Standex International Corporation

Good morning and welcome to the STANDX International Fiscal Fourth Quarter 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 touchtone 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. To 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 Earning 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 financial 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 fourth quarter 2022 conference call. We're very pleased with our strong fourth quarter performance, which concluded a highly successful fiscal 2022. The significant transformation of Standex combined with solid operational execution has strengthened our market positions and delivered record financial results. We are entering fiscal 2023 with an active pipeline of new business opportunities and productivity initiatives to further build on our momentum. 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. The strength of our high-quality businesses with attractive growth and margin profiles is reading through in our results. From a margin perspective, fourth quarter fiscal 2022 represented our fifth consecutive quarter of record consolidated adjusted operating margin. Consolidated adjusted operating margin of 13.9% in fiscal fourth quarter 2022 was a 60 basis point increase year on year and a 10 basis point improvement sequentially, despite the sales impact of the COVID-19 lockdown in China. STANDEX's five company business segments each reported adjusted operating margin of at least 15% as we successfully executed company-wide productivity and price realization actions. We reported 14.7% organic revenue growth year-on-year in fiscal 2022 as four of our five business segments reported sales increases. Electric vehicles, renewable energy, commercial aviation, and defense and markets remained strong. while food service equipment has recovered to pre-COVID levels. Revenue contribution from high growth markets such as electric vehicles, green energy, and the commercialization of space increased to $59 million in fiscal 2022, an approximately 50% increase year on year. Our electronics segment achieved a significant milestone with record sales of $304 million in fiscal 2022. Both revenue and segment operating income have more than doubled over the past five years as we have aggressively pursued new market opportunities. Another milestone is reached by our scientific segment with record revenue of $84 million, which has more than doubled since 2017. Our solar energy project with Enel is progressing well with process design activities for the pilot plant we announced last quarter. Order trends remain healthy, and our backlog, realizable in under one year, grew 22% to $256 million. In fiscal 2023, we have an active operational excellence calendar, including ongoing lean events, continued standardization of operating disciplines across business units, and further leveraging of our G&A structure. We continue to implement strategic sourcing actions where applicable. but a significant portion of our client base is in the same region where materials are sourced and products are manufactured, reducing supply chain issues. Adam here will discuss our financial performance, liquidity position, and capital allocation in greater detail later in the call. In fiscal first quarter 2023, we expect revenue and operating margin to be similar to fourth quarter fiscal 2022, but increase year on year. In fiscal 2023, we expect continued improvement in financial metrics, Our outlook is supported by backlog realizable in under one year of approximately $256 million at the end of fiscal 2022, representing approximately 22% increase year-on-year. Now, please turn to slide four, and I will begin to discuss our segment performance and outlooks beginning with electronics. Segment revenue of $72 million decreased 1% year-on-year. and market trends remain favorable, particularly for renewable energy and electric vehicles. However, as expected, the COVID-19 lockdown in China impacted sales by approximately $6 million in the quarter. Adjusted operating margin of 22.5% in fiscal fourth quarter 2022 represented a 90 basis point increase year on year, primarily due to the impact of price realization and productivity actions. New business opportunities remain strong, with first-year NBO sales delivering $17 million in fiscal 2022, a 15% increase year-on-year. The pictures on slide four highlight the electronic segment's focus on growth markets, such as grid infrastructure and charging systems for electric vehicles. Regarding our first quarter fiscal 23 outlook, sequentially we expect a moderate increase