Standex International Corporation

Good day and welcome to the STANDEX International Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Gary Farber. Please go ahead.

Thank you, Sarah, 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 two. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations, and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to STANDEX's most recent 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 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 included adjusted net income, adjusted income from operations, 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. StanX believes that such information provides an additional measurement and consistent historical comparison of the company's performance. On the call today is StanX's Chairman, President, and Chief Executive Officer, David Dunbar, and Chief Financial Officer and Treasurer, Ademir Sarcevic, and I'll turn it over to them.

Thank you, Gary. I will begin with an overview of our fiscal second quarter results and provide an update on our continued progress in executing on our strategic priorities. Ademir will follow with a discussion of our financial performance in the quarter, and I will provide some additional thoughts on our outlook. Now, if everyone could turn to slide three. Let's move into a discussion of second quarter results and key themes. We're pleased with second quarter results as quarterly performance continues to trend in line with our expectations. Results were consistent with our commentary on the first quarter conference call in November as we made further progress driving StandEx's strategy. Specifically, on a consolidated level, we reported $190.6 million in sales, a 2.5% year-over-year decrease, an adjusted EPS of $1.3, 5.1% year-over-year increase. For the third consecutive quarter, the engraving business demonstrated sequential margin improvement on flat sales growth. In addition, operating margin improved on the year-over-year basis for the first time in several quarters. Results of the electronic segment were sequentially similar to the first quarter, as expected, as macroeconomic headwinds continued to impact results, primarily in Asia. That said, the North American funnel of new business opportunities is growing. Also, engineering technologies trends remain strong. We also have an attractive pipeline of opportunities further positioning the company for higher growth and margin. Growth laneways increased 17% over second quarter 2019, propelled by offerings in nickel shell, laser, and tool finishing. We continue to see very positive trends in NBOs and electronics, particularly in North America, where the funnel has increased 6% year-to-date in fiscal 2020. The most recently closed acquisition, GS Engineering, is performing very well, with many opportunities across the global STANDEX engraving MOLTECH footprint. In December, we announced a definitive agreement to acquire Torotel, which specializes in the custom design, manufacture, and sale of precision magnetic components. The Torrentel acquisition is a strong strategic fit, adding expertise in attractive end markets, including aerospace and defense, that will strengthen our customer value proposition. We continue to expect the transaction to close in the first calendar quarter of 2020. The cost savings and restructuring actions announced in engraving and electronics are complete and flowing through the P&L. These initiatives are complemented by a company-wide focus on increased productivity. We also continue to address materials inflation in the electronics segment, through changes in re-switch production and material substitution. In the engineering technology segment, ongoing productivity improvements are further magnifying the benefits of volume leverage and expanding operating income growth. To further drive operational execution and productivity, we expect to have an experienced VP of operations join Standex in late February, further positioning us to achieve the company's long-term goals for growth and profitability by more fully leveraging the Standex value creation system. From a liquidity perspective, our emphasis on working capital management initiatives and free cash flow generation delivered improved results year over year, and the balance sheet remains strong. Net debt to adjusted EBITDA is under one time, and we will have approximately $195 million in available liquidity post the closing of Torretel. We also continue to repatriate cash from international markets and are on plan to repatriate $35 million this year. Now let's review the segments, beginning on page four with engraving, where we continue to make operating margin progress. Sales decreased 0.6% year over year. This largely reflected the timing of customer automotive programs balanced with growth laneways, which increased 22% to approximately $22.4 million, with growth in nickel shell, laser, and tool finishing, as well as the contribution from the GS engineering acquisition. Operating margin of 18.1% represented a 100 basis point sequential increase from the first quarter and a 20 basis point margin improvement year over year, reflecting improved operational execution and leverage associated with prior restructuring actions. Next quarter, we expect year over year improvement due to several top line and operating leverage drivers. From a sales perspective, there will be an increased level of new automotive model rollouts, contribution from new technologies such as soft trims, laser engraving and tool finishing, as well as the GS engineering contribution. Margins will benefit from volume leverage combined with cost savings from recent restructuring activity over the past few quarters. Our focus on operating discipline is gaining momentum as we have fully staffed the regional operations teams and are rolling out standardized ERP tools to support them. Please turn to slide five, the electronics segment. Several factors weighed on electronics results, particularly in Asia. Total sales decreased 13% and operating income declined 25% year-over-year. The sales decline largely reflected weaker end markets in Asia and continued distributed destocking, although these trends appear to be moderating. There were pockets of positive trends including market strength in aerospace and defense and new applications for smart grid products in utilities. Despite the impact of volume deleveraging and material inflation in the Asia read switch operation on operating income year-over-year, Operating margin of 17% was sequentially similar to the first quarter as efficiency actions implemented in fiscal year 20 supported margins. Next year, we expect electronic sales volume to increase slightly sequentially and decline on a year-over-year basis. While there are some near-term challenges, we are successfully pursuing several initiatives. The new business opportunity funnel strengthens, particularly in North America, where it has increased 6% year-to-date in fiscal 2020, positioning the business for future growth. Applications recently awarded from this funnel will deliver an estimated incremental $11 million in sales in our fiscal year 21. An ongoing focus on productivity and cost initiatives, including addressing material inflation through changes in the reed switch production process. Turning to slide six, engineering technologies. Engineering technologies results remain strong, with revenues increasing 12.4%, and operating income growing more than five times that rate at 66% year-over-year. The results reflect strength in core markets of aviation, space and defense, as well as momentum in manufacturing productivity improvements. Backlog to be delivered in under one year grew 17% year-over-year. Due to project timing, we expect revenue in the fiscal third quarter to decrease year-over-year. However, we expect operating income in the third quarter to increase year-over-year, driven by the growth of new aerospace platform parts, Productivity, and Cost Efficiency Initiatives. Turning to hydraulics on slide seven. The 6.6% decrease in sales reflected customers reducing existing inventory levels as well as a slowdown in the dump truck market partially offset by positive refuse market trends. Second quarter operating margin of 16.1% increased slightly from 15.9% a year ago. The margin increase year over year reflected solid expense management and a favorable product mix. We expect revenue and operating income to decrease next quarter year over year, reflecting customer destocking as well as the end of tariff relief on select products from our China plant. Our focus remains on positioning standings for higher growth and margin improvement. For example, in the case of the hydraulic segment, we are realigning capacity towards providing greater support for aftermarket sales growth and additional new business opportunities. Now let's move to slide eight, the food service equipment group. Sales were flat year over year, reflecting a mix of trends, including growth in pumps, balance with relatively flat demand in scientific and refrigeration, and lower sales in merchandising year over year. The 30% increase in operating income was largely reflective of the scientific profit contribution impact, as well as a positive contribution from refrigeration. Next quarter, we expect food service group sales to be relatively flat year over year, reflecting growth in scientific, with refrigeration group and pump sales decreasing slightly. We expect an increase in operating income year over year driven by productivity improvements and favorable mixed friends of some of the higher margin businesses. Now with that, I will turn the call over to Ademir to discuss the financial results in more detail. Ademir.