Earnings Call Transcript - SXI Q1 2022

Operator, Operator

Good morning, and welcome to Standex International Fiscal First Quarter 2022 Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now I’d like to turn the conference over to Gary Farber, Affinity Growth Advisors. Please go ahead, sir.

Gary Farber, Affinity Growth Advisors

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. Please refer to Standex's Safe Harbor statement on Slide 2. Matters that Standex management will discuss on today's 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 non-GAAP measures of EBIT, including adjusted EBIT and EBITDA, as well as other non-GAAP measures, which are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

David Dunbar, Chairman, President and CEO

Thank you, Gary. Good morning, and welcome to our fiscal year first quarter 2022 conference call. I'm very pleased with our first quarter results, which reflected solid financial performance and an expanding pipeline of growth opportunities. Standex is a stronger company today as a result of well-executed portfolio moves and the higher level of performance of our businesses. We continue to have a favorable outlook for fiscal 2022 and look forward to successfully executing our growth strategy. I want to thank our employees, executive teams, and the Board of Directors for their dedication and support as we grow our portfolio of high quality businesses. Now, if everyone can turn to Slide 3, key messages. Revenue and consolidated adjusted operating margin increased significantly year-on-year in fiscal first quarter 2022, as we leveraged positive demand trends and converted new business opportunities from our pipeline. Consolidated organic revenue growth of approximately 17% year-on-year reflected strength in our Electronics and Scientific segments. Electronics revenue increased approximately 37% year-on-year, primarily due to a broad-based geographical recovery with continued solid demand for relays in renewable energy and electric vehicle applications, along with positive trends in transportation, appliance, test and measurement, and distribution end markets. Scientific segment revenue increased approximately 29% year-on-year driven by retail pharmacies, clinical laboratories, and academic institution end markets. Consolidated adjusted operating margin of 13.4% was a 250 basis point year-on-year increase and represented our second consecutive quarter of delivering our highest consolidated margin in Standex history. Our results also reinforce the benefits of our continued investment in end markets that have healthy growth prospects and where we can incorporate our innovative solutions and strong customer value proposition. Sequentially, total company backlog realizable in under one year increased approximately 12% with strength particularly in the Electronics, Specialty Solutions, and Engraving segments. At the Electronics segment, the new business opportunity pipeline continues to grow, and we are seeing positive trends in such end markets as electric and heavy-duty vehicles, defense, industrial, and aerospace. In addition, Renco Electronics, which we acquired a little over a year ago, is contributing to the growth of our opportunity pipeline as we realize sales synergies from cross-selling opportunities in our expanded customer base. At the Scientific segment, we are also introducing a new product family, blood bank refrigerators, and plasma freezers, leveraging our expertise in life sciences and refrigeration to expand into adjacent markets. Execution on our active funnel of productivity and efficiency initiatives is further adding to our success. We're driving manufacturing and supply chain productivity with actions including new lean programs, and mitigating inflationary trends through price realization and value engineering. In addition, our reed switch production and material substitution project at the Electronics segment continues to mitigate some of the material inflation we are seeing and remains on track to be substantially complete by the end of fiscal 2022. We continue to have significant financial flexibility to pursue new organic and inorganic growth opportunities, given our strong balance sheet and liquidity position and consistent cash flow generation. Ademir will discuss our financial performance in greater detail later in the call. Regarding our financial outlook, we are off to a solid start to the fiscal year and continue to expect stronger financial performance year-on-year in fiscal 2022. In the second quarter, we expect revenue and operating margin to increase slightly compared to fiscal first quarter 2022 and significantly compared to the year-ago quarter.

Ademir Sarcevic, CFO and Treasurer

Well, thank you, David, and good morning, everyone. First, I will provide a few key takeaways from our fiscal first quarter 2022 results, which exhibited strength across several important metrics. Organic revenue growth of approximately 17% year-on-year reflected solid demand trends at our Electronics and Scientific segments. In addition, we continue to see overall healthy order trends across the company as we enter our fiscal second quarter. From a margin standpoint, adjusted consolidated operating margin of 13.4% increased both sequentially and year-on-year and represented our second consecutive quarter of highest margin in Standex’s history. This strong operating performance reflects several factors, including effectively leveraging volume growth, realizing the benefits of price and productivity actions, and the positive impact of our prior strategic portfolio moves. Our financial strength is afforded by consistent free cash flow generation, which increased year-on-year. In summary, we are entering our fiscal second quarter with positive order trends, an active funnel of productivity initiatives, and an expectation for continued solid cash generation in fiscal 2022, all further adding to our strong financial position.

David Dunbar, Chairman, President and CEO

Thank you, Ademir. If everyone can please turn to Slide 12 for key takeaways. In fiscal '22, we expect stronger financial performance year-on-year as we execute on the positive end market trends we are seeing and further drive ongoing productivity initiatives across our significantly strengthened portfolio. Underpinning this outlook is a very active pipeline of growth opportunities with a positive trajectory in our new business opportunity funnel and new product introductions. We are leveraging a significant number of growth opportunities in front of us through ongoing manufacturing and supply chain productivity actions, including initiatives such as new lean programs and mitigating inflationary trends through price realization and cost consolidation efforts. Our strong balance sheet and liquidity position and consistent free cash flow generation position us very well to pursue both organic and inorganic growth opportunities, and we remain opportunistic and disciplined in allocating capital. As highlighted by some of the order trends discussed today, our approach is resonating with customers, reflecting the strength of our deep technical and applications expertise in innovative solutions and reinforcing the value of our high-quality businesses.