in revenue due to continued positive end-market demand, and some recovery of sales which were deferred due to the lockdown in China. We also expect a slight sequential increase in operating margin due to the sales increase partially offset by product mix. Please turn to slide five for a discussion of the engraving segment. Revenue increased 1.6% year-on-year to $37 million, including 7% organic growth and a 5.5% headwind from exchange rate changes. Operating margin of 16.2% in fiscal fourth quarter 2022 increased 80 basis points year-on-year due to sales growth and the impact of productivity and efficiency initiatives, including progress on our previously announced $2 million in cost savings actions. Laneway sales of $56 million grew approximately 9% year-on-year with positive trends in soft trim tools, laser engraving, and tool finishing. The picture on slide five illustrates the broad applicability of engravings technological expertise and one partner solution approach to non-auto end markets. In this case, virtual reality goggles. Our comprehensive approach offers customers the opportunity to work with Standex as their sole supplier from design, prototyping, to production on a global basis. In particular, our proprietary rapid texture prototyping quickly turns digital concepts into physical patterns. enabling us to put a physical sample in front of customers in a matter of a few days, greatly reducing project lead times. In our next fiscal quarter, we expect a slight sequential decrease in revenue due to project timing, as well as an operating margin due to project mix, partially offset by operational improvements. In fiscal 2023, we also expect continued growth in soft trim demand, reflecting auto manufacturers increasing move to higher quality interior surfaces and textures. Turn to slide six, scientific segment. As expected, scientific revenue decreased 9% year on year to nearly $19 million. This reflected ongoing sales in core markets such as pharmaceutical, clinical laboratories, and academic institutions offset by lower demand associated with COVID-19 vaccine storage. Operating margin of 19.8% decreased 20 basis points year on year due to the lower volume. As highlighted on slide six, the pace of new product introductions at Scientific is accelerating, further broadening our product line and capabilities, including new product families, such as blood bank and blood plasma, and patented features that conform with the latest standards for refrigeration designed for hospitals, medical, clinical, and research facilities. In the fiscal first quarter of 23, we expect a sequential basis, a slight revenue and operating margin decrease, due to lower COVID vaccine storage demand. Turn to the engineering technology segment page on slide seven. Revenue of $22 million increased 5% year on year, reflecting continued growth in commercial aviation and energy end markets. Operating margin of 15% was similar year on year due to volume growth and project mix. As pictured on slide seven, Our advanced engineering team has further pushed the capabilities of our spin-forming process to create an extended-leg Lipskin suitable for application on wide-body aircraft. In the next fiscal quarter, we expect a moderate to significant decrease in revenue, despite the healthy backlog, reflecting project timing with a slight decrease in operating margin due to productivity initiatives mostly offsetting impact of volume decrease. On a sequential basis, revenue and operating margin are expected to increase significantly in fiscal second quarter 23 as a healthy backlog begins to convert to sales. Please turn to slide eight, specialty solutions. Specialty solutions revenue of $35 million represented a nearly 37% year-on-year increase due to volume growth in end markets and the impact of price realization actions at Hydraulics. Operating margin increased 370 basis points to 15.3% reflected the volume increase and impact of pricing and efficiency actions. As pictured on slide 8, we have expanded our highly successful milk merchandiser product line. This new product emphasizes some of the key features of the original product version, including flexibility to merchandise a wide assortment of products and easy loading and unloading, but in a smaller unit version for schools with less space. In the fiscal first quarter 2023, on a sequential basis, we expect revenue to be similar to end market demands with a moderate improvement in operating margin due to sales, pricing, and productivity initiatives. I will now turn the call over to Ademir to discuss our financial performance in greater detail.

