Standex International Corporation

Good morning ladies and gentlemen and welcome to the Sandex International Fiscal Check and Quarter 2025 Financial Results Conference Call. At this time, only in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, January 31, 2025. I would now like to turn the conference over to Mr. Christopher 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 .sandex.com. Please refer to Sandex's Safe Barber Statement on slide two. Matters that Sandex 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 Sandex'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-GAP measures of EBIT, which is earnings before interest and taxes, adjusted EBIT, EBITDA, which is earnings before interest, taxes, depreciation, and amortization, adjusted EBITDA, EBITDA margin, and adjusted EBITDA margin. We will also refer to other non-GAP measures, including adjusted net income, adjusted operating income, adjusted net income from continuing operations, adjusted earnings per share, adjusted operating margin, pre-operating cash flow, and pro forma net debt to EBITDA. Adjusted measures exclude the impact of restructuring, purchase accounting, amortization from acquired intangible assets, acquisition-related expenses, and one-time items. These non-GAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Sandex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance. On the call today is Sandex's Chairman, President, and Chief Executive Officer David Dunbar, and Chief Financial Officer and Treasurer, Adimir Sarcevic.

Thank you, Chris. Good morning, and welcome to our Fiscal Second Quarter 2025 conference call. Following strong operating performance in the Fiscal First Quarter, we delivered record-adjusted operating margin in the Fiscal Second Quarter, supported by the highest sales since the divestiture of the refrigeration business in April 2020. Our sales in the fast-growing end markets continue to expand as a percent of the total. Our new product sales are increasing above our projections, and our team's focus on price and productivity continues to deliver strong operating margins. For the remainder of the year, based on increasing order rates and customer activity, we continue to expect our end markets to improve, with the recent Amran-Norayan Group acquisition providing an additional tailwind. Today, we will provide significant updates to our fast-growth market sales, as well as revised and improved 2028 financial expectations. Now, if everyone can turn to slide three, key messages. In the second quarter, sales increased to 6.4 percent, with contributions from acquisitions partially offset by organic decline. Sales from the Amran-Norayan Group exceeded our expectations. Though organic sales were down in electronics due to softness in automotive and general industrial end markets in Europe and North America, our book to bill was 1.02, indicating that markets are improving and that our commercial strategy is taking hold. With two months of Amran-Norayan sales into the electrical grid end market, our Fiscal Second Quarter sales into fast-growth markets were over 20 percent of total company sales. Sales into fast-growth markets were primarily driven by the electrical grid, commercialization of space, and defense applications. I will share more detail on our view of fast-growth markets later in the call. New product sales totaled $14.5 million in the Fiscal Second Quarter, which increased approximately $3.5 million sequentially and more than doubled year on year. I am especially pleased that we continue to demonstrate resilient operating performance from the execution of our price and productivity initiatives and from inorganic investments. As a result, we achieved a record adjusted operating margin of 18.7 percent, up 170 basis points sequentially, and up 150 basis points year on year, led by an adjusted operating margin of 27.6 percent in the electronics business segment. The integration of Amran-Norayan is progressing well and ahead of plan. On a sequential basis in Fiscal Third Quarter 2025, we expect moderately to significantly higher revenue, driven by the impact of the recent Amran-Norayan group acquisition and improving overall demand in electronics. We expect slightly to moderately