Good morning, ladies and gentlemen, and welcome to the Standex Fiscal Third Quarter 2024 Financial Results Conference Call. [Operator Instructions]. And this call is being recorded on Friday, May 3, 2024. I would now like to turn the conference over to Mr. Christopher Howe, Director of Investor Relations. Please go ahead.

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 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 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. 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 third quarter 2024 conference call. Despite continued softness in general market conditions, we continued our trend of strong margin performance. If we exclude the one-time stock compensation charge, our streak of record adjusted operating margin performance would have continued. I would like to thank our employees, our executives and the Board of Directors for their efforts and continued dedication and support that drove these results. Now if everyone can turn to slide 3, the key messages. In the third quarter sales into fast growth end markets grew 9% year on year to $26 million. We are on track to achieve our long-term target of $200 million annual sales into fast growth end markets by fiscal year 2028. We continue to experience the effects of transitory market softness, which led to an organic decline of 5.7%. These headwinds included continued softness in appliances and general industrial end markets in China and Europe, the impact of a lower number of projects and inventory destocking by a few large electronics customers in the semiconductor and test and measurement end markets. These were partially offset by contributions from our recent acquisitions, including the late February completion of our acquisition of Sanyu Switch Company, expanding our relay product offering. In addition, we continue to work an active pipeline of other inorganic opportunities. During the fiscal third quarter, we also continued to generate strong profitability from the execution of our price and productivity initiatives. As a result, we again achieved adjusted gross margin of nearly 40%, which followed a record 40.3% last quarter. We continued to demonstrate our ability to drive operating improvements while adapting to changing macro conditions. Consolidated adjusted operating margin increased 20 basis points year on year to 15.4%, which includes a 70…

Thank you, David, and good morning, everyone. Let's turn to slide 5, Q3 2024 summary. On a consolidated basis, total revenue decreased approximately 3.8% year on year to $177.3 million. This reflected an organic revenue decline of 5.7% and 0.9% impact from foreign exchange, partially offset by 2.7% net impact from recent acquisitions and a prior program divesture. Q3 2024 adjusted operating margin increased 20 basis points year-on-year to 15.4%. In the quarter, we incurred the one-time stock compensation charge related to our CEO reaching retirement eligibility. This charge impacted adjusted operating margin by approximately 70 basis points. Excluding this charge, adjusted operating margin would have been similar to our record second quarter 2024 performance. In the fiscal third quarter, adjusted operating income decreased 2.2% on a 3.8% consolidated revenue decrease year on year. Adjusted earnings per share grew 6.1% year on year to $1.75 in the third quarter of fiscal 2024 compared to $1.65 a year ago. Net cash provided by operating activities was $24.4 million in the third quarter of fiscal 2024 compared to $23.3 million a year ago. Capital expenditures were $5.2 million compared to $5.6 million a year ago. As a result, we generated a record fiscal third quarter free cash flow of $19.3 million compared to $17.6 million a year ago. Our free cash flow conversion ratio as a percent of GAAP net income was 121%. Likewise, on a year-to-date basis, we generated record free cash flow of $50.8 million. Now please turn to slide 6, and I will begin to discuss our segment performance and outlook beginning with electronics. Segment revenue of $80.4 million increased 2.8% year on year as a 13.5% benefit from recent acquisitions was mostly offset by an organic decline of 9.3% and a 1.3% impact from foreign currency. Adjusted operating…

Thank you, Ademir. Please turn to slide 10. I'm very proud of our team for their continued operational excellence and focus on growing markets that led to our quarterly results. We are prepared as inventory levels normalize and demand returns, while our fast-growth markets will continue to evolve and accelerate. We have proven over the 11 consecutive quarters of record margin that we can expand margin and grow earnings by adapting to changing macro conditions. Excluding the one-time charge in the quarter, this streak would have continued. We remain optimistic about the [Technical Difficulty] secular trends that will benefit from the transition from combustion to hybrid and electric in automotive, infrastructure spending and smart grid, defense applications, and next-generation aerospace development, and from the evolution of space exploration. Broadly speaking, these trends are still in the earlier stages of development. We are on track to achieve our long-term target of $200 million plus in annual sales into fast growth end markets by fiscal year 2028. To support our growth, we continue to expand our engineering capabilities to drive new product development and new applications across markets with growth potential. In fiscal year 2025 for the first time in the company's history, new products will be released in every one of our businesses. We continue to maintain a strong balance sheet that allows us to prudently assess an active pipeline of organic and inorganic growth opportunities. In fiscal 2025, we expect to return to organic growth rates in line with our long-term financial objectives. We reaffirm 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 of greater than 15%, and free cash flow conversion at approximately 100% of GAAP net income. We will now open the line for questions.

