Standex International Corporation

Good morning and welcome to the STANDEX second quarter fiscal 2021 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, Please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Gary Farber of Affinity Growth Advisors. Please go ahead.

Thank you, operator, and good morning. Please note that the presentation accompanying management's remarks can be found on the investor relations portion of the company's website at www.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 annual report of Form 10-K as well as other SEC filings and public announcements for a detailed list of risk factors. In addition, I'd like to remind you that today's discussion will include references to the non-GAAP measures of EBIT, which is earnings before interest and taxes, adjusted EBIT, which is EBIT excluding restructuring, purchase accounting, acquisition-related expenses, and one-time items, EBITDA, which is earnings before interest, taxes, depreciation, and amortization, adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, and more. 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 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.

Thank you, Gary. Good morning and welcome to our fiscal second quarter 2021 conference call. On today's call, I will provide commentary on our results and the trends we are seeing in our businesses. I will then review our segment performance and outlook. Ademir will follow with a discussion of our consolidated results and financial position. Finally, I will conclude with comments on the longer term financial framework we are introducing today and conclude with takeaways. Now, if everyone can turn to slide three, key messages, I will discuss second quarter themes and results. We're very pleased with our fiscal second quarter results. We had a solid revenue growth at electronics and scientific segments year on year while our engraving segment margin improved sequentially. At electronics, nearly half of the 31% year on year revenue increase reflected organic growth with positive trends in electric vehicles, general automotive, appliances, and semiconductor equipment. Scientific revenue continued to grow at a double digit rate with a 16% year on year increase driven by strong demand for COVID vaccine storage. We now believe that COVID-related storage demand is likely to be at the higher end of our previously indicated $10 million to $20 million range in fiscal 2021. At the engraving segment, margin improved approximately 100 basis points sequentially due to favorable geographic mix, productivity, and cost action. Looking forward, our portfolio has never been in better condition, and that's reflected in our outlook. We exited the second quarter with several positive trends, positioning us well for a stronger second half in fiscal 2021. Our total backlog, realizable under one year, was approximately $173 million at the end of the second quarter, an approximately 14% sequential increase. This reflected strength on the electronics and scientific segments in a gradual market recovery at Specialty Solutions. We are also actively engaged with our customers on emerging global opportunities and end markets such as electric vehicles, renewable energy, and 5G. In addition, the integration of Renko Electronics is ahead of our initial plan, and we are effectively leveraging its complementary customer base and end markets. We also saw continued progress on our productivity and finance initiatives. We are on track for over $7 million in annual savings in fiscal 2021 from cost actions and are implementing additional productivity and efficiency initiatives, which will provide further opportunity heading into fiscal 2022. At the electronics segment, while we are addressing rhodium material inflation with price actions in the near term, We are also implementing new manufacturing processes over the next two years, which will allow us to offer customers a choice of switches with rhodium or other materials, removing our exposure to rhodium inflation once and for all. Finally, our previously announced interest expense and tax rate initiatives resulted in an approximate 15% reduction in interest expense and 510 basis point reduction in tax rate year on year in second quarter fiscal 2021. We also further strengthened our financial profile in the quarter, providing significant flexibility to pursue our portfolio of organic and inorganic growth opportunities. We generated strong free cash flow of $17 million in the second quarter and through the first half of fiscal 2021 have achieved 95% free cash flow to net income conversion rate. During the quarter, we also repatriated approximately $17 million from foreign subsidiaries and are on track to achieve our previously announced $35 million repatriation target in fiscal 2021. We ended the quarter with a net debt to adjusted EBITDA ratio of 0.9 times and approximately $200 million in available liquidity. In regard to our fiscal third quarter 2021 outlook, we expect a moderate sequential revenue and operating margin improvement compared to fiscal second quarter 2021 results. This reflects a sequential revenue increase at electronics, scientific, engineering technologies, and specialty solution segments. Engraving revenue is expected to decline sequentially, reflecting both geographic mix and timing of projects, but return to growth in fiscal fourth quarter 2021, both sequentially and year on year. Please turn to slide four. I will begin to discuss our segment financial performance, starting with electronics. In the second quarter, Electronic segment revenue increased approximately $14.3 million, or 31.2% year-on-year, to $60.1 million, supported by organic revenue growth of approximately 15%. Organic growth reflected a broad-based geographic recovery with positive trends in electric vehicles, general automotive, appliances, and semiconductor equipment and marketing. In particular, as shown in the picture in slide four, we have a growing portfolio of content for the electric vehicle market including relays, planar transformers, and coolant level and charging position sensors. The recent Renco