Standex International Corporation

Good day and welcome to the Standex International Fiscal Third Quarter 2022 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 a touch-tone 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 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-GAP measures included 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 the 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. A reconciliation from such non-GAAP measures to the most analogous GAAP measures may be found in the company's earnings release issued yesterday. On the call 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 2022 conference call. Our momentum continued in our fiscal third quarter with solid financial performance. a healthy pipeline in growing end markets, and good execution by our global teams. Our repositioned business portfolio is increasingly aligned with sustainable global trends, and we are expanding our range and penetration of innovative solutions. I want to thank our employees, our executives, and the board of directors for their continued dedication and support. Now, if everyone can turn to slide three, key messages. Revenue and consolidated adjusted operating margin continue to increase both year-on-year and sequentially with order strength, share gains, and productivity initiatives, all significant contributors. Stanix revenue growth was broad-based, with four of our five segments increasing year-on-year and sequentially. In particular, the electronics segment delivered record quarterly sales of nearly $80 million. We continue to see strong demand globally across many of our product lines. Electronics backlog, realizable under a year of approximately $151 million at the end of the third quarter, represented a 57% year-on-year and 5% sequential increase. In addition, specialty solutions segment revenue increased approximately 20% year-on-year, with continued positive trends as food service equipment markets returned to pre-COVID-19 levels. Consolidated adjusted operating margin of 13.8 percent, our fourth consecutive quarter of record margin, was 160 basis point increase year-on-year and 20 basis point improvements sequentially. From a growth perspective, Stanix is aggressively pursuing new opportunities for applications in sectors with attractive growth profiles where our technology and expertise enjoy significant competitive advantages. End market trends in sectors such as electric vehicles, renewable energy, Commercialization of space and defense remained strong, while food service and commercial aviation continued to recover. Total company backlog, realizable under one year of approximately $267 million at the end of the third quarter, represented a 51% increase year-on-year, with strength at the electronics, specialty solutions, and engraving segments, and a slight increase sequentially. We continue to strengthen our customer value proposition through strategic acquisitions, In March, we announced the purchase of Sensor Solutions, a privately held Colorado-based designer and manufacturer of Hall Effect sensor products. This is a complementary technology enhancing our existing solutions in high-value sectors, such as electric vehicles, industrial automation, and medical end markets. We are already seeing substantial sales synergies as we introduce our joint product offerings through our sales channels. In addition, our previously announced solar panel project with Enel is progressing as a plant site in Brindisi, Italy, has been selected for the pilot production phase. As we navigate a challenging and dynamic operating environment, we continue to implement new tools and processes in our operating playbook. All businesses have added more frequent bottoms-up reviews of current and projected costs to respond rapidly to inflation with appropriate productivity and pricing actions. These efforts are complemented by an active calendar of lean initiatives and ongoing strategic sourcing actions. While we are seeing signs of improved efficiency in STANDEX North American engraving operations, we are also announcing today additional actions globally which will result in $2 million of annualized cost savings. In the electronic segment, we are on plan to complete our reed switch material substitution project this quarter, reducing our exposure to future rhodium inflation. In line with our disciplined and balanced approach to capital allocation, we announced today a new $100 million share repurchase program. Our portfolio continues to drive a growing number of exciting new business opportunities, and we see significant opportunities for further shareholder value creation. StandEx's balance sheet strength and consistent cash flow generation position us well to execute on this program. Adam and I will discuss our financial performance, liquidity position, and capital allocation in greater detail later in the call. Regarding our financial outlook, in fiscal fourth quarter 2022, we expect a slight sequential decrease in revenue and operating margin, but an increase year on year. The sequential quarterly decrease primarily reflects the financial impact of the COVID-19 lockdown in Shanghai, China, which we currently estimate will defer sales of approximately $7 million to $9 million from our electronic segment from the fiscal fourth quarter 2022 into the following quarter. As STANDEX enters fiscal 2023, we are well positioned for further revenue and margin improvement as end market trends remain strong. Our new business opportunity pipeline continues to grow, and our focus on continuous improvement through ongoing productivity and efficiency actions becomes further embedded in our segments. Our outlook assumes a continued macroeconomic recovery. Now, please turn to slide four, and I will begin to discuss our segment performance and outlook beginning with electronics. Segment revenue of $80 million increased approximately $15 million, or 23% year-on-year, reflecting broad end-market strength across all geographies, including renewable