Standex International Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Standex International Fiscal First Quarter 2025 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. This call is being recorded on Tuesday, October 29, 2024. I would now like to turn the conference over to Christopher Howe, Director of Investor Relations.

Operator

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 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 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

Speaker 2

of

Speaker 1

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.

Speaker 3

Thank you, Chris. Good morning. This is an exciting day for us at Standex as we report on our fiscal Q1 2025 results and share details of our most recent acquisition announced earlier this morning. First, a brief summary of our quarterly results. Following record profit and cash generation in fiscal 2024, we achieved record gross margin above 40% in the fiscal Q1 with operating margin near 16% despite challenging general market conditions that pressure the top line.

Speaker 3

Behind the scenes, our engineering sales and marketing teams continue to ramp up new product development and we are on track with our new product releases in fiscal year 2025. In fiscal year 2025 based on recent order rates and customer interaction, we continue to expect our end markets to stabilize in the second quarter and strengthen in the second half. Last night or this morning, we acquired Ameren Instrument Transformers and Narayan Powertech, leading manufacturers of low voltage and medium voltage instrument transformers, in separate transactions for a combined enterprise value of approximately $462,000,000 Going forward on this call, we will refer to these entities collectively as the Amarin and Orion Group. These transactions are expected to be immediately accretive to Standex's revenue growth, EBITDA margin, operating margin, earnings per share and free cash flow. Over the last 3 years, the Ameren Orion Group has increased revenue at an average cumulative annual growth rate of 30%.

Speaker 3

It expects approximately $100,000,000 of revenue in calendar year 2024 with adjusted EBITDA margin north of 40%. This acquisition enhances our presence in the fast growing high margin electrical grid market driven by infrastructure upgrades, capacity expansion and rising data center demand. Standex's exposure to fast growth markets increases to approximately 25% of total sales on a pro form a basis for fiscal 2024. Furthermore, we are extending our geographic reach into the domestic Indian market and strengthening our technical expertise in low to medium voltage technologies. I will share more details on this acquisition later in the call.

Speaker 3

Now if everyone can turn to Slide 3, key messages. In the Q1, sales declined 7.7% with contributions from acquisitions partially offsetting an organic decline. The sales decreased in electronics due to continued soft demand in general industrial end markets in Europe, orders continue to strengthen indicating that markets are improving and that our commercial strategy is taking hold. We also continue to experience an impact from a slowdown of new vehicle introductions in North America and delays in general market softness in Europe affecting our Engraving segment. We continue to expect demand to improve as we enter the second half of fiscal twenty twenty five.

Speaker 3

Sales in the fast growth end markets were flat year on year at $20,000,000 in the Q1. Sales into electric vehicles, defense applications and commercialization of space grew year on year respectively, but were offset primarily by demand conditions affecting the soft trim business in our Engraving segment. We expect sales into fast growth end markets as defined here to improve sequentially and year on year in the fiscal Q2. New product sales increased approximately 20% year on year to $11,000,000 in the fiscal Q1. We continue to demonstrate resilient operating performance from the execution of price and productivity initiatives.

Speaker 3

As a result, we achieved record adjusted gross margin of 41.1 percent, up 2 40 basis points on a sequential basis and adjusted operating margin near 16%. Research and development expenses were 2.8% of sales as we continue to invest in new product development. 3 of our 5 segments reported adjusted operating margin of approximately 20% or higher. Looking ahead on a sequential basis, in fiscal Q2 2025, we expect moderately to significantly higher revenue driven by the impact of the recent MRN Orion Group acquisition, more favorable project timing and engraving and improving overall demand in electronics and specialty. We expect slightly moderately higher adjusted operating margin benefiting from higher sales partially offset by increased investments in selling, marketing and R and D.

Speaker 3

We also expect the Ameren and Orion Group acquisition to be slightly accretive to adjusted earnings per share in the fiscal Q2. As mentioned in my beginning comments, the Ameren Narayan Group acquisition is expected to be immediately accretive to all key financial metrics. The entirety of its revenue resides in fast growth markets. As a result, our exposure to fast growth markets increases to approximately 25 percent of sales on a pro form a fiscal year 2024 basis from 13% of sales prior to the acquisition. In the fiscal Q1, we launched 3 new products and remain on track to release over a dozen new products.

Speaker 3

We anticipate new products released in fiscal year 2025 to contribute over 100 basis points of incremental growth. Considering our acquisition of the Ameren Orion Group, we will provide an updated long term financial look on our fiscal Q2 earnings call. Please turn to Slide 4, an overview of the Ameren Orion Group. Ameren Orion Group is a market leader in low and medium voltage instrument transformers, providing custom engineered products that serve leading global OEMs and utility customers. It is comprised of Ameren instrument transformers headquartered in Sugar Land, Texas and Orion PowerTech Limited headquartered in Gujarat, India.

