Standex International Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

Key Takeaways

  • 1.5% organic revenue growth in Q3 with sales into fast growth markets up 40% year-over-year to $23 million and projected to grow ~50% in FY2023 to $85 million.
  • Record adjusted operating margin of 15.2% in Q3 marks the eighth consecutive quarter of record profitability, up 140 basis points year-over-year.
  • Free cash flow of $17.6 million drove net debt to EBITDA to zero, leaving approximately $344 million of available liquidity for growth and M&A.
  • For Q4 FY2023, the company expects sequentially similar revenue with organic sales offsetting the ProCon divestiture and slightly higher adjusted operating margin.
  • Reaffirmed long-term FY2028 targets include high single-digit organic growth to over $1 billion in sales, adjusted operating margin above 19%, ROIC over 15%, and ~100% free cash flow conversion.
AI Generated. May Contain Errors.
Earnings Conference Call
Standex International Q3 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day, and welcome to the Standex International Fiscal Third Quarter Results Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. 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 These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's most recent annual report on Form 10 ks as well as other SEC filings and public announcements for a detailed list of risk factors.

Speaker 1

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, pre operating cash flow and pro form a net debt to EBITDA. These non GAAP financial measures are intended to serve as a complement 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, Adamir Sarchevic.

Speaker 2

Thank you, Chris. Good morning, and welcome to our fiscal Q3 of 2023 conference call. We are very pleased with the results. We continued our trend of record operating margin. Sales into fast growth markets continue to accelerate.

Speaker 2

New product developments New application pursuits continue to expand across our businesses. I want to thank our employees, our executives and the Board of Directors for their continued dedication and support. Now if everyone can turn to Slide 3, key messages. We reported 1.5% organic revenue growth year on year As 3 of our 5 business segments exhibited organic revenue growth, our long term growth profile continues to improve As sales into fast growth end markets grew 40% from prior year to $23,000,000 in the quarter, We anticipate this revenue stream to grow by approximately 50% in fiscal year 2023 to approximately $85,000,000 Overall, we anticipate organic revenue growth in fiscal year 2023 from 4 of our 5 business segments. Profitability continues at record levels.

Speaker 2

The continued effectiveness of our price and productivity actions maintained our record margin set last quarter, Representing our 8th consecutive quarter of record level adjusted operating margin. Consolidated adjusted operating margin of 15.2% In fiscal Q3 2023 was a 140 basis point increase year on year. 3 of Standex's 5 business segments expanded margin year on year. 4 of our 5 segments reported operating margin near 15% or greater with our Specialty Solutions segment Delivering 22.2 percent margin. We are pleased to see continued improvement in our ROIC, which is now at 12% on an annualized basis through Q3 FY2023.

Speaker 2

With free cash flow of $17,600,000 and the divestiture of ProCon in the Our net debt to EBITDA ratio is now at 0. This leaves us approximately $344,000,000 of available liquidity to invest in our healthy funnel of organic growth and acquisition opportunities. Amyr will focus our financial performance, liquidity position and capital allocation in greater detail later in the call. In fiscal Q4 2023, on a sequential basis, we expect similar revenue with organic sales Offsetting the impact of the ProCon divestiture. We expect similar to slightly higher adjusted operating margin compared to fiscal Q3 2023.

Speaker 2

On a year on year basis, we expect mid to high single digit organic growth offset by the ProCon divestiture and significant adjusted operating margin improvement, driven by continued realization of pricing and productivity initiatives. 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. Let's turn to slide 4, fast growth end markets. Here we highlight our fast growth end markets and how they are driving growth across Standex.

Speaker 2

In the renewable energy end market, our isolation relays, which are able to withstand high voltages, play a critical role in solar inverters to enable safe and efficient switching. Moving to electric vehicle applications. The physical properties of our REED relays are designed to withstand high voltage batteries in safety circuits. Here we anticipate to benefit from increased content on electric vehicles versus traditional combustion engine vehicles. In soft trim, Our highly efficient soft trim tool improves manufacturing productivity and reduces maintenance costs.

Speaker 2

For the commercialization of space, We are a leading solution supplier of fuel tank domes for launch vehicles. Our differentiated spin forming capability has allowed us to enter new and exciting development projects Like the next generation prototype 0 emission aircraft. Shifting to defense, new defense power management needs are driving demand for our custom magnetic solutions such as critical hardware for new hypersonic, interceptor and tactical missile programs. 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, Q3 2023 summary. On a consolidated basis, total revenue decreased 2.6% year on year to 184,300,000 This reflected organic revenue growth of 1.5%, offset by 1.6% impact from the ProCon divestiture and 2.5% impact from foreign exchange. 3rd quarter 2023 adjusted operating margin increased 140 basis points year on year The 15.2%, matching our highest adjusted operating margin in company history from the prior quarter. Our adjusted operating income grew approximately 7% on a 2.6% consolidated revenue decrease year on year.

