Q3 2024 Standex International Corp Earnings Call
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Operator: Good morning, ladies and gentlemen, and welcome to the Statics International Fiscal Third Quarter 2024 Financial Results Conference Call. At this time, all lines are in a listen-only mode.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the aesthetics entering fiscal third quarter 2024 financial results Conference call. At this time all lines are in a listen only mode.
During the presentation, we will conduct a question and answers.
Speaker Change: But by them during this year.
Speaker Change: Assistance, Please press star zero for a dockworker.
Operator: Following the presentation, we will conduct a question and answer session. But anytime during this call you require immediate assistance, please press star zero for the... And this call is being recorded on Friday, May 3rd, 2024. I would now like to turn the comments over to Mr. Christopher Howe, Director of Investor Relations. Please go ahead.
Speaker Change: And this call is being recorded on Friday may <unk> 2024.
Speaker Change: I would now like to turn conference over to Mr. Christopher Howe Director of Investor Relations. Please go ahead.
Christopher H. Howe: 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, expectations, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's most recent annual report on Form 10-K, as well as other SEC filings and public announcements for a detailed list of risk factors.
Christopher H. Howe: Thank you operator and good morning.
Christopher H. Howe: Please note that the presentation accompanying management's remarks can be found on the investor relations portion of the company's website.
Christopher H. Howe: At Www Dot <unk> dot com.
Christopher H. Howe: 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 Tax, Adjusted EBIT, which is EBIT excluding restructuring, purchase accounting, acquisition-related expenses, and one-time items, and EBITDA, which is Earnings Before Interest, Taxes, Depreciation, and Amortization. Adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses, and one-time items. EBITDA margin and adjusted EBITDA margin. We will also refer to other non-GAAP measures, including adjusted net income, adjusted operating income, and adjusted net income from continuing operations.
Christopher H. Howe: These refer to <unk> Safe Harbor statement on slide two.
Christopher H. Howe: Matters that Standex management will discuss on today's conference call include predictions estimates expectations and other forward looking statements.
Christopher H. Howe: These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Christopher H. Howe: 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.
Christopher H. Howe: 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.
Christopher H. Howe: 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.
Christopher H. Howe: 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.
Christopher H. Howe: 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 Standex's Chairman, President, and Chief Executive Officer, David Dunbar, and Chief Financial Officer and Treasurer, Ademir Sarcevic.
Christopher H. Howe: 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.
Christopher H. Howe: <unk> believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance.
Christopher H. Howe: On the call today is <unk>, Chairman, President and Chief Executive Officer, David Dunbar, and Chief Financial Officer, and Treasurer, Adam here, sorry civic.
David A. Dunbar: Thank you, Chris. Good morning, and welcome to our fiscal third quarter 2024 conference call. Despite continued softness in general market conditions, we continued our trend of strong margin performance. If we exclude the one-time stock compensation charge, our streak of record-adjusted operating margin performance would have continued. I would like to thank our employees, our executives, and the Board of Directors for their efforts and continued dedication and support that drove these results. Now, if everyone can turn to slide three, the key messages.
David A. Dunbar: Thank you Chris Good morning, and welcome to our fiscal third quarter 2024 conference call. Despite continued softness in general market conditions. We continued our trend of strong margin performance. If we exclude the one time stock compensation charge our streak of record adjusted operating margin performance would have.
Christopher H. Howe: <unk>.
Christopher H. Howe: I would like to thank our employees, our executives and the board of directors for their efforts and continued dedication and support that drove these results now if everyone can turn to slide three key messages.
David A. Dunbar: In the third quarter, sales into fast growth and emerging markets grew 9% year-on-year to $26 million. We are on track to achieve our long-term target of $200 million annual sales into fast growth and emerging markets by fiscal year 2028. However, we continue to experience the effects of transitory market softness, which led to an organic decline of 5.7%.
Christopher H. Howe: In the third quarter sales into fast growth end markets grew 9% year on year to $26 million. We are on track to achieve our long term target of $200 million annual sales into fast growth end markets by fiscal year 2028.
Christopher H. Howe: We continue to experience the effects of transitory market softness, which led to an organic decline of five 7%.
David A. Dunbar: These headwinds included continued softness in appliances and general industrial end markets in China and Europe, the impact of a lower number of projects, and inventory destocking by a few large electronics customers in the semiconductor and test and measurement market. These are partially offset by contributions from our recent acquisitions, including the late February completion of our acquisition of Sonya Switch Company, expanding our relay product offering. In addition, we continue to work on an active pipeline of other inorganic opportunities.
These headwinds included continued softness in appliances, and general industrial end markets in China, and Europe, the impact of a lower number of projects and inventory destocking by a few large electronics customers in the semiconductor and test and measurement end markets.
Christopher H. Howe: Were partially offset by contributions from our recent acquisitions, including the late February completion of our acquisition of Sony's switch company, expanding our relay product offering.
Christopher H. Howe: In addition, we continue to work an active pipeline of other inorganic opportunities.
David A. Dunbar: During the fiscal third quarter, we also continued to generate strong profitability from the execution of our price and productivity initiatives. As a result, we again achieved an adjusted gross margin of nearly 40%, which followed a record 40.3% last quarter. We continue to demonstrate our ability to drive operating improvements while adapting to changing macro conditions. Consolidated Adjusted Operating Margin increased 20 basis points year-on-year to 15.4 percent, which includes a 70 basis point impact from the one-time stock compensation charge.
Christopher H. Howe: During the fiscal third quarter. We also continued to generate strong profitability from the execution of our price and productivity initiatives. As a result, we again achieved adjusted gross margin of nearly 40%, which followed a record 43% last quarter. We continued to demonstrate our ability to drive operating improvements.
Christopher H. Howe: While adapting to changing macro conditions.
Christopher H. Howe: Consolidated adjusted operating margin increased 20 basis points year on year to 15, 4%, which includes a 70 basis point impact from the one time stock compensation charge.
