00:07 Good morning, and welcome to the Standex International Second Quarter Fiscal 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, this event is being recorded. 00:36 I would now like to turn the conference over to Gary Farber of ClearView Advisors. Please go ahead.

00:42 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 should refer to Standex's most recent Annual Report of Form 10-K as well as other SEC filings and public announcements for a detailed list of risk factors. 01:23 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 one-time items; 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 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. 02:11 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. 02:27 On the call today is Standex's Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer and Treasurer, Ademir Sarcevic.

02:36 Thank you, Gary. Good morning, and welcome to our fiscal second quarter 2022 conference call. I'm very pleased with our strong second quarter results, which were above our expectations with record performance in several areas. Our success reflects the significant repositioning of our portfolio around high growth end markets, where our expertise and innovative solutions provide compelling customer value proposition. We are excited about the growing number of new business opportunities in front of us and are in the early innings of further driving the trajectory of the next leg of our growth strategy. I want to thank our employees, executive teams and the Board of Directors for their continued dedication and support. 03:18 Now, if everyone can turn to Slide 3, key messages. Both revenue and consolidated adjusted operating margin increased significantly year-on-year in the second quarter. Record sales of both our electronics and scientific segments in the quarter were key drivers of organic revenue growth, which was 20% year-on-year. 03:36 Electronics segment revenue grew approximately 27% year-on-year with broad based strength across all geographic regions and end markets, such as electric transportation, solar, military, aerospace and semiconductor, all platforms were significant future growth. 03:55 Scientific segment revenue increased approximately 38% year-on-year with positive trends in our core markets, complemented by ongoing demand for COVID-19 vaccine storage refrigeration. For the third consecutive quarter, we've reported our highest adjusted consolidated operating margin in Standex history, 13.6%, representing a 220 basis point year-on-year increase. This reflected strength in end market product demand, complemented by market share gains, productivity and price realization initiatives. 04:30 We are entering the second half of fiscal 2022 with a very robust pipeline of new business opportunities in high-growth end markets. We're also further leveraging our business units through highly targeted investments in research and development,…

15:00 Thank you, David; and good morning, everyone. First, I will provide a few key takeaways from our fiscal second quarter 2022 results. Revenue, operating margin and free cash flow all increased both sequentially and year-on-year. Organic revenue growth of approximately 20% year-on-year reflected record sales of the electronics and scientific segments with 4 of our 5 segment reporting increased sales. 20% year-on-year organic growth consists of approximately 2/3 in volume increase and 1/3 in price realization. 15:32 In addition, adjusted consolidated operating margin of 13.6% in the quarter represented a 20 basis point sequential increase and 220 basis points increase year-on-year, led by strong operating performance in the electronics and scientific segments. We also further added to our significant balance sheet and liquidity strength the solid free cash flow generation. 15:55 In summary, supported by continued strong market demand and active pipeline of new business opportunities and new product development, ongoing focus on price and productivity initiatives and with a year-to-date book-to-bill well in excess of 1, Standex is entering the second half of fiscal 2022 with momentum and expectations for continued improvement in financial performance, both sequentially and year-on-year. In addition, all these positive trends provide us with further financial flexibility to pursue a very active pipeline of M&A opportunities. 16:27 Now, let's turn to Slide 9, second quarter fiscal 2022 income statement summary. On a consolidated basis, total revenue increased 18.8% year-on-year from $156.3 million in the second quarter of 2021 to $185.7 million this quarter. This revenue increase primarily reflect the strong organic growth of the electronics and scientific segment. The sales increase was partially offset by the prior divestiture of the Enginetics business, which contributed approximately $2.3 million in revenue in the fiscal second quarter of 2021, as well as a small impact from foreign…