Speaker 4

It is

Speaker 3

a classic customer intimacy business. It has developed a business model focused on rapid prototype development, reliability, fast delivery and customization creating long term customer relationships. The Ameren Narayan Group is vertically integrated and has impressive manufacturing and engineering talents. Notably, its presence in India expands our footprint in one of the world's fastest growing economies. The Ameren Narayan Group has grown revenue at an average growth rate of nearly 30% over the last 3 years.

Speaker 3

In calendar year 2024, it expects revenue of approximately $100,000,000 Amarin Orion's mission critical products and Amarin and Orion's mission critical products and proprietary processes help generate sustainable EBITDA margins greater than 40%. I am delighted to welcome the 7 50 employees of Amarin and Orion to Standex. We are gaining a very experienced and capable team with a compatible culture and we look forward to forging an exciting future together. Please turn to Slide 5, which highlights the strong combined presence across the power value chain. Ameren Orion's broad portfolio of custom engineered products service critical components in the power transmission and power distribution markets.

Speaker 3

Its position in the power value chain is unique and fills in critical areas where Standex does not have a strong presence today. Amarin Orion's products are complementary to Standex's existing offering and are a natural extension into high growth applications. It has a very strong presence in power transmission and power distribution markets where Standex has limited exposure. On the other hand, Standex has a position in the commercial and residential consumption markets. The combined entity deepens coverage across all three stages of the power transmission market.

Speaker 3

Please turn to slide 6, which highlights secular tailwinds that are driving transformer market growth. Ameren Orion is well positioned to capitalize on several secular market trends. The growing need to expand electrical grid capacity is at an inflection point. To achieve country's national energy and climate goals, the global grid must expand from 80,000,000 kilometers to 170,000,000 kilometers with 50,000,000 kilometers of the existing grid to be replaced or a total construction of 175 percent of the entire existing grid in the next 25 years. The U.

Speaker 3

S. And other nations around the world have passed sweeping legislation in recent years that is intended to help fund grid expansion. We continue to see new project announcements, which increased demand across multiple applications, including data centers, renewables and large scale utility upgrades. The current rapid growth in demand for electricity is driven by increased living standards across the world, the need to upgrade old infrastructure and significantly new sources of demand, especially data centers. Finally, the success of the global energy transition depends on rapid expansion of the grid.

Speaker 3

These market tailwinds provide exciting long term growth potential. Now if everyone can turn to Slide 7, which highlights the complementary capabilities of Ameren and Narayan. This acquisition presents a compelling opportunity to unite our unique capabilities and leverage our complementary offerings to create a stronger combined leader in custom manufacturing of power management components. Our combined product suite and global manufacturing footprint enhances our customer value proposition and strengthens our go to market capabilities. Amarin, Orion brings extensive electrical grid market knowledge and new technologies to our product portfolio.

Speaker 3

As part of Standex, we expect to provide Amarin and Orion with resources that will accelerate the growth of their business, particularly through capacity expansion plans and access to our global distribution network. Amarin Narayan also adds an important presence in India, one of the fastest growing economies in the world. Additionally, Standex's presence will help accelerate their growth in Europe. I will now turn the call over to Adamir, who will discuss the details of this transaction and our combined financial profile.

Speaker 4

Thank you, David, and good morning, everyone. Please turn to Slide 8, detailed transaction summary. As David mentioned, Standex has acquired Ameren Orion Group for combined enterprise value of $462,000,000 on a cash free debt free basis using a mix of cash and stock. The consideration mix was comprised of 85% cash or 154,000,000 and 15% stock or $27,000,000 for the Ameron entity and 90% cash or $254,000,000 and 10% stock or $28,000,000 for the Narayan entity. The cash consideration will come from a combination of cash on hand and our credit facilities.

Speaker 4

This acquisition fits perfectly within our strategy to accelerate growth in secular fast growth end markets. We remain committed to maintaining a strong investment grade balance sheet and intend to focus our capital allocation priorities on debt repayment in the next 2 years. We expect to achieve a net leverage ratio below 1 within 24 months. Now if everyone can turn to Slide 9, which highlights the enhanced financial profile and the end market exposure. The addition of Ameren Orion Group will immediately enhance Standex's financial profile and significantly expand our end market exposure in fast growth markets, while growing our largest business division.

Speaker 4

In the 1st full year as a combined company, the margin profile will represent over 200 basis points expansion opportunity versus Standex's standalone EBITDA margin. In addition, our Electronics segment will now represent over 50% of total Standex's revenue. In fiscal year 2024, on a pro form a basis, the addition of Ameren Orion Group to our existing definition of fast growth end markets increases our exposure to fast growth markets from 13% of sales to approximately 25%. Let me turn the call back to David to summarize this highly strategic and transformative acquisition.