[Operator Instructions]. Your first question comes from the line of Chris Moore of CJS Securities.

Good morning. Good morning. Maybe we'll start electronic. So I mean you call that electronics in Europe and Asia being softer for a while. Can you just remind us what percentage of total electronics we're talking about there?

Well, roughly electronics is about one-third in each region of the world, North America, Europe and Asia.

Yeah, okay. And in terms of North American performance, again, there was -- the semiconductor, the challenges you referenced, those were within North America or those were within Asia? Where was that?

Yes, actually, that's a good point. Those are customers of our magnetics business and that is in North America. Yeah and typically, we sold those products to the semiconductor equipment manufacturers, then they export globally. There is an expectation that we hear from the customer. By the end of this year, we should see a ramp in orders, specifically for installations in North America following the chipset investments.

Got it. Appreciate that. You mentioned reed switches as a leading indicator improving sequentially. Just how long has it been since you can make that statement? Has it been the last couple of quarters or just starting now? I'm just trying to understanding how long it's been since we've been -- you're seeing that indicator.

Well, first of all, the idea that reed switches serve as an indicator for Standex in general, this goes back to well before I joined the company. It has been kind of a shorthand that the company used back in the days when we had dozens and dozens of different businesses. Reed switches were -- we used as a leading indicator. Our reed switch sales began to drop in this order -- orders begin to drop in Q2 '22. So it's really just the last two quarters and starting to see them firm up.

Got it. Very helpful. I think you guys have done an exceptional job on margins even lately without the benefit of much volume leverage. Maybe just which segments do you still expect to drive the biggest increase in over the next few years to meet your longer-term goals?

Hey, good morning, Chris. It's Ademir. I will tell you the answer to that question, it's all of us. We believe all of them have an opportunity to expand the margin. And if you look at our long-term margin projections for all of those businesses, for example, we think we can get electronics to 25% operating margin. The last quarter, they were a little north of 20%. You can see the opportunity we see in the electronics business, for example. But really the answer is we feel there's an opportunity to expand margin in all of our businesses.

Your next question comes from the line of Mike Legg of Benchmark.

Thanks. Good morning, everyone. Following up on the reed switch piece, what is the lead time for those orders versus delivery?

A lot of these go through distribution and we -- it's about a month. We've about a month cycle. I you can get an order from our distributors once was we ship within three to four weeks. In some cases with our larger distributors, they'll have a kind of a block order or commitment for a year and they'll call-off orders as the year progresses. But individual orders are about a one month delivery protection.

And then you talked a lot about new product development in each of the divisions. Can you talk a little bit about the cycle there for new product development? How long it takes? And then these are obviously all new products. What that means to additional revenue?

Yes, yes, that's a great question. And you'll recall that we sell components or subassemblies that then go to either Tier 1s or OEMs that are incorporated in their design. So our new products are subject to the cycle that our customers have. So let's say, we identify a new opportunity. It may typically take a year for us to settle on the design, develop the product, and then be ready to present it to our OEM customers. We began working with them incorporating it in their design, that may be a year to two years. Then they launch their product, and I think in the past, we've shown data that once our OEM customers begin shipping a new product, it typically ramps for two to three years before hits max volume. So if you add all that up, it's -- from the beginning of new product development to sales of any significance could be three to five years.

So it's fair to say that with new product developments coming online in '25, fiscal '25, that this is one of the culmination of efforts over the past couple of years?

Yes. Yes, these are largely development projects that began a few years ago.

