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Edited Transcript of NDSN earnings conference call or presentation 21-Aug-19 12:30pm GMT

Q3 2019 Nordson Corp Earnings Call

WESTLAKE Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordson Corp earnings conference call or presentation Wednesday, August 21, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory A. Thaxton

Nordson Corporation - Executive VP & CFO

* Lara L. Mahoney

Nordson Corporation - VP of IR & Corporate Communications

* Michael F. Hilton

Nordson Corporation - Senior Advisor

* Sundaram Nagarajan

Nordson Corporation - President & CEO

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Conference Call Participants

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* Allison Ann Marie Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Christopher M. Dankert

Longbow Research LLC - Research Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation's Third Quarter Fiscal Year 2019 Conference Call. (Operator Instructions)

Lara Mahoney, you may begin your conference.

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Lara L. Mahoney, Nordson Corporation - VP of IR & Corporate Communications [2]

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Thank you, Lisa. Good morning. This is Lara Mahoney, Vice President of Corporate Communications and Investor Relations. Today, I'm joined by Sundaram Nagarajan, Nordson's new President and CEO; Mike Hilton, Senior Advisor to the company and former President and CEO; and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Wednesday, August 21, 2019, to report Nordson's fiscal year 2019 third quarter results.

Our conference call is being broadcast live on our new Investor Relations webpage at investors.nordson.com, and it will be available there for 14 days.

There will be a telephone replay of the conference call available until September 4, 2019, which can be accessed by dialing (416) 621-4642. You will need to reference ID number 593-7809.

During this conference call, forward-looking statements may be made regarding our future performance based upon Nordson's current expectations. These statements may involve a number of risks, uncertainties and other factors as discussed in the company's filings with the Securities and Exchange Commission that could cause actual results to differ.

After our remarks on the quarter, we will be happy to take your questions.

With that, I'll turn the call over to Mike.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [3]

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Good morning, everyone. Thank you for joining Nordson's Fiscal 2019 Third Quarter Conference Call. Before we discuss the financial results, I'd like to welcome Naga to the call. Naga joined us as President and Chief Executive Officer on August 1, 2019, just about 3 weeks ago.

He joins us following a 23-year career with ITW. We're very pleased to have him join the company.

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Sundaram Nagarajan, Nordson Corporation - President & CEO [4]

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Thank you, Mike. It's an honor to join Nordson. And on behalf of the Nordson colleagues around the world, I want to thank you for your leadership over the past 10 years.

I appreciate the opportunity now to lead this talented team, and thank Mike and our Board of Directors for trusting me with this position.

I'm starting to travel to our sites to get to know the business, and I have had the opportunity to meet individually with members of our leadership team.

Throughout my career, I have thrived in driving growth and profitability by focusing on customer, while prioritizing innovation and talent development.

Similarly, Nordson's focus on customer passion and innovation has resulted in a market-leading enterprise, strong track record of growth and solid profit margin.

I'm using my first 90 days to listen and understand the opportunities that will drive Nordson's next chapter of growth. I also look forward to meeting with our shareholders and analysts.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [5]

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Thank you, Naga. We're very glad to have you on the team. Now turning our attention to the third quarter. The ongoing uncertainty related to international trade disputes is continuing to influence customer investments in new technology and capital. This challenging macroeconomic environment is lasting longer than most expected. And as a result, capital projects have been delayed, and we've had a weaker third quarter than we originally anticipated.

The softness in product lines serving electronics end markets and those within the Industrial Coating segment offset solid organic growth from our Adhesive Dispensing segment and the non-electronics product lines within Advanced Technology.

Also during the quarter, within Industrial Coating segment, some customers moved deliveries into the fourth quarter. So we expect to deliver a strong top line results for this segment in the fourth quarter. Throughout this period, our team has been focused on executing continuous improvement initiatives and managing cost.

As a result, they held third quarter operating margin equal to the prior year when adjusting for onetime charges in both years, despite the decline in total company sales during the quarter as well as the pressure and distraction from tariffs.

I'll now turn the call over to Greg to provide a more detailed perspective on the third quarter.

