Standex International Corporation

Good morning and welcome to the STANDEX International fourth quarter 2020 results 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. Please note this event is being recorded. I would now like to turn the conference over to Gary Farber, Affinity Growth Advisor. Please go ahead.

Thank you, Alyssa, 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 today 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-times 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. Stanix believes that such information provides an additional measurement and consistent historical comparison of the company's performance. On the call today is Stan X's chairman, president and chief executive officer, David Dunbar and chief financial officer and treasurer, Ademir Sarcevic. With that, I'll turn it over to David.

Thank you, Gary. Good morning and welcome to our fourth quarter fiscal 2020 conference call. Before I discuss this quarter's results and our outlook, I want to thank our employees around the world. I'm very proud of their efforts in this challenging environment and the dedication, creativity and resilience they've demonstrated. On today's call, I will first provide commentary on the fiscal fourth quarter 2020 results and the trends we are currently seeing. I'll then discuss several of the key themes and accomplishments in the quarter. From there, I will discuss the segment performance and trends. Ademir will follow with a discussion of our consolidated results and financial position in greater detail. Finally, I will conclude with some comments on our outlook and key takeaways from our results and initiatives. Now, if everyone can turn to slide three, key messages. Overall, fiscal fourth quarter results were in line with our expectations, despite the very challenging operating environment, as our teams displayed a high degree of global collaboration and coordination while maintaining a safe and healthy environment. Importantly, since the end of April, our end markets sequentially have exhibited a gradual increase in the level of customer activity that has continued into our first quarter, most notably and our engraving, electronics and scientific segments. We also continue to make substantial progress further positioning Standex around more profitable platforms with favorable growth prospects and compelling customer value propositions. At the beginning of the quarter, we completed the divestiture of our refrigerated solutions group. This transaction is accretive to our consolidated operating margin profile by approximately 200 points. The transaction also continued the process that began with our divestiture of the cooking business in early 2019. In July, we announced the acquisition of Renco Electronics. Renco is a leading U.S.-based customs magnetics manufacturer. We believe this is a great strategic fit, deepening our significant engineering and technical expertise, as well as providing a highly complementary customer base. In addition, Renco will be accretive to our earnings to fiscal 2021 and additive to consolidated free cash flow. Today, we are also announcing the realignment of our reporting segments reflected in our fiscal fourth quarter results. Besides engraving, electronics, and engineering technologies, our reporting segments will now include scientific and specialty solutions. A standalone scientific segment will allow us to communicate more effectively the highly attractive profile of this business and its long-term outlook. We acquired this business at the end of 2016, and since then it has experienced significant growth, focusing on the manufacture of laboratory refrigerators and freezers, as well as cryogenic equipment for the scientific, biomedical, and pharmaceutical markets. In fiscal 2020, the scientific segment reported $57 million in revenue and in excess of a 20% operating margin. The specialty solutions segment we are introducing today as a reporting segment will include the hydraulics, We will now be reporting these businesses in line with the way they are managed under one common group president. Besides the portfolio repositioning, we continue to successfully execute cost actions and have a healthy funnel of operational excellence initiatives to implement as we enter fiscal 2021, which will strengthen our market leadership and cost positions. During the quarter, we realized $4.2 million from productivity and expense actions and expect $7 million in annual savings in fiscal 2021. Further adding to these efforts, we're building on our current foundation with support of our new VP of operations hired this past February. A recurring theme and priority in how we manage STANDEX is to maintain a strong balance sheet and significant liquidity position supported by consistent free cash flow generation and disciplined capital allocation. We generated free cash flow of $19.5 million in the fourth quarter of 2020 and repaid $13 million in debt. The company ended the quarter with approximately $200 million in available liquidity and a net debt to adjusted EBITDA ratio under one. Also, Stanix repatriated approximately $19 million in the quarter and $39 million in fiscal 2020 from foreign subsidiaries ahead of a prior forecast of $35 million. Our significant financial flexibility positions us well as we execute on an active pipeline of organic and inorganic opportunities as in the case of Renco, which we paid for out of cash on hand without incurring additional debt. In sum, as I reflect on fiscal 2020, despite the challenges associated with COVID-19, we continue to build a corporation around larger, more profitable platforms in high value markets with strong competitive advantage and customer focus. We also have a healthy pipeline of internal projects and inorganic growth opportunities that can generate attractive returns. Underpinning these actions is a strong balance sheet and significant financial flexibility. As a result, Standix is well positioned to exit the current environment as a stronger company. Please turn to slide four as I will begin to discuss our segment financial performance in greater detail, beginning with electronics. The electronics segment revenue decreased approximately $5 million, or 10%, year over year as we experienced weakness in both North American and European markets. associated with the economic impact of the COVID-19 pandemic. This weakness was partially mitigated by a modest recovery in Asian and markets. Operating income decreased approximately $2.8 million, or 32.3% year over year in the quarter. Besides lower volume, operating income was impacted by higher raw material input costs, as well as partial plant facility shutdowns in India and Mexico, which have since reopened. These items were partially offset by cost savings and productivity initiatives. In addition, the funnel of new business opportunities continues to be active and is at a very healthy $40 million as we work with our customers on their new product designs. As an example of a new product, we collaborated on a custom magnetic sensor for smart grid monitoring. STANDEX process controls and design capabilities were key to this application. This product enables remote wireless underground monitoring of electric power quality. As is typical, this product had a multi-year sales cycle and will have an approximately 10-year product lifecycle. Our fiscal first quarter 2021 electronic segment outlook is for a meaningful sequential increase in revenue due to positive trends in our magnetic product line, as well