Speaker 3

Thank you, Adamir. Please turn to Slide 10. Ameren Orion represents a highly strategic opportunity for Standex. The company's technical design capabilities, customer relationships and expertise in the electric grid market fit perfectly in our portfolio and we see ourselves as the right partner to enable the continued growth of the business. Ameren Orion opens up a $2,000,000,000 addressable market for Standex and aligns with our strategic goals of identifying new high growth markets that will accelerate Standex future growth.

Speaker 3

As the largest acquisition in Standex's history, this is a key milestone for our business and builds on our history of successfully creating value in the electronics space. Now I will turn the call back to Adamir to discuss our Q1 fiscal 2025 results.

Speaker 4

Thank you, David. Let's turn to Slide 11, Q1 2025 summary. On a consolidated basis, total revenue decreased approximately 7.7% year on year to $170,500,000 This reflected an organic revenue decline of 11.4% and a 0.1% impact from foreign exchange, partially offset by 3.8% benefit from recent acquisitions. Q1 2025 adjusted operating margin was flat year on year at 15.9% and adjusted operating income decreased 8% on a 7.7 percent consolidated revenue decrease year on year. Adjusted earnings per share decreased 1.7% year on year to $1.71 Net cash provided by operating activities was $17,500,000 in the Q1 of fiscal 2025, compared to $16,400,000 a year ago.

Speaker 4

Capital expenditure was $6,700,000 compared to $4,300,000 a year ago. As a result, we generated fiscal Q1 free cash flow of $10,800,000 compared to $12,100,000 a year ago. Now please turn to Slide 12, and I will begin to discuss our segment performance and outlook, beginning with Electronics. Segment revenue of $77,700,000 decreased 4.8 percent year on year as 8.5% benefit from recent acquisitions and 0.3% benefit from foreign exchange were more than offset by an organic decline of 13.7%. Adjusted operating margin of 21.9 percent in fiscal Q1 2025 increased 150 basis points year on year as the contribution from recent acquisitions, productivity initiatives and product mix were partially offset by lower volume.

Speaker 4

Our new business opportunity funnel increased approximately 38% year on year and is currently at approximately $99,000,000 As David highlighted in his comments, we continue to see encouraging signs that markets are starting to recover, which is further supported by positive order trends. Orders in electronics increased 15% sequentially to approximately $75,000,000 the highest orders quarter in over a year. Sequentially, in fiscal quarter Q2 2025, we expect significantly higher revenue driven by the recent Amran Narayan Group acquisition and higher sales into fast growth end markets and slightly to moderately higher adjusted operating margin

Speaker 2

due to

Speaker 4

the recent acquisition and pricing and productivity initiatives, partially offset by higher investments in selling, marketing and R and D. Please turn to Slide 13 for a discussion of the Engraving and Scientific segments. Engraving revenue decreased 18.2 percent to 33,400,000 dollars driven by organic decline of 17.5 percent and a 0.7% impact from foreign exchange. Operating margin of 17.5% in fiscal Q1 2025 decreased 110 basis points year on year due to slower demand in North America and Europe, partially offset by productivity initiatives. In our next fiscal quarter, on a sequential basis, we expect moderately higher revenue and slightly higher operating margin due to more favorable project timing in Asia and Europe and productivity initiatives.

Speaker 4

Scientific revenue decreased 2.7% to $17,700,000 due to lower demand from retail pharmacies, partially offset by higher volume from new product sales. Operating margin of 26.8 percent decreased 30 basis points year on year as the impact of lower volume and higher freight costs more than offset productivity actions. Sequentially, we expect similar revenue and slightly lower operating margin due to continued investments in R and D and higher freight costs. Now turning to Engineering Technologies and Specialty Solutions segments. Engineering Technologies revenue increased 12.7% to $20,500,000 driven by organic growth of 13.3%, slightly offset by 0.6% impact from foreign exchange.

Speaker 4

This strong organic growth was due to more favorable project timing in the space end markets that drove growth in new product development and new applications. Operating margin of 19.5 percent increased 2 90 basis points year on year, reflecting leverage on higher sales and pricing and productivity initiatives. Sequentially, we expect similar to slightly higher revenue due to new products and new applications and slightly lower operating margin due to product mix. Specialty Solutions segment revenue of $21,100,000 decreased 18.3% year on year, primarily due to softness in general market conditions in the display merchandising business and in the hydraulics business. Operating margin of 16.8% decreased 490 basis points year on year.

