Standex International Corporation (NYSE:SXI) Q3 2024 Earnings Call Transcript May 3, 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, ladies and gentlemen, and welcome to the Standex Fiscal Third Quarter 2024 Financial Results Conference Call. [Operator Instructions]. And this call is being recorded on Friday, May 3, 2024. I would now like to turn the conference over to Mr. Christopher Howe, Director of Investor Relations. Please go ahead.
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 one-time items; EBITDA margin; and adjusted EBITDA margin. We will also refer to other non-GAAP measures, including adjusted net income, adjusted operating income, adjusted net income from continuing operations, adjusted earnings per share, adjusted operating margin, free operating cash flow and pro 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 third quarter 2024 conference call. Despite continued softness in general market conditions, we continued our trend of strong margin performance. If we exclude the one-time stock compensation charge, our streak of record adjusted operating margin performance would have continued. I would like to thank our employees, our executives and the Board of Directors for their efforts and continued dedication and support that drove these results. Now if everyone can turn to slide 3, the key messages. In the third quarter sales into fast growth end markets grew 9% year on year to $26 million. We are on track to achieve our long-term target of $200 million annual sales into fast growth end markets by fiscal year 2028.
We continue to experience the effects of transitory market softness, which led to an organic decline of 5.7%. These headwinds included continued softness in appliances and general industrial end markets in China and Europe, the impact of a lower number of projects and inventory destocking by a few large electronics customers in the semiconductor and test and measurement end markets. These were partially offset by contributions from our recent acquisitions, including the late February completion of our acquisition of Sanyu Switch Company, expanding our relay product offering. In addition, we continue to work an active pipeline of other inorganic opportunities. During the fiscal third quarter, we also continued to generate strong profitability from the execution of our price and productivity initiatives.
As a result, we again achieved adjusted gross margin of nearly 40%, which followed a record 40.3% last quarter. We continued to demonstrate our ability to drive operating improvements while adapting to changing macro conditions. Consolidated adjusted operating margin increased 20 basis points year on year to 15.4%, which includes a 70 basis points impact from the onetime stock compensation charge. If it were not for me reaching my 10th anniversary at Standex and the related one-time stock compensation change, our adjusted operating margin would have been similar to last quarter’s record. Three of our five segments reported adjusted operating margin near or above 20%, while margin in the Engineering Technologies segment approached nearly 18%.
All five segments reported adjusted operating margin greater than 17%. We achieved a record fiscal third quarter free cash flow of $19.3 million, maintaining record free cash flow year to date. Our consistent and improved cash flow generation and annualized ROIC of over 12% further highlights the quality of our business. On a sequential basis, in fiscal Q4 2024, we expect slightly to moderately higher revenue due to favorable project timing in the Engineering Technologies segment, increased market demand in the Specialty Solutions segment, and the impact of our recent acquisitions. We expect slightly to moderately higher adjusted operating margin sequentially due to leverage on higher sales and pricing and productivity actions. In fiscal year 2025, we expect to return to organic growth rates in line with our long-term financial objectives.
We expect our sales into fast-growth markets to outpace growth of the general market. 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 of greater than 15%, and free cash flow conversion of approximately 100% of GAAP net income. Let’s turn to slide 4, electronic business focus and market updates. I would like to focus on our largest segment, electronics, how its markets are evolving in the near term, and how our longer-term efforts to increase its sales growth are progressing. The market headwinds we have been experiencing are beginning to abate and we anticipate general market conditions to improve in fiscal year 2025.
Typically, the sale of switches has served as a leading indicator of market turns in our business. They are the first to fall into a downturn and the first arise when the market picks back up. We mentioned last quarter that sales figure were bottoming out and starting to show a positive inflection. This positive inflection continued through the quarter and we saw a sequential increase in orders. We have mentioned before the continued softness in appliances and general industrial markets in China and Europe related to electronics. This continued in the fiscal third quarter, but we are now seeing orders pick up in Europe and for appliances and consumer related end markets globally. Our top customers that manufacture critical equipment for end markets like semiconductor, automation, and smart grid have indicated order trends are likely to improve through the second half of the calendar year.
This is supported by US investments in infrastructure and domestic chip production. The markets we serve will always ebb and flow. The longer-term prospects of the electronics business will be shaped more by the investments and focus we are bringing to increase this growth trajectory. This is a long-term effort, and I’m pleased to see that our projects are gaining traction. Sales into fast growth markets like renewable energy, electrical vehicles, smart grid, and will account for nearly 20% of segment sales in fiscal 2024. Managing an active funnel of new business opportunities is the basic building block of growth in electronics. Our NBO funnel increased 26% year on year in the fiscal third quarter and grew 10% organically. We started ramping up new product development a few years ago, and I’m happy to share that this development is beginning to convert to sales.
We are in the early days of new product sales and though the numbers are small in the single digit millions, they are growing nicely contributing to our fiscal 2024 results. Research and development investments continue to increase, and we have multiple new products slated for release in fiscal year 2025. The new product development cycle and the commercial focus on faster-growing markets creates a flywheel that gradually builds momentum and is having an increasing impact on sales and electronics. This leaves us confident as we look to fiscal year 2025 and beyond. 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, Q3 2024 summary. On a consolidated basis, total revenue decreased approximately 3.8% year on year to $177.3 million. This reflected an organic revenue decline of 5.7% and 0.9% impact from foreign exchange, partially offset by 2.7% net impact from recent acquisitions and a prior program divesture. Q3 2024 adjusted operating margin increased 20 basis points year-on-year to 15.4%. In the quarter, we incurred the one-time stock compensation charge related to our CEO reaching retirement eligibility. This charge impacted adjusted operating margin by approximately 70 basis points. Excluding this charge, adjusted operating margin would have been similar to our record second quarter 2024 performance.