as revenue contribution from the recently closed Renco acquisition. We also expect a sequential improvement in operating margin, reflecting continued costs and productivity initiatives, as well as limited sequential impact from reed switch raw material input costs. Our electronics business has dramatically transformed in recent years, growing from a $40 million largely North American business into an integrated global player. We have recently organized the business into two separate P&Ls, one for the magnetics business, the other for switches and sensors. This will allow greater focus to each of these product lines to grow organically. We will also continue to expand this business with attractive bolt-on acquisitions expanding into new markets and adjacent technologies. Please turn to slide five for a discussion of the engraving segment. At the engraving segment, revenue decreased approximately $6.5 million or 17% year over year, primarily due to delays in the receipt of tools from customers as we indicated in our fiscal third quarter conference call. We are seeing this work shift into the first fiscal quarter of 2021. Importantly, over the longer term, auto OEMs continued to hold on to their new program rollout schedules. Engraving operating income declined $2.7 million, or 51.5% year-over-year, reflecting volume declines associated with the economic impact of COVID-19 mitigated partially by productivity and expense savings in the quarter. Laneway growth remained healthy with a 9% year-to-date increase to $43 million. driven by soft trim tools, laser engraving, and tool finishing. We've been very active collaborating with designers on new electric vehicles in all regions of the world. The example here shows how we leveraged our global presence and comprehensive service offering including architecture design services, chemical and laser texturizing, soft trim tools, and tool finishing services to bring out this new model. Our fiscal first quarter 2021 outlook is for a meaningful sequential increase in engraving revenue and operating margin in fiscal quarter, first quarter 2021. The expected revenue increase reflects both customer orders that have shifted from fiscal fourth quarter 2020 to first quarter 21, as well as an overall increase in the level of customer activity. The expected margin increase is associated with higher volumes sequentially, combined with cost efficiency and productivity initiatives in North America and Europe. In addition, we are beginning to leverage our global SAP platform and engraving for enhanced productivity. We have spent the last two and a half years moving all engraving sites to a common ERP. Now we are rolling out standard reports and operating procedures to help our regional managers better plan and manage their capacity, overtime, and productivity. Please turn to slide six, the scientific segment. Now we turn to our newest segment. We will begin to break out the scientific business as a standalone segment. When we acquired Horizon Scientific in October 2016 and combined it with our own scientific refrigeration business, we had a business with $34 million of sales. Sales grew to $57 million in fiscal year 20, even with the fourth quarter deceleration from the COVID-induced slowdown. In that time, we have seen the management team continue to do what they do best, identify emerging market opportunities and quickly develop and bring to market a solution. The end market for scientific refrigeration is dynamic, Shaped by frequent regulatory changes as well as constant evolution and distribution strategy for medications and vaccines. We have been able to strengthen this business with our growth discipline process tools and accelerated investment in R&D. This is a business we expect to continue to grow organically, and we are also actively exploring bolt-on acquisitions to expand its reach. Scientific revenue decreased approximately $2.6 million or 17% year over year, with operating income declining approximately $900,000 or 24.8% year over year. The scientific segment was impacted by a market shift toward consumable protective equipment due to the COVID-19 pandemic and less near-term emphasis on capital equipment expenditures by its customer base. However, in fiscal first quarter 21, we expect to see meaningful sequential revenue and margin increase as customer ordering patterns return to a more historical mix. In addition, for the coming flu season, Healthcare facilities plan to move even more flu vaccinations into other delivery points such as pharmacies so they can focus on COVID treatments. This is driving demand for our products from our national pharmacy chain customers where we are well established. Scientific prospects include other promising opportunities as well. Our scientific unit manufactures cabinets well suited for the storage needs of COVID-19 vaccines and treatments now in the approval process. We're actively evaluating and pursuing the opportunity this presents. Turn to the engineering technology segment on slide seven. Engineering technologies revenue decreased $7.3 million or 21.7% year over year in the fiscal fourth quarter 2020, reflecting lower aviation related sales, offset partially by increased sales in the space and market. Operating income margin increased from 13.6% in fiscal fourth quarter 19 to 15.8% in the fourth quarter of 2020, despite the sales headwinds due to favorable product mix, cost actions, and manufacturing efficiencies. We also continue to innovate, collaborating with customers on next generation missile nose cones using our proprietary spin forming process. In fiscal first quarter 2021, we expect to see significant sequential revenue and significant operating margin decrease. The decline is primarily due to the economic impact of COVID-19 on the commercial aviation market, especially our engine parts business. Space and market sales will see a decline sequentially in the fiscal first quarter of 21 due to the timing of projects. The segment's defense end markets are expected to increase year over year throughout fiscal 2021. We will continue to work to further align engineering technologies cost structure with the current demand environment in aviation. Now let's move on to slide eight, the specialty solutions segment, which includes the hydraulics, merchandising, and pumps businesses. Specialty solutions revenue decreased approximately $8 million or 25% year over year in the fourth quarter of fiscal 20. The revenue decrease was primarily associated with the economic impact of COVID-19 on several end markets, including the food service equipment and hospitality industries at the pumps and merchandising businesses and the dump market at hydraulics. Segment operating income decreased $2.3 million, or 39% year-over-year, reflecting lower volume, partially mitigated by cost actions, including headcount reductions and temporary plant slowdowns. We expect fiscal first quarter 21 revenue and operating income to be similar to fiscal fourth quarter 2020. Using the STANDEX growth discipline process, we are introducing a new product for schools, the Federal Milk Merchandiser, which provides several benefits. Flexibility to merchandise a wide assortment of products as well as accessible to young students. It reduces labor as there is no need to remove milk every night. And it includes an innovative condenser cleaning alarm using Standex electronics to alert users to efficiency losses. I will now turn the call over to Ademir, who will discuss our quarterly results in greater detail.