Standex International Corporation

Good day and welcome to the STANDEX International First School Fourth Quarter 2023 Financial Results Teleconference. All participants will be in a 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 this event is being recorded. I would now like to turn the conference over to Christopher Howell, 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 fourth quarter 2023 conference call. We are very pleased with the results which completed a record fiscal year. We continued our trend of record operating margin performance. On the top line, Sales into fast growth markets continued to accelerate, as did new products and new applications. I would like to thank our employees, our executives, and the board of directors for their efforts and continued dedication and support that drove our exceptional fiscal 2023 results. Now, if everyone can turn to slide three, key messages. In the fourth quarter, we reported 7.8% organic revenue growth year on year. led by our electronics and engraving business segments, which both exhibited double-digit organic growth. Our long-term growth profile continues to improve as sales into fast growth end markets grew 67% year-on-year to $24 million in the fiscal fourth quarter 2024. We anticipate this revenue stream to grow by greater than 20% in fiscal year 2024 to over $100 million. Profitability continues at record levels, The continued effectiveness of our price and productivity actions, combined with a lower freight cost, help us achieve a ninth consecutive quarter of record adjusted operating margin. Consolidated adjusted operating margin of 15.4% in fiscal fourth quarter 2023 was a 150 basis point increase year on year. Our margin expansion was driven by our engraving, scientific, and specialty solutions business segments. while our largest segment, electronics, had relatively stable margin. Three of our five segments reported operating margin greater than 20%, with our engraving segment approaching 20% margin. With free cash flow of $32.8 million in the quarter, our net cash position as of June 30th was $22.3 million. We had approximately $372 million of available liquidity to invest in our healthy funnel of organic growth and acquisition opportunities. Adam here will discuss our financial performance, liquidity position, and capital allocation in greater detail later in the call. We are also very pleased to see continued improvement in our ROIC. ROIC of 12.4% in fiscal 2023 improved 130 basis points year-on-year. In fiscal 2024, we expect high single-digit sales growth. We also expect continued margin expansion ahead of our long-term outlook. These expectations are based on operating improvements achieved in fiscal 2023, planned productivity initiatives for fiscal 2024, increased contribution from new products and applications, continued acceleration of our fast growth and markets, and a more stable economic environment. On a year-on-year basis, in fiscal first quarter 2024, we expect a slight increase in revenue, a strong organic growth in engraving, and the contribution from intronix, help to offset a slow recovery in China and Europe markets served by electronics and the impact of the pro-con divestiture. On a sequential basis, we expect slightly lower revenue as the contribution from our Mintronics acquisition offsets unfavorable project timing in engineering technologies and a continued slow recovery in China and Europe markets served by electronics. We expect similar to slightly higher adjusted operating margins compared to fiscal fourth quarter 2023. We reaffirm our long-term financial outlook by fiscal year 2028. These targets include high single-digit organic growth to greater than $1 billion in sales, adjusted operating margin greater than 19%, return on invested capital of greater than 15%, and free cash flow conversion at approximately 100% of GAAP net income. Let's turn to slide four, highlights from our Mintronics acquisition. We announced earlier this week that we acquired Mintronics. There are specific strategic and financial criteria we look for in an acquisition, like complementary products, attractive end markets, a defensible competitive advantage, and cultural fit. Mintronics has many of these attributes, and we are excited to welcome their team to StandX. Let me begin with an overview of the company. Founded in 1990 and based in South Dakota, Mintronics designs and manufactures customized as well as standard magnetics components and products for cable fiber, smart meters, industrial control and lighting, electric vehicles, and home security markets. More broadly speaking, these component and product applications fit within certain fast-growing end markets like 5G, smart grid, and industrial automation. The purchase price was approximately $30 million. This implies a transaction multiple of approximately 8.5 times the last 12 months ended June 2023 EBITDA. We expect the acquisition to be accretive to earnings per share and to achieve a double-digit return on invested capital in our first full year of ownership. The divestiture of Procon for $70 million, followed by the acquisition of Mintronics for $30 million, represents an effective round trip of cash as Mintronics sales and operating income contributions effectively replace Procon sales and operating income in year one of ownership, with further upside potential in the years ahead. We were attracted to Mintronics for its highly complementary customer base and product line, its engineering talent and resources that provide a seamless cultural fit, and for its participation in attractive end markets. We are excited to welcome the team to STANDEX and anticipate that during the integration, we will discover additional opportunities to create value as we have done with our previous acquisitions. I will now turn the call over to Ademir to discuss our financial performance in greater detail.

