Standex International Corporation (NYSE:SXI) Q1 2023 Earnings Conference Call November 4, 2022 8:30 AM ET
Company Participants
Chris Howe – Director of Investor Relations
David Dunbar – President and Chief Executive Officer
Ademir Sarcevic – Vice President, Chief Financial Officer and Treasurer
Conference Call Participants
Peter Lucas – CJS Securities
Nicholas Heymann – William Blair
Operator
Good morning, and welcome to the Standex International Fiscal First Quarter 2023 Financial Call. [Operator Instructions] Please note this event is being recorded.
I’d now like to turn the conference over to Chris Howe, Director of Investor Relations. Please go ahead.
Chris 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 could 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 complementary result 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, and welcome to Standex. We’re happy to have you join us. And good morning, everyone, and welcome to our first fiscal quarter 2023 conference call. We’re very pleased with our first quarter performance, which built on a highly successful fiscal 2022. Our focus on fast growth markets, pricing disciplines and nimble execution by our global management teams positioned us to continue delivering strong earnings in a dynamic macroeconomic environment. We have an active pipeline of new business opportunities and productivity initiatives to continue our momentum. I want to thank our employees, our executives and the Board of Directors for their continued dedication and support. Now if everyone can turn to Slide 3, key messages. The continued effectiveness of our price and productivity actions improved our margin profile in the quarter and produced our sixth consecutive quarter of record adjusted operating margin. Consolidated adjusted operating margin of 15% in fiscal first quarter 2023 was a 160-basis point increase year-on-year and a 110-basis point improvement sequentially despite external challenges such as high inflation and foreign currency headwinds.
Four of Standex five company business segments, each reported adjusted operating margin of at least 16% as we successfully executed company-wide productivity and price realization actions. We reported 7.3% organic revenue growth year-on-year as three of our five business segments exhibited organic revenue growth. Electric vehicles, renewable energy, commercial aviation and defense end markets remain strong while Scientific was impacted by lower demand for COVID vaccine storage. Revenue contribution from high-growth markets such as electric vehicles, green energy and the commercialization of space increased approximately 30% year-on-year to $17 million in fiscal first quarter 2023. We anticipate this revenue stream to grow by over 35% in FY ’23.
Our solar energy project with ENEL is progressing well and is now in the pilot plant design phase. Order trends remain healthy, and the backlog realizable in under 1 year grew 12% year-on-year to $266 million. As part of our value creation system, we continue to have an active focus on lean initiatives, and in turn, the standardization of operating disciplines across all business units, further leveraging our G&A structure. As a result, we are seeing continued improvement in our ROIC. With Q1 FY ’23 annualized ROIC at 12%, 160 basis points improvement year-on-year. Ademir will discuss our financial performance, liquidity position and capital allocation in greater detail later in the call. In fiscal second quarter 2023 on a sequential basis, we expect slightly higher revenue and similar operating margin. On a year-on-year basis, we expect flat revenue comprised of mid- to high single-digit organic growth countered by an equivalent reduction from currency and moderate to significantly improving operating margin. In fiscal 2023, we anticipate the majority of our segments to exhibit solid organic growth.
Now please turn to Slide 4, and I will begin to discuss our segment performance and outlook, beginning with Electronics. Segment revenue of $75 million decreased 1% year-on-year as 4.3% organic growth and 1.5% contribution from acquisitions were more than offset by 6.6% negative impact from foreign exchange. End market trends remain favorable, particularly for industrial applications, medical, power management and EV-related markets. Operating margin of 24.1% in fiscal first quarter 2023 was flat versus the year ago period, primarily due to organic sales growth and productivity initiatives offsetting the inflationary and currency impact. New business opportunities funnel remains strong and is currently at $62 million.
The pictures on Slide 4 highlights the Electronics segment’s focus on growth markets such as warehouse automation. Within magnetics, we are delivering components for smart conveyor systems in manufacturing and warehouse automation to improve precision and energy efficiency. This business will continue to grow, supporting the overall electrification trend in many markets. Within sensors and switching technologies, our relays are unique products, meeting the isolation requirements in renewable energy applications as well as electric vehicles. We continue to see strong growth coming from China and Europe as renewables continue to expand in those markets. Sequentially, we expect revenue in our second fiscal quarter to be similar as relay and magnetics components grow in North America is offset by softness in white goods end markets in Asia and Europe. The company expects a slight decrease in operating margin, mostly due to mix and higher growth investments, partially offset by continued price actions.
