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Nordson Corp
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Good day and thank you for standing by. Welcome to the Nordson Corporation's Second Quarter Fiscal Year 2021 Conference Call. [Operator Instructions]
I would now like to hand the conference over to Lara Mahoney.
Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communication. I'm here with Sundaram Nagarajan, our President and CEO; and Joseph Kelley, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, May 25, 2021 to report Nordson's fiscal 2021 second quarter results.
You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our Web site at www.nordson.com/investors. This conference call is being broadcast live on our investor Web site, and will be available there for 14 days. There will be a telephone replay of the conference call available until Tuesday June 1.
During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric was provided in the press release issued yesterday. Before we begin, please refer to Slide 2 of our presentation, where we note that certain statements regarding our future performance that are made during this call may be forward-looking 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.
Moving to today's agenda, on Slide 3, Naga will discuss second quarter highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the two business segments. Joe also will talk about the balance sheet and cash flow. Naga will conclude with high-level commentary about our enterprise performance as well as our updated fiscal 2021 full year guidance. We will then be happy to take your questions.
With that, I'll turn to Slide 4, and hand the call over to Naga.
Good morning, everyone. Thank you for joining Nordson's fiscal 2021 second quarter conference call. Throughout fiscal 2020, we remained invested in what makes Nordson strong, our direct sales model and innovative position technology portfolio. We also advanced our new NBS Next growth framework, which ensures we focus our resources on the best opportunities for profitable growth. This strategy has positioned us well last year, and as the recovery continues to accelerate in 2021, it has put us in an excellent position to respond to our customers and deliver record sales, gross margin, operating profit and EBITDA during the fiscal 2021 second quarter.
As the quarter progressed end market demand accelerated faster and to a greater degree than we originally anticipated, particularly in medical, electronics and industrial end markets. Nordson's dispense applications in the Industrial Precision Solutions segment benefited from the pickup in industrial end markets as well as the sustained demand for food and beverage packaging.
In the Advanced Technology Solutions segment, a data centric economy where increasing demand for semiconductors and complex electronic devices drove the need for our test and inspection and fluid dispense products. We have also started to see recovery in our medical interventional solution product lines as the outpatient surgeries are beginning to increase following the COVID-19 related slowdown. Our medical businesses continues to benefit from accelerated growth of single use plastic fluid components for biopharmaceutical applications.
I want to congratulate and thank the Nordson global team for achieving this record second quarter. I'm also proud of our team's dedication to meet this accelerating demand while maintaining COVID-19 safety protocols and effectively managing supply chain and capacity constraints. I'll speak more about the business in few moments. But first, I'll turn the call over to Joe to provide more detailed perspective on our financial results for the quarter.
Thank you Naga and good morning to everyone. On Slide #5, you see second quarter 2021 sales were $590 million, an increase of 11% over prior year's second quarter sales of $529 million. This double-digit growth is more than a bounce back. In fact, as Naga noted, this is a quarterly record for the company, breaking the previous record established in Q3 of 2017.
The sales increase was primarily related to 10% organic volume growth, off of a relatively strong Q2 2020 performance. Favorable foreign currency and the net negative impact from acquisitions and divestitures. The benefits from the Fluortek and vivaMOS acquisitions were more than offset by the negative headwinds from the divestiture of the screws and barrels product line.
When excluding the divested product line in the prior year for compatibility purposes, sales growth would have been 15% in the current year second quarter. Robust growth in electronics and consumer non-durable end markets as well as strengthening medical and industrial end markets were the primary drivers of this performance. From a geographic perspective, growth was strong in all regions except Japan, which has been more heavily impacted by shutdowns related to the pandemic.
Gross profit totaled $338 million or 57% of sales in the quarter compared to $290 million, or 55% of sales in the prior year. This 260 basis point increase in gross margin was driven by the combination of improved sales mix, volume leverage and benefits from structural cost reduction measures taken in fiscal 2020. The divested screws and barrels product line at the beginning of the fiscal second quarter was a significant contributor to the improved sales mix.
