Standex International Corp

NYSE:SXI

Earnings Call Analysis

Standex Reports Mixed Q2 Results, Growth in Margins

Standex International saw a 5% year-on-year revenue decline to $178.4 million in Q2 2024, with an organic decrease of 7.4%. This dip was partly mitigated by the Minntronix acquisition and favorable currency exchange rates. Despite the revenue dip, adjusted operating margins rose to 16.1%, marking an 11th straight quarterly record. Adjusted earnings per share edged up to $1.78 from $1.74, while free cash flow dropped slightly to $19.5 million. Segment-wise, Electronics and Engraving showed revenue growth, while Scientific, Engineering Technologies, and Specialty Solutions faced declines. Standex forecasts moderate revenue improvement and persistent margin growth through fiscal 2024, with a continued strategic focus on high-growth markets and new product development.

Standex Boasts Strong Growth in Fast Markets and Record Margins Despite Organic Declines

Standex International's pursuit of growth in fast-markets is yielding fruit with a year-on-year growth of 14% to $21 million, keeping them on track for a long-term target set for 2028. While the company grapples with an organic sales decline of 7.4% due to transitory market softness, this has been partially mitigated by the Minntronix acquisition and favorable foreign currency. With an additional acquisition of Sanyu Switch Co. expected to close in the fiscal third quarter, Standex has shown adaptability by achieving record adjusted gross and operating margins, the latter seeing a year-on-year increase of 90 basis points to 16.1%.

Cash Flow Prowess and Strong Long-term Vision Despite Marginal Pressures

The company celebrates a robust free cash flow of $19.5 million for the quarter, contributing to a record year-to-date cash flow and maintaining an impressive return on invested capital (ROIC) over 12%. Standex proudly meets and surpasses their 3 to 5-year financial targets within just three years, highlighting efficient capital allocation and operational strategy. While the fiscal third quarter sees an expectation for slightly higher revenue but a minor dip in operating margin due to one-time charges, the future holds promise for higher sales and improved margins, especially by the fiscal fourth quarter.

A 2028 Vision: Setting the Bar for Organic Growth and Investment Returns

Looking ahead, Standex reaffirms its commitment to achieving its 2028 vision with expectations of high single-digit organic growth exceeding $1 billion in sales, an operating margin greater than 19%, ROIC greater than 15%, and free cash flow conversion matching approximately 100% of GAAP net income.

A Decade of Transformational Leadership and a Strategic Vision for the Future

Marking his 10th anniversary, CEO David Dunbar reflects on Standex's journey from a modest market cap of $660 million to a powerhouse valued at $1.8 billion. This transformation involved divesting over half of the company's sales and shrinking from 15 to 6 business units, with a sharpened focus on operational excellence, R&D, and serving faster-growing markets. Standex has significantly improved gross margins from 33.4% to 40.3% and nearly doubled EPS, while increasingly relying on the internal promotion for talent, demonstrating a company culture committed to nurturing and rewarding its workforce. Dunbar underscores the achievement of initial long-term financial targets in just three years as evidence of the company's operational capabilities and strategic effectiveness.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Standex International Fiscal Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, February 2, 2024. I would now like to turn the conference over to Mr. Chris Howe, Director of Investor Relations. Please go ahead, sir.

[Huang Howe, executive]

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.

[David Dunbar, executive]

Thank you, Chris. Good morning, and welcome to our fiscal second quarter 2024 conference call. The quality of our businesses was highlighted in our results as we continued our trend of record adjusted operating margin performance. I would like to thank our employees, our executives and the Board of Directors for their efforts and continued dedication and support that drove our results.

Now if everyone could turn to Slide 3, key messages. In the second quarter, sales in the fast growth end markets grew 14% year-on-year to $21 million. We remain on track to achieve our long-term target of $200 million in sales in the fast growth end markets by fiscal year 2028. As we projected in last quarter's outlook, we experienced the effect of unfavorable project timing in the Engineering Technologies segment and transitory market softness in other markets, which led to an organic decline of 7.4%. This was partially offset by contributions from our recent Minntronix acquisition and favorable foreign currency.

In general, we expect market conditions to start moving in fiscal fourth quarter 2024. In addition, we continue to work on an active pipeline of inorganic opportunities. As we announced last quarter, we signed a definitive agreement to acquire Sanyu Switch Co., we anticipate this transaction to close during our fiscal third quarter.

