Good day, and welcome to the Standex International Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Gary Farber. Please go ahead.

Thank you, Sarah 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, included 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; and Chief Financial Officer and Treasurer, Ademir Sarcevic and I'll turn it over to them.

Thank you, Gary. I will begin with an overview of our fiscal second quarter results and provide an update on our continued progress in executing on our strategic priorities. Ademir will follow with a discussion of our financial performance in the quarter and then I will provide some additional thoughts on our outlook. Now if everyone could turn to slide 3. Let's move into a discussion of second quarter results and key themes. We're pleased with second quarter results as quarterly performance continues to trend in line with our expectations. Results were consistent with our commentary on the first quarter conference call in November as we made further progress driving Standex' strategy. Specifically on a consolidated level, we reported $190.6 million in sales a 2.5% year-over-year increase -- decrease and adjusted EPS of $1.03, 5.1% year-over-year increase. For the third consecutive quarter, the Engraving business demonstrated sequential margin improvement on flat sales growth. In addition, operating margin improved on the year-over-year basis for the first time in several quarters. Results of the Electronics segment were sequentially similar to the first quarter as expected as macroeconomic headwinds continue to impact results primarily in Asia. That said the North American funnel of new business opportunities is growing. Also Engineering Technologies trends remain strong. We also have an attractive pipeline of opportunities further positioning the company for higher growth and margin. Growth laneways increased 17% over second quarter 2019 propelled by offerings nickel shell, laser and tool finishing. We continue to see very positive trends in NBOs in Electronics, particularly, in North America where the funnel has increased 6% year-to-date in fiscal 2020. The most recently closed acquisition GS Engineering is performing very well with many opportunities across the global Standex Engraving Mold-Tech footprint. In December we announced a definitive agreement to acquire…

Thank you, David, and good morning, everyone. First, I will provide a few key takeaways from our second quarter results. Overall, quarterly financial performance continues to be in line with our expectations. Trends in Engineering Technologies remain solid. Engraving segment improved its operating margin both sequentially and year-on-year on relatively flat sales. Electronics, which has faced a challenging market for the past few quarters, held its margin sequentially in the 17% range by leveraging productivity initiatives. We also continue to execute on key initiatives to maintain our strong balance sheet position. Working capital and cash flow metrics both improved year-on-year. We continue to successfully repatriate cash from international markets. And finally, we have remained disciplined in managing our cost structure. The cost restructuring actions in Engraving and Electronics are complete to deliver $3.8 million in annualized savings, and we will implement additional productivity programs across the company. Now let's turn to slide 9, second quarter 2020 financial summary. On a consolidated basis, total revenue declined 2.5% year-on-year. This reflects organic weakness in Electronics, strength in our Engineering Technologies and contribution from GS Engineering in the Engraving segment. FX remained a headwind, but to a lesser extent than in prior quarters with a negative impact of 0.4%. Second quarter gross margin improved 70 basis points on a GAAP basis and 60 basis points on an adjusted basis compared to second quarter 2019. This year-on-year increase reflected sales mix and productivity improvements in several businesses including Engineering Technologies and Engraving. Adjusted operating margin declined 80 basis points from 10.9% in the second quarter of 2019 to 10.1% in the second quarter of 2020. This is primarily due to a $2.2 million increase year-on-year in corporate expenses. Similar to last quarter, the corporate expense headwind reflects increased accrued stock-based compensation and benefit expense…

Thank you, Ademir. I will conclude with Slide 14. In the third fiscal quarter of 2020, we expect total revenue to increase slightly sequentially but be similar to third quarter of 2019. In regard to operating income, Standex expects operating income to be sequentially similar to slightly better than second quarter results and show significant improvement year-over-year, as we realize additional benefits of the company's cost reduction actions. Our outlook assumes the following: improved Engraving and Scientific segment performance and increased profitability in Engineering Technologies year-over-year. Performance in the Electronics segment will improve sequentially although be lower year-over-year. At the Hydraulics segment, we expect third quarter results will be similar to second quarter 2020 results but a decrease year-over-year as customers destock inventory against the backdrop of a softer market environment. Underpinning Standex' ongoing success is a focus on operational discipline and improvement further driving continued emphasis on productivity and efficiency initiatives as evidenced by improvement in working capital metrics and Engraving margin in the past few quarters. This focus will be further supported now by the hiring of the VP of Operations. We remain focused on positioning the company's portfolio on higher growth and return opportunities and further extending Standex' competitive advantages. This is evident in the trends for growth laneways and NBOs as well as recent transactions such as the GS Engineering and the definitive agreement to acquire Torotel. Finally, we are committed to maintaining a strong balance sheet complemented by a disciplined approach to capital allocation and we'll be opportunistic as we pursue further value creation opportunities. With that we will open the call up to questions. Operator?

We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Chris Moore with CJS. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning. Maybe we could start on the Electronics side just kind of bigger picture. I'm trying to get a feel for the geographic mix. Obviously, the headwinds are coming from Asia. If we look back a year and then currently and then kind of maybe out a little bit further, do you expect that there's a shift going on? Is there something kind of structural in Asia that would make it difficult to rebound later this year or into 2021? And kind of just how you kind of see that geographic mix from here and moving forward?