It is noteworthy that a gross margin of 57% is a new quarterly company record. Also records in the quarter or operating profit of $166 million or 28% of sales, a 33% increase from the prior year adjusted operating profit of $125 million and EBITDA of $192 million, or 33% of sales, which is 26% higher than the prior year EBITDA of $152 million. The incremental EBITDA margins were 65% in the quarter.
Investors are starting to see the power of the NBS Next growth framework, as it drives double-digit organic sales volume growth, improved sales mix, enhances manufacturing efficiencies, resulting in strong profitable growth.
Looking at non-operating expenses, net interest expense decreased $1 million or 17% from the prior year levels associated with reduced debt levels and a lower effective borrowing rate. Other net expense increased $3 million, largely driven by currency translation gains in the prior year that did not repeat in the current year.
Tax expense totaled $32 million, or an effective tax rate of 20% in the quarter. Net income in the quarter increased year-over-year 35% to $124 million or $2.12 per share, yet another quarterly company record. This significant growth is reflective of volume leverage driven by the 11% increase in sales as well as benefits from cost control measures and improved efficiencies.
Now let's turn to Slide 6 and 7 to review the second quarter 2021 segment performance. Industrial Precision Solutions sales of $299 million increased 6% compared to the prior year second quarter. The organic volume increase of 8% was driven by strong demand and flexible packaging and industrial coating product lines. A strengthening euro and RMB also contributed to a 5% in currency benefit during the quarter.
The divested screws and barrels product line was a negative 7% impact on the year-over-year sales growth. It's important to note that the segment sales are north of 2020 and 2019 levels when prior year balances are adjusted for the divested screw and barrel product line.
Operating profit in the segment was $104 million, or 35% of sales compared to $77 million of adjusted operating profit in the prior year period. This 36% profit growth was driven by sales volume leverage associated with the 8% organic growth, favorable sales mix, improved manufacturing efficiencies and lower year-over-year SG&A, including reduced travel expense that we continue to experience through the second quarter.
Moving now to Advanced Technology Solutions. Sales of $291 million increased approximately 18% compared to the prior year second quarter. This change included an organic increase of approximately 13% as well as increases of approximately 3% related to currency and 2% related to acquisitions. The increase in organic sales volume was driven by strong demand for test and inspection product lines serving electronics end markets and fluid management product lines serving medical and industrial end markets.
Also, as we forecasted, on the first quarter call, we started to see the electronic dispense applications contribute to growth late in the quarter. Second quarter 2021 operating profit for this segment was $77 million, or 26% of sales. This increase of 30% over prior year operating margin of $59 million or 24% of sales was driven by sales volume leverage, favorable sales mix and the realization of benefits from cost control measures taken in fiscal 2020. It is encouraging to see the benefits of NBS Next driving the top line organic growth and delivering strong incremental profit margins in both of our operating segments.
Finally, turning to the balance sheet and cash flow on Page 8. We again end the quarter with a very strong balance sheet and sufficient available borrowing capacity. Cash totaled $133 million and net debt was $734 million, ending the quarter with a 1.2x leverage ratio based on trailing 12 months EBITDA. Free cash flow in the quarter was strong at $94 million, which was 4% above the prior year free cash flow.
Cash conversion and net income was 75% in the quarter, which was below normal levels due primarily to a $50 million discretionary pension contribution. Improvements in working capital efficiency contributed favorably to our free cash flow in the quarter. The year-to-date free cash flow conversion rate remains north of 100%.
I will now turn the call back to Naga.
Thank you, Joe. Let's turn to Slide 9. Again, thank you to the Nordson team for delivering this outstanding performance in the quarter. We hosted an Investor Day on March 30 to detail our long-term plans for making a strong Nordson even stronger. If you did not have a chance to participate in our Investor Day, the replay of the event is available on our Web site.
Now, I'd like to summarize a few highlights. First and foremost, we describe the strong growth drivers enabling Nordson's future profitable growth performance, including diverse end markets, new applications and emerging markets. While our growth drivers are unique to each of our divisions, the diversity of our end markets and the high-level of recurring revenue made us resilient through fiscal 2020 and our strengthening in fiscal 2021 results.
At our Investor Day, we also reiterated our commitment to innovation, one of Norton's key competitive advantages. Our customer intimate model gives us insight to the needs of our customers, and we develop our product roadmap as an enabler of their new technologies.
