Q1 2024 Standex International Corp Earnings Call
<unk> director of Investor Relations. Please go ahead.
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 Dot <unk> Dot com. 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.
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.
<unk> and amortization adjusted.
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, Adam here <unk>.
Thank you Chris.
Good morning, and welcome to our fiscal first quarter 2024 conference call.
Our fiscal first quarter results highlight the quality of our businesses as we continue our trend of record operating margin performance on the top line sales into fast growth markets continue to grow as did sales of new products and new applications.
I would like to thank our employees, our executives and the board of directors for their efforts and continued dedication and support that drove our solid fiscal first quarter 2024 results.
If everyone can turn to slide three key messages.
In the first quarter, we reported two 5% organic growth year on year led by our engraving and engineering technologies business segments.
Sales into fast growth end markets grew 20% year on year to $20 million in the fiscal first quarter 2024.
We anticipate this revenue stream will reach approximately $100 million in fiscal year 2024.
In addition, we continue to work on an active pipeline of inorganic opportunities to further strengthen our competitive positioning and gain access to value added applications within our electronics segment.
Earlier this week, we signed a definitive agreement to acquire Sun you switch company.
A designer and manufacturer of Reed relays with a particular strength in test and measurement equipment and other switching applications.
This acquisition significantly strengthens our product portfolio in electronics and deepens, our access to key customer accounts.
We also continued to generate strong profitability from the execution of our price and productivity initiatives across segments and achieved a 10th consecutive quarter of record adjusted operating margin consolidated.
<unk> adjusted operating margin of 15, 9% in fiscal first quarter 2024, with a 90 basis point increase year on year. Our margin expansion was driven by our scientific engineering technologies and specialty solutions business segments three of our five segments reported adjusted operating margin greater than 20%.
And all five segments reported adjusted operating margin greater than 16, 5%.
We achieved free cash flow of $12 1 million in the quarter, the highest ever free cash flow generation in our fiscal first quarter our.
Our consistent and improved cash flow generation further highlights the quality of our businesses.
Our net debt position as of September 30 was $21 7 million.
We had approximately $347 million of available liquidity to invest in a healthy funnel of organic growth and acquisition opportunities.
We are also very pleased to see continued improvement in our ROIC.
Annualized fiscal first quarter 2020 for ROIC of 12, 7% improved 60 basis points year on year.
On a sequential basis in fiscal second quarter 2024, we expect slightly lower revenue was continued softness in China and European markets served by electronics and unfavorable foreign currency or partially offset by more favorable project timing and additional development work in the engineering technologies.
As well as the contribution from our Medtronic acquisition.
We expect similar to slightly higher adjusted operating margin compared to fiscal first quarter 2024, due to 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 greater than $1 billion in sales.
Adjusted operating margin greater than 19%.
Return 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 highlights from our sand you switch company acquisition.
We announced earlier this week that we signed a definitive agreement to acquire Japanese based Sanya switch company.
Let me begin with an overview of the company with corporate headquarters in Tokyo, Japan, <unk> designs and manufacturers read relays.
Test sockets and testing systems for semiconductor and other electronics manufacturing and other switching applications.
With a 50 year history, signing was highly regarded and respected globally with a reputation for high quality products and the customer focus culture.
The transaction will be funded by stand excess cash balance is expected to close before January 31 2024.
The valuation is in line with historical multiples paid we expect the acquisition to be accretive to earnings per share and to achieve a double digit return on invested capital in our first full year of ownership.
The acquisition of <unk> will add breadth to our product portfolio expand key account relationships enhance our engineering and manufacturing capability and strengthen our geographic footprint.
With deciding on Medtronic <unk> acquisitions, we will essentially complete the reinvestment of proceeds from our Procon divestiture and in the process delivered nearly double the annualized revenue and operating income lost from the divestiture in the first year of ownership.
We returned the remaining cash to shareholders through share repurchases and an increased dividend.
I will now turn the call over to Adam here to discuss our financial performance in greater detail. Thank.
Thank you David and good morning, everyone.
Let's turn to slide five first quarter 2020 for summary.
On a consolidated basis total revenue increased two 3% year on year to $184 8 million.
<unk> organic revenue growth of two 5% and the 0.5% benefit from foreign exchange offset by a 0.6% net impact from the recent Medtronic acquisition and private Brooklyn divestiture.
First quarter 2024, adjusted operating margin increased 90 basis points year on year to 15, 9%, our 10th consecutive quarter with the highest adjusted operating margin in company history.
Adjusted operating income grew eight 2% on two 3% of consolidated revenue increase year on year.