Chris Moore, Analyst, CJS Securities

Another excellent quarter. It seems like most of the conversation on earnings calls this quarter are focused on supply chain, inflation, and labor. Any thoughts on how Standex is able to avoid that as a focus?

David Dunbar, Chairman, President and CEO

Yes, there are a couple of important perspectives there, Chris. A year ago, two years ago how much we were struggling with rhodium in our Electronics business. As the team got their arms around that, they’ve completely changed their cost management of the rhodium and, more importantly, their pricing process. They moved from a lot of 12-month pricing agreements to monthly pricing. All, of course, were reviewed by management. This started last November, and the results have been very effective in managing that. We have been communicating across all the businesses of Standex. It has evolved for us to be more proactive in passing along prices, whether from freight or material. We are seeing that margin play. It’s never easy to have those discussions with customers, but we've improved our practice over the last year. On the supply chain front, most of our businesses source in a region for plants in a region for customers in a region. We have a couple of businesses, though, that depend on the global supply chain, Scientific and Hydraulics. The Scientific results are managing through those challenges, especially in managing international freight. That’s why, at a corporate level, you haven’t seen as much impact from those issues.

Chris Moore, Analyst, CJS Securities

Very helpful. If we could switch to Electronics, obviously, an important component of revenue and profitability. Can you discuss visibility in this specific segment, and share any thoughts on distributor inventory levels?

David Dunbar, Chairman, President and CEO

We serve a wide variety of end markets here. Our sales to distributors account for about 20% of the sales of the entire business. Distributor levels have been growing consistent with the rest of the business. We haven't seen any dramatic swings in the mix of our sales by channel. There may be some excessive buying as customers try to get ahead of potential supply issues, but overall, we see growth in our applications. Our new applications are ramping up quickly, particularly in relay products. The overall business mix remains good, and in fact, as of October, sales remained strong with a book-to-bill ratio of 1.2, indicating that whatever might be going on in distribution is not enough to dampen the overall demand we’re experiencing in that business.

Chris Moore, Analyst, CJS Securities

Trying to better understand the end markets where you might still be in a bit of catch-up mode from COVID, which could provide a tailwind.

David Dunbar, Chairman, President and CEO

Yes, we had thought all along that the foodservice equipment markets would be the slowest to catch up. We anticipated that by next quarter, starting in calendar '22, those markets would catch up. However, we believe that by this quarter, aviation market shipments will return to pre-COVID levels. Everything else is at or above pre-COVID levels.

Ademir Sarcevic, CFO and Treasurer

Yes, Chris, I agree. For the most part, we’re already there. We are seeing very good order rates across our businesses, which is a positive sign.

Chris Howe, Analyst, Barrington Research

Starting with the Scientific segment, you continue to do well, exceeding expectations. Can you talk about the factors that led to this quarter's performance and your outlook?

David Dunbar, Chairman, President and CEO

A couple of positive things contributed to the quarter's success. Our sales exceeded our internal estimates. We are seeing continued demand for COVID vaccine storage, which is not as high as last winter but still robust, especially with the approval of vaccinations for younger children. Many doctors' offices require storage units, providing a steady pipeline of sales. Additionally, we received a large order for replacing cabinets from units installed four or five years ago, which is part of the growing trend with our increasing installed base.

Chris Howe, Analyst, Barrington Research

You've hinted at an operating margin around 20%. How should we think about that while continuing to make investments in the segment?

David Dunbar, Chairman, President and CEO

We continue to project low 20% margins for this business. There are always variances quarter by quarter. This last quarter, the business faced headwinds in supply chain costs, particularly freight from Asia, which was significantly higher than before. So we are working to pass on those costs. We are also investing in growing our team, with significantly more engineers compared to few years ago, and we are seeing growth potential from our new blood bank and plasma freezer products.

Chris Howe, Analyst, Barrington Research

Considering how well you've managed through the inflationary environment and supply chain issues, what are your concerns when looking at the global economy versus your business?

David Dunbar, Chairman, President and CEO

My main concern is ensuring that we are moving quickly to seize new opportunities while maintaining discipline and smart investing for future growth. I feel we have good market positions and a strong portfolio, but we must keep pressing forward to capitalize on these advantages.

Operator, Operator

At this time, we have no further questions. Now I'd like to turn the conference back over to Mr. David Dunbar for closing remarks. Please go ahead.

David Dunbar, Chairman, President and CEO

Thank you. Thank you to all for your interest in Standex. I want to express great appreciation to the employees of Standex who are managing very well through a difficult environment. We look forward to reporting back to you in three months on our second quarter. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.