Q4 2023 Standex International Corp Earnings Call
Participants
Ademir Sarcevic; VP, CFO & Treasurer; Standex International Corporation
Christopher H. Howe; Director of IR; Standex International Corporation
David A. Dunbar; Chairman, President & CEO; Standex International Corporation
Christopher Paul Moore; Senior Research Analyst; CJS Securities, Inc.
Gary Frank Prestopino; MD; Barrington Research Associates, Inc., Research Division
Michael Frederick Legg; Senior Equity Analyst; The Benchmark Company, LLC, Research Division
Presentation
Operator
Good day and welcome to the Standex International Fiscal Fourth Quarter 2023 Financial Results Teleconference. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Christopher Howe, Director of Investor Relations. Please go ahead.
Christopher H. 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' 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' 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 onetime 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 to EBITDA. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's financial performance.
On the call today is Standex' Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer and Treasurer, Ademir Sarcevic.
David A. Dunbar
Thank you, Chris. Good morning and welcome to our fiscal fourth quarter 2023 conference call. We are very pleased with the results, which completed a record fiscal year. We continued our trend of record operating margin performance.
On the top line, sales into fast-growth markets continued to accelerate, as did new products and new applications. I would like to thank our employees, our executives and the Board of Directors for their efforts and continued dedication and support that drove our exceptional fiscal 2023 results.
Now if everyone can turn to Slide 3, key messages. In the fourth quarter, we reported 7.8% organic revenue growth year-on-year, led by our Electronics and Engraving business segments, which both exhibited double-digit organic growth. Our long-term growth profile continues to improve as sales into fast-growth end markets grew 67% year-on-year to $24 million in the fiscal fourth quarter 2024. We anticipate this revenue stream to grow by greater than 20% in fiscal year 2024 to over $100 million.
Profitability continues at record levels. The continued effectiveness of our price and productivity actions, combined with the lower freight cost, helped us achieve a ninth consecutive quarter of record adjusted operating margin. Consolidated adjusted operating margin of 15.4% in fiscal fourth quarter 2023 was a 150 basis point increase year-on-year. Our margin expansion was driven by our Engraving, Scientific and Specialty Solutions business segments, while our largest segment, Electronics, had relatively stable margin. 3 of our 5 segments reported operating margin greater than 20% with our Engraving segment approaching 20% margin.
With free cash flow of $32.8 million in the quarter, our net cash position as of June 30 was $22.3 million. We had approximately $372 million of available liquidity to invest in our healthy funnel of organic growth and acquisition opportunities. Ademir will discuss our financial performance, liquidity position and capital allocation in greater detail later in the call.
We are also very pleased to see continued improvement in our ROIC. ROIC of 12.4% in fiscal 2023 improved 130 basis points year-on-year. In fiscal 2024, we expect high single-digit sales growth. We also expect continued margin expansion ahead of our long-term outlook. These expectations are based on operating improvements achieved in fiscal 2023, planned productivity initiatives for fiscal 2024, increased contribution from new products and applications, continued acceleration of our fast-growth end markets and a more stable economic environment.
On a year-on-year basis, in fiscal first quarter 2024, we expect a slight increase in revenue as strong organic growth in Engraving and the contribution from Minntronix helped to offset a slow recovery in China and Europe markets served by Electronics and the impact of the Procon divestiture.
On a sequential basis, we expect slightly lower revenue as the contribution from our Minntronix acquisition offsets unfavorable project timing in Engineering Technologies and a continued slow recovery in China and Europe markets served by Electronics. We expect similar to slightly higher adjusted operating margins compared to fiscal fourth quarter 2023.
We reaffirm 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 of greater than 15% and free cash flow conversion at approximately 100% of GAAP net income.
Let's turn to Slide 4, highlights from our Minntronix acquisition. We announced earlier this week that we acquired Minntronix. There are specific strategic and financial criteria we look for in an acquisition like complementary products, attractive end markets, a defensible competitive advantage and cultural fit. Minntronix has many of these attributes, and we are excited to welcome their team to Standex.
Let me begin with an overview of the company. Founded in 1990 and based in South Dakota, Minntronix designs and manufacturers customized as well as standard magnetics components and products for cable fiber, smart meters, industrial control and lighting electric vehicles and home security markets. More broadly speaking, these component and product applications fit within certain fast-growing end markets like 5G, smart grid and industrial automation.
