Good morning, welcome to Standex International Fiscal Third Quarter 2020 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Gary Farber of Affinity Growth Advisors. Please go ahead.

Thank you, Kate 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' Safe Harbor statement on Slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex' 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 onetime items; EBITDA margin; and adjusted EBITDA margin. We will also refer to other non-GAAP measure, 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 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 performance. On the call today is Standex' Chairman, President and Chief Executive Officer, David Dunbar; the Chief Financial Officer and Treasurer, Ademir Sarcevic. With that I'll turn it over to David.

Thank you, Gary. Good morning, and welcome to our fiscal third quarter 2020 conference call. I hope that everyone on the call and your families have been doing well, coping with the challenges related to the COVID-19 pandemic. A lot has changed in the last three months since we last spoke on our second quarter call. On today's call, I will share with you the actions we've taken in response to the impact of COVID-19, with our highest priority being on the health and safety of our employees, customers and suppliers. Next, we were very active in the third quarter in regard to financial and strategic initiatives, so I will provide an update on why I believe these actions position us well in this more challenging environment and ultimately, when the environment normalizes. From there, I will discuss performance and segment trends. Ademir will then discuss our consolidated results and financial position in greater detail. Finally, I will conclude with some comments on our outlook and key takeaways from our results and initiatives. Now if everyone can turn to Slide 3, key messages. In regard to the impact of COVID-19, we were fortunate to have been deemed an essential business in most of our plants and have had limited shutdowns in our facilities, excluding our China plants. We indicated on our second quarter earnings call that these plants would be closed for part of the quarter, but all are now fully operational. I'm pleased with how we've responded to the challenges associated with COVID-19. I have so much gratitude for our global leaders for collaborating at a very high level and for all of our employees and their constructive response to this unfolding pandemic. We took immediate and effective actions to support a healthy and safe operating environment for our…

Thank you, David, and good morning, everyone. First, let me provide a few key takeaways from our fiscal third quarter 2020 results. While we reported a significant year-on-year increase in adjusted EPS. Our sales and margins were impacted by the economic effects of COVID-19, primarily within our Engraving segment. As David previously discussed, we strengthened our financial flexibility on several fronts through continued cash flow generation, reducing interest expense, continuing to repatriate cash and lowering our capital expenditures for the year. Finally, we implemented several cost-saving actions in the quarter. The cost actions announced today will generate approximately $4 million in savings in the fiscal fourth quarter and $7 million in annualized savings. We plan to incur approximately $1.5 million in restructuring charges in the fiscal fourth quarter related to these actions. We also announced closure of a pump’s facility in Ireland, which will result in approximately $1 million of savings on an annualized basis. Now let’s turn to Slide 9, third quarter 2020 financial summary. On a consolidated basis, total revenue declined 3.1% year-on-year for the fiscal third quarter. This reflects organic weakness, primarily in Electronics and Engraving due to the economic impact of COVID-19. Acquisitions contributed 0.9% to overall growth in the quarter, while foreign exchange remained a headwind with a negative impact of 0.8%. Gross margin decreased 50 basis points year-on-year, reflecting volume decline and material inflation in the Electronics segment. Adjusted earnings per share were $0.96, reflecting the decrease in interest expense due to lower borrowings and lower overall interest rate. In addition, our tax rate was 470 basis points lower year-on-year due to the mix of U.S. and non-U.S. earnings. Please turn to Slide 10, fiscal third quarter 2020 free cash flow. We reported free cash flow of $7.3 million compared to $11.3 million in…

