Good day, and welcome to the Standex International Fiscal Third Quarter Results Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris 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 onetime items; 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 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 2023 conference call. We are very pleased with the results. We continued our trend of record operating margin. Sales into fast-growth markets continue to accelerate. New product developments and new application pursuits continue to expand across our businesses. I want to thank our employees, our executives and the Board of Directors for their continued dedication and support. Now if everyone can turn to Slide 3, key messages. We reported 1.5% organic revenue growth year-on-year as 3 of our 5 business segments exhibited organic revenue growth. Our long-term growth profile continues to improve as sales into fast growth end markets grew 40% from prior year to $23 million in the quarter. We anticipate this revenue stream to grow by approximately 50% in fiscal year 2023 to approximately $85 million. Overall, we anticipate organic revenue growth in fiscal year 2023 from 4 of our 5 business segments. Profitability continues at record levels. The continued effectiveness of our price and productivity actions maintained our record margin set last quarter, representing our eighth consecutive quarter of record level adjusted operating margin. Consolidated adjusted operating margin of 15.2% in fiscal third quarter 2023 was a 140 basis point increase year-on-year. 3 of Standex's 5 business segments expanded margin year-on-year. 4 of our 5 segments reported operating margin near 15% or greater with our Specialty Solutions segment delivering 22.2% margin. We are pleased to see continued improvement in our ROIC, which is now at 12% on an annualized basis through Q3 FY '23. With free cash flow of $17.6 million and the divestiture of Procon in the quarter, our net debt-to-EBITDA ratio is now at 0. This leaves us approximately $344 million of available liquidity to invest in our healthy funnel of organic growth…

Thank you, David, and good morning, everyone. Let's turn to Slide 5, third quarter 2023 summary. On a consolidated basis, total revenue decreased 2.6% year-on-year to $184.3 million. This reflected organic revenue growth of 1.5%, offset by a 1.6% impact from the Procon divestiture and 2.5% impact from foreign exchange. Third quarter 2023 adjusted operating margin increased 140 basis points year-on-year to 15.2%, matching our highest adjusted operating margin in company history from the prior quarter. Our adjusted operating income grew approximately 7% on a 2.6% consolidated revenue decrease year-on-year. Adjusted earnings per share, $1.65 in the third quarter of fiscal 2023, compared to $1.54 a year ago, approximately 7% growth year-on-year. Net cash provided by operating activities was $23.3 million in the third quarter of 2023 compared to $11.9 million a year ago. Capital expenditures of $5.6 million, compared to $3.4 million a year ago. As a result, free cash flow was $17.6 million in fiscal third quarter 2023 compared to free cash flow of approximately $8.5 million a year ago. Our balance sheet continues to provide substantial flexibility to support an active pipeline of organic and inorganic opportunities as well as increased investment in R&D and growth capital. Now please turn to Slide 6, and I will begin to discuss our segment performance and outlook, beginning with electronics. Segment revenue of $78.2 million decreased 2.1% year-on-year as an organic increase of 1.3% was more than offset by a 3.4% negative impact from foreign exchange. Although softness in appliances and distribution end markets remains, power management, renewable energy and EV-related markets remain robust. From a regional standpoint, North America market demand was strong, while China and Europe demand has been slower to recover. Adjusted operating margin of 21.8% in fiscal third quarter 2023 decreased 230 basis points versus the…

Thank you, Ademir. Please turn to Slide 10. Standex is well positioned to deliver solid organic growth as an operating company, driven by increased activity and demand within our fast growth end markets. We are excited about seeing these opportunities materialize and expand. Our regional presence, strong customer relationships and disciplined approach to pricing and productivity, provide protection from supply chain challenges and inflation. As a result, we have continued to deliver sustainable, profitable growth through this environment. Our strong balance sheet positions us well to be opportunistic on an active pipeline of internal investments and an active funnel of inorganic candidates. We'll now open the line for questions.

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

Maybe we'll start with electronics. So revenue will be -- it looks like to be basically flat year-over-year. Backlog is down slightly. Maybe can you just talk about the visibility beyond Q4 on the Electronics segment.

Well, I guess, we serve a lot of end markets, we go through different channels. And we have different visibility for different channels. We feel very good about the continued growth in fast-growth markets. And I think it's like distribution channels, we have a little less visibility to, those are going to be a function more of the general economy. But we tend to look at this through the cycle, feel very strongly about this business. We have a strong competitive position in good end markets and good growth prospects. If you look in the shorter term -- I'll turn it over to Ademir.

Yes, Chris, I think we -- from a regional standpoint, the North America demand has been holding up and Europe and China is slowly recovering. The white goods or the appliance end market is still a bit soft, but we feel -- as David said, we feel very strongly and very, very good about our fast-growth end markets exposure, and we feel that can more than offset the softness we are seeing in our plans. It's some more of the general, general economic terms. So we are optimistic.

Got it. Helpful. I'll leave it there. On the fast growth side, markets like smart grid defense, electric vehicles, your positioning is a function of both your SST and magnetic products. That said, is either of those a more significant revenue growth driver longer term?

You mean SST or Magnetics?

Yes.

Isn't that...

Correct.

Yes, I guess -- they each are contributing equally into these fast-growth markets, Magnetics. We got a great position in Defense, for example. But I think there's -- the tailwinds behind renewable energy and electric vehicles, in particular, will drive -- we anticipate it will drive sales faster in SST. So we'll probably see faster growth rates there. I mean in the fast-growth market group.

Yes. And if I can just add, Chris, and if you take a look at electric vehicles, for example, that's where our SST business has a very good position. And as those vehicles replace combustion vehicles, that's where we keep seeing about 3 to 5x more content per vehicle than in the current combustion scenario. So SST clearly is in a good position to capitalize on these market trends.