In the presentation, we highlighted two of our newest products, the ProBlue Flex melter for packaging customers, and the new Vantage integrated dispense and automation system, which is the first fully integrated wafer handling system designed for the semiconductor industry. In both cases, these new products are advancing automation, reducing cost and accelerating productivity. Both products contributed to record sales in the quarter.
To make a strong Nordson even stronger, we also spoke to the new competencies that we are building, notably the NBS Next growth framework. This data driven framework is driving our decision making. We are already starting to see the benefits of our deployment of NBS Next.
Last year, we announced structural cost reductions that were based on our strategic discipline analysis. It also drove our decision to divest the screws and barrels product line at the beginning of the second quarter. Simultaneously, we approved new investments in our top opportunities, such as funding new equipment for our Loveland Colorado facility to grow our biopharmaceutical components, and building a new facility in Mexico to support the needs of our Nordson medical interventional solution products. These decisions are strengthening both our top and bottom line.
Since being vaccinated, I have started to travel to our businesses. It is exciting to see the engagement of our teams deploying NBS Next to make data driven decisions on how to delight our best customers or invest in the most innovative technology projects or prioritize top products in manufacturing operations.
Turning to Slide 10, NBS Next is a critical pillar of our new Ascend Strategy, which is designed to deliver top tier revenue growth with leading margins and returns. In addition to NBS Next, the other interconnected pillars of the Ascend Strategy are; Owner Mindset, Nordson's entrepreneurial division-led organization and Winning Teams, Nordson's talent strategy. It is also exciting to experience the progress we are making in each of these pillars. We now have all of our division leaders in place, and they are focused on building a deep and diverse bench of talent who will support our long-term growth.
The successful execution of the Ascend Strategy will help us achieve our long-term growth milestones of $3 billion in revenue and 30% EBITDA. This target will be achieved through a combination of organic growth within each segment as well as the acceleration of acquisitions. Clearly, the record second quarter, an updated fiscal 2021 outlook demonstrate that we are off to a strong start towards achieving our long-term goals.
Now let's turn to our updated fiscal 2021 outlook on Slide 11. As we enter the fiscal third quarter, backlog is strong and trailing 12-week order entry is up double digits about prior year levels across the majority of our product lines and geographic regions. For full year fiscal 2021, we expect sales growth to be approximately 8% to 10% over fiscal year 2020. Excluding the 3% headwind from the revenue of the divested screws and barrels product line in the prior year, our forecasted full year sales growth would be approximately 11% to 13%.
Our forecasted sales growth combined with strategic actions taken around efficiency and cost is forecasted to deliver earnings in the range of $7.20 to $7.50 per diluted share. The midpoint of this guidance reflects 34% earnings growth compared to prior year and a 25% increase over 2019 earnings. Our current financial results signify more than the benefits of the recovery.
Nordson wins because of the foundation of our precision technology focus, customer centric model and diversified end markets. We are well-positioned to benefit from the recovery, and our products remain a critical solution to our customers through the cycle ahead.
Additionally, our management team is fully engaged in advancing the implementation of the Ascend Strategy, which will establish a growth framework entrepreneurial organization and a deep diverse team to drive sustainable profitable growth. As always, I want to thank our customers, employees and shareholders for your continued support.
With that, we will pause and take your questions.
[Operator Instructions] The first question comes from the line of Allison Poliniak with Wells Fargo.
Good morning. Naga, we're hearing a lot about supply chain issues sort of impacting maybe some growth opportunities, particularly as we enter the back half. Any thoughts there in terms of what you're seeing at this point?
Yes. Thank you, Allison. From our standpoint, we've had some issues, but very limited around resin. From where we stand today, it is really non-material to our expectations in the back half of the year.
Perfect. And then I just want to get back to your comments on medical. Obviously, you're seeing an improvement there. And you mentioned the single point of use on the consumable side. Is your sense -- is that an inventory issue that people are replenishing inventories? Or is this sort of true demand kind of behind that what you're seeing today?
