Nordson Corp

NASDAQ:NDSN

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen. Thank you for standing by and welcome to Nordson Corporation Second Quarter Fiscal Year 2019 Conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I would like to turn the conference call over to Lara Mahoney. You may begin.

[Lara Mahoney, Investor Relations]

Thank you, Olivia. Good morning. This is Lara Mahoney, Vice President of Corporate Communications and Investor Relations. I am here with Mike Hilton, our President and CEO and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, May 21, 2019 to report Nordson’s fiscal year 2019 second quarter results.

Our conference call is being broadcast live on our webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of the conference call available until June 4, 2019 which can be accessed by dialing 404-537-3406. You will need the reference ID number 6423748.

During this conference call, forward-looking statements maybe 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 will turn the call over to Mike.

[Mike Hilton, President and Chief Executive Officer]

Good morning, everyone. Thank you for joining Nordson’s fiscal 2019 second quarter conference call. The Nordson team delivered a solid second quarter. One of Nordson’s greatest strengths is the diversity of our end markets and our ability to execute on our growth initiatives. This was evident in the second quarter as we achieved total company organic sales growth of 3% with all three segments contributing organic sales growth. I will speak more about our fiscal 2019 annual guidance in a few moments. But first, I will turn the call over to Greg to provide some more detailed perspective on the second quarter.

[Greg Thaxton]

Thank you, Mike and good morning to everyone. Second quarter 2019 sales decreased less than 1% compared to the prior year’s second quarter. This change included an increase of 3% organic volume and a decrease of 4% 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 was not significant. Within the Adhesive Dispensing Systems segment, sales decreased 1% compared to the prior year’s second quarter, inclusive of an increase in organic volume of 4% and a decrease of 5% 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 approximately 1% compared to the prior year’s second quarter. Organic volume growth of 2% was offset by a decrease of 2% related to the unfavorable effects of currency translation again as compared to the prior year. Double-digit growth within the Fluid Management product lines was offset by product lines serving electronics end-markets. Industrial coating system sales increased approximately 2% compared to the prior year’s second quarter. These results included organic volume growth of 4%, where growth was solid for most product lines and a 3% reduction related to the unfavorable effects of currency translation as compared to the prior year.

Moving down the income statement, gross margin for the total company was 55% in the quarter. Operating profit was $129 million with reported operating margin of 23%. On a segment basis, Adhesive Dispensing Systems delivered strong operating margin of 30% in the quarter. Within the Advanced Technology Systems segment, reported operating margin was 23% in the second quarter, which was in line with the prior year on lower sales. Industrial coatings segment reported operating margin of 22%, an increase of 340 basis points compared to the prior year, driven by volume leverage and improved sales mix. And as with performance in all segments, this segment’s performance is also the result of continued emphasis on the Nordson Business System.

On a total company basis, net income for the quarter was $92 million and GAAP diluted earnings per share were $1.58, inclusive of a $0.04 per share discrete tax benefit related to share-based compensation. We delivered second quarter EBITDA of $156 million or 28% of sales. Free cash flow before dividends during the quarter was $93 million resulting in cash conversion of 102% of net income. 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-month EBITDA at the end of the second quarter.

I will now turn the call over to Mike for a few closing comments.

[Mike Hilton, President and Chief Executive Officer]

Thank you, Greg. We continue to believe the diversity of our business, including geography, applications and end-market diversity, along with our ability to innovate and deliver on growth initiatives will allow us to achieve our long-term growth targets. As we look at the remainder of the fiscal year, we continue to forecast organic growth for the year though the impact of macroeconomic trend suggests our organic growth will likely be in the low single-digits for fiscal 2019. Based on current exchange rates, we still expect unfavorable currency translation effects of 2% compared to the prior year. With this sales outlook, we remain confident in our ability to generate approximately 100 basis points of operating and EBITDA margin improvement over the prior year as we continue to focus on continuous improvement throughout the businesses. As always, thank you to our customers, employees and shareholders for your continued support.

With that, we will pause and take your questions.

[Operator]

[Operator Instructions] And our first question is coming from the line of Chris Dankert with Longbow Research. Your line is now open.

[Chris Dankert, Longbow Research]

Hey, good morning guys. Thanks for taking my question.

[Mike Hilton, President and Chief Executive Officer]

Good morning, Chris.

[Chris Dankert, Longbow Research]

I guess as we kind of move into the back half of the year here and into ‘20 can you just kind of breakout any kind of synergistic benefit from the plant consolidation. I know we have got some of the duplicate costs reduction maybe it’s $6 million on fiscal ‘19, but just kind of what is the synergistic benefit beyond just removing those costs?