David A. Dunbar: If it were not for me reaching my 10th anniversary at Standex and the related one-time stock compensation change... Our adjusted operating margin would have been similar to last quarter's record. Three out of five segments reported adjusted operating margin near or above 20%, while margin in the engineering technology segment approached nearly 18%. All five segments reported adjusted operating margin greater than 17%.
Christopher H. Howe: If it were not for me, reaching my 10th anniversary at <unk> as it related one time stock compensation change.
Christopher H. Howe: Our adjusted operating margin would have been similar to last quarter's record.
Christopher H. Howe: Three of our five segments reported adjusted operating margin near or above 20% while margin in the engineering technologies segment approach to nearly 18%.
Christopher H. Howe: All five segments reported adjusted operating margin greater than 17%.
David A. Dunbar: We achieved a record fiscal third quarter free cash flow of $19.3 million, maintaining record free cash flow year to date. Our consistent and improved cash flow generation and annualized ROIC of over 12% further highlight the quality of our business. On a sequential basis, in fiscal fourth quarter 2024, we expect slightly to moderately higher revenue due to favorable project timing in the engineering technology segment, increased market demand in the specialty solutions segment, and the impact of our recent acquisition.
Christopher H. Howe: We achieved a record fiscal third quarter of free cash flow of $19 3 million maintaining record free cash flow year to date.
Christopher H. Howe: Our consistent and improved cash flow generation and annualized ROIC.
Christopher H. Howe: Although over 12% further highlights the quality of our business.
Christopher H. Howe: On a sequential basis in fiscal fourth quarter 2024, we expect slightly to moderately higher revenue due to favorable project timing in the engineering technologies segment increased market demand and the specialty solutions segment and the impact of our recent acquisitions.
David A. Dunbar: We expect slightly to moderately higher adjusted operating margins sequentially needing to leverage higher sales, and pricing, and productivity. In fiscal year 2025, we expect to return to organic growth rates in line with our long-term financial objective. We expect our sales into fast-growing markets to outpace growth of the general market. We are reaffirming our long-term financial outlook through fiscal year 2028. These targets include high single-digit organic growth to greater than $1 billion in sales, adjusted operating margin of greater than 19%, return on invested capital of greater than 15%, and free cash flow conversion at approximately 100% of GAAP net income.
Christopher H. Howe: We expect slightly to moderately higher adjusted operating margin sequentially due to leverage on higher sales and pricing and productivity actions.
Christopher H. Howe: In fiscal year 2025, we expect to return to organic growth rates in line with our long term financial objectives.
Christopher H. Howe: We expect our sales into fast growth markets to outpace growth of the general market.
Christopher H. Howe: We are reaffirming our long term financial outlook by fiscal year 2028. These targets include high single digit organic growth to greater than $1 billion in sales adjusted operating margin greater than 19%.
Christopher H. Howe: Return on invested capital of greater than 15% and free cash flow conversion of approximately 100% of GAAP net income.
David A. Dunbar: Let's turn to slide four, Electronic Business Focus and Market Update. I would like to focus on our largest segment, electronics, how its markets are evolving in the near term, and how our longer-term efforts to increase its sales growth are progressing. The market headwinds we have been experiencing are beginning to abate, and we anticipate general market conditions to improve in fiscal year 2025. Typically, the sale of bear read switches has served as a leading indicator of market turns in our business. They are the first to fall when the market picks back up.
Christopher H. Howe: Turn to slide four electronic business focus and market updates.
Christopher H. Howe: I would like to focus on our largest segment electronics, how it's markets are evolving in the near term and how our longer term efforts to increase its sales growth are progressing.
Christopher H. Howe: The market headwinds, we have been experiencing are beginning to abate and we anticipate general market conditions to improve in fiscal year 2025.
Typically the sale of bare Reed switches has served as a leading indicator of market turns.
Christopher H. Howe: In our business. They are the first to fall into a downturn in the first arise when the market picks back up we mentioned last quarter that sales CAGR, we're bottoming out and starting to show a positive inflection. This positive inflection continued through the quarter and we saw a sequential increase in orders.
David A. Dunbar: We mentioned last quarter that sales here were bottoming out and starting to show a positive inflection. This positive inflection continued through the quarter, and we saw a sequential increase in orders. We have mentioned before the continued softness in appliances and general industrial markets in China and Europe related to electronics.
Christopher H. Howe: We have mentioned before the continued softness in appliances and general industrial markets in China, and Europe related to electronics. This continued in the fiscal third quarter, but we are now seeing orders pick up in Europe and for appliances and consumer related end markets globally.
David A. Dunbar: This continued in the fiscal third quarter, but we are now seeing orders pick up in Europe and for appliances and consumer-related end markets globally. Our top customers that manufacture critical equipment for end markets like semiconductor, automation, and smart grid have indicated that order trends are likely to improve through the second half of the calendar year. This is supported by U.S. investments in infrastructure and domestic chip production. However, the markets we serve will always ebb and flow.
Christopher H. Howe: Our top customers that manufacture critical equipment for end markets like semiconductor automation and smart grid have indicated order trends are likely to improve through the second half of the calendar year. This is supported by U S investments in infrastructure and domestic chip production.
Christopher H. Howe: The markets, we serve will always ebb and flow the longer term prospects of the electronics business will be shaped more by the investments and focus we are bringing to increase its growth trajectory. This is a long term effort and I am pleased to see that our projects are gaining traction sales into fast growth markets like renewable energy electrical vehicles.
David A. Dunbar: The longer-term prospects of the electronics business will be shaped more by the investments and focus we are bringing to increase its growth trajectory. This is a long-term effort, and I'm pleased to see that our projects are gaining traction. Sales into fast-growing markets like renewable energy, electrical vehicles, smart grid, and new aero will account for nearly 20% of segment sales in fiscal 2024. Managing an active funnel of new business opportunities is the basic building block of growth in electronics. Our NBO funnel increased 26% year-on-year in the fiscal third quarter and grew 10% organically.
