Q2 2024 Standex International Corp Earnings Call
Participants
Christopher Howe; Director of IR; Standex International Corporation
David Dunbar; Chairman, President & CEO; Standex International Corporation
Ademir Sarcevic; VP, CFO & Treasurer; Standex International Corporation
Christopher Moore; Analyst; CJS Securities, Inc.
Michael Legg; Analyst; The Benchmark Company, LLC
Michael Shlisky; Analyst; D.A. Davidson & Co.
Ross Sparenblek Sparenblek; Analyst; William Blair & Company L.L.C.
Gary Prestopino; Analyst; Barrington Research Associates, Inc.
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the Standex International Fiscal Second Quarter 2024 financial results conference call. (Operator Instructions) This call is being recorded on Friday, February 2, 2024, I would now like to turn the conference over to Mr. Chris Howe, Director of Investor Relations. Please go ahead, sir.
Christopher Howe
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. You should refer to Standex's most recent annual report on Form 10 K as well as other SEC filings and public announcements for a detailed list of risk factors.
In addition, I'd like to remind you that today's discussion will include references to the non-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 onetime 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 forma net debt EBITDA.
These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles. Generally Accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance.
On the call today as Standex's Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer and Treasurer, Ademir Sarcevic.
David Dunbar
Thank you, Chris. Good morning, and welcome to our fiscal second quarter 2024 conference call. The quality of our businesses was highlighted in our results as we continued our trend of record adjusted operating margin performance. I would like to thank our employees, our executives and the Board of Directors for their efforts and continued dedication and support that drove our results.
Now if everyone could turn to slide 3, key messages in the second quarter. Sales in the fast growth end markets grew 14% year-on-year to $21 million, and we remain on track to achieve our long-term target of $200 million in sales into fast growth end markets by fiscal year 2028.
As we projected in last quarter's outlook, we experienced the effect of unfavorable project timing in the Engineering Technologies segment and transitory market softness in other markets, which led to an organic decline of 7.4%. This was partially offset by contributions from our recent Medtronic's acquisition and favorable foreign currency in general we expect market conditions to start moving in Fiscal Fourth Quarter 2024.
In addition, we continue to work on an active pipeline of inorganic opportunities. As we announced last quarter we signed a definitive agreement to acquire Xinyu switch company. We anticipate this transaction to close during our fiscal third quarter. We also continued to generate strong profitability from the execution of our price and productivity initiatives.
In the fiscal second quarter, we achieved record adjusted gross margin and an 11th consecutive quarter of record adjusted operating margin. This is the first time in the Company history. The gross margin was above 40%, and it demonstrates our continued ability to drive operating improvements while adapting to changing macro conditions.
Consolidated adjusted operating margin increased to 90 basis points year on year to a record 16.1%. Three of our five segments reported adjusted operating margin greater than 20% again and in all five segments reported adjusted operating margin greater than 17%. We achieved free cash flow of $19.5 million in the quarter, leading to record free cash flow year to date. Our consistent and improved cash flow generation and ROIC of over 12%.
Further highlights the quality of our businesses. Looking back to February 2021, we communicated a set of long-term financial targets over three to five years. These targets included mid-single digit organic growth, EBITDA margin above 20% and return on invested capital above 12%.
We are proud to have reached these targets within three years on a sequential basis, in fiscal Q3 2024, we expect slightly higher revenue due to the contribution from our pending acquisition of Sanyo and a slight recovery in the electronics and Specialty segments. We expect slightly lower adjusted operating margin sequentially due to the impact of a one-time charge related to me reaching retirement eligibility under the stock compensation plan.
Excluding this onetime charge, adjusted operating margin would be similar on a sequential basis. Although I am now retirement eligible understand ex the stock compensation plan, I don't plan to go anywhere. I remain committed to my role as CEO, and I'm excited by our long-term vision for Standex in fiscal Q4 2024. On a sequential basis, we expect meaningfully higher sales and continued improvement in adjusted operating margin. This outlook assumes slight market recovery in the end markets served by electronics and Specialty segments contribution from the pending Sun acquisition and more favorable project timing.
