Speaker 1:
From the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, welcome Inside the ICE House. Our podcast from Intercontinental Exchange is your go-to for the latest on markets, leadership, vision, and business. For over 230 years, the NYSE has been the beating heart of global growth. Each week, we bring you inspiring stories of innovators, job creators, and the movers and shakers of capitalism here at the NYSE and ICE's exchanges around the world. Now let's go Inside the ICE House. Here's your host, Lance Glenn
Lance Glinn:
Standex International, that's NYSE ticker symbol SXI, began its journey in 1955, evolving from a small New England manufacturing company, referred to as that little M&A shop, into a globally recognized leader in engineer products and solutions. By 1969, the company was listed on the New York Stock Exchange, paving the way for further expansion and innovation.
Today, 70 years later and 55 from its listing on the NYSE, Standex embodies the spirit that has defined its legacy, operating through six segments, electronics, engraving, engineered technologies, scientific, federal industries, and custom hoists. The company's modern-day portfolio reflects a commitment to solving challenges and helping to create what's next.
Joining us now are two guests focused on steering Standex's continued success and future growth, President and CEO David Dunbar and CFO Ademir Sarcevic. Leading Standex since January 2014, David's career has spanned multiple sectors and enterprises including Pentair, Emerson Electric, and Honeywell. Ademir joined Standex in September 2019 and like David spent time at Pentair, among other places prior to his current role. David, Ademir, thanks so much for joining us Inside the ICE House.
David Dunbar:
Thank you, pleasure to be here.
Ademir Sarcevic:
[inaudible 00:01:59] thanks. Good morning.
Lance Glinn:
So David, in our earlier conversation, you mentioned something that really stuck with me. You said you're never too far away from a Standex product. It's a powerful thought considering how the company's solutions really touch millions of people every single day. So for those who just may not be familiar with Standex or who may not know that they're being impacted by a Standex product, how would you explain what the company does and just the impact that it has?
David Dunbar:
Well, just from that perspective of everybody being close to a Standex product, we're a relatively small company, but our products really are everywhere. So our electronics business, we make 600 million reed switches a year, and those reed switches go into everything from toys to security systems. And maybe the best example, anyone who has a security system in their home, in the window there is a magnet and in the frame is a reed switch. So when the magnet, when you open it, the magnet goes away from the reed switch. The reed switch opens, your light goes on. So that probably covers half your listeners here today.
If anyone gets in a car every day, our engraving business texturizes the plastic, hard plastic parts in the car in almost every vehicle in North America and Europe and very many of them in China. So if you look around the car, those parts that are in hard plastic but look like leather or look like textile, we probably did that, did that texturizing.
Lance Glinn:
And Standex is approaching two remarkable milestones, 70 years since its founding, that'll be reached in 2025. 55 years as a listed company this year in 2024 here at the New York Stock Exchange. Achievements that are milestones, as I mentioned before, and speak to the company's enduring success over the last seven plus decades as a company and five plus decades as a listed company here at the NYSE. As the leader of the company during these celebratory times, what does this legacy and this rich history and tradition mean to you?
David Dunbar:
Well, if you start with how long we've been listed. Well, we were founded in '55, we were listed in '69, and we were here five years ago to celebrate our 50th. And at the time, the archivist of the stock exchange told us that in 1969, there were about 2,800 companies on the exchange. Of those, less than 280 are still listed. So we repeat that to ourselves all the time because those two numbers kind of represent the creative destruction that is capitalism. And some businesses fade, new ones arise, and capital seeks the most productive use.
So to be a survivor, Standex has naturally reinvented ourselves from the inside. We've transformed many times, I'm sure we'll talk about that as we go this morning. We use that as an indicator of having a scrappy, agile, nimble culture, so we're very proud of that. The 70th anniversary, you talked to us last week and said, "Oh, what are you planning next week?" And Christine and I pretended we were thinking about it. We'll do something.
Lance Glinn:
And now Ademir, I want to bring you into the conversation. So the 70 years as a company, 55 as a listed company, it, I'm, sure comes with a lot of pressure and responsibility to uphold the legacy that's been, while also create your own and make sure that 70 years from now the company's still going and still successful. Do you feel that pressure every day when you go into the office every day when you sort of plot the company's future moving forward?