Christopher H. Howe: Smart grid and 1000 Aero will account for nearly 20% of segment sales in fiscal 2024.
Managing an active funnel of new business opportunities is the basic building block of growth in electronics, our NBL funnel increased 26% year on year in the fiscal third quarter and grew 10% organically.
David A. Dunbar: We started ramping up new product development a few years ago, and I'm happy to share that this development is beginning to translate to sales. We are in the early days of new product sales, and though the numbers are small in the single-digit millions, they are growing nicely, contributing to our fiscal 2024 results. Research and development investments continue to increase, and we have multiple new products slated for release in fiscal year 2025.
Christopher H. Howe: We started ramping up new product development, a few years ago and I'm happy to share that this development is beginning to convert to sales. We are in the early days of new product sales and though the numbers are small in the single digit millions they are growing nicely contributing to our fiscal 2024 results.
Christopher H. Howe: Research and development investments continue to increase and we have multiple new products slated for release in fiscal year 2025.
David A. Dunbar: The new product development cycle and the commercial focus on faster-growing markets create a flywheel that gradually builds momentum and is having an increasing impact on sales and electronics. This leaves us confident as we look to fiscal year 2025 and beyond. I will now turn the call over to Ademir to discuss our financial performance in greater detail.
Christopher H. Howe: The new product development cycle, and the commercial focus on faster growing markets creates a flywheel that gradually builds momentum and is having an increasing impact on sales in electronics. This leaves us confident as we look to fiscal year 2025 and beyond.
Speaker Change: I will now turn the call over to <unk> to discuss our financial performance in greater detail.
Ademir Sarcevic: Thank you, David, and good morning, everyone. Let's turn to slide 5, the third quarter 2024 summary. On a consolidated basis, total revenue decreased approximately 3.8% year-on-year to $177.3 million. This reflected an organic revenue decline of 5.7% and a 0.9% impact from foreign exchange, partially offset by a 2.7% net impact from recent acquisitions and a prior broken divestment. Third quarter 2024 adjusted operating margin increased 20 basis points year-on-year to 15.4%. In the quarter, we incurred a one-time sum compensation charge related to our CEO reaching retirement eligibility.
Speaker Change: Thank you David and good morning, everyone, Let's turn to slide five third quarter 2020 for a summary.
Ademir Sarcevic: This charge impacted the just operating margin by approximately 70 basis points. Excluding this charge, adjusted operating margin would have been similar to a record second quarter 2024 performance, and the fiscal third quarter adjusted operating income decreased 2.2% on a 3.8% consolidated revenue decrease year-on-year. Adjusted earnings per share grew 6.1% year-on-year to $1.75 in the third quarter of fiscal 2024, compared to $1.65 a year ago. Net cash provided by operating activities was $24.4 million in the third quarter of fiscal 2024, compared to $23.3 million a year ago. Capital expenditures were $5.2 million, compared to $5.6 million a year ago.
On a consolidated basis total revenue decreased approximately three 8% year on year to $177 3 million.
This reflected an organic revenue decline of five 7% and the 0.9% impact from foreign exchange, partially offset by a two 7% net impact from recent acquisitions and the prior Brooklyn divestiture.
Speaker Change: Third quarter 2024, adjusted operating margin increased 20 basis points year on year to 15, 4% in.
Speaker Change: In the quarter, we incurred a onetime startup of social charges related to our CEO retail retirement eligibility.
Speaker Change: This charge impacted adjusted operating margin by approximately 70 basis points.
Speaker Change: Excluding this charge adjusted operating margin would have been similar to our record second quarter 2020 for performance.
Speaker Change: In the fiscal third quarter adjusted operating income decreased two 2% on a three 8% consolidated revenue decrease year on year.
Speaker Change: Adjusted earnings per share grew six 1% year on year to $1 75 in the third quarter of fiscal 2024 compared to $1 65, a year ago.
Speaker Change: Net cash provided by operating activities was $24 4 million in the third quarter of fiscal 2024 compared to $23 3 million a year ago.
Speaker Change: Capital expenditures of $5 4 million compared to $5 6 million a year ago.
Ademir Sarcevic: As a result, we generated a record fiscal third quarter free cash flow of $19.3 million compared to $17.6 million a year ago. Our free cash flow conversion ratio as a percent of GapNet income was 121%. Likewise, on a year-to-date basis, we generated a record free cash flow of $50.8 million.
Speaker Change: As a result <unk>.
Speaker Change: The record fiscal third quarter free cash flow of $19 3 million compared to $17 6 million a year ago.
Speaker Change: Our free cash flow conversion ratio as a percent of GAAP net income was 121%.
Speaker Change: Likewise on a year to date basis, we generated record free cash flow of $50 8 million.
Ademir Sarcevic: Now, please turn to slide six, and I will begin to discuss our segment performance and outlook, beginning with electronics. Segment revenue of $80.4 million increased 2.8% year-on-year, as a 13.5% benefit from recent acquisitions was mostly offset by an organic decline of 9.3% and a 1.3% impact from foreign currency. Adjusted operating margin of 20.5% in fiscal third quarter 2024 decreased 130 basis points year-on-year as the contribution from recent acquisitions and productivity initiatives was more than offset by lower organic sales and product margins.
Speaker Change: Now please turn to slide six and that will begin to discuss our segment performance and outlook beginning with electronics.
Speaker Change: Segment revenue of $84 million increased two 8% year on year as a 35% benefit from recent acquisition was mostly offset by an organic decline of nine 3%.
Speaker Change: One 3% impact from foreign currency.
Adjusted operating margin of 25% in fiscal third quarter 2024 decreased 130 basis points year on year as the contribution from recent acquisitions and productivity initiatives, but more than offset by lower organic sales and product mix.
Ademir Sarcevic: Our new Business Opportunity Funnel increased 26% year-on-year and grew 10% organically and is currently at approximately $78 million. We remain confident in our ability to increase share and accelerate our presence in fast-growing markets such as industrial automation, smart grid, renewable energy, and EV-related markets.