Thank you, David, and good morning, everyone. First, I will provide a few key takeaways from our fourth quarter and fiscal 2022 results. We continue to successfully drive operational execution and margin improvement. Adjusted operating income increased twice the rate of the revenue growth in both the fourth quarter and the fiscal year, with record performance in several areas. Tandex reported approximately 5% revenue growth year-on-year in the fiscal fourth quarter 2022, despite the negative impact from COVID-19 lockdown in Shanghai and pressure from the foreign exchange. And market demand trends remained healthy as we ended the fourth quarter with an overall book-to-bill ratio of slightly over 1%. We also reported our fifth consecutive quarter of record consolidated adjusted operating margin. Our earnings strength reflected volume growth and continued readout of price and productivity initiatives. Fiscal 2022 adjusted operating margin increased 170 basis points year-on-year to 13.7%, our highest in the history of the company, resulting in operating income growth of approximately 28% on a 12% consolidated revenue increase year-on-year. Our increased profitability contributed to a 210 basis points increase in return on invested capital to 11.1%. We also added to our substantial financial strength as our liquidity position increased and our consistent cash flow generation continued. Our balance sheet provides substantial flexibility to support an active pipeline of organic and inorganic opportunities, as well as increased investment in R&D and growth capital. In summary, we had strong results across key financial metrics in fiscal 2022 and are well positioned for continued improvement in fiscal 2023, reflecting a strong operating profile, continued positive end market trends, and expanding range of new products. Now let's turn to slide nine, fourth quarter fiscal 2022 income statement summary. On a consolidated basis, total revenue of $184.7 million increased 4.7% year-on-year, compared to $176.4 million in the fourth quarter of 2021. Year-on-year, this reflected organic revenue growth of 7.8% and a 0.9% contribution from the sensor solution acquisition, partially offset by 3.9% impact from foreign exchange. Organic revenue growth was almost evenly split between increased volume and price realization. From a segment perspective, sales at specialty solutions, engineering technologies, and the engraving segment increased year-on-year. This was partially offset by an approximately 6 million sales impact from the COVID-19 lockdown in China at our electronic segment. As David indicated in his comments, we expect to begin to recover a portion of these sales in our fiscal first quarter of 2023. Adjusted operating margin of 13.9% in the fourth quarter represented an increase of 60 basis points year on year and 10 basis points sequentially, reflecting sales growth and the impact of price and productivity actions. As expected, Our tax rate was 22% in the quarter, or 130 basis points increase year-on-year, primarily due to the geographic mix of earnings. Sequentially, we expect a slight increase in our tax rate in fiscal first quarter 2023, with a full-year fiscal 2023 tax rate between 23% and 24%. Adjusted earnings per share were $1.54 in the fourth quarter of fiscal 2022, compared to $1.40 a year ago, approximately 10% growth year-on-year. Please turn to slide 10, fourth quarter 2022 free cash flow. Net cash from operating activities was $29.5 million in the fourth quarter of 2022 compared to $32.5 million a year ago. The decrease partially reflected the sales deferral related to the impact of the COVID-19 lockdown in China. In addition, capital expenditures were $10.8 million compared to $6.1 million a year ago. As a result, Standex generated free cash flow of $18.8 million in fiscal four quarter 2022 compared to free cash flow of approximately $26.4 million in fiscal four quarter 2021. Next, please turn to slide 11 for a summary of Standex's liquidity statistics and the capitalization structure, which remains strong. We ended fiscal 2022 with approximately $313 million of available liquidity and increased both sequentially and year-on-year. At the end of the four quarter, STANDEX had net debt of approximately $70 million compared to $65.8 million at the end of the third quarter and $63.1 million at the end of fiscal 2021. Our net debt at the end of fiscal 2022 consisted primarily of long-term debt of $175 million as we repaid approximately $25 million of maturing debt during the quarter. Cash and cash equivalents totaled $104.8 million with approximately $94 million held by foreign subs at the end of the fourth quarter. We continue to execute on our cash repatriation program with approximately $10 million repatriated from foreign subs in the fourth quarter and nearly $31 million in fiscal 2022, bringing our three-year total to $108 million. We expect to repatriate between $30 and $35 million in cash in fiscal 2023. With regards to capital allocation, we repurchased approximately 107,000 shares for $10 million in the quarter and $91 million remaining under the current authorization. We also declared last week our 230-second quarterly cash dividend of $0.26 per share, an approximately 8.3% increase year-on-year. In fiscal 2023, we expect capital expenditures to be between $35 million and $40 million, compared to approximately $24 million in fiscal 2022. The increased investment year-on-year includes additional capital for capacity expansion, productivity actions, and growth efforts as we deepen our presence in high-growth markets. I will now turn the call over to David for key takeaways from our four-quarter results.