Ademir Sarcevic:
Well, yeah. Well, good morning, first of all. But yeah, every job brings certain pressure, but we try to take everything in strides and in the right context. We dedicate ourselves to do the best job we can, to serve our shareholders, our customers, our employees, our community. And there are pressures to make the numbers or to make certain investments. But at the end of the day, as long as we do the best we can, we call it accountability with empathy, we feel good about ourselves. And as long as the next day is the better than the day before, we feel good and we make progress from there.
But we are not a culture of cutthroat or stressful approaches to things. We are pretty humble company. We try to do the best we can every day and just move forward. At the end of the day, we all come home and kiss our family, kiss our children, and go to sleep and try harder the next day.
Lance Glinn:
Absolutely. Absolutely. So I'll stick with you, Ademir. What would you describe as the sort of biggest differentiator when it comes to Standex and your competitors? What sort of sets the company apart?
Ademir Sarcevic:
Well, I will tell you two things. Everybody thinks their products and solutions are the best, and we do too. We have this customer intimacy approach that we pride ourselves on. But it's more that it's people. I will tell you, when I interviewed to come to Standex five, six years ago, what attracted me to Standex is the people and the passion and the accountability that I have seen as part of the interview process. And that's what I think sets us apart from some of our competitors, to be quite honest with you. We don't have the best processes, we don't have the most standard of work, but our people are superb.
Lance Glinn:
And David, if you could think back five years ago when you first hired Ademir, what sort of attracted you to him and what made him the right person to fill the CFO role?
David Dunbar:
Well, I've been here 11 years and I feel like I've had four jobs. So when I hired Ademir, I was transitioning from my second job to my third job, and the future of the company really needed more disciplined processes to improve our forecasting, improve the predictability of results. And with Ademir's background, he was the perfect CFO to come in. He came from an operating company.
And Standex, until that time, had basically been a holding company, a portfolio company with dozens and dozens of businesses that did what they did the way they did, and we got the results we got. But it was pretty choppy quarter to quarter. So as we were steering the ship to become more of an industrial operating company, I needed a CFO that came from an operating environment, and Ademir ticked all those boxes. And we had actually crossed paths at Tyco and briefly at Pentair. So we knew each other, we didn't work that closely together, but there are people I could call to say-
Ademir Sarcevic:
Well, I'll tell you a story. I was actually in New Jersey watching my oldest son play soccer game, and hopefully he doesn't listen to this podcast because-
David Dunbar:
You weren't paying attention to it.
Ademir Sarcevic:
No, because, no, I wasn't paying attention, but it was a pretty lopsided game. It was like they were losing like 8-0, 9-0. I remember that day. And the phone rang and it was actually a recruiter who said, "Hey, Ademir, do you know this company Standex in New Hampshire? They're looking for the CFO." But they were actually looking for me to refer them somebody, my former boss. And I listened for about a couple of minutes and I said, "Well, what about me?" They're like, "What do you mean, what about you?" I said, "What about me?" And the rest is-
Lance Glinn:
The rest is history.
Ademir Sarcevic:
The rest is history.
Lance Glinn:
The rest is history. Now, David, your career overall, when we spoke, you told me it spanned multiple industries, right? Engineering, product management, sales and marketing. And through each stop, you've maintained this sort of sense of creativity and that's what's helped you drive the success that you've had. So how has that creative approach shaped your journey from day one to now ultimately leading this NYC listed enterprise?
David Dunbar:
Yeah, well, I don't know. I don't how far back to go, but when I was young, my mother got my sister and I a table when we were in three or four years old and taught us to paint and draw. And I think that instilled in me the idea, you can look at a blank sheet of paper, imagine something and bring it to life.
And as I went through school, I loved learning, I was a good student. When I got into, when I started work with Honeywell in 1989 in Brussels, and I didn't really have a career plan. I was just attracted to a job where I thought I could learn something, where I thought I could contribute and where I liked the boss. And as time went on, I worked as an engineer, as a salesperson, in marketing, and then I thought it would be really interesting to run a business. So when I was at Emerson, I got my first P&L.
But I was always attracted to jobs where there was a bit of a transformation to be done. I didn't want to go into an organization or business that was already running and humming along and just needed to get a little better, a little faster. I was attracted to those things where there was bigger change involved.