In the Engineering Technologies segment, we are reaffirming our long-term financial outlook by fiscal year 2028. These targets include high single digit organic growth to greater than $1 billion in sales, adjusted operating margin greater than 19%, return on invested capital greater than 15%, and free cash flow conversion at approximately 100% of GAAP net income.
Let's turn to slide 4. In January, I celebrated my 10th anniversary of Standex. I'd like to take a little walk down memory lane here because it's important to understand where we are going and how we will get there.
First, let's look at our results. At the end of January 2014, the Company's market cap was just over $660 million. Now 10 years later, it has grown to $1.8 billion. We have significantly outperformed the Russell 2000 and kept pace with the S&P 500 over that time, a great accomplishment for a small-cap company. The financial results that created that valuation are below on roughly the same sales. We increased gross margins from 33.4% to 40.3% and nearly double the EPS.
The real story of how we delivered these results.
Please turn to Page 5. Our vision was to evolve from our holding company roots to become a high-performing operating company, building it around strong businesses with defensible competitive advantages in serving growing end markets. We developed the management process that we call the Standex value creation system.
We evaluated our portfolio to retain businesses that met this criteria and that had an operating income potential of 15%. Perhaps most importantly, we wanted to ensure we attract and retain the great talent that thrives in a collaborative problem-solving culture. We got to work and we executed. We significantly retooled and refocused the portfolio we divested over one-half the sales of the company, reducing the number of businesses from 15 to 6.
We grew our better businesses with a combination of organic investments and acquisitions. We focused on operational improvements and implemented strong pricing and productivity processes and controls across all businesses. Gross margin grew to 40.3%. At the same time, we increased R&D spending from 0.6% of sales to 2.9% of sales. We serve a better mix of end markets with 36% of our sales.
Now going into markets growing over 5%. The lowest operating margin business in the corporation used to be in the low single digits. Now our lowest margin business delivers over 15%. Operating income through the metric I am perhaps most pleased with is how we are creating career paths for our people. For 2014, we sold about 35% of our management positions with internal hires going outside for the remainder now in 2024, those numbers are reversed with the majority of our key positions going to current Standex employees through these 10 years, we have developed the capability to perform at a higher level and begin to deliver on our commitments despite the twists and turns of the markets around us by working on those things we can control, we delivered the financial results I showed earlier.
Now please turn to page 6. Three years ago, we issued longer-term financial expectations stating over the next three to five years, we would achieve the targets shown in this slide have copies here from the 2021 presentation. We have essentially met them in three years. We delivered EBITDA of 19.6% versus the target of 20% ROIC of 12.3% versus the target of 12%. Our free cash flow conversion has been operating near our target of 100% of GAAP net income. Our businesses and our teams have shown they can perform at a higher level.
Turn to page 7. Last year, we issued updated targets to achieve by 2028. We will do this by executing the same strategy and building on the capabilities we have developed in the past 10 years, a couple of differences are that we do not need significant portfolio reshaping. In addition, much more of our energy is devoted to operating our high-quality businesses and especially getting better and better at bringing new products to market and penetrating fast growing markets. We will continue to devote our energies to those things we can control and position ourselves to exceed those targets as well I will now turn the call over to Ademir to discuss our financial performance in greater detail.
Ademir Sarcevic
Thank you, David, and good morning, everyone. Let's turn to Slide 8. Second quarter 2020.
For a summary, on a consolidated basis, total revenue decreased approximately 5% year on year to $178.4 million, in line with our sequential outlook we discussed last quarter. This reflected organic revenue decline of 7.4%, partially offset by 1.9% net impact from the recent Electronics acquisition and prior Protocom divestiture and 0.6% benefit from foreign exchange.
Second Quarter 2024 for adjusted operating margin increased 90 basis points year on year to 16.1%. Our 11th consecutive quarter with the highest adjusted operating margin in Company history. Adjusted operating income grew 0.3% on a 5% consolidated revenue decrease year on year, reflecting continued focus on driving margin improvement through OpEx and pricing initiatives.