higher adjusted operating margin due to higher revenue, partially offset by higher investments in selling, marketing, and R&D. For the remainder of the fiscal year, we continue to expect our end markets to improve, with the electrical grid end market providing an additional tailwind. With seven new products just released in the Fiscal Second Quarter, we remain positioned to release more than a dozen new products in Fiscal 2025. Sales from new products are cracking ahead of expectations and are expected to now contribute approximately 200 basis points of incremental growth. Now, if everyone can turn to slide four, an update on our recent acquisition. The acquisition of the Amran-Norayan group last October was the largest transaction in the company's history. Considering the magnitude of the transaction, I am extremely pleased with how our teams have adapted, a testament to the cultural fit of this acquisition. The integration is progressing well and we have achieved all major integration milestones in the areas of finance, HR, and IT. When we announced this acquisition, we estimated calendar year sales in 2024 of approximately $100 million. We are happy to report that the Amran-Norayan group exceeded this target, with Fiscal Second Quarter results higher than anticipated. In fact, the month of December was the highest revenue month in its history. Their contribution led to sales in the fast growth markets exceeding 20% of total company sales for the first time. The growth within Amran-Norayan is being driven by three powerful forces to increase global electrical capacity, increasing living standards in all countries of the world, modernization of existing aging grid infrastructure, and incremental demand from data centers. We anticipate the Amran-Norayan group to continue growing revenue at a healthy double-digit rate in calendar year 2025. Now, if everyone can turn to slide five, fast growth markets redefined. Three years ago, we identified -of-markets driven by long-term secular trends that provide above average growth opportunities. Of these markets, those that provided StandX the best growth opportunities were renewable energy, electric vehicles, soft trim, commercialization of space, and the electronics defense market. Aggregating these sales into a single number provided a shorthand to explain the growth potential of our company. Our fast growth market sales has become an important number for our shareholders as well as for our management as we review priorities. In those three years, our fast growth market sales have grown from $40 million to nearly $100 million. Space, defense, and electric vehicles have been the primary drivers of the growth and remain attractive. Electric vehicle sales have decelerated but are still growing around the world and combined with our increased content per vehicle still represent an above-market growth opportunity for us. Other markets like 5G and soft trim have not provided the lift we expected. Our recent acquisition makes a step-jump change to our growth profile. 100% of the sales of the Amran-Norayan group are into the fast-growing market of the electrical grid, doubling our fast growth sales. Considering this acquisition and the degree to which the global environment has shifted versus three years ago, we are taking a fresh look to more accurately reflect the company's faster growing markets and to show how we continue to pivot towards markets with above-average growth. As the company is comprised today, our new fast growth markets are the electrical grid, renewable energy, electric and hybrid vehicles, commercialization of space, and defense. We removed soft trim and 5G, but of course we still serve customers in these spaces. We have added the electrical grid and defense sales in engineering technologies. In the fiscal second quarter, sales into these redefined fast growth markets were approximately $43 million. In fiscal 2025, we anticipate approximately $170 million from sales into fast growth markets. By fiscal 2028, we anticipate sales into fast growth markets to be greater than $340 million in sales, which would represent greater than 30% of total sales. I will now turn the call over to Adimir to discuss our financial performance in greater detail.