Speaker Change: New business opportunity funnel decreased 26% year on year and grew 10% organically and is currently at approximately $78 million.
Speaker Change: We remain confident in our ability to increase share and accelerate our presence in fast growth markets, such as industrial automation smart grid renewable energy and <unk> related markets.
Ademir Sarcevic: So, sadly, in fiscal fourth quarter 2024, we expect similar revenue and a slightly lower to similarly adjusted operating margin due to the unpayable mix. We anticipate general market conditions to improve in fiscal year 2025. Please turn to slide 7 for the discussion of the engraving and scientific set.
Speaker Change: Sequentially in fiscal fourth quarter of 2024, we expect similar revenue is slightly lower at the similar to adjusted operating margin due to unfavorable mix.
Speaker Change: We anticipate general market conditions to improve in fiscal year 2025.
Speaker Change: Please turn to slide seven for a discussion of the engraving of scientific segments.
Ademir Sarcevic: Engraving revenue decreased 1.7% to $36.3 million, driven by an organic decline of 0.2% and a 1.5% impact from foreign currency. Operating margin of 17.2% in fiscal third quarter 2024 increased 270 basis points year-on-year due to the realization of productivity actions. In our next fiscal quarter, on a sequential basis, we extract slightly lower revenue and slightly to moderately lower operating margin due to unfavorable project timing in North America and Europe. Scientific revenue decreased 10.4% to $16.9 million due to general market softness and the related impact on retail pharmacy.
Engraving revenue decreased one 7% to $36 3 million driven.
Speaker Change: Driven by an organic decline of 0.2% and a one 5% impact from foreign currency.
Speaker Change: Operating margin of 17, two 2% in fiscal third quarter of 2024 increased to 170 basis points year on year due to realization of productivity actions.
Speaker Change: And our next fiscal quarter on a sequential basis, we expect slightly lower revenue a slightly to moderately lower operating margin due to unfavorable project timing in North America and Europe.
Scientific revenue decreased 10, 4% to $16 9 million due to the general market softness and the related impact on retail pharmacies.
Ademir Sarcevic: Operating margin of 28.9% increased 480 basis points year-on-year due to lower freight costs and productivity initiatives offsetting lower volume. Although market conditions have been challenging, new product development volume increased approximately 60% year-on-year, and new product development sales represented approximately 10% of segment sales in the quarter. We successfully achieved slightly higher revenue and a similar operating margin. We anticipate market conditions to start to improve in fiscal year 2025. Now turn to slide 8 for a discussion of the Engineering Technologies and Specialty Solutions Center.
Speaker Change: Operating margin of 28, 9% increased 480 basis points year on year due to lower freight cost and productivity initiatives offset the lower volume.
Speaker Change: Although market conditions have been challenging.
Speaker Change: New product development volume increased approximately 60% year on year and new product development sales represented approximately 10% of segment sales in the quarter.
Speaker Change: Sequentially, we expect slightly higher revenue and similar operating margin.
Dissipate market condition to start to improve in fiscal year 2025.
Speaker Change: Now I'll turn to slide eight for a discussion of engineering technologies and specialty solutions segments.
Ademir Sarcevic: Engineering technology's revenue of $20.1 million increased 11.3% year-on-year as higher demand for aviation was partially offset by lower defense sales caused by delays in government funding. Operating margin of 17.5% increased 450 basis points year-on-year, as leverage on higher aviation sales and pricing of productivity initiatives were partially offset by research and development expense. This margin result is near the lower end of our long-term target for the segment and represents the fourth consecutive quarter of operating margin improvement.
Speaker Change: Technologists revenue of $20 1 million increased 11, 3% year on year.
Speaker Change: Higher demand in aviation was partially offset by lower defense sales caused by delays in government funding.
Operating margin of 17, 5% increased 450 basis points year on year.
<unk> leverage on higher aviation sales and pricing or productivity initiatives, partially offset by research and development expenses.
Speaker Change: This margin result is near the lower end of our long term target for the segment.
Speaker Change: That's the fourth consecutive quarter of operating margin improvement.
Ademir Sarcevic: Sequentially, we expect moderately to significantly higher revenue and moderately higher operating margin due to more favorable project timing. Specialty solution segment revenue of $23.5 million decreased 27.1% year-on-year, primarily due to the proper divestiture and normalization in the display merchandising business, partially offset by organic growth in the hydraulics business. Operating margin of 19.9% decreased 230 basis points year on year as the impact of the prop on the revenie and lower sales in the display merchandising business more than offset higher sales in the hydraulics business. Sequentially, we expect moderately higher revenue and operating margin to improve end market demand and leverage on higher sales.
Speaker Change: Sequentially, we expect moderately for significantly higher revenue and moderately higher operating margin due to more favorable project timing.
Specialty solutions segment revenue of $23 5 million decreased 27, 1% year on year, primarily due to the Brooklyn divestiture and normalization in the display merchandising business, partially offset by organic growth in the hydraulics business.
Operating margin of 19, 9% decreased to 130 basis points year on year as the impact of the <unk> divestiture are less sale sales in display merchandising business more than offset higher sales into hydraulic business.
Sequentially, we expect moderately higher revenue and operating margin improved end market demand and leverage on higher sales.
Ademir Sarcevic: Next, please turn to slide nine for a summary of Standex's liquidity statistics and the capitalization structure, which remains strong. Standex ended fiscal third quarter 2024 with $347 million of available liquidity. At the end of the third quarter, Standex had net debt of $10 million compared to $6.2 million at the end of the fiscal second quarter 2024. Standex's long-term debt at the end of the fiscal third quarter 2024 was $148.8 million. Cash and cash accrual loans totaled $138.8 million.
Speaker Change: Next please turn to slide nine for a summary of <unk> liquidity statistics, and the capitalization structure, which remains strong.