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Gregory A. Thaxton, Nordson Corporation - Executive VP & CFO [6]

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Thank you, Mike, and good morning to everyone. Third quarter 2019 sales decreased 4% compared to the prior year's third quarter. This change included a decrease of 2% organic volume and a decrease of 2% related to the unfavorable effects of currency translation. Growth in the quarter related to the first year effect of the fiscal 2018 acquisition of Clada Medical Devices and the 2019 acquisition of Optical Control was not significant.

Within the Adhesive Dispensing Systems segment, sales increased 2% compared to the prior year's third quarter, inclusive of an increase in organic volume of 4% and a decrease of 2% related to the unfavorable effects of currency translation as compared to the prior year. Growth was solid across most all product lines.

Advanced Technology Systems sales decreased 5% compared to the prior year's third quarter, inclusive of a decrease in organic volume of 4% and a decrease of 1% related to the unfavorable effects of currency translation, again, as compared to the prior year.

Double-digit growth in medical product lines was offset by softness in product lines serving electronics end markets. This is largely the result of minimal customer innovation coming to market in 2019 as well as the tension related to the ongoing trade dispute.

Industrial Coating Systems sales decreased 18% compared to the prior year's third quarter.

These results include a decrease in organic volume of 17% and a decrease of 1% related to the unfavorable effects of currency translation as compared to the prior year.

As Mike noted, the timing of system shipments can impact quarterly results, and we expect strong fourth quarter volume growth within this segment.

Moving down the income statement, gross margin for the total company was 54% in the quarter, operating profit was $130 million, with reported operating margin of 23%. These results include $1.2 million for onetime restructuring charges and a charge of $200,000 for the onetime step up in the value of acquired inventory.

Adjusted operating margin for the quarter excluding these onetime charges was 24%, equal to the prior year's third quarter adjusted operating margin to also exclude onetime charges.

Again, this is strong operating performance in the quarter against a challenging macro environment. On a segment basis, Adhesive Dispensing Systems delivered strong operating margin of 31% in the quarter. We're pleased to see the progress the team is making to drive margins within this segment.

Within the Advanced Technology Systems segment, reported operating margin was 21% in the third quarter, down from the prior year, primarily due to lower sales volume.

The Industrial Coating Systems segment delivered operating margin of 19%. This team has worked hard to make sustainable improvements to its operating performance, and we are pleased to achieve this level of performance despite weaker sales in the quarter.

On a total company basis, net income for the quarter was $94 million and GAAP diluted earnings per share were $1.62. We delivered third quarter EBITDA of $158 million or 28% of sales.

Our press release includes financial exhibits reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA.

From a balance sheet perspective, net debt to EBITDA was approximately 2.1x trailing 12 months EBITDA at the end of the third quarter.

And I'll now turn the call over to Mike for a few closing comments.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [7]

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Thank you, Greg. As I reflect on our expectations at the beginning of the year, the effect of recent macroeconomic trends has had more significant impact than anticipated, especially with the trade dispute continuing longer than most had expected.

Many of our end markets, such as those within the Adhesive segment and the medical portion of Advanced Technology have held up well despite these pressures, but some customers are certainly more cautious with capital investment during these uncertain times.

With the full year, we now expect flat to modest organic sales growth and unfavorable foreign currency effects of approximately 2% on sales as compared to the prior year.

We will remain focused on continuous improvement initiatives to offset cost and the weaker expected sales growth to hold or modestly improve operating margin and EBITDA margin compared to the prior year.

The macroclimate underscores the importance of our diversification strategy. Despite the weakness in the electronics end markets, I'm pleased with the solid organic growth in our Adhesive Dispensing segment and the non-electronics product lines within Advanced Technology segment during the quarter. Expect that growth to continue.

We also expect a strong fourth quarter from our Industrial Coating segment based on our current backlog.

We will continue to look for opportunities to diversify our business.

On July 1, we announced the acquisition of Optical Control, a Germany-based designer and developer of high-speed, fully automatic counting systems using X-ray technology. This product line expands Nordson's test and inspection capability for electronics customers. I'd like to formally welcome the Optical Control employees to the Nordson team.

The strength of Nordson's position as a valued solution provider to our customers, combined with the diversity of our end markets is this confidence that will continue to drive organic growth going forward.

We also remain focused on delivering value to our shareholders. Earlier this month, we announced a dividend increase of 9%. This marks the 56th consecutive year of annual dividend increases, ranking us 14th among publicly traded companies for the longest-running record of annual dividend increases.

