Standex International Corp/De/ Q2 FY2024 Earnings Call

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. 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.

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.

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 forecast, 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 improving in fiscal fourth quarter 2024. Additionally, 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's history that gross margin was above 40%. It demonstrates our continued ability to drive operational improvements while adapting to changing macro conditions. Consolidated adjusted operating margin increased by 90 basis points year-on-year to a record 16.1%. Three of our five segments reported adjusted operating margin greater than 20%, and 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 my 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 about 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 markets served by electronics and specialty segments, contributions from the 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 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 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 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 Standex employees. Through these ten 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 ten 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.

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 a 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 a 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 lower organic sales and product mix. Our new business opportunity funnel increased 30% year-on-year and grew 13% organically and is currently 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 higher 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 fourth quarter 2024. Please turn to slide 10 for a discussion of the Engraving and Scientific segments. Engraving 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, 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 fourth 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. Regarding capital allocation, we repurchased approximately 33,500 shares for $4.5 million in the second quarter. We also declared our 238th consecutive cash dividend of $0.30 per share, approximately a 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.

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 eleven 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 greater than 15%, and free cash flow conversion at approximately 100% of GAAP net income. We will now open the line for questions.

Thank you, sir. We have our first question coming from the line of Chris Moore from CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a few questions.

Good morning.

So maybe just we'll start with electronics. Looks like softer electronics conditions in Europe and China are continuing. So maybe two questions there. What indicators are you looking at, if any, to help gauge when demand might strengthen a bit there?

Yes, in the last few quarters, Chris, we've pointed out we saw softness in China and Europe. We anticipated those would begin to reverse. We also call out 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 end markets. They are also used for samples as people are developing new products. So that's typically the first thing to go down and the first to come up. This quarter, we're starting to see those orders tick up. Based on historic precedent, we are seeing that turning. We're seeing appliance orders come back 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. However, with the order trends reversing, we expected late this quarter and into next for those to come up.

Got it. It's helpful. Appreciate that. My understanding is that China represents roughly 10% electronic revenue. Just trying to understand what's the new normal? What are the puts and takes for China to stay at that level three to five years from now?

That's a good question. About two-thirds of our sales in China are for the Chinese market. The ship-to addresses in China may be from some multinationals that are there, but there are many Chinese manufacturers that purchase from us. The other two-thirds is export. So, what will change there? There are more of our customers who are talking about reshoring to North America. Frankly, for us, it's kind of a left-pocket-right-pocket thing. We'll follow that business wherever it goes. For the remainder of the business, it has more to do with your guess being as good as mine about the prospects for the Chinese economy.

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 maybe a little bit more about how much visibility you have on that.

Yes, so we said delay in funding. It's not so much delay in funding; it’s sort of a reallocation of where their spending is. We have a position in the Navy nuclear vessels, and some of that spending has been pushed out in order to fund support for some of the conflicts around the world. We actually have quite good visibility in the engineering technologies business, and I believe we called out, we do expect a very strong Q4 as customer projects line up for delivery. If we execute and the customers don’t change, it will be a record Q4 for engineering technology. So we're quite confident in that.

Perfect. Maybe just last one for me. Looks like the M&A side, Sanyu is closing shortly. Just kind of how deep is the funnel? Are there any $50 million plus revenue targets out there at this stage?

Yes, last year, we said there were a number of family-owned businesses with which we continue to build relationships. However, there were very few $50 million, $75 million businesses that seemed to be actionable. That's changing a little bit. There are some attractive, larger businesses we have been positioning ourselves with the owners, and it looks like some of them could be actionable in the next quarter or two. So I'd say the funnel is looking healthier than it did last year.

Got it. That's really helpful, David. I will leave it there. Thanks.

Thank you, Chris.

Thank you. We have our next question coming from the line of Michael Legg from Benchmark. Please go ahead.

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 and cost initiatives?

Well, it's actually pretty easy to get there, Mike. If you take a look at whatever your estimate is for our sales this year, over the next four years, we’re very confident fast growth markets will add another $100 million to sales, and all those sales are at margins above our average. So that will mix us up. The rest of that growth will just come with 3.5% growth on the base business. If you just take some leverage on that, we get to the 19%. If you give us a little credit for succeeding with new products, which are typically higher margins, there's upside both to a margin mix and to a top line.