Speaker Change: Standex ended fiscal third quarter 2024, with $347 million of available liquidity at the end of the third quarter Standex had net debt of.
Speaker Change: $10 million compared to $6 4 million at the end of the fiscal second quarter 2004.
Speaker Change: Benefits long term debt at the end of fiscal third quarter of 2024 was $148 8 million cash and cash equivalents totaled $138.8 million.
Ademir Sarcevic: With regard to capital allocation, we repurchased approximately 34,000 shares for $5.1 million in the third quarter. We also declared our 239th consecutive cash dividend of $0.30 per share, an approximately 7.1% increase year on year. In fiscal 2024, we expect capital expenditures to be between $28 million and $32 million, compared to approximately $24 million in fiscal 2023.
Speaker Change: With regards to capital allocation.
Purchased approximately 34000 shares for $5 1 million in the third quarter.
We also declared our 239 quarterly consecutive cash dividend of <unk> 30 per share and approximately seven 1% increase year on year.
Speaker Change: In fiscal 2024th we expect capital expenditures to be between $28 million and $32 million compared to approximately $24 million in fiscal 2023.
David A. Dunbar: I will now turn the call over to David to discuss our key takeaways from our third quarter results. Thank you, Ademir. Please turn to slide 10. I'm very proud of our team for their continued...
Speaker Change: I will now turn the call over to David to discuss our key takeaways from our third quarter results. Thank you Adam here, Please turn to slide 10.
David A. Dunbar: Thank you, Ademir. Please turn to slide 10.
David A. Dunbar: I'm very proud of our team for their continued operational excellence and focus on growing markets that led to our quarterly results. We are prepared as inventory levels normalize and demand returns, while our fast-growing markets will continue to evolve and accelerate. We have proven over the 11 consecutive quarters of record margin that we can expand margin and grow earnings by adapting to changing macro conditions. Excluding the one-time charge in the quarter, this streak would have continued.
David A. Dunbar: I am very proud of our team for their continued operational excellence and focus on growing markets that led to our quarterly results. We are prepared as inventory levels normalize and demand returns, while our fast growth markets will continue to evolve and accelerate we have proven over the 11 consecutive quarters of record margin that we can expand margin and grow earnings by adapting.
David A. Dunbar: Turning to changing macro conditions and excluding the onetime charge in the quarter. This streak would've continued.
David A. Dunbar: We remain optimistic about the long-term secular trends that will benefit from the transition from internal combustion to hybrid and electric cars in the automotive industry, infrastructure spending in the smart grid, defense applications, and next-generation aerospace development, and from the evolution of space exploration. Broadly speaking, these trends are still in the earlier stages of development. We are on track to achieve our long-term target of $200 million-plus in annual sales into fast-growing end markets by fiscal year 2028.
David A. Dunbar: We remain optimistic about the secular trends that will benefit from the transition from internal combustion to hybrid and electric in automotive infrastructure spending in smart grid defense applications and next generation Aerospace development and from the evolution of space exploration.
David A. Dunbar: Broadly speaking these trends are still in the earlier stages of development.
David A. Dunbar: We are on track to achieve our long term target of $200 million plus in annual sales into fast growth end markets by fiscal year 2028.
David A. Dunbar: To support our growth, we continue to expand our engineering capabilities to drive new product development and new applications across markets with growth potential. In fiscal year 2025, for the first time in the company's history, new products will be released in every one of our businesses. We continue to maintain a strong balance sheet that allows us to prudently assess an active pipeline of organic and inorganic growth opportunities. In fiscal 2025, we expect to return to organic growth rates in line with our long-term financial objective.
To support our growth, we continued to expand our engineering capabilities to drive new product development and new applications across markets with growth potential.
David A. Dunbar: In fiscal year 2025 for the first time in the company's history, New products will be released in every one of our businesses.
We continue to maintain a strong balance sheet that allows us to prudently assess an active pipeline of organic and inorganic growth opportunities.
David A. Dunbar: In fiscal 2025, we expect to return to organic growth rates in line with our long term financial objectives.
David A. Dunbar: 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, adjusted operating margin greater than 19%, return on invested capital of greater than 15%, and free cash flow conversion at approximately 100% of gap net income. We will now open the line for questions.
David A. Dunbar: We reaffirm our long term financial outlook by fiscal year 2028. These targets include high single digit organic growth to 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 of approximately 100% of GAAP net income.
Speaker Change: We will now open the line for questions.
Operator: Thank you, Richard. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press the star followed by the number two. And if you're using a speakerphone, disconnect the handset before pressing any number. In one moment, please, your first question. The first question also.
Speaker Change: Thank you Sir.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the number one on your Touchtone phone you will hear from better and has been raised.
Speaker Change: With clients from the polling process. Please press star followed.
Speaker Change: And then you are using a speaker phone.
Speaker Change: The handset before pressing any key.
Speaker Change: One moment, please geoffrey's question.
Speaker Change: Our first question comes from the line of question Mara CGS Securities. Your line is now open.
Chris: Hey, good morning guys. Thanks for taking the time to answer a couple questions.
Mara: Hey, good morning, guys. Thanks for taking a couple of questions.
Chris: Morning, Chris. Morning. Good morning. Good morning. Maybe we'll start electronics. So, I mean... call that electronics in Europe and Asia being softer for a while. Can you just remind us, you know, kind of what percentage of total electronics we're talking about there?
Mara: Morning, Chris.
David A. Dunbar: Well, roughly electronics is about one-third of the world, North America, Europe, and Asia.
Mara: Good morning, Good morning, maybe we will start electronics so.
Mara: I mean, you've.
Mara: Call that electronics in Europe, and Asia being softer for for a while.
Can you just remind us kind of what percentage of total electronics, we're talking about there.
Chris: Well roughly electronics.
Chris: One third in each region of the World North America, Europe and Asia.
Chris: Gotcha. And in terms of kind of North American performance, again, there was the semiconductor that challenges you referenced with those were within North America, those were within Asia. Where was that? Yeah, actually.