We also continued to generate strong profitability from the execution of our price and productivity initiatives. In the fiscal second quarter, we achieved record adjusted gross margin and an 11th consecutive quarter of record adjusted operating margin. This is the first time in company history that gross margin was above 40% and it demonstrates our continued ability to drive operating improvements, while adapting to changing macro conditions. Consolidated adjusted operating margin increased to 90 basis points year-on-year to a record 16.1%. 3 of our 5 segments reported adjusted operating margin greater than 20%, again, and in all 5 segments reported adjusted operating margin greater than 17%.

We achieved free cash flow of $19.5 million in the quarter, leading to record free cash flow year-to-date. Our consistent and improved cash flow generation and ROIC of over 12% further highlights the quality of our businesses.

Looking back to February 2021, we communicated a set of long-term financial targets over 3 to 5 years. These targets included mid-single-digit organic growth, EBITDA margin above 20% and return on invested capital above 12%. We are proud to have reached these targets within 3 years.

On a sequential basis, in fiscal third quarter 2024, we expect slightly higher revenue due to the contribution from our pending acquisition of Sanyu and a slight recovery in the Electronics and Specialty segments. We expect slightly lower adjusted operating margin sequentially due to the impact of a onetime charge related to me reaching retirement eligibility under the stock compensation plan. Excluding this onetime charge, adjusted operating margin would be similar on a sequential basis.

Although I am now retirement eligible under Standex's stock compensation plan, I don't plan to go anywhere. I remain committed to my role as CEO and I'm excited by our long-term vision for Standex.

In fiscal fourth quarter 2024, on a sequential basis, we expect meaningfully higher sales and continued improvement in adjusted operating margin. This outlook assumes slight market recovery in the end market served by Electronics and Specialty segments, contribution from the pending Sanyu acquisition and a more favorable project timing in the Engineering Technologies segment.

We are reaffirming 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 greater than 15% and free cash flow conversion at approximately 100% of GAAP net income.

Let's turn to Slide 4. In January, I celebrated my 10th anniversary at Standex. I'd like to take a little walk down memory lane here because it's important to understand where we are going and how we will get there. First, let's look at our results.

At the end of January 2014, the company's market cap was just over $660 million. Now, 10 years later, it has grown to $1.8 billion. We have significantly outperformed the Russell 2000 and kept pace with the S&P 500 over that time, a great accomplishment for a small-cap company.

The financial results that created that valuation are below. On roughly the same sales, we increased gross margins from 33.4% to 40.3% and nearly doubled EPS. The real story is how we delivered these results. Please turn to Page 5.

Our vision was to evolve from our holding company roots to become a high-performing operating company, building around strong businesses with defensible competitive advantages and serving growing end markets. We developed a management process that we call the Standex Value Creation System. We evaluated our portfolio to retain businesses that met this criteria and that had an operating income potential of 15%. Perhaps most importantly, we wanted to ensure we attracted and retain the great talent that thrives in our collaborative problem-solving culture. We got to work and we executed.

We significantly retooled and refocused the portfolio. We divested over 1/2 the sales of the company, reducing the number of businesses from 15 to 6. We grew our better businesses with a combination of organic investments and acquisitions. We focused on operational improvements and implemented strong pricing and productivity processes and controls across all businesses. Gross margin grew to 40.3%. At the same time, we increased R&D spending from 0.6% of sales to 2.9% of sales.

We serve a better mix of end markets with 36% of our sales now going into markets growing over 5%. The lowest operating margin business in the corporation used to be in the low single digits, now our lowest margin business delivers over 15% operating income. The metric I am perhaps most pleased with is how we are creating career paths for our people.

In 2014, we filled about 35% of our management positions with internal hires, going outside for the remainder. Now, in 2024, those numbers are reversed with the majority of our key positions going to current Standex employees. Through these 10 years, we have developed a capability to perform at a higher level and begin to deliver on our commitments. Despite the twists and turns of the markets around us, by working on those things we can control, we delivered the financial results I showed earlier.

Now please turn to Page 6. 3 years ago, we issued longer-term financial expectations stating, over the next 3 to 5 years, we would achieve the targets shown in the slide I've copied here from the 2021 presentation. We have essentially met them in 3 years. We delivered EBITDA of 19.6% versus the target of 20%, ROIC of 12.3% versus the target of 12%, our free cash flow conversion has been operating near our target of 100% of GAAP net income. Our businesses and our teams have shown they can perform at a higher level. Turn to Page 7.