20:05 Thank you, Ademir. If everyone can please turn to Slide 12 for a discussion of our improved growth outlook. We are entering the next phase of our strategy and the growth trajectory, well positioned to exceed our prior long-term organic revenue growth target of mid-single digits. We are focusing on end markets aligned with sustainable growth trends. We can provide innovative solutions, addressing emerging global opportunities in areas such as renewable energy, electric vehicles, human health, commercialization of space and products that emphasize sustainability in their features. 20:38 Our presence in these high growth end markets is already contributing $64 million in sales annually and increasing at a 25% compound annual growth rate. Our applications typically have multi-year customer purchase lifecycles, providing a recurring revenue stream. We are leveraging our significant pool of internal talent with the recent announcement of a dedicated office of innovation. We are increasing investments in R&D to execute on a very active pipeline of new product introductions and expand the range of high return opportunities company wide. 21:11 We are focused on driving profitable growth with investment in R&D, which has doubled since the end of fiscal 2019, while our consolidated adjusted margin improved. Recent releases include introducing new product categories at scientific, including blood bank and plasma cabinets and a ground up redesign at merchandising of our new Vision series, which we introduced in November and is already generating significant customer order flow. 21:37 Our approach to executing on our projects is highly collaborative and multifaceted to maximize the value of our expertise. In the case of the solar project with ENEL, which I discussed earlier in my comments, electronics, engraving and our innovation and technology office are collaborating to apply custom surface engraving and electronic componentry. In addition, Standex has a minority ownership stake in Gr3n SA, whose recycling process will be used for material inputs to module production. We expect a pilot plant to begin operation in early 2023. 22:13 Please turn to Slide 13 to discuss our update to the Standex financial framework. A year ago, we provided a comprehensive list of financial targets highlighted on Slide 13 that we expected to achieve in the next 3 to 5 years. Our performance in the past year and the momentum in the business increased our confidence in meeting and exceeding these targets. We are well positioned to continue to exceed mid-single digit sales growth. We now expect to reach an adjusted EBITDA margin above 20% and a return on invested capital above 12% in the next 18 to 36 months, reflecting a significant strengthening of our business portfolio and breadth of company growth and productivity initiatives and pipeline. 22:55 Operator, I will now open the line for questions.

22:59 Thank you. We will now begin the question-and-answer session. Our first question comes from Chris McGinnis from Sidoti & Company. Please go ahead.

23:26 Yeah. Good morning. Thanks for taking my questions, and congratulations on a very strong quarter.

23:32 Yes, thank you. Good morning.

23:34 I guess just one thing right off the bat, it's just that, a number of other companies are reporting kind of significant increases in raw material, supply chain issues or labor, can you just address maybe how much of a headwind that is right now? And how are you largely offsetting that?

23:52 I'll say a couple of words and then turn it over to Ademir. Our biggest raw material issue in the last few years was rhodium in electronics, and I think you've seen in the last year how we've effectively managed that by passing price through to recover the margin and we've also engineered an alternative products for customers using ruthenium in those switches. 24:14 The other business that's really affected by material increase in hydraulic and you kind of see that in the specialty module, but hydraulics has always dealt with fluctuations in steel price and has a well-established process for passing price through and we're confident that we're positioned to start recapturing that margin in the coming quarter.

24:34 Yeah, Chris, and if I can add. For the most part, we are the regional supplier for regional customers. We don't have really a lot of a long kind of long-haul supply chain, if you will. So we estimate in the quarter, there was about $6 million worth of sales that got pushed from the quarter, pushed to the right, but these are sales that we did not lose, these are not cancellations, it's just something that we will have to ship in Q3 and Q4, but for the most part there has been a pretty limited impact for us.

25:02 Great. And then, I guess, just in relation -- I'm sorry.

25:06 Go ahead

25:07 Just in relation to the updated long-term target, what's the driving factor to make that in 18 months versus 36 month? What are the -- what do you think that can lead it to be quicker versus the longer-term execution?

25:23 Well, it's two things, Chris. One is just simply looking at the performance of the business in the last year. I mean, where we're headed now, we're headed where we thought we would be a year ago and even our performance relative to external expectations, we've exceeded the expansion in margin rate and our sales. So we are farther along than we thought we would be. 25:43 Secondly, we just completed a very granular ground up recast of our five-year projections for all of our businesses. We came out of there with a lot of confidence that our topline growth will continue, we'll leverage margin expansion. And the Page 12 gives a number of the items that go into our enhanced topline expectation. So it's a process of just kind of watching the performance in the last year and also really digging through our businesses to see what they've got in the pipeline to contribute to the next few years.

26:20 Great. And then just one more for me and I'll jump back in queue. Just in relation to the balance sheet and the opportunity for M&A. I know last quarter you bought back some shares that didn't happen in Q2. I'm just guessing, is the opportunity for M&A becoming maybe more apparent at this point?

26:40 Yeah. I'll say a word about that. Every quarter we look at our cash, what are the best uses of cash, continue to buy back shares is always on the table, but it's in context with the other options in front of us. So, obviously, we have some great internal investment opportunities. The acquisition pipeline has become busier in recent quarters. Our intent is not to sit on cash for a long time. We're going to put it in the most productive uses and I can only say we follow the same quarter-by-quarter valuation. Ademir, do you want to add anything to that?

27:19 Yeah. The only thing I would add, Chris, our share repurchases will continue to be an important part of our capital allocation strategies. And I wouldn't read too much into the fact that we didn't repurchase any shares last quarter.

27:30 Okay. I appreciate that. I'm going to jump back in queue. Good luck in Q3, but I'll talk .

27:35 Yes. Thank you.

27:36 Thank you.

