Good day, and welcome to Standex International Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode.[Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Gary Farber from Affinity Growth Advisors. Please go ahead.

Thank you, Nicole, 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, 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 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 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 income from operations, 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 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 performance.On the call today is Standex Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle.

Thank you, Gary. I will begin with an overview of our fiscal fourth quarter results and provide an update on our continued progress in executing on our strategic priorities. Tom will follow with a discussion of our financial performance in the quarter, and I will provide some additional thoughts on our outlook.Now, if everyone can turn to Slide three. Before I begin to comment on this quarter’s results, I would like to discuss the press release which many of you may have seen last night regarding the upcoming departure of Tom DeByle, our Chief Financial Officer. We are disappointed to see Tom leave Standex.Over the past 11 years, he’s had a significant impact on our financial management and company, he has been a trusted partner of mine, and I will miss working with him. I want to wish him success in his new opportunity. We appreciate his many contributions over the years.I'll now move into a discussion of our results. The quarter’s results were in line with our expectations and commentary on our third quarter conference call in April. Results were sequentially stronger than the third quarter as expected, but below fourth quarter fiscal 2018.Specifically, performance in Engineering Technologies, Hydraulics and Scientific remains strong. We did continue to experience macroeconomic headwinds that impacted our results in Engraving and Electronics. However, our restructuring efforts are proceeding as expected, and we anticipate achieving an annualized $3.8 million cost savings run rate by 2Q -- by the second quarter of 2020.In addition, we delivered strong free cash flow, further reinforcing our financial strength to pursue various value enhancing investments and acquisition opportunities. Despite the impact of a lower level of automotive programs and tariffs on our results, we made substantial progress both in the quarter and year, furthering our strategic goals and reshaping…

Thank you, David. Before I jump into the financials I'd like to say a few words about my personal situation. As you know, I have announced that I'll be leaving Standex after 11 years. As of last Tuesday, my wife and I became empty nesters. We have lived everywhere from Italy, to Belgium, the Netherlands, and even the likes of Fargo, North Dakota. We are mobile and at a point in our lives where we have options.Standex gave me the great opportunity to become the Chief Operating Officer. It was a great position, and I appreciate the board, and David who wanted me to fill this role. I have spent the last few months preparing to be an effective COO. However, another opportunity came up for me, and I decided to take it.My last day at Standex will be Friday, September 20th. I believe that Standex is on the right path in its transformation. The financials are sound. The balance sheet is in great shape to take advantage of both organic and inorganic growth opportunities. I will really enjoyed my stay at Standex and I will miss working with my great colleagues and miss not being part of the exciting challenges ahead.It was a very difficult decision for me. I'll be working over the next few weeks to ensure a smooth transition with Ademir, the new CFO.Now let me provide an overview of the fourth quarter results. From our revenue and EPS perspective, the quarter played out largely as expected with continued strength in engineering, hydraulics and scientific. Sequential improvement in Engraving, seasonal recovery and food service, and sales for electronics were similar to the Q3 2019.Our financial position remains very strong as evidenced by our leverage statistics and liquidity, and supported by improved and consistent free cash flow, generated…

Thank you, Tom. Formal remarks conclude on slide 18. From a financial results perspective, as we enter fiscal 2020. We expect a sequential decline in the first quarter, due to continued challenges in some of our markets followed by improved year-over-year performance in our fiscal second quarter.We expect to benefit from scheduled platform rollouts in the automotive OEM market, a very strong funnel of new business opportunities in electronics, and continued growth in engineering technologies and hydraulics. These improvements will be complemented by the completion of a cost restructuring we announced in the third quarter of 2019 as well as ongoing efficiency projects that we have identified.When we step back from the quarterly puts and takes, we are making significant progress on further building out our higher margin growth businesses and expect to further add to this momentum in fiscal 2020, supported by very strong financial position and expanded team of highly energized and talented leaders globally.Finally, we have a very robust funnel of new growth laneways and an active pipeline of inorganic opportunities that will further strengthen our customer value proposition and results. And with that, we'll open the call to your questions. Operator?

Thank you. [Operator Instructions] And our first question come Chris McGinnis of Sidoti & Company. Please go ahead.

Good morning. Thanks for taking my question.

Good morning, Chris.

Nice quarter. Can you maybe just talk a little bit about maybe just go through a couple of the segments, but Engraving when you're thinking about you know just the operating income decline in the quarter, just can you maybe talk about as that strengthens, how much of that margin comes back and maybe the margin profile of that segment overall it's weighed around a bit in the last couple of years, so can you just maybe talk about that? Thank you.