Thank you, Ademir. If everyone can please move to Slide 15. I would like to take a brief moment to express the significant impact the divestiture of our refrigeration business has had on Standex. I want to first thank the employees of the refrigeration group for their hard work and dedication over many years at Standex. The refrigeration business was largely a standards product business. This was also true for the cooking business, which we divested a year ago. With these two divestitures, we now possess a portfolio of businesses that have leading positions in niche markets and compete on a common basis through customer intimacy to deliver customized solutions and have competitive advantage in their spaces. They have track records of delivering good margin performance, and the new Standex has an operating margin 200 basis points higher than the business did with refrigeration in the portfolio. Our current businesses are big fish in small ponds, and we can now focus much more management attention on feeding and growing them. In closing, I want to thank our employees for their dedication and efforts as well as our customers and suppliers for their ongoing support. I'm very proud of our team. Following our experience in China in regard to COVID-19, we deployed an effective playbook through a high degree of intercompany coordination and collaboration, focusing on employee health and safety. This effort continues as we work our way through this situation. Out of necessity, this has created a deeper level of cooperation between our business than we've ever seen. While this remains an extremely challenging environment, we're confident in our ability to safely and successfully execute and progress on our strategic initiatives. Based upon our segment discussion earlier in the call, let me summarize our expectations for the fourth quarter. In…

[Operator Instructions] Our first question is from Chris Moore from CJS Securities. Go ahead.

Good morning, guys. Maybe we could just – I wanted to focus on Electronics, but perhaps a little – I was future growth, maybe a little longer-term and talk about some of the variables that ultimately might be impacting the longer-term growth in that segment and perhaps the end market focus, is there – do you see any kind of shifting or areas of particular opportunity longer-term?

Yes. So in the Electronics, you recall, we have a high reliability magnetics business and these reed switch and related sensor business. The reed switch business serves about $1.5 billion global market, and its applications evolve with technology. For example, we have a lot of new applications in electric vehicles and new technologies. So that space will naturally evolve to the growth areas in the economy. We talk a lot about our new business opportunity funnel, the NBO funnel, which has grown throughout this year. We're actively working quite a large funnel, and our estimate is just $55 million in there that will convert to sales. This year, we mentioned this in the last call, but not this call. We'll have between $11 million and $12 million of sales in these new applications that will be in our sales in this fiscal year 2020 from Q1 to Q4. So on a $160 million business, a $10 million, $12 million business, that's enough growth to overcome any churn in our core business and help us grow a bit faster than market as we try to inch out our market share in that $1.5 billion segment. So overall, I think the segment grow slightly faster than GDP because of the growth in sensor markets. And we can grow somewhat faster than that as we take share. On the high reliability magnetics business, this is a steadier business and it's the key markets that we serve are aerospace, military, defense, medical devices, products for the smart grid and power gen. So maybe a little slower growing end market, but it's a very steady long-term market with a lot of visibility. So hope that helps frame the growth expectations.

It does, thanks. From M&A perspective, obviously, you've got a strong balance sheet, lots of flexibility. I would guess the next couple of quarters, I don't know much is happening on that end. But can you talk a little bit about the pipeline? And is it really – is it Electronics and Engraving where the focus is on the M&A side?

Yes. We have an active pipeline. We are working some opportunities. And as we've said in the past, the highest number of opportunities are in the Electronics space because that is the biggest end market with the largest number of smaller niche players. There are some opportunities in Engraving. There's some in the scientific space. But as you say, in general, activity is a little slower, although we're keeping our eyes and ears open for any opportunities that might appear from companies that become stressed in this downturn, and we're prepared to take advantage.

Got it. Last one from me, just from a kind of a competitive landscape perspective. Do you see any of your businesses that actually will be in a better competitive position on the other side – or potentially better on the other side of COVID?

Well, yes, we think nearly all of them will be in a better position we can go business by business. But all of them have there's some growth initiatives. We have some new products that are in development that we hope to be announcing later this year. We're working closely with customers on new applications. And because – although we've taken significant actions to reduce our cost position, we're protecting our engineers, we're protecting our applications people, so we can continue to do that work, which will position us for the other side.

That’s really helpful. Thanks, guys.

[Operator Instructions] Our next question is from Chris McGinnis from Sidoti & Company. Go ahead.

Good morning, thanks for taking my questions. And hope you all are doing well. I just want to start a little bit – I was a little surprised and congrats on a good quarter and I think the business is holding up a little bit more resilient than I thought. Can you just maybe talk around the Engraving and maybe also around the Electronics and the Auto exposure and just how that's playing out for you, just given the steep decline within that segment?

