITDA margin target with an adjusted operating margin target to better align with our business segment reporting and internal operating process.

We expect to reach our previous targets of better than 20% adjusted EBITDA margin and better than 12% return on invested capital within the next fiscal year. We expect to continue to ramp up our R&D investments with a target of over 3% from approximately 2% year-to-date in fiscal 23.

It is our expectation that with this financial performance we will increase our return on invested capital to greater than 15 percent in improvements from our prior target of greater than 12 percent.

Our return on invested capital target applies to our current portfolio of businesses and excludes the impact of potential acquisitions.

We expect our free cash flow conversion target ratio to remain at approximately 100% of GAAP net income.

Finally, with our substantial financial flexibility, we plan to continue to execute on an active pipeline of organic and inorganic growth opportunities.

These targets exclude potential investments, revenue, and profits related to our solar energy project with Enel.

Our targets exclude potential investments, revenue, and profits related to our solar energy project with NNEL. Please turn to slide 14.

Stamps is well positioned to deliver sustainable, profitable growth as an operating company, comprised of a stronger mix of high quality businesses with attractive growth rates and higher margin profiles.

We are pleased with our healthy organic growth rates in engineering technologies, engraving, and specialty solutions, and remain confident in our long-term organic growth potential across our business and that segments.

As seen through our Procon pumps announcement, we will continue to optimize our portfolio to focus on larger businesses and advantageous growth opportunities.

We continue to see strong growth in our fast growth markets. Looking forward, we're optimistic about global trends that align with our products, applications, and research and development efforts. We are excited about the long runway ahead for these opportunities as they evolve with our customer intimacy model.

Our pricing disciplines and OPX actions that are fundamental to our business allow for us to adapt to the different scenarios presented by this global environment.

Our durable balance sheet positions us to be opportunistic on an active pipeline of eternal investments and an active funnel of inorganic candidates.

We will now open the line for questions.

We'll now begin the question and answer session.

To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

But draw your question, please, Pristar, then, too.

At this time, we'll pause momentarily to assemble our roster.

Our first question comes from Chris Moore from CJS Securities. Please go ahead.

Good morning guys, thanks for taking a couple questions. Good morning. Good morning. I appreciate the updated five-year targets. I'm the 19% operating margin target in five years.

obviously very attractive. You know, around 14% fiscal 22. Maybe just talk a little bit more about what the big drivers are there. Are you targeting roughly that 80 to 100 basis points per year improvement or is it likely to be a bit more lumpy?

Yeah, Chris, it's Adam here. I think that's probably a good handicap. Obviously, it could get a little bit lumpy year on year depending on the general economic environment. We do feel that we're going to get to those raised to our organic growth improvement. We put up some numbers. We feel pretty confident about regarding our vast growth and market.

be steady through the five years just as we've had a pretty steady improvement in in the last few years.

Got it. And just in terms of Procon, just two quick ones there. The operating margin associated with Procon is relatively the same as overall specialty operating margin, or is there much of an impact there?

I would assume similar operating margins as the rest of the specialty solution businesses.

God, and the last one I'm pro-con. Just how should we be thinking about the tax implication on the pro-con sales? Are anything you can do to protect most of those proceeds?

Oh man Chris is all for me so yes so that is the

We do believe after the customary closing adjustments and using some of the deferred tax assets we have on a balance sheet for prior divestitures, we should be able to net majority of those proceeds north of 70 million.

Got it. Maybe the last one from me just in terms of the visibility on ETG. Obviously one was Q1 was so off there, Q2 stronger, a SOFT, Q3 stronger Q4. Is that pattern unique to Fiscal 23 or is it too soon to tell for 24 just trying to understand?

seasonal pattern. It's completely a function of customer schedule. So on the aviation side, Airbus, their production rate has gone up and down, you know, into the pandemic and out of the pandemic. Commercial space launches and their schedules affect this recent ramp up in military and defense. So those things

Don't follow a seasonal calendar schedule, but our visibility is very good to that business. And we've got a great backlog. We're very confident in a very strong Q4 following our guidance for Q3 being a little softer.

Got it. I appreciate it. I will leave it there.

Appreciate it. I will leave it there. Thank you, Chris.

Our next question comes from Michael Lake from Benchmark. Please go ahead. Thanks. Good morning and congratulations on a nice quarter. Wanted to dig a little deeper into the Pro-Con sale. We obviously got a nice price for over two times sales.

Was that something you had put up for sale or were you approached by the buyer?

you had put up for sale or were you approached by the buyer? Well I'd say

If you step back a little bit, the divestitures we made in years past were troubled businesses. We really needed to devvast so we could focus on the better businesses.

Now with the divestiture of refrigeration, all the businesses we have are good in their sectors, they have competitive advantage, they perform well. And so for those that don't have the long-term prospects in our portfolio, our approach to divestiture has been to pick and choose the time, either when the opportunity presents itself, we think the opportunity is good for them, and we think it's good for them.

we could make a divestiture given the strength in our other businesses. So we just compared the prospects for the different businesses. We saw good opportunity here. We knew there were interested buyers out there. We did run a process. There was good participation in the process. We're very happy with the outcome. We think we found a long-term home for that business that will really emphasize the capabilities the Pro-Con brings and the

talk about now that you have all this firepower to go after M&A, what the M&A pipeline looks like, please.

