Standex International Q4 2023 Earnings Call Transcript

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August 4, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the Standex International Fiscal 4th Quarter 2023 Financial Results Teleconference. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Christopher Howe, Director of Investor Relations. Please go ahead.

Speaker 1

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 2. 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.

Speaker 1

You should refer to Standex's most recent annual report on Form 10 ks 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 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, 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 form a 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, Adameir Sarcevic.

Speaker 2

Thank you, Chris. Good morning, and welcome to our fiscal Q4 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 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.

Speaker 2

Now if everyone can turn to Slide 3, key messages. In the Q4, we reported 7.8 percent 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 $24,000,000 in the fiscal Q4 2024. We anticipate this revenue stream to grow by greater than 20% in fiscal year 2024 to over $100,000,000 Profitability continues at record levels. The continued effectiveness of our price and productivity actions combined with the lower freight costs help us achieve a 9th consecutive quarter of record adjusted operating margin.

Speaker 2

Consolidated adjusted operating margin of 15 4 point 4 percent in fiscal Q4 2023 was 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. 3 of our 5 segments reported operating margin greater than 20% with our Engraving segment approaching 20% margin. With free cash flow of $32,800,000 in the quarter, our net cash position as of June 30 was $22,300,000 We had approximately $372,000,000 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.

Speaker 2

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 end markets and a more stable economic environment.

Speaker 2

On a year on year basis, in fiscal Q1 2024, we expect a slight increase in revenue as strong organic growth in Engraving And the contribution from Intronics helped to offset a slow recovery in China and Europe markets served by electronics and the impact of the ProCon divestiture. On a sequential basis, we expect slightly lower revenue as the contribution from our Mindtronics 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 Q4 2023. We reaffirm our long term financial outlook by fiscal year 2028. These targets include high single digit organic growth to greater than $1,000,000,000 in sales, Adjusted operating margin greater than 19%, return on invested capital of greater than 15% and free cash flow conversion at approximately 100 percent of GAAP net income.

Speaker 2

Let's turn to Slide 4, highlights from our Mindtronics acquisition. We announced earlier this week that we acquired Mindtronics. There are specific strategic and financial criteria we look for in an acquisition, Complementary products, attractive end markets, a defensible competitive advantage and cultural fit. Medtronics has many of these attributes and we are Excited to welcome their team to Standex. Let me begin with an overview of the company.

Speaker 2

Founded in 1990 and based in South Dakota, Medtronic's designs and manufacturers 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 fit within certain fast growing end markets like 5 gs, smart grid and industrial automation. The purchase price was approximately $30,000,000 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 1st full year of ownership. The divestiture of ProCon for $70,000,000 Followed by the acquisition of the Nutronics for $30,000,000 represents an effective round trip of cash as Nutronics sales and operating income contributions Effectively replaced ProCon sales and operating income in year 1 of ownership with further upside potential in the years ahead.

Speaker 2

We were attracted to Medtronics 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 Adamir to discuss our financial performance in greater detail.

Speaker 3

Thank you, David, and good morning, everyone. Let's turn to Slide 5, Q4 2023 summary. On a consolidated basis, total revenue increased 1.9% year on year to $188,300,000 This reflected organic revenue growth of 7.8%, offset by a 5% impact from the ProCon divestiture and a 0.8% impact from foreign exchange. 4th quarter 2023 adjusted operating margin increased 150 basis points year on year to 15.4%, our highest adjusted operating margin in company's history. Our adjusted operating income grew approximately 13.2% on a 1.9% consolidated revenue increase year on year.

Speaker 3

Adjusted earnings per share were $1.76 in the Q4 of fiscal 2023 compared to $1.54 a year ago, approximately 14.3% growth year on year. Net cash provided by operating activities was $40,400,000 in the Q4 of 2023 compared to $29,500,000 a year ago. Capital expenditures were $7,600,000 compared to $10,800,000 a year ago. As a result, Free cash flow was $32,800,000 in fiscal Q4 2023 compared to free cash flow of approximately $18,700,000 a year ago. Now please turn to Slide 6, and I will begin to discuss our segment performance and outlook beginning with Electronics.

Speaker 3

Segment revenue of $79,900,000 increased 11.1% year on year as an organic increase of 12.3% was partially offset by 1.2% negative impact from foreign exchange. Although softness in appliances and distribution end 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 Q4 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 and D investments. Sequentially, we expect slightly higher revenue in fiscal Q1 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.