Okay, great. And then just last question, you mentioned the pipeline for M&A being robust. Can you just comment on that a little bit more?

Yes, it remains robust and we have two kinds of deals that we work. The bread and butter Standex acquisition for years was a family owned business, privately owned business, where the owner founders who are approaching an exit. We have a very healthy funnel of those opportunities. And they're a little smaller, $20 million, $30 million, maybe $50 million in sales at the top. In the last few years, we have also been positioning ourselves for larger opportunities, maybe $100 million in sales. And these would be run with a more professional advanced process and our funnel in the first category -- it's always relatively healthy. In the last, gosh -- in the last six months, I'd say the funnel of these larger opportunities is starting to perk up. It looks like there are more of these deals that are preparing to come to market.

Great. Thank you, and look forward to 2025.

Your next question comes from the line of Mike Shlisky of D.A. Davidson.

Yes, hi, good morning and thanks for taking my questions. I guess I wanted to get a more broad view. I mean, you sound pretty confident about getting back to a more normalized organic growth rate next fiscal year. You kind of outlined a lot of what's happening in the . I was wondering if you could give us a couple of other bullet points on the other side as to how you get that confidence that -- segment pretty much they'll all turn back to some more normalized organic growth rate?

Yes, yes. Okay. Well, if you think about the segments that have the best growth profile next year we're the most confident, engineering technologies. We have this very long cycle business. We have great visibility to our customers' planned shipments. And so FY25 is going to be a very strong year for engineering technologies and space, aviation. Our hydraulics business is really starting to see a pickup in order activity. We think some of the infrastructure bill -- funds are now being appropriated and applied to projects that are resulting in demand for our cylinders. The chassis shortage, it was a problem in that business, is now cleared up. So more of the trailer capacity is being devoted to the kinds of trailers we do. So we're very confident there. Scientific is fundamentally a good underlying business with 3% or 4% growth. We also have new products coming out there in this year. We'll have maybe $5 million of sales from new products in that business. In FY25, we will start to enter the replacement period for cabinets that were shipped in COVID. I think we regularly mention that these cabinets have a four to seven year typical service life. So as we get into the second half '25, we expect some of those will begin to hit that period. Now with engraving, we called out that some of the push-outs in OEM platforms, we're calling for a more modest growth there. But there we have pretty good visibility. So I think I've covered them all.

Yeah. You got them [Technical Difficulty].

I think you did. Yes. Thank you. And then in that in a high-growth environment, especially we've got some new products rolling out and perhaps some R&D rolling off, if I'm wrong there, correct me on that, but do you sense that there is little bit better than just small bites of additional margin, excluding your stock cost? Could there be a bit more of expansion in '25 and it can be seen here in '24?

Yes, Mike, it's Ademir. I think we'll continue to expand our gross margin. On some of these new products that we're launching, we expect that they're going to have a little bit of a better margin profile than some of the standard products, if you will, that we sell. So they'll be number one. The other thing I'll just mention, we want to continue to invest in R&D and our commercial sales activity. Because we believe that's the investment for the future and investment into new products that we can continue to roll these developments and profile products over time. So yes, we expect to still continue to expand gross margin. But we also expect that we're going to stay within about 3% to 3.5% of sales in terms of R&D expenses.

Okay. That clears it up. I appreciate that. Thanks a lot.

Your next question comes from the line of Gary Prestopino of Barrington Research.

Lot of questions have been answered. But I guess some of what I'd like to know is with these new products, particularly you're talking about an engineering solution or in electronics. How much of those are really targeted into what you would call your fast growth markets?

The new products we released next year, we have three basic categories. There are reed switches relays and sensors. We have new products coming out in all categories. Just recalling. We reviewed the list last week. At least two of them are targeted at fast growth markets and others just expand into adjacencies to help us fill a broader solution set for our current customers. So let's say half of them are a fast-growth markets.

Thank you. And there are no further questions.

I want to thank everybody for joining us for the call today. We enjoy reporting on our progress at Standex. And finally, again, I want to thank our leadership, our employees, and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal fourth quarter 2024 call.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.