Last year, we issued updated targets to achieve by 2028. We will do this by executing the same strategy and building on the capabilities we have developed in the past 10 years. A couple of differences are that we do not need significant portfolio reshaping. In addition, much more of our energy is devoted to operating our high-quality businesses and especially getting better and better at bringing new products to market and penetrating fast-growing markets. We will continue to devote our energies to those things we can control and position ourselves to exceed those targets as well.

I will now turn the call over to Ademir to discuss our financial performance in greater detail.

[Ademir Sarcevic, executive]

Thank you, David, and good morning, everyone. Let's turn to Slide 8, Second Quarter 2024 Summary.

On a consolidated basis, total revenue decreased approximately 5% year-on-year to $178.4 million, in line with our sequential outlook we discussed last quarter. This reflected organic revenue decline of 7.4%, partially offset by 1.9% net impact from the recent Minntronix acquisition and prior Procon divestiture and 0.6% benefit from foreign exchange.

Second quarter 2024 adjusted operating margin increased 90 basis points year-on-year to 16.1%, our 11th consecutive quarter with the highest adjusted operating margin in company history. Adjusted operating income grew 0.3% on a 5% consolidated revenue decrease year-on-year, reflecting continued focus on driving margin improvement through OpEx and pricing initiatives.

Adjusted earnings per share were $1.78 in the second quarter of fiscal 2024, compared to $1.74 a year ago, a 2.3% growth year-on-year. Net cash provided by operating activities was $23.8 million in the second quarter of 2024, compared to $29.8 million a year ago. Capital expenditures were $4.3 million, compared to $5.8 million a year ago. As a result, free cash flow was $19.5 million in fiscal second quarter 2024, compared to $24 million a year ago. On a year-to-date basis, free cash flow of $31.6 million represents a record first half cash generation in the history of the company.

Now please turn to Slide 9, and I will begin to discuss our segment performance and outlook, beginning with Electronics. Segment revenue of $79.4 million increased 9.5% year-on-year, as the 14.7% benefit from the recent Minntronix acquisition and 0.5% benefit for foreign currency were partially offset by an organic decline of 5.7%. Adjusted operating margin of 20.3% in fiscal second quarter 2024 decreased 310 basis points year-on-year as the contribution from the Minntronix acquisition and pricing and productivity initiatives were more than offset by lower organic sales and product mix.

Our new business opportunity funnel increased 30% year-on-year and grew 13% organically and is currently approximately $76 million. We remain confident in our ability to increase share and accelerate our presence in fast growth end markets, such as industrial automation, smart grid, renewable energy and EV-related markets.

Sequentially, in fiscal third quarter 2024, we expect slightly to moderately higher revenue and slightly higher operating margin from stronger volume and the contribution from the pending acquisition of Sanyu. Based on the observed order trends, we anticipate general market conditions to improve in fiscal fourth quarter 2024.

Please turn to Slide 10 for a discussion of the Engraving and Scientific segment. Engraving revenue increased 8.4% to $40.8 million, driven by organic growth of 6.7% and a 1.7% benefit from foreign currency. Operating margin of 21.8% in fiscal second quarter 2024 increased 490 basis points year-on-year due to higher volume and realization of productivity actions.

In our next fiscal quarter, on a sequential basis, we expect meaningfully lower revenue and operating margin due to the seasonal impact of the Chinese New Year on project timing and fewer new platform rollouts in North America.

Scientific revenue decreased 15.6% to $16.3 million, as lower demand for COVID vaccine storage units and retail pharmacies was slightly offset by higher new product sales. Operating margin of 26.1% increased 450 basis points year-on-year due to lower freight cost and productivity initiatives offsetting lower volume.

Sequentially, we expect slightly higher revenue and similar to slightly higher operating margin. Now turn to Slide 11 for a discussion of the Engineering Technologies and Specialty Solutions segments.

Engineering Technologies revenue of $19.9 million decreased 17.8% year-on-year due to timing of projects. This reflected an organic decline of 18.1% and a 0.3% benefit from foreign currency. Operating margin of 17.1% increased 160 basis points year-on-year, as pricing and productivity initiatives were partially offset by lower volume and higher research and development expenses.