Adjusted earnings per share were $1.78 in the second quarter of fiscal 2024 compared to $1.74 a year ago, a 2.3% growth year on year. Net cash provided by operating activities was $23.8 million in the second quarter of 2024 compared to $29.8 million a year ago.
Capital expenditures were $4.3 million compared to $5.8 million a year ago. As a result, free cash flow was $19.5 million in Fiscal Second Quarter 2024 compared to $24 million a year ago. On a year to date basis, free cash flow of $31.6 million represents a record first half cash generation in the history of the Company.
Now please turn to slide 9, and I would again begin to discuss our segment performance and outlook. Beginning with electronic segment. Revenue of $79.4 million increased 9.5% year on year, a 14.7% benefit from the recent Medtronic acquisition and 0.5% benefit from foreign currency, but partially offset by an organic decline of 5.7%.
Adjusted operating margin of 20.3% in Fiscal Second Quarter 2024 decreased 310 basis points year on year. And the contribution from the Medtronic acquisition and pricing and productivity initiatives were more than offset by lower organic sales and product mix. Our new business opportunity funnel increased 30% year on year and grew 13% organically and is currently in approximately $76 million.
We remain confident in our ability to increase share and accelerate our presence in fast-growing end markets such as industrial automation, smart grid, renewable energy and EV related markets sequentially in fiscal third quarter 2020 for the excess like we expect slightly to moderately higher revenue and slightly higher operating margin from stronger volume and the contribution from the pending acquisition of Sun. Based on the observed order trends, we anticipate general market conditions to improve in fiscal Q4 2024.
Please turn to slide 10 for a discussion of the Engraving and scientific segments in greater revenue increased 8.4% to $40.8 million, driven by organic growth of 6.7% and a 1.7% benefit from foreign currency operating margin of 21.8% in Fiscal Second Quarter 2024 increased 490 basis points year-on-year due to higher volume and realization of productivity actions in our next fiscal quarter.
On a sequential basis, you'd expect me not meaningfully lower revenue and operating margin due to the seasonal impact of the Chinese New Year on project timing and fewer new platform rollouts.
In North America, Stantec revenue decreased 15.6% to $16.3 million as lower demand for COVID vaccine storage units and retail pharmacies was slightly offset by higher new product sales. Operating margin of 26.1% increased 450 basis points year on year due to lower freight cost and productivity initiatives offsetting lower volume. Sequentially, we expect slightly higher revenue and similar to slightly higher operating margins.
Now turn to slide 11 for a discussion of the engineering technologies and Specialty Solutions segments.
Engineered Technologies revenue of $19.9 million decreased 17.8% year on year due to timing of projects. This reflected an organic decline of 18.1% and a 0.3% benefit from foreign currency. Operating margin of 17.1% increased 160 basis points year on year as pricing and productivity initiatives were partially offset by lower volume and higher research and development expenses.
Sequentially, we expect similar revenue reflecting improvement across most end markets, offset by lower defense end market sales caused by delays in government funding and similar to slightly lower operating margin.
We anticipate significant sequential growth in the fiscal fourth quarter, reflecting more favorable project time Specialty Solutions segment revenue of $22 million decreased 35.5% year on year, primarily due to the Broadcom divestiture and other and an organic decline in the Hydraulics business from the industry-wide chassis shortage. Operating margin of 18.1% increased 130 basis points year on year, driven by price and productivity realization, partially offset by lower volume. Sequentially, we expect slightly to moderately higher revenue and operating margin due to improved demand in the Hydraulics business.
Next, please turn to slide 12 for a summary of standard liquidity statistics and the capitalization structure, which remains strong. Standex ended fiscal second quarter 2024 with $347 million of available liquidity at the end of the second quarter, Standex had net debt of $6.2 million compared to $21.7 million at the end of fiscal first quarter of 2024 Sanofi's long-term debt at the end of fiscal second quarter 2024 was $148.7 million. Cash and cash equivalents totaled $142.4 million. With regards to capital allocation, we repurchased approximately 33,500 shares for $4.5 million in the second quarter. We also declared our 238 quarterly consecutive cash dividend of $0.30 per share and approximately 7.1% increase year on year. In fiscal 2024, we expect capital expenditures to be between $25 million and $30 million compared to approximately $24 million in fiscal 2023.