The purchase price was approximately $30 million. This implies a transaction multiple of approximately 8.5x the last 12 months ended June 2023 EBITDA. We expect the acquisition to be accretive to earnings per share and to achieve a double-digit return on invested capital in our first full year of ownership.
The divestiture of Procon for $70 million, followed by the acquisition of Minntronix for $30 million, represents an effective round-trip of cash as Minntronix sales and operating income contributions effectively replaced Procon sales and operating income in year 1 of ownership with further upside potential in the years ahead.
We were attracted to Minntronix for its highly complementary customer base and product line, its engineering talent and resources that provide a seamless cultural fit and for its participation in attractive end markets. We are excited to welcome team to Standex and anticipate that during the integration, we will discover additional opportunities to create value as we have done with our previous acquisitions.
I will now turn the call over to Ademir to discuss our financial performance in greater detail.
Ademir Sarcevic
Thank you, David, and good morning, everyone. Let's turn to Slide 5, fourth quarter 2023 summary. On a consolidated basis, total revenue increased 1.9% year-on-year to $188.3 million. This reflects organic revenue growth of 7.8%, offset by a 5% impact from the Procon divestiture and a 0.8% impact from foreign exchange.
Fourth quarter 2023 adjusted operating margin increased 150 basis points year-on-year to 15.4%, our highest adjusted operating margin in company history. Our adjusted operating income grew approximately 13.2% on a 1.9% consolidated revenue increase year-on-year.
Adjusted earnings per share were $1.76 in the fourth quarter of fiscal 2023 compared to $1.54 a year ago, approximately 14.3% growth year-on-year. Net cash provided by operating activities was $40.4 million in the fourth quarter of 2023 compared to $29.5 million a year ago. Capital expenditures were $7.6 million compared to $10.8 million a year ago. As a result, free cash flow was $32.8 million in fiscal fourth quarter 2023 compared to free cash flow of approximately $18.7 million a year ago.
Now please turn to Slide 6, and I will begin to discuss our segment performance and outlook, beginning with Electronics. Segment revenue of $79.9 million increased 11.1% year-on-year as an organic increase of 12.3% was partially offset by a 1.2% negative impact from foreign exchange. Although softness in appliances and distribution end markets in China and Europe remains, industrial automation, power management, renewable energy and EV-related markets remain robust across our regions.
Adjusted operating margin of 21% in fiscal fourth quarter 2023 decreased 150 basis points year-on-year as the contribution from higher sales and pricing and productivity initiatives were more than offset by unfavorable mix, inflation and higher R&D investments. Sequentially, we expect slightly higher revenue in fiscal first quarter 2024 as the contribution from Minntronix and higher sales into fast-growth markets are partially offset by a continued slow recovery in China and Europe. We expect similar operating margin on a sequential basis, reflecting a similar product mix.
As we move through calendar year 2024, we believe Electronics will start to reflect more typical organic growth rates on a run rate basis, barring any unforeseen economic disruptions.
Please turn to Slide 7 for a discussion of the Engraving and Scientific segments. Engraving revenue increased 14% to $42.4 million as organic growth of 15.5% was partially offset by a 1.4% headwind from foreign exchange. Organic growth was driven by strong demand in Europe and growth in soft trim applications in Asia. Operating margin of 18.6% in fiscal fourth quarter 2023 increased 240 basis points year-on-year due to higher sales and realization of productivity actions.
In our next fiscal quarter, on a sequential basis, we expect slightly lower revenue, reflecting timing of customer projects and slightly higher operating margin. In addition, we continue to look for opportunities to enhance the long-term margin profile of Engraving. As such, we have initiated site consolidation projects in Detroit area and in Germany, which will improve customer service and capacity utilization as we go from 2 to 1 site in each of these geographies. These consolidations will result in approximately $3 million of restructuring costs in fiscal 2024 with the payback expected within 2 years. We anticipate starting to realize the benefits of these projects in our fiscal fourth quarter 2024.
Scientific revenue decreased 2.6% to $18.3 million as higher sales into research and academic end markets were offset by lower demand for COVID-19 vaccine storage. Operating margin of 25.5% increased 570 basis points year-on-year due to lower freight costs and realization of productivity actions. On a sequential basis, in fiscal first quarter 2024, we expect similar revenue and operating margin.
