Standex International Corporation

Good day and welcome to the Standex International Fiscal Fourth Quarter 2021 Financial 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. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Gary Farber with Affinity Growth Advisors. Please go ahead, sir.

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 Stanix'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. Stanex 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 fourth quarter fiscal 2021 conference call. I'm very proud of our accomplishments and what has been an unprecedented and challenging environment over the past year and a half. I want to thank our employees, executive teams, and the Board of Directors for their contributions and dedication in making fiscal 2021 a highly successful year for STANDEX. I look forward to further collaboration as we enter fiscal 2022 with a strengthened operating profile and some very new and exciting opportunities in front of us. Now, if everyone can turn to slide three, key messages. We ended fiscal 2021 with strong fourth quarter results and solid execution on our growth strategy. At the electronics segment, approximately two-thirds of the 63% year-on-year revenue increase in the fourth quarter reflected organic growth with continued broad-based geographical recovery, including increased demand for relays in solar and electric vehicle applications. As reflected in our backlog trends, we are continuing to see strong demand across many of our product lines and all geographies at Electronics. Our scientific segment also had a strong quarter with solid revenue and operating income growth year on year. We also have an active pipeline for new product development at scientific and recently received our first product patent in this segment, which I will discuss later in the call. At the engraving segment, revenue increased approximately 16% year on year, reflecting a favorable geographic mix, project timing, and increased soft trim product demand. Execution on our portfolio transformation strategy has strengthened both Standex's operating performance and strategic positioning as we further expand our end market focus and introduction of new products. From a financial standpoint, our new segments are focused around high-quality businesses that optimize our growth and margin profile. Total company backlog, realizable in under one year, increased 19% sequentially in fourth quarter fiscal 2021 with strength in electronics, specialty solutions, and engineering technologies. On a consolidated basis, we reported an adjusted operating margin of 12% in fiscal 2021, representing a 90 basis point increase year on year with our fourth quarter margin of 13.3%, the highest quarterly margin Standex has ever reported. The reshaping of our portfolio has also enabled us to accelerate our investment in resources to aggressively pursue opportunities in end markets that have healthy growth prospects. such as electric vehicles, renewable energy, and smart grid. Our strengths and competitive advantages in these markets drive innovative product solutions which leverage our technical and applications expertise and resonate with our customers. For example, we've been partnering with a major global energy company on a multi-year development effort and have recently delivered prototype modules to support projects in the renewable energy sector. The potential to scale production to support this project and to commercialize other exciting and innovative organic growth opportunities throughout the company has reached a level that requires executive oversight. It marks another step on our journey toward becoming a high performing industrial operating company. Last night, we announced the creation of a chief innovation and technology officer role in response to these types of new end market and growth opportunities on which we plan to capitalize. We are promoting Flavio Mascara, president of engraving, to this new innovation and technology role, which will also be a member of the Standix corporate executive team. Flavio joined our engraving segment in July 2006 as VP of Europe and has led our efforts into successfully transforming the engraving segment into a global texturizing business. He has also championed growth laneways in tool performance services and expanded into the growing soft trim tool market. His innovative approach has enabled engraving to maintain its position as the technology leader globally. Flavio's depth of experience in innovation and new technology development and strategic insights will be a tremendous asset company-wide. I am also pleased to announce that Jim Hoeven will step into the role of president of the engraving segment. Jim joined Standex in February 2020 as vice president of operations and supply chain. In September of 2020, Jim also took on responsibilities as interim vice president and general manager in North America for the engraving segment, while maintaining his role as VP of operations and supply chain for Standex. Under Jim's guidance, the North American business has made steady progress strengthening operational excellence processes, developing talent, and achieving results. We have also begun a process to address Jim's prior role of corporate VP of operations and supply chain. Underpinning our growth strategy is an active pipeline of productivity and efficiency initiatives. This is enabling us to mitigate the impact of supply chain issues and material and wage inflation, which is affecting the broader industrial sector. A few of our actions, which I want to highlight, include continued lean initiatives implemented across our production plant footprint, enhanced strategic sourcing to drive direct material synergies. In addition, our focus on mitigating material inflation and improving our composition in the electronics segment through changes in reed switch production and material substitution, is expected to be substantially complete by the end of fiscal 2022. We are in a very strong financial position to pursue organic and inorganic growth opportunities given our significant financial flexibility as a result of our strong balance sheet and liquidity position and consistent cash flow generation. Adamir will discuss our financial performance in greater detail later in the call. As far as our outlook, In fiscal 2022, we expect stronger financial performance reflecting positive demand trends, the impact of additional productivity initiatives, and our significantly strengthened operating profile. In the first quarter of fiscal 2022, we expect a slight