I will now turn the call over to David to discuss key takeaways from our second quarter results.
David Dunbar
Thank you, Ademir Please turn to Slide 13. I'm very proud of our team for their strong operational execution and continued focus on growing markets. And new applications that led to our quarterly results. In our streak of 11 consecutive quarters of record margin. We have proven that we can expand margin and grow earnings by adapting to changing macro conditions, I'm excited as sales from fast-growth markets become even more significant contributors to our organic growth.
Sales growth in these markets, combined with expected new product releases, strong customer relationships and operational rigor give us confidence in the Company's long-term organic growth and profit potential. We continue to maintain a strong balance sheet based on our prudent and consistent capital allocation, which allows us to continue to pursue additional inorganic investments complementary to our strategy. In fiscal 2024, we expect continued margin expansion tracking to our long-term outlook. We anticipate sales in the fast-growth markets to continue progressing towards $200 million plus by fiscal 2028.
We reaffirm our long-term financial outlook for fiscal 2028. These targets include high single digit organic growth to greater than $1 billion 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.
Question and Answer Session
David Dunbar
(Operator Instructions) Chris Moore, CJS Securities.
Christopher Moore
Good morning, guys. Thanks for taking a few questions, Tony, good morning. So maybe just was sort of electronics, it looks like softer and the electronics conditions in Europe and China are continuing. So maybe two questions there. On what indicators are you looking at, if any to help gauge when demand might strengthen a bit there?
David Dunbar
Yes, in the last few quarters, first, we pointed out we saw softness in China and in Europe. We anticipated those will begin to reverse and we also call it the appliance market in particular.
So when we look at trends, a good leading indicator for us is the orders on bare switches that go through distribution channels. These are often sold across many different applications into many, many end markets, and they're also used for samples as people are developing new products. So that's typically the first thing to tick down in the first to come up this quarter, we're starting to see those orders tick up. So we're so based on historic precedent, deals were canceled. We are seeing that turning pushing appliance orders come I come back on in the quarter.
The general level of sales in China and Europe are still lower than we expected when we talked about this last year, but with the with the order trends reversing we expected late this quarter and into next for that those to come up.
Christopher Moore
Got it. That's helpful. I appreciate that. My understanding is that China represents roughly 10% electronic revenue. And I'm just trying to understand what's that, what's the new normal? What are the puts and takes for China to stay at that level three to five years from now?
David Dunbar
Well, that's a good question about two thirds of our sales in China are in China for China. So the ship to address it in China.
There's some multinationals that are there. There are a lot of Chinese manufacturers that they purchase from us. The other two thirds is the other third is exports. So what will change there? There are more of our customers that are talking about reshoring to North America and frankly, for us just kind of left pocket right pocket thing will follow that business wherever it is on for the remainder of the business, it has more to do with your guess is as good as mine about the prospects for the Chinese economy.
Christopher Moore
Got it. I appreciate that. Maybe just on engineering. So obviously being impacted by delays in government funding, you're expecting a big increase Q4 just to maybe a little bit more about how much visibility you have on that?
David Dunbar
Yeah. So on we said delay in funding is not so much volume funding is sort of a reallocation of where their spending is for the we have we have a position in the Navy nuclear on vessels, and some of that spending has been pushed out in order to fund support for some of the conflicts around the world now we actually have quite good visibility in the Engineering Technologies business.
And I think in the in the script, we called out, we do expect a very strong Q4 as customer projects line up for delivery. What could be if we if we execute and the customers don't change, it will be a record Q4 differentiator and technology, so quite confident there.
Christopher Moore
Perfect. Maybe just last one for me. Looks on the M&A side. Can you closing shortly, just kind of how deep is the funnel are there any $50 million plus revenue targets out there at this stage?
David Dunbar
Yeah, last year we said there were there was other family-owned businesses, which we continue to build relationships with, but there were very few $50 million, [$7,500] million businesses that seem to be actionable. That's changing a little bit.