Please turn to Slide 5 for a discussion of the Engraving segment. Revenue remained nearly flat at $35 million as an 8.3% headwind from exchange rate changes overshadowed 7.9% organic growth. Operating margin of 16.7% in fiscal first quarter 2023, increased 280 basis points year-on-year due to the realization of previously announced productivity actions in North America and Europe. Laneway sales of $15 million grew approximately 5% year-on-year with positive trends in tools, laser engraving and tool finishing. The picture on Slide 5 illustrates our innovative texture services for customers like Ford using our advanced laser technology, which can be engineered to create colored services without paint. In our next fiscal quarter, on a sequential basis, we expect revenue to be similar and operating margin to decrease slightly due to project mix. In fiscal 2023, we also expect continued growth in soft trim demand reflecting auto manufacturers increasing move to higher-quality anterior surfaces and textures.
Please turn to Slide 6, Scientific segment. As expected, Scientific revenue decreased 14% year-on-year to $18.5 million dollars primarily driven by lower demand associated with COVID-19 vaccine storage. Operating margin 20.2%, decreased 70 basis points year-on-year due to the lower volume, which was mostly offset by price and productivity actions. As highlighted on Slide 6, the pace of new product introductions of Scientific is accelerating, further broadening our product line and capabilities. We were the first to release products compliant with the new NSF-NIST vaccine storage standard and continue to expand the product family with new sizes. As new vaccines and treatments continue to be introduced, Scientific has a favorable market position to meet the growing demand. On a sequential basis, in the fiscal second quarter of ’23, we expect slightly higher revenue increase and slightly lower to similar operating margin, primarily due to R&D investments and higher anticipated spend on advertising and trade shows.
Turning to the Engineering Technologies segment page on Slide 7. Revenue of $17 million decreased 3% year-on-year reflecting project timing and the impact of foreign currency. Operating margin of 11% increased 590 basis points year-on-year due to productivity and efficiency initiatives and the impact of a onetime project-related charge in fiscal first quarter ’22 that did not repeat. As pictured on Slide 7, our advanced engineering team is developing products for a large number of customers from established market leaders to innovative start-ups. Through applications like the pictured core fuel tank dome as well as adjacent rocket engine and structural components. In the next fiscal quarter, on a sequential basis, we expect a moderate to significant increase in revenue and operating margin, reflecting project phasing. Please turn to Slide 8, Specialty Solutions segment.
Specialty Solutions revenue of $35 million increased nearly 37% year-on-year due to price realization, strong market demand in Hydraulics business unit and the favorable year-over-year comparison due to a labor work stoppage in 2 plants during fiscal first quarter ’22. Operating margin increased 640 basis points to 17.4%, reflecting the price and volume increases. As pictured on slide 8, we have continued to expand our Procon product line with a helical gear pump professional espresso shots and milk foaming, which requires 40% less energy than competitive products. In the fiscal second quarter ’23, on a sequential basis, we expect revenue to decrease slightly, primarily due to seasonality in foodservice equipment and market, expected to be similar as volume decline is offset by pricing and productivity actions. I will now turn the call over to Ademir to the detail.
Ademir Sarcevic
Thank you, David, and good morning, everyone. First, I will provide a few key takeaways from our first quarter 2023 results. Despite continued inflationary pressures and flow to drive organic growth and margin expansion. Our earnings strength reflects the successful implementation of our pricing actions and realization of our productivity initiatives. As a result, we achieved our sixth consecutive quarter of record consolidated adjusted operating margin. In addition, our end market demand trends remain healthy as we ended the first quarter with an overall book-to-bill ratio of slightly over 1.
Now let’s turn to Slide 9, first quarter 2023 summary. On a consolidated basis, total revenue increased 2.8% year-on-year to $180.6 million. This reflected organic revenue growth of 7.3% and 0.6% contribution from the Sensor Solutions acquisition partially offset by a 5.1% impact from foreign exchange. First quarter 2023 adjusted operating margin increased 160 basis points year-on-year to 15%, our highest in the history of the company, as our adjusted operating income grew approximately 15.7% on a 2.8% consolidated revenue increase year-on-year. Our first quarter 2020 tax rate decreased 140 basis points hear on year. Sequentially, we expect a similar tax rate in the fiscal second quarter of ’23 with a full year tax rate between 23% and 24%.