Speaker 3

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 7 for a discussion of the Engraving and Scientific segments. Engraving revenue increased 14% to $42,400,000 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 soft rim applications in Asia. Operating margin of 18.6% in fiscal Q4 20 23 increased 2 40 basis points year on year due to higher sales and realization of productivity actions.

Speaker 3

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 projects in the Detroit area and in Germany, which will improve customer service and capacity utilization as we go from 2 to 1 site in each of these geographies. These consolidations will result in approximately $3,000,000 of restructuring costs in fiscal 2024 with the payback expected within 2 years. We anticipate starting to realize the benefits of these projects in our fiscal Q4 2024.

Speaker 3

Scientific revenue decreased 2.6 percent to $18,300,000 as higher sales into research and academic end markets were offset by lower demand for COVID-nineteen 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 Q1 2024, We expect similar revenue and operating margin. Now turn to Slide 8 for a discussion of the Engineering Technologies and Specialty Solutions segments. Engineering Technologies revenue of $21,800,000 increased 1.3% year on year.

Speaker 3

Operating margin of 14.2 percent 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 Q1 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 productivity initiatives mostly offset the impact of volume decline and a higher mix of development projects. The long term demand for this segment remain 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 twenty twenty four and beyond.

Speaker 3

Our Specialty Solutions revenue of $25,900,000 decreased 26.6% year on year as the Procon divestiture and the organic decline in the hydraulics business were partially offset by organic growth in the display merchandising business. On a pro form a basis, excluding ProCon, revenue decreased $600,000 or 2.1 percent 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 Q1 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 and the capitalization structure, which remains strong.

Speaker 3

Standex ended fiscal Q4 2023 with $372,000,000 of available liquidity, an increase of approximately $59,000,000 from the prior year. At the end of the Q4, Standex had net cash of $22,000,000 compared to net debt of $70,000,000 at the end of fiscal 2022. Standex's long term debt at the end of fiscal Q4 2023 was $173,400,000 Cash and cash equivalents totaled $195,700,000 With regards to capital allocation, we repurchased approximately 50,900 shares for $7,000,000 in the 4th quarter. We also declared our 236th quarterly cash dividend of $0.28 share, an approximately 7.7 percent increase year on year. In fiscal year 2024, We expect capital expenditures to be between $35,000,000 $40,000,000 compared to approximately $24,000,000 in fiscal 2023.

Speaker 3

I will now turn the call over to David to discuss our key takeaways from our 4 quarter results.

Speaker 2

Thank you, Adamere. Please turn to Slide 10. Standex is in a strong position to deliver solid organic growth as an operating company, driven by accelerating activity and demand within our fast growth end 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 and by the continued progress of our growth efforts.

Speaker 2

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 $200,000,000 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.

Speaker 2

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.

Operator

We will now begin the question and answer session. The first question today comes from Chris Moore with CJS Securities. Please go ahead.

Speaker 4

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

Speaker 2

Good morning, Chris. Good

Speaker 4

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

Speaker 2

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 hydraulics business, they've got a solid end market outlook with infrastructure investment in the coming years in North America.

Speaker 4

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

Speaker 3

Hi, Chris. It's good morning. It's Adam here. So if you kind of our high single digit Sales growth assumes couple of points inorganically that we're going to get from the Medtronic's acquisition or the benefits of the Medtronic's acquisition once you take out ProCon kind of on basis and kind of mid to high mid single digits organic growth for the corporation. That's the math behind it.

Speaker 3

For the most part, we see healthy end markets. We do see some softness in China and Europe, specifically for electronics. We that that's going to get resolved over the next of 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.

Speaker 4

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

Speaker 2

It depends on the business. Engraving is solid and they have a lot of momentum coming into this year. Engineering Technologies backlog would lead to more shipments in the back half of the year, but we have great visibility to that. We are seeing some softness in electronics and appliances, consumer goods related shipments in China and Europe. We're anticipating that will start to pick up in the back half of the year.

Speaker 2

And then throughout, there's this overly fast growth, What we call the fast growth markets, which was about $83,000,000 last year, that will grow to $100,000,000 this year and that's pretty steady quarter after quarter. So if you add all those things up, it's there will be relatively more a little more growth in the second half.