Now turn to Slide 8 for a discussion of the Engineering Technologies and Specialty Solutions segments. Engineering Technologies revenue of $21.8 million increased 1.3% year-on-year. Operating margin of 14.2% decreased 80 basis points year-on-year as an increase in the number of new platform development projects were mostly offset by productivity initiatives.
In fiscal first quarter 2024, on a sequential basis, we expect a significant decrease in revenue, reflecting customer timing of projects. We expect a slight to moderate decrease in operating margin as productivity initiatives modestly offset the impact of volume decline and a higher mix of development projects.
The long-term demand for this segment remain robust. The current backlog and the new platform development funnel are expected to provide a solid foundation for growth in the second half of fiscal 2024 and beyond.
Specialty Solutions revenue of $25.9 million decreased 26.6% year-on-year as the Procon divestiture and the organic decline in the Hydraulics business were partially offset by organic growth in the Display Merchandising business. On a pro forma basis, excluding Procon, revenue decreased $0.6 million or 2.1% year-on-year.
Operating margin increased significantly to 24.8% from 15.3% a year ago driven by higher sales in the Display Merchandising business, realization of pricing initiatives and higher mix of aftermarket sales and operational improvements in the Hydraulics business. In fiscal first quarter 2024, on a sequential basis, we expect a slight decrease in revenue and operating margin.
Next, please turn to Slide 9 for a summary of Standex' liquidity statistics and the capitalization structure, which remain strong. Standex ended fiscal fourth quarter 2023 with $372 million of available liquidity, an increase of approximately $59 million from the prior year. At the end of the fourth quarter, Standex had net cash of $22 million compared to net debt of $70 million at the end of fiscal 2022. Standex' long-term debt at the end of fiscal fourth quarter 2023 was $173.4 million. Cash and cash equivalents totaled $195.7 million.
With regards to capital allocation, we repurchased approximately 50,900 shares for $7 million in the fourth quarter. We also declared our 236th quarterly cash dividend of $0.28 per share, an approximately 7.7% increase year-on-year. In fiscal year 2024, we expect capital expenditures to be between $35 million and $40 million compared to approximately $24 million in fiscal 2023.
I will now turn the call over to David to discuss our key takeaways from our fourth quarter results.
David A. Dunbar
Thank you, Ademir. Please turn to Slide 10. Standex is in a strong position to deliver solid organic growth as an operating company driven by accelerating activity and demand within our fast-growth end markets. We're excited about the development of these opportunities.
I'm proud of our team for a record fiscal performance that was driven by our operational execution and by the continued progress of our growth efforts. For fiscal 2023, we achieved several record milestones that include gross margin, adjusted operating margin, adjusted earnings per share and free cash flow.
In fiscal 2024, we expect high single-digit sales growth. We also expect continued margin expansion ahead of our long-term outlook. We anticipate our fast-growth markets to continue to progress towards our fast-growth markets' revenue target of $200 million-plus by fiscal 2020.
Our regional presence, strong customer relationships and disciplined approach to pricing and productivity continue to provide protection from supply chain challenges and inflation. As a result, we are confident we will continue to deliver sustainable profitable growth through this environment. Our strong balance sheet allows us to continue to pursue additional inorganic investments complementary to our strategy.
We will now open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) The first question today comes from Chris Moore with CJS Securities.
Christopher Paul Moore
Specialty Solutions operating margin, 24.8%, is that sustainable in the low 20s in the -- over the long term?
David A. Dunbar
Absolutely. One of the unsung heroes in the company right now is our Display Merchandising business. 26% of their sales are coming from new products. They're getting into some new markets, new product categories. And so they have had a fantastic year, and that is sustainable because of the new products and the new market presence. And then Hydraulics business, they've got a solid end-market outlook with infrastructure investment in the coming years in North America.
Christopher Paul Moore
Got it. Very helpful. Maybe just talk a little bit about the fiscal '24 cadence that you will need to get to the high single-digit growth that you're talking about for this year.
Ademir Sarcevic
Yes. Chris, it's Ademir. So if you kind of -- our high single-digit sales growth assumes a couple of points inorganically that we're going to get from the Minntronix acquisition or the benefits of the Minntronix acquisition once you take out Procon kind of on a net basis and kind of mid- to high mid-single-digit organic growth for the corporation. That the math behind it.