Chris: Got you and in terms of kind of North American performance again.
Chris: The semiconductor.
Chris:
Chris: <unk> as you referenced.
Chris: Within North America, those were within Asia, where are we.
David A. Dunbar: Yeah, actually that's a good point. Yeah, those are customers of our magnetics business, and that's in North America. Yeah, and typically, we sell those products to semiconductor equipment manufacturers, then they export globally. There is an expectation, and we hear from the customer, that by the end of this year, we should see a ramp in orders specifically for installations in North America following the CHIPS Act investment.
Chris: Is that.
Chris: The accident Thats a good point that those are customers of our magnetics business and that is in North America, Yes, typically we sold those products to the semiconductor equipment manufacturers.
Chris: Then they export globally. There is an expectation that we hear from the customer by the end of this year, we should see a ramp in orders specifically for installations in North America. Following the chipset investment.
Speaker Change: Got it I appreciate that.
Chris: Got it, I appreciate it. You mentioned read switches as a leading indicator, you know, improving sequentially. Just give me, how long has it been since you can make that statement? Has it been the last couple of quarters or just starting now? I'm just trying to understand, you know, how long it's been since we've been kind of seeing that indicator.
Speaker Change: You mentioned kind of reed switches as a leading indicator.
Speaker Change: Improving sequentially.
Speaker Change: Just give me how long has it been since you can make that statement has it been the last couple of quarters are just starting now I'm just trying to understand how long it's been since we've been kind of seeing that indicator.
David A. Dunbar: Well, first of all, the idea that read switches serve as an indicator for Standex in general, this goes back to well before I joined the company; it's been kind of a shorthand that the company used. Back in the days when we had dozens and dozens of different businesses, read switches were used as a leading indicator. Read switch sales began to drop in, this is an order, orders began to drop in Q222. So it's really just the last two quarters, I'm starting to see them firm up.
Speaker Change: Well first of all.
Speaker Change: The idea that reed switches serve as an indicator.
Speaker Change: Sure.
Speaker Change: <unk> in general this goes back to well before I joined the company as being kind of a short hand of the company used back in the days when we had dozens and dozens of different businesses Reed switches were.
Speaker Change: We use as a leading indicator.
Reed switch sales began to drop in.
Speaker Change: This is the order orders begin to drop in Q2 'twenty two.
Speaker Change: So it's really just the last two quarters are starting to see them firm up.
Chris: Got it. Very helpful. Obviously, you guys have done an exceptional job on margins, even lately without the benefit of, you know, much volume leverage. Maybe just which segments do you still expect to drive the biggest increase over the next few years to meet your long-term goals?
Speaker Change: Got it very helpful.
Speaker Change: Obviously, you guys have done an exceptional job on margins, even even lately without the benefit of of much volume leverage.
Speaker Change: Which segments do you still expect to.
Speaker Change: To drive that the biggest increase over the next few years Tipton to meet your.
Speaker Change: Your longer term goals.
Ademir Sarcevic: Hey, good morning, Chris. It's Ademir.
Speaker Change: Hey, good morning, Chris It's Adam and I will tell you the answer to that question is all of us.
Ademir Sarcevic: I will tell you the answer to that question is all of us. We believe all of them have an opportunity to expand their margin. And if you look at kind of our long-term margin projections for all of those businesses, you know, for example, we think we can get electronics to 25% operating margin. The last quarter, they were a little north of 20. So you can see the opportunity we see in the electronics business, for example. But really, the answer is we feel there's an opportunity to expand the margin in all of us.
Adam: We believe all of them have an opportunity to expand the margin and if you look at kind of our long term margin projections for all of those businesses. For example, we think we can get electronics, a 25% operating margin last quarter. They are a little north of 20%. So you can see the opportunity we see in electronics business. For example, but really the answer is we feel there is an opportunity to expand the margin and all.
Adam: All of our businesses.
Chris: All right. I appreciate that. I will leave it there. Thanks, guys.
Speaker Change: Alright, I appreciate that I will leave it there thanks guys alright. Thank you.
Operator: And your next question comes from the line of Michael Legg of Benchmark. Your line is now open. Thanks. Good morning, everyone.
Adam: Okay.
Adam: And your next question comes from the line of Michael Legg of Benchmark. Your line is now open.
Michael Frederick Legg: Thanks, Good morning, everyone.
Michael Frederick Legg: Remodeling up on the weeds.
Michael Frederick Legg: Following up on the lead switch piece, what is the lead time for those orders versus delivery?
Michael Frederick Legg: Following up on the Reed switch piece, what is the lead time for those orders versus delivery.
Michael Frederick Legg:
David A. Dunbar: You know, a lot of these go through distribution. And it's about a month. We have about a month cycle. We can get an order from our distributors, and then we ship within three to four weeks. In some cases, with our larger distributors, they'll have kind of a block order or commitment for a year, and then they'll call off orders as the year progresses. But individual orders are about a month delivery
Michael Frederick Legg: Yeah.
Michael Frederick Legg: A lot of these go through distribution.
Michael Frederick Legg: And we have some other months, we have about a month cycle.
Michael Frederick Legg: Get an order from our from our distributors.
Michael Frederick Legg: And then we ship within three to four weeks in some cases with our larger distributors don't have.
Michael Frederick Legg: And have a block order our commitment for a year level call off orders as they as the year progresses, but individual orders or about a one months delivery okay.
David A. Dunbar: And then, you know, you talked a lot about new product development in each of the divisions. Can you talk a little bit about the cycle there for new product development, how long it takes, and then, obviously, these are all new products, and what that means for additional revenue. Yeah.
Michael Frederick Legg: And then you talked a lot about new product development in each of the divisions can you talk a little bit about the.
Michael Frederick Legg: Cycled out for new product development, how long it takes.
Michael Frederick Legg: And then.
Speaker Change: Yes. These are obviously, all new products, what that means to additional revenue.