We take pride in returning a portion of our cash flow to our shareholders.

Before we move into Q&A, I'd like to take this moment, as it is my last conference call, to thank our shareholders, analysts, employees and customers for their support over the past 10 years. We've entered new markets and grown this business while holding true to Nordson's core values of integrity, respect for people, customer passion, excellence and energy.

It's been an honor to lead this great company. I know Naga and Nordson's strong leadership team will continue to enhance the company's great legacy. I will continue to work with Naga to ensure a smooth transition. To start to see him, Greg and Lara on the road meeting with the investment community, and I'm pleased to pass the torch to him.

With that, we pause and take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Allison Poliniak from Wells Fargo.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [2]

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Welcome, Naga, and best of luck, Mike. I just want to go to ICS for a second. I know the customer delays and pushouts aren't uncommon. Any color around those pushouts? Any ability to quantify it? And then I guess any risk that they don't execute in Q4?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [3]

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As I said, it's nothing really unusual about it. I'd say we've had some large projects that we're ready to go in the quarter and the customer has just moved them back a little bit. So they're all in execution now and will be delivered in the quarter. So we expect to see, as we said, a strong quarter there. So there's nothing unusual or underlying that other than just some movement of larger orders into the fourth quarter.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [4]

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Okay. Perfect. And that the growth reduction. I know you guys were looking at the mobile set and some of the electronics, that's not a surprise. I guess what area, I guess drove down that growth target for the year?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [5]

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I would say most all of it falls into the electronics space. If you think back to where we were in the second quarter, the electronics industry in general was expecting a recovery in the second half, that's really not playing out. And we were working on a number of specific mobile projects that given the trade disputes, essentially all of them have been put on hold. So I'd say the area that really has driven the shortfall has been those delays in the capital spending around electronics, and particularly affecting our dispense business there.

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Operator [6]

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Our next question comes from the line of Christopher Glynn from Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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Just echo Allison's comments, welcome Naga, and Mike, it's been great working with you. Just -- besides the electronics market's continuing softening, I'm wondering if any other area is starting to get tougher to tend down, doesn't look like anything in the quarter really. But as you're looking at things in real time, any other demand patterns fraying or still pretty solid?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [8]

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No. I would say, if you look at sort of our Adhesive Dispensing segment, that's running along at a nice pace, kind of what we would expect.

Our medical business is very strong. Our business in Advanced Technology outside the electronics space is solid. I think when we look at the end of the year, we'll see a nice recovery in the Coatings business in this fourth quarter. I'd say even within electronics, our test and inspection business is holding its own. The one that's been most affected significantly is the dispense side of things, and that's really kind of been the key driver in the short term. So I'd say the run rate businesses are doing strong. We'll see an improvement in Coatings in the next quarter, and we're really not expecting the electronics piece to be a drag in the next quarter. So I'd say nothing else -- I'm sorry, in general, if the trade dispute gets worse, you could see some pull back on overall capital spending. We're not seeing that yet.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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Okay. That makes sense. And on the guidance for flattish margins for the year are a little better. The first 9 months were down each quarter, obviously, but implies maybe near record segment margin performance in theft of the first polymer deals. Wondering if you're seeing a clear path for ADS to have the best organic growth and margin rate of the year because you kind of back into that with the full year company outlook.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [10]

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Well, we do expect volume to go up in the fourth quarter across most all of the businesses. And yes, we have seen improvement coming from our polymer business. As we talked about, we expected to see elimination of most of duplicate cost this year. We have the facilities running at good operating rates, but we would expect next year to see some additional improvement. So I think we're at a good spot on the Adhesives segment at this point.

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Operator [11]

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Our next question comes from the line of Matt Summerville from D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [12]

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A couple questions. First, can you talk about, sort of as a follow-up to Chris' question, the annualized savings you anticipate to generate from the manufacturing or footprint optimization that you completed a couple of quarters back in the Adhesive Dispensing segment beyond kind of the elimination of the duplicative cost that you mentioned, Mike?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [13]

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Yes. I would say, Matt, for this year, we didn't expect to see much beyond the elimination of those costs. What we said as we get the new facility up and running and the equipment all lined out, given our investment in sort of newer technology in the equipment as we load those facilities, we'd expect to see some efficiency gains. We haven't specifically quantified that. I think historically, we've gotten questions around, can we get back -- that segment back on an annual basis to 30% margins or above, and we said we think we can do that. So obviously, that improved performance would be part of that. But this year we weren't necessarily counting on a big step up due to the efficiency there as we lined out this.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [14]