Well you know even without that divestiture we have plenty of pipe we have three hundred some million dollars of available liquidity had we needed it so we didn't feel constrained so there was no there was no pressure on that on that front but if you think about through the five or six dimensional problem and moving moving these portfolios

actionable in the coming months. We're relatively, you know, knock on wood, you never know when these things will come together. But there are good opportunities we think are actionable. We're trying to get them over the finish line and put those proceeds to work right away. Yeah, and Michael, we're on a pretty disciplined process on M&A's side as far as the opportunities. If you look at our track record, we are pretty pleased with how most of our acquisitions went.

Obviously, nothing at that run rate. Can we talk about what's in the works for CapEx for the second half of the year? Yeah, I mean, a lot of CapEx, not a lot. Some of the CapEx investments we have this year is probably more focused over growth than maybe in prior years. So you would see us putting that CapEx to work in our target things somewhere else fast.

Thanks, Michael.

Again, if you have a question, please press star then one. Our next question comes from Ross Sparenick from William Blair. Please go ahead.

please press star then one. Our next question comes from Ross Barinick from William Blair. Please go ahead. And I get more in, guys.

Hey Russ, hey, you know, just take it on electronics. You maybe just kind of walk us through some of the puts and takes there. I mean, coming in the year, it looks like organic sales have been roughly flopped down. If you take out the other deferred revenue and I mean, looking forward to kind of those adorable rights of course, that too. Right path might vary.American and BUh-J.

Flack it down also year over year. So I mean this is all consumer appliance I mean How can we kind of you know maybe gel that with the the weaker margin commentary to on the favorable mix? Because I mean the margin profile to I believe first quarter supposed to be the high or the low point of the year But now it seems like we're kind of decelerating here So I mean if China's start coming back, I mean this is this revert. I mean does this

to deliver that. Nearly 50 million dollars over fast growth sales aren't electronics. Those continue to progress well.

But there's a large piece of the business that kind of serves the general economy. We talked in the last couple quarters about slowness in appliance, China, and Europe . We got both those things happening simultaneously. You got a little bit of slowdown in Asia and appliances. It's largely offset by these growth and money.

thing for us that's right you know Q2, Q3 is kind of from an organic growth standpoint it's a bit of a soft-up water for us but indications are with China reopening and some of our fast growth and market growth, I know that sounds kind of weird the way I said it, we expect Q4 organic growth to be much stronger in electronics then.

and Q2 and Q3. So that's, you know, and this business, you know, has, you know, grown significantly in the fiscal 22, you know. So you kind of look at our overall organic growth rate. In FY22, we posted almost 15% organic growth rate. You know, we're having a little bit of a general economic impact on Mellon electronics and Q2 and Q3. We expect that gonna resolve itself.

over time and we'll get back to our usual runway. Okay I know that's helpful and then you maybe transfer over to the 2028 targets you know thanks for providing those it's very helpful. High single-digit organic growth I mean this seems to apply well over a billion dollars and I know that I think you guys have previously spoken through like 2025 you're looking at double-digit organic growth from.

new product initiations, and you're going to double R&D over the next five years. So maybe what are some of the assumptions as we think about kind of base case, bear case, and how we get above that billion dollars by 2028? I mean, what do you guys kind of bake it in there?

Well, just thinking that the last few years as we've given this kind of longer to this rolling longer term outlook,

We complete our strategy reviews with all the businesses. We can risk assess them, roll them up, and

And then update our longer term outlook. Two years ago, we came out and said, well, we have a mid-single digit growth. We get to even to 20% and three to five years, ROAC 12%. We're basically at those margin targets now in less than the three years. And last year, we took up the growth rate based on this fast growth market impact.

So now here we are a year later. We've again updated the strategy review And are updating these these numbers and since we basically you know we're at the RLIC number now And you know within the next 12 months. We we've hit that EBITDA number, so It's time to update them rather than up three to five. We just said

five years, but look at our past performance. There's an opportunity to do that a little earlier. With some...

depending on what's going on in the general economy, and maybe faster growth and some of the fast growth, faster growth markets and opportunities. So that's basically, follow the same process we have in the last few years, and you're very confident that our businesses continue to position themselves better in these stronger markets. And so you mentioned double digit growth. We've always, we started mid-single digit, we said we could get to upper single digit. I think there was a question a few, I don't know, a year or so ago, saying when would we be in a position to announce that we could hit double digit growth? And I think my answer was, in a year or two, as we see our R&D grow and our effectiveness at rolling out these new products.

I'll just say a couple things and turn it over to Adam here. I mean the growth...

We're preparing an update in our investor presentation, and that will step back and talk a little differently about growth. So as we look in the next few years, we've broken down our growth.

in our core business and the new applications and new products. New applications and new products come out at margins that are accreted to our margins.

Some of the margin growth comes from introducing new products with better value propositions and more and a stronger competitive advantage, mixing us up in volume. There is an expectation in every one of our businesses every year that productivity plans will drive 3% of cogs to the bottom line.

And those things help fund the R&D increase that you mentioned. Yeah, and Ross, I mean, I think, you know, and if you remember, we put up those few slides by segment that kind of shows the margin potential of each segment, you know, some that will be purely volume growth and pricing. But there are a couple of segments in a specifically in draining and engineering technology, there is more productivity actions to do.

that we need to drive to get those margins to hit those levels that we summarized in the slide. So it's really a mix of everything, you know, and you know, as we have focused on this over the last few years, we're going to continue to focus on driving productivity in our businesses and as well as growth and hitting those targets.

All right. This concludes our question and answer session. I would like to turn the conference back over to David Dunbar for any closing remarks.

All right, thank you. I want to thank everybody for joining us for the call. We enjoy reporting on our progress at StandEx. 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 third quarter of 2023 call.

Thank you for attending today's presentation. You may now disconnect.