David A. Dunbar: Yeah, that's a great question and, you know, recall that we sell components or subassemblies that then go to either Tier 1s or to OEMs that are incorporated in their designs. So our new products are subject to the cycle that our customers have. So let's say we identify a new opportunity. It may typically take a year for us to settle on the design, develop the product, and then be ready to present it to our OEM customers.
Speaker Change: Yes, Thats a great question and you'll recall that we sell components or sub assemblies that then go to either tier ones or Oems that are incorporated in their designs. So our new products are are subject to the cycle that our customers have so let's say, we identify a new opportunity.
Speaker Change: Typically take a year for us to settle on the design.
Speaker Change: <unk> developed a product and then be ready to presented to our OEM customers will begin working with them incorporating it in their design that may be a year to two years.
David A. Dunbar: We begin working with them, incorporating it into their design. Then they launch their product, and I think in the past, we've shown data that once our OEM customers begin shipping a new product, it typically ramps for two to three years before it hits maximum volume. So if you add all of that up, it could be from the beginning of new product development to sales of any significance could be three to five years.
Speaker Change: Then they launch their product.
Speaker Change: And I think in the past we've shown data that once.
Speaker Change: Our OEM customers began shipping a new product it typically ramps for two to three years before hits map. The Max volume. So if you add all of that up.
Speaker Change: From the beginning of new product development too.
Speaker Change: Sales of any any significance can be three to five years.
David A. Dunbar: Okay, so it's fair to say that with new product developments coming online in 2025, fiscal 25, this is really the culmination of efforts over the past couple years.
Speaker Change: Okay. So it's fair to say that with new product developments coming online in 'twenty five fiscal 'twenty five that this is really the culmination of efforts over the past couple of years.
David A. Dunbar: Yes, yeah, these are largely development projects that began a few years ago. And then there's just one last question.
Speaker Change: Yes, yes.
Speaker Change: Largely development projects that began a few years ago okay.
David A. Dunbar: Okay, great. And then just the last question, you mentioned the pipeline for M&A being robust. Can you just comment on that a little bit more?
Speaker Change: Okay, Great and then just last question you mentioned the pipeline for M&A being robots can you just comment on that a little bit more.
Speaker Change: Yes.
Speaker Change: It.
David A. Dunbar: It remains robust, and we have two kinds of deals that we work on. The bread-and-butter Standex acquisition for years was a family-owned business, a privately-owned business, where the owner-founders were approaching an exit. We have a very healthy funnel of those opportunities, and they're a little smaller. You're 20, 30, maybe $50 million in sales at the top. In the last few years, we've also been positioning ourselves for larger opportunities, maybe $100 million in sales.
Speaker Change: It remains robust and we have we have two kinds of deals that we work on.
Speaker Change: The bread and butter Standex acquisition for years was a family owned business.
Speaker Change: Totally owned business, where the owner founders approaching an exit.
Speaker Change: We have a very healthy funnel of of those opportunities and they're a little smaller 2030, maybe $50 million in sales at the top.
Speaker Change: In the last few years, we have also been positioning ourselves.
Speaker Change: For larger opportunities, maybe $100 million in sales.
Speaker Change: And these would be run with a more more professional advanced process.
David A. Dunbar: And these would be run with a more advanced, professional process, and our funnel in the first..., uh... first category is always relatively healthy. In the last, gosh, in the last six months, I'd say the funnel of these larger opportunities is starting to perk up. It looks like there are more of these deals that are preparing to come to market.
Speaker Change: And our funnel in the first.
Speaker Change: The first category always its always relatively healthy.
Speaker Change: In the last cash in the last six months I'd say the funnel of these larger opportunities is starting to perk up it looks like there are more of these deals that are preparing to come to market.
Michael Frederick Legg: Great. Thank you. I look forward to 2025.
Speaker Change: Great. Thank you look forward to 2025.
Speaker Change: Thank you.
Operator: Your next question comes from the line of Mike Shlisky from D.A. Davidson. Your line is open.
Your next question comes from the line of Mike.
Mike: <unk> from D. A Davidson your line is open.
Michael Shlisky: Yes, hi, good morning, and thanks for taking my questions. I guess I want to get a more broad view. I mean, you sound pretty confident about getting back to a more normalized organic growth rate next fiscal year. You kind of outlined a lot of what's happening in electronics. I was wondering if you could give us a couple of other bullet points for the other side of how you get that confidence that on. The breach segment pretty much will all turn back to some more normalized organic growth rate.
Mike: Yes, hi, good morning, and thanks for taking my questions.
Mike: Hi.
Mike: I guess I wanted to get a more broader view.
Mike: Sound pretty confident about getting back to a more normalized.
Speaker Change: When looking at growth rate next fiscal year.
Speaker Change: You kind of outline a lot of what's happening in that trial I was wondering if you can give us a couple of other bullet points in the other segments.
Speaker Change: And how you get that confidence.
Speaker Change: On.
Speaker Change: For each segment pretty much I'll turn it back to some more normalized organic growth rate.
David A. Dunbar: Yeah, okay, well, if you think about the segments that have the best growth profile for the next year, we're the most confident about engineering technologies.
Speaker Change: Yeah, well, if you think about the segments and have the best growth profile into next year. What are the most confident engineering technologies. We have this is a very long cycle business, we have great visibility to our customers' planned shipments and so FY 'twenty five is going to be a very strong year for engineering technologies and space aviation.
David A. Dunbar: We have this very long cycle business. We have great visibility into our customers' planned shipments. And so FY25 is going to be a very strong year for engineering technologies and space and aviation. Our hydraulics business is really starting to see a pickup in order activity. We think some of the infrastructure bill funds are now being appropriated and applied to projects that are resulting in demand for our cylinders. The chassis shortage, which was a problem in that business, is now cleared up, so more of the trailer capacity is being devoted to the kinds of trailers we do, so we're very confident there. Scientific is fundamentally a good underlying business with 3% to 4% growth.