At a high level, the mix of the business is roughly a third in Europe, in America and in Asia. And Asia has come down a bit. It's probably ticked down a few percentage points relative to the others. What's driven it down in the last year is softness in global auto a lot of our sales into Asia are to suppliers to auto OEMs that make various devices that include our sensors; a general slowdown in industrial activity in China in part due to tariffs. So we think those things are – they're temporary in nature and cyclical relative to the markets that we serve. So we don't think there's a long-term shift in our geographic balance.

Got it. Thank you. Maybe just talk a little bit about Torotel. In terms of further expanding the capabilities, the customer value proposition, can you talk a little bit further about, what that brings you to Standex?

Yeah. It brings a few things. First of all, the position that Torotel has in aerospace and defense markets are -- is very attractive to us. These are long-term relationships they have. They're on many significant new platforms that will be ramping up in the coming years. The fundamental characteristics of high-reliability Magnetics that we like is, the business is based on, very close collaboration between, our engineering teams and customers' engineering teams, which results in essentially functioning as an extension of that technical group with the customers. We get designed into a platform. And basically ride that platform through its life. And good performance on our part then earns the opportunity to design ourselves into the future platform, so very sticky long-term relationships with these customers in aerospace and defense is an attractive market. We believe we're building a competitive advantage and a strong competitive position in this market, with a series of acquisitions in high-reliability Magnetics. There are still a number of smaller players out there. It's a somewhat fragmented market. And with the Torotel acquisition, we'll have about $100 million business here in North America. We are able to invest in equipment in our quality labs, in our product development tools, and develop a bigger, deeper new product development capability, than many competitors. So Torotel's capabilities are additive to all of that. And so, the central premise of our magnetic strategy is to develop the strongest engineering capability in North America for high-reliability Magnetics. That's what customers really look for us to deliver.

Got it, it’s very helpful. I'll jump back in line. I appreciate it guys.

Thank you, Chris.

Our next question comes from Chris McGinnis with Sidoti & Company. Please go ahead.

Hi. Good morning. Thanks for taking my questions.

Hi Chris.

Can you just -- in the Electronics you talked -- you sort of talk about the changing the composition of the reed switch. Can you just give an update on that? I know that was one of the pressures over the last year, changing kind of the formation or the composition of it. And maybe just provide an update on that? Thanks.

Yeah. This has really been a pressure point for us the last few years. If you recall back in 2017, we acquired the reed switch business from OKI. We now call it our Kofu plant. And nearly all the reed switches in that plant are tipped with rhodium. At the same time, our plant in the U.K. we tipped about half of our reed switches with rhodium. Rhodium at the time back in 2017 was selling for about $1,500, $1,600 an ounce. It is now over $10,000 an ounce. We use about 2,500 ounces a year. It is a very thinly traded commodity, very volatile. And so what we've done in the last year as the price of rhodium has increased, is take a look at all of our applications and determined, where the performance advantages of rhodium are necessary, and where we can replace the use of rhodium with other precious minerals, iridium or ruthenium. And so, we started a project to begin transitioning those reed switches to other materials. And we think we'll be complete I think about 18 months as we -- every quarter we'll be moving more and more of our reed switches to ruthenium or iridium. And then, the remainder with rhodium will be in such, mission-critical, high-value applications that we'll be able to pass price through to the market, because of the performance advantages.

Right and then, just two more questions. One, can you just talk a little bit about Asia? And what's happening with Coronavirus and any expectations of any potential impact to your business?

Yeah. Well, we're a small cap industrial with a somewhat modest presence in China. Our current expectation from our businesses, I just talked to our customers is our plants will be shut down for an extra week after the lunar new year. The current assumption we have baked into our forecast here is that, we will get back to production at the end of February. And make up any interruption in our business and our supply chain within the quarter. Most of the focus now is within our employees just staying safe. Employees are working from home. And we'll be returning to the -- to our plants next week when they start operating again.

Yeah. Thanks. And just one last one on the Engineering. Just with that expectation of revenue being down in Q3, can you just walk us through -- obviously really strong growth coming from that segment over the last 1.5 years or two. Can you just maybe talk a little bit about the timing and should that make Q4 even stronger? Or how does that timing play out? Thanks.

Well, you're right to say it. It is strictly a question of project timing with our customers. These are large projects and sometimes depending on other items in the customer supply chain, customer inspections or others. These projects can slip from one quarter to the next. However, you see the backlog is up 17%. The prospects for this business are very strong. We do anticipate a strong Q4. And our teams are doing everything they can to try to schedule their capacity so we can get some more shipments this quarter, although current customer schedules don't necessarily support that. So the short answer is yeah. We -- strong Q4 and good long-term prospects.

Okay. Thanks for taking my questions and good luck in Q4.

Thank you, Chris.

[Operator Instructions] At this time, there are no further questions. I would like to turn the conference back over to David Dunbar for any closing remarks.

All right. Thank you. I want to thank everyone today for your 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 in the third quarter fiscal 2020 call.

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