Yes. In our single use components, these are for biopharma applications. So think of vaccine, think of new biopharmaceuticals that are coming on the market, we truly see it as representative of the demand, because this is a demand we have seen all through last year as well as this year. So, we have very limited supply chain kind of restocking in this business. We sell mostly directly to our customers there.
Great. I'm just going to sneak one more in. Any mix issues to be mindful of in the back half of the year for you?
Joe, you want to take that one?
Yes. I think, Allison, good question. I do think that the mix was quite favorable when we looked at our Q2 performance, but when we look at the forecast for the remainder of the year, again, it's pretty much a broad based demand environment that we see in as it relates to geographies and as you see the volume organic growth in both segments. So I would tell you, there's no mix issues to be aware of heading into the back half that we see at this time.
Perfect. Thank you.
The next question comes from the line of Saree Boroditsky with Jefferies.
Good morning. Congratulations on the great quarter. You had really great margin performance in IPS. Could you just talk through is this is the right level to think about going forward, given the divestiture and how should we think about the benefit of lower travel that you mentioned?
Joe, will you take that?
[Technical difficulty] take that one, Naga. When you look at our IPS margins in the quarter and our Nordson record level margins in the quarter, we did benefit clearly from the volume leverage. And then the improved sales mix when you think about that the divestiture of the screw and barrel business had a significant impact. I would tell you at the Nordson level, that probably expanded margins of 150 to 200 basis points. And at the IPS level, you're talking about 300 to 400 basis points can be attributed to the improved sales mix tied to the divestiture of the screws and barrels product line. And so even excluding that, there are nice margin performance. When you think about going forward, I do think there's a component as I mentioned in the script, where expense will start to ramp up a little bit in the second half, particularly if you think about our direct sales model with the travel and expense, T&E expense coming up, we'll begin to ramp a little bit more in the second half than we saw in the first half.
Great. And then with leverage about 1.2x, it's really below your target range. Maybe we could talk a little bit about what you're seeing in the M&A market or how you're thinking about share buybacks?
Yes. So on the M&A market, I will tell you we remain very active. And looking at deals, I will tell you there's a feeling in the market that the number of deals coming across has continues to, I would say, increase as we work through post-pandemic. And so we remained very active, strategic discipline that we reviewed in our Investor Day is our primary filter. And then after we confirmed strategic discipline, we will put the financial criteria on and we remain financially disciplined.
So we're looking, as you know, for acquisition targets primarily in the test and inspection in the medical space and we will continue to be active. So the volume I would tell you is picking up in terms of what it is we're looking at. As it relates to share buyback, we target to offset dilution. I will point out Saree that we did contribute additional $50 million to our defined benefit pension plans. So now our U.S funded status is north of 98%. And we did pay down $150 million in debt in the quarter.
Thanks for taking the question.
The next question comes from the line of Connor Lynagh with Morgan Stanley.
Yes, thanks. I was wondering if we could return to the supply chain conversation a little bit. So it sounds like availability is really not an issue for you. Are you seeing component cost inflation that you need to address with price? Or is that also relatively muted?
Yes, when you think about inflation as it relates to Nordson, first of all you have to think about our overall Nordson cost structure. And I would tell you the material cost is a relatively small component of our overall cost structure. So manufacturing conversion cost, fixed manufacturing costs and SG&A represents a larger component than the material cost itself. We do have procedures and processes in place to address material cost increases with price where and when appropriate.
But I would tell you, Connor, that the challenge is more on the labor cost, potential inflation there or availability. So when you think about the NBS Next initiatives and investments that we've made in in-lining and streamlining the manufacturing process, this is really helping us mitigate some of those pressures on both inflation and availability of the labor costs on the manufacturing side. And where availability isn't a problem, we're able to expand our capacity to serve this 10% volume growth. So that's the pressure I would tell you we're seeing is more on the labor side than on the material cost inflation side.
Okay, got it. And then maybe just sticking with the cost maybe, you called out the discretionary expenditure headwind as we move toward -- further towards reopening. Could you maybe just give us an order of magnitude to think about is that at a Nordson level of 50 basis point, 100 basis points, how should we think about how significant that could be?
Yes, I would tell you, if you just look at the first half year-over-year, it's about a probably $5 million benefit in terms of travel and entertainment expense, particularly on our commercial sales force direct sales model, so a portion of that's going to start to come back.