Something people don't understand is leadership really, it's a creative endeavor and a leader has to have a vision of where you want to go. That's the same thing that the painter experiences when they look at the blank canvas, what do you want to create? So that was one of the things I created, I really was attracted to at Standex. The board explained to me back in 2013, when they were recruiting, that they wanted the next CEO to chart a new course for the company. The portfolio model was kind of gone and outdated, needed a CEO who could identify which businesses have legs and how can we build an operating company. It was a blank sheet of paper and that was just so attractive to me.
Lance Glinn:
Now, Ademir, your journey has its own unique path coming from Bosnia, Bosnia background, how were you, first and foremost, just first introduce to Standex? I know you just talked about the phone call you had with the recruiter during your son's soccer game. But as you sort of just looked at that opportunity, what in your mind sort of made Standex the right place for you?
Ademir Sarcevic:
Well, I was at that point in my career where I was at Pentair for about eight, nine years. And great company, I was very comfortable there. And frankly, I wasn't really even looking to leave. And then this call came in a very unique time. And then I got to spend some time with David, and he's a very unique leader in the way he run things and he looks at things, he's very inclusive, very collaborative culture. So you could kind of see yourself fitting there and having a voice. And obviously, any company you work for, you want to have a voice.
And then more I met the executive team around David and the presidents, that culture of inclusiveness, collaboration, debates. And trust me, David can talk about this, we have a lot of debates behind closed doors, but it's always done in the right manner and we all align around common objective and move on. So that's really what attracted me.
And then if you kind of look under the surface, there were these gems of the businesses. And I'm a finance guy, I look at the P&Ls. I remember looking at the P&L the first day at work. I was like, "My God, what about this one? What about this one? Well, this one not so good." So you can see kind of the potential of the company. And once we put some systems and processes in place, we actually beefed up some of the staff, put some maybe more robust procedures, and the rest is history.
We feel good where we are today. We are not done with our work and reshaping a portfolio and growing this company. Hopefully, when we are back here five years from now, we'll be talking about what we have done from this point on to the next. But that's what attracted me.
Lance Glinn:
Absolutely. No, absolutely. And as I mentioned, coming from Bosnia during a time of conflict, what was just that experience? Because it's one that not many obviously have. And how has that experience or how did that experience inform your leadership style, your financial discipline, and really not only how you do your day-to-day at Standex, but just live your daily life?
Ademir Sarcevic:
Yeah, so it puts perspective in your life. I grew up in a middle class family back home. My father was university professor, my mom was a high school teacher, elementary school teacher. So we lived well. And then when the early '90s, when the war started, everything changed on a dime. I grew up in Sarajevo, the city got surrounded. It got destroyed I think four years later. I don't know how many people died, but the city was destroyed. So you lose everything essentially very quickly.
And I was very fortunate to be able to come here, kind of luck in a way. Ended up going to school at University of Bridgeport and worked my way through school. You kind of go to school during the day and you work, you work during the night. But it also gives you certain perspectives. I wouldn't be here today if there were not people who helped me along the way. So you always want to give that back in a way.
You'll learn the value of hard work, that nothing is given, everything's earned. You also learn that you're not saving lives at work, that nobody's going to die. If you miss a shipment or miss a quarter, hey, we tried our best, but you know what? Nobody died. We're going to try harder the next quarter.
And then you also try always surround yourself with good people, people that you can trust, that trust you and build that teamwork. So I would just tell you just build certain perspectives in life that might be a little bit different if I didn't have to go through what I gone through. Now, I don't recommend anybody to go what I went through, but it does help put some mental things in place.
Lance Glinn:
Absolutely. Now, Standex has undergone significant evolution over the past 70 years, from its early days as a small M&A focused operation to today's structure with six core businesses, electronics, engraving, engineer technologies, scientific, federal industries, and custom hoist.
So, David, during times of transformation, so many companies struggle. We talked about how Standex has been resilient these last 55 years as an NYC listed company, where a lot of companies that were on the NYC when Standex was listed may no longer be listed now. So what do you believe sort of has enabled, especially over the last five, 10 years, enabled Standex to remain successful through all these changes, all these transformations, and has put you at a point where you're really strong and really successful?