In the fiscal third quarter, adjusted operating income decreased 2.2% on a 3.8% consolidated revenue decrease year on year. Adjusted earnings per share grew 6.1% year on year to $1.75 in the third quarter of fiscal 2024 compared to $1.65 a year ago. Net cash provided by operating activities was $24.4 million in the third quarter of fiscal 2024 compared to $23.3 million a year ago. Capital expenditures were $5.2 million compared to $5.6 million a year ago. As a result, we generated a record fiscal third quarter free cash flow of $19.3 million compared to $17.6 million a year ago. Our free cash flow conversion ratio as a percent of GAAP net income was 121%. Likewise, on a year-to-date basis, we generated record free cash flow of $50.8 million.
Now please turn to slide 6, and I will begin to discuss our segment performance and outlook beginning with electronics. Segment revenue of $80.4 million increased 2.8% year on year as a 13.5% benefit from recent acquisitions was mostly offset by an organic decline of 9.3% and a 1.3% impact from foreign currency. Adjusted operating margin of 20.5% in fiscal Q3 2024 decreased 130 basis points year on year as the contribution from recent acquisitions and productivity initiatives were more than offset by lower organic sales and product mix. Our new business opportunity funnel increased 26% year on year and grew 10% organically and is currently at approximately $78 million. We remain confident in our ability to increase share and accelerate presence in fast-growth markets such as industrial automation, smart grid, renewable energy, and EV related markets.
Sequentially, in fiscal Q4 2024, we expect similar revenue and slightly lower similar adjusted operating margin due to unfavorable mix. We anticipate general market conditions to improve in fiscal year 2025. Please turn to slide 7 for a discussion of the engraving and scientific segments. Engraving revenue decreased 1.7% to $36.3 million, driven by an organic decline of 0.2% and a 1.5% impact from foreign currency. Operating margin of in fiscal third quarter 2024 increased 270 basis points year on year due to realization of productivity actions in our next fiscal quarter. On a sequential basis we expect slightly lower revenue and slightly to moderately lower operating margin due to unfavorable project timing in North America and Europe. Scientific revenue decreased 10.4% to $16.9 million due to the general market softness and the related impact on retail pharmacies.
Operating margin of 28.9% increased 480 basis points year on year due to lower freight costs and productivity initiatives offsetting lower volume. Although market conditions have been challenging, new product development volume increased approximately 60% year on year and new product development sales represented approximately 10% of segment sales in the quarter. Sequentially, we expect slightly higher revenue and similar operating margin. We anticipate market conditions to start to improve in fiscal year 2025. Now turn to slide 8 for a discussion of engineering technologies and specialty solutions segments. Engineering technologies revenue of $20.1 million increased 11.3% year on year as higher demand in aviation was partially offset by lower defense sales caused by delays in government funding.
Operating margin of 17.5% increased 450 basis points year on year as leverage on higher aviation sales and pricing and productivity initiatives were partially offset by research and development expenses. This margin result is near the lower end of our long-term target for the segment and represents the fourth consecutive quarter of operating margin improvement. Sequentially, we expect moderately to significantly higher revenue and moderately higher operating margin due to more favorable project time. Specialty solutions segment revenue of $23.5 million decreased 27.1% year on year, primarily due to the Procon divestiture and normalization in the display merchandising business, partially offset by organic growth in the hydraulics business. Operating margin of 19.9% decreased 230 basis points year on year as the impact of the Procon divestiture and less sales in the display merchandising business more than offset higher sales in the hydraulics business.
Sequentially, we expect moderately higher revenue and operating margin through improved end market demand and leverage on higher sales. Next, please turn to slide 9 for a summary of Standex’s liquidity statistics and the capitalization structure, which remains strong. Standex ended fiscal Q3 2024 with $347 million of available liquidity. At the end of the third quarter, Standex have net debt of $10 million compared to $6.2 million at the end of the fiscal second quarter ’24. Standex’s long-term debt at the end of fiscal Q3 2024 was $148.8 million. Cash and cash equivalents totaled $138.8 million. With regards to capital allocation, we repurchased approximately 34,000 shares for $5.1 million in the third quarter. We also declared our quarterly consecutive cash dividend of $0.3 per share and approximately 7.1% increase year on year.
In fiscal 2024, we expect capital expenditures to be between $28 million and $32 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 third quarter results.
David Dunbar: Thank you, Ademir. Please turn to slide 10. I’m very proud of our team for their continued operational excellence and focus on growing markets that led to our quarterly results. We are prepared as inventory levels normalize and demand returns, while our fast-growth markets will continue to evolve and accelerate. We have proven over the 11 consecutive quarters of record margin that we can expand margin and grow earnings by adapting to changing macro conditions. Excluding the one-time charge in the quarter, this streak would have continued. We remain optimistic about the [Technical Difficulty] secular trends that will benefit from the transition from combustion to hybrid and electric in automotive, infrastructure spending and smart grid, defense applications, and next-generation aerospace development, and from the evolution of space exploration.
Broadly speaking, these trends are still in the earlier stages of development. We are on track to achieve our long-term target of $200 million plus in annual sales into fast growth end markets by fiscal year 2028. To support our growth, we continue to expand our engineering capabilities to drive new product development and new applications across markets with growth potential. In fiscal year 2025 for the first time in the company’s history, new products will be released in every one of our businesses. We continue to maintain a strong balance sheet that allows us to prudently assess an active pipeline of organic and inorganic growth opportunities. In fiscal 2025, we expect to return to organic growth rates in line with our long-term financial objectives.
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. We will now open the line for questions.
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