Standex International Corporation

Good morning, and welcome to the Standex International Fiscal Second Quarter 2023 Financial Results 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. Please note this event is being recorded. I would now like to turn the conference over to Chris Howe, Director of Investor Relations. 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 on 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 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, Chris. Good morning, and welcome to our fiscal second quarter 2023 conference call. Yesterday, prior to our earnings release, we announced a signed agreement to divest our ProCon pumps business to invest industrial for $75 million, subject to customary post-closing adjustments. We expect the closing of this transaction to occur during the month of February. The PROCON Investiture supports continued simplification of our portfolio and enables us to further focus on our larger businesses and fast growth and market opportunities. We plan to use the proceeds to fund attractive organic growth and acquisition opportunities consistent with our capital allocation model. I would like to thank our PROCON colleagues for their contributions to STANDEX and wish them much success as they start a new chapter for the business. Shifting to our second quarter performance, we are proud of our results, which came in better than our expectations. We were able to continue our trend of sequential margin improvement with double-digit organic growth in three of our segments. The execution by our global management teams and strong demand in our fast-growth markets position us to continue growing organically while sustaining and improving upon our other key financial metrics. We continue to be optimistic about our new product and applications development across our businesses. 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. We are very pleased with our sales performance and another record margin in the quarter. We reported 5.5% organic revenue growth year on year, as three of our five business segments exhibited organic revenue growth greater than 10%. Electric vehicles, renewable energy, commercial aviation, and defense end markets remain strong, while the scientific segment, as expected, was impacted by lower demand for COVID vaccine storage. Revenue contribution from high-growth markets such as electric vehicles, green energy, and the commercialization of space increased approximately 35% year-on-year to $19 million in fiscal second quarter 2023. We anticipate this revenue stream to grow by approximately 40%. in FY23. Order trends remain healthy and backlog realizable in under one year grew 2% year-on-year to approximately $269 million. The continued effectiveness of our price and productivity actions improved our margin profile in the quarter and produced our seventh consecutive quarter of record adjusted operating margin. Consolidated adjusted operating margin of 15.2% in fiscal second quarter 23 was a 160 basis point increase year on year and a 20 basis point improvement sequentially, despite a challenging global environment. Four of Standex's five business segments expanded margin year on year, with three segments showing margin expansion of 270 basis points or more. All five of our segments reported operating margin over 15%. As part of our value creation system, We continue to have an active focus on lean initiatives and, in turn, the standardization of operating disciplines across all business units, further leveraging our G&A structure. As a result, we are seeing continued improvement in our ROIC metric, with Q2 FY23 annualized ROIC at 12.3%. Adamir will discuss our financial performance, liquidity position, and capital allocation in greater detail later in the call. In fiscal third quarter 23 on a sequential basis, we expect a slight to moderate decrease in revenue due to unfavorable foreign exchange and the impact of the pro-con divestiture. We expect slightly lower to similar adjusted operating margin compared to fiscal second quarter 23 as price and productivity actions mostly offset lower sales. We expect higher adjusted operating margin compared to the same period a year ago. Now, please turn to slide four. and I will begin to discuss our segment performance and outlook beginning with electronics. Segment revenue of $73 million decreased 5% year-on-year as an organic decline of 0.2% and a 6.1% negative impact from foreign exchange, more than offset a 1% contribution from acquisitions. Most of the end market trends remain favorable, particularly for industrial applications, power management, renewable energy technologies, and EV-related markets. From a regional standpoint, North American market demand was very strong, while China and Europe demand, primarily in the appliances and market, remained soft. We do expect China market demand to start improving after the Chinese New Year. Operating margin of 23.4% increased 100 basis points versus the year-ago period, primarily due to productivity initiatives offsetting lower volume and the currency impact. The pictures on slide 4 highlight the electronic segment's focus on growth markets, such as the expansion and modernization of the electrical grid. In this example, you can see we provide the mission-critical transformers and inductors essential to monitor performance in utility substations. Sequentially, we expect revenue in our third fiscal quarter to improve slightly to moderately, with strong demand across end markets in North America and increased sales into fast-growth markets. The company expects similar to slightly lower operating margin due to unfavorable product mix and plant moves in China and Germany, which were completed in early January. Please turn to slide five for a discussion of the engraving segment. Revenue increased 3% to $38 million, a strong organic growth of 12% more than offset a 9.2% headwind from foreign exchange. Operating margin of 16.9% in fiscal second quarter 23 increased 270 basis points year on year due to realization of previously announced productivity actions in North America and Europe. The segment continues to see positive trends in soft trim tools, laser engraving, and tool finishing. The picture on slide five illustrates how the customer intimacy model is deployed in the engraving business to provide broad solutions. The design, verify, produce process was used with several large OEMs to first develop texture design concepts for new vehicles, then implement them on both hard trim parts and soft trim parts. These projects also leveraged a global supply chain and our global presence allowed a coordinated and seamless simultaneous delivery to meet the customer's launch schedules. In our next fiscal quarter on a sequential basis, We expect revenue to decrease slightly and operating margin to decrease moderately due to unfavorable project mix. We expect more favorable mix in fiscal for the quarter 23, as well as continued growth in soft trim demand, reflecting auto manufacturers increasing move to higher quality interior surfaces and textures. Please turn to slide six, scientific segment. As expected, scientific revenue decreased 22% year on year to $19 million, primarily driven by lower demand associated with COVID-19 vaccine storage. Operating margin of 21.6% decreased 70 basis points year on year due to lower volume more than offsetting price, productivity actions, and lower freight cost. The picture on slide six illustrates a newly designed flammable material and hazardous location storage cabinet that meets required regulatory standards. This differentiated product is primarily used in academic research and industrial settings. On a sequential basis in the fiscal second quarter of 23, we expect slightly lower revenue and a similar operating margin as productivity actions and lower freight costs are projected to offset volume decline. Now, turn to the engineering technology segment page on slide seven. Revenue of $24 million increased 34% year-on-year, reflecting strong growth across all markets. Operating margin of 15.5% increased to 270 basis points year-on-year due to higher volume and the impact of productivity and efficiency initiatives. As pictured on slide 7, our engineering team is leveraging its advanced metal forming capability to enable the world's first zero-emission aircraft. We recently announced a contract to manufacture prototype hardware for the Airbus Zero-E hydrogen-powered aircraft. In fiscal third quarter 23, on a sequential basis, we expect a significant decrease in revenue due to project timing and a slight decrease in operating margin as productivity actions offset a volume decline. We do expect more favorable timing of projects in the fiscal fourth quarter of 2023, which is supported by a healthy backlog. Please turn to slide eight, specialty solutions segment. Specialty solutions revenue of $34 million increased 15% year on year, due to healthy organic growth in hydraulics and display merchandising businesses. Operating margin increased 420 basis points to 16.8%, reflecting price and volume increases and realization of productivity actions. As pictured on slide 8, our display merchandising business has continued to enhance its offering through redesigns of existing products, which is fueling growth and represents about a quarter of business sales. In the fiscal third quarter of 23, on a sequential basis, We expect revenue to decrease moderately to significantly, primarily due to the pro-con divestiture. Operating margin is expected to increase slightly to moderately due to ongoing pricing and productivity actions in the hydraulics and display merchandising businesses. I will now turn the call over to Ademir to discuss our financial performance in greater detail.