Speaker 4

Sequentially, we expect slightly higher revenue and operating margin. Next, please turn to Slide 15 for a summary of Standexx liquidity statistics and the capitalization structure. At the end of the Q1, Standex had net cash of $15,600,000 compared to net cash of $5,300,000 at the end of fiscal quarter 2024. Standex's long term debt at the end of fiscal Q1 2025 was $149,000,000 cash and cash equivalents totaled $164,600,000 dollars We declared our 241st quarterly consecutive cash dividend of $0.32 per share, an approximately 6.7% increase year on year. In fiscal 2025, excluding the Ameren Orion Group acquisition, we expect capital expenditures to be between $35,000,000 $40,000,000 Following the acquisition of the Amaran and Orion Group, our net leverage ratio is approximately 2.2 times and our available liquidity is greater than $300,000,000 I will now turn the call over to David to discuss our key takeaways from our Q1 results and our acquisition of the Ameren Orion Group.

Speaker 3

Thank you, Adamir. Please turn to Slide 16. I'm very proud of our team for their continued operational execution that led to our record gross margin in the fiscal Q1. I'm also especially proud of the creativity, the commitment that it took to execute this very complex transaction with Ameren and Orion Group. And we also saw a lot of creativity and collaboration in the Ameren Orion teams that reinforce to us we are going to make a great team together.

Speaker 3

The acquisition significantly expands our presence in the fast growing high margin electrical grid end market benefiting from infrastructure upgrades, capacity expansions and data center demand. Now with this acquisition, our exposure to fast growth markets has effectively doubled on pro form a fiscal 2024 basis. We look forward to welcoming the entire Ameren Orion team to our company and are excited by our combined growth potential. To support our future growth, we continue to invest in our engineering capabilities to drive new product development and new applications across markets with growth potential. In fiscal year 2025, we continue to be on track for new products to be released in every one of our businesses, which are expected to add over 100 basis points of incremental growth.

Speaker 3

With the acquisition of the Ameren Orion Group, we intend to use our cash flows to reduce debt while we continue to assess an active pipeline of organic and inorganic growth opportunities that support future growth. We expect to reduce our net leverage ratio below 1x EBITDA within the 1st 24 months post transaction. With the added exposure to high margin fast growth markets, we've never been in a better position as a company to offset challenging market conditions and capitalize on market opportunities. Considering our acquisition of the Ameren and Orion Group, we will provide an updated long term financial outlook on our fiscal Q2 earnings call. We will now open the line for questions.

Operator

Thank Your first question comes from Christopher Moore at CJS Securities. Please go ahead.

Speaker 5

Good morning, guys. Congratulations.

Speaker 3

Good morning, Mike. It looks

Speaker 5

like a lot of work went into this one for sure.

Speaker 6

Good morning, Mike. Maybe just

Speaker 5

absolutely. Just in terms of kind of a reasonable expectation for organic growth for 'twenty five, I know things are kind of stabilized in Q2 and pick up. Are you expecting organic growth to be slightly positive for the year or just how should we look at that?

Speaker 4

Yes, I think Chris, it's Adam here. I think, obviously, electronics is now our biggest segment by far. And as we look through our Q2 and as we look at our recent order rates, we feel the market is stabilizing, is starting to pick up. So Q2 will not be able to be having an organic growth in fiscal Q2. As we move to Q3 and Q4, we think it's not unreasonable to expect that the electronics kind of a core business will have mid to high single digits organic growth.

Speaker 4

And obviously when you put the Ameren acquisition on top of that and them growing at a pretty significant CAGR, we have pretty high expectations for that business. Engraving business has been challenged with some of the push outs from the OEMs. So we now look at Engraving as being significantly contributing to organic growth this fiscal year. And then when you look at the Engineering Technologies, for example, they are growing at a pretty significant rate, double digit organic growth in the quarter and we expect that to continue. Scientific is starting to recover.

Speaker 4

I would probably tell you as we move to the rest of the year, probably kind of a mid single digit growth. And that specialty has been kind of choppy, a little bit around U. S. Elections and uncertainties as to what's going to happen. So we'll kind of monitoring what happens in that segment and we'll obviously provide a little bit more guide on that as we see what happens after the election.

Speaker 4

So I don't know if hopefully that helps.

Speaker 5

No, it does. I appreciate that. So in terms of the acquisition, can you talk a little bit more what does it mean to be sister companies? Is there a lot of overlap between what they do? Is most of production happening out of one facility?

Speaker 5

I'm just trying to understand kind of how that looks?

Speaker 3

Yes. It's we look at it as one global company. It was founded in the '90s in India. With success there, they then expanded into the U. S, created a separate legal entity to serve the U.

Speaker 3

S. Market. Initially, really all the design expertise, the supply chain came from India. In the last 20 years, the business in Houston has been increasing its own technical staff, its engineering team has had some they have ability to customize designs in the U. S.

Speaker 3

For U. S. Customers. But

Speaker 4

it's

Speaker 3

the same family has founded and grown the teams, it's similar culture across the businesses. But there are 2 legal entities. Maybe that's more inside baseball for us because it complicated the transaction because we had to acquire the entities separately, but it's effectively coming into us as a single global business.