Thank you, David, and good morning, everyone. Let's turn to slide 6, second quarter 2025 summary. On a consolidated basis, total revenue increased approximately .44% -on-year to $189.8 million. This reflected a .3% benefit from recent acquisitions, partially offset by an organic revenue decline of .2% and .7% impact from foreign exchange. With the recent acquisition of the Amaran Orion Group, the largest in the company's history, non-GAAP measures will now exclude amortization of acquired intangible assets, which affects our electronics, engraving, and scientific business segments. You may refer to our appendix slide in the presentation for historical reconciliation. Second quarter 2025 adjusted operating margin increased 150 basis points -on-year to record 18.7%. In the fiscal second quarter, adjusted operating income increased .4% on .4% consolidated revenue increase -on-year. Adjusted earnings per share remain flat -on-year at $1.91. Net cash provided by operating activities was $9.1 million in the second quarter of fiscal 2025 compared to $23.8 million a year ago. Capital expenditures were $7 million compared to $4.3 million a year ago. As a result, we generated fiscal second quarter free cash flow of $2.1 million compared to $19.5 million a year ago. Our fiscal second quarter includes one-time payments of approximately $11 million for acquisition related expenses. Now please turn to slide seven and I will begin to discuss our segment performance and outlook beginning with electronics. Segment revenue of $95.9 million increased .8% -on-year as .3% benefit from recent acquisition was partially offset by an organic decline of .7% and .9% impact from foreign currency. Adjusted operating margin of .6% in fiscal second quarter 2025 increased 560 basis points -on-year as the contribution from recent Amra and Narayan Group acquisition, productivity initiatives and product mix were partially offset by lower volume. Excluding recent Amra and Narayan Group acquisition, our new business opportunity funnel increased approximately 32% -on-year and is currently at approximately $100 million. Our book to bill in fiscal second quarter was $1.02 million with orders of approximately $98 million driven by order strengthening in core business and contribution from the recent Amra and Narayan Group acquisition. Sequentially, in fiscal third quarter 2025, we expect significantly higher revenue driven by the recent Amra and Narayan Group acquisition, accelerating new product sales and higher sales into fast growth and markets and moderately higher adjusted operating margin as contribution from recent acquisition and pricing and productivity initiatives are partially offset by higher investments in selling, marketing and R&D. Please turn to slide 8 for discussion of the engraving and scientific segments. Engraving revenue decreased 23% to $31.5 million driven by organic decline of .2% and a .8% impact from foreign currency. Adjusted operating margin of .3% in fiscal second quarter 2025 decreased 850 basis points due to lower revenue. In our next fiscal quarter, on a sequential basis, we expect slightly to moderately low revenue and adjusted operating margin due to continued softness in the automotive end markets in North America and Europe and less favorable project timing in Asia due to Chinese New Year. To address the continued softness in end markets served by this segment, the company initiated additional restructuring actions that project to yield $4 million in annualized savings once fully implemented starting in fiscal fourth quarter 2025. At the same time, we are starting to see some encouraging signs that the market is slowly recovering in North America based on recent visit to one of the largest tool shops in the region and large amount of tools currently being worked on. Scientific revenue increased .4% to $18.5 million due to the recent acquisition and organic growth of .9% mostly due to higher volume from new product sales partially offset by lower demand from retail pharmacies. Adjusted operating margin of .9% decreased 80 basis points year on year due to the impact of the recent custom biogenic systems acquisition. Sequentially, we expect slightly to moderately high revenue and slightly to moderately lower adjusted operating margin due to higher contribution to revenue from the recent acquisition, additional R&D investments and higher freight costs. Now turn to slide nine for discussion of the engineering technologies and specialty solution segments. Engineering technologies revenue increased .9% to $22.6 million driven by organic growth of .5% slightly offset by .6% impact from foreign currency. This strong organic growth was due to more favorable project timing in the space and market and growth in sales from new products. Operating margin of .3% decreased 80 basis points year on year as higher development work was partially offset by higher sales. Sequentially, we expect slightly low revenue due to project timing and slightly higher operating margin due to product mix. Specialty solution segment revenue of 21.3 million decreased .9% year on year primarily due to the general market softness in display merchandising and hydraulics businesses. Operating margin of .7% decreased 140 basis points year on year. Sequentially, we expect similar revenue and slightly higher operating margin. Next, please turn to slide 10 for a summary of standards of liquidity statistics and capitalization infrastructure. Our current available liquidity is approximately $185 million. At the end of the second quarter, Standex had net debt of $413.2 million compared to $6.2 million at the end of fiscal second quarter 2024. Our net leverage ratio currently stands at 2.9. In fiscal third quarter 2025, we expect interest expense to be between $7 million and $7.5 million. Standex's long-term debt at the end of the fiscal second quarter 2025 was $534.3 million. Cash and cash equivalents totaled $121.1 million. We declared our 242nd quarterly consecutive cash dividend of $0.32 per share, an approximately .7% increase year on year. In fiscal 2025, we expect capital expenditures to be between $30 and $35 million. Next turn to slide 11 that highlights our updated long-term targets by fiscal 2028. We communicated our long-term financial targets by fiscal 2028 two years ago during our fiscal second quarter 2023 earnings call. This prior outlook excluded the impact of potential acquisitions and divestitures. Since then, we have acquired Ventronics, Sunuswitch, Amran Narayan Group, and Custom Biogenic Systems and Divested Procon. As such, the composition of the company is meaningfully different. We now target reaching greater than $1.15 billion in sales by fiscal year 2028 versus the prior target of greater than $1 billion in sales. We now target adjusted operating margin of higher than 23% by fiscal year 2028 versus our prior target of greater than 19% margin. We expect to continue to ramp up our R&D investments with a target over 3%. It is now our expectation that with this financial performance, we will increase our return on invested capital to greater than .5% versus the prior target of greater than 15%. We expect our free cash flow conversion target ratio to remain at approximately 100% of GAAP net income. Our financial targets apply to our current portfolio businesses and exclude the impact of any future acquisition or divestiture. I will now turn the call over to David for concluding remarks.