Got it. That's helpful. And maybe the last one, just maybe you can talk a little bit more about M&A. Strategic M&A has obviously been a big part of your guys' history. You certainly have the balance sheet, net debt is at 0. How would you characterize the M&A efforts currently, versus, say, a year ago? Just how are you looking at it long term? And it's just some add-ons? Or is there anything significant out there?

Always important for us. We play in 2 different -- 2 very different M&A markets. We do a lot of our acquisitions historically. They're family-owned or privately-owned businesses. And those owners sell for their own reasons at their own times and don't -- those deals don't necessarily follow the trends in the broader M&A market. We have an active pipeline of such companies now. Some of them could be actionable in the near term. We feel that we are well positioned as a preferred owner for some attractive companies. We build these relationships over a long, long period of time. And when the time comes when they're ready to transition, we're there. On the other hand, in the last year or so, because of our track record and confidence in -- especially in bringing in acquisitions into the Electronics business, we have been working to bring larger businesses into our funnel. More of these are in the broader M&A market. And although there's activity there in building our funnel, there's less actionable -- fewer actionable opportunities in the near term just because the broader M&A market has taken a bit of a pause.

Our next question comes from Michael Legg from Benchmark.

Congratulations on a nice quarter, guys. Just wanted to touch base a little bit on the economic impact we're seeing today on what you're seeing in the supply chain, on hiring and wages, and then your ability to increase your pricing related to your supply chain costs. Can you just talk a little bit about that, please?

Well, first of all, just the umbrella statement. We feel very, very good about our team's abilities to manage their price to cover the cost of material, inflation and inputs, both supply chain and materials, they proved it in spades throughout the last 3 years of the pandemic. It varies a bit business by business how that plays out. But you can see we've expanded our margins through the pandemic. In terms of current conditions, supply chain issues have eased for our businesses in the last few years. And right now, it's not impacting our deliveries or any of our current commitments.

Yes, I got nothing to add.

And on hiring and wages?

No, we are seeing more pressure on wages. We -- I'd say -- I can't quantify this statement, but it has taken a little longer to fill positions, especially in Europe and North America. But we are finding candidates. We've got a good story here. It's a good company. We're able to attract good candidates and bring them in. But we are seeing some wage inflation and delays in hiring.

And then just one last question. ENEL, now any update on that project?

Yes. Well, this is a great project with our partner ENEL, the solar energy project. We have in the last 6 months of the year proven that the technologies we've developed together do deliver performance improvements for the solar panels. We are in a phase of industrialization. We're designing the manufacturing processes. We're also working with them on business models to determine what the right participation model is. I'd say the project has become a little -- it's still in development. So it's a little harder to predict the time line. So we're maybe taking longer than we thought we would a year ago, but the project still has a lot of support from ENEL. We're excited about it, and we'll continue to communicate as we make progress. But we're in this kind of final phases of development is maybe the way to put it.

And Mike, if I can just add, all of the numbers that we put out there in terms of the longer-term guidance do not include any contribution from this project. So when and if this becomes a contributing factor to our performance, that will be on top of the numbers we communicated.

[Operator Instructions] Our next question comes from Gary Prestopino from Barrington Research.

A couple of questions here. In terms of 8 consecutive quarterly records of adjusted operating margin, I think it was 140 basis point lift year-over-year. Yes, I would assume the majority of that is due to what you're doing on the productivity side. Has pricing been a big issue there? And then I guess the other question I would then layer on top of that is with the fast-growth markets sales, do those have a higher margin profile than the consolidated operating margin for the company?

Yes. Let me say -- I'll turn it over to Ademir. It really is multiple things. If you go back 3 years, our portfolio is much better. All the businesses are performing well. There are productivity programs reading through. They've all done well, realizing price, covering their inflation. And the new products in the fast-growth markets are at higher margins than the corporate average. So we mix up in margin as that grows.

Yes. I mean I think that's right. We have a pretty robust operating model, Gary, kind of across all of the units where we track pricing and productivity initiatives for each of the businesses. And we are fortunate to have people in our businesses who are very accountable and know the customers, know the markets, and run those business units very well. And we are proud of our achievement of 8 consecutive quarters and we'll see how it plays in the future.

Could you -- is it possible that you could quantify just how much higher the fast-growth markets margins are or is that something you don't make public?

We haven't made it public. Just how do you answer that? They're higher.

Okay.

Gross margin, if you think -- what's our gross margin side for -- is it 3.8%?

Yes, its 3.5%.

3.5%. Gross margin on the fast-growth markets is above that by several hundred basis points.

Correct.

Okay. That's very helpful. And then lastly, just to refresh my memory, what you're doing in the EV market, you're doing both standard passenger cars, off-road vehicles, correct? Are you also doing things like last-mile delivery trucks, things that are not more of the standard EVs as we think about them?

Yes. Most of our volume is in passenger vehicles. The last-mile delivery vehicle volume is starting to pick up. The way to think of where we play, especially with the relays for the safety escalation circuits and the battery management systems, those have applications in vehicles that operate at higher voltages. So newer vehicles are operating at higher voltages to achieve more efficiency. All the off-road vehicles are higher voltages and the last-mile vehicles as well.

This concludes our question-and-answer session. I would like to turn the conference back over to David Dunbar for any closing remarks.

All right. Thank you. I want to thank everybody for joining us for this call. We always enjoy reporting on our progress here at Standex. And finally, again, I want to thank our employees, our Board of Directors and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal fourth quarter 2023 call.

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