Adjusted earnings per share were $1 74 in the first quarter of fiscal 2024 compared to $1 60, a year ago, and eight 7% growth year on year.
Net cash provided by operating activities was $16 4 million in the first quarter of 2024 compared to a use of $2 7 million a year ago.
Capital expenditures of $4 3 million compared to $5 3 million a year ago.
As a result free cash flow was $12 1 million in fiscal first quarter 2024 compares to free cash flow usage of approximately $8 million a year ago.
Now please turn to slide six and I will begin to discuss our segment performance and outlook beginning with electronics.
Segment revenue of $81 $7 million increased eight 6% year on year as a 10% benefit from the recent Medtronic is acquisition and the 0.4% benefit from foreign currency, partially offset by an organic decline of one 8%.
Adjusted operating margin of 24% in fiscal first quarter 2024 decreased 370 basis points year on year.
As the contribution from pricing and productivity initiatives more than offset by lower organic sales and unfavorable mix.
We continue to experience softness in appliances, and general industrial end markets in China and Europe.
As a response, we are implementing additional cost saving measures targeting G&A and cost of goods sold which we expect to yield approximately $7 million in annualized cost savings once fully implemented.
I expect to be substantially complete with these actions, but at the end of the current quarter and incurred approximately $1 5 million in restructuring costs.
Despite the market softness in China, and Europe, we remain confident in our ability to increase share and accelerated presence in fast growing end markets, such as industrial automation smart grid renewable energy and EBIT related markets.
This is also reflected by our new business opportunity funnel, which increased 10% year on year and is currently at approximately $72 million.
Sequentially, we expect slightly lower revenue in fiscal second quarter 2024, as higher sales into fast growth markets offset by continued slow recovery in China and Europe.
We expect similar operating margins as productivity actions more than offset the impact of the slight revenue decline.
Please turn to slide seven for a discussion of the engraving and scientific segments.
<unk> revenue increased 16, 5% to $40 8 million driven by organic growth of 15, 5% and a 1% benefit from foreign currency.
Organic growth continues to be driven by strong demand in Europe and growth growth in software and applications in Asia.
Operating margin of 18, 6% in fiscal first quarter 2024 increased 190 basis points year on year due to higher volume and realization of productivity actions.
And our next fiscal quarter on a sequential basis, we expect similar revenue and slightly higher operating margin low continuous due to continued strength of the underlying end markets.
In addition, our previously announced site consolidation project in Detroit and in Germany are well underway and we remain on track to start realizing the benefits of this project in the fiscal fourth quarter of 2024.
Scientific revenue decreased one 4% to $18 2 million as higher sales into research and academic end markets were more than offset by lower demand for COVID-19 vaccine storage from retail pharmacies.
Operating margin of 27, 1% increased 690 basis points year on year, due to lower freight costs and pricing and productivity initiatives.
Sequentially, we expect similar revenue and operating margin. In addition, we continue to invest in new product development in this segment.
We expand our product portfolio to access a larger customer base.
Now I'll turn to slide eight for a discussion of the joining technologies and specialty solutions segments.
<unk> technologies revenue of $18 2 million increased seven 2% year on year.
This reflected organic growth of six 1% in the 1% benefit from foreign currency.
Operating margin of 16, 6% increased 560 basis points year on year as pricing productivity initiatives, partially offset by investments towards new product development and new applications.
Sequentially, we expect moderately higher revenue.
Slightly more favorable project timing and higher level of development activities and a similar operating margin.
Specialty solutions segment revenue of $25 9 million decreased 25, 9% year on year, primarily due to the program divestiture.
Operating margin of 21, 7% increased 430 basis points year on year, driven by price and productivity realization into display merchandising and hydraulic businesses.
Sequentially, we expect a slight decrease in revenue and operating margin due to fewer shipping days and seasonality in the display merchandising business.
Next please turn to slide nine for a summary of status this liquidity statistics and capitalization structure, which remains strong.
The index ended fiscal first quarter of 2024 were $347 million of available liquidity, an increase of approximately $53 million from the prior year.
At the end of the first quarter Standex had net debt of $21 7 million compared to net cash of $22 3 million at the end of the fiscal fourth quarter of 2023.
<unk> long term debt at the end of fiscal first quarter 2024 was $148 6 million cash and cash equivalents totaled $126 8 million.
With regards to capital allocation, we repurchased approximately 140000 shares for $22 2 million in the first quarter.
This amount includes $10 2 million of share repurchases to satisfy taxes taxes on vesting of restricted shares.
We also declared our 237% for a quarterly cash dividend the dividend increasing to 30 cents per share and approximately seven 1% increase year on year.