Thank you, Adhameer. Please turn to slide 12. I'm very proud of our team for their continued operational execution and for their efforts in integrating the largest acquisition in the company's history, both of which helped us achieve our record adjusted operating margin in the fiscal second quarter. We remain optimistic about the long-term secular trends that will benefit from infrastructure upgrades, capacity expansion, and data center demand within the electrical grid, the evolution of space exploration, defense applications, and from the transition from internal combustion to hybrid and electric vehicles in automotive. For the remainder of fiscal 2025, we expect our end markets to improve with sales in the electrical grid and market providing an additional tailwind. To support our future growth, we continue to invest in new product development and new applications across markets with growth potential. We are on track to release over a dozen new products this fiscal year across our businesses, which are now expected to contribute approximately 200 basis points of incremental growth. With the acquisition of the Amra and Narayan Group, we intend to use our cash flows to reduce debt while we maintain flexibility to fund an active pipeline of organic and inorganic growth opportunities that support future growth. We are increasing our fiscal 2028 long-term targets to sales of greater than $1.15 billion, adjusted operating margin of greater than 23%, and ROIC of greater than 15.5%. We will now open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment please

for your first question. Your first question comes from the line of

Gary Prestopino from Barrington Research. Please go ahead.

Hey, good morning, Dave and Adamir.

Morning, Gary. Good

morning. A couple of questions here. First of all, I just want to make sure we clarify this with these new targets. Is the sales number and the adjusted operating margin number, is that an exit rate in Q4-28 or is that for the full year?

That will be, Gary, that will be for the full year or exit rate at the end of FY-27. But so either full year 28 or exiting FY-27.

OK, so full year. OK, great. And then Adamir, could you I know you gave us what the interest expense is going to be orderly going forward. Could you maybe give us an idea of what the DNA is going to be when you have a full three months of the acquisition under your belt on a quarterly basis?

Yeah, so yeah, sure. So our historic amortization expense before the Ameran Orion acquisition was about $2 million per quarter. We think that's probably going to be around $4 to $5 million going forward kind of in fully, you know, once we have three months of Ameran Orion in our run rate. So that will be for the amortization and then for depreciation, $20 to $22 million per year.

OK, so $22 million for depreciation. And what did you say was the amortization? $4 million per quarter?

Yeah, $4 to $5 million. OK. Per quarter. Great. And then given

the when you made the acquisition of Ameran, you said it had about a 40% adjusted EBITDA margin. And I would assume that that holds for what they did in calendar 24?

Yes.

OK. And then last question, and I'll jump off. With this potential Stargate project, who would be your main competition there and what you supply, you know, if this project gets off the ground?

Yeah, so we would get into those facilities in a couple of ways. If you think about Ameran Orion with the instrument transformers, those sales would be into the So we have the equipment providers like Eaton, GE, Schneider, depending on who gets the contracts. So we're actually agnostic about who gets it because they're all customers of ours.

OK, so I guess the inference from that is that if this gets off the ground, these companies would be supplying most of the products and you would be in a great position to be supplying what you supply to each of these companies.

Yeah, so they'll provide the switch gear, the transformers and the substations to support the power there. And in each of those pieces of equipment would be the instrument transformers from our business. OK, thank

you very much.

Yeah, thank you, Gary.

Thanks, Gary.

Thank you. And your next question comes in the line of Chris Moore from CGA Ask Situate Youth. Please go ahead.

Hey, good morning, guys. Thanks for taking a couple, Chris. Yeah, maybe just talk a little bit about the puts and takes for organic growth in 2H. Is Q4 more likely than Q3? Just, you know, what kind of visibility you have towards organic growth at this stage?