Yes. And then Mike, it's Ademir; if I can just add, we 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 continuing to drive our gross margin up and use some of those dollars to fund the R&D funnel and continue that growth.

Great. And then we're seeing a lot of news on just EV sales being slowed. Can you talk a little bit on the EV sector and what you're seeing from your customers?

Yes. Our EV presence, I think we've talked about this before; our products are especially adapted to the needs of EVs that operate at higher voltages, say above 800 volts. Last year, I think about 11 million vehicles, electric vehicles, were sold last year. Three million of those operated at 800 volts or more. We're on 60% of those vehicles. We're on about 30% of the remainder of those vehicles. Our content is higher on those high voltage vehicles. So about 60% of our EV sales come from these higher-end vehicles. They continue to grow nicely. In fact, we had the biggest quarter we've had in EVs this last quarter. It continues to grow very nicely. So at the top end, we continue to see healthy growth. In fact, we just won positions on two platforms for Mercedes this last quarter. At the lower end of the market, the growth may slow, but we still see that as a double-digit growth opportunity, even for the 400-volt vehicles.

And then just the last one, on Sanyu, the timing of that during the third quarter, how much are you incorporating that into the guidance you gave as far as Sanyu's contribution?

Yes, I think Michael, if we can close it in the next few weeks, the guidance that we gave actually slightly assumes no Sanyu and moderately would assume we get a month, a month and a half of Sanyu revenue within the quarter.

Okay, great. Thank you. Great quarter.

Thank you.

We have our next question coming from the line of Michael Shlisky from D.A. Davidson. Please go ahead.

Good morning, and thanks for taking my question. I wanted to start asking about scientific, another down quarter year-over-year due to the COVID 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've now lapped it twice. I'm curious to see when we might start seeing positive organic growth in that business.

Yes, we think we’ve lapped that surge from COVID. I mean, the sales growth for that business was up 40% in 2021, up 6% in 2022, and has been down the last two years. But the decline, it was down 11% last year. This year, it will be down like half of that or less. Most of that is the reduced purchase from pharmacies. We are seeing growth in our new products. New products account for a little more than 10% of sales in that business or are about approaching 10%. That gets us into new segments. In this last year, we’ve talked about a return to kind of normal buying patterns from universities, laboratories, and other life science institutions. So we expect growth from here.

And Mike, it’s Ademir; if I can just add to that, these units that are sold usually have a useful life of about four to seven years before they are replaced. So if you go back to those units we sold in 2021, at some point over the next couple of years, there will be a replacement cycle coming in. We hope to capture that opportunity as well.

Got it. Yes, thank you for that. Then I want to turn to specialty solutions. I noticed in the slides you had put a fire truck in there, and that's an important hydraulic market. I guess I'd be curious, as I talk with some fire truck manufacturers, and there's only a few of them out there, they are booked through something like 2025 or 2026 at this point, and they are trying to maximize their throughput now. I'd be curious as to when that might start turning a little bit 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 you already seeing improvements? And two, is that a real, I know it's just fire trucks, but is that also a high growth market for you going forward?

Yes, that's a great point. We very observant there to see the fire truck. We put that in there because there's a new application we're working on in that business. We provide some modest growth opportunity for us. It's a small piece of our sales now. If we win the application, we still have to work through the supply chain and the current delays in the fire truck market, as you described. So in a year or two, maybe that adds some sales growth. The bigger driver for hydraulics is the dump truck and dump trailer markets, garbage, and waste vehicles. There, the last few quarters, orders have been dampened due to a basic chassis shortage. I just talked with the leader of the business yesterday; 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.

Great. And then as a first-timer on the call here, I just wanted to ask a more basic question. You reiterated your fiscal '28 goals, and I'm curious if you could, because you've reached your fiscal '21 goals in about three years, do you feel like there's a chance that some of these goals might be attainable in that same three-year time frame, say, in '26? Or is it very strictly a five-year plan, not a three to five-year plan?

Yes, that's a great point. We actually debated last year whether to communicate a three to five-year plan. We decided to keep it simple and just say by 2028. However, we could deliver earlier. If you think about where we end up this year, we'll have four more years to get to the billion dollars. Fast growth markets, we believe, will contribute. There's another $100 million there. Our new product sales are ramping up. New product leases are getting better, and the markets we serve are relatively attractive. All we need is 3.5% sales growth over four years to get to that billion. 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.