For the most part, we see healthy end markets. We do see some softness in China and Europe, specifically for Electronics. We think that that's going to get resolved over the next -- over the upcoming quarters. But everything else remains healthy, and we are very optimistic and bullish about our fast-growth end-market exposure and the growth we are seeing there. And that's kind of the math behind it.
Christopher Paul Moore
Is the growth a little bit back-half loaded, you think?
David A. Dunbar
It depends on the business. Engraving is solid and they have a lot of momentum coming into this year. Engineering Technologies backlog would lead to more shipments in the back half of the year. We'll have great visibility to that.
We are seeing some softness in electronics and appliances, consumer good-related shipments in China and Europe. We're anticipating that will start to pick up in the back half of the year. And then throughout, there's this overlay of fast growth -- what we call fast-growth markets, which was about $83 million last year. That will grow to $100 million this year, and that's pretty steady quarter after quarter. So if you add all those things up, it's -- there will be relatively a little more growth in the second half.
Christopher Paul Moore
Got it. Maybe I'll just sneak one more in. You just closed the Minntronix deal. It looks like a nice fit. Maybe just update the M&A funnel a little bit in terms of what you're seeing in the market and your thoughts there.
David A. Dunbar
Yes. Well, there's 2 kinds of funnels we have. We have kind of family-owned businesses, privately owned businesses like Minntronix. And there are quite a few out there. We have relationships with many of them.
The timing is hard to predict because the owners sell for their own reasons at their own times. And in fact, this Minntronix opportunity, we've known Lew -- I mean the President of our Electronics business, John, has known Lew for decades. And Lew called John earlier this year and said, "I think I'm ready." And it came together in a few months. So it's still hard to predict the timing, but we think we are well positioned for others. And there are a few out there that could be actionable in the coming quarters.
The second category of opportunities are larger deals. And we would love to bring in $100 million or $200 million of sales in a single acquisition. That's been relatively quiet in the last year in terms of deals, although we are getting to know the owners. We're putting ourselves in a position to be included in those processes when they come. It appears we're getting signs there are a few of those that may come to market in the second half of this year. So I'd call it a good and robust funnel both on the low end and the high end.
Operator
The next question comes from Michael Legg with Benchmark.
Michael Frederick Legg
Congrats on a great quarter. Can you comment a little bit on how much of the 7.8% revenue growth was related to pricing increases?
Ademir Sarcevic
Mike, kind of -- in general terms, we will probably say about 1/2 to 2/3 is volume, 1/3 to 1/2, depending on the quarter, is pricing. But more of it is volume than price.
Michael Frederick Legg
Okay. Great. And then it seemed like everything is going pretty well for all the segments. What are you seeing from a weakness perspective? And what type of opportunities would you see from that side?
David A. Dunbar
Well, Mike, I want to -- I would call out the weakness in appliances and consumer goods in Europe and China. We think that will be upside towards the tail end of the year. The weakness, I don't know, if I'd comment...
Ademir Sarcevic
No, I mean, I think, Mike, we see more strength than weaknesses kind of at the end markets that we play in. We -- for example, our magnetics business plays in the U.S., in the North American end market for the most part, and that's been robust. Our Engraving end markets are pretty robust. So it's kind of -- as we kind of look at the markets across the globe that we serve, we feel pretty good about the overall health of them.
David A. Dunbar
I guess I would add -- I mean, as you know, it's -- we have a lot of businesses, and they serve different end markets. If you look at more pure-play electronics companies that have reported in the last week or so, they're seeing some softness. They're seeing some -- there's some inventory stocking, destocking, especially in components. We're seeing that, too, but that's a smaller part of our business. So it doesn't really affect the top line as much. But -- we're seeing the same effects as others.
But we've got this fast-growth market going from $80 million to $100 million. We're very confident in that. And the ETG backlog in the second half is very strong. Those things I mentioned earlier with Chris, I think when you add it all up, makes for a healthy mix of end markets.
Michael Frederick Legg
Okay. Great. Congrats on the quarter.
David A. Dunbar
Yes. Thank you, Mike.
Ademir Sarcevic
Thank you.