There are some attractive larger businesses. We have been positioning ourselves with that with the owners. And it looks like some of them could be actionable in the next quarter or two. So I think the funnel is looking healthier than it did last year.
Christopher Moore
That's really helpful, David, I will leave it there. Thanks.
David Dunbar
Thank you, Chris.
Operator
(Operator Instructions) Michael Legg, Benchmark.
Michael Legg
When you look at your 19% operating margin goal by 2028, how much of that is coming from internal versus external expectations from new product development costs, cost initiatives plus acquired businesses?
David Dunbar
Well, it's actually it's pretty easy to get. There are microphones. If you take a look at your whatever your estimate is for our sales this year over the next four years, we're very conference fast-growth markets will add another $100 million to sales and although sales are at margins above our average, so that that mixes us up and then the rest of the year, you get the rest of that growth of just 3.5% growth on the base business. And if you just take some leverage on that. We get to the 19%. So if you give us a little credit for succeeding with new products, which are typically our higher margins and there's upside both to a margin mix and to a top line.
Ademir Sarcevic
Yeah. And then Mike, it's Ademir. If I can just add in a we've developed a pretty good operating muscles over the last three or four years, both from a pricing and OpEx standpoint.
So on top of what David just said, from a volume standpoint, we'll continue driving productivity and we anticipate continued to drive our gross margin up and use some of those dollars to fund the R&D funnel and continue that to continue to grow.
Michael Legg
Okay. And then you were seeing a lot of news on just EV sales being slowed. Talk a little bit on the EV sector where what you're seeing from here customers?
David Dunbar
Yes, our EV present. And I think we've I think we've talked about this before. Our products.
Ours are especially adapted to the needs of EVs that operate at higher voltages, say, above 800 volt. So last year, I think at about 11 million vehicles are electric vehicles were sold last year, 3 million of those operated 800 volts or more. We run 60% of those vehicles. We're on about 30% of the remainder of those vehicles.
And if you kind of our content is higher on those high-voltage vehicles.
So about 60% of our EV sales come from these higher end vehicles and that they continue to grow nicely. In fact, we this last quarter we just had the biggest quarter we've had in EV is continues to grow very nicely. So at the top end, we continue to see healthy growth. In fact, we just won another platform up two positions on two platforms and Mercedes this last this last quarter at the lower end of the market had the growth may slow, but we still see that as a at a double digit growth on opportunity even with the 400 volt vehicles.
Michael Legg
And then just the last one on SANYO, the timing of that during the third quarter, how much you incorporating that into the guidance you gave as far as Sandoz contribution?
Ademir Sarcevic
Let Adam handle.
Yeah, I think, Michael, if we are if we can close it in the next few weeks, you know that the guidance that we gave actually slight kind of slightly to moderately slightly assumes no Sanyo and moderately would assume we get a month or month-and-a-half of SANYO revenue within the quarter.
Michael Legg
So okay, great.
Thank you. Great quarter.
Ademir Sarcevic
Thank you.
Operator
(Operator Instructions) Mike Shlisky, D.A. Davidson.
Michael Shlisky
Good morning and thanks for taking my question, I wanted to start asking to start off on a scientific another down quarter year over year due to the COVID. Well, the hangover, if you will, you've had organic growth that's been kind of negative for just about two years now almost every quarter. Is there a point where that kind of flattens out? I mean, at some point, you have now lapped the twice. I'm curious to see when we might start seeing positive organic growth in that in that business yet.
David Dunbar
And we think we've lab to lab that does that that surgeon from COVID, I mean, is the sales growth for that business was and is up 40% in 21, up 6% in 22 and has been down the last two years, but then decline and was down 11% last year.
This year will be down like half of that or less. And most of that is that is the reduced purchased from pharmacies. We are seeing we've seen growth in our new products. New products are a little more than 10% of sales in that business or have about approaching 10%. That gets us into new segments.
We're in this last year, we've talked about a return to kind of normal buying patterns from universities, laboratories, other life science institutions so on.
So we'd expect growth from here.
