Standex International Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Standex International Fiscal 4th Quarter 20 24 Financial Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, August 2, 2024. I would now like to turn the conference over to Chris 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 of the company's financial performance.

Speaker 1

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 fiscal year 2024 conference call. I would like to thank our corporate finance team and each of our business leaders for achieving our record profit and cash generation in fiscal 2024 with challenging general market conditions pressuring the top line. Behind the scenes, our engineering and sales and marketing teams continue to ramp up new product development and enhance our competitive position. As a result, in fiscal 2024, we expanded gross margin 90 basis points and operating margin 60 basis points, while investing an additional $3,300,000 in research and development to fuel our future growth initiatives.

Speaker 2

Even in the face of challenging market conditions, we continue to expand margins and increase investments for future growth. In fiscal 2025, we expect to release a record number of new products. Now if everyone can turn to Slide 3, key messages. In the Q4, sales declined 4.3% with contributions from acquisitions and fast growth markets partially offsetting an organic decline. Those sales were down in electronics due to continued soft demand in appliances and general industrial end markets in China and Europe.

Speaker 2

We have seen orders strengthening these past 2 months indicating that markets are improving and that our commercial strategy is taking hold. We also experienced an impact from a slowdown of new vehicle introductions in North America affecting our Engraving segment. We expect demands to improve as we enter the second half of fiscal 2025. Demand in Asia and Europe remains stable. Sales in the fast growth end markets grew 13% year on year $27,000,000 in the 4th quarter and grew 13% year on year to $94,000,000 in fiscal 2024.

Speaker 2

Sales grew faster than expected in space and defense end markets and slower than expected in renewable energy, electric vehicles and smart grid applications. I am especially pleased that we continue to demonstrate resilient operating performance from the execution of our price and productivity initiatives. As a result, we achieved adjusted operating margin of 16%, up 60 basis points on a sequential basis. 4 of our 5 segments reported adjusted operating margin above 20%. Following record profitability in fiscal 2023, we again achieved fiscal year record milestones in adjusted gross margin, adjusted operating income, adjusted operating margin, adjusted earnings per share and free cash flow.

Speaker 2

At the same time, in fiscal year 2024, research and development investments were the highest ever and increased $3,300,000 to 2.8 percent of sales. We remain optimistic about our long term operating margin potential as we leverage better general market conditions and higher sales contribution from new products and new applications. On a sequential basis, in fiscal Q1 2025, we expect similar to slightly higher revenue as higher sales into fast growth end markets are mostly offset by less favorable project timing in the Engineering Technologies segment. We expect similar to slightly higher gross margin and slightly lower to similar adjusted operating margin due to higher investments in selling, marketing and R and D. We are positioned to release new products in every business in fiscal 2025 contributing over 100 basis points of incremental growth.

Speaker 2

I will go into more detail on the next slide. In addition, we anticipate fast growth market sales to grow above 20% and exceed $110,000,000 in fiscal 2025. In fiscal year 2025, we expect general market conditions to stabilize in the first half and strengthen as we move further into the second half providing a healthier backdrop for growth. We are reaffirming 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 greater than 15% and free cash flow conversion at approximately 100 percent of GAAP net income.

Speaker 2

Let's turn to Slide 4 that highlights our progress and what's ahead for new product development and new applications. Personally, I'm very excited about 2025. This slide has literally been 10 years in the making. We began ramping up our R and D spending about 5 years ago as we completed our portfolio transformation and began focusing on operational improvements. As our margins and our predictability improved, we were able to increase our R and D spending as you see in the graph here, growing from $6,300,000 to $20,500,000 A new product development can take several years, then must be incorporated into our customers' own new product design cycle, so it takes a few years to convert a new product development project to sales.

Speaker 2

It's like turning on the spigot in the hose and waiting for the water to come out the other end. Our work is now beginning to bear fruit. New product releases begin with a trickle in 2023 with 2 new products followed by 3 in 2024. Now new products are nearing completion in all businesses and we anticipate releasing more than 12 new products in 2025. We anticipate they will add more than 1% to our sales growth in 2025.

Speaker 2

Every business will launch at least one new product and we will release at least 1 in every quarter of the year. As the year progresses, we will provide updates on recently released products. This is the year to watch us as we develop the skill to launch new products and ramp their sales. I will now turn the call over to Adamere and discuss our financial performance in greater detail.