[Mike Hilton, President and Chief Executive Officer]

Well, I think as we have said before, we expect to see some efficiency improvements as we go into 2020. We didn’t necessarily expect to see them this year as we lined out all of the new equipment there. We haven’t put a number on that yet. And so I think we are not really ready to do that, but we would expect to see some efficiencies in 2020 coming from optimizing operation as a result of the consolidation.

[Greg Thaxton]

And Chris, this is Greg, I would add in 2019, that is part of the margin expansion we expect to see is as we kind of wind down the consolidation efforts, we expect to see some of that benefit in the current fiscal year.

[Chris Dankert, Longbow Research]

Got it. Got it, thanks. And then on the last call, you guys had mentioned we didn’t need to see an upward inflection necessarily in mobile to kind of hit the prior organic guidance range. I guess kind of what’s baked into the new range and just kind of how you are thinking about mobile particularly within that guide?

[Greg Thaxton]

Yes, I would say, one of the things that’s sort of affected us a little bit in this quarter and will affect the Q3 in particular is we really haven’t seen our customers introduce any significant level of innovation into this cycle of phones. So we are not counting on that going forward for the rest of the year and quite frankly that has impacted our forecast and moving that down a bit. So for the rest of the year, we are not really counting on any kind of significant step up related to innovation in our customer base.

[Chris Dankert, Longbow Research]

Got it. Got it. If I could just sneak one in, on top of that I guess I don’t expect so, but have you seen any impacts from kind of the Huawei tension, just any comment there would be helpful?

[Mike Hilton, President and Chief Executive Officer]

I didn’t catch the last part, what did you – of what you said there Chris, on the impact of...

[Chris Dankert, Longbow Research]

Apologies, just kind of impact from the tension between China and the U.S. as it relates to Huawei?

[Mike Hilton, President and Chief Executive Officer]

I would say, in general, I think some of the slowness in our electronics equipment business is a function of just the current trade tension. So I think some people are holding off on investment. As it relates to Huawei, I think we will need to see how that plays out. Obviously, we have said before that the Chinese mobile players are our customers, so we will have to wait and see how that plays out. But again, we are not expecting a significant step up in any kind of innovation across the board in that segment for the rest of the year and that’s been a key focus of bringing our guidance down.

[Chris Dankert, Longbow Research]

Understood. Thanks so much guys. I’ll hop back in queue.

[Mike Hilton, President and Chief Executive Officer]

Okay.

[Operator]

Our next question is coming from the line of Matt Summerville from D.A. Davidson. Your line is now open.

[Drew Haroldson, D.A. Davidson]

Hey, good morning. This is Drew Haroldson on for Matt. First off, I am wondering...

[Mike Hilton, President and Chief Executive Officer]

Good morning, Drew.

[Drew Haroldson, D.A. Davidson]

Good morning. First off, I am wondering what performance in ADS was between the four main buckets in the second quarter and what it’s go forward outlook is?

[Mike Hilton, President and Chief Executive Officer]

I would say across the core adhesives business, most of the businesses performed well. You know the non-wovens was still little softer, but we are starting to see some improvement from an order perspective there. So we are encouraged, I’d say for the second half of the year across all of those product lines. And some of those like in the TPS area, our longer lead projects it will have more of an impact in the fourth quarter.

[Drew Haroldson, D.A. Davidson]

Got it. And then second off, I am wondering how the three individual segments compared to the low-single digit organic outlook for the whole company?

[Greg Thaxton]

For the year, we still expect all of the segments to grow some marginally and some a little bit more, but we still expect them all to grow for the year. Individual product lines aren’t likely to grow. So for example, our electronic systems product line is likely to be down.

[Drew Haroldson, D.A. Davidson]

Got it. Thank you.

[Operator]

Our next question is coming from the line of Jeff Hammond with KeyBanc Capital. Your line is now open.

[Jeff Hammond, KeyBanc Capital]

Hi, good morning guys.

[Mike Hilton, President and Chief Executive Officer]

Good morning.

[Jeff Hammond, KeyBanc Capital]

So just to be clear on the guide, is the guide – the lower revenue guidance, is that isolated to the electronics piece or are there other areas of softness that you are seeing and maybe just within that speak to what you are seeing out of Europe and out of your automotive end markets?

[Mike Hilton, President and Chief Executive Officer]

Yes, I’d say it’s largely the electronics piece. Most of our other product lines are doing well and we expect them to continue to do well. Our run-rate businesses in particular like medical and EFD and our packaging businesses are particularly strong. The auto business is kind of choppy. It’s been a drag for a couple of years. We don’t see it having a big effect net-net on the year, although it was more of a drag in the first part of the year.