Adjusted earnings per share were $1.60 in the first quarter of fiscal 2023 compared to $1.34 year ago, approximately 19% growth year-on-year. Net cash used in operating activities was $2.7 million in the first quarter of 2023 compared to net cash provided by operating activities of $13.1 million a year ago. This decrease reflected annual bonus payments, onetime legal settlement payment accrued in the prior period and impact of supply chain inefficiencies. In addition, capital expenditures were $5.3 million compared to $5 million a year ago. As a result, free cash flow was negative $8 million in fiscal first quarter 2023 compared to free cash flow of approximately $8.1 million in fiscal first quarter 2022. We anticipate a return to a more normalized level of free cash flow conversion with further improvements in the second half of fiscal 2023 with further improvements in the second half of fiscal 2023 as we continue to target free cash flow conversion at or above 100% of GAAP net income. Our balance sheet continues to provide substantial flexibility to support an active pipeline of organic and inorganic opportunities as well as increased investment in R&D and growth capital.
Please turn to Slide 10, FY ’23 segment snapshot. From a segment perspective, 3 of our 5 segments exhibited organic growth year-on-year, highlighted by Specialty at 39.3% and Engraving at 7.9%. As expected, Scientific segment sales declined organically 14.3% due to lower demand for COVID vaccine storage. Foreign currency was a headwind to revenue growth, primarily in the Electronics and Engraving segments as it represented a 6.6% and 8.3% headwind respectively. From an operating margin standpoint, 4 of our segments operating margins above 16% and 3 of our 5 segments significantly expanded operating margin year-o-year led by Specialty contributing the 640-basis increased. Scientific segment maintained operating margins to over 20% despite 14% organic revenue decline due to readout of pricing and productivity actions.
Next, please turn to Slide 11 for a summary of Standex’s liquidity statistics and the capitalization structure, which remains strong. Standex ended fiscal first quarter 2023 at $294 million of available liquidity, an increase of approximately $27 million from the prior year. At the end of the first quarter, Standex had net debt of $95.5 million compared to $70 million at the end of fourth quarter and $68.9 million at the end of fiscal first quarter 2022. Standex’s net debt at the end of the fiscal first quarter 2023, consisted primarily of long-term debt of $198.9 million. Cash and cash equivalents totaled $103.4 million with approximately $94 million held by foreign subs. There was no repatriation for in the first quarter. We still expect to between $30 million and $35 million in cash in fiscal 2023. With regards to capital allocation, we repurchased approximately 90,000 shares for $8.4 million in the quarter and $82.3 million is still remaining under the current authorization. We also declared last week our 233rd quarterly cash dividend of $0.28 per share, an approximately 7.7% increase year-on-year.
In fiscal 2023, we still expect capital expenditures to be between $35 million and $40 million compared to approximately $24 million in fiscal 2022. The increased investment year-on-year includes additional capital for capacity expansion, productivity actions and growth efforts as we deepen our presence in high-growth markets.
I will now turn the call over to David for key takeaways from our first quarter results.
David Dunbar
Thank you, Ademir. Please turn to Slide 12. Standex is well positioned to deliver sustainable, profitable growth as we have progressed from a portfolio company to an operating company comprised of a stronger mix of high-quality businesses with attractive growth rates and higher margin profiles. As such, we anticipate continued improvement across our financial metrics in fiscal year 2023. Our segments are favorably aligned with emerging and sustainable global trends in areas such as renewable energy, electric vehicles, defense, human health and the commercialization of the space. With much of these opportunities only in the early innings, we are excited about their evolution and potential for further contribution to our financial metrics.
Our strong pricing disciplines and OpEx actions are offsetting the challenging inflation and supply chain environment. The financial flexibility from our strong balance sheet positions us to execute on an active pipeline of internal investments as well as to pursue an active funnel of inorganic candidates. I’m confident we are positioned to perform well in these uncertain market conditions. Our businesses are leaders in their markets, they have demonstrated an ability to adapt to dynamic market conditions and focus on attractive sales and margin opportunities. We will now open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions]
Our first question comes from Chris Moore from CJS Securities.
Peter Lucas
Yes, hi. Good morning. It’s Pete Lucas for Chris. How should we think about the mix between volume and price for your ’23 revenue growth?
David Dunbar
If you think about Q1, I think the bits and pieces are in there. You’ve got about — it’s about half and half, volume and price. And then you net of FX.
