Standex International Corporation

Good morning, ladies and gentlemen, and welcome to the Standix International Fiscal Second Quarter 2024 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, February 2, 2024. I would now like to turn the conference over to Mr. Chris Howell, Director of Investor Relations. Please go ahead, sir.

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-GET 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 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 in 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 Starcevic.

Adamir Starcevic Thank you, Chris. Good morning and welcome to our fiscal second quarter 2024 conference call. The quality of our businesses was highlighted in our results as we continued our trend of record adjusted operating margin performance. 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 results. Now, if everyone could turn to slide three, key messages. In the second quarter, sales into fast growth end markets grew 14% year-on-year to $21 million. We remain on track to achieve our long-term target of $200 million in sales into fast growth end markets by fiscal year 2028. As we projected in last quarter's outlook, we experienced the effect of unfavorable project timing in the engineering technology segment and transitory market softness in other markets, which led to an organic decline of 7.4%. This was partially offset by contributions from our recent Mintronics acquisition and favorable foreign currency. In general, we expect market conditions to start moving in fiscal fourth quarter 2024. In addition, we continue to work on an active pipeline of inorganic opportunities, As we announced last quarter, we signed a definitive agreement to acquire Sinew Switch Company. We anticipate this transaction to close during our fiscal third quarter. We also continue to generate strong profitability from the execution of our price and productivity initiatives. In the fiscal second quarter, we achieved record-adjusted gross margin and an 11th consecutive quarter of record-adjusted operating margin. This is the first time in the company history that gross margin was above 40%, and it demonstrates our continued abilities to drive operating improvements while adapting to changing macro conditions. Consolidated adjusted operating margin increased to 90 basis points year on year to a record 16.1%. Three of our five segments reported adjusted operating margin greater than 20%. Again, and in all five segments reported adjusted operating margin greater than 17%. We achieved free cash flow of $19.5 million in the quarter, leading to record-free cash flow year-to-date. Our consistent and improved cash flow generation and ROIC of over 12% further highlights the quality of our businesses. Looking back to February 2021, we communicated a set of long-term financial targets over three to five years. These targets included mid-single-digit organic growth, EBITDA margin above 20%, and return on invested capital above 12%. We are proud to have reached these targets within three years. On a sequential basis, in fiscal third quarter 2024, we expect slightly higher revenue due to the contribution from our pending acquisition of Sanyu and a slight recovery in the electronics and specialty segments. We expect slightly lower adjusted operating margins sequentially due to the impact of a one-time charge related to me reaching retirement eligibility under the stock compensation plan. Excluding this one-time charge, adjusted operating margin would be similar on a sequential basis. Although I am now retirement eligible under STANDEX's stock compensation plan, I don't plan to go anywhere. I remain committed to my role as CEO, and I am excited by our long-term vision for Standex. In fiscal fourth quarter 2024, on a sequential basis, we expect meaningfully higher sales and continued improvement in adjusted operating margin. This outlook assumes slight market recovery in the end market served by electronics and specialty segments, contribution from pending SANU acquisition, and more favorable project timing in the engineering technologies segment. We are reaffirming 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 percent, return on invested capital greater than 15 percent, and free cash flow conversion at approximately 100 percent of GAAP net income. Let's turn to slide four. In January, I celebrated my 10th anniversary at Standex. I'd like to take a little walk down memory lane here because it's important to understand where we are going and how we will get there. First, let's look at our results. At the end of January 2014, the company's market cap was just over $660 million. Now, 10 years later, it has grown to $1.8 billion. We have significantly outperformed the Russell 2000 and kept pace with the S&P 500 over that time, a great accomplishment for a small cap company. The financial results that created that valuation are below. On roughly the same sales, we increased gross margins from 33.4% to 40.3% and nearly doubled EPS. The real story is how we delivered these results. Please turn to page five. Our vision was to evolve from our holding company roots to become a high-performing operating company, building it around strong businesses with defensible competitive advantages and serving growing end markets. We developed a management process that we call the Standix Value Creation System. We evaluated our portfolio to retain businesses that met this criteria and that had an operating income potential of 15%. Perhaps most importantly, we wanted to ensure we attracted and retained a great talent that thrives in our collaborative problem-solving culture. We got to work, and we executed. We significantly retooled and refocused the portfolio. We divested over one-half the sales of the company, reducing the number of businesses from 15 to six. We grew our better businesses with a combination of organic investments and acquisitions. We focused on operational improvements and implemented strong pricing and productivity processes and controls across all businesses. Gross margin grew to 40.3%. At the same time, we increase R&D spending from 0.6% of sales to 2.9% of sales. We serve a better mix of end markets with 36% of our sales now going into markets growing over 5%. The lowest operating margin business in the corporation used to be in the low single digits. Now, our lowest margin business delivers over 15% operating income. The metric I am perhaps most pleased with is how we are creating career paths for our people. In 2014, we filled about 35% of our management positions with internal hires, going outside for the remainder. Now, in 2024, those numbers are reversed, with the majority of our key positions going to current Standex employees. Through these 10 years, we have developed a capability to perform at a higher level and begin to deliver on our commitments. Despite the twists and turns of the markets around us, by working on those things we can control, we delivered the financial results I showed earlier. Now please return to page six. Three years ago, we issued longer-term financial expectations stating over the next three to five years we would achieve the targets shown in the slide I've copied here from the 2021 presentation. We have essentially met them in three years. We delivered EBITDA of 19.6% versus the target of 20%, ROIC of 12.3% versus the target of 12%. Our free cash flow conversion has been operating near our target of 100% of GAAP net income. Our businesses and our teams have shown they can perform at a higher level. Turn to page seven. Last year, we issued updated targets to achieve by 2028. We will do this by executing the same strategy and building on the capabilities we have developed in the past 10 years. A couple of differences are that we do not need significant portfolio reshaping. In addition, much more of our energy is devoted to operating our high-quality businesses and and especially getting better and better at bringing new products to market and penetrating fast-growing markets. We will continue to devote our energies to those things we can control and position ourselves to exceed those targets as well. I will now turn the call over to Admir to discuss our financial performance in greater detail.