Standex International Corporation

Good day and welcome to the Sandex International third quarter fiscal year 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 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 with 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, 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, 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. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's performance. On the call today is Standex's Chairman, President, and Chief Executive Officer, David Dunbar, and Chief Financial Officer and Treasurer, Adamir Sarcevic.

Thank you, Gary. Good morning, and welcome to our fiscal third quarter 2021 conference call. It has now been over a year since the pandemic closed in on us all. Let me first start with an expression of profound gratitude to the employees of Standex, our executive teams, and the board of directors. The circumstances of the pandemic required a level of agility and responsiveness that would not have been possible without a high degree of collaboration, trust, and a sense of common mission. I'm proud of what we accomplished together. As a result, Standex is emerging from the pandemic far stronger than when we entered it. Now, if everyone can turn to slide three, key messages. We had another solid quarterly performance with results ahead of our expectations and expect this momentum to continue with stronger financial performance in fiscal fourth quarter 2021. At the electronic segment, nearly half of the 35% year-on-year revenue increase in the third quarter reflected organic growth with solid demand for relays in solar and electric vehicle applications and reed switches for transportation and markets. Overall, we are seeing strong demand across many of our product lines and all geographies at electronics. Our scientific segment also had an excellent quarter with solid revenue and operating income growth year on year. We continue to expect that revenue from COVID-related storage demand in fiscal 2021 will be at the higher end of our originally indicated $10 million to $20 million range. At the specialty solutions segment, revenue and operating income sequentially increased 18.3% and 32.4%, respectively, as we see the early stages of recovery in our end markets. From a strategic perspective, we continue to position StandX around products and platforms that optimize our growth and margin profile with strong customer value propositions. Electronics segment backlog realizable in under one year increased approximately 26% sequentially, as the demand in end markets, including electric vehicle and renewable energy, continues to trend positively. Results and order flow at Renko Electronics were solid as we successfully leveraged their complementary customer base and end markets. At the end of the third quarter, we also announced the divestiture of NGenetics Corporation. Our engineering technology segment will now be focused on our core spin-forming capabilities with its strong value proposition, reducing material inputs and processing time, ultimately providing higher growth and margin opportunities for the segment. The sale of nGenetics is also accretive to our margin profile. ETG will continue to focus on serving the space, commercial aviation, and defense end markets. We are also further leveraging these demand trends and strategic initiatives with ongoing productivity and efficiency actions. At the electronic segment, we continue to make progress in the core, mitigating material inflation through changes in the read switch production, and material substitution. We are on track to substantially complete this transition by the end of fiscal 2022. We continue to allocate production capacity to our highest margin segment opportunities. For instance, at the specialty solution segment, hydraulics aftermarket revenue increased 23% year on year in the third quarter. These actions are complemented by a strong balance sheet and liquidity position, giving us the financial flexibility to deploy capital for our active pipeline of organic and inorganic growth opportunities. Adam here will discuss these metrics in more detail. In regard to our fiscal fourth quarter 2021 outlook, we expect slight to moderate sequential revenue increase and a more significant operating margin improvement compared to the third quarter of fiscal 2021. Underpinning this outlook are the following. Sequentially, we expect revenue growth for the electronics, engraving, and specialty solution segments. However, the consolidated revenue increase sequentially will be partially offset by the absence of nGenetics, which contributed approximately $4 million in revenue in the third quarter and was divested at the end of the quarter. We expect significant operating margin improvements sequentially compared to fiscal third quarter 2021 results. This improvement will be driven primarily by electronics, engraving, and engineering technologies. Besides our financial results today, we are also pleased to announce that our Board of Directors has committed to nominating Robin Davenport of Parker-Hannafin for election to the Board of Directors at STANDEX's 2021 Annual Shareholder Meeting. In the interim, Ms. Davenport will serve as an observer and advisor to our Board of Directors. Robin is a highly accomplished and respected executive with comprehensive financial and global industry expertise in the manufacturing sector and significant experience and success in the areas of M&A, capital allocation, and corporate strategy. In my discussions with her, I found her to be very thoughtful and insightful interviews and believe she'll be a valuable addition to the current Board of Directors' efforts. I look forward to working closely with her and the current members of the Stand Next Board as we further execute our strategic and financial priorities. Now, please turn to slide four, and I will begin to discuss our segment financial performance, starting with electronics. Revenue grew approximately $17 million, or 35.4% year-on-year, with nearly half of the increase due to organic growth. This growth reflected a broad-based geographic recovery, including a strengthening in demand for relays in solar and electric vehicle applications, and re-switched demand in transportation and markets. The recent Renko acquisition contributed revenue of $6.4 million and has proven to be a highly complementary fit with our Magnetics portfolio. Operating income increased approximately $4.3 million, or 54.2% year-on-year, reflecting operating leverage associated with revenue growth, profit contribution from Renko, and productivity initiatives partially offset by increased raw material costs. The pictures highlighted on slide four are examples of how we can leverage the technological advantages of reed switches to contribute to our growth in end markets, such as electric vehicles and solar power. In particular, reed switches, given their unique physical properties, are well suited to safety isolation testing for electric