energy, electric transportation, solar, and military aerospace markets. The electronics segment had strong operating leverage, with an approximately 24% segment margin resulting in $19 million in adjusted operating income, or a 56% year-on-year increase. This was due to revenue growth, pricing, and productivity actions. We continue to enjoy a favorable mix between well-established relationships and new customers. First-year sales from new business opportunities are forecast to be approximately $17 million in fiscal 2022, a 37% increase year-on-year, and our MBO funnel has grown to approximately $65 million. an approximately 10 percent increase year-on-year. The picture on slide four highlights a concrete example of how our customer intimacy model creates lasting, deep relationships. In this case, an initial single application in 2018 opened the door to future opportunities, expanding the relationship to over 10 applications and $4 million of annual sales. Regarding our fourth quarter fiscal 22 outlook, we expect a moderate sequential decrease in revenue and operating margin despite our growing backlog and strong end market demand. Headwinds from the COVID-19 lockdown in Shanghai, China, will push some sales into the following quarter and will be only partially offset by continued strong demand across key end markets. Please turn to slide five for a discussion of the engraving segment. Revenue of $37 million increased just over 3% year on year due to positive trends in North America and soft trim demand. Operating income of $5.7 million grew 27% due to volume growth as well as efficiency and productivity actions. Laneway sales of approximately $15 million increased nearly 14% year-on-year due to positive trends in soft trim tools, laser engraving, and tool finishing. The picture on slide five highlights a significant texturizing opportunity with a recent customer. Through our one-partner solution, we are able to offer a comprehensive solution on a global basis from design, prototyping, and execution of the final product, a significant competitive advantage. In this case, we designed the texture in Europe and then delivered the engraving with our customers' chosen toolmakers in Asia. In regard to our fiscal fourth quarter outlook, we expect a slight sequential decrease in engraving segment revenue and operating margin due to the timing of projects and geographic mix. We also expect continued growth in our soft trim offering. Now turn to slide six, the scientific segment. As expected, scientific revenue of $19 million decreased approximately $5 million year on year, or 22%, reflecting lower demand for COVID-19 vaccine storage, partially offset by sales in pharmaceutical, clinical laboratories, and academic institution and markets. Operating income of approximately $4 million decreased approximately 1.6 million, or 28%, due to lower volume and higher freight costs partially offset by pricing actions. As highlighted on slide six, the pace of new product introductions at Scientific is steadily increasing. The Scientific segment is the first in the industry to launch stability and temperature test chambers with natural refrigerants and variable speed compressors with a patent application pending. In our fiscal fourth quarter, sequentially we expect revenue to be similar and operating margin to decrease slightly. We expect strong demand from smaller regional pharmacies and doctors' offices to offset lower sales from large national pharmacy chains. Our new product development effort remains very active, positioning us well for future new sources of revenue with a focus on innovative proprietary technologies. Turning to the engineering technology segment on slide seven, Revenue of approximately $21 million increased $1 million, or nearly 5% year-on-year, on continued growth in commercial aviation, defense, and medical end markets. This was partially offset by the absence of the previously divested and genetics business, which contributed approximately $4 million in revenue to last year's third quarter. Operating income of $2 million increased approximately $1 million, or 87%, reflecting volume growth and project mix. As highlighted here, engineering technologies is expanding its European presence. Pictured are an aluminum tank solution delivered to a large European spacecraft manufacturer and an example of Standex's titanium hot forming efforts at our SpinCraft UK site. Besides our significant technical and market expertise, we offer a cost-effective locally manufactured solution for the fast-growing European space sector. On a sequential basis, we expect fiscal fourth quarter revenue to be similar to slightly higher due to strength in commercial space as we secure an increasing number of new business wins. We expect a slight to moderate increase in operating margin due to leverage associated with volume and productivity initiatives. Please turn to slide eight, specialty solutions. Specialty solutions revenue of $32 million increased to just over $5 million, or 20% year-on-year, due to growth in food service equipment and refuse in the markets. Operating income of $3.6 million decreased approximately $600,000, or 15%, reflecting the impact of material inflation and increased freight costs, primarily in the hydraulics business, partially offset by volume growth and pricing actions. Order trends are strong, with specialties backlog realizable under a year of $48 million, increasing approximately 170% year-on-year and 7% sequentially. Pictured on slide eight reflects a recent redesign of our successful package X cylinder to further improve its operating life. In the fiscal fourth quarter, we expect a slight sequential increase in revenue and moderate improvement in operating margin. This reflects increased production levels at the hydraulics business unit and solid demand in display merchandising, which we expect to further leverage through pricing and productivity actions. I will now turn the call over to Adam here to discuss our financial performance in greater detail.