Sequentially, we expect similar revenue reflecting improvement across most end markets offset by lower defense end market sales caused by delays in government funding and similar to slightly lower operating margin. We anticipate significant sequential growth in the fiscal fourth quarter, reflecting more favorable project timing.

Specialty Solutions segment revenue of $22 million decreased 35.5% year-on-year, primarily due to the Procon divestiture and an organic decline in the Hydraulics business from the industry-wide chassis shortage. Operating margin of 18.1% increased 130 basis points year-on-year, driven by price and productivity realization, partially offset by lower volume. Sequentially, we expect slightly to moderately higher revenue and operating margin, due to improved demand in the Hydraulics business.

Next, please turn to Slide 12 for a summary of Standex's liquidity statistics and the capitalization structure, which remained strong. Standex ended fiscal second quarter 2024 with $347 million of available liquidity. At the end of the second quarter, Standex had net debt of $6.2 million, compared to $21.7 million at the end of fiscal first quarter 2024. Standex's long-term debt at the end of fiscal second quarter 2024 was $148.7 million. Cash and cash equivalents totaled $142.4 million.

With regards to capital allocation, we repurchased approximately 33,500 shares for $4.5 million in the second quarter. We also declared our 238th quarterly consecutive cash dividend of $0.30 per share, an approximately 7.1% increase year-on-year.

In fiscal 2024, we expect capital expenditures to be between $25 million and $30 million, compared to approximately $24 million in fiscal 2023. I will now turn the call over to David to discuss key takeaways from our second quarter results.

[David Dunbar, executive]

Thank you, Ademir. Please turn to Slide 13.

I am very proud of our team for their strong operational execution and continued focus on growing markets and new applications that led to our quarterly results. In our streak of 11 consecutive quarters of record margin, we have proven that we can expand margin and grow earnings by adapting to changing macro conditions. I'm excited as sales from fast growth markets become even more significant contributors to our organic growth.

Sales growth in these markets, combined with expected new product releases, strong customer relationships and operational rigor, give us confidence in the company's long-term organic growth and profit potential. We continue to maintain a strong balance sheet based on our prudent and consistent capital allocation, which allows us to continue to pursue additional inorganic investments complementary to our strategy. In fiscal 2024, we expect continued margin expansion tracking to our long-term outlook.

We anticipate sales in the fast-growth markets to continue progressing towards $200 million plus by fiscal 2028. We reaffirm our long-term financial outlook for fiscal 2028. These targets include high single-digit organic growth, 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]

[Operator Instructions] We have our first question coming from the line of Chris Moore from CJS Securities.

[Christopher Moore, analyst]

So maybe just we'll start Electronics. It looks like softer Electronics conditions in Europe and China are continuing. So maybe 2 questions there. What indicators are you looking at, if any, to help gauge when demand might strengthen a bit there?

[David Dunbar, executive]

Yes. In the last few quarters, Chris, we pointed out we saw softness in China and Europe. We anticipate those would begin to reverse and we also call out the Appliance market in particular. So when we look at trends, a good leading indicator for us is that the orders there switches. They go through distribution channels. These are often sold across many different applications, into many end markets. And they're also used for samples as people are developing new products. So that's typically the first thing to tick down and the first to come up.

This quarter we're starting to see those orders to tick up. So we're -- so based on historic account, we are seeing that turning -- we're seeing appliance orders come back in the quarter. General level sales in China and Europe are still lower than we expected when we talked about this last year, but with the order trends reversing, we expected late this quarter and into next for those to come up.

[Christopher Moore, analyst]

Got it. That's helpful. Appreciate that. My understanding is that Chin a represents roughly 10% Electronics revenue. Just trying to understand what's the new normal. What are the puts and takes for China to stay at that level 3 to 5 years from now?

[David Dunbar, executive]

That's a good question. But 2/3 of our sales in China are in China, for China. So they ship to addresses in China. There's some multinationals that are there. There are a lot of Chinese manufacturers that purchase from us. The other 2/3 is -- the other third is export, so what will change there? There are more of our customers that are talking about reselling to North America. And frankly, for us, it's kind of a left pocket, right pocket thing. We'll follow that business wherever it is. For the remainder of the business, it has more to do with -- your guess is as good as mine, about the prospects for the Chinese economy.

[Christopher Moore, analyst]

Got it. Appreciate that. Maybe just on Engineering. So obviously being impacted by delays in government funding, you're expecting a big increase Q4. Just maybe a little bit more about how much visibility you have on that.