I'll say a couple words of turn over to Adimir. If you look first half to second half, the first half, kind of a downside surprise for us was the softness in the engraving business from the auto OEMs with their delays and cancellations of programs. So they're at a low point in Q2. Their Q3 is always soft. As Adimir mentioned in the prepared remarks, though, the tool shops are getting very busy. So we do anticipate that by Q4 and into Q1 next year engraving will pick up. In all other businesses, order trends are good. We see a ramp.

Yeah, no, I think that's right. We're very pleased with the order rates we are seeing in electronics and both in the core business as well as in the Ameran Orion Group. And we think that's going to provide us a nice tailwind as we kind of get into this core, especially when we get into our fiscal Q4 and beyond. So we feel pretty optimistic about general trends we are seeing. Mine is the engraving.

All right. I appreciate that. So I just want to make sure I'm looking at that Ameran correctly. I mean, when you close, you talked about 100 million revenue. You know, in two months, it looks like you said it was a record December. It looks like they close to 25 million. Is there any seasonality here? Can sales be lumpy quarter to quarter? You know, just with some big orders that happened to be in December. Just any thoughts there?

Yeah, sure, Chris. There's really

not much seasonality. And, you know, just as a reminder, we had Ameran Orion in our portfolio as part of standards company for two months. And in those two months, the sales for the Ameran Orion group were about 19 and a half million dollars. So, you know, it's about 10 million dollars per month run rate right now. So you can analyze that and see that, you know, that 100 million is not 100 million anymore. It's more like 120.

OK, got it. And in terms of moving forward, the 30 percent that they did, that's aggressive, but double digit is what we're talking about, you know, more in the somewhere in the teens.

Yeah, so I'd say that the current run rate, the current growth continues to be at that same momentum we showed last year, the 20, 30 percent. But if you look out over a year or two, we're still we're still recommending a 15 percent model. We need some more time with this business as we get to know the customers and the customers plans. We think 15 percent is a very solid expectation, could be higher than that. They certainly are growing faster than that at this moment.

Got it. And maybe just one more big picture on an Amarin in terms of the integration, you know, just trying to get a sense of how long it takes. I mean, for example, you talked about them needing to create a footprint in Europe. Is that is that something that can be done over the next year or, you know, just just any sense is that, you know, kind of what that evolution looks like?

Yeah, no question. Our plan is to have a footprint in Europe in the calendar year. It's a and receiving a lot of a lot of attention. Now we put some of our European management team on this, working with the Narayan team out of India. And we've already had many discussions with customers to sort out the planning of which particular products need to be ramped up first. So this is very much a live project.

Got it. And maybe just the last one for me, the engraving restructuring four million dollars is there is that people's facilities and any any insight there?

It is Chris is both. It's both facilities consolidation and, you know, had come reduction for the roles we don't plan to replace. Got it. I will leave it there. Appreciate it, guys. Thank you.

Thank you.

Thank you. And your next question comes from the line of cross bear black from William Blair. Please go ahead.

Hey, good morning,

gentlemen. Hey, Ross. Hey, guys, can you maybe remind us where capacity stands for the Amron asset and then just maybe what the margin profile was a couple of years back before we saw the, you know, acceleration in orders?

With a margin. Let me start with the last question first. The margin before covid was they were in the mid to upper thirties and you're good. They've kind of ramped into the forties primarily on leverage and and but it's always been a healthy margin profile. So I think we think where they're running now is representative in terms of capacity. They were running their plants at one one shift. And so we're working with them now to add a second shift and even a third shift. So there is. So what would that mean? There may be at 60 percent capacity with the expansion that those shifts can give us. And then, as we just mentioned before, we're looking at this European side to, you know, add additional capacity.

Yeah, that's right.

Yeah, that's very helpful. And then a good segue there. We think about kind of, you know, the coming capacity expansion in Europe. I mean, what does that imply for the 23 percent margin walk? I know you guys also have, you know, a growing productivity pipeline to the core business because, you know, first glance, it looks like that 23 percent is largely just the mix of Amron and the Amort exclusion.