Speaker 3

Thank you, David, and good morning, everyone. Let's turn to Slide 5, Q4 2024 summary. On a consolidated basis, total revenue decreased approximately 4.3% year on year to $180,200,000 This reflected an organic revenue decline of 9.4 percent and 1.1% impact from foreign exchange, partially offset by 6.2% benefit from recent acquisitions. 4th quarter 2024 adjusted operating margin increased 60 basis points year on year to 16%. In the fiscal 4 quarter, adjusted operating income decreased 1% on 4.3% consolidated revenue decrease year on year.

Speaker 3

Adjusted earnings per share remained flat year on year at 1 $0.76 Net cash provided by operating activities was $28,700,000 in the Q4 of fiscal 2024 compared to $40,400,000 a year ago. Capital expenditures were $6,500,000 compared to $7,600,000 a year ago. As a result, we generated fiscal 4th quarter free cash flow of 22 $200,000 compared to $32,280,000 a year ago. Our free cash flow conversion ratio as a percent of GAAP net income was 112%. 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 $80,400,000 increased 0.6% year on year as 14.6% benefit from recent acquisitions was mostly offset by an organic decline of 12.3 percent and 1.6% impact from foreign currency. Adjusted operating margin of 20.5 percent in fiscal Q4 2024 decreased 50 basis points year on year as the contribution from recent acquisitions and pricing and productivity initiatives were more than offset by lower volume. Our new business opportunity funnel increased approximately 30% year on year and is currently at approximately 85,000,000 dollars As David highlighted in his comments, we are starting to see encouraging signs that markets are starting to recover, which is further supported by positive order trends in the last 2 months. June orders in electronics increased approximately 30% over the average order intake for the past 6 months, and our July orders increased approximately 5% over June orders. The recent upward trend in monthly orders has been driven by the following factors: inventory normalization, strengthening of the North American mail aero market, the return of certain semiconductor customers, increased demand for bare read switches and our commercial focus on gaining share in fast growth end markets.

Speaker 3

We anticipate the positive impact from this trend to more meaningfully show in our top line as we move to the second half of our fiscal year. Sequentially, in fiscal Q1 2025, we expect similar to slightly higher revenue, driven by higher sales into fast growth end markets and similar adjusted operating margin as pricing and productivity initiatives offset higher investments in selling, marketing and R and D. Please turn to Slide 7 for a discussion of the Engraving and Scientific segments. Engraving revenue decreased 22.8% to $32,700,000 driven by organic decline of 21% and 1.9% impact from foreign exchange. Operating margin of 12% in fiscal Q4 2024 decreased 660 basis points year on year due to slower demand in North America due to OEM platform push outs.

Speaker 3

In our next fiscal quarter, on a sequential basis, we expect moderately higher revenue and operating margin due to more favorable project timing in Europe and Asia. Scientific revenue decreased 4.1 percent to $17,500,000 due to lower demand from retail pharmacies. Operating margin of 28.1 percent increased 260 basis points year on year due to impact of productivity initiatives and lower freight costs, partially offset by lower volume. Sequentially, we expect similar revenue and slightly lower operating margin due to continued investments in recent development activities and higher freight costs. Now turn to Slide 8 for a discussion of the Engineering Technologies and Specialty Solutions segments.

Speaker 3

Engineering Technologies revenue increased 15.7% to $25,300,000 driven by organic growth of 15.9%, slightly offset by 0.2% impact from foreign currency. This strong organic growth was due to higher demand in aviation end market, more favorable project timing and growth in new applications. Operating margin of 20.9 percent increased 6 70 basis points year on year as leverage on higher sales and productivity initiatives were partially offset by investments in research and development. This represents the 5th consecutive quarter of sequential operating margin improvement in this segment. Sequentially, we expect moderately to significantly lower revenue and slightly lower operating margin due to unfavorable project timing.

Speaker 3

Specialty Solutions segment revenue of $24,200,000 decreased 6.3% year on year, primarily due to lower demand in the display merchandising business, partially offset by organic growth in the hydraulics business. Operating margin of 22.2% decreased 260 basis points year on year. Sequentially, we expect similar revenue and operating margin. Next, please turn to Slide 9 for a summary of Standex's liquidity statistics and the capitalization structure, which remains strong. Standex ended fiscal Q4 2024 with $347,000,000 of available liquidity.

Speaker 3

At the end of the 4th quarter, Standex had net cash of $5,300,000 compared to net debt of $10,000,000 at the end of fiscal Q3 2024. Zenix's long term debt at the end of fiscal Q4 2024 was 148,900,000 Cash and cash equivalents totaled $154,200,000 We declared our 240th quarterly consecutive cash dividend of $0.30 per share, an approximately 7.1% increase year on year. In fiscal 2025, we expect capital expenditures to be between $35,000,000 40,000,000 dollars I will now turn the call over to David to discuss our key takeaways from our 4th quarter results.