[David Dunbar, executive]

Yes. So we said delay in funding. It's not so much delay in funding, it's sort of a reallocation of where their spending

is. We have a position in the Navy nuclear vessels, and some of that spending has been pushed out in order to fund support for some of the conflicts around the world now. We actually have quite good visibility in the Engineering Technologies business. And I think, in the script, we've called out -- we do expect a very strong Q4 as customer projects line up for delivery. Well, it could be -- if we execute and the customers don't change, it will be a record Q4 for Engineering Technology. So we're quite confident in that.

[Christopher Moore, analyst]

Perfect. Maybe just last one for me. It looks on the M&A side, Sanyu is closing shortly. Just kind of how deep is the funnel? Are there any $50 million-plus revenue targets out there at this stage?

[David Dunbar, executive]

Yes. Last year, we said there were other family-owned businesses, which we continue to build relationships with. But there were very few $50 million, $75 million, $100 million businesses that seem to be actionable. That's changing a little bit. There are some attractive larger businesses. We have been positioning ourselves with the owners. And it looks like some of them could be actionable in the next quarter or 2. So I'd say the funnel is looking healthier than it did last year.

[Operator]

We have our next question coming from the line of Michael Legg from Benchmark.

[Michael Legg, analyst]

When you look at your 19% operating margin goal by 2028. How much of that is coming from internal versus external expectations from new product development, cost initiatives versus acquired businesses?

[David Dunbar, executive]

Well, it's actually -- it's pretty easy to get there, Mike. If you take a look at -- whatever your estimate is for our sales this year, over the next 4 years, we're very confident fast-growth markets will add another $100 million to sales and all those sales are at margins above our average. So that mixes us up. And then the rest of -- you get the rest of that growth with just 3.5% growth on the base business and if you just take some leverage on that, we get to the 19%. So if you give us a little credit for succeeding with new products, which are typically are higher margins, there's upside both to a margin mix and to a top line.

[Ademir Sarcevic, executive]

Yes. And then, Mike, it's Ademir, if I can just add. We developed pretty good operating muscles over the last 3 or 4 years, both from a pricing and OpEx standpoint. So on top of what David just said, from a volume standpoint, we'll continue driving productivity and we anticipate continue to drive our gross margin up and use some of those dollars to fund the R&D funnel and continue to grow.

[Michael Legg, analyst]

Great. And then we're seeing a lot of news on just EV sales being slowed. Can you talk a little bit on the EV sector, what you're seeing from your customers?

[David Dunbar, executive]

Yes. Our EV presence -- I think, we've talked about this before. Our products are especially adapted to the needs of EVs that operate at higher voltages, say, above 800 volts. So last year, I think -- about 11 million vehicles -- electric vehicles were sold last year, 3 million of those operated at 800 volts or more. We are on 60% of those vehicles. We're at about 30% of the remainder of those vehicles. And if you kind of -- our content is higher on those high-voltage vehicles. So about 60% of our EV sales come from these higher-end vehicles. And that -- they continue to grow nicely.

In fact, we -- this last quarter, we just had the biggest quarter we've had in EV. It continues to grow very nicely. So, at the top end, we continue to see healthy growth. In fact, we just won another platform, 2 positions -- 2 platforms in Mercedes this last quarter. At the lower end of the market, the growth may slow, but we still see that as a double-digit growth opportunity, even the 400-volt vehicles.

[Michael Legg, analyst]

Great. And then just the last one. On Sanyu, the timing of that during the third quarter, how much are you incorporating that into the guidance you gave as far as Sanyu's contribution?

[David Dunbar, executive]

I want Ademir here on it.

[Ademir Sarcevic, executive]

Yes, I think, Michael, if we can close it in the next few weeks, the guidance that we gave actually kind of slightly to moderately slightly assumes no Sanyu moderately would assume we get 1 month or 1.5 months of Sanyu revenue within the quarter.

[Operator]

We have our next question coming from the line of Mike Shlisky from DA Davidson.

[Michael Shlisky, analyst]

I wanted to start asking -- I want to start off on Scientific. I know that's down quarter year-over-year due to the COVID or the hangover, if you will. You've had organic growth that's been kind of negative for just about 2 years now, almost every quarter. Is there a point where that kind of flattens out? I mean, at some point, you've now lapped it twice. I'm curious to see when we might start seeing positive organic growth in that business.