Speaker 5

Got it. That's helpful. So you talked about growth over the last 3 years 30%. Is a couple of things there. Is that a reasonable target for this business for the next 3 to 5 years or just any thoughts there?

Speaker 3

Well, as we get our feet on the ground to get to know each other, we would we'd love to see that. If you look at the external data, the increase in investment in Grid, their own backlog, there's a lot of momentum in that business. I would say for planning purposes, if you think mid teens would be a very safe number to plan growth around. And then as the coming quarters roll out, with our experience, we'll have better and better visibility.

Speaker 5

Got it. That's helpful. Obviously, data center is a hot term these days. The $100,000,000 revenue, is that is half of that data center is just a piece of it and that's the fast growing piece or just trying to understand kind of the end market splits

Speaker 4

a little bit.

Speaker 3

Right. The products they make are agnostic as to what actually is pulling the electricity. So anything that drives expansion of the grid will drive their sales. And I think they say I don't know what the percent, the incremental investment in the grid of 10% to 15% simply for data centers would be 10% to 15% of the growth for this business. But there's also aging infrastructure around the world.

Speaker 3

Well, just in the U. S, the fires in Texas and Hawaii and California caused by old grid, that needs to be replaced and upgraded. That will drive demand. And in much of the world, the growth in living standards depends on more electricity to more rural areas. That will drive a lot of instrument issues.

Speaker 3

So all of these things drive the same product, but certainly data centers is another 10%, 15% growth on top of that.

Speaker 5

That's awesome. A lot of fast growing markets here. I will jump back in line. I really appreciate it guys.

Speaker 4

Thank you. Thanks, Chris.

Operator

Thank you. Next question comes from Michael Lake at Benchmark. Please go ahead.

Speaker 6

Thanks. Good morning. Congrats on the acquisition. Just want to follow-up on Chris' questions there. So just on the growth of the 30% growth that they've historically had for the acquisitions, I thought I heard you say on the conference call that you would that by joining Standex, it could accelerate the growth, but then you just answered that where it should be modeling the teams growth.

Speaker 6

Can you just explain that please? Yes.

Speaker 3

We're asking you to be conservative. Let us get a quarter or 2 under a belt to get to know the business and the customers. You can call us a little conservative here with that number. We think that's a very, very dependable number, the mid teens.

Speaker 6

Okay, great. And then just on the customer, is there any major customer, any key customer concentration?

Speaker 3

No. They serve all the big players in the OEM equipment, both in Europe and in the U. S. And in India. And in fact, their European customers have really been pressuring them to create a footprint in Europe.

Speaker 3

And so we can really help accelerate that. They've got plans and can make made a step or 2, but with our team, we can really accelerate that, better serve those European customers. But they're all listed on Page 4 of the earnings deck and you'll see all the familiar names.

Speaker 6

Okay, great. And then just on the EBITDA margin is obviously very strong. Usually when acquisitions you get some leverage, is there opportunity to even increase that EBITDA ahead where it is from this business?

Speaker 3

I would say that they would increase it through growth, through leverage on the top line as opposed to cost any cost synergies. I think we'll be able to expand more cost effectively. So going into Europe, for example, we've got a team that can leverage and their growth should be a little more efficient and speedy.

Speaker 6

Okay. And then just last question, the pipeline is a little lighter than it's been, but your book to bill was extremely strong. Can you just comment on that a little bit more?

Speaker 4

Mike, is that about electronics?

Speaker 6

Yes.

Speaker 4

Yes. Now look, I mean, we look obviously, we look at electronics orders daily. And we have said on our last conference call that we have seen an uptick, that uptick has continued. Dollars 75,000,000 worth of orders in the quarter is the highest orders quarter we had in over a year. And we fully expect that we're going to be at that number maybe a little bit higher in this fiscal quarter as well from an order standpoint.

Speaker 4

So we see the market stabilizing, starting to recover and that makes us cautiously optimistic as we enter the second half of our fiscal year.

Speaker 6

Okay, great. Thanks guys. Congrats on the acquisition.

Speaker 3

Thank you, Mike.

Operator

Thank you. Next question comes from Mike Schloskey at D. A. Davidson. Please go ahead.

Speaker 2

Good morning. Thanks for taking my questions. Looking at the acquired entities, the $100,000,000 of revenue with 4% income margin, it's hard to argue with those numbers. But I do have to ask, do you see any synergies post deal that we should be kind of modeling here?

Speaker 3

The synergy we described are more to position them better to grow into Europe. We think they help us cross selling our other products into the Indian market through their relationships. This business is running so well. They have things they can teach us. We're not going to rapidly drive cost synergies in terms of their organization.