Ademir Sarcevic
Yes. So this is Ademir. Maybe I can just expand on that. Historically, you ran about 2/3 volume, 1/3 price. Q1, we were about 50-50 price and volume and we’re thinking for the remainder of the year will be somewhere in that range between 50-50 and 2/3, 1/3 as we move forward to the rest of the fiscal year.
Peter Lucas
Very helpful. And then just looking at the segments, where do you see the biggest opportunity going forward? And then on the flip side, which do you think will be most impacted by the current rising weak environment?
David Dunbar
Well, the biggest opportunity is the businesses that have grown the best in the last few years, they’re serving very strong end markets. Electronics has got a lot of momentum in electric vehicles and renewables. Engineering Technology is commercialization of space continues to ramp up. Their military and defense business are strong. Good runway there. Those most affected by — I don’t know if it’s so much the high-rate environment, but current economy. We have a couple of product lines out of Electronics that go into like residential products. We’re seeing a little softness there. So for example, we sell switches and sensors that go into appliances. So we expect a little softness there. That’s about 15%.
Ademir Sarcevic
It’s 10% to 12%, Electronics sales.
David Dunbar
Electronics. And some of the — the food equipment businesses that are in Specialty, we expect them to be sorted. But the others are all serving markets that we think are relatively unaffected.
Ademir Sarcevic
Yes. And if I can just add to that. One thing we are really, really excited about is in what we call fast growth markets, which was 30% year-on-year in Q1, and we continue to see strength in those end markets, and we expect that to get even as we progress to the rest of the fiscal year.
Operator
The next question is from Nicholas Heymann from William Blair.
Nicholas Heymann
Hi, good morning. I really thought that — the first quarter, you came out pretty well given everything that’s going on. But I was curious, first on Electronics. I believe there was a $6 million of deferred revenue in Electronics in China in the last quarter. And I was curious how much you realized of that $6 million. And then secondly, how you see China evolving here as a market, given all the ongoing pandemic lockdowns, which I guess, hopefully, are going to end soon?
David Dunbar
Yes. So first of all, you’re right about it, you’ve good memory. The $6 million was what was held over from the lockdowns of Shanghai in our Q4. About $4 million of that shipped in the quarter. In terms of where China is going, I guess, your guess is good as mine. Our China orders continue to be strong, although we see some softness in — of appliances in China.
Ademir Sarcevic
Yes. And Nick, the only thing I would add to that, if you kind of look at sequentially the sales bridge between Q4 and Q1, we had about $3 million to $4 million worth of unfavorable FX headwinds on the top line. And a lot of that is actually in the Electronics and Engraving, actually all of it in Electronics and Engraving businesses, so that would have impacted some of that sequential [Inaudible].
Nicholas Heymann
Okay. That’s helpful. You mentioned in somewhere your intentions to expand Engraving into Asia. Can you help size that market relative to the U.S. and Europe and where you think your penetration rates can evolve over time? And how big an opportunity is this? Is this…
David Dunbar
Yes. So yes, I can handle that. So globally, our Engraving business is about 1/3 in America, Europe and Asia in our traditional businesses. Where we see the growth opportunities in soft trim in Asia. And you may recall a few years ago, we acquired this GS Engineering in the U.S. and they have a particular technology for a kind of soft trim. And that type of software is very popular and growing rapidly in China. So we’re in the process of doing a technology transfer, taking that competitive advantage to our China business. We think in the next few years, we can grow that from — it’s — well, a year ago, it was nothing. We think we can grow that to close to $10 million in the coming years.
Nicholas Heymann
Okay. That’s good to know. In Engineering Technologies, I’ll see if I can ask 1 more, can you provide more insight the project timing for the rest of the year for this business. And give us some idea as to whether or not that’s just a step-up as we go through the rest of ’23? Or that’s something that you can visibly see extending beyond ’23?
Ademir Sarcevic
Nick, it’s Ademir. I’ll handle this one. Q1 of this fiscal year from a project timing standpoint is a low quarter for the Engineering Technologies business. So we expect — as we the second quarter now that we’ll see a significant ramp in sales — moderate to significant ramp in sales as well as operating margin. And we have no reason to believe that, that type of performance would not continue through the second half of this fiscal year and then into ’24. I mean I think you know the end markets for this business are pretty healthy from space, defense, commercial aviation. So we’re pretty optimistic what ETG business can do over the next 12 to 18 months.
Operator
There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to David Dunbar for any closing remarks.
David Dunbar
All right. I want to thank everybody for joining us for the call. 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 second quarter call.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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