Standex International Corporation (NYSE:SXI) Q2 2024 Earnings Call Transcript
Standex International Corporation (NYSE:SXI) Q2 2024 Earnings Call Transcript February 2, 2024
Standex International Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Standex International Fiscal Second Quarter 2024 Financial Results Conference Call. All participants’ lines are in a listen-only mode. [Operator Instructions] This call is being recorded on Friday 02, February 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 two. 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 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'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 continue our trend of record 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 three, key messages. In the second quarter, sales into fast growth end markets grew 14% year-on-year to $21 million. 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 outlet, 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 Minntronix 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 Sanyo Switch Company. We anticipate this transaction to close during our fiscal third quarter. We also continue 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 that gross margin was above 40%.
And it demonstrates our continued abilities 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 third quarter 2024, we expect slightly higher revenue due to the contribution from our pending acquisition of Sanyu 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 meet reaching retirement eligibility under the stock compensation plan. Excluding this one-time charge, adjusted operating margin would be similar on a sequential basis. Although I am now retirement eligible under Standex's 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 fourth quarter 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 market served by electronics and specialty segments, contributions from pending Sanyu acquisition and more favorable project timing in the engineering technology 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 four. In January, I celebrated my 10th anniversary at 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 doubled EPS. The real story is how we delivered these results. Please turn to page five. 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 and serving growing end markets.
We developed a 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 attracted and retained a great talent that thrives in our 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 six. 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 lowest single digits. Now, our lowest margin business delivers over 15% operating income. The metric I am perhaps most pleased with is how we are creating career paths for our people. In 2014, we filled 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 stand-ex employees. Through these 10 years, we have developed a 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 deliver the financial results I showed earlier. Now, please return to page six. Three years ago, we issued longer-term financial expectations stating over the next three to five years, we would achieve the targets shown in the slide I've copied 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 seven. 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 eight, second quarter 2024 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 Minntronix acquisition and prior Procon divestiture and 0.6% benefit from foreign exchange. Second quarter 2024 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 nine and I will begin to discuss our segment performance and outlook, beginning with electronics. Segment revenue of $79.4 million increased 9.5% year-on-year as a 14.7% benefit from the recent Minntronix acquisition and 0.5% benefit from foreign currency were 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 as the contribution from the Minntronix acquisition and pricing and productivity initiatives were more than offset by a lower organic sales and product mix. Our new business opportunity funnel increased 30% year-on-year and grew 13% organically and is currently an approximately $76 million. We remain confident in our ability to increase share and accelerate our presence in fast growth end markets such as industrial automation, smart grid, renewable energy and EV related markets. Sequentially, in fiscal third quarter 2024, we expect slightly to moderately high revenue and slightly higher operating margin from stronger volume and the contribution from the pending acquisition of Sanyu.
Based on the observed order trends, we anticipate general market conditions to improve in fiscal four quarter 2024. Please turn to slide 10 for a discussion of the Engraving and scientific segment. Engraving revenue increased 8.4% to $40.8 million driven by organic growth of 6.7% and the 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, we expect 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. Scientific 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 costs 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 solution segments. Engineering 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 and market sales caused by delays in government funding and similar to slightly lower operating margin.
We anticipate significant sequential growth in the fiscal four quarter reflecting more favorable project timing. Specialty solution segment revenue of $22 million decreased 35.5% year-on-year primarily due to the proclaimed divestiture 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 Standex's 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 2024. Standex'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 am 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.
Operator: Thank you sir. [Operator Instructions] We have our first question coming from the line of Chris Moore from CJS Securities. Please go ahead.
See also 11 Best Aluminum and Aluminum Mining Stocks To Buy and 12 High Quality Headphones Under $100.
To continue reading the Q&A session, please click here.