Yes, it has Chris. First thing I'd say is you have to remember this is a services business. So it is a very high fixed cost with our service technicians and our -- facilities and related equipment, and it levers and de-levers pretty significantly. So if you were to look at year-on-year I'd say 60% or so of that margin decline is really related to the deleverage in volume and not of a mix shift as we get more volume in relatively in Europe and North America, less in Asia. Asia is by far our highest margin business. So that's just kind of dynamics and movement of the business.Now the sales are up. You have to remember, we brought in a couple of acquisitions in the year, they serve the same end markets, they are services business, so they follow that same compression. So we have announced the productivity improvements. We're closing some non-profitable sites, and we still hold the long term with the 20% EBIT generation of this business.

Thank you. And then could you just talk a little bit on the GS acquisition, and how you expect to think about rolling that out across the kind of the global platform that you have?

Yes. Well, we're very excited about this acquisition. We've just completed -- what it was like last week a 100-day, hundredth day of the integration. So our integration, we got all the plumbing fix, all the HR stuff, largely done and we're rolling this outcome sequentially focusing first on increasing penetration of North American customers. And then we'll begin to roll out into Europe and Asia. Our sales forces around the world are chomping it a bit to sell this. We just have to ramp up the capability as a technical sale. We need technically adept application engineers and design engineers to do the quotations and help of customers.So it was growing double digits when we acquired it. We expect that to continue and more to come.

That's great. And then one more and I'll jump back to queue. Just within Engineering, you did note that oil and gas was up, I think, 23%. I think the expectation was aviation was to be strong, but could you just maybe talk a little bit about oil and gas just kind of a one-time thing or is that an improving market for you overall? Thanks.

Well, oil and gas is hard for us to forecast. We’re just at over three, four years or five years ago was a $35 million component in this business. This was largely oil and gas and space. Oil and gas dropped to as low as $5 million. And since then we have been saying, we don't really count on oil and gas long term in this business, because the components we serve offshore platforms for deep sea platforms. We don't -- we'll see indications that will come back in a significant way. And the gas turbine business that we supported in North America, production has moved to Europe and there's some design changes going on in those businesses.So we anticipate modest oil and gas sales in the future. Just last quarter, we had some -- we had some deep sea platform orders, some repair and replacement orders, that was unexpected. And our long term view is there will continue to be some repair and replacement orders, but it's in the mid-single digit millions of dollars.

Thanks for taking my questions, good luck in Q1. Thank you.

Thank you.

Our next question comes from Chris Moore of CJS. Please go ahead.

Hey, good morning guys.

Morning.

Good Morning. Maybe I could start with electronics, so David, you talked a little bit about that new funnel of business opportunities, maybe can you just talk a bit more about kind of timing, the cadence of the potential ramp, and also you know similar to what you just went through on Engraving kind of the normalized operating margin as volume returns a little bit.

Yes. Here again, I get a 20% EBIT is a good expectation for this business. So we're very excited about the funnel. The work on this really started three or four years ago when the Electronics business began looking at their channels and assessing the ability to sell higher value sensors in addition to the sales for distribution in the packaged switches and relays. As I mentioned -- two years ago our funnel of new business opportunities was $20 million.In that time, we have created a new position of field applications engineers. We have filled those positions in North America. We had this position in Europe. We've added some people in Asia. We've trained our channels and it takes a while, but we're seeing now the momentum in the funnel buildup. That funnel is now worth $50 million, and the components of that funnel are much larger on average. We have -- guess I figured what the number is, but we have more than 10 opportunities that will result in annual sales opportunities of over a $1 million. Whereas the funnel two or three years ago, that was -- that [indiscernible] worth $300,000 or $400,000 as we get into these higher value sensors, they're bigger opportunities.So our expectation is, this year, I think, we're expecting something under $10 million of sales from that funnel. And that will ramp up till they are at full volume toward the end of 2020 into 2021. So we'd expect maybe twice that volume in 2021 as they ramp up.

Got it. That's helpful. Kind of a more big picture I know you don't give specific guidance, but given where we're talking about Q1, you know kind of down sequentially and then certain pieces starting to pick up a little bit. Is there any color that you can provide in terms of you know what EPS growth might look like for this year, you know just on a kind of relative basis what our expectations should look like?

Tom, you want to take that.

Yes I think. Well you know we target 8% increase in EPS, and I mean that we did have some headwinds this year. So what I would anticipate a little bit better than that probably, based with our acquisitions that we've done this past year that David talked about the higher EBIT percentage. So you know, I'd say we're still targeting eight plus.

Yes, we always plan around that, and, you know, we see softness in Q1, and then pickup in Q2, gradual strength, Q3, Q4, as those NBOs flow in, new auto model roll-outs hit and Engineering Technologies strength continues.

That's helpful. Absolutely. And just in terms of looking at tariffs anything that's worth discussing at this point. Tom, you know historically we talked a little bit about some of the unscientific refrigeration and hydraulics, anything that could be you know a surprise or a negative in this fiscal year?

