Standex International Corporation

Good day and welcome to the STANDEX International Fiscal First Quarter 2021 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 a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I'd now like to turn the conference over to Gary Farber with Affinity Growth Advisors. Please go ahead, sir.

Thank you, Rocco, 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, and EBITDA margin and adjusted EBITDA margin. We will also refer to other non-GAAP measures including 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 Stanix's Chairman, President, and Chief Executive Officer, David Dunbar, and Chief Financial Officer and Treasurer, Ademir Sarcevic. I'll now turn the call over to David.

Thank you, Gary. Good morning and welcome to our fiscal first quarter 2021 conference call. On today's call, I will provide commentary on the quarterly 2021 results and the trends we are seeing in our business. I will then review our segment performance. Ademir will follow with a discussion of our consolidated results and financial position. Finally, I will conclude with comments on our outlook and key takeaways. Now, if everyone can please turn to slide three, key messages. Overall, fiscal first quarter results were ahead of our expectations on several fronts, reflecting stronger than anticipated demand, and Solid Operational Execution, particularly at our electronics, engraving and scientific segments. Consolidated revenue increased 8.5% sequentially. This is ahead of the outlook we provided previously of fiscal first quarter 2021 revenue being flat to slightly above the fourth quarter of 2020. At the electronic segment, revenue increased 23% sequentially and 18.6% year on year, reflecting positive trends in magnetics as well as contribution from the recent Renko acquisition. Sequentially, engraving operating margin increased 800 basis points to 16.1% due to cost efficiency and productivity initiatives on 15.1% revenue growth compared to fiscal fourth quarter 2020. Finally, the scientific segment reported its highest quarterly sales ever at $16.7 million. Earlier this year, we divested our refrigerated solutions business and established scientific as a standalone reporting segment, both actions advancing our strategy to build our higher margin segments. In particular, the scientific segments results reflected increased demand for seasonal flu vaccine storage, as well as initial sales related to potential COVID-19 vaccines. In addition, our electronics new business opportunity pipeline is healthy at $56 million across a wide variety of end markets, We expect the sales contribution from this pipeline to grow sequentially on an annual basis. In engraving, we see continued opportunity in the tool finishing and soft trim tool laneways globally. We are leveraging these top line trends with stronger operating disciplines in all businesses, complemented by several financial initiatives. We are on track to deliver over $7 million in savings in fiscal 2021 from the actions we announced in the third quarter of fiscal 2020. We also begin to implement tax savings initiatives in the quarter, including optimizing our foreign tax credits. We expect our tax-related actions to result in cash savings of $2 million to $3 million in fiscal 2021. As a result, our tax rate in fiscal 21 is expected to be approximately 22% or 500 basis points lower than fiscal 2020. We also expect to realize $1.5 million in cash savings in fiscal 21. due to our previously announced floating to fixed rate interest swaps. We continue to maintain a strong financial position with a solid balance sheet and significant liquidity supported by consistent free cash flow generation. Standex had approximately $206 million of available liquidity at the end of the fiscal first quarter with a net debt to adjusted EBITDA ratio of 1.1. During the quarter, we generated free cash flow of $4.4 million. We also continued our cash repatriation efforts with approximately $8 million repatriated in the first quarter. We expect to repatriate $35 million in total in fiscal 21, which would result in $74 million in cash repatriated over the past two fiscal years. In sum, we're off to a solid start and expect continued growth and margin improvements as we move through fiscal 21. Our financial flexibility will continue to strengthen through free cash flow generation, cash repatriation, and new tax initiatives. In our fiscal second quarter of 21, we expect consolidated revenue to be flat to slightly above the first quarter, with a slight to moderate increase in segment operating margin. Please turn to slide four, and I will begin to discuss our segment financial performance, beginning with electronics. Electronic segment revenue increased $8.7 million, or 18.6% year-on-year, reflecting a 3.9% organic growth rate with strength in the magnetics product line, and a $5.9 million from the recent Renco acquisition or approximately 12.6%. The balance of the revenue increase is related to foreign currency impact. Adjusted operating income increased approximately $1 million or 12.7% year-on-year, reflecting operating leverage on the revenue growth, productivity initiatives, and Renco Electronics' profit contribution, partially offset by inflationary material cost increases. Our new business opportunities funnel has increased to $56 million and is expected to deliver $11 million of incremental sales in FY21 across a broad range of end markets, including industrial, electrical vehicles, safety systems, and military. We are also very pleased at the pace of integration of our sales channels with Renco. In three months, they've identified over $1 million of cross-selling opportunities in each other's accounts ahead of our expectations. In terms of our second quarter fiscal 2021 outlook, we expect revenue to be sequentially slightly higher and operating margin to be sequentially similar to the fiscal first quarter. Our outlook assumes improvement in European and North American markets with Asia results slightly below fiscal first quarter 21. Please turn to slide five