Thank you, David, and good morning, everyone. Let's turn to slide five, fourth quarter 2023 summary. On a consolidated basis, total revenue increased 1.9% year-on-year to $188.3 million. This reflected organic revenue growth of 7.8%, offset by a 5% impact from the pro-con divestiture and a 0.8% impact from foreign exchange. For quarter 2023, adjusted operating margin increased 150 basis points year-on-year to 15.4%, our highest adjusted operating margin in company history. Our adjusted operating income grew approximately 13.2% on a 1.9% consolidated revenue increase year on year. Adjusted earnings per share were $1.76 in the fourth quarter of fiscal 2023, compared to $1.54 a year ago, approximately 14.3% growth year on year. Net cash provided by operating activities was $40.4 million in the fourth quarter of 2023, compared to 29.5 million a year ago. Capital expenditures were 7.6 million compared to 10.8 million a year ago. As a result, free cash flow was 32.8 million in fiscal four quarter 2023 compared to free cash flow of approximately 18.7 million a year ago. Now, please turn to slide six and I will begin to discuss our segment performance and outlook beginning with electronics. Segment revenue of $79.9 million increased 11.1% year-on-year, as an organic increase of 12.3% was partially offset by a 1.2% negative impact from foreign exchange. Although softness in appliances and distribution and markets in China and Europe remains, industrial automation, power management, renewable energy, and EV-related markets remain robust across our regions. Adjusted operating margin of 21% in fiscal fourth quarter 2023 decreased 150 basis points year-on-year, as the contribution from higher sales and pricing and productivity initiatives were more than offset by unfavorable mix, inflation, and higher R&D investments. Sequentially, we expect slightly higher revenue in fiscal first quarter 2024, as the contribution from intronics and higher sales into fast-growth markets are partially offset by continued slow recovery in China and Europe. We expect similar operating margin on a sequential basis, reflecting a similar product mix. As we move through calendar year 2024, we believe electronics will start to reflect more typical organic growth rates on a run rate basis, bearing any unforeseen economic disruptions. Please turn to slide seven for a discussion of the engraving and scientific segments. Engraving revenue increased 14% to $42.4 million, as organic growth of 15.5% was partially offset by 1.4% headwind from foreign exchange. Organic growth was driven by strong demand in Europe and growth in software applications in Asia. Operating margin of 18.6% in fiscal four quarter 2023 increased 240 basis points year-on-year due to higher sales and realization of productivity actions. In our next fiscal quarter, on a sequential basis, we expect slightly lower revenue, reflecting timing of customer projects and slightly higher operating margin. In addition, we continue to look for opportunities to enhance the long-term margin profile of engraving. As such, we have initiated site consolidation projects in the Detroit area and in Germany, which will improve customer service and capacity utilization as we go from two to one site in each of these geographies. These consolidations will result in approximately $3 million of restructuring costs in fiscal 2024 with the payback expected within two years. We anticipate starting to realize the benefits of these projects in our fiscal four quarter 2024. Scientific revenue decreased 2.6% to 18.3 million as high sales in the research and academic end markets were offset by lower demand for COVID-19 vaccine storage. Operating margin of 25.5% increased 570 basis points year-on-year due to lower freight costs and realization of productivity actions. On a sequential basis in fiscal first quarter 2024, we expect similar revenue and operating margin. Now turn to slide eight for a discussion of the engineering technologies and specialty solution segments. Engineering technologies revenue of 21.8 million increased 1.3% year-on-year. Operating margin of 14.2% decreased 80 basis points year-on-year as an increase in the number of new platform development projects were mostly offset by productivity initiatives. In fiscal first quarter 2024, on a sequential basis, we expect a significant decrease in revenue reflecting customer timing of projects. We expect a slight to moderate decrease in operating margin as productivity initiatives mostly offset the impact of volume decline and a higher mix of development projects. The long-term demand for this segment remained robust. The current backlog and the new platform development funnel are expected to provide a solid foundation for growth in the second half of fiscal 2024 and beyond. A specialty solutions revenue of $25.9 million decreased 26.6% year-on-year as the proclinic divestiture and the organic decline in the hydraulics business were partially offset by organic growth in the display merchandising business. On a pro forma basis, excluding pro con, revenue decreased 0.6 million or 2.1% year on year. Operating margin increased significantly to 24.8% from 15.3% a year ago, driven by higher sales in the display merchandising business, realization of pricing initiatives, and higher mix of aftermarket sales and operational improvements in the hydraulics business. In fiscal first quarter 2024, On a sequential basis, we expect a slight decrease in revenue and operating margin. Next, please turn to slide 9 for a summary of STANDEX 6 liquidity statistics and the capitalization structure, which remains strong. STANDEX ended fiscal four quarter 2023 with $372 million of available liquidity, an increase of approximately $59 million from the prior year. At the end of the four quarter, STANDEX had net cash of $22 million, compared to net debt of 70 million at the end of fiscal 2022. Standex's long-term debt at the end of fiscal fourth quarter 2023 was 173.4 million. Cash and cash equivalents totaled 195.7 million. With regards to capital allocation, we repurchased approximately 50,900 shares for $7 million in the fourth quarter. We also declared our 236th quarterly cash dividend of 28 cents per share and approximately 7.7% increase year-on-year. In fiscal year 2024, we expect capital expenditures to be between $35 million and $40 million, compared to approximately $24 million in fiscal 2023. I will now turn the call over to David to discuss our key takeaways from our four-quarter results.