[David Dunbar, executive]

Yes. We think we've lapped that surge from COVID. I mean the sales growth for that business was -- is up 40% in '21, up 6% in '22, then it's been down the last 2 years. But the decline -- it was down 11% last year. This year it will be down like half of that or less. And most of that is the reduced purchase from pharmacies. We are seeing -- we're seeing growth in our new products. New products are a little more than 10% of sales of that business or about approaching 10%. That gets us into new segments. We're -- in this last year, we've talked about a return to kind of normal buying patterns from universities, laboratories, other life science institutions. So we expect growth from here.

[Ademir Sarcevic, executive]

Yes. And, Mike, it's Ademir, if I can just add to that. These units that are sold usually have, call it -- I don't want to say useful life, but they're usually utilized for about 4 to 7 years before they are replaced. So if you go back to those units that we sold in 2021, at some point over the next couple of years, there will be a replacement cycle coming in and we hope to capture that opportunity as well.

[Michael Shlisky, analyst]

Got it. Yes. I wanted to turn to Specialty Solutions. I did notice in the slide you had put a fire truck in there, and that's an important hydraulic piece of the market. I guess, I'd be curious, as I talk with some of the fire truck manufacturers and there's only a few of them out there, they are booked through 2025 at this point, and they are trying to maximize their throughput now. I'd be curious as to when that might start turning a little bit more positive because those folks seem to be dealing with a lot more orders than they can even handle right now. I guess, I'm curious, one, are you -- are you already seeing improvements? And then kind of maybe, two, is that a real -- I know it's just fire truck, but is that also a high-growth market for you now going forward?

[David Dunbar, executive]

Yes. That's a great point. Yes, very observant there to see the fire truck. We put that in there because it's -- there's a new application we're working on in that business would provide some modest growth opportunity for us. It's a small piece of our sales now. And if we win the application, we still have to work through the supply chain, the current delays in the fire truck market, as you described. So in a year or 2, maybe that adds some sales growth.

The bigger driver for Hydraulics is dump truck, dump trailer markets, garbage and waste vehicles. And there, the last few quarters, orders have been dampened due to a basic chassis shortage. And I just talked with the leader of the business yesterday, orders in January have been really good in that business. And it looks like the chassis shortage for dump truck, dump trailer, these broader vehicles, is starting to loosen up that's translating into sales. So we see a stronger second half for our Hydraulics business.

[Michael Shlisky, analyst]

Great. And then as the first time we were on the call here, I just wanted to ask a more basic question. And that is you reiterated your fiscal '28 goals. I'm curious if you could because you've reached your fiscal '21 goals in about 3 years, do you feel like there's a chance that some of these goals might be attainable in that same 3-year time frame, call it '26? Or are you -- is it very strictly a 5-year plan and not a 3 to 5 years?

[David Dunbar, executive]

Yes, that's a great point. We actually debated last year whether to communicate it as a 3- to 5-year plan. We just said, let's just not complicate things, let's just say '28, by '28. But we could deliver that earlier. If you think about an answer to Chris or Mike, wherever we end up this year, we'll have 4 more years to get to the $1 billion. The fast growth markets, we believe in that. There's another $100 million there. Our new product sales are ramping up. Our new product leases are -- we're getting better and better at that. The markets we serve are relatively attractive. All we need is 3.5% sales growth over 4 years to get to that $1 billion. So if you give us a little more success with some new product sales and maybe a little tailwind from the market, we could get there earlier.

[Ademir Sarcevic, executive]

Yes. And, Mike, that's an organic target, right? Obviously, anything we're doing organically comes on top of that.

[Operator]

We have our next question coming from the line of Ross Sparenblek from William Blair.

[Ross Sparenblek, analyst]

Sticking to EVs, I mean, just given that the market seems to be pretty centric to China over the next few years, I mean, what does the mix look like as it relates to North America, Europe and in China?

[David Dunbar, executive]

Yes. So I described earlier how we're more concentrated in the higher voltage vehicles, which last year 11 million vehicles, 3 million were high voltage. 60% of our sales come from those. The way that's spread geographically, about 50% of our sales in the EVs are in Europe. 45% in China and the remainder in North America.

[Ross Sparenblek, analyst]

That's very helpful. And then maybe just moving to engraving margins. Can you maybe help us parse out some of that outperformance in the second quarter? I mean, taking out just normal operating leverage and maybe a pull forward of the footprint consolidation, there's still a couple of hundred basis points. Maybe what is that exactly? Is there any mix? And what benefit should we expect to carry forward in the third quarter since it is seasonally low?