Speaker 3

But of course, you will look at sourcing. I think they've got some sourcing relationship for the better position than we do. They have an India supply chain, which is very exciting to us, which we can leverage. So I'd say those are lower percentage impacts on value creation in the near term. The primary thing is to help them grow and gain the leverage on the top line.

Speaker 2

Okay. This may be in some kind of filing. There's a lot being fired at us this morning. If I missed it, I apologize. Have you the shares that are being issued as part of the deal, is that priced as of like yesterday's closing price for Standex or I'm not sure what to assume there?

Speaker 4

30 day average, Mike.

Speaker 2

Okay, great. And just turning to the ongoing businesses, I want to ask about the Engraving margins. They were up, I don't know, 4 or maybe even 5 points from the prior quarter. And I don't recall you being quite that bullish on the margins for Engraving. And with sales being down, it's even more surprising to see an up quarter from the previous quarter.

Speaker 2

What's the story there? Was there a mix in the Q1 here? And given what you're seeing right now, does it make sense to step away from any customers if they're not providing the appropriate returns on your investment?

Speaker 4

Yes, I think, Mike, there's a little bit of a mix, but there's a lot of also a lot of productivity actions that business has taken over the last few quarters. If you recall, we took some restructuring actions in Germany and the United States. We continue to look at leveraging our cost base more effectively. So that's kind of what drove the margins to where you see them today. And we expect to continue with some of those actions as we get into our second the Q2 and the rest of the fiscal year.

Speaker 4

And as far as our footprint and where we operate in the customer we serve, yes, sure. I mean, we obviously look at that consistently and when things don't make sense for us, then we'll reconsider where we operate and how

Speaker 6

we operate.

Speaker 2

Okay. All right. I appreciate the answers. I'll pass it along.

Speaker 7

Thank you, Mike.

Operator

Thank you. The next question comes from Gary Prestopino at Barrington Research. Please go ahead.

Speaker 6

Yes. Good morning, all. Several questions here. First of all, can you consolidate this immediately? Or do you have to wait till you get this India regulatory approval?

Speaker 4

No, Gary. I mean, it's been signed and closed and the acquisition has been consummated. So it's done. The only issue there is about 10% of the Orion ownership that is going to be held by minority owners at this point, the current owners of the Orion. And we expect we're going to get that Indian regulatory approval within the next 3 to 6 months, in which case we're going to convert them into shares and then we'll own 100% of the Orion entity.

Speaker 4

Okay. Today we own 90%.

Speaker 6

Okay. Of the combined entity, you said it's about $100,000,000 of revenues, right? Can you break that down geographically on a broad brush, Europe, U. S, South America, Asia?

Speaker 4

There's not much in Europe. I would probably tell you it's about 30%, 40% United States and the rest would be Asia.

Speaker 2

Yes. 55%?

Speaker 4

Yes, 55%, yes. That would

Speaker 3

be Asia 45% out of the Texas business.

Speaker 6

Rest of is Asia. Okay. Now is there particularly with your Indian operation, is there a functional currency over there, the rupee or are they how are they billing? I mean, are we going to have FX risk here regarding the rupee given they've been in

Speaker 3

the No.

Speaker 2

Well, that's a good question. So

Speaker 3

they're basically in country for country. So their supply chain is India, they supply India customers from their India plant for the India supply chain. There's a single digit 1,000,000 shipments into Europe. We want to supply that from a European site, which we will build with them. So we'll be in the Eurozone, our cost will be in Euro.

Speaker 3

And then the North American site is in Texas. There is some sourcing from India because the basic supply chain goes back through India. So I hope that gives you an idea that the footprint answers your question.

Speaker 6

Well, no, I'm just trying to understand. I mean, how when this entity was a separate entity, how are they billing? Are they billing in rupees? And then you have to convert that back into dollars once the billing is done?

Speaker 3

They build their Indian customers in rupee. All the U. S. Customers, which is 45% of the sales, those are dollar transactions and dollar costs. And the exports to Europe are in Europe, but that's just a few $1,000,000

Speaker 6

Okay. That's fine. Thank you. And then, did you say this opens up a $200,000,000,000 market for you? I don't know.

Speaker 6

I was trying to write

Speaker 3

it down. $2,000,000,000

Speaker 6

$2,000,000,000 Okay. $2,000,000,000 dollars You wish it was $100,000,000

Speaker 3

Yes. Well, if you look at total annual investments in the grid are about $600,000,000,000 That's on everything, cable, stations, transformer station distribution. So this is $2,000,000,000 of the $600,000,000 The International Energy Agency projects that to grow to $1,100,000,000 $1,200,000,000 by 2,030. So that ratio ought to hold. The instrument transformers are a smaller part of that, but they perform a very critical function throughout the entire transmission and distribution system.