[Jeff Hammond, KeyBanc Capital]

Okay. And then just on the margin ramp, it looks like your margins were down a little bit 1Q, flat in 2Q and then you still think of a 100 basis point margin ramp. So can you just talk about how you ultimately get there given where you see incrementals to get to that number?

[Mike Hilton, President and Chief Executive Officer]

Yes, I would say if you look at it, there is a piece of that, that is related just to improving the performance in our polymer business and so eliminating some of that duplicate costs and some efficiencies there. And then our Nordson – through our Nordson Business Systems we have a bunch of projects that we are working on that are, I would call in the singles category, so projects that generate several hundred thousand dollars a year of improvement. So that maybe through automation and maybe using our ability to in-source some things that we outsource, there is a variety of things at each of the businesses that when you add them all up are significant. And so it’s really driving the Nordson Business System piece along with improvements in our polymers business.

[Greg Thaxton]

And then Jeff, this is Greg. Of course, the volume growth will generate some with an incremental that we generate on that volume.

[Jeff Hammond, KeyBanc Capital]

Okay. And then just you mentioned in Electronics, I think if you look, I think you had the really tough comp in 1Q, and I think that comps get easier into 3Q, but maybe just talk about cadence in that tech business as you see it into the back half of the year?

[Mike Hilton, President and Chief Executive Officer]

Yeah. So, I think when we look at the next quarter with my earlier comments, we really haven’t seen innovation on the customer side. The electronics piece is going to continue to struggle in the fourth quarter or in the third quarter. In the fourth quarter there is maybe some easier comps, but maybe just some commentary on the overall company looking through the rest of the year. We expect Q3 to be up modestly from a revenue perspective and we expect Q4 to be up more substantially, and the Q4 I think Q3 piece is really continued drag from electronics. The Q4 piece is really a function of long lead projects that we already have in-house or expect to come in, in the near future. And then our, the strength of our run rate businesses which would include things like medical, our EFD business and our packaging business, so that combination gives us some comfort that we’ll see a stronger fourth quarter that ultimately when you integrate them across the year, gets us to that sort of overall low single-digits.

[Greg Thaxton]

And Jeff, I’d just add a little commentary. In a year where it plays out as Mike suggested where we don’t have the innovation in the electronic end markets you would typically see our fourth quarter being stronger, the strongest quarter in the fiscal year. So it kind of plays out that this is in line with that type of year and as Mike characterized, you’re likely to see continued growth as we move through the year.

[Jeff Hammond, KeyBanc Capital]

Okay. So, there’s a step up in growth in all the segments into the fourth quarter or would that be isolated events?

[Greg Thaxton]

No, not just event stack, I mean we see real strength in the as I said in those run rate businesses. I mean, we’ve talked about that medical has been particularly strong. Key parts of our EFD business we expect it to be strong. Our packaging business has been really solid. We have long lead orders in place in things like our coatings and our polymer business that gives us some comfort and then we are seeing some improvement in the near-term in our non-wovens business. So that combination I think is helpful. And then, outside of the dispense side and the electronics piece; the other parts of the business are solid. So that’s the sort of the combination that when you look at it, adds strength to the fourth quarter and the electronics piece is probably a bit of a drag in the third quarter still.

[Jeff Hammond, KeyBanc Capital]

Okay, excellent. Thanks guys.

[Operator]

Our next question is coming from the line of Walter Liptak with Seaport Global. Your line is now open.

[Walter Liptak, Seaport Global]

Hi, thanks. Good morning guys.

[Greg Thaxton]

Good morning.

[Mike Hilton, President and Chief Executive Officer]

Good morning.

[Walter Liptak, Seaport Global]

So, wanted to ask about Huawei directly, so I don’t think, one of these calls we’ve ever talked about a specific customer. And I know you sell to the mobile device makers and some of the Chinese mobile phone companies become more important over the last few years. But I wonder if you can give us some insight into what’s happening. You have a fair amount of business out of China and obviously with trade war and a lot of the things that are in the press right now. I wonder what your view is on how that’s impacted the business in the quarter and what that might do you know in the coming quarters.

[Mike Hilton, President and Chief Executive Officer]

So, I’d say at a high level, Walter, we do think, and if you look at our geographic numbers, they’re down in Asia. We do think that the trade issues back and forth are creating some delay in investment in Asia. A lot of that linked to the electronics part of the business. From a mobile perspective, in general, as we’ve said, it’s not been a year with a lot of innovation, where it had some promise in the beginning year that’s really not played out. I think as we said before, we support all of the larger and the Chinese players. So, I’d say there is some concern with the latest sort of rounds of discussion and even last night there has been some relaxation as it relates to Huawei. But no one customer is significant enough that kinds of drive what we see going forward. And so, our forecast is assuming pretty modest year from a mobile business, in general. So, we’re not counting on it. Does this do these tensions make it potentially worse? It could. I mean, we’re trying to account for that, but it could.