for a discussion of the engraving segment. Revenue decreased approximately $2 million or 5.3% year over year and operating income was lower by approximately The results reflected the impact of COVID-19 on our end markets, partially mitigated by productivity and expense savings in the quarter. However, sequentially from Q4 fiscal 20, engraving reported a significant improvement as revenue increased 15.1% and operating margin improved 800 basis points, reflecting an overall increase in the level of customer activity combined with cost efficiency and productivity initiatives, which will continue with the segment. Laneway sales are recovering quickly from Q4, growing by 27% sequentially to $11.7 million, nearly back to pre-COVID levels on strength and tool finishing offering and soft trim tools. I'm pleased to see the progress our North American engraving business has made improving labor management through standard work and better capacity planning. Our Corporate VP of Operations, hired in February, is collaborating with business management to improve operating procedures and drive efficiencies. In addition, the completion of our global ERP platform will allow additional analysis and improved performance management across all major global sites to further drive consistent performance. As far as second quarter outlook on a sequential basis, Standex expects a slight revenue increase and continued improvement in operating margin in the fiscal second quarter of 21. The expected revenue growth reflects an increased level of customer activity due to new automotive launches along with continued introduction of soft trim tools and tool finishing offerings. We expect to see continued margin improvement from the volume increase combined with continued cost efficiencies and productivity initiatives. Turning to slide six, the scientific segment. Scientific segment revenue increased approximately $1.9 million, or 13% year-on-year, reflecting organic growth in end markets, especially retail pharmaceutical chains. The sales growth reflects distribution and storage of vaccine for the coming flu season, as well as a few initial orders for COVID vaccine storage. Operating income increased approximately $400,000 or 10% year over year, reflecting revenue growth partially offset with reinvestments in the business for future growth opportunities. The picture highlights are under counter cabinet used for storage of refrigerated and frozen medications and vaccines. Standix is well positioned with strong distribution channels for a leading role in a potential COVID-19 vaccine rollout. In the second quarter, we expect to see a sequential and year-on-year revenue increase driven primarily by continued positive trends in retail pharmaceutical chains and clinical end markets and accelerated by the expected rollout of a national COVID vaccine. We expect operating margin to slightly improve reflecting volume increase balanced with reinvestment for future growth opportunities. Looking further, We expect scientific revenue growth sequentially and year-on-year in fiscal 21 with approximately $10 to $20 million of incremental sales to support COVID vaccine storage. Turning to the engineering technology segment on slide seven. As expected, engineering technologies had a challenging quarter. Revenue and operating income decreased $7 million or 28.4% and $2.9 million or 86% year-on-year respectively. The first quarter results reflected the economic impact of COVID-19 on the commercial aviation market, especially engine parts manufacturing. However, we continue to experience positive trends in the unmanned segment of the space industry and defense sales. In our second quarter, we expect revenue to be sequentially similar to the first quarter as a result of continued weakness in the aviation end market. Operating margin is expected to increase slightly sequentially despite aviation end market trends. as a result of productivity initiatives and cost reduction activities which are ongoing. We are pleased to show the progress of our efforts to expand capacity in our Bill Rickett plant using lean processes. As a result of set-up time reduction, improved layouts, and process improvements, we have increased throughput 20%, positioning us well to support continued growth in our space and markets and deliver higher margins. Please turn to slide eight, specialty solutions. which includes the hydraulics, merchandising, and pumps businesses. Specialty solutions revenue and operating income decreased year on year, although it was in line with our expectations that results would be sequentially similar to the fiscal fourth quarter of 2020. Revenue decreased approximately $6.2 million or 19.7% year over year. The 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 markets at hydraulics. Operating income decreased approximately $1.7 million or 30.9% year over year, reflecting lower volume, partially mitigated by cost reduction efforts. To partially offset these trends, we pursued additional opportunities focused on strengthening the segment's margin profile. We continue to allocate hydraulics capacity to higher value opportunities, particularly after market sales. We've also closed a pumps operation in Ireland and outsourced the components previously manufactured there to save approximately $1 million annually. Though their end markets are down from the effect of COVID-19, the business has continued to utilize our growth discipline processes to work with customers on promising future opportunities. The example pictured here is a pump control system that houses eight pumps along with the electronic controls and diagnostics. This is a good example of the business using a structured approach to explore new growth opportunities in an inexpensive manner. As far as outlook, in fiscal quarter, the second quarter 2021, we expect revenue and operating margin to decline slightly sequentially due to normal seasonality and the lower number of shipping days in the quarter. I will now turn the call over to Ademir, who will discuss our quarterly results in greater detail.