Okay, understood. And maybe just to tie this together with some of the questions that others have been asking. I mean, it seems like based on the EPS guidance that there is a certain degree of margin degradation, maybe some reversal of mix, is that the right way to think about the back half outlook is that there could be some pressure on margin, but the top line growth is strong.
Yes, so the top line growth is strong. I think, as you're familiar the mix in any given quarter could be favorable or unfavorable. And I do think in Q2 we did see a favorable mix. And so as it goes forward, that may moderate a little bit. And then I would tell you on the cost structure side, the expense -- some of that expense should start to come back. And that's one.
Joe, let me add something to this. Connor, the best way to think about us is that our long-term incrementals on growth is 40% to 45%. We believe based on our current [ph] guidance, we would still be north of that 40% to 45% incremental in the back half. So, yes, there is some cost coming back, but still pretty solid performance is what we are forecasting.
Got it. Appreciate the color. I'll turn it back.
The next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.
Just on backlog, can you give us the backlog number and what that is up organically? I don't know if I missed that in the presentation.
Yes, Jeff, these are abnormal times coming out of the pandemic. And when we're looking at our customers' behavior, our backlog, our order entry, we're seeing differences in now in the timing of delivery. And so I don't think our backlog is indicative of the next quarter sales. What I can tell you is our backlog in our order entry are up double digits, and therefore we have confidence in the guidance that we provided. But to give a backlog number right now would not be appropriate, I think.
So the idea is that you're getting significant orders, but they're longer turnaround than the normal.
Yes, we do see in particular businesses on the system side customers placing orders in advance. And so therefore with delivery times that go out actually into 2022, which is a little bit abnormal for our historical customer order patterns. So therefore it's distorting that data point.
Okay. And then just -- maybe just to go back to IPS margins, because just -- is there a way to give what the underlying core incremental margins were in the quarter? And I'm just trying to understand, like outside of screw and barrel, like how much mix drove it versus some of this temp [ph] cost and kind of how you think about that in the second half, because those were pretty eye popping.
Yes. So when you think about the IPS business in the quarter itself, I would tell you, the screw and barrel divestiture expanded margins roughly 300 to 400 basis points. So if we were 35% op, you can drop that down, which is still a very strong north of 30% operating profit number for that business. And so the way to think about that is the power of the leverage on the 8% organic growth within that segment. And so as Naga mentioned, very strong incremental margins in that business, some favorable mix on the consumer non-durable as it relates to packaging, some favorable mix also within our industrial coatings segment. And it's also that -- in this business, the industrial coatings where we took some actions last year to structurally reduce our costs late in Q4. And so you see some of that benefit coming through as well.
Okay. And then just last one. You mentioned in advanced tech, the electronics precision dispense kind of picking up late in the quarter. Maybe that's still lagging from a growth standpoint, but just talk about what you're seeing there from a forward kind of order quoting visibility? Thanks.
Joe, let me take that one, and then you can give some color. Jeff, what we're beginning to see here is on the PCB side we are starting to pick up some pretty strong order patterns around surface treatment, our plasma surface systems -- surface treatment systems. Late in the quarter, we also begin to see our flow with dispense product lines in electronics beginning to contribute across a diverse set of the electronic supply chain. Semiconductor certainly helping, PCB helping and complex electronic components also helping. So I would say we feel pretty good about what we see in that business and expected to contribute nicely in the quarters to come.
Okay. Thanks a lot.
The next question comes from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
Good morning.
Good morning.
So on the medical side, maybe just some thoughts on elective versus non-elective underlying trends as you're seeing it today. And then how you think that inflection curve happens from here. Obviously, some nice improvement this quarter. Is this kind of the right sustainable pace? And when do you think you're back to what a more normalized level would look like?
Well, when we come to normalized levels, that is going to be difficult to predict. But let's talk a little bit about what we're seeing in the business right now. First and foremost, if you think about our biopharma side of the business where we have the fluid components, continues to be strong. It has been strong, continues to be strong, and mainly led by not only vaccine, but just the number of drugs that are getting manufactured and introduced from a biopharma perspective is just accelerating. We expect that part of the business continue to