Speaker 3

Adjusted earnings per share, dollars 1.65 in the Q3 of fiscal 2023 compared to $1.54 a year ago, Approximately 7% growth year on year. Net cash provided by operating activities was $23,300,000 in the Q3 of 2023 compared to $11,900,000 a year ago. Capital expenditures were $5,600,000 compared to $3,400,000 a year ago. As a result, free cash flow was $17,600,000 in fiscal Q3 2023 compared to free cash flow of approximately $8,500,000 a year ago. Our balance sheet continues to provide substantial flexibility to support an active pipeline of organic and inorganic opportunities as well as increased investment in R and D and Growth Capital.

Speaker 3

Now please turn to Slide 6, and I will begin to discuss Segment performance and outlook beginning with Electronics. Segment revenue of $78,200,000 decreased 2.1% year on year As an organic increase of 1.3% was more than offset by a 3.4% negative impact from foreign exchange. Although softness in appliances and distribution end markets remains, power management, renewable energy and EV related markets remain robust. From a regional standpoint, North America market demand was strong, while China and Europe demand has been slower to recover. Adjusted operating margin of 21.8 percent in fiscal Q3 2023 decreased 230 basis points versus the year ago period, Primarily due to lower sales and unfavorable product mix, offsetting price and productivity initiatives.

Speaker 3

Sequentially, we expect similar revenue and operating margin in our fiscal 4th quarter as increased sales in the fast growth markets offset by a slow recovery in China and Europe. On a year on year basis, we expect double digits organic growth in this segment, mostly due to improved market conditions in China and Europe versus a year ago. Please turn to Slide 7 for a discussion of the Engraving and Scientific segments. Engraving revenue decreased 0.8% $36,900,000 as organic growth of 3.9% was more than offset by a 4.7% headwind from foreign exchange. Operating margin of 14.5 percent in fiscal Q3 2023 decreased 90 basis points year on year due to unfavorable regional mix.

Speaker 3

The segment continues to see positive trends in soft trim tools, laser engraving and tool finishing. In our next fiscal quarter, on a sequential basis, We expect similar to slightly higher revenue and operating margin. Scientific revenue remained relatively flat at $18,900,000 Primarily driven by higher sales in the research and academic end markets, offset by lower demand for COVID-nineteen vaccine storage. Operating margin of 24.1 percent increased 220 basis points year on year due to price and productivity initiatives and lower freight costs. On a sequential basis, in fiscal Q4 of 2023, we expect similar revenue and slightly higher operating margin.

Speaker 3

We expect that the year on year comparison will become more favorable in upcoming quarters as we are now fully behind our COVID related demand surge for our vaccine storage units. Now turn to Slide 8 for a discussion of the Engineering Technologies and Specialty Solutions segments. Engineering Technologies revenue of 18,100,000 Decreased 13.6% year on year, reflecting lower volume due to project timing, partially offset by higher revenue from new product development. Operating margin of 13% increased 190 basis points year on year as price and productivity initiatives offset lower volume. In fiscal Q4 2023, on a sequential basis, we expect a moderate increase in revenue and operating margin due to more favorable project timing in Aviation and Space end markets.

Speaker 3

Specialty Solutions revenue of $32,300,000 remained flat year on year, Reflecting strong organic growth in the display merchandising business, offset by an organic decline in the hydraulics business and the Procon divestiture. Operating margin increased significantly to 22.1 percent from 11.2% a year ago, driven by higher sales in the displayed merchandising business A realization of productivity initiatives in the Hydraulics business. In the fiscal Q4 2023, on a sequential basis, We expect revenue to decrease moderately to significantly, primarily due to the Procon divestiture and lower sales in the display merchandising business. Operating margin is expected to be slightly lower. Next, please turn to Slide 9 for a summary of Standex's liquidity statistics and the capitalization structure, which remains strong.

Speaker 3

Standex ended fiscal Q3 2023 With $344,000,000 of available liquidity, an increase of approximately $44,000,000 from the prior year. At the end of the Q3, Standex had net cash of $2,000,000 compared to net debt of $70,000,000 at the end of fiscal 2022 And net debt of $65,800,000 at the end of fiscal Q3 2022. Dyandex's long term debt at the end of fiscal Q3 2023 $173,300,000 Cash and cash equivalents totaled $175,300,000 With regards to capital allocation, we Approximately 42,500 shares for $5,000,000 in the 3rd quarter and $72,100,000 is remaining under the current repurchase authorization. We also declared our 2 100 and 35th quarterly cash dividend of $0.28 per share, an approximately 7.7% increase year on year. In fiscal 2023, we now expect capital expenditures to be between $25,000,000 $30,000,000 compared to approximately $24,000,000 in fiscal 2022.