Thank you, Ademir. Please turn to slide 10. Sandex is in a strong position to deliver solid organic growth as an operating company. driven by accelerating activity and demand within our fast growth and markets. We're excited about the development of these opportunities. I'm proud of our team for our record fiscal performance that was driven by our operational execution and by the continued progress of our growth efforts. For fiscal 2023, we achieved several record milestones that include gross margin, adjusted operating margin, adjusted earnings per share, and free cash flow. In fiscal 2024, we expect high single-digit sales growth, We also expect continued margin expansion ahead of our long-term outlook. We anticipate our fast-growth markets to continue to progress towards our fast-growth markets revenue target of $200 million plus by fiscal 2028. Our regional presence, strong customer relationships, and disciplined approach to pricing and productivity continue to provide protection from supply chain challenges and inflation. As a result, we are confident we will continue to deliver sustainable, profitable growth through this environment. Our strong balance sheet allows us to continue to pursue additional inorganic investments complementary to our strategy. We will now open the line for questions.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

The first question today comes from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a couple questions.

Morning, Chris.

Good morning. Specialty Solutions, operating margin 24.8%. Is that sustainable in the low 20s over the long term? Absolutely.

One of the unsung heroes in the company right now is our display merchandising business. 26% of their sales are coming from new products. They're getting into some new markets. new product categories. They have had a fantastic year, and that is sustainable because of the new products and the new market presence. And then the hydraulics business, they've got a solid end market outlook with infrastructure investment in the coming years in North America.

Got it. Very helpful. Maybe just talk a little bit about the fiscal 24 cadence that you will need to get to the high single-digit growth that you're talking about for this year?