Speaker 4

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

Speaker 2

Yes. Well, there's 2 kinds of funnels we have. We have kind of family owned businesses, privately owned businesses like Mindtronics. And there are There are quite a few out there. We have relationships with many of them.

Speaker 2

The timing is hard to predict because the owners sell for their own reasons at their own times. And in fact, This Mindtronics 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.

Speaker 2

The 2nd category of opportunities are larger deals and we would love to bring in 100,000,000 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. 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 In the high end.

Speaker 4

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

Speaker 2

Thank you, Chris.

Operator

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

Speaker 5

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

Speaker 3

Mike, kind of in general terms, we will probably say about half to 2 thirds Volume 1 third to half depending on the quarter is pricing, but most of it is volume than price.

Speaker 5

Okay, great. And then it seems like everything is 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?

Speaker 2

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

Speaker 3

mean, I think, Mike, we see more strength and weaknesses kind of at the end markets that we play We for example, our magnetics business plays in the U. S, in the North American end market for the most part, and that's been robust. Our engraving end markets are pretty robust. So it's kind of as we kind of look at the markets across Across the globe that we serve, we feel pretty good about the overall health of that.

Speaker 1

I guess

Speaker 2

I would add, I mean, as you know, we have a lot of businesses and they serve different end markets. 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 There's 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.

Speaker 5

But we're

Speaker 2

seeing the same effects as others. But we've got this fast growth market going from $80,000,000 to $100,000,000 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, Makes for a healthy mix of end markets.

Speaker 5

Okay, great. Congrats on the quarter. Thank you. Yes. Thank you,

Operator

The next question comes from Gary Prestachino with Barrington Research. Please go ahead.

Speaker 6

Hey, good morning, Dave and Adam here. Adam here, 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?

Speaker 3

Correct.

Speaker 6

Okay. And that's constant currency, right?

Speaker 3

Correct.

Speaker 6

Okay. And then can you

Speaker 2

talk about

Speaker 6

with this Mindtronics acquisition, How you can leverage their products and their platform to drive increased growth Within that legacy business and within your business itself?

Speaker 2

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 business with the sales synergies that have come from offering their products through our existing channels. And they are and each of those businesses also So if you added up a few $1,000,000 from our other electronics business, we're still getting to know Medtronic, the specific accounts, the specific applications. But our expectation is that over the next couple of years, we'll be adding some We have $2,000,000 to $5,000,000 of sales synergies from that based on the same experience with other although I can't name accounts And applications today.

Speaker 6

No, I understand that. I mean, was Mindtronics 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. Working with America?

Speaker 2

They do have you know what, they have a sales model. It's very similar to ours. So 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 regions, primarily China and North America. But the customer decision is made here in North America.

Speaker 2

So we The hypothesis is we can help them get into customers in Europe some additional customers in Asia and China, we have more reach than they do there.

Speaker 3

Yes. And their customer relationships are extremely Strong, Gary. I mean, that whole customer intimacy model we compete on, and Medtronic is right there with us. And that's one of the things that attracted us to them. And I think as a combination of 2 companies, we'll be able to get they'll be able to help us, we'll be able to help them and then kind of move forward.

Speaker 6

Okay. And then 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, I'm ready to sell. Is that

Speaker 2

Yes. Yes, that's right. If I can just interject one thing, we did make the point During the call that with the sale of ProCon earlier, we had $70,000,000 of proceeds. This was a $30,000,000 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.

Speaker 2

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 then as I mentioned earlier To Chris' question, I think we're positioning ourselves for some larger opportunities.

Speaker 6

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 Are they starting to see the handwriting on the wall in terms of that you're getting bigger presence, more geographic spread?

Speaker 2

Well, I guess just to ask Go ahead. Yes, 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 1st phone call.

Speaker 2

In terms of being competitors, the interesting thing about like Mindtronics 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 Mindtronics. We have competed on some new applications with them over time. We have some similar capabilities.

Speaker 2

But 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 5 gs 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 who they align with.

Speaker 1

Okay. Thank you very much.

Speaker 2

Yes. Thank you, Gary.

Operator

This concludes our question and answer session. I would like to turn the conference Back over to David Dunbar for any closing remarks.

Speaker 2

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 Q1 2024 call.

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Standex International Q4 2023
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