Standex International Corporation

Good morning and welcome to the STANDEX International Second Quarter Fiscal 2022 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 of Clearview 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 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. 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 2022 conference call. I'm very pleased with our strong second quarter results, which were above our expectations with record performance in several areas. Our success reflects the significant repositioning of our portfolio around high growth end markets, where our expertise and innovative solutions provide compelling customer value propositions. We are excited about the growing number of new business opportunities in front of us and are in the early innings of further driving the trajectory of the next leg of our growth strategy. I want to thank our employees, executive teams, and the board of directors for their continued dedication and support. Now, if everyone can turn to slide three, key messages. Both revenue and consolidated adjusted operating margin increased significantly year on year in the second quarter. Record sales of both our electronics and scientific segments in the quarter were key drivers of organic revenue growth, which was 20% year-on-year. Electronic segment revenue grew approximately 27% year-on-year, with broad-based strength across all geographic regions and end markets, such as electric transportation, solar, military aerospace, and semiconductor, all platforms for significant future growth. Scientific segment revenue increased approximately 38% year-on-year with positive trends in our core markets, complemented by ongoing demand for COVID-19 vaccine storage refrigeration. For the third consecutive quarter, we reported our highest adjusted consolidated operating margin in STANDEX history, 13.6%, representing a 220 basis point year-on-year increase. This reflected strength in end-market product demand, complemented by market share gains productivity, and price realization initiatives. We are entering the second half of fiscal 2022 with a very robust pipeline of new business opportunities in high growth end markets. We're also further leveraging our business units through highly targeted investment in research and development, strengthening our foundation and outlook for future growth. Total company backlog, realizable in under one year, increased approximately 11% sequentially in the quarter, and 53% year-on-year, with record backlog levels at the electronics and specialty solution segments. In addition, our electronics segment new business opportunity pipeline of $64 million represented a 14% year-on-year increase and is expected to contribute $19 million in sales in fiscal 2022, approximately 25% above the previous year. We also achieved an important milestone in our project with Enel, a global energy company, delivering full-size prototype solar modules in December. We highlighted this opportunity on our fiscal fourth quarter call in August and are now expected to move to design a construction of a pilot plant, further expanding Standix's potential avenues for growth. Our operating approach globally remains highly collaborative and well-coordinated across business segments and leadership teams. A significant portion of our client base is in the same region where materials are sourced and products are manufactured. minimizing supply chain issues. We continue to drive supply chain productivity through proactive and strategic material sourcing and logistics management. We continue to execute on standardized operating disciplines across business units, including new lean programs and highly focused sales, inventory, and operations planning processes. In regard to inflationary trends, we have implemented new processes and systems combined with collaborative efforts among segment engineering, sales, and purchasing personnel, to effectively implement price realization actions. In addition, at the electronic segment, by the end of fiscal 2022, we expect to substantially complete the expansion of our ruthenium-based reed switch production. We are now able to offer customers a choice of switches with rhodium or other materials, reducing our exposure to future rhodium inflation. In the second quarter, we also further strengthened our balance sheet and liquidity position, supported by continued solid cash generation. and have substantial financial flexibility to further expand the number of high return organic and inorganic opportunities across our business units. Adam here will discuss our financial performance in greater detail later in the call. Regarding our financial outlook, we expect our momentum to continue in fiscal 2022 with stronger financial performance in the second half of our fiscal year, both year on year and compared to the first half of fiscal 2022. Specifically, on a sequential basis in the fiscal third quarter, we expect revenue to be similar to slightly higher and operating margin to be slightly higher sequentially with a significant overall increase year-on-year compared to fiscal third quarter 2022. We are also pacing ahead of the long-term financial targets we provided a year ago. As before, our outlook assumes a continued macroeconomic recovery. Now, please turn to slide four, and I will begin to discuss our segment financial performance and outlook beginning with electronics. At the electronic segment, our record second quarter revenue performance, growing new business pipeline, and fiscal third quarter outlook reflect the volume ramp of the previous year's new business opportunity awards, strength in our end markets, and product demand complemented by continued market share gains. Segment revenue of $76.6 million represented an increase of $16.8 million and a 27.9% organic growth year on year. This growth reflected positive trends across all markets and geographies, including in electric transportation, solar, military aerospace, and semiconductor markets. Operating income grew