David Dunbar:
Well, there's a culture in the company of, there's a nimble, agile culture. It goes back to Dan Hogan who founded the company. He was working on some memoirs just before he died, and I read them. And he just relished a complicated deal or a complicated situation or a puzzle to solve. So even back then, the company was constantly transforming as he was looking at different acquisitions to make and different problems to solve in the acquisition.
And my predecessor, Roger Fix, started as CEO in 2001, and he and the board, they embarked on... Roger cleared a lot of underbrush in those 10 years. But the culture of the company is restless and it's constantly seeking improvement. Now, the way they improved in the past was to buy better businesses and sell some old ones. So there was never a static view that we will always be the same.
And when I started, the board was very clear, there's a big change coming up, we're going to become an operating company. So that was the mission. It was embedded in the attitude of the board that nothing could stay static and be successful for a long term, for a long time.
We have a saying every day. One of the things I truly like about my job is I say this all the time. A lot of times I come in in the morning and I have no idea what's going to happen, because we got big meetings and you don't know what's going to come at you. But we have a great team and we've proven over the years that we can respond to unexpected inputs and come out of it on our feet.
So it has more to do with, I guess, the culture and the restlessness. And we're not satisfied if we see the results start to taper. We look for a root cause and look for a direction to improve.
Lance Glinn:
I know, Ademir, with Standex's six core businesses, how do you prioritize capital allocation and resource allocation to drive growth, maximize shareholder value? What factors guide your decisions on how to make sure these segments get what they need?
Ademir Sarcevic:
Well, it's a great question. So we have what we call a capital location methodology, the way we look at allocating capital. So number one is safety. We want to make sure all of our employees and everybody works in a safe environment. After that, we look for organic growth opportunities, and that's where we kind of prioritize where which segment have the highest opportunity. One of the reasons electronics business is now our largest segment is because they're operating very attractive in markets and they have a lot of growth options that we like to explore with them.
The third one is inorganic. You have seen us kind of being very active on the inorganic acquisition market. We'll continue to do that. We levered maybe to two times right now, but we still have a very, very healthy balance sheet. So there'll be number three.
Number four would be debt. If we have any debt, we would want to repay the debt. Now, we didn't have it until now. So now paying by debt becomes a bit of a priority. And then obviously giving back money to shareholders via share buybacks, dividends, et cetera, et cetera.
So there'll be kind of the three. But out of the six businesses that we have, clearly we look who competes in which end markets, what gives us the highest level of return, IRR, and that's how we go about allocating capital.
Lance Glinn:
And you mentioned inorganic growth, and that's sort of where I want to pivot the conversation to next. In late October of 2024, Standex announced its acquisition of two major companies, US-based Amran Instrument Transformers, and India-based Narayan PowerTech, excuse me, marking the largest acquisitions in company history. David, what was just the strategic rationale behind these deals? And how do they align with Standex's short and long-term objectives?
David Dunbar:
Yeah, let me start by picking up on the last question you asked me, why Standex is maybe a survivor and others... I think there's a innate humility within the board, within the company. By that I mean we don't get overly attached to what we've decided and say, "We will make this work no matter what." We're not like King Canute standing on the beach ordering the tide to recede when you can't do that. So as a board and as a company, we've acquired companies and things didn't work out as we planned, a few years later we divested those same companies. So we'd start an initiative and it doesn't work. We'll peel back.
But we always have multiple things at play. And those things that work, we reinforce. And those things that don't, we stop. So there's a process of experimentation based on this humility that we don't always know everything and things don't work the way we plan, and we've got to change course as we go. Maybe that's a better way to articulate the spirit of the company.
And about five years ago, as we became an operating company and brought Ademir in, we were able to start predicting our results better. That allowed us to start ramping up our research and development. So if you know that you can count on growing earnings, you can start to put some into long-term commitments. But if you've got choppy results, it's very hard to do that.
So then we, okay, we're going to ramp up our R&D. We want to do that to grow. And in the course of those discussions about growth, we took a close look at all the end markets that we serve, and we've come up with this term, it came from one of our analysts, fast growth markets. And there are five or six markets that are growing faster than general industry, that provide outsized opportunities to grow, electric vehicles, renewable energy, military defense is growing well, and grid. Grid is maybe the biggest, largest, fastest growing opportunity we have. We have a smaller position in grid, but as we looked at our strategy, we thought, "Boy, it would be great to have a stronger position in grid."