Thank you, Adamir. If everyone can please turn to slide 12 for a discussion of key takeaways. The significant transformation of STANDEX over the past few years combined with solid execution is driving substantial growth and record performance across the company. We expect continued improvement in financial metrics in FY23. Our portfolio and expertise is also favorably aligned with emerging and sustainable global trends in end markets such as renewable energy, electric vehicles, and commercialization of space, further adding to our growth profile. Our very active funnel of productivity, price realization, and strategic sourcing initiatives are offsetting the challenging inflation and supply chain environment. A cornerstone supporting our growth strategy is our strong balance sheet and consistent cash flow generation, which provides substantial financial flexibility to execute on our active pipeline of organic, and inorganic growth opportunities. We will now open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Chris Moore from CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a few questions. Morning. Good morning. So electronics obviously been a key driver. I think the numbers are right. It represented something like 54% of fiscal 22 operating profit versus, you know, 45% in 21. Do you expect that trend to continue?

Yeah, we do. One of the things that we mentioned, just in the last five years, this business has more than doubled in sales. Their operating income has increased. They serve a great market. We have a good position in EVs and renewables. And a lot of the capex increase is to expand the capacity in that business to serve these growing markets. So, yeah, absolutely, we do.

Got it. All right. I obviously don't give guidance, but any thoughts in terms of the cadence of quarters in fiscal 23 from, you know, kind of both revenue and earnings perspective?

Yeah, Chris, it's Adam here. I know we do give a view on our fiscal Q1 of FY23, and we view that to be sequentially similar to Q4 last quarter, but, you know, up year on year, you know, you know, there's a bit of a project timing in the engineering technology segment, and, you know, that's kind of on the negative side that's affecting us in the core. On the positive side, you know, we're going to get growth in electronics. So we view... Q1 to be sequentially similar, and then as we get into Q2, Q3, Q4, we expect, you know, both revenue as well as operating margins.

I would say, too, another thing to that, we've got new products coming out in almost all the businesses, and as some were released last year, some are coming out this year. We have new capacity coming online in the course of the year for electronics. So our expectation is that will drive, you know, progressive growth through the year.

Got it. And maybe just more big picture. Sure. Can you, you know, kind of talk about the progress on achieving the longer-term financial targets and some of the, you know, the more specifics on the key growth trends and areas for 23?

Yeah, we feel very good about where we're at with those long-term targets. You know, we was back, I think it was February 21, so about 18 months ago, we said that in three to five years, we'd get our EBITDA above 20%. We would grow sales mid-single digit, you know, uh, we target free cashflow at a hundred percent, get our ROIC to 12%. So sales, you know, our organic sales this last quarter, this last year was 14% growth. So, you know, we're, we're, we're ahead of that, uh, on that number. EBITDA, uh, get to 20%. We finished 21 at 17%. We finished this last year at 17.6%. So I'd say we're on track, uh, on that one, uh, free cashflow. Uh, last year we were 118%. This year, 88%. Um, You know, we're in the zone on that one. And the ROIC, last year we finished at 9%. This year we finished just over 11%. So we're ahead of track on that one. So we're on track, and we think we hit those, I guess the last target to hit there is at EBITDA in the next 18 to 24 months.

Got it. I appreciate that. Last one from me, just any other thoughts that you can share with us in terms of the solar project with NL?

Yeah, we're in somewhat of a quiet period here. This year is the year of we're building a pilot plant to prove out the ability to industrialize and ramp up production. Between Austin and Nell, we have satisfied ourselves that the technologies we both bring to this do deliver the expected performance benefit. So now we're designing process equipment. We're fine-tuning the the manufacturing processes, and we should get into kind of low-volume production probably sometime next year. So it will be somewhat quiet, but, you know, as we advance, we'll continue to share information on our progress. We feel very good about it. We have a very close relationship with Enel. It's a high priority for them and increasingly exciting for us.

Got it. I will leave it there. I appreciate it, guys.

The next question comes from Chris Howe from Barrington Research. Please go ahead.