I wouldn't say surprise or negative. The impact of tariffs, the primary impact is on our customers in China. So electronics plant in China delivers switches, relays and sensors to manufacturers in China that then export, their volumes are down. There are tool makers in the south of southern part of China that are largely export. They've been impacted by tariff, but that is already baked in, so that's kind of in our in our run rate.Our hydraulics business, we did get an exemption on the -- on our cylinders from our plant in China. I guess, the funnels are exclusion. We applied for an exclusion that was granted last December, and we’ll again apply for that as that as that renews in December. So from a tariff standpoint, I'd say it's been, kind of it's in the run rate.

Got it. All right appreciate it, guys. I'll jump back in the line.

Thank you.

Thank you, Chris.

[Operator Instructions] Our next question comes from George Godfrey of CL King. Please go ahead.

Thank you. Thank you for taking the question, Tom. Sorry to see you go, you'll be missed. I hope we cross again in your next life or paths.

Okay. Thank you, George.

All right. I heard what you said about the targeting of 8% EPS growth and I'm looking at the Q4 of 2018 slide and some of the financial objectives for the next three to five years. First question is, to achieve that 8%, how important is it to get the organic growth up towards the GDP plus 2% given there was 0.5 call it for this year to get to that 8% EPS do you need organic growth in that 2% plus level?

Not this year. No, you know we've got margin improvements coming in refrigeration and Engraving in particular. The continued ramp of ETG, which we know is that, those orders are already booked and the implementation of this productivity and the material savings in electronics delivered the majority of the improvement.

Got it. Okay. And then my second question, Dave, I heard what you said about the reed switch build up back in Q4 and then Electronics EBIT margin targeting 20%. And if I look at the Q4 in 2018, it was 26%. So 20% EBIT margin down to 20%. And then, I'd like to look at also on a dollar basis, the year-over-year revenue decline in Electronics was about $3 million, but the EBIT was $5 million on that $3 million decline. So was there something specific in the pricing or the profitability of those particular reed switches a year ago that you don't expect to continue as we move through this year?

Well a year ago, the global market reed switches was at capacity, and so we were in kind of a privileged position of, we allocated -- we allocated our production or shipments to the highest margin opportunities that were out there. And as your last year Q4, we maybe didn't insist enough, but we said 26% is -- it's everything aligned and even then we said long term, low 20s is a better expectation for the business. So that's a difficult bridge because the market conditions have changed so much.Now, on top of that, since then, Rhodium has increased from 2 million -- 2,000, I don't know, what it was a year ago, 2,000 an ounce to 4,000 last month, that is a -- we consume about 2,500 ounces of Rhodium. So you can do the math. With $1000, it is $2 million of impact.So that was the big impact we had -- we announced in our Q1 of this year or our calendar Q1, that our Mexico plant had their wages doubled overnight from December to January, so new government implemented new minimum wage. So now that plant has been gradually working to reduce headcount, improve productivity and they are getting back to where they need to be. But those are two significant headwinds. The business has done a nice job of passing price on where we could, but in that same time, there's been some slack in the market, there's more capacity out there, it's a little more difficult to get price than it was last year.

Understood. Thank you for taking my questions, David and Tom.

Thank you, George.

Our next question comes from John Cummings of Copeland Capital. Please go ahead.

Good morning, guys. Just one question on Engraving. I know in the past, you’ve cited industry data with the number of new model releases each year. I'm just curious if you could give us an update on that data for the next couple of years?

Yes, John, I could follow up, which I don't have those numbers in front of me, but our expectation -- the data source we use is IHS. IHS collects the data from all the OEMs, and they identify the dates they expect to launch a new model and significant refreshes. And we know from experience is that the date -- that the -- let's say, four plants launched in new ranger, we should see the tools from that ranger about 270 days earlier in our shops.So that does publish schedules still give us confidence in a ramp up in volume this quarter, a very big quarter in our Q2 and Q3. And I apologize, I don't have the specifics in front of me, but we can give you the list of the programs and their dates, if you'd like, as a follow up call.

Okay. Thank you. And just one question on Engineering Technologies and the margin there, obviously very strong quarter. I guess how sustainable is the margin at this level next year and looking forward?

Yes. No, we are -- we now -- as the new programs have ramped up, they have better margins. We've invested in automation and robotics to have a very efficient production process. We've said consistently this business will get to 15% plus EBIT, so we're still confident.

Okay. And maybe one final question on the dividend. Just curious, given the tough year this year, and I usually evaluate the dividend in October. Just curious, what we should expect for the dividend going forward?

I'd say you can expect consistent approach as we have in the past. We'd like to grow the dividend; we're generating good cash; we like the prospects of the businesses.

Our payout ratio is really low.

Yes.

And we always review it in our October Board meeting, the dividend.

Okay. Great. All right. Thank you.

Okay.

[Operator Instructions]

All right. Okay, we got to wrap up, I guess. Thank you for your questions. I want to thank everyone today for their interest in Standex, letting us share our results, accomplishments and vision. Also, I want to thank our employees and shareholders for their continued support. We look forward to speaking with you again in our first quarter call.

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