Speaker 2

Thank you, Adamir. Please turn to Slide 10. I'm very proud of our team for their continued operational execution and focus on growing markets that led to our record cash and profit generation in fiscal 2024. We achieved several records that were driven by our operational execution, continued progress of our growth efforts and the successful integration of our recent acquisitions. We remain optimistic about the long term secular trends that will benefit from the transition from internal combustion to hybrid and electric and automotive, infrastructure spending and smart grid, defense applications and next generation aerospace development and from the evolution of space exploration.

Speaker 2

We anticipate sales into fast growth end markets to accelerate over our long term target horizon and beyond as these trends develop. 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 for the first time in the company's history, new products will be released in every one of our businesses. We continue to maintain a strong balance sheet that allows us to prudently assess an active pipeline of organic and inorganic growth opportunities to support future growth. In fiscal 2025, we expect general market conditions to stabilize in the first half and strengthen as we move further into the second half barring any unforeseen economic disruptions.

Speaker 2

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% of GAAP net income. We will now open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Michael Legg from Benchmark. Michael, please go ahead.

Speaker 4

Thanks. Good morning, everyone, and congratulations on another nice quarter. I wanted to kind of dig into a little bit the new product development. Can you explain a little bit the development phase alongside the customer and how you work with them to come up with the new products, whether they're next generation products or new products? And then as they work into the production cycle of the customer, in the first year you gave us 100 basis points improvement.

Speaker 4

But what does that really mean for the second, 3rd year as these things start to be rolled into it? And then just a follow-up on that would be, you have 12 that you've mentioned for fiscal 2025. What does the R and D pipeline look like longer term for new products? Thanks.

Speaker 2

That's a lot of questions. If I forget any, let me know. So first of all, how we work with customers, as you know, most of our businesses compete on what we call customer intimacy. So our new product ideas come from our customers. We identify applications or neighboring needs for the applications we serve that we don't meet with current product.

Speaker 2

That goes into our innovation hopper and then as it gets to our filters goes into new product development. So the ideas come from customers. And in some businesses like engineering technologies, the new product development is actually often funded by the customer and is for a specific customer project. So we don't develop a product simply based on some abstract notion of what the market might need and then launch a new product in the market to see what will happen. We already know customers need it.

Speaker 2

We work out the specs and the requirements with customers. So when we launch it, we know that we're on the mark. What was the next question? Adamere, you can help me.

Speaker 4

Year 2 and 3, what your first year 100 basis points that

Speaker 2

you Yes. So this is a year we've said you watch us as we learn how these how new products ramp. In general, it takes it will take about 3 years at least for a new product to ramp to full volume because our customers have to design it into their cycle. And I guess as the year goes on, we'll communicate more what our expectations. I would tell you, we said 100 basis point greater than 100 basis point sales from new products this year.

Speaker 2

We certainly have internal targets higher than that. As we get more customer wins, we'll be able to portray a better evolution in years 2 3, but we certainly expect that to increase and ramp up. There are other products in the pipeline that next year we'll be announcing that we've got new products scheduled for release in 2026. We've got a full pipeline now. We're spending $20,000,000 a year on R and D that will drive new product releases year after year.

Speaker 4

Great. And then just one other question. On your 5 year target for 'twenty eight on those goals, historically you've exceeded your previous long term guidance over those time frames. Is this new? Where would you say you are in comparison to making those numbers 5.28 or earlier?

Speaker 2

Well, year on year, we went backwards from last year. So I'd say we maybe take a step back. The step back as we've communicated is largely the market. Over if you step back even farther, you look over 10 years, our organic growth over 10 years has been about 3% a year since COVID has been 4%. With the step back this last year, just the way market cycles work, we'd expect the market to come back in the next year or so.

Speaker 2

We communicated today, we think the second half, it will come back. So we take that core growth of 3% over 10 years as a good proxy for our business, what it will do over the next 4 years. We believe our fast growth markets will still be $200,000,000 our sales into fast growth markets in 2028. That leaves about $170,000,000 of sales to come from 3% growth rate, which is about $90,000,000 and the new product development sales need to add about $80,000,000 over the next 4 years. So we feel very good about where we're at.

Speaker 2

Given the magnitude of new products releasing now and continued progression with fast growth.