Speaker Change: They our hydraulics business is really starting to see a pickup in order activity, we think some of the infrastructure Bill.
<unk>.
Speaker Change: Funds are now being appropriated and applied to projects that are resulting in demand for.
Speaker Change: For our cylinders the chassis shortage that was a problem in that business is now cleared up so more of the trailer capacity is being devoted to the kinds of tanker trailers, we do feel very confident there.
<unk>. This is fundamentally a good underlying business with 3% to 4% growth. We also have new products coming out there and this year, we will have maybe $5 million of sales from new products in that business in FY 'twenty five we will start to enter the replacement period for <unk>.
David A. Dunbar: We also have new products coming out there, and this year we'll have maybe $5 million in sales from new products in that business. In FY25, we will start to enter the replacement period for cabinets that were shipped in COVID. You know, we, I think we regularly mentioned that these cabinets have a four to seven year typical service life. So as we get into the second half of 25, we expect some of those will begin to hit that period.
Speaker Change: Cabinets that were shipped in Covid.
Speaker Change: I think we regularly mention that these cabinets of a four to seven year typical service life. So as we get into the second half of 'twenty five we expect some of those will begin to hit that hit that period.
David A. Dunbar: Now with engraving, we called out that some of the pushouts in OEM platforms are calling for more modest growth there, but there we have pretty good visibility. So I think I've covered them all.
Speaker Change: We now.
Speaker Change: Engraving, we called out that some of the push outs in OEM platforms, our calling for more modest growth there.
Speaker Change: But there we have pretty good visibility.
Speaker Change: So I think that covered them all at home good items in.
Speaker Change: And electronics and electronics.
Speaker Change: I think you did yes. Thank you.
Michael Shlisky: I think you did, yes. Thank you. And then, in that high growth environment, and especially if you've got some new products rolling out and perhaps some R&D rolling off,
Speaker Change: Yeah.
Speaker Change: And then in the higher growth environment, especially if you've got some new products rolling out and perhaps some R&D rolling off.
Speaker Change: And if I'm wrong on that correct me on that but do you sense that there is a little bit better than just a small little bites of additional margin.
Speaker Change: Excluding Europe.
Speaker Change: Scott cost could there be a bit more of expansion and 25.
Can be seen here in 'twenty four.
Ademir Sarcevic: Yeah, Mike, it's Ademir. I think we'll continue to expand our gross margin. Some of these new products that we are launching, we expect that they're going to have a little bit of a better margin profile than some of the standard products, if you will, that we sell. So that would be number one. The other thing I'll just mention is that we want to continue to invest in R&D and our commercial sales activity because we believe that's an investment for the future and investment in new products so we can continue to roll these developments and products over time. So, yes, we expect to continue to expand gross margin, but we also expect that we're going to stay within about 3% to 3.5% of sales in terms of R&D expenses.
Speaker Change: Yes, Mike its Adam here I think we'll continue to expand our gross margin on some of these new products that we're launching we expect that they're going to have a little bit of a better margin profile than some of the standout products. If you will that we sell so that would be there'll be number one the other thing I'll just mention a weak one.
Speaker Change: We want to continue to invest in R&D and our commercial sales activity, because we believe that the investment for the future and the investment that the new products that we can continue to roll. This these developments and.
Speaker Change: Products over time, so yes, we expect that that will continue to expand gross margin, but we also expect that youre going to stay with it about three to three 5% of sales in terms of R&D expenses.
Michael Shlisky: Okay, that clears it up. I appreciate it. I'll pass it along. Thank you. And once again, if you would like to ask a question, simply press the star followed by the number one on your telephone keypad.
Speaker Change: Okay that clears it up I appreciate it I'll pass it along.
Speaker Change: Thank you and once again, if you would like to ask a question simply press the star followed by the number one on your telephone keypad.
Operator: Your next question comes from the line of Gary Prestopino from Barrington Research. Your line is open.
Speaker Change: Your next question comes from the line of Gary Preska Pinot from Barrington Research. Your line is open.
Speaker Change: Hi, Good morning, all my other questions have been answered, but I guess.
Speaker Change: Some of what I would like to know what these new products, particularly you are talking about an engineering solution.
Speaker Change: Electronics.
Speaker Change: How much of those are really targeted to what you would call your SaaS growth markets.
Gary Frank Prestopino: The new products to be released next year, you know, we have... We have three basic categories there: lead switches, relays, and sensors. We have new products coming out in all categories, and, just recalling, we reviewed the list last week. At least two of them are targeted at fast growing, fast growing markets, and others have just expanded to adjacencies to help us fill a broader..., broader solution set for current customers. So, you know, half, let's say half of them are fast growth markets.
Speaker Change: The new products being released next year.
We have.
Speaker Change: We have we have three basic categories there are.
Speaker Change: Reed switches relays and sensors, we have new products coming out in all categories.
Speaker Change: And just recall we reviewed the list last week.
Speaker Change: At least two of them are targeted fast growth fast growth markets and others, just expanding to adjacencies to help us fill a broader.
Sure.
Speaker Change: Broader solutions set for for our current customers. So.
Speaker Change: <unk>, let's say half of them are fast growth markets.
Speaker Change: Okay. Thank you.
Operator: Thank you, and there are no further questions at this time.
Speaker Change: Thank you and there are no further questions at this time.
David A. Dunbar: All right. I want to thank every... Thank you everybody for joining us on the call today. We enjoy reporting on our progress at Standex. And finally, again, I want to thank our leadership, our employees, and shareholders for your continued support and contributions. We look forward to speaking with you again on our fiscal fourth quarter 2024 call. Thank you, presenters, and ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Alright.
Speaker Change: Thank you everybody for joining us for the call today, we enjoy reporting on our progress at <unk> and final again I want to thank thank our leadership our employees and shareholders for your continued support and contributions we look forward to speaking with you again in our fiscal fourth quarter 2024 call.
Speaker Change: Okay.
Speaker Change: Thank you for your centers and ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.