Speaker 3

I will now turn the call over to David to discuss our key takeaways from our 3rd quarter results.

Speaker 2

Thank you, Adamir. Please turn to Slide 10. Standex is well positioned to deliver solid organic growth as an operating company, driven by increased activity and demand within our fast growth end markets. We are excited about seeing these opportunities materialize and expand. Our regional presence, strong customer relationships And disciplined approach to pricing and productivity provide protection from supply chain challenges and inflation.

Speaker 2

As a result, we've continued to deliver sustainable profitable growth through this environment. Our strong balance sheet positions us well We'll now open the line for questions.

Operator

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

Speaker 4

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

Speaker 2

Good morning.

Speaker 4

Good morning. Maybe start electronics. So Revenue will be it looks like be basically flat year over year, backlog is down slightly. Maybe can you Talk about the visibility beyond Q4 on the Electronics segment.

Speaker 2

Well, I guess, well, we serve a lot of end markets. We go through different channels, and we have different visibility for different We feel very good about the continued growth in fast growth markets. And I Things like distribution channels, we have a little less visibility to those. Those are going to be a function more of the general economy. But We tend to look at this through the cycle, feel very strongly about this business.

Speaker 2

We have a strong competitive position and good end markets and good growth prospects. If you look in shorter term, I'll turn it over to Adam here.

Speaker 3

Yes. Chris, I think we from a regional standpoint, the North America demand has been holding up and Europe and China is slowly recovering. The white goods or the appliance end market is still a bit soft. But we feel, as David said, we feel very Strongly and very, very good about our fast growth end markets exposure, and we feel that can more than offset the softness we are seeing In our plans, it's somewhat of the general economic term, so we're optimistic.

Speaker 4

Got it. Helpful. I'll leave it there. On the fast growth side, markets like smart grid, defense, electric vehicles, Your positioning is a function of both your SST and magnetic products. That said, is either Are those a more significant revenue growth driver longer term?

Speaker 2

You mean SST or magnetics?

Speaker 4

Yes. Is

Speaker 2

this supposed to

Speaker 4

be correct?

Speaker 2

Yes. I guess They each are contributing equally into these fast growth markets. Magnetics, they got a great position in defense for example. But I think there's The tailwinds behind renewable energy and electric vehicles in particular will drive we anticipate will drive sales faster in SST. So we'll probably see faster growth rates there in the fast growth market group.

Speaker 3

Yes. And if I can just add, Chris, and if you take electric vehicles, for example, that's where our SSD business has a very good position. And as those vehicles replace combustion vehicles, that's where we keep seeing about 3 to 5 times more content per vehicle than in the current combustion Scenario. So SSD clearly is in a good position to capitalize on these market trends.

Speaker 4

Got it. That's helpful. And maybe the last one, just maybe we can talk a little bit more about M and A. Strategic M and A has obviously been a big part Of your guys' history, you certainly have the balance sheet, net debt is at 0. How would you characterize the M and A efforts currently?

Speaker 4

Is it Versus say a year ago, just how are you looking at it long term? Is

Speaker 5

Just

Speaker 4

some add ons or is there anything significant out there?

Speaker 2

Always important for us. We play in 2 different 2 very different M and A markets. We do a lot of our acquisitions historically that are family owned or privately owned businesses And those owners sell for their own reasons at their own times and don't those deals don't necessarily follow the trends in the broader M and A market. We have an active pipeline of such companies now. Some of them could be actionable in the near term.

Speaker 2

We feel that we are well positioned As a preferred owner for some attractive companies, we build these relationships over a long, long period of time. And when the time comes, when they're ready to Transition, we're there. On the other hand, in the last year or so, because of our track record and confidence in Especially in bringing in acquisitions into the electronics business, we have been working to bring larger Businesses into our funnel. More of these are in the broader M and A market. And Although there's activity there in building our funnel, there's less actionable fewer actionable opportunities in the near term Just because the broad M and A market is taking a bit of a pause.

Speaker 1

Got it. Very helpful.

Speaker 4

I'll leave it there. Thanks guys.

Speaker 2

Thanks, Chris. Thanks, Chris.

Operator

Our next question comes from Michael Legg from Benchmark. Please go ahead.

Speaker 5

Thanks. Good morning. Congratulations on a nice quarter, guys.

Speaker 2

Thank you, Mike.

Speaker 5

You're welcome. And just wanted to touch base a little bit on the economic impact we're seeing today on what you're seeing in the supply chain On hiring and wages and then your ability to increase your pricing related to Your supply chain costs, can you just talk a little bit about that, please?