Good morning, David and Anamir. Hey, Chris. Good morning. Hey. I wanted to focus here first on the engraving segment. You talked about the continued growth that you anticipate in soft trim to benefit fiscal 23. Can you talk about how that would translate to the aggregate business or overall business as we consider growth in engraving for its different lines of business?

Well, the soft trim business, if you go back years, we had kind of a pilot in our Portugal facility. We did a couple million dollars a year in soft trim. We acquired GS Engineering in 2019, and they have a process that gives them an advantage in lead time, cost, and soft trim. Then we hit the pandemic downturn. That business kind of slowed down a little bit. But in the course of the last few years, auto OEMs have become increasingly focused on improving the quality of the textures in the interiors, and you're finding soft trim surfaces in more and more vehicles, more mid-tier vehicles, whereas in the past, they were only in higher-end vehicles. So in this last year, we saw our backlog grow, maybe doubled in the year, in soft trim as a result of that. And our European business is based on, I don't want to get into too much detail, but a process called slush molding. Slush molding is a very energy-intensive process that And in the past year, we've been getting more and more inquiries from European OEMs about this GS process, which is more energy efficient and could be applied now for the European OEMs, helping them meet their ESG targets. So we're optimistic that we may see a little more growth opportunity in Europe in the coming year in this business. So that business, although it's relatively small in our portfolio, it's mid-teens, millions of dollars, is growing double digits, primarily in Asia. But now we're exploring this opportunity to grow in Europe. So I hope that gives you a framework for it.

Yeah. I guess shifting here to another question on engraving, you mentioned – I think in your Q1-23 outlook that there was project timing that impacts the first quarter. So as we think about your Q2 outlook for engineering technologies, would you expect the same kind of recovery in the second quarter from the first quarter in the engraving segment to kind of reverse that? Yeah.

We do, Chris. You followed the business for a while, so you know the engraving business is somewhat difficult for us to forecast from quarter to quarter because these projects They can easily slip from one quarter to the next, and we don't always know when a tool will be shipped from the tool shop to our shop. But what we do know is that tool shops in America and in Europe are loaded with tools. So those tools will show up in our shops for texturizing. We think, based on the schedules we have from those tool makers now, we think there will be a bit of a decline, as we described in our Q1 schedule. But those tools are going to show up, so we think they come back in Q2.

Okay, perfect. And then I'll ask one more and then hop back into Q for others. I guess, can you just give us an update? Your balance sheet remains healthy and robust. We're kind of still in somewhat of an uncertain environment, but what does the M&A pipeline look like for the business? And can you be strategic in this area? and active in this area as we look to the next 12 months? Or, yeah, maybe you could characterize what you're seeing there as far as pricing and opportunity.

Yeah, so, you know, the kind of deals we do often are not part of a formal process. We have long-term relationships with a lot of the companies that participate in the markets where we play. And The timing of those deals has more to do with the personal plans of the owners and founders. So our funnel still includes businesses like that. And there are some out there that could be actionable in the coming quarters in this year. Now, a few years ago, we did start working to expand our pipeline to include more businesses that could bring in, say, $100 million or more of sales in acquisitions. Now, with those, we have seen a bit of a slowdown in the number of deals that are out there, just as a function of the general M&A world. However, we remain active, working our pipelines. Sometimes there's a long-term courtship involved, so we're staying close to these owners and these larger businesses that may come out. They know we're interested. So if you were to just step back and think what would be your expectation of M&A at Standex, I think if you look back over the last few years and kind of take our average annual acquisition activity and, you know, project that into the future, that's probably as safe an assumption as ever.

All right. Thanks for taking my questions.

Thank you, Chris. Again, if you have a question, please press star, then 1. That's star one if you have a question. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to David Dunbar for any closing remarks.

All right, I want to thank everybody for joining us for the call. We enjoyed reporting on our progress at STANDEX. And finally, again, I want to thank our employees and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal first quarter 2023 call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.