[Walter Liptak, Seaport Global]

Okay, okay. And the comments about innovation, I wondered if you can just go a little bit deeper on that. I know in the past, we’ve talked about 5G, and it seems like 5G is moving forward in some parts of the world. What do you think the timing is of that and what other kind of innovation were you thinking could be happening that maybe has pushed out a little?

[Mike Hilton, President and Chief Executive Officer]

Yes, so we typically work on a lot of projects from the November through sort of the February timeframe, and typically, some of those go forward in a year where you see significant changes in models. You see a lot of that being incorporated in a year where it’s pretty incremental. You don’t see as many. I’d say this is the year, we haven’t seen much at all in the way of innovation, and I think some of that’s related to just sort of a lower demand for mobile phone. Some of that is, I think, related to the trade issues that are ongoing right now. So, we haven’t seen a lot of new investment incorporated into innovation.

As it relates to 5G, there are headline news out there around 5G and 5G capable phones. But really, there’s not much incorporated in the phone at this point. The driver for that is going to be less on the phone side and more on the infrastructure side for 5G to work effectively and get the benefits of it, you need a lot more localized infrastructure in place. So that’s going to play out from ‘20 through 2021 and beyond, because the range of 5G is very short and so you need a lot, more physical antennas outside. And then, within the phones, you need fairly significant changes. So, I think it’s 2020 and beyond in terms of having a real impact and it’s going to be somewhat linked more to the broader infrastructure play. Now there is some opportunities for us in that infrastructure play too, but these are these require high density transmission towers, not like we necessarily have today you can hang all this stuff on a lamppost and everything else. But it’s an investment that has to happen and until that happens; you’re not really going to get a benefit on the phone side. So, I’d say, while you see you see advertised 5G, in effect I think even some of the U.S. phone companies had to withdraw their comments because they’re not really 5G at this point.

[Walter Liptak, Seaport Global]

Okay. Okay, thanks for that. And then, just one last follow-on from one of Jeff’s questions about Europe, the volume growth of 4.6% looked very good and I wonder if you could talk about any of the trends that are going on there, either by segment or because we hear about EU slowing in Brexit and maybe anything on like a new orders or front logs that can help us understand what the trends are like?

[Mike Hilton, President and Chief Executive Officer]

Yes, I would say if you look at the European in general coming into the year, we thought it was going to be a pretty modest growth year maybe a little bit less than last year from a broader economy. I think that’s in fact what’s playing out although there was some more encouraging news most recently, I think out of Germany. For us, it’s really a function of specific parts of our, business like Packaging that continue to remain solid. What we expect overall for Europe for Europe to be a modest growth year from an economic perspective.

[Walter Liptak, Seaport Global]

Okay. Okay, thank you.

[Operator]

[Operator Instructions] And our next question is coming from the line of Jason Rodgers with Great Lakes Review. Your line is now open.

[Jason Rodgers, Great Lakes Review]

Yes, so I did have one follow-up on the, on the mobile side, just wondering, based on your past history, if you’ve seen back-to-back years were mobile customers did not innovate, just thinking about next year, the outlook for the mobile side.

[Mike Hilton, President and Chief Executive Officer]

Yes. So, what I would say is this is a little atypical because you typically haven’t taken a tack here as they describe it and we really saw last year being relatively incremental and this year being fairly weak. And I do think the trade side of that is having an impact. And I think it’s affecting overall demand and then investment for it. So, I think that’s unusual. I do think Walt’s prior question around 5G is what’s going to be the next big driver around mobile. For us, the other thing that we have been doing is diversifying our business within the electronic space and doing more and more for example, in auto electronics and in the semiconductor side as well as driving growth in the non-electronics pieces in general industry and the medical side and that certainly helped – that overall segment helped in the quarter and will help for the year, because the other things, those run-rate kind of businesses are doing well.

[Jason Rodgers, Great Lakes Review]

Okay, thanks.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the conference call back over to Mr. Mike Hilton for closing remarks.

[Mike Hilton, President and Chief Executive Officer]

Thank you. And I thank everyone for participating on today’s call. Just as one final summary point, we do expect to grow this year as we have said low single-digits. We do expect to improve our margins 100 basis points. So, despite some of the challenges that are out there from a macro perspective and some of the industry-specific challenges, the diversity of our business is going to allow us to grow and improve margins this year. And I want to thank all of our team for being focused on delighting customers and making that happen. So thank you.

[Operator]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may all disconnect. Everyone have a great day.