Speaker 3

Yes. And I would second that, Mike. I think we feel pretty confident and comfortable that, again, barring any unforeseen economic disruptions that we'll get to those targets.

Speaker 4

Congratulations on the quarter. Thanks.

Speaker 2

Thank you, Mike.

Operator

Your next question is from the line of Chris Moore from CJS Securities. Chris, please go ahead.

Speaker 5

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

Speaker 6

Good morning.

Speaker 5

All right. Good morning. So it looks like you're expecting fiscal 2025 to be more back half loaded. Can you maybe just talk a little bit more about the visibility kind of surrounding the belief general markets will begin to improve? And really are there specific segments or markets that you're thinking about?

Speaker 5

I think you talked a little bit of electronics and maybe on engraving, but just trying to understand which segments you're thinking are really more likely second half loaded? Yes.

Speaker 2

So I'll add a couple of data points and then Adam here can pitch in. We have some of our businesses, some segments of business where we have good long term visibility. So engineering technologies, for example, we have a very good view in engineering technologies, defense, aviation and space, especially are going to ramp up through the year. So we feel very good, very confident about that growth. In our magnetics business, in electronics, sales in the semiconductor, manufacturing equipment, We anticipate that will start to ramp up towards the end of the calendar year.

Speaker 2

That looks really good. Another data point we have, we've talked about in past quarters is we use the sale of switches as a leading indicator for our businesses. It's historically been a good indicator and we've really seen that start to ramp nicely in the last few quarters. I think 2 quarters ago, we said we thought it bottomed out, it was starting to come up. Last quarter, we said it was coming up a little Now we're seeing a more decisive increase as Adamir mentioned in his script.

Speaker 2

Yes.

Speaker 3

And Chris, if I can add to that, we also obviously track internal data and we are encouraged by what we are seeing in video electronics order over the past 2 months. They ran up about 30% higher in the month of June over the past 6 months, then July was higher. So we are cautiously optimistic that trend will continue. And we have a lot of commercial focus on making sure we gain share and we continue to grow.

Speaker 5

Got it. I appreciate that. Conversely, are there any segments where growth is still going to be from where you sit today a little bit more challenging, might be flattish or up a little bit versus what we just talked about?

Speaker 2

Yes, I think we mentioned in the script, engraving in North America in particular, anyone following the auto OEMs in North America, they're going through it, let's say, a transitional period here. Many of them have announced they're pushing out their new platforms. Ford in particular was a very good customer for us earlier this year announced they're pushing platforms out by a couple of years. So we think FY 'twenty five will be a challenging year for North American Engraving Business.

Speaker 5

Got it. In terms of the longer term goals, the organic growth high single digits, it seems like that would be lots of things would have to go right in '25 in order to reach that. Is that a fair way to look at it?

Speaker 2

Well, way to think of it is the way we think is that by the end of the year, we believe we'll be kind of a sequential growth rate that supports annual upper single digits. We have good visibility to this coming quarter and we think it will start to accelerate from there based on some of the things we talked about. And by our Q3, Q4, we anticipate that growth rate will support the upper single digits. I kind of went through the math earlier to the prior question. Of course, if the markets the markets are going to have a 3% or 4% impact on our business.

Speaker 2

But on top of that, our fast growth presence, we're very confident in the growth there. And then with the new product releases, we have a new engine for growth to take us into upper single digits above that core. Yes.

Speaker 3

And if I can just add to that, Chris, I mean, you know half of the company is electronics, right? And again, from what we are seeing from a macro level, electronics had a tough year from the top line standpoint, and that's because of just the general macro environment. But we are seeing that start to improve, plus all some of the new products we're going to be launching in this segment along with their exposure fast growth end markets make us optimistic that as we move to the year, again, barring any unforeseen economic disruptions that we're going to see pretty nice organic growth in the Electronics business, especially in the second half of the fiscal year. Because these orders we are taking now, it takes time for them to actually turn into sales.

Speaker 5

Got it. That's helpful. I will leave it there. I appreciate it guys.

Speaker 3

Thank you, Chris.

Operator

Your next question is from the line of Mike Schliske from D. A. Davidson. Mike, please go ahead.

Speaker 6

Good morning. Thanks for taking my questions here. So I want to pop up one of the earlier questions, one of your answers. I don't want to get too far ahead, but it's the level of process you have this fiscal year. Is that supposed to be the kind of the new norm going forward?

Speaker 6

Have you unlocked kind of a new cultural imperative to keep that product cadence fairly high?