So about a year and a half ago, we have an M&A council, Ademir, Chris Howard, IR director's on it, Vanit, and they meet every month, every other month and look at opportunities, what's in the funnel. And they go through this filtering process, competitive advantage, good margins, do they serve an attractive growing market? And just under two years ago, this company kind of popped up on their radar and it checked all the boxes. So Chris Howard, director of IR, reached out to them. They responded back, and the conversation started about 18 months ago. So it was very deliberate looking for that kind of opportunity. But you never know-
Lance Glinn:
This was Amran or Narayan.
David Dunbar:
It's the same company.
Lance Glinn:
Okay.
David Dunbar:
So the company was founded in the '90s in India. The younger brother moved to America just over 20 years ago, founded Amran. So they go by different trade names, but it's the same company.
And it was the younger brother we communicated with, Bargov, almost two years ago and started the... Well, I first met them about a year ago, February of this year. So it was part of a very deliberate strategy, but canvassing for opportunities that ticked those boxes, and we are just delighted that it worked out.
Lance Glinn:
And Ademir, you mentioned electronics before. The acquisition strengthens that segment for Standex. What made Amran and Narayan financially attractive to the business? And why was now the right time to pursue these substantial growth opportunities?
Ademir Sarcevic:
Well, they have a really strong margin profile, and that starts by the end market they compete in and the products and kind of the customer intimacy that they have. Because you cannot make a lot of money unless you have really good products and you have a really good connection with your customers and provide value. So every model we ran was accretive to our margins, was accretive to our earnings. And when we projected the debt pay-downs...
What we do actually, to be quite honest, you run different scenarios. You run what we call a business scenario. What would this look like if everything goes as planned? And that's what we call our businesses and ourselves accountable to. But then we kind of risk adjust it. What if things don't go as planned? And what will have to go wrong or right for this just to give us return equal to [inaudible 00:23:51]? And if you think that's a doomsday scenario, that's highly unlikely, we know we have ourselves a pretty good deal.
So Amran and Narayan checked all of those boxes. Then if you look at the end markets they are competing, to buy this is at the right time, they have grown over 30% organically over the last two years. The end market they are in is extremely, extremely attractive. We like it and it opens us up to a significant growth opportunities as a company, as we look as kind of synergies between our core businesses and what they bring to the table.
So kind of checked all the boxes strategically, financially, and even as importantly culturally, because we spent a lot of time with the owners and their teams. And culturally, it just feels like it's a Standex company. Because that was part of some transactions before and they can look great on paper, but if the culture doesn't fit, things usually don't work out.
David Dunbar:
Well, with the brother, something interesting. So they have demand from their customers that exceeds their capacity and their customers would like them to be building plants in other parts of the world. Well, the older brother managed the business in India, the younger brother came to Texas and they were uncomfortable with the idea of creating a new location somewhere in the world because there's no third brother. So we call ourselves, we're the third brother.
Lance Glinn:
The third brother.
David Dunbar:
Yeah.
Lance Glinn:
And you mentioned culture, Ademir. David, just what is your process in determining that cultural fit? Because it is such an important part, and any CEO for whatever company, whatever business that comes Inside the ICE House and we chat with them, they always seem to hit on, no matter what the numbers are, no matter how successful the company is, if the culture isn't right, they're just not going to work out. How do you ensure that, whether it be Amran, Narayan, any other acquisition you make, the culture is right?
David Dunbar:
Yeah, there's a couple of ways that I look at it. The very first thing is how does the business compete? And if we want to talk about it later, but when I started, we did a lot of strategy work in our businesses to figure out what's the source of competitive advantage, if they have it? How do they compete and win? And is it defensible? And we came up with this concept, we didn't come up with it, we had a consultant. Customer intimacy described our best businesses.
Now, businesses can also compete on what they call, what that same consultant called operational excellence or product leadership, but those are all very different. And a company that competes on operational excellence is succeeding by having the best supply chain in the world. It's typically higher volume. They're very good at managing cost and just grinding out little improvement every year. These are typically the high volume players in any market. That didn't describe us. Product leadership, these are the companies that introduce the latest technology and are working closely with research institutions. There's a different investment profile to be one or the other.