Speaker 2

Well, first of all, just the umbrella statement, we feel very, very good about Our team's abilities to manage their price to cover the cost of material inflation and inputs both supply chain and materials, They proved it in spades throughout the last 3 years of the pandemic. It varies a bit business by business how that plays out, But you can see we've expanded our margins through the pandemic. In terms of current conditions, Supply chain issues have eased for our businesses in the last few years. And Right now, it's not impacting our deliveries or any of our current commitments.

Speaker 3

Yes. That's I got nothing to add. Okay.

Speaker 5

And on hiring and wages?

Speaker 2

Yes. No, we are seeing more pressure on wages. I'd say, I can't quantify this statement, but it is taking a little longer to fill positions, Especially in Europe and North America, but we are finding candidates. We got a good story here. It's a good company.

Speaker 2

We're able to track good candidates and bring them in, But we are seeing some wage inflation and delays in hiring.

Speaker 5

And then just one last question. Any update on that project?

Speaker 3

Yes, well this

Speaker 2

is a great project. With our partner Enel, the solar energy project, we have in In the last 6 months, you have proven that the technologies we've developed together do deliver performance improvements for the solar panels. We are in a phase of industrialization. We're designing the manufacturing processes. We're also working with them on business model to What the right participation model is?

Speaker 2

I'd say the project has become a little, it's still development. So It's a little hard to predict the time line. So we're maybe taking longer than we thought we would a year ago, But the project still has a lot of support from Enel. We're excited about it and we'll continue to communicate as we make progress. But we're in this Final phases of development is maybe the way to put it.

Speaker 3

And Mike, if I can just add, all of the numbers to put out there in terms of the longer term guidance, do not include any contribution from this project. So when and if this becomes a contributing factor to our performance, that will be on top of

Operator

Our next question comes from Gary Prestopino from Barrington Research. Please go ahead.

Speaker 6

All right. Hey, good morning, Dave and Adam here.

Speaker 3

Gary.

Speaker 6

A couple of questions here. In terms of 8 consecutive quarterly records of adjusted operating margin, I think it was 140 basis point lift year over year. Yes. I would assume the majority of that is due to what you're doing on the productivity side. As pricing been a big issue there and then I guess the other question I would then layer on top of that is with the fast growth markets Sales, do those have a higher margin profile than the consolidated operating margin for the company?

Speaker 6

Yes.

Speaker 2

Let me tell you where I'll turn it over to Adam here. It really is multiple things. If you go back 3 years, our Folio is much better. All the businesses are performing well. There are productivity programs reading through.

Speaker 2

They've all done well, realizing price, covering their inflation. And the new products in the fast growth markets are at higher margins than the corporate average. So we mix up in margin as that grows.

Speaker 3

Yes. I mean, I think that's right. We have a pretty robust operating model, Gary, kind of across all of the units where we track pricing and productivity initiatives for each of the businesses. And We are fortunate to have people in our businesses who are very accountable and know the customers, know the markets and run those business units very well. And We are proud of our achievement of a consecutive quarter.

Speaker 3

We'll see how it plays up in the future.

Speaker 6

Could you is it possible that you could quantify just How much higher the fast growth markets margins are? Is that something you don't make public?

Speaker 2

We haven't made it public. That's how How do you answer that? They're higher.

Speaker 3

Okay. The

Speaker 2

gross margin. I mean, you think What's the gross margin size for, 38%? Yes, 38.5%. 30 8.5%, gross margin On the fast growth markets, it's above that by several 100 basis points.

Speaker 3

Correct.

Speaker 6

Okay. That's very helpful. And then lastly, just to refresh my memory, what you're doing in the EV market, you're doing both standard passenger cars, Off road vehicles, correct. Are you also doing things like last mile delivery, Trucks, things that are not more of the standard EVs as we think about them?

Speaker 2

Yes. Most of our volume is in passenger vehicles. The last mile delivery vehicle volume is starting to pick up. The way to think of where we play, especially with The relays for the safety isolation circuits and the battery management systems, Those have applications in vehicles that operate at higher voltages. So newer vehicles are operating at higher voltages to achieve more efficiency.

Speaker 2

All the off road vehicles are higher voltages, and the last mile vehicles as well.

Speaker 6

Okay. Thank you very much.

Speaker 3

Thanks, 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

All right. Thank you. I want to thank everybody for joining us for this call. We always enjoy reporting on our progress here at Standex. And finally, again, I want to thank our employees, our Board of Directors and shareholders for your continued support and contributions.

Speaker 2

We look forward to speaking with you again in our fiscal Q4 2023 call.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr