Standex International Corporation Q3 2023 Earnings Call
Please refer to <unk> Safe Harbor statement on slide two.
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 <unk>. Most recent annual report on Form 10-K, as well as other SEC filings and 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 EBIT.
Which is earnings before interest 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.
Operating cash flow.
And pro forma net debt to EBITDA. These.
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.
<unk> 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, Adam Your sarcastic.
Thank you, Chris Good morning, and welcome to our fiscal third quarter of 2023 conference call.
We're very pleased with the results. We continued our trend of record operating margin sales into fast growth markets continue to accelerate new product developments and new application pursuits continued to expand across our businesses.
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.
We reported one 5% organic revenue growth year on year and three of our five business segments exhibited organic revenue growth. Our long term growth profile continues to improve as sales into fast growth end markets grew 40% from prior year to $23 million in the quarter.
We anticipate this revenue stream to grow by approximately 50% in fiscal year 2023 to approximately $85 million.
Overall, we anticipate organic revenue growth in fiscal year 2023 from four of our five business segments.
Profitability continues at record levels. The continued effectiveness of our price and productivity actions maintained a record margin set last quarter.
Representing our eighth consecutive quarter of record level adjusted operating margin.
Consolidated adjusted operating margin of 15, 2% in fiscal third quarter 2023 was 140 basis point increase year on year.
<unk> has five business segments expanded margins year on year four of our five segments reported operating margins near 15% or greater with our specialty solutions segment, delivering 22, 2% margin.
We are pleased to see continued improvement in our ROIC, which is now at 12% on an annualized basis through Q3, FY2023.
Free cash flow of $17 6 million and the divestiture of <unk> in the quarter, our net debt to EBITDA ratio is now at zero. This leaves us approximately $344 million of available liquidity to invest in our healthy funnel organic growth and acquisition opportunities.
We will focus our financial performance liquidity position and capital allocation in greater detail later in the call.
In fiscal fourth quarter 2023 on a sequential basis, we expect similar revenue with organic sales growth offsetting the impact of the <unk> divestiture, we expect similar to slightly higher adjusted operating margin compared to fiscal third quarter 2023 on a year on year basis, we expect mid to high single digit organic growth offset.
By the Procon divestiture and significant adjusted operating margin improvement driven by continued realization of pricing and productivity initiatives.
We reaffirm our long term financial outlook by fiscal year 2028. These targets include high single digit organic growth to greater and greater than $1 billion in sales.
Adjusted operating margin greater than 19%.
Turn on invested capital of greater than 15% and free cash flow conversion at approximately 100% of GAAP net income.
Let's turn to slide four fast growth end markets here, we highlight our fast growth end markets and how they are driving growth across <unk>.
In the renewable energy end market, our isolation relays, which aren't able to withstand high voltages play a critical role in solar inverters to enable safe and efficient switching.
Moving to electric vehicle applications with physical properties of our <unk> are designed to withstand high voltage batteries and safety circuits.
We anticipate the benefit from increased content on electric vehicles versus traditional combustion engine vehicles.
In soft trim, our highly efficient soft trim tube improves manufacturing productivity and reduces maintenance costs for.
<unk> for the commercialization of space, we are a leading solution supplier of fuel tank domes, four launch vehicles or.
Our differentiated spin forming capability has allowed us to enter new and exciting development projects like the next generation prototype zero emission aircraft.
Shifting to defense.
Defense power management needs are driving demand for our custom magnetic solutions, such as critical hardware for new hypersonic interceptor and tactical missile programs.
I will now turn the call over to Adam to discuss our financial performance in greater detail.
You, David and good morning, everyone, let's turn to slide five third quarter 2023 summary.
On a consolidated basis total revenue decreased two 6% year on year kind of $84 3 million.
This reflected organic revenue growth of one 5% offset by one 6% impact from the proton divestiture and two 5% impact from foreign exchange.
Third quarter 2023, adjusted operating margin increased 140 basis points year on year, the 15, 2% matching our highest adjusted operating margin in company history from the prior quarter.
Our adjusted operating income grew approximately 7% on a two 6% consolidated revenue decreased year on year.
Adjusted earnings per share $1 65 in the third quarter of fiscal 2023 compared to $1 54, a year ago, approximately 7% growth year on year.
Net cash provided by operating activities was $23 3 million in the third quarter of 2023.
Third to $11 $9 million a year ago.
Capital expenditures of $5 6 million compared to $3 $4 million a year ago. As a result free cash flow was $17 6 million in fiscal third quarter of 2023 compared to free cash flow of approximately $8 5 million a year ago.
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.
Now please turn to slide six and I will begin to discuss our segment performance and outlook beginning with electronics.
Segment revenue of $78 2 million decreased two 1% year on year as an organic increase of one 3% was more than offset by a three 4% negative impact from foreign exchange.
All of the softness in appliances and distribution end markets remains power management renewable energy and EMEA related markets remained robust.
From a regional standpoint, North America market demand was strong while China and Europe demand has been slower to recover.
Adjusted operating margin of 21, 8% in fiscal third quarter, 2023 decreased 230 basis points versus the year ago period.
Due to lower sales and unfavorable product mix.
Setting price and productivity initiatives.
Sequentially, we expect similar revenue and operating margin in our fiscal fourth quarter as increased sales in the fast growth markets offset by a slow recovery in China and Europe .
On a year on year basis, we expect a double digit organic growth in this segment, mostly due to improved market conditions in China, and Europe versus a year ago.
Please turn to slide seven for a discussion of the engraving and scientific segments.
Engraving revenue decreased <unk>, 8% to $36 9 million as organic growth of three 9% was more than offset by a four 7% headwind from foreign exchange.
Operating margin of 14, 5% in fiscal third quarter of 2023.
This 90 basis points year on year due to unfavorable regional mix the.
The segment continues to see positive trends in software tools laser engraving and tool finishing.
And our next fiscal quarter on a sequential basis, we expect similar to slightly higher revenue and operating margin.
Sandisk revenue remained relatively flat at $18 9 million, primarily driven by higher sales into research and academic markets offset by lower demand for COVID-19 vaccine storage.
Operating margin of 24, 1% increase to 120 basis points year on year, due to price and productivity initiatives and lower freight costs.
On a sequential basis in fiscal fourth quarter of 2023, we expect similar revenue and slightly higher operating margin.
As expected the year on year comparison will become more favorable in upcoming quarters. As we are now fully behind our COVID-19 related demand surge for our vaccine storage units.
Now I'll turn to slide eight for a discussion of engineering technologies and specialty solutions segments.
Engineered technologist revenue of $18 1 million decreased 13, 6% year on year, reflecting lower volume due to project timing.
Fully offset by higher revenue from new product development.
Operating margin of 13% increased 190 basis points year on year.
Price and productivity initiatives offset lower volume.
In our fiscal fourth quarter of 2023 on a sequential basis, we expect a moderate increase in revenue and operating margin.
The more favorable project timing in aviation and space end markets.
Specialty solutions revenue of $32 3 million remained flat year on year, reflecting strong organic growth in the display merchandising business.
Set by an organic decline in the hydraulics business and the product line divestiture.
Operating margin increased significantly to 22, 1% from 11, 2% a year ago, driven by higher sales and a display merchandising business.
Realization of productivity initiatives in the hydraulics business.
In the fiscal fourth quarter of 2023 on a sequential basis, we expect revenue to decrease moderately at the significantly primarily due to the Brooklyn divestiture and lower sales and a display merchandising business.
Operating margin is expected to be slightly lower.
Next please turn to slide nine for a summary of standards. This liquidity statistics and the capitalization structure, which remains strong.
The index ended fiscal third quarter 2023, with $344 million of available liquidity, an increase of approximately $44 million from the prior year.
At the end of the third quarter Standex had net cash of 2 million.
So net debt of $70 million at the end of fiscal 2022, and net debt of $65 8 million at the end of fiscal third quarter 2022.
John This is long term debt at the end of fiscal third quarter, 2023 was $173 3 million cash and cash equivalents totaled $175 3 million.
With regards to capital allocation, we repurchased approximately 42500 shares for $5 million.
In the third quarter and $72 $1 million remaining under the current repurchase authorization.
So declared our 235 quarterly cash dividend of <unk> 28 per share and approximately seven 7% increase year on year.
In fiscal 2023, we now expect capital expenditures to be between $25 million and $30 million compared to approximately $24 million in fiscal 2022.
I will now turn the call over to David to discuss our key takeaways from our third quarter results.
You heard Amir.
Please turn to slide 10.
Standex is well positioned to deliver solid organic growth as an operating company driven by increased activity in demand within our fast growth markets. We are excited about seeing these opportunities materialize and expand.
Our regional presence strong customer relationships and disciplined approach to pricing and productivity provide protection from the supply chain challenges and inflation.
As a result, we have continued to deliver sustainable profitable growth through this environment.
Our strong balance sheet positions us well to be opportunistic on an active pipeline of internal investments and an active funnel of inorganic candidates.
Well 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.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw 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.
Hey, good morning, guys. Thanks for taking a couple of questions.
Hello, Good morning, maybe to start electronics, so revenue will be it looks like basically flat year over year backup.
Backlog is down slightly.
Maybe can you just talk about the visibility beyond Q4 on.
On the electronics segment.
Well I guess.
We serve a lot of end market as we go through different channels and we have different visibility for different channels. We feel very very good about the continued growth in the fast growth markets.
And.
I think it was like distribution channels, we have a little less visibility to those those are going to be a function more of the general economy, but.
We tend to look at this through the cycle feel very strongly about this business with a strong competitive position and good end markets.
Good growth prospects. If you look at if youre looking at shorter term I'll turn it over to Adam here, Yes, Chris I think from a regional standpoint in North America demand has been holding up in Europe , and China is slowly recovering the white goods. So the appliance end market there is still a bit soft but.
We feel as David said, we feel very strongly and very very good about our fast growth end markets exposure and we feel that can more than offset the softness we are seeing in our plans as somewhat of the general general economic terms.
And again optimistic.
Got it helpful I'll leave it there.
On the SaaS paas growth side.
Markets like smart grid and defense like two vehicles.
Youre positioning as a function of both.
Your SST and magnetic products that said it is either of those are more significant revenue growth driver.
Longer term.
SSG or magnetics.
Yes.
Okay.
Correct, Yes, I guess.
The aegis contributing equally into these fast growth markets Magnetics, we've got a great position in defense for example.
But I think there is.
The tail winds behind renewable energy and.
Electric vehicles in particular will drive we anticipate will drive sales faster than SST, So we'll probably see.
Faster growth rates there.
And the fast growth market group.
And if I can just add Chris and if you take electric vehicles. For example, that's where our SSD business has a very good <unk>.
<unk> and as those vehicles to replace combustion.
Vehicles, that's why we keep seeing about three to five times more content per vehicle than in a current combustion scenario. So <unk> clearly is in a good position to capitalize on these market trends.
Got it that's helpful and maybe the last one just maybe you can talk a little bit more about M&A strategic M&A has obviously been a big part of your guys' history, you certainly have the balance sheet net debt is at zero.
How would you characterize the M&A efforts currently.
Versus say a year ago.
Just how do you how are you looking at it long term.
There are some add ons or is there anything significant out there.
I'll always important for us we play in two different two very different M&A markets. We do a lot of our acquisitions. Historically, there are family owned or privately owned businesses and those owner sell for their own reasons at their own times and don't Miss those deals don't necessarily follow the.
The trends in the broader M&A market, we have an active pipeline of <unk>.
Such companies now some of them could could be actionable in the near term we feel that we are well positioned as a <unk>.
Let's say preferred owner for some attractive companies, we build these relationships over a long long period of time and when the time comes when Theyre ready to transition were there on the other hand in the last year or so because of our track record and confidence in especially in bringing in acquisitions into the electronics business.
We have been working to bring larger.
Businesses into our funnel more of these are in the in the broader M&A market.
Although there is activity there in building our funnel.
There was less actionable.
Fewer actionable opportunities in the near term.
Just because of the broader M&A market has taken a bit of a pause.
Got it very helpful. I'll leave it there thanks guys.
Thanks, Chris.
Our next question comes from Michael Legg from Benchmark. Please go ahead.
Thanks, Good morning, congratulations on a nice quarter guys.
Thank you.
Youre welcome.
Wanted to touch base, a little bit on the economic impact, we're seeing today and what youre seeing in the supply chain.
Hiring and wages and then your ability to.
Increase your pricing related to your supply chain costs can you just talk globally about that please.
Well first of all just the umbrella statement, we feel very very good about our team's abilities to manage their price to cover.