27:37 The next question comes from Chris Moore from CJS Securities. Please go ahead.

27:42 Good morning, guys. Thanks for taking my questions.

27:45 Hi, Chris.

27:46 Good morning. So you talked about -- if reed switch production material substitution project should be finished by the end of 2022, just curious, if it had been finished by the end of 2021 kind of roughly how additive would that have been in 2022? Is that more of a volume versus margin --

28:05 Yeah. That's a great question. When we first started talking about that, we thought to recapture the margin we were losing from rhodium inflation. We would need to have this ruthenium production in place. But starting about a year ago with the Q3 of 2021, our electronics business put in place more disciplined pricing process and began recovering the margins from the rhodium. 28:30 So by the time we got to the end of the year, the ruthenium project was no longer one about recapturing margin, but it was one of, A, expanding capacity and, B, offering our customers an option between ruthenium and rhodium switches. So had we -- I mean, your question is a hypothetical one, had we had that capacity online last, say, June, for example, it would have given us more capacity and probably some upside on the sales line.

28:59 Got it. Thank you. Engraving is a one segment that lagging a little bit, just maybe talk about visibility and expectations beyond Q3?

29:11 Yeah. So engraving, the way we think of this business is 70% of the sales go to the auto industry and is driven by new platform and the outlook for new platform rollouts in the coming years is stable to slightly growing. So think of that like a GDP growing end market. We -- there is a move in the market to more soft trim parts than hard trim. Our bread and butter for years and years was hard trim. We acquired a business a few years ago to accelerate our soft trim sales and that backlog is really growing. So we anticipate that the soft trim sales in the coming quarters will start to read through. We'll see that grow. 29:55 And you see in our -- in this quarter that our laneway growth really is solid. So -- on the -- in the auto end market, we think we're well positioned to participate in the trends of soft trim and our laneways are driving growth. On the non-auto business, which we've always used as sort of a way to fill capacity in our sites, there -- that's about 30% of the business. We've had more competition in recent years as some of our smaller regional competitors have invested in lasers. 30:29 So we've talked about our new laser technology, which is -- we're beginning to roll out and will start to roll through our regions this calendar year. So those things are all going on in the engraving business. When we talk about getting this business back to a 20% operating income, there's essentially three key things. The one is, Jim Hooven is now running the business, he is driving operating disciplines consistently across the regions, because the labor management practices and pricing, in particular, are critical. 31:01 Secondly, just ramping up the soft trim growth, especially in Asia will help us grow topline. And thirdly, the roll out of this new laser technology across all the businesses will strengthen our position in the non-auto segment.

31:16 Got it. And that laser rollout, that's more of a second half calendar 2022 when it really gets moving or is that a calendar 2023?

31:29 First, we have two installs now, there will be another couple in -- over the next couple of quarters and then a few more in the first half of the next fiscal year. So it's a kind of a calendar year story. You'll see it progressively roll through.

31:49 Got it. Specialty was a nice beat in revenue certainly where we were looking for, $30 million, you're talking about kind of sustaining close to that in Q3, what would it take to increase that quarterly revenue closer to $35 million?

32:07 Well, the end markets are almost back to the pre-COVID levels in the foodservice equipment. I think our team believes that this quarter they will get back to the pre-COVID levels. So for the and display merchandising, we'll continue to see end market strength. The new products that we've released we think are going to take some share, so that will accelerate growth there. 32:32 With the hydraulics business, we will be a beneficiary in the coming years of this North American infrastructure spend. That's not going to be a pop to the earnings, but it provides some laneway over the next 5 to 10 years to continue to grow. So I think that favorable external market conditions plus our new product releases will help us continue to grow the topline.

32:58 Got it. And last one for me. I just wanted to -- maybe Ademir could repeat it, I didn't hear exactly, the breakdown on the organic growth in the quarter between price and volume? Did you say 1/3 price, 2/3 volume, did I hear that correctly?

33:12 Yes, you did, Chris.

33:14 Okay. All right. I'll jump back in line. Thanks, guys.

33:17 Thank you.

33:18 Thanks.

33:19 Our next question comes from Chris Howe from Barrington Research. Please go ahead.

33:29 Good morning, David and Ademir.

33:31 Good morning.

33:33 Good morning. I guess, first off, starting with Slide 12, if we think about the new product pipeline across the businesses, perhaps more specifically around solar energy, can you talk about just the puts and takes and how you balance your level of R&D investments? And also your level of investment in pursuing new opportunities beyond what you already have?