Speaker 6

Okay. Do they is their business, you said it's custom solutions, so they're working with whatever entity needs their products. Is the initial step based on an RFP to bid on the business or it doesn't involve an RFP, it involves direct contracts between?

Speaker 3

That's a great question. This is very similar to our electronics business, the way we compete on customer intimacy. Often the first application into a customer, it's maybe through an RFP or through some other means. Once you once we successfully execute a first application now, the relationship is formed, it deepens and then the next application we're asked, we're invited to design and we progressively become partners with the customer. So that's effectively what they're doing.

Speaker 3

A lot of their growth is just picking up new a new and larger set of new applications within each of their customers.

Speaker 6

Okay. That's great. And then just lastly and I'll drop off. It looks like if you use the stock portion of the consideration for both I'm sorry, the cash for both acquisitions, it looks like about $408,000,000 of cash, which I assume that that's going to be borrowings or the majority of it. What kind of rate are you paying right now on those borrowings?

Speaker 4

Yes. I think it's a little bit less than what you just mentioned in terms of the dollar value, Gary. But the way I would think about it, we are having this 364 day loan that we took. There's a little bit of a higher interest rate on that loan until we syndicate it back and get it back into accordion. You can assume between all in kind of full burden on the amount of money we borrowed.

Speaker 4

You can probably assume 6.5% to 7% in this quarter and then we expect it to come down to 5 ish, maybe a little kind of a south a little higher than 5% as we move into Q3 and Q4 as we get this 364 day loan kind of terminated and put into the accordion and we look to put some swaps in place.

Speaker 6

Okay. Thank you.

Operator

Thank you. The next question comes from Ross Sperinblatt at William Blair. Please go ahead.

Speaker 7

Hey, good morning, guys. Hey, Rod.

Speaker 6

Hey, Rod. Hey, I'd just like to get

Speaker 2

a sense of the genesis

Speaker 7

of how these two acquisitions came into the fold. I mean, were these sourced? Were you talking to them for several years here? I mean, I never really got the sense that this opportunity existed.

Speaker 3

Yes. Thanks for asking the question. So for the last few years, we've been as we've directed our internal teams to focus more on opportunities in fast growth markets, we've also applied that filter to opportunities in the acquisition funnel. And so we became aware of this business a couple of years ago. We really started I first met them just after the New Year.

Speaker 3

And so I think February was the first time I met them. We've had a lot of meetings since then with increasing regularity. And the business was founded in the 90s. They're getting to a point in their book in the business growth. They could leverage they could use a partner like Standex.

Speaker 3

And also for the family too, it's meaningful to have a broader organization to work with them to grow around the world. So this was just a 2 part, just them and us talking since about February and coming to terms on the deal, so bilateral deal that met both of our needs. We're very excited about it. We spent a lot of time together to first kind of gain comfort that we run the businesses in compatible ways. It's a very compatible culture.

Speaker 3

We've come to really know and respect the team that has founded the company and runs the company. So it's larger, but it's very typical for the kind of acquisitions we've done over the years.

Speaker 7

Yes. So did they reach out

Speaker 6

to you guys or did you

Speaker 7

just stumble across it and wanted to see if they wanted to partner?

Speaker 3

You know our fantastic Director of IR, Chris Howe. Chris called him up and said, hey, we'd like to talk to you and they took the call.

Speaker 4

And Ross, what about we'll tell you like from kind of the future potential standpoint, we are this is Dave has been here for 10 years, I've been here for 5 or 6. This is the acquisition that we are most excited about. We look at this really as being kind of a transformational opportunity for us. The end markets are phenomenal. The growth opportunity is great.

Speaker 4

Obviously, you see the financial profile of the entities. And so we think we could do some special things together and hopefully we can.

Speaker 7

Yes, absolutely. And congrats to Chris on that. Hopefully you guys remember that bonus time. Thinking about kind of the competitive landscape, dollars 2,000,000,000 TAM, looks like 5% market share globally. Why do they have a right to win?

Speaker 7

I mean, is it the customized aspect, higher end of the market? What is truly unique about these 2 companies?

Speaker 3

Over the years, they've developed a unique business model that serves the market with an integrated organization. They can turn around a prototype in days to a week, whereas competitors may take weeks to months to turn the prototype around. They and that embeds them very early on in the design cycle with their OEMs. So they've become a trusted partner with OEM. In fact, early on, when we were looking into this space, we did some voice of customer work with these customers and we weren't specifically asking about Ameren and Narayan.

Speaker 3

We were just asking them about who are their suppliers and they specifically mentioned what a great partner Ameren and Narayan is. So we got great confirmation from the customers of the relationship and how they build the trust. So it comes from a very flexible business model. It's an India complete India supply chain. They've got a great cost position and they've been innovative with their design as well.