Cover the cost of material inflation in inputs, both supply chain and materials.
We've proved it in spades throughout the last three years to the pandemic it varies business by business, how that how that plays out but you can see we've we've.
Expanding our margins through the pandemic.
In terms of the current conditions supply chain issues have eased for our businesses in the last few years.
<unk>.
Right now, it's not impacting our deliveries or.
Any of our current commitments.
I've got nothing to add.
Okay.
And on hiring and wages.
Now we are seeing more pressure on wages.
Well I'd say.
I can't quantify it as stable, but it has taken a little longer to fill positions.
Especially in Europe , and North America, but we are finding candidates. We've got a good story here is a good company, we are able to attract good candidates and bring them in.
But we are seeing some wage inflation and delays in hiring.
And then just one last question.
Any update on that project.
Yes, well this is a great project.
With our partner in the solar Energy project, we have in the last in the last six months proving that the technology. We've developed together do do deliver performance improvements for the solar panels. We are in a phase of industrialization, we're designing and manufacturing processes. We're also working with them on.
On business model to determine what the right participation model is I would say the project has become a little.
Development so.
The.
It's a little hard to predict the timelines who are maybe taking longer than we thought we were a year ago, but the project still has a lot of support from Enel. We're excited about it and we will continue to communicate as we make progress, but we are in this kind of final phases of development, maybe the way to put it and Mike If I can just add in all of the the number to put out there in terms of the <unk>.
<unk> term guidance do not include any contribution from this project so when and if this becomes.
A contributing factor to our performance that will be on top of the numbers we communicated.
Great Thanks, and congratulations again.
Thank you Mike.
Again, if you have a question. Please press Star then one.
Our next question comes from Gary Presto P&L from Barrington Research. Please go ahead alright.
Hey, good morning, Dave and Adam here.
Yeah, a couple of questions here.
In terms of.
Eight consecutive quarterly records of adjusted operating margin I think it was 140 basis point lift year over year.
Yes, I would assume the majority of that is due to what youre doing on the productivity side.
Is pricing.
Big issue there and then I guess the other question I would then layer on top of that is with the fast growth markets.
Sales do those have a higher margin profile than the consolidated.
Operating margin.
Let me say.
Ill turn it over to Adam.
Really is multiple things.
If you go back three years.
Portfolio is much better all of the businesses are performing well there our productivity programs reading through they've all done well realizing price covering their inflation and the new products in the fast growth markets are at higher margins than the corporate average so we mix up in margin as that grows.
That's right, we have a pretty robust operating model Gerry kind of across all of the units, where we track pricing and productivity initiatives for each of the businesses.
We are fortunate to have people in our businesses, who are very of carnival in.
And on all the other customers in other markets and Randos run those business unit is very well.
We are proud of our achievement of eight consecutive quarters, we will see how it plays out in the future.
Could you is it possible that you could quantify just how much higher the fast growth markets margins or is that something you don't make public.
We havent made it public.
So how to.
Hi, the answer that I would say.
They're higher.
Okay. Okay.
What is that.
Gross margin for 38 30.
$38 five 5% gross gross margin on the on the.
<unk> mortgages above that but several hundred basis points correct. Okay.
Very helpful. And then lastly, just to refresh my memory.
What youre doing in the EV market Youre doing bolt standard passenger cars off road vehicles.
Correct are you also doing things like last mile delivery.
Trucks things.
More of the standard <unk> as we think about them.
Yes.
Most of our volume is in passenger vehicles.
The last mile delivery vehicle volume is starting to pick up the way to think of where we play especially with.
There really is for the safety isolation Paul.
It's in the battery management systems.
Those have applications in in vehicles that operated higher voltages. So newer vehicles are operating at higher voltages voltages to achieve more efficiency all the off road vehicles or higher voltages.
And the last mile vehicles as well.
Okay. Thank you very much.
Okay. Thanks.
Got it.
This concludes our question and answer session I would like to turn the conference back over to David Dunbar for any closing remarks.
Alright, Thank you I want to thank everybody for joining us for this call we always enjoy reporting on our progress here at Standex and finally again I want to thank our employees our board of directors and shareholders for your continued support and contributions we look forward to speaking with you again in our fiscal fourth quarter 2023 call.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
[music].
Sure.