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Just as a follow-up and 2 things. First, in the past, I know you don't comment numerically, specifically, on incoming order rates but you've been willing to give at least some sort of year-over-year color. If you're able to do that regarding the 3 businesses, what you saw through the quarter perhaps even kind of a monthly cadence, whether things got better, got worse, stayed the same? And then lastly, Greg, can you just comment on your free cash flow performance this quarter versus the year-ago period? And maybe parse out why it was down quite a bit?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [15]

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Yes. I would say overall as you look, progress through the quarters, order rates improved a little bit, not dramatically, but improved a little bit. So I'd say, a combination of what we see in our run rate businesses, plus the backlog and some recent orders in our Coatings business in particular gives us some confidence in the fourth quarter volume growth we expect to see. So I'd say modest improvement, but I wouldn't read too much into that throughout the quarter.

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Gregory A. Thaxton, Nordson Corporation - Executive VP & CFO [16]

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Yes. And Matt, on the free cash conversion, we'll have this in different quarters in the year. It's really a combination of 2 things related to working capital. It's the timing during the quarter of when we ship some larger system sales. So if they occur at the back end of the quarter, they are still sitting in receivables. And it's also, I'd say more so related to an inventory build as we gear up for the expected strong fourth quarter. So it's working capital related, and I would expect that when we get to the end of the year, we'll be back at that 100% conversion rate.

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Operator [17]

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Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [18]

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So congrats, Mike, for a great tenure, and Naga, welcome aboard.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [19]

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Thank you.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [20]

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So just a couple things. If we can just go back to the Coating, I'm just trying to pin down, is there a way to quantify how much revenue is pushing from 3Q to 4Q just as we try to size the growth rate into 4Q?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [21]

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Not specifically. But what I would say, Jeff, is we wouldn't have called it out if it wasn't substantial amounts of revenue that was moving in some large shipments. So it wasn't incidental.

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Gregory A. Thaxton, Nordson Corporation - Executive VP & CFO [22]

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And Jeff, this is Greg. I would add to that, it's both the timing of some of those orders in terms of when they ship. But I think for this segment, we have to remember that we're often talking about larger dollar system sales. So it's also the timing of when we get those orders in, in the quarter that they're going to ship. So it's -- the comments that we're trying to provide is to suggest that, although from the third quarter alone with the volume down in the direction that it was, it -- we're trying to suggest that it's not really the flow of the demand that we're seeing within that segment, that when you balance what we expect to deliver in the fourth quarter, it's going to get you back to, call it normalized performance. But what we would say is we -- the fourth quarter is probably going to be a record in that particular segment.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [23]

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Okay. That's very helpful. And then Mike, I think you said electronics, you didn't expect to be a drag in the fourth quarter. And I'm just -- this has kind of been a piece that's been a little more quiet and challenging this year. So just give us a sense of what you're seeing that gives you confidence that we see some kind of uptick or that it doesn't continue to be a drag.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [24]

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Yes. I would say part of that is a function, to be frank, of comparables with last year. Part of that is a function of sort of the steady-state part of that business, there's a steady-state part of the business. The test and inspection business has been pretty steady. And so really, I'd say it's not that we're looking for a big uptick. We just don't see it going down any more.

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Gregory A. Thaxton, Nordson Corporation - Executive VP & CFO [25]

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And of course, we've got the stability of the non-electronics portion of the business within the Advanced Tech segment that helps that growth.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [26]

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Okay. And then just last one on the Advanced Tech. The margins, you were down pretty substantially, I think your incrementals were pretty close to 100%. But just give me a sense, and I think you said it was really just volume driven. But is that just mix rich business that is going away? Or is there something else going on there that's driving the steeper margin decline?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [27]

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Yes. I think we heard all that, Jeff. What I would say is first, volume does have an impact in the short term. Secondly, particularly within the electronics part of the business, our dispense business, as I said, is down substantially and that business tends to carry higher margins than our test and inspection business, largely because we make more of the specific components for that business [as opposed to] purchasing some in on the test and inspection side. So those 2 are, I'd say, the biggest contributors to what we're seeing there, volume piece and the mix.