We're a customer intimacy business. We're neither one nor the other, product leadership or operational excellence. But customer intimacy, we work closely with the customer's engineering group, so our engineers, their engineers, understand the problem, solve the problem, and then we become the long-term supplier. So we're not necessarily the lowest cost supplier, not necessarily the latest technology, but we are the right solution.
And one of the things that they told us 10 years ago, which proven to be true, is I've learned if you take two companies in the same industry, one competes on customer intimacy, one competes on operational excellence, there's no common language or no way... Because these guys, it's always about optimizing costs. With us, it's about relationships and investing in... So that's the first filter. If they compete on customer intimacy, they're going to be in the same cultural zone as us.
And then when we meet the teams, I have a little test. So if I ask somebody to talk about the company, talk about the history of the company, talk to the founder, I kind of count the second it takes them to mention their people and their team. If that's more than a few minutes, then that's kind of a red flag. It's not determinative. But our best acquisitions have been bringing in businesses where the owners really cared who was going to be the owner of the business and give their employees time and space to grow and good career opportunities.
So there's two intangibles, but they've been really meaningful guidelines for us. And early on, we have a high touch process too, like Ademir mentioned. We spend a lot of time with the Shah brothers, getting to know them, and there's no shortcut for that.
Ademir Sarcevic:
And it's also their teams. Our first meetings in Houston was with one of the brothers, but also few of his key people and see how they... You can't fake it. You see how they talk to each other, how they work together, the atmosphere. And it just seems so sincere, so good that from a cultural standpoint, just kind of checked the box.
Lance Glinn:
Absolutely. And now since the acquisitions of Amran and Narayan, Standex also acquired, a smaller deal, Michigan-based Custom Biogenic Systems. So when you take these recent deals, sort of just into perspective, David, how would you describe Standex's just overall M&A philosophy and balancing the M&A opportunities while also obviously making sure you focus on that organic growth as well?
David Dunbar:
Yeah. Well, 20 years ago, Standex acquired anything that looked like it was a good deal. Privately owned companies where the founders retiring, the kids are fighting, there's a tax problem or whatever. Now our acquisitions are very focused on building the businesses we have, so that's a major strategic difference.
So we go through a filter with any business. First, does it compete on customer intimacy? Does it have a defensible competitive advantage? Does it have a margin potential higher than ours? Often, the family-owned businesses are not run for profit for efficiency, so the reported margin might be lower, but if we look at it and understand, we can get it there, that makes a difference. And then the cultural fit, as Ademir mentioned.
So all the deals we look at pass through those filters. If they pass through those filters, then we run the different scenarios, and if that... That WAC scenario is very important to me. So if almost everything goes wrong and we can still deliver value above the cost of capital, that's a good deal.
Lance Glinn:
That's the deal to go with.
David Dunbar:
Yeah.
Lance Glinn:
So I want to shift focus, excuse me, to product innovation. As I've mentioned before, innovation, whereas I've said many times on this podcast, innovation really arises when something needs to be improved, not necessarily broken, but it just needs to be improved, whether that's efficiency-wise, overall effectiveness. And David, I'll start with you, but what sort is the process, alongside Ademir and the rest of your leadership team, to identify when innovation is needed and then how to then implement that meaningful change in whatever product?
David Dunbar:
Yeah. Well, that is the question of the day for us. I mentioned earlier I feel like I've had four jobs, and this is my fourth job, is ramping up new product development and resulting in effective launches of new products that drive significant growth for us in the future. So we're building muscle throughout all the organizations, we're getting the right engineering teams in place, product management, sales, marketing and business development, and putting in place process so they can all work together in a predictable, manageable way.
So in the process, kind of to answer your question directly, the very first phase of the stage gate is ideation. So the teams will... We might hire consultants, we might just gather input from our sales people. We'll have brainstorming sessions where people from different businesses come together and just think off-the-wall thoughts about what opportunities might be.
Then they filter those opportunities and try to estimate how big is that end market? What kind of profitability is there? Who are the competitors? And if it gets through those filters, then we'll start to scope a project development, and then we're in the development cycle.