And Mike, that's an organic target, right? Obviously, anything we're doing organically comes on top of that.

Right, got it. Thanks so much. I'll pass it along.

Thank you, Mike.

We have our next question coming from the line of Ross Sparenblek from William Blair. Please go ahead.

Good morning, guys.

Hey, Ross.

Hey, sticking to EVs, I mean, given that the market seems to be pretty centric to China over the next few years, what does the mix look like as it relates to North America, Europe, and China?

Yes. I described earlier how we're more concentrated in the higher voltage vehicles. Last year there were 11 million vehicles, 3 million were high voltage. Our sales for EVs are approximately 50% in Europe, 45% in China, and the remainder in North America.

Thank you. That's very helpful. And maybe just move into Engraving margins. Can you help us parse out some of that performance in the second quarter? Taking out just normal operating leverage and maybe a pull forward of the footprint consolidation, there's still a couple of basis points. What's that exactly? Is there any mix? What benefits should we expect to carry forward in the third quarter, since it is seasonally low?

Yes, Ross, it's Ademir. As we discussed about our Engraving segment performance, we implemented multiple productivity initiatives, including site consolidations. Some of that will start weeding out in Q3 and Q4. There will be additional savings that we will achieve in those quarters. We always said that the Engraving target margin is over 20%. As you know, this business does get lumpy quarter-to-quarter based on the volume level. But on an annualized basis, we believe this segment will start delivering over 20% margins moving forward. Q3 will be lower just because of the seasonality in China and some of the softness we are observing in North America. However, as we enter fiscal 2025, we expect that Engraving margin will stay over 20%.

So it should be a pretty nice exit right there. And then maybe just one more here. Is there anything to read into the CapEx? We entered the year expecting roughly $15 million. That was tied to electronics and engineered customer commitments, and we reduced it by about $10 million now as of the second quarter. Is this just being pushed to the right? Are the customer programs being pushed to the right? I'm just curious.

You've watched this for a while. We're getting much better at forecasting sales and profits. However, we still have ways to go on forecasting CapEx. The difference between what we said coming into the year and the update now shows a delay with some of the capital equipment we need in our plan. Some of that has been pushed to the right. Additionally, in the last year, we talked about reducing headcount in some businesses to adjust to lower sales in the end markets. This reduces the manpower to implement projects, further pushing some projects to the right. Those are two major factors.

That's it.

Awesome, guys. Well, thank you and good luck.

Thank you, Ross.

We have our next question coming from the line of Gary Prestopino from Barrington Research. Please go ahead.

Hey, good morning, David, Ademir, Chris. A couple of questions here. First of all, on the Engraving side, you said you're looking at some lower sales in Q3. 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?

Yes, so this happens every year. It's the Chinese New Year effect. We do a sizable business in China. It's very profitable and slows down for a couple of weeks during this time of year.

Okay, so nothing in there in terms of that's systemic to some particular industry you're serving. It's just a slowdown in China for the New Year?

Right. Additionally, this business can be affected quarter-to-quarter because of project timing issues. North America is going to experience some slowdown as well due to the timing of platform releases.

That's right. Okay. And then in regard to Q3 with this charge that you're going to take for you, David, does that charge. Yes, I know; you’re retirement thing, besides getting your Medicare card, right? Will you be backing that charge back into your adjusted EBITDA calculation?

It will not be adjusted. We look at this as a timing thing. At some point, it will be 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 corporate expenses line.

Okay. And then could you just refresh my memory as to what you're paying for Sanyu and how are you paying for it? Is it a debt transaction and are you paying all cash or just lowering your cash balances?

Well, first of all, we are taking it from our existing cash balances. Remember, I'll just remind you on the sale of Procon where we netted $70 million; we used that to acquire Sanyu, purchase Minntronix, and then give additional funds back to shareholders in terms of dividends and share buybacks. That's the way we would fund it. We haven't finalized the transaction yet. We will disclose more information about the exact purchase price as we close the transaction. But that gives you a good indication of how we are paying for it.

Thank you.

Thanks, Gary.

Thank you. 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.

Thank you. 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, 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.

Thank you, sir. 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 day.