Speaker 2

Yes. We've got good visibility to product launches this year and emerging visibility to 2026, and we see what's in the pipeline in stages 012. I do believe this will be the new cadence for us. We'll release new products kind of at this rate indefinitely.

Speaker 3

And Mike, if I can just add to that, we are at about 2.8% of sales in terms of R and D spend. I think we said that we want to get over 3% as we move forward. So we're going to continue investing in R and D. We believe in these new products that are going to get launched. And as David says, watch us see how it works out.

Speaker 6

Of course, fantastic. We haven't talked much about the M and A environment yet. I'm curious if you can tell us a little bit about the pipeline, what's in the later stages, or even if you're looking to divest anything, how anything is going on that process?

Speaker 2

Yes. We got I think we mentioned last quarter, we have a very active pipeline. These are the majority of the really active opportunities are privately owned businesses. And in most cases, there's not a process. These are based on long term relationships.

Speaker 2

So there are some that are actionable. So don't be surprised if in the coming months we do announce something. But until you have a deal, you don't have a deal. But we I would say we feel optimistic about the environment for us. In terms of divestitures, we only have good products in our portfolio.

Speaker 2

We get inbound calls regularly about many of our businesses. And at the time kind of our choosing, we were confident we would have the option if we chose to divest in other business. However, there's no pressing need like there was 3, 4 years ago.

Speaker 6

Got it. Maybe the last one for me back to the topic of your new products. Have any of them been released yet just the 1st month into the fiscal year? And if so, how has it gone?

Speaker 2

Yes, we've got a few scheduled for release this quarter. We talked about their business. We got all the presidents together last month told them every quarter we're going to talk about new products. And they said, well, please don't tell us tell our competitors what we're going to release in the coming quarters. So wait till after the release and then update.

Speaker 2

So in our next earnings release, we'll share the releases from this quarter and then progressively. But I have to tell you, I'm really pleased. The last 3 or 4 years, you can imagine, we're spending $20,000,000 in R and D. There was a lot of work going on. We have quarterly reviews with our our Board formed a special committee, the Innovation and Technology Committee.

Speaker 2

We review the pipeline. We review our work processes. 1 of our board members ran the research and development labs at Procter and Gamble. Michael Hickey on our board from Ecolab has a great pedigree in growth and ramping up sales of new products. So there's been a lot of activity under the hood.

Speaker 2

So we're really excited that FY 'twenty five, we can start to kind of open the curtain on some of those things. And we're anxious just as anxious as you are to see how those new launches go. And we know that not all these new products will succeed. That's why you need a portfolio of new products. And developing new products is one thing, ramping up sales through really effective marketing and targeting and a directed commercial approach is another.

Speaker 2

So we'll go through the year report on our progress and it was very exciting year for us.

Speaker 6

Exciting. Thanks so much. I'll pass it along.

Speaker 3

Thank you. Thanks, Mike.

Operator

Your next question is from the line of Gary Prestotino from Barrington Research. Gary, please go ahead.

Speaker 7

Hi, good morning all.

Speaker 6

Hi, Gary.

Speaker 7

Adam here, you I couldn't write this down fast enough. You talked about sequential changes in orders. Could you just go through that? I think you gave some data on June July.

Speaker 3

Yes, sure, Gary. So our June orders for the month of June in our Electronics segment were about 30% higher than the average order rate for the past 6 months, May and before. And in July, that trend continue because the orders in July were another 5% higher over 5% higher than our June orders. So for the past 2 months, we are seeing really positive trends from kind of showing that the market is recovering along with some of our extended commercial activity. Okay.

Speaker 7

Good to hear. And then just on your new products that you're going to roll out over a dozen new products. How many of these are targeted for your fast growth markets?

Speaker 2

Let's see. Not all of our markets our business serve what we've defined as fast growth markets. We have a number of new products coming out in scientific, for example, great end market, but it's not in our fast growth. The electronics businesses, the electronics new products, virtually all of them will have some applications at least in fast growth. The Engineering Technologies new products are all fast growth end markets.

Speaker 2

So, roughly say half of them are fast growth.

Speaker 7

Okay. And then in terms of these new products, is there any, looking for the right word here, increase in the specialization technology or whatever that with these products that you should be able to attain a higher margin or contribution margin on these new products versus some of the legacy business that you have?