But I would say we are in early days of that. Before COVID, our spending on R&D was less than 1% of sales. And as I mentioned before, with Ademir's arrival and are becoming more of a predictable operating company, we're now at about 3%, which is where we wanted to get. So we have a lot of development and progress.
We have just started to launch new products from that. So I'd say we're getting good at developing products, bringing them to market. This year we'll be telling for us to see how good are we at converting that into sales and sales growth.
Lance Glinn:
So Ademir, look, not all innovation is successful. There's hits and misses throughout the process, and it's, I think crucial to identify early what those hits and misses are, so you don't obviously overextend yourselves into ideas and products that don't end up going anywhere. So what KPIs, metrics do you and your team use to measure the success or failure of specific innovations so you can decide what to obviously continue pursuing or decide to push something to the side?
Ademir Sarcevic:
Well, as David said, we are kind of at the early stages of being an innovative company. So as we kind of develop new products, obviously the first thing is we got to fund these products. We got to fund these projects, we got to make sure that there is enough support for it.
But to David's point, there is a process by which all of those projects are reviewed. And if we see that any of those stage-gate process, things are not going to work out, we'll scale back. We'll pull back the investments from the new products. We said right now, this year I think we said that about 2% of our growth will come from new products. This is the first year we actually can measure that and see how well we do. So give us a year, let's see how well we do. And then we'll be able to talk a little bit more about how do we approach it from a more sophisticated standpoint.
Lance Glinn:
And over the last five years, there's really been no technical innovation bigger than artificial intelligence. It's taking over every industry, no matter what the business does, no matter who the leader is, it's worldwide, it's business-wide. And leaders from various industries have come on the podcast, and so many of them have this idea that you have to adapt AI in some way, shape, or form, front-end or back-end, or you're taking the risk of being passed over, you're taking the risk of being left behind.
And I'll start with you, David, and then go to you, Ademir, but where do you first stand on AI integration? How is Standex or is Standex, I guess I should ask, implementing it or integrating it in any way, again, whether that be on the back end of the business or front consumer-facing?
David Dunbar:
Yeah, so we see AI as the ultimate accelerator of innovation and efficiency and insight. And this year, all of our businesses, in fact, we just had our strategy meetings last week with all of our businesses. So I've challenged each of them to find at least one area in their business where they can bring in-house whatever tool they think, but let's say for shorthand, a large language model, they can train on their data to improve their process. So in Ademir's group, it might be improve our forecasting based on learning from our historic data. Our engineering teams can look at all the designs they've made and more quickly optimize the design to minimize materials, improve performance. And there are now more and more of the suppliers we work with are incorporating AI tools into their products. And we will be an aggressive user of those tools. We're not going to develop an AI system, but adapting it to our environment's important.
Two years ago, in our engraving business, there was a particular person in Europe that was enamored with the idea. He found an open source model, a large language model, trained it on all the designs we'd done for texturizing and engraving, and created a tool to accelerate designs and also create designs that we would never imagine. So there are pilots and experiments going on all across the company, and as they succeed or fail, we'll learn from the best and then incorporate across the company.
Lance Glinn:
Ademir on AI for you. While there are, or while there is so much opportunity that comes along with it, what also comes along with it is a lot of risk and a lot of unknown and uncertainty. So how are you balancing the opportunity and the excitement of what AI could be over the next 5, 6, 7, 10 years with making sure you act in an ethical way with it and that you mitigate any of those potential risks that can also come over the next 5, 6, 7 years?
Ademir Sarcevic:
Yeah. Well, that's a great question because it's a fine balance. And we are also very careful and conservative, at least in the finance world, where and how we use AI. We consult a lot with external groups from the other, call it MAPI or CFO groups. We have access to that. Our tax leader actually is very versed in AI and he does a lot of... He's kind of a front man with respect to learning about AI and what we can or cannot do. So we try to take a cautious approach.
But I'll tell you, like what David said, I would love for AI to run our forecasting model and kind of show us what we do well, what we don't do well. But it's just one data point. It doesn't make it the only data point. Tax is another example. If you can actually go to ChatGPT and ask a tax question and they tell you the answer, that's pretty cool. But you got to be careful not to expose your systems. You got to be careful to protect your proprietary data. And especially in the world we are in today, every little leak can be a big problem.