acquisition also contributed to our revenue growth in the quarter with approximately $6 million in incremental revenue contribution year on year. Electronics operating income increased approximately $2.2 million or 28.1% year on year from operating leverage associated with revenue growth, productivity initiatives, and profit contribution from Renco, partially offset by increased raw material prices. Our new business opportunity funnel has increased to $56 million across a broad range of markets and is expected to deliver $12 million of incremental sales in fiscal 2021. Sequentially, in the third quarter, we expect a moderate increase in electronics revenue and operating margin. We expect further growth for relays in renewable energy and electric vehicle applications as well as recovery in reed switch demand in transportation and markets. Our near-term backlog is very healthy with backlog realizable under a year increasing $15 million or 25% sequentially in the fiscal second quarter. Please turn to slide five for a discussion of the engraving segment. Revenue decreased just under 1% year over year to approximately $37.9 million and operating income was $6.5 million, or a 6% year-over-year decrease. The results reflected the economic impact of COVID-19 on our end markets, partially mitigated by productivity and expense savings in the quarter. Sequentially, revenue increased 2.5%, excluding foreign exchange, and operating margin improved approximately 100 basis points to 17.1%, reflecting favorable geographic mix and our productivity and cost action. Laneway sales increased approximately 9% sequentially to $12.9 million, focused around soft trim tools, laser engraving, and tool finishing. As highlighted to the left, we have further innovated our customer design process given the global travel restrictions due to the pandemic. Intensive customer collaboration is at the heart of the customer intimacy model in all of our businesses and was slowed by COVID-related restrictions. By utilizing high-definition cameras and 3D software, we have created a remote approval process to enable customer engagement and design approvals despite global travel restrictions, allowing us to further the design process while maintaining a high degree of client engagement. Sequentially, in our third fiscal quarter, we expect a slight revenue decline and a moderate decline in operating margin at engraving, reflecting geographic mix and project timing. In our fiscal fourth quarter 2021, we expect an increase in revenue and operating margin sequentially and year on year. Turning to slide six, the scientific segment. Scientific segment revenue increased 16.1% year on year to $17.9 million, largely due to positive trends at retail pharmaceutical chains and medical distribution companies, much of it associated with the demand for COVID vaccine storage. Operating income increased 4.4% year-on-year to $4.2 million, reflecting the volume increase balanced with investments to support our growth opportunities. Sequentially, in the fiscal third quarter, we expect a moderate to strong increase in revenue and operating margin to be slightly ahead of second fiscal quarter 2021. This reflects volume growth driven by continued COVID-19 vaccine storage demand balanced with reinvestment in the business for R&D and growth opportunities. The segment's backlog, realizable under a year, increased approximately $4 million, or 65% sequentially, compared to fiscal first quarter 2021. We expect COVID vaccine storage demand to come in at the high end of our previously indicated $10 million to $20 million sales range in fiscal 2021. Turning to the engineering technologies segment on slide seven. On a year-over-year basis, engineering technologies revenue and operating income decreased approximately 33.9% and 60.2% to $17.5 million and $1.4 million, respectively. As expected, the revenue and operating income decrease reflected the economic impact of COVID-19 on the commercial aviation market, especially engine parts manufacturing. On a sequential basis, segment operating margin increased approximately 500 basis points on a similar revenue level to fiscal first quarter 2021 as a result of product mix and our ongoing productivity actions. Besides the early stages of recovery in our aviation end markets that we are seeing, we are also well positioned for continued space end market growth. In addition to projected government launch forecasts to support NASA and national security, we also have significant opportunities in commercial space markets. In the fiscal third quarter, on a sequential basis, we expect a moderate increase in revenue primarily due to the early stages of recovery in the commercial aviation end market. We expect operating margin to be sequentially similar to the second quarter due to higher sales mix of lower margin Asian parts business, partially offset by productivity initiatives. Please turn to slide eight, specialty solutions. On a year-over-year basis, specialty solutions revenue decreased approximately 17.8% to $22.8 million, with operating income of $3.2 million, or a 26% year-on-year decrease. As expected, the revenue and operating income decline reflected the economic impact of COVID-19 pandemic on this segment's end markets. Sequentially, in our fiscal third quarter, we expect a moderate sequential increase in revenue and operating margin, reflecting a gradual recovery and the food service industry and strong order trends in the refuse markets. Supporting this outlook, our backlog, realizable under a year, increased sequentially approximately $3.5 million, or 35%, compared to Q1 fiscal 2021, reflecting ongoing recovery in food service equipment and refuse end markets. From a strategy standpoint, our emphasis on shifting hydraulics manufacturing capacity toward higher margin aftermarket opportunities continues with aftermarket revenue increasing 15% year on year. The hydraulics business is also a potential beneficiary from a potential infrastructure bill with increased investment in roads and bridges. I will now turn the call over to Ademir, who will discuss our quarterly results in greater detail.