Hi, Chris. It's good morning. It's Adam here. So if you kind of – our high single-digit sales growth assumes a couple of points inorganically that we're going to get from the Mintronics acquisition or the benefits of the Mintronics acquisition once you take out Procon kind of on a net basis. and kind of mid-to-high, mid-single-digit organic growth for the corporation. That's the math behind it. You know, for the most part, we see healthy end markets, and we do see some softness in China and Europe, specifically for electronics. You know, we think that that's going to get resolved over the upcoming quarters. But everything else remains healthy, and we are very optimistic and bullish about our fast growth and market exposure and the growth we are seeing there, and that's kind of the math behind it.

Is the growth a little bit back half loaded, you think?

It depends on the business. Engraving is solid, and they have a lot of momentum coming into this year. Engineering technology's backlog would lead to more shipments in the back half of the year. We'll have great visibility to that. We are seeing some softness in electronics and appliances, consumer good-related shipments in China and Europe. We're anticipating that will start to pick up in the back half of the year. And then throughout, there's this overlay of fast growth, what we call fast growth markets, which was about 83 million last year. That'll grow to 100 million this year, and that's pretty steady quarter after quarter. So if you add all those things up, there will be relatively more a little more growth in the second half.

Got it. Maybe I'll just sneak one more in. You just closed the Mintronics deal. It looks like a nice fit. Maybe just update the M&A funnel a little bit in terms of what you're seeing in the market and your thoughts there.

Yeah, well, there's two kinds of funnels we have. We have kind of family-owned businesses that privately owned businesses like Mintronics. And there are quite a few out there. We have relationships with many of them. The timing is hard to predict because the owners sell for their own reasons at their own times. And in fact, this Mintronics opportunity, we've known Lou, I mean, the president of our electronics business, John, has known Lou for decades. And Lou called John earlier this year and said, I think I'm ready. And it came together in a few months. So it's a little hard to predict the timing, but we think we are well positioned for others. And there are a few out there that could be actionable in the coming quarters. The second category of opportunities are larger deals. And we would love to bring in $100 or $200 million of sales in a single acquisition. That's been relatively quiet in the last year in terms of deals, although we are getting to know the owners better. we're putting ourselves in a position to be included in those processes when they come. It appears we're getting signs. There are a few of those that may come to market in the second half of this year. So I call it a good and robust funnel, both on the low end and the high end.

Terrific. Very helpful. I'll leave it there. Thanks, guys.

Thank you, Chris.

The next question comes from Michael Lang with Benchmark. Please go ahead.

Thanks. Good morning. Congrats on the great quarter. Can you comment a little bit on how much of the 7.8% revenue growth was related to pricing increases?

Mike, you know, kind of in general terms, we would probably say about, you know, half to two-thirds is volume, one-third to half, depending on the quarter, is pricing. But most of it is volume than price.

Okay, great. And then, you know, it seems like everything's going pretty well for all the segments. What are you seeing from a weakness perspective and what type of opportunities would you see from that side?

Well, in terms of market, we call out the weakness in appliances and consumer goods in Europe and China. We think that'll be upside towards the tail end of the year. Other weakness, I don't know.

No, I mean, I think, Mike, we see more strengths and weaknesses kind of at the end markets that we play in. You know, we, for example, our magnetic business plays in the U.S., you know, in the North American end market for the most part, and that's been robust. You know, our engraving end markets are pretty robust. So, you know, it's kind of as we kind of look at the markets across the globe that we serve, we feel pretty good about the overall health of them.

I guess I would add, I mean, as you know, we have a lot of businesses and they serve different end markets. And if you look at more pure play electronics companies that have reported in the last week or so, they're seeing some softness. They're seeing some inventory stocking, destocking, especially in components. We're seeing that too, but that's a smaller part of our business. So it doesn't really affect the top line as much. But we're seeing the same effects as others. But we've got this fast growth market going from $80 to $100 million. We're very confident in that. And the ETG backlog in the second half is very strong. Those things I mentioned earlier with Chris, I think when you add it all up, it makes for a healthy mix of end markets.

Okay, great. Congrats on the quarter. Thank you. Yeah, thank you.