Speaker 2

Yes, absolutely. We anticipate that all these new products based on the voice of customer work we've done and our own knowledge of the products the product families that are part of is that they will deliver gross margins higher than the average in that business. And some of them are just kind of pushing the envelope of performance of the products. Some of them are entering into new adjacent segments. But our expectation in our funnel when we develop a product, if it's not going to deliver higher margin, we'll pass on and go to other and prioritize those developments that will deliver higher margins.

Speaker 7

So David, right off the bat, as you roll these things, these new products out, they do have a higher incremental gross margin and we should see positive impact to the gross margin as we go through the year?

Speaker 2

Yes, that's our expectation. We've got limited experience over the last 5 years, we've launched a handful of products. Those new products are selling at higher margins. So based on that experience and our voice of customer in development, we do believe that at moment of launch, they will be accretive to our margins.

Speaker 1

Okay. Thank you very much.

Operator

Your next question comes from the line of Ross Sparenbeck from William Blair.

Speaker 8

Hey, starting on the new products, I mean, I was a curious comment that you don't expect all these are going to succeed even though the vast majority are voice of the customer. I believe 70% are educated there. So is that still a way to think about it, maybe 30% of these dozen are just kind of throwing out there to see what sticks?

Speaker 2

Well, if you look at any look at I mean everybody when they launch a product believes it's going to succeed. The reality is, if you look at the data, not all new products succeed. In fact, most of them fall short of So we're just I think we're just looking at others' experience to say, let's be honest and humble here, they're not all going to succeed. But we think we have enough of them and enough of them will succeed enough and probably exceed our expectations to drive our top line growth. So I didn't mean to confuse you with that statement.

Speaker 2

We're not going to launch something knowing that it's not going to succeed, but we're just learning from experience here.

Speaker 8

Okay. Maybe I'm just reading too much into it, but thanks for the clarity there. I think maybe just kind of framing the average TAM expectations. I mean, a dozen products, 7% or $7,000,000 of sales. They're not all going to hit July 1, obviously.

Speaker 8

But what are you guys targeting? And then what is maybe like your ROI or product vitality index threshold as we think about conceptualizing that ramp and how these can build if they are successful?

Speaker 2

Well, those are great questions. I think in the course of the year, we will get better and better about talking about those things. I would say that we've our sales this last year of the products that have been released in the last 5 years, something like mid single digit percent of our sales. We think that will go up another 100 basis points or more this coming year. Over 5 plus years, We'll see how long it takes these to ramp.

Speaker 2

But for us to even you could create your own model here, but for us to deliver upper single digit growth long term and relying on new products to some extent, we're going to have to get into the teens and above over time with new products. I don't know when we'll get there. As we evolve, we'll share that more. Adam, you have something to add?

Speaker 3

No, I think that's right. That's right.

Speaker 8

Okay. And is there anything you can call out particular like this is a $20,000,000 opportunity and we're really excited and the other ones are just kind of taking little adjacent share here and there.

Speaker 2

I think what we do is that quarter by quarter as we announced what's been released, we would do that. We do have some that potentially really expand our served market and have a $20,000,000 plus opportunity.

Speaker 3

But Raj, just to put it in perspective, this is not we wouldn't launch a product and say $2,000,000 market opportunity. I mean, we are talking about much higher opportunity we are targeting. And so these are significant changes. Yes.

Speaker 7

That's fair. And last

Speaker 8

one here on just electronic margins and expectations. I know we have 200 basis points of prior cost out. I think there's like 5 magnetic products that are launching, which are dilutive. So how should we think about the incrementals this year given the crosscurrents? And then what level of revenue do you think we need to achieve for electronics to get back to the 2023 kind of 22% to 23%?

Speaker 3

Yes. I think, Ross, you're going to get a few things working in our favor. Obviously, the volume, just that margin fall through that you get from a higher volume. We are still getting some price and productivity. We got new products that are going to be launched.

Speaker 3

And we would expect our margin in Electronics to improve sequentially as we improve to the fiscal year. And we do believe the second half will be stronger from a revenue standpoint than the first half. So again, as David said, you can do your own model, but as you kind of think about the second half of FY FY 2025, we are optimistic that the margin is going to get better than it is today.

Speaker 5

All right.

Speaker 8

Thanks guys.

Speaker 2

Thank you.

Operator

There are no further questions at this time. I'll hand the call over to David Dunbar for closing remarks. Sir, please go ahead.

Speaker 2

All right. Thank you. I want to thank everybody for joining us on the call. 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.

Speaker 2

We look forward to speaking with you again in our fiscal Q1 2025 call.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.

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Earnings Conference Call
Standex International Q4 2024
00:00 / 00:00