vehicles and battery management systems. We also continue to capture attractive new customer wins to support our MBO pipeline. In this case, we highlighted a magnetic motion system for a defense elevator application, which will contribute more than $11 million over the next three years. Currently, our new business opportunity funnel has increased to $59 million across a broad range of markets and is expected to deliver $12.4 million of incremental sales in fiscal 2021. Sequentially, in fiscal fourth quarter 2021, we expect a modest increase in revenue and slight operating margin improvement at electronics compared to fiscal third quarter 2021. Our outlook reflects a continued broad-based end market recovery, including further growth for relays in solar and electronic vehicle applications, supported by a healthy order flow with backlog realizable under a year, increasing approximately $20 million, or 26% sequentially, in our third fiscal quarter. Please turn to slide five for a discussion of the engraving segment. Revenue increased approximately $600,000 or 1.7% year-on-year, and operating income was similar year-on-year as expected, at $4.5 million. The revenue increase reflected favorable foreign exchange impact, partially offset by the timing of projects. Operating income was essentially similar year-on-year due to a less favorable project mix. Laneway sales of $13.6 million were an approximate 5% sequential increase, reflecting growth in soft trim tools, laser engraving, and tool finishing. The picture on slide five highlights a recent customer win on the Ford F-150 platform for soft trim interiors. Overall, we are seeing solid demand and backlog trends for our soft trim capabilities, further reinforcing the rationale behind our prior acquisition of GS Engineering, a leading provider of cutting-edge proprietary technology for the production of in-mold grain tools. Since the acquisition, we have further rolled out GS technology on our global platform, positioning us well in the growing soft surface markets as the auto industry focuses on interior comfort of vehicles and increasingly replaces leather with sustainable materials. In fiscal fourth quarter 2021, we expect a slight revenue and more significant operating margin increase compared to fiscal third quarter 2021 at the engraving segment. The expected sequential financial performance improvement reflects a more favorable geographic mix, project timing, and increased soft-trim product demand leveraged over productivity and cost initiatives. Turning to slide six, the scientific segment, revenue increased approximately $9.6 million, or 65%, year-on-year, reflecting continued positive trends in retail pharmacies, clinical laboratories, and academic institutions mainly attributable to demand for COVID-19 vaccine storage. Operating income increased $2.6 million or approximately 81% year-on-year due primarily to the volume increase balanced with investments to support future growth opportunities. In fiscal fourth quarter 2021, we expect a moderate sequential decrease in revenue due to lower demand for COVID-19 vaccine storage combined with higher freight costs, which we expect to result in a sequential decrease in operating margin, although we still expect an operating margin above 20% in the quarter. As shown on the picture in slide six, we provide comprehensive solutions with a broad product line. We can meet customer requirements for different model sizes and temperature ranges across a wide variety of end markets, including pharmaceutical, medical, scientific, biotechnology, and industrials. Pictured here is a clinic with a number of different medications in small quantities requiring a variety of our storage solutions. Finally, I am pleased with the progress the scientific team is making in managing the pipeline of new product development projects, which will position the business well with future new sources of revenue. Turning to the engineering technology segment on slide seven, revenue decreased approximately $6.7 million. and operating income was about $1.9 million lower year-on-year, a 25.4% and 59.8% decrease, respectively. On a year-on-year basis, fiscal third quarter 2021 results reflected the economic impact of COVID-19 on the commercial aviation markets and project timing in space and energy segments, partially offset by growth in defense and markets. The decrease in operating margin was due to the lower volume partially offset by productivity and cost initiatives. In fiscal fourth quarter 2021, we expect revenue on a sequential basis to be similar to the prior quarter with growth in commercial aviation, defense, and space offset by the absence of engenetic sales due to its divestiture at the end of fiscal third quarter 2021. We expect a significant increase in operating margin reflecting a continued broad-based end-market recovery and favorable mix complemented by ongoing productivity initiatives. As pictured on slide seven, we continue to win attractive long-term contracts with industry leaders to develop new platforms and to next-generation hypersonic programs. Our manufacturing process utilizes spin-forming technology, an inherently more efficient process. We start with a plate as opposed to a large block of titanium and then shape it with less material waste and cost and achieve the same functionality and strength. Please turn to slide eight, specialty solutions. Specialty solutions revenue decreased approximately $3.7 million or 11.9% year on year with an operating income decline of about $600,000 or 12.9%. This decrease primarily reflected the economic impact of the COVID-19 pandemic on the segments and markets, particularly in food service equipment. I would like to commend the specialty team for effectively managing their costs to nearly hold their margin rate despite the significant reduction in revenue. Sequentially, specialty solutions revenue and operating income increased 18.3% and 32.4%. We believe we are in the early stages of a recovery in food service and refuse end markets that we expect to continue into our fiscal fourth quarter. In fiscal fourth quarter 2021, we expect a slight sequential increase in revenue, with operating margin expected to slightly decrease sequentially, reflecting material inflation, particularly in hydraulics, which we are seeking to recover through pricing actions. Pictured on the slide is a recent new product introduction, the milk and food merchandiser, developed primarily for the school market and offering several advantages, including flexibility to merchandise a wide assortment of products, easy loading and unloading, and product accessibility to young children. As we return to more normalized patterns of experience outside the home, in-person learning in schools and indoor dining in restaurants, we are seeing a recovery in the school, restaurant, and grab-and-go food end markets for products such as the food merchandiser. I will now turn the call over to Adamir, who will discuss our financial performance in greater detail.