As a reminder, if you wish to ask a question, please press star then 1 to enter the question queue. The next question comes from Gary Prestino with Barrington Research. Please go ahead.

Hey, good morning, Dave and Adam here. Adam, I just want to clarify. You said embedded in your guidance is mid to high single digit organic growth for 2024 on the top line?

Correct.

Okay, and that's constant currency, right?

Correct.

Okay. And then can you talk about, with this Mintronics acquisition, how you can leverage their products and their platform to drive increased growth within that legacy business and, you know, within your business itself?

Well, in the last few years, we've acquired – Agile, Renco, Northlake, other magnetics businesses. And our experience is that we've added about 10 points to the sales of each of those businesses with the sales synergies that have come from offering their products through our existing channels. And each of those businesses also sell, if you add up a few million dollars from our other electronics business, We're still getting to know Mintronic, the specific accounts, the specific applications. But our expectation is that over the next couple years, we'll be adding some, you know, $2 million to $5 million of sales synergies from that, based on the same experience with others. Although I can't name accounts and applications today.

No, I understand that. I mean... Was Mintronics selling outside of the U.S., and that's one of the things that you can do is carry them, their business outside of the U.S. or North America?

They do have – you know what? They have a sales model. It's very similar to ours. They work with engineering teams in America, and they secure the business in America with the application expertise and the application design. Some of the ship-to address actually is in China and in other countries. in other regions, primarily China and North America, but the customer decision is made here in North America. So a hypothesis is we can help them get into customers in Europe and some additional customers in Asia and China. We have more reach than they do there.

Yeah, and their customer relationships are extremely strong, Gary. I mean, that whole customer intimacy model we compete on, Metronix is right there with us, and that's one of the things that attracted us to them. And I think as a combination of two companies, we'll be able to get – they'll be able to help us, and we'll be able to help them, and then kind of move forward.

Okay, and this was just a function. I mean, I assume that this was maybe a family-run business, and the gentleman that was running it, as you said, just said, I'm ready to sell.

Yeah, that's right. If I could just interject one thing. We did make the point during the call that with the sale of Procon earlier, we had $70 million in proceeds. This was a $30 million acquisition. We more than replaced the sales and the operating income from Procon with growth opportunity. And we can also improve the profitability of this business based on our experience with the other businesses. And we think we're well positioned with some other privately owned businesses in America. At some point, we'll do the same. So this is a good example of what has been a classic Standex acquisition. And as I mentioned earlier to Chris's question, I think we're positioning ourselves for some larger opportunities.

But I guess just in general, not to beat a dead horse here, but with a lot of these acquisitions, if you're actually competing with some of these smaller companies, are they starting to see the handwriting on the wall? in terms of that you're getting bigger, bigger presence, more geographic spread?

Well, I guess there's two aspects. First of all, we have a great reputation in the market. So these family-owned businesses, there are other companies, other larger companies acquiring companies like them. Obviously, we're very proud of our reputation. We think we get the first phone call. In terms of being competitors, the interesting thing about Mintronics is this magnetics business is really a customer intimacy business. And the relationship that engineers have with the OEMs is really important to create a long-term relationship. And we only compete on the fringes, frankly, with Mintronics. We have competed on some new applications with them over time. We have some similar capabilities. But the this magnetics market is characterized more by who has what customer relationships and who has what industry expertise. So Medtronics brings us knowledge of some smart grid applications we weren't so strong in, and especially in 5G design. So there's less of a competitive issue there. However, in general, your statement is true that these smaller family-owned businesses, they see some consolidation going on in the industry, and they're getting themselves in a position where they're going to have to choose you know, who they align with.

Okay, thank you very much.

Yeah, thank you, Gary.

Once again, if you wish to ask a question, please press star then 1 to enter the question queue.

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This concludes our question and answer session.

I would like to turn the conference back over to David Dunbar for any closing remarks.

Thank you. I want to thank everybody for joining us for the call today. We enjoy 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 2024 call.

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