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Operator [28]

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(Operator Instructions) Our next question comes from the line of Mike Halloran from Baird.

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Unidentified Analyst, [29]

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This is [Pez] on for Mike. I was hoping to maybe get a little bit more color going back to the margins. So we have the moving pieces with ICS, some of the cost initiatives. You could maybe help us directionally by segment, it feels like maybe we're expecting a little bit of nonwovens improvement and then also some ETS. Could you maybe help us bridge the gap a little bit there, working into 4Q and some of the puts and takes there?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [30]

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Well, I would say overall, we'd expect for the year to be kind of flat to modestly up is what we're thinking here. Part of that improvement is going to come in the fourth quarter as our volume improves, and we'll get leverage on that volume. As we've talked about, our run rate businesses have been solid, and we'll see some improvement in the Coatings business as well. We've been working very hard on our continuous improvement initiatives in part to try and offset the impact of the volume decline but also to deal with the trade issues that bring tariffs into play. And so when you look at that overall is the adhesives side, specifically to your question around nonwovens, the overall segment is growing as we've talked about in this quarter, particularly strong in packaging and product assembly, nonwovens is off a little bit but in aggregate, solid growth in a tougher macroeconomic...

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Operator [31]

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Our next question comes from the line of Chris Dankert from Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [32]

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Looking at Advanced Technology from a high level here, obviously, I think 5G is top of the mind for a lot of people. Obviously flex circuitry is another driver, albeit a bit lumpy. But when we think about innovation that could drive change in long-term revenue growth for Nordson, I guess beyond 5G and flex, what else kind of gets you excited in that business from a high level?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [33]

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Yes. I would say what we see continued growth around is auto electronics, that'll particularly, as we've talked about in the past, be associated in the short term with a lot of measures that are put in place from a safety perspective and longer term, it supports movement to autonomous driving. We're also seeing an increase on the electric vehicle side and so particularly the battery technology, although the penetration of electric vehicles is modest, but in a long run that's going to improve and create some opportunities.

We do see some opportunities coming from 5G. We think that's going to play out over a number of years because of the need to build the infrastructure piece to really make that effective, the phone piece won't be the gating item, it'll be the infrastructure piece that'll be the gating item. And then longer term, there's probably some additional opportunity around all of the data analytics and so forth. I think as we look at our diversification in the segment, test and inspection part of the business is growing nicely and it taps into a lot of different markets. So we feel good about that balance and then obviously, the balance outside of electronics we think. So I'd say, there are longer-term growth drivers, some of which play into medical, but a lot of which (inaudible) mobile (inaudible). So we'll see those on the horizon as important drivers for the business.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [34]

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Got it, got it. And then just kind of a follow-up to that theme, I guess. What inning do you guys think we are in terms of the tiering inside of Advanced Technology here?

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Michael F. Hilton, Nordson Corporation - Senior Advisor [35]

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I'm sorry, the what? Tiering.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [36]

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The tiering, yes.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [37]

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Yes. I would say if you look at -- that applies mostly to the electronics parts of our business but there are some in the non-electronics parts as well. I'd say we've got a pretty broad portfolio in both expense and the test and inspection side that involves significant tiering, probably 4 to 6 levels of offering now. A lot of those are just relatively new being introduced in the last year or so. And I'd say if we look at things like our valve portfolio in our EFD business, we've got a full stack with some possibilities to continue to develop that. I think while we're very well positioned as customers move from manual semiautomatic operation into automated operation in those businesses. So I think we're well positioned. In the short term, I think we've seen a pause here significantly related to the ongoing trade dispute.

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Operator [38]

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And we have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

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Michael F. Hilton, Nordson Corporation - Senior Advisor [39]

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Thank you. And again, thank you for your support. We've talked about some short-term macroeconomic challenges, but I think what you've seen is the diversity of our end markets, our focus on customer solutions have allowed us to continue to have opportunities for growth and improve margins over the long run, and in the short run, our run rate businesses have done well and we expect to see improvement in the fourth quarter in some of our other businesses. So we're, I'd say, encouraged in a difficult market, that diversity of our business has positioned us well. Thank you, again, for your support and we appreciate your time and attention on today's call.

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Operator [40]

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Thank you. This concludes today's conference call. You may now disconnect.