So we are cautious, we are careful. We actually work very closely with the legal department. But we want to be using it where it makes sense.
David Dunbar:
If I can just add one more thing, but we're also very deliberate and intentional about it. And we formed an AI council, so there's members from every business on the AI council. It's chaired by our chief information officer, just to keep track of all these pilots and all these activities. Because within our sectors, within our markets, we want to be leaders in adoption.
Lance Glinn:
Absolutely. So as we near the end of our conversation, Ademir, I'll turn to you. When you're looking more short term over the next 365 days as 2025 arrives, what goals and objectives have you and your team set for the new year to ensure that 2025 for Standex is one that's strong and profitable?
Ademir Sarcevic:
I think for us, number one is to successfully integrate the acquisition we just did, the largest acquisition in company history. We want to make sure that's integrated. We want to make sure we deliver the promises we give to our shareholders as well with respect to financial performance of the business.
Obviously, there's a lot of unknowns coming with respect to the new administration and maybe some of the tariffs and changes that might be put in place. So we are running multiple scenarios, I'm sure everybody else is kind of trying to figure out what does this all mean for the company.
So if you ask me if we can deliver on our organic growth promise, if we can continue to expand our margins, if we can continue giving R&D dollars to our businesses to create new products, if we can achieve our 200 basis points growth from new product development this fiscal year, I think that'll be a pretty, pretty good year. And obviously, we want to use some of the cash proceeds we do to pay down, to pay down debt.
And at the same time, continue to have fun. Operate in an environment we actually work hard, but we have fun and we don't let, as you started the conversation, you don't let stress of the day to get to you. So hopefully even, again, if we invited here five years from now, hopefully we can remember this conversation and we can say, "Hey, we did what we said we're going to do."
Lance Glinn:
Absolutely. Now, David, you became president and CEO in 2014. We spoke towards the beginning of our conversation about 55 years as a listed company, 70 years as a company overall. As you enter this new year of your leadership, how are you positioning the company, alongside Ademir and your leadership team, so that when we do talk to you five years from now, Standex is still strong, profitable, resilient through whatever the changes may bring over the next five years, and in a very good spot?
David Dunbar:
We talked about a lot of the obvious things earlier, ramping up R&D, being a more disciplined operating company. When I started the company, our operating income was about 9%. Our operating income now is running about 16%. So tremendous improvement, but there's less margin for error. So our ability to forecast and deliver is even more important now than it was back then. We had so many more businesses some were up, some were down, and there was a little of slop in the system. Now we really need our businesses to be dialed in. So that creates, in some quarters, some real pressure in the organizations.
So what I'm trying to do and working with the entire management team is institutionalize a healthy culture, a focused culture. Ademir mentioned balancing empathy and accountability. We set the highest standards and we're constantly trying to improve. And we've got to bring our organization along, train people, give them the systems, be aware of their experience in delivering those results.
And an analogy that we used at our leadership meeting that I think is great for this kind of situation is think about your favorite football team in the last two minutes. If they've got to put points on the board to win, you see a team playing without fear or tension. They're very focused on the outcome, but they're alert, they're communicating, they're creative.
Someone told me a story about Joe Montana in the huddle years ago in a very high stakes situation. The team got around him in the huddle, he said, "Hey, is that John Candy up in the stands?" So even in a moment, high stakes like that, there was a lightness to it.
So this is not easy, if we're coming in towards the end of the quarter and it's tough in a certain business and they've got to really drive to see what they can do, I'm asking all my leaders to see, are you behaving like Tom Brady and the Patriots or Patrick Mahomes and the Chiefs in those two minutes? And if not, why? So try to unleash the best of your creativity because the problems we're facing now are going to be new. The expectations of performance are a little higher, and we need the best that everybody can bring at those most critical moments.
Lance Glinn:
Well, gentlemen, congratulations on 55 years, congratulations on 70 years as a company as a whole. I look forward to that conversation five years from now when we celebrate 75 years from Standex, and thank you so much for joining us Inside the ICE House.
David Dunbar:
Thank you, Lance.
Ademir Sarcevic:
Thank you. Appreciate it.
Speaker 1:
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