approximately 72.2% year-on-year to $17.2 million as we effectively leveraged organic sales growth, pricing actions, and productivity initiatives, partially offset by increased raw material and freight costs. Electronics backlog realizable under a year of approximately $143 million increased 9% sequentially and 88% year-on-year. Our new business opportunity pipeline of $64 million reflects the broad expansion we are seeing, including in electric vehicle and renewable energy end markets and share gain in the military aerospace sector. As highlighted in the picture on slide four, Our current NBO funnel includes strong demand for new renewable energy programs that are quickly ramping up in both Europe and Asia. For our fiscal third quarter 2022 outlook, we expect a slight increase in revenue and operating margin as we execute on our solid backlog position. We expect strong demand to continue across all product categories and regions, with military aerospace programs continuing to ramp up for magmatics products demand. Please turn to slide five. for a discussion of the engraving segment. Revenue of $36.6 million in the quarter and operating income of $5.2 million represented a 3.4% and 20% decrease year-on-year, respectively due to the timing of projects and geographic mix. Laneway sales of $15.7 million increased approximately 14% year-on-year with positive trends in soft trim tools, laser engraving, and tool finishing product categories. Engraving backlog, realizable under a year, increased 7% sequentially in fiscal second quarter 22. The picture on slide five highlights a recent customer win for the new Ford Ranger P703 model, a global three-year tool texturizing program for vehicles to be assembled in the U.S., India, Thailand, South Africa, and Argentina. Our ability to offer a comprehensive approach through the full value chain from design, prototyping, and execution of a final product on a global basis remains a key competitive differentiator, particularly for leading multinational manufacturers. In our fiscal third quarter, we expect sales and operating margin to be similar to the second quarter with an expected decrease in project work in Asia associated with the Chinese New Year offset by contributions from projects in Europe and growth in software and sales. Turning to slide six, the scientific segment. Record quarterly revenue of $24.6 million represented an increase of 37.7% year-on-year, with growth in pharmaceutical, clinical laboratories, and academic institution markets, complemented by strong demand for COVID-19 vaccine storage. Operating income of $5.5 million increased 29.7% year-on-year, reflecting volume growth and pricing initiatives to partially offset higher freight costs, as well as increased investments to support additional new product development. Sequentially, backlog realizable under a year increased 7%. As pictured on the slide, our scientific segment is the first in the industry to provide customers with equipment certified to the NSF 456 standard developed by the U.S. Centers for Disease Control and Prevention and the National Sanitation Foundation. These new equipment standards focus on maintaining ideal vaccine storage conditions and address the potential high cost of failure, which can reach millions of dollars of client losses on ineffectively refrigerated medications. In our fiscal third quarter, we expect a moderate sequential decrease in revenue and operating margin due to expected lower demand for COVID vaccine storage. Our new product development effort remains very active as reflected in the growing level of intellectual property and new product categories. Turning to the engineering technology segment on slide seven, revenue and operating performance in the quarter reflected recovery in commercial aviation and markets in the absence of the previously divested and genetics business in the fiscal third quarter of 2021. Sales increased 3.4% year-on-year to $18.1 million, and operating income grew approximately 69.8% to $2.3 million. In the second quarter, backlog realizable under a year increased 8%. As highlighted on the picture on slide seven, our market reach is broad and we're well positioned to capture a wide range of emerging growth opportunities from the commercialization of space to collaborating with commercial air framers on net zero carbon aviation applications, as well as defense programs globally. Regarding our outlook for the fiscal third quarter, we expect revenue to be sequentially similar to slightly higher, primarily due to growth in space and medical end markets, with a slight to moderate increase in operating margin, reflecting end market strength and productivity initiatives. Please turn to slide eight, specialty solutions. Specialty solutions revenue grew 30.4 percent year-on-year to $29.7 million, reflecting continued end market recovery, primarily in food service, specialty retail, and refuse end markets. Operating income increased 16.4 percent to $3.7 million, due to volume growth and pricing actions, partially offset by material inflation and increased freight costs. Sequentially, backlog realizable under a year increased $10.1 million, or approximately 29% in second quarter fiscal 22, reinforcing the continued recovery in key end markets. Pictured on slide eight is the recently launched Procon Nautilus helical gear pump for espresso and milk foaming applications. This unique product highlights our value-based approach to client solutions. The Nautilus gear pump is energy efficient with a low amp draw, reinforces the overall focus on sustainability of our development programs, and offers a compact size with smoother and quieter operation. In regard to our outlook, in fiscal third quarter 22, we expect a slight to moderate increase in revenue and operating margin sequentially, reflecting positive trends in backlog and end markets. who continue to seek to recover material inflation through pricing actions. I will now turn the call over to Ademir to discuss our financial performance in greater detail.