Operator
(Operator Instructions) The next question comes from Gary Prestopino with Barrington Research.
Gary Frank Prestopino
Ademir, I just want to clarify, you said embedded in your guidance is mid- to high single-digit organic growth for 2024 on the top line?
Ademir Sarcevic
Correct.
Gary Frank Prestopino
Okay. And that's constant currency, right?
Ademir Sarcevic
Correct.
Gary Frank Prestopino
Okay. And then can you talk about with this Minntronix acquisition, how you can leverage their products and their platform to drive increased growth within that legacy business and within your business itself?
David A. Dunbar
Well, in the last few years, we've acquired Agile, Renco, Northlake, other magnetics businesses. And our experience is that we've added about 10 points to the sales of each of those business with the sales synergies that have come from offering their products through our existing channels.
And they are -- and each of those businesses also -- so if you added all the few million dollars from our other Electronics business, we're still getting to know Minntronix, the specific accounts, the specific applications. But our expectation is that over the next couple of years, we'll be adding some $2 million to $5 million of sales synergies from that based on the same experience with other, although I can't name accounts and applications today.
Gary Frank Prestopino
No, I understand that. I mean, was Minntronix selling outside of the U.S., and that's one of the things that you can do is carry them, their business outside of the U.S. or North America?
David A. Dunbar
They do have -- you know what, they have a sales model -- it's very similar to ours. They work with engineering teams in America, and they secure the business in America with the application expertise and the application design. Some of the ship-to address actually is in China and in other regions, primarily China and North America. But the customer decision is made here in North America. So we -- a hypothesis is we can help them get into customers in Europe and some additional customers in Asia and China. We have more reach than they do there.
Ademir Sarcevic
Yes. And their customer relationships are extremely strong, Gary. I mean the whole customer intimacy model we compete on, the Minntronix is right there with us. And that's one of things that attracted us to them. And I think as a combination of 2 companies, we'll be able to get -- they'll be able to help us, and we'll be able to help them and then kind of move forward.
Gary Frank Prestopino
Okay. And then -- and this was just a hunch. I mean, I assume that this was maybe a family-run business and the gentleman that was running it, as you said, just said I'm ready to sell. Is that...
David A. Dunbar
Yes, yes. Yes, that's right. And if I could just interject one thing. We did make the point during the call that with the sale of Procon earlier, we had $70 million of proceeds. This was a $30 million acquisition. We more than replaced the sales and the operating income from Procon with growth opportunity. And we can also improve the profitability of this business based on our experience with the other businesses. And we think we're well positioned with some other privately owned businesses in America. At some point, we'll do the same.
So this is a good example of what has been a classic Standex acquisition. And as I mentioned earlier to Chris' question, I think, we're positioning ourselves for some larger opportunities.
Gary Frank Prestopino
But I guess, just in general, not to beat a dead horse here, but with a lot of these acquisitions, if you're actually competing with some of these smaller companies, are they starting to see the handwriting on the wall in terms of that you're getting bigger -- a bigger presence, more geographic spread and...
David A. Dunbar
Well, I guess there's just 2...
Gary Frank Prestopino
Go ahead, I'm sorry.
David A. Dunbar
Yes. First of all, we have a great reputation in the market. So these family-owned businesses -- there are other companies -- other larger companies acquiring companies like them. I would say we're very proud of our reputation. We think we get the first phone call.
In terms of being competitors, the interesting thing about Minntronix is this magnetics business is really a customer intimacy business. And the relationship that engineers have with the OEMs is really important. It creates a long-term relationship. And we only compete on the fringes, frankly, with Minntronix. We have competed on some new applications with them over time. We have some similar capabilities. But the -- this magnetics market is characterized more by who has what customer relationships and who has what industry expertise.
So Minntronix brings us knowledge of some smart grid applications we weren't so strong in and -- especially in 5G design. So there's less of a competitive issue there. However, in general, your statement is true that these smaller family-owned businesses, they see some consolidation going on in the industry, and they're getting themselves in a position where they're going to have to choose who they align with.
Operator
(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to David Dunbar for any closing remarks.
David A. Dunbar
Thank you. I want to thank everybody for joining us for the call today. We enjoy reporting on our progress at Standex. And finally, again, I want to thank our employees and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal first quarter 2024 call.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