Ademir Sarcevic
Yeah, Mike, it's Ademir. If I can just add to that, some of these units that are sold, they usually have call it. I don't know it's a useful life, but they usually utilize for about four to seven years before they replace. So if you go back to those units that we sold in 2021 at some point over the next couple of years, there will be a replacement cycle coming in and we hope to capture that opportunity as well.
Michael Shlisky
Got it. Thank you for that.
We wanted to turn to some specialty solutions. I did notice in the slide, you had put a AM a fire truck in there, and that's an important hydraulic piece of the market. I guess I'd be curious. So as I talk with some of the contract manufacturers and there's only a few of them out there, they are booked through May 2025 or which ones at this point, and they are trying to maximize their the throughput.
Now I'd be curious as to when that might start turning a little more positive because those folks seem to be dealing with a lot more orders than they can even handle right now. I guess I'm curious, one are used, i.e., are you are you already seeing improvements? And then kind of the two, is that a real? I know it's just fire trucks, but is that also a high-growth market where you know, going forward.
David Dunbar
Yes, interesting green points. You have very observant there to see the virus and we put that in there because it's so there's a new application we're working on in that business would provide some modest growth opportunity for us. It's a small piece of our sales now and that way, if we win the application, we still have to work through the supply chain, the current delays in the fire truck market, as you described.
So in a year or two, maybe that that had some sales growth, the bigger driver for Hydraulics is dump truck dump trailer markets, garbage and waste vehicles. And there the last few quarters, orders have been dampened due to a basic chassis shortage. And I just talked with the leader of the business yesterday, the Gen orders in January have been really good in that business. And it looks like the chassis shortage for dump truck dump trailer and these broader vehicles is starting to loosen up. That's translating into sales. So we see a stronger second half for our hydraulics business.
Michael Shlisky
Great. I was the first time around the call here. I just wanted to ask a more basic question and that is, you reiterated your fiscal 20 goals. I'm curious if you could because you're you've reached your fiscal 21 goals and about three years. Do you feel like there's a chance the Company's goals may be attainable in that same three year timeframe, call it '26 or are you on? Is it a very strictly a 5-year plan and not a year three to five years?
David Dunbar
Yes, that's a great point. We actually debated last year whether to communicate the three to five year plan. We just said, let's just not complicate things, which is, say '28 by '28. But there we could we couldn't deliver that earlier. If you talk if you think about it in answer to Chris or Mike, wherever we end up this year, we'll have four more years to get to the $1 billion fast-growth markets we believe that there's another $100 million there are new product sales are ramping up.
New product releases are getting better and better at that. The markets we serve are relatively attractive. All we need is 3.5% sales growth over four years to get to that $1 billion. So if you give us a little more success with some new product sales and maybe a little tailwind from the market we could get there earlier.
Michael Shlisky
Yes.
Ademir Sarcevic
And like that's inorganic targets, right? Obviously, anything we would do inorganically comes on top of that.
Michael Shlisky
Right. Got it. Thanks so much.
I'll pass along.
David Dunbar
Thank you, Mike.
Operator
(Operator Instructions) Ross Sparenblek, William Blair.
Ross Sparenblek Sparenblek
Good morning guys through us, I think in the EVs, I mean, just given the market seems to be pretty central to China over the next few years, what does the mix look like as it relates to North America, Europe and in China?
David Dunbar
Yes. So I described earlier how we're more concentrated in the higher voltage vehicles, which last year were 11 million vehicles, 3 million or high-voltage, 60% of our sales come from those the way that's spread geographically, about 50% of our sales in the EVs are in Europe 45% in China and the remainder in North America.
Ross Sparenblek Sparenblek
And I guess that's very helpful. And then maybe just moving to engraving margins. Can you maybe help us parse out some of that outperformance in the second quarter. I mean taking out just normal operating leverage and maybe a pull forward of the I know footprint consolidation are still a couple hundred basis points on maybe what is that exactly? Was there any mix and what benefit should we expect to carry forward in the third quarter?
It is seasonally low.
Ademir Sarcevic
Yes, Ross, it's Ademir up in I mean, we've talked before about our Engraving segment and performance year-over-year. We did put a lot of productivity initiatives in play, including site consolidations, which you just would you just quoted some of that is going to start reading out in Q3 and Q4?