In fiscal 2024, we expect capital expenditures to be between $30 million and $35 million compared to approximately $24 million in fiscal 2023.
I will now turn the call over to David to discuss to discuss our key takeaways from our first quarter results.
Adam here, please turn to slide 10.
<unk> is in a strong position to deliver sales growth within our underlying businesses driven by accelerating activity in our fast growth end markets and our competitive positioning.
I am proud of our team for our fiscal first quarter performance that was driven by our strong operational execution and by our increased presence in growing markets and new applications are.
Regional presence strong customer relationships and disciplined approach to pricing and productivity helped protect profitability and provides opportunity for continued margin improvement as.
As a result, we are confident we will continue to deliver sustainable profitable growth through the current economic environment and.
In addition, our strong balance sheet.
Allows us to continue to pursue additional inorganic investments complementary to our strategy.
In fiscal 2024, we expect mid single digit or better sales growth, depending upon recovery across China, and Europe and markets served by electronics and assuming continued resilience of U S end markets.
We expect continued margin expansion ahead of our long term outlook.
We anticipate our fast growth markets to continue to progress towards our fast market revenue target of $200 million.
Plus by fiscal 2028.
We reaffirm our long term financial outlook for fiscal year 2028. These targets include high single digit organic growth to greater than $1 billion in sales adjust.
Adjusted operating margin greater than 19% return on invested capital of greater than 15% and free cash flow conversion of approximately 100% of GAAP net income.
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 if youre using your speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll 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.
Good morning, good morning.
You talked about softness currently Bolton.
China and EMEA I'm wondering if you could parse those a little bit in terms of.
Is there.
Any better visibility in either of those markets are kind of.
How youre thinking about them.
Yes, it seems like we've been kind of cutting and pasting those comments for about six quarters here.
And we're looking at it.
In both.
<unk>.
About six quarters. It goes backlog was at a peak and has been gradually coming down.
And.
We've commented on that nearly every quarter for the last year or so there's some destocking the sort of general industry slowdown, especially consumer goods and appliances, we've seen those things.
In the last couple of months last couple of months that we have seen the orders.
They seem to be bought.
Two months, so it does not a trend make but.
It may be bottoming out and firming up.
Especially in Asia.
If youre looking for kind of a recent trend if that's what you mean.
Yes and.
EMEA anything.
<unk> to talk about there.
I would say.
Similar stabilizing EMEA as decline was not as dramatic as China, we expected much more coming back in Asia in the spring and we didn't see that so.
Germany in particular was an industrial recession, starting earlier this year.
And Thats.
That's a flat.
And then Chris it's Adam if I can add.
It's more around Asia, and China and Europe.
It kind of ties down too to what David was saying about appliances and general industrial end markets some distributor destocking.
We feel that it might be bottoming out, but a little bit too early to say and we're going to continue playing as you say offense and defense and that's one of the reasons, we announced we have taken some of the cost outside of electronics business. So when the market comes up we'll be in a very good position to get that get that organic growth again in a levered up at the high.
Right.
Got it I appreciate that.
Let me just add a couple of things on that.
General industry headwind is there you hear it from other players out there, but our fast growth vectors sales fast growth market sales were up 20%, our new product sales were up on a new application sales are up so we do have we have growth momentum.
And we're still very confident about our positioning in these markets as they pick up that will be an accelerator for us.
Got it that's helpful.
I think I heard you say, David the target for fiscal 'twenty for us.
Revenues mid single digit rate did I get that right yes.
Yes, mid single digit plus depends a bit on.
And as general industry conditions.
To the extent the China Europe.
Come back a little stronger there is upside to that number.
Got it I appreciate that and maybe just last one on <unk> site. So Ford is postponing I don't know 12 billion.
EV factory building the reasons given them willingness of customers to pay extra for electric vehicles. Just curious if you if you.
Kind of impact that could have potentially either on your ice a little bit.
Yes.
<unk> build out.
Our ice business is doing pretty well with easy as we are seeing it's still growing but it's decelerating and we have had some kind of a rescheduling of orders. So we anticipate our sales into evs in 'twenty four we will grow less than we had thought they would.
Because of all the headlines that we're reading and you mentioned you mentioned Ford.
Got it it's helpful I will jump back in line. Thanks, guys.
Thank you Chris.
The next question comes from Michael Legg from Benchmark. Please go ahead.
Thanks, Good morning, everyone.
Can you talk a little bit about the inflationary environment, what youre seeing in supply chain pricing and your ability to pass that onto your customers and what that means from a organic growth perspective. Thanks.
Yes, yes, it's Adam and Mike So, yes, I mean, I think we are.