decrease in revenue, but a similar operating margin compared to fourth quarter fiscal 2021. Now, please turn to slide four, and I will begin to discuss our segment financial performance, starting with electronics. Revenue increased $28 million or 62.7% year-on-year, reflecting a 42.2% organic growth rate or an approximate $19 million increase. The Renco acquisition contributed approximately $7.3 million in revenue and continues to be a highly complementary fit with our magnetics portfolio. Our electronics operating margin increased to 21.6% compared to 13.1% in the year-ago quarter, reflecting operating leverage associated with revenue growth and productivity initiatives, partially offset by increased raw material cost. The expansion of the electronics segment through new markets such as electric vehicles and renewable energy, as well as the impact of prior acquisitions like Agile Magnetics are adding to our prospects. We continue to leverage the sales synergies of our Agile acquisition in markets such as semiconductors and through the expanded capabilities it has provided us. In particular, MBOs contributed in excess of $15 million in fiscal 2021, compared to our prior estimate of $12 million on our third quarter earnings call. Our pipeline remains healthy, with total segment backlog realizable under a year, increasing approximately $22 million, or 23% sequentially in the fourth quarter, as we continue to see strong growth in reed switch-based products and magnetics applications. Sequentially at the electronic segment, we expect a slight increase in revenue and a moderate increase in operating margin in first quarter fiscal 2022, reflecting continued end market strength in reed switch and relay products, as well as further growth in the North American magnetics market. Please turn to slide five for a discussion of the engraving segment. Revenue increased approximately $5 million, or 15.9% year on year, with operating income growth of approximately $3.1 million, or 119% year-on-year, reflecting a favorable geographic mix, timing of projects, and increased soft-trim product demand. Operating margin increased to 15.4% compared to 8.1% in the year-ago quarter, reflecting the volume growth combined with segment productivity and our cost initiatives. With our GS engineering acquisition now integrated, We have further globalized the business and leveraged its technological advantages, resulting in a very strong backlog for soft trim demand as the auto industry focuses on interior comfort of vehicles and increasingly replaces leather with sustainable materials. Laneway sales and engraving were approximately $14.8 million, representing a 9% increase sequentially and greater than 50% increase year on year, including growth in soft trim tools, laser engraving, and tool finishing. Sequentially, in first quarter fiscal 2022, we expect a slight to moderate revenue and operating margin decrease, primarily due to the timing of texturization projects and regional mix. We do expect continued strength in soft trim demand. Turning to slide six, the scientific segment. Revenue increased approximately $8 million, or 62.7% year on year, reflecting positive trends in pharmacy chains, clinical laboratories, and academic institutions, primarily attributable to demand for COVID-19 vaccine storage. Operating income increased 48.7% year on year, reflecting the volume increase balanced with investments to support future growth opportunities and higher freight costs. At the scientific segment, we have added to our engineering and product teams to further develop a growing pipeline of potential new products. Pictured on slide six is our recently patent-approved controlled autodefrost refrigerated solution, or CAD, designed for safe and effective frozen medication storage for end markets, such as pharmacies, labs, and clinics. This is the first product in the marketplace which enables autodefrost while guaranteeing vaccines remain below critical temperatures, thus eliminating the need to manually defrost the freezer. The development of this product is reflective of our focus on increasing the exposure proprietary technologies and growing our intellectual property portfolio. At scientific, in fiscal quarter 2022, we expect a moderate sequential decrease in revenue and a slight decline in margin, reflecting lower demand for COVID-19 vaccine storage, refrigeration, and increased freight costs partially offset by price and productivity actions. Turning to the engineering technology segment on slide seven. Revenue decreased $5.7 million, or 21.8%, and operating income was $1.1 million lower, representing a 25.6% decrease year on year. The decreases primarily reflected the absence of the recently divested in genetics business and the economic impact of COVID-19 on the segments and markets. On a sequential basis, operating margin increased to 15.1% compared to 6.2% in third quarter reflecting a continued broad-based sequential end-market recovery and favorable mix complemented by ongoing productivity initiatives. Sequentially, we expect a slight to moderate decrease in revenue and operating margin, reflecting the timing of projects. We are entering fiscal 2022 with an active new business pipeline, particularly in the space and aviation sectors. Highlighted on slide seven are numerous aerospace and space platforms we are aligned with. reinforcing the strength and appeal of our spin-forming capabilities, which continue to resonate with customers. Please turn to slide eight, specialty solutions. Specialty solutions revenue increased approximately $1.7 million, or 7.1%, as its end markets, particularly in food service and specialty retail, continued to recover. Operating income decreased approximately $700,000, or 18.7%. This reflected the impact of work stoppages, which have since been resolved and material inflation which we are seeking to recover through pricing actions. Highlighted on slide eight is our Procon designed next generation helical gear pump for food and beverage applications such as coffee, espresso, milk foaming, syrup, and reverse osmosis. We believe this product is approximately 20% more energy efficient than current gear pump technology with a longer service life. In first quarter fiscal 2022, we expect a slight sequential increase in revenue and operating margin, primarily due to growth in merchandising and the pro-con pumps business, partially offset by the impact of a prior work stoppage that has been resolved. I will now turn the call over to Ademir, who will discuss our financial performance in greater detail.