Speaker 3

They've been innovative in compressing these instrument transformers in smaller spaces and meeting the increasing power and efficiency requirements of the new designs from the OEMs.

Speaker 7

Okay. You guys are like number 1 globally. Do you have a sense of this is a couple other larger competitors out there?

Speaker 3

I'd say they're not number 1 in volume, but they are they have the we would say they have the highest reputation. They also become an outsourced partner. Some of the $2,000,000,000 market is the external spend on instrument transformers. The large global OEMs, they have some more standard product that they do internally. So it is a much larger market.

Speaker 3

And with Ameren Narayan's success in the customer intimacy model, they've actually kind of succeeded in having their OEM partners progressively give them a greater piece of their transformer business, for those for the higher end, the most demanding transformers.

Speaker 7

Yes, that's very helpful. Quickly on electronics, can you maybe just update us on how orders moved through the quarter on like a monthly basis? I'm just trying to gauge your confidence for the second half recovery. As we take out the $11,000,000 of new products, it looks like Q1 revenue overall were down about 15%. And it is difficult to just try to assess where we are in the overall macro cycle versus maybe anything that's maybe idiosyncratic like potential share losses on certain product lines that we should be aware

Speaker 6

of? Yes.

Speaker 4

I think Ross, if you kind of look at our order intake in electronics over the past 4 quarters, that book to bill was 0.6, 0.7. I think we were running at about $60,000,000 $65,000,000 per quarter in orders. And I think we are seeing some of those lower orders kind of flush through our sales in the last quarter or 2. So it probably takes kind of I would tell you depends again on if it's magnetic, if it's SSD sensors, if it's SSD business. But 3 to 6 months to kind of this stuff to get from the orders into the sales.

Speaker 4

But look, we had $75,000,000 worth of bookings last quarter. As you remember on our last earnings call, we were pretty optimistic about it, kind of played out the way we thought. And we think this quarter will be similar, maybe slightly up and then or indications from our customers is that into our fiscal Q3 and Q4 that order intake is going to continue to pick up. So that's what we are basing kind of our assessment on.

Speaker 7

Yes. I definitely imagine that the distribution channel is pretty balanced at this point, if not a little destock. Yes.

Speaker 4

That's exactly right. Yes, that's right.

Speaker 7

Okay. Maybe just one last one, so I'm on the tailwind here. Productivity versus mix for electronic margins in the quarter. And I know you guys have done some great cost out. There's a new added division over there that's finding a broader project funnel for you guys.

Speaker 7

But how should we just think about the legacy business going forward?

Speaker 4

I think you would The new acquisitions. Yes, yes. No, that's a good question. Our as we get into the Q3 and Q4 of this fiscal year, on the base business, we would expect to continue to kind of slightly improve operating margins and grow first of all, to slightly improve gross margins as we move forward, that would also lead to improvement of the operating margins. So as you think about modeling, without kind of Ameren Orion Group, we would expect if there wasn't an acquisition that the business performance would improve both from the top line and from the gross margin operating line standpoint and kind of slightly as you move to the quarters.

Speaker 7

Yes. I mean, getting back to kind of that mid-twenty range though, do you have a sense of the time line there? You've done a lot of

Speaker 4

that, right? We should start to see that. Yes, yes. We'll kind of give you a better view on that, Ross, as we get into Q2. We want to really look at as to what we have in terms of Ameren and Orion and how those margins and that kind of fits into the overall picture.

Speaker 4

But yes, I mean, we would assume that we would be improving margin sequentially and get into the 25% range at some point in the next few quarters.

Speaker 2

And the volumes could follow

Speaker 3

the jet we just described.

Speaker 4

Exactly. It got there, yes, exactly. I'm just trying to be conservative. Ross is not letting me be conservative.

Speaker 7

Thanks for the time, gentlemen. Congrats again.

Speaker 3

Thank you, Ross.

Speaker 4

Thanks.

Operator

Thank you. We have no further questions. I will turn the call back over to David Dunbar for closing comments.

Speaker 3

All right. I want to thank everybody for connecting today. We are through a curveball by scheduling and then rescheduling this call. This was a very complicated transaction. And I want to thank everybody for adjusting their schedules.

Speaker 3

We're very excited about that. Hope that came through today. And as we go forward, you'll see the impact it has on our business. I want to thank you all for joining us for the call. We really do enjoy reporting on the progress at Standex.

Speaker 3

And finally, again, I want to thank all of our employees, both new and old, for their continued support and contributions. This transaction was complicated. There were many, many people across Standex and across Eimer and Arian that participated and it really demonstrated the talent, the commitment and the creativity of our teams to get things done. Thank you also for the shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal Q2 2025 call.

Operator

Ladies and gentlemen, this concludes your conference for today. We thank you for participating and we ask that you please disconnect your lines.

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Earnings Conference Call
Standex International Q1 2025
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