Yeah, I mean, I think, you know, obviously,

Amron margins are extremely healthy. And, you know, we do expect we're going to get, you know, leverage on the sales on the other set up we're going to have in Europe. You know, and, you know, but they also think we can get a very healthy margin expansion on our core businesses. I think historically, Ross, we have proven between price and productivity. You know, we know how to, you know, how to drive margin improvement. And we do expect as we get into the later part of this fiscal year, we're going to see a lot of the market. And hopefully, into next year, we're going to start seeing a healthy organic growth in our electronics core business, which also should help us, you know, drive the drive the margin expansion because it's, you know, and scientific also has been very, very healthy. And those are those are the two segments that drive, you know, the overall margin expansion for the company. And as you have seen, you know, engraving has given us a little bit of a headwind this quarter. You know, we think as we get into the next fiscal year, that's going to obey that and get a little bit a little bit easier from a comp standpoint as well.

Okay, if I can, you know, two more here on scientific with the pharmacy decline, can you maybe help us sties what that, you know, the celebration was versus kind of the growth in the research and industrial? I believe it's like a third of that business and maybe just remind us where we are in the down cycle for pharmacy at scientific.

Well, maybe maybe we would look at I think it's Adam is looking up the numbers at a peak back in Kobe. I think the pharmacies were running with just over 20 million dollars a year. I think now it's about two million. That's right.

Yeah, that's right.

So you can maybe back in there. So we so we have had kind of a strengthening in the other parts of the business. You can kind of do the math there.

But we're really at a trough level here. So that's all upside. And then you last year on electronics, I booked a bill, you know, it was slightly positive. But what were the organic orders for electronics?

Yeah, so the organic

orders, the book to bill for the core business was about one and I'm around the line was at about one point two. So that gets us to about one point two average.

Perfect. All right. Thank you, gentlemen. Thank you.

Thank you. Once again, should you have a question, please press star four by two one on your telephone keypad. Your next question comes on the line of Mike Schlesky from the Davidson. Please go ahead.

Hey there.

Good morning. Thanks for taking my question.

I.

Hey, David, I want to talk about maybe your thoughts on the new product launches and the pipeline there. I was kind of curious as to what might happen after Christmas 2025, which is really only a few months away at this point. Do you have a similar cadence for next year or maybe even an exploration ahead? Just give us some thoughts as to what the next wave of new product discussions might look like.

Yeah, so we do have a look at F.I. 26. I think we've got roughly the same. Well, you know, it's 18 months out to the to the end of fiscal year 25. But the fiscal 26, the products that are queued up to be released in fiscal year 26, about the same order of magnitude of as those in F.I. 25. So we've got, you know, we started we started the new product development three or four years ago. It takes a while for these things to start coming out, but the pipelines are full. So we anticipate a stream of new products every year going forward. And this is the first full year that your first year, the pipelines have

been full in launching new products. Great. My other question,

you know, there have been some successful space launches over the last month or two here from some some newer players or players expanding greatly in what they're doing in the space initiatives. Can you comment on are there any like major chunky pieces of business coming in the next couple of quarters that we should be aware of for our models or do you see more of a smooth delivery

pipeline ahead? Let's see. First of all,

our. You know, our our content in space is on the larger vehicles. So some of the newer players have heard about have have smaller smaller vehicles and we don't make we don't make the domes for them. So if you if you listen to the the launch announcements from ULA from larger the larger the larger vehicles from everybody, that's what drives our business. And that is still ramping into next year and the year after and then should be kind of an undergraduate and steady increase as we get to twenty six, twenty seven,

twenty eight. Great. I'll leave it there. Thanks so much. All right. Thank you, Mike.

Thank you. There are no further questions at this time. I would not like to turn the call over to Mr. David Dunbar for any closing remarks.

I want to thank everybody for for listening to the call today. We enjoy reporting on our progress at Standex. And finally, I want to thank our employees, the board of directors and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal third quarter. Twenty twenty five call.

Thank you. And this is today's call. Thank you for participating in the all disconnect.