So there will be an additional savings, if you will, that we can achieve in those quarters, we always said that the Engraving target margin is over 20% us very well. It does get lumpy quarter to quarter over because based on the on the volume level, but you know, kind of on an annualized basis, we think that this Engraving segment will start giving us over 20% margins going forward.
So Q3 will be lower just because of the seasonality in China and some of the softness we are seeing a little bit in North America. But as we enter into fiscal 25, we expect that engraving margin will stay over 20%.
Ross Sparenblek Sparenblek
Yes, it's actually a pretty nice exit rate there.
And then maybe just one more here. Is there anything to read into the CapEx we entered the year, expecting roughly half of that was tied to your Electronics and Engineered customer commitments, and we reduced it by about $10 million. Now as of the second quarter. So is this just being pushed to the right, are the customer programs being pushed to the right as the only material? And I have to do it?
David Dunbar
you've watched us for a while, we're getting much better at forecasting sales and profits, we have a ways to go on forecasting CapEx side. I'd say the difference between what we said coming into the year and the update now certain there's a bit of delay with some of the capital equipment that we that we need in our plants and some of that's been pushed to the right. And we did in the last year, we talked about we've reduced headcount in some businesses to adjust to the lower sales in the end markets that kind of reduces the manpower to implement projects. So that pushes some projects to the right. Those are two big two major factors element that's often guys.
Ross Sparenblek Sparenblek
Well, thank you. And good luck.
Ademir Sarcevic
Thank you, Ross.
Operator
(Operator Instructions) Gary Prestopino, Barrington Research.
Gary Prestopino
Hey, good morning, David and me or Chris a couple of questions here.
First of all, on the Engraving side, you said you're looking at some lower sales in Q three. Are those lower sales, a function of what you're seeing in the automotive market or what markets are actually causing that to move down sequentially?
David Dunbar
Yes, it if this happens every year since such good Chinese New Year effect, we do sizable business in China is very profitable and still slows down for a couple of weeks every time this year.
Gary Prestopino
Okay.
So nothing in there in terms of that sort of systemic to some particular industry or serving. It's just a slowdown in China to win.
David Dunbar
Right and this business from quarter to quarter, there are no waves and there's also some project timing issues. So North America is going to be a little slower as well, simply from the timing of platforms.
Gary Prestopino
Right. Okay.
And then in regard to Q3 with this charge that you're going to take for a new D&B, those that have had a charge?
David Dunbar
Yes.
Michael Legg
Your retirement thing besides getting your Medicare card, right, I have passed that. Will you be backing that charge back into your adjusted EBITDA calculation will evolve?
Ademir Sarcevic
It will not be adjusted. We look at this as a timing thing, Gary, at some point, this would be in part of our P&L and we didn't feel it was appropriate to call that out as an adjustment. So it will be included in our the corporate actions right in our corporate expenses line.
Gary Prestopino
Okay. And then could you just refresh my memory as to on what are you paying percent you and how are you paying for it?
Is that it's a debt transaction and you're paying all data or just from drug lowering your cash balances?
Ademir Sarcevic
Well, first of all, we are taking it from our existing cash balances remember, I'll just remind you on the sale of protocol where we netted $70 million and we used that to buy Xinyu two by Medtronics and then yield to even additional money back to the shareholders in terms of dividends or share buybacks. And that's kind of that's the way we would the that the Navy was funded.
We haven't released. We're still waiting to close. We'll disclose more information about the exact purchase price and everything else as we as we close the as we close the transaction. But that gives you a good indication of what we what we what we have paid.
Gary Prestopino
Okay. Thank you.
Ademir Sarcevic
Thank you.
Operator
And there are no further questions at this time. I'd now like to turn the call back over to Mr. David Dunbar for final closing comments, or do you want to thank everybody for joining us for the call.
David Dunbar
We enjoy reporting on our progress at Standex. And finally, again, I want to thank our employees, the Board of Directors and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal third quarter 2024 call.
Operator
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely.