We are still seeing some inflationary pressures, but frankly, that's not us.
Strong available as you know a few quarters ago, and specifically I know, we are seeing a bit of a.
Deflation, if you will because the oceanic freight cost is still at kind of a pre COVID-19 levels and you know kind of how it exploded during COVID-19.
We have developed a pretty sort of playbook around price and productivity and a few years ago, we continue to abide by that playbook.
As you'll have seen that we had 10 consecutive quarters of highest adjusted operating margin in company history.
One of the reasons, we're able to do that is because we have a pretty good way of managing price and productivity and we expect to be able to continue continue to do that even in the environment.
We know where the softer end markets and electronics, we want to make sure we protect the margin and that will be a combination of off price price and productivity.
So that will be there'll be my take on it.
Thanks, and then just one other question on the Neal with your technology developed there for solar lots going on Oman in New York can you just give us some comments on that please.
Yeah. So that project as you know we've reported before that we think we've developed some special technology to develop together with Enel and we're spending this year to complete industrialization to make sure that where we.
We're prepared to launch products at target cost and quality.
There are two significant things have happened kind of in the external environment to that project.
Remember, we're talking commercial solar panels here and.
In Europe, the market for commercial solar panels has changed quite a bit.
There's estimates there are 80 million, China, Chinese panels and inventory over there the price for panels about 50% of what it was a year ago, so much more competitive and market than it was a year ago to.
Second external to the project.
Impact is.
Government owned partly government owned.
And the.
New Italian government appointed a new leader there they are in the process of reviewing their entire portfolio of projects they've been selling some assets they've canceled a couple of renewable projects. So if you add those things into the project, we're kind of stepping back and looking at where is the best what's the best way to deploy this technology.
The market for commercial panels is about 80% of the global market for solar panels, but that other 20% is significant and there is some potentially attractive niche markets. There. So we're stepping back and looking at is there a better place to introduce this technology in the market and in the next quarter or so we'll have we'll have a clearer direction on that.
Great. Thank you.
Again, if you have a question. Please press Star then one.
And our next question comes from Gary <unk> from Barrington Research. Please go ahead.
Good morning, all.
Couple of questions.
The acquisition of.
Daniel or the planned acquisition.
Is there any customer overlap and.
What do they bring product wise that you don't have already in the market.
There's a little bit of customer overlap.
But.
Their customers.
They have a high concentration in selling relays into automated test equipment.
So if you think of putting in place.
Manufacturing process for <unk> products, or even battery management systems or smart grid products. These things all need to be tested as they get more complex, they're more testing points and when you think of it is for every testing point you need a relay so the design of <unk>.
This test equipment depends on a lot of realize.
The <unk> team has worked with those test and measurement company to design. These.
These pieces of test equipment and have developed kind of a.
And application knowledge, there thats deeper than our knowledge in the test and measurement. So we see it as complementary both in the customer base, they bring and the application expertise they bring and the way we look at the markets. They serve is when we talk about our fast growth markets Smart grid Evs five G.
Sure.
The growth in those markets also pull through business in in this test and measurement equipment, Although we don't report it but it's kind of a secondary effect of this growth market. So it's our best product line already realized this strengthens our position globally. It brings us new application expertise and some new customers.
Okay. Thank you can you give us some idea of the revenues are you can't until you actually close.
Yes, so the way to think about that is.
Is it.
Rewind to April when we announced the sale of <unk> a few months after that.
Medtronic and for less than half the proceeds from Procon, we replace the sales and in the first you will replace the operating income from program.
For about the same price now if you add Medtronic and sang Yoo.
We more than doubled the revenue we've lost in the operating income we lost two procon and with the extra proceeds we've increased our dividend.
And bought back shares so I know, we're talking a little bit of code. There, but you can think of this is roughly the size of electronics in sales.
And operating income potential and I think Gary if I can just add to that it does give us a much better growth potential than what we had the trocar. So we replaced those proceeds with two businesses a double revenue and operating income in the first year of ownership with a double rois with double digit ROIC EBITDA with a great growth potential over the long.
So we feel pretty good about it.
Okay.
Couple of questions are around the electronics segment.
The applications that are.
Impacting the sales growth and the operating profit growth.
When you're talking about appliances, I get that general industrial what what end markets are being served there.
While these reed switches wind their way into everything from.
Irrigation systems for your your inbound irrigation systems.
Jim.
Commercial building construction security systems contain a lot of Reed switches.
Level and measurement systems in tanks that contain liquids.
Process plants, so I think.
That's how we use the term general industry there are many many.
Many many end applications.
I mean are you are there are you serving the same applications in the United States to North America.