Yes. As you know, they each have – they're exposed to Auto in different ways. The Electronics business is – sells sensors that go into level of measurement applications brake fluid levels, different liquid reservoirs. In fact, just an interesting fact within an electrical vehicle, there are many more liquid reservoirs for cooling purposes around electric vehicle than in a combustion vehicle. So the Electronics business is going to follow SARS more. And their exposure to Auto is in low-20% of their total sales. The Engraving business, however, is exposed to Auto through the schedule of new platform releases. And that – predicting how that will behave in this downturn is a little trickier because in past downturns, in some cases, OEMs even accelerated new product releases, which was good for us, to compete for share in a tighter market. In other cases, they delayed those new platforms to conserve cash in a deep downturn. For the moment, our visibility over the next quarter or so, our OEMs are telling us, they're maintaining the releases that they foresee this year. There's some delays because it's hard to get people together to do the collaborative markup sessions that are typical in this business because people are working from home and they can't get together. But the platform schedules themselves. For the moment, to the best of our knowledge, we remain on track.

Great. Okay, and thanks for that color. And just with everything that's happening within the marketplace, how is this opportunity for you maybe to go out and get some more growth? How do you see things changing where you can really capitalize on your kind of niche position in the marketplaces that you play within and can you go out and maybe take some share in this opportunity? Obviously, you have a really strong balance sheet. So that may be an opportunity. But what about even also on the organic side? Can you maybe...

Yes. Well, that's a great question. You first have to remember how we compete and win and work with our customers. So we're working with the customers to design a product or an assembly for a new product that they have, a new application they need. Once it is approved and then it goes into production. And we're usually sole-sourced, and we supply that customer for the life of their product. The engineering process can be long; it can be six months to 12 months or more. And that's where the competition takes place. The competition takes place in getting the right to sit down and collaborate with the customers' engineers. You do the work, and that results in revenue and sales that will appear six to 18 months later. We are really well positioned right now. Our MBO list is very healthy. Our engineering teams – their biggest challenges is supporting all of the opportunities they have in front of them. Because we compete with many smaller companies, I can only assume that there are at least some of them that are struggling. So we are – we're positioning ourselves well for that growth. But there's a lag time to it because we first design, it goes into production and then ramps up.

Appreciate that. Thanks for that. And then just two quick ones. Just on the cost savings and I think you said $4 million in Q4, but $7 million annually. Is that on top of the Procon savings and then also the interest expense savings? Or is that configured into that $7 million annual?

No. The Procon savings are – they're going to take us a little while to get those savings to read out. So they're probably going to start reading out over the later part of next fiscal year. So that will be on top of $7 million, but we don't expect to see the $1 million fully read out in fiscal 2021. And the interest expense is going to be just per quarterly base, it's going to be about $1.5 million interest...

It is not in that $7 million. $7 million structural changes to...

Okay. So $9 million, a little over $9 million of cost savings, that's pretty solid. So congrats on that. And then a last question. I know it's probably not on your radar at the moment, just given kind of what's happening in the marketplace. But now that you -- within the Food Service segment, you've changed that pretty dramatically over the last 1.5 years. Any thoughts around maybe changing that segment name just given that now it's maybe a little less Food Service and now you got the Scientific in there that's doing really, really well?

Yes. I think that's a legitimate question. I'd say now we have this quarter behind us, we're businesses kind of know where they stand. We've taken the actions. It was quite a busy quarter for us. But I'd say we'll begin examining that question here in the next quarter. And our fiscal year ends in June that would be an appropriate time to take a look at it.

Got it. Thanks for taking my questions. Good luck to you and stay safe.

Thank you, Chris.

Thanks Chris.

At this time there is no more question. So it concludes our question-and-answer session. I would now like to turn the conference back over to David Dunbar for closing remarks.

All right. Thank you. I want to thank everyone today for their interest in Standex and 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 on the fourth quarter fiscal 2020 call later this summer. Thank you.

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