34:06 Yeah. I was so excited to put this slide together. This is like the combination of 8 years of work in getting our businesses a focus on controlling their own destiny with their own organic growth programs. And if you look at Standex years ago, we've reported our R&D spending of less than 1% of our sales. And to be honest, a lot of that was customer support, manufacturing support. There wasn't really a pipeline of new products that we're working on. 34:31 A several years ago, with the GDP+ process that's grown by Paul Burns in the Business Development Group, we started identifying new product development, we started allowing the businesses to ramp up their engineering spending and you see -- and this year we'll be about 2%. Ademir, is that right?

34:52 Yeah.

34:52 About 2% of our sales in R&D. If you benchmark other companies, I think long term, provided we find, we think we can, attractive new products to invest in, you'll see that number drift probably closer to 3% and over 3% of sales. But this is all part of a disciplined stage gate process, so this kind of gets to your question, how do we decide where to invest? 35:14 first, we have these ideation sessions with all the businesses. From that ideation session, we have a list of portfolio of opportunities, we choose the ones that appear the best and we first construct the market test. And the market test is a way for us to go out, talk to customers, maybe just a voice of customer research, maybe get a prototype in some customers' hands. And then in just a few months kind of determine, is there something worth exploring here. 35:43 And if so, then it enters our stage gate process. We have a monthly review between the business and our Business Development team to track the evolution of this idea until we get to kind of a green light to start a new product development. So it's quite a disciplined process. We do this with all the businesses and you're just starting to see the culmination of that. This work has been going on for years, but the new products are now coming out. They are starting to generate sales and we're confident enough about it to put -- kind of put some highlights on this page about how that will help drive long-term growth.

36:24 Okay. Helpful. And then just following up on a previous question related to the reed switch substitution and how if it were completed sooner perhaps it would have helped on the revenue line. As we think about the differences in material, how should I think about it as it relates to demand for certain applications?

36:58 Yeah. Just very roughly the characteristics of rhodium are best suited to the most mission-critical applications out there. So if you've got a switch that must work a 1 billion times without any interruption that -- the characters of the rhodium are more secure there. If you have a switch that needs to undergo very high voltage across an open switch like in the safety isolation testing for electric vehicles, that's better for rhodium. 37:32 On the other end of the spectrum, applications like your security system in your home where there is a reed switch in the window and a magnet in the window frame and the other way around, our ruthenium switch is perfectly adequate for toys or sprinkler system. So, kind of lower end and higher end applications of those -- the two of those span the range of application condition.

37:59 Okay. Is it fair to say then based on the lower end applications of ruthenium that the cost of the switch is lower, but perhaps the demand for ruthenium for exceeds what it is now for rhodium? That's it from

38:17 Well, first of all, there is a more ruthenium in the world, the market for ruthenium is more liquid, there is higher supply. And if you count up all the reed switches sold in the world, there are more ruthenium switches sold than rhodium switches and they are more lower end applications. So I think that's what you're getting at.

38:37 Yeah. Okay. And then, lastly just of the --

38:42 If I could, Chris. I apologize. Let me make one point. Our margins on ruthenium switches are equivalent to our rhodium switches. So maybe a lower price point, but it's lower cost as well, because of ruthenium. So we're agnostic about which switch customer chooses.

39:02 Okay. And then, lastly, on the scientific segment, there is ongoing replacement of cabinets as we move further down the line. Talking about that, but also can you talk about the global opportunity for scientific. I know, domestically you continue to be strong, perhaps COVID-related, perhaps not, but how should we think about opportunities outside of our order for scientific?

39:39 Yeah. This is something we've actually spent some energy in the last year. Through that same growth process I mentioned, we have conducted some market test to look at the opportunity. What we discovered is, in many parts of the world, they are still using the same kind of refrigerator you might have in your office to keep drinks in or something that you buy at Costco, so they are very low price point, lower quality cabinet and not very attractive for us at this moment. 40:12 For those countries that do have higher quality standards for medication and vaccine storage, they have their own unique requirements and certification requirements. And we are looking at ways that we can play in those markets. It's not as simple a matter as just exporting the products you make here in America to those countries, we have to find a way to either reengineer and get certified to those local protocols, but we are actively exploring those things.

40:48 Okay. That's all I have. Thank you.

40:49 Thank you.

40:52 This concludes our question-and-answer session. I'd like to turn the conference back over to David Dunbar for any closing remarks.

41:00 Yeah. Thank you. We delivered strong topline growth and record margins in the quarter. We see substantial runway to further drive Standex growth and profitability given our strengthening positions in a high growth markets and are also aligned with sustainable global trends and investment in innovative solutions, which leverage our significant technical and application expertise to provide compelling customer solutions. 41:24 I want to thank everyone today for their interest in Standex, in our discussion of our fiscal second quarter and current outlook. And, again, I want to thank our employees and shareholders for their continued support. We look forward to speaking with you again on our fiscal third quarter 2022 call.

41:43 Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.