[Ademir Sarcevic, executive]

Yes. Ross, it's Ademir. As we have talked before about our Engraving segment and performance, we did put a lot of productivity initiatives in play, including site consolidations, which you just quoted. Some of that is going to start reading out in Q3 and Q4. So there will be an additional savings, if you will, that we're going to achieve in those quarters. We always said that the Engraving target margin is over 20%. As you know us very well, it does get lumpy quarter-to-quarter over based on the volume level. But kind of on an annualized basis, we think that this Engraving segment will start giving us over 20% margins going forward. So Q3 will be lower just because of the seasonality in China and some of the softness we are seeing a little bit in North America. But as we enter fiscal '25, we expect that Engraving margin will stay over 20%.

[Ross Sparenblek, analyst]

Yes. So it should be a pretty nice exit rate there. And then maybe just one more here. Is there anything to read into the CapEx? We entered the year expecting roughly that was tied to Electronics and Engineered customer commitments. And we reduced it by about $10 million now as of the second quarter. So is this just being pushed to the right? Are the customer programs being pushed to the right? Just [indiscernible]?

[David Dunbar, executive]

You've watched us for a while. We're getting much better at forecasting sales and profit. We have ways to go on forecasting CapEx. So I'd say the difference between what we said coming into the year and the update now, there's a bit of delay with some of the capital equipment that we need in our plants. So some of that's been pushed to the right. We did -- last year, we talked about -- we've reduced headcount in some businesses to adjust to the lower sales in the end markets. That kind of reduces the manpower to implement projects, so that pushes some projects to the right. Those are 2 big -- 2 major factors. Ademir?

[Ademir Sarcevic, executive]

Yes, that's it.

[Operator]

We have our next question coming from the line of Gary Prestopino from Barrington Research.

[Gary Prestopino, analyst]

A couple of questions here. First of all, on the Engraving side, you said you're looking at some lower sales in Q3, are those lower sales a function of what you're seeing in the automotive market or what markets are actually causing that to move down sequentially?

[David Dunbar, executive]

Yes. So this happens every year. It's Chinese New Year effect. We do a sizable business in China. It's very profitable and slows down for a couple of weeks every time this year.

[Gary Prestopino, analyst]

Okay. So nothing in there in terms of that's systemic to some particular industry you're serving, it's just a slowdown in China because of the new year?

[David Dunbar, executive]

Right. And this business from quarter-to-quarter there are waves and there's this project timing issues. So North America is going to be a little slower as well, simply from the timing of platforms -- platform releases.

[Gary Prestopino, analyst]

Okay. And then in regard to Q3 with this charge that you're going to take for new day, does that charge -- I know your retirement thing besides getting your Medicare card, right? Will you be backing that charge back into your adjusted EBITDA calculation?

[David Dunbar, executive]

It will.

[Ademir Sarcevic, executive]

It will, it will not be adjusted. We look at this as a timing thing. Gary, at some point, this would be part of our P&L, and we didn't feel it was appropriate to call that out as an adjustment. So it will be included in our -- right, in our corporate expenses line.

[David Dunbar, executive]

The corporate expense.

[Gary Prestopino, analyst]

Okay. And then could you just refresh my memory as to what you're paying for Sanyu and how are you paying for it? Is it a debt transaction? Are you paying all debt or just lowering your cash balances?

[Ademir Sarcevic, executive]

Well, first of all, we are taking it from our existing cash balances. Remember, I will just remind you on the sale of Procon where we netted $70 million and we used that to buy Sanyu, to buy Minntronix, and then give additional money back to the shareholders in terms of dividends and share buybacks. So that's kind of -- that's the way we would -- that's the way it was funded. We haven't really -- we're still waiting to close. We'll disclose more information about the exact purchase price and everything else as we close the transaction. But that gives you a good indication of what we are paying for.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Mr. David Dunbar for final closing comments.

[David Dunbar, executive]

All right. Thank you. I want to thank everybody for joining us for the call. We enjoy reporting on our progress at Standex. And finally, again, I want to thank our employees, the Board of Directors and shareholders for your continued support and contributions. We look forward to speaking with you again in our fiscal third quarter 2024 call.

[Operator]

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.