Yes, although.
There is much more volume in China for many of those applications.
And we tend to I guess, maybe just think about the manufacturing base in North America tend to be higher higher value add products and more sophisticated products. So we haven't seen the impact.
Our Reed switch sales into North America, but that's a smaller end market.
Would would.
Would be.
This business have shown an increase in adjusted operating income exiting out.
The issues that are in.
China and Europe on appliances in general in industrial.
Sure.
Yes.
Okay Alright.
Part of it part of it.
The reported margin change in the group also has to do with mix.
Probably recall that the magnetics business in general has lower margin.
S T. The switches and sensors, so as that mix changes to your mixed mix down a little bit of margin, but the underlying businesses the margins are improving right.
Okay. Thank you.
Our next question comes from Ross <unk> from William Blair. Please go ahead.
Hey, good morning, guys.
Hey, Ross on Earth.
Hey, maybe just to put a finer point on Chris's question with the rescheduling of the Evs can you maybe give us a sense of what is sitting in that backlog to me it looks like the orders are decently well.
I know the second half expectations warfare at least some pretty stable Chinese demand coming through that could help drive those margins so anything around that would be helpful.
Well, we're seeing this.
We are seeing is in North America, and Europe, primarily as you said, China's China's plugging along and we are in.
Those trying to vehicles that operate at more than 400 volts.
So there is.
Yes, I don't have a backlog number for you, but the scheduled what we do with these we get awarded a platform and we get an annual schedule from the OEM of what they think they will need in the quarter. So what we're getting from some of the European and American EV is kind of a push out of that.
Schedule.
Yes, the expectation is still that you should have some good volume and at least on my year over year growth in the second half from Chinese adoption right.
Yes, Chinese adoption, but.
Also in Europe, we anticipate growth just not as much as we had thought.
In China.
Some growth in.
In Europe, North America don't know, if thats going to be flat or slightly up Ross just as a good reminder, is all content per EV is 3% to five times the content in ice so even if the evs are growing at a lower lower rate as long as they are growing it's a good. It's a good thing for us and I think to David's point because of all the all the headlines we are seeing in these.
Days in some of those some of the push outs that growth is slowing down but again our content is still.
We are still benefiting from the from the content change and we expect that to continue in the years ahead.
Yes, absolutely that's why I'm trying to reconcile the $7 million of cost savings actions I mean coming into this quarter.
Everything seemed pretty steady Eddy in the second half.
Houston restructuring so it feels like maybe something changed I understand the mix with the magnetics the volume wasn't that low year over year. So I mean.
Generally just general industrial PMI slowing in <unk> kind of pause for concern for you guys and electronics.
Yes.
I've mentioned before I think it was Chris's question, our new product sales were up new applications are up and the fast growth market numbers theyre growing not as fast as we thought so the problem is not there. It's just this kind of legacy based general business through desk distribution and through the various and sundry applications.
I mentioned earlier.
And the cost action electronics, these or the App.
Might be accelerating some of those actions because of the market softness, but as part of our margin expansion progress to hit those targets that we gave you know we always look at our back office structure, our cost of goods sold components and this is just one way we are working through to make sure. We continue improving our margins and protecting our margins through some of this.
Some of the softness if you will.
Okay, Yeah, but again really important Todd change, they're not touching not touching R&D R&D is almost 3%.
And at 3% of revenue. This this quarter. So that's really important that we are still preserving our growth.
Our growth priorities.
That's excellent.
Each of us.
Great Yes.
No no I'm, sorry, we're just going to say, yes I would.
The cost reduction is kind of an abundance of caution not knowing how long this period of softness in general industry will endure so, particularly cautious approach sugar cost do not affect topline opportunities.
Yes.
Okay.
Click on the commercial space and understanding the timing of that project pipeline, obviously, a really strong quarter expectations for another strong second quarter here I thought that was going to be kind of more of a second half story. So there wasn't any pull forward to be concerned with right. I mean, this is pretty steady Eddie.
And the backlog that we're going to see some material expansion from mix as we move through the year.
Yes, the only one thing I would say about the steady areas. As you know it is a project business. So projects can move a bit and cross from one quarter into the next.
But with that caveat I would agree with everything you said is pretty steady Eddie with good backlog.
Number of platforms that are growing.
Awesome Alright, thank you guys.
Thank you thanks, Brian.
This concludes our question and answer session I would like to turn the 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 Standex and finally again I want to thank all of our employees and shareholders for your continued support and contributions we look forward to speaking with you again in our fiscal second quarter 2024 call.
Conference is now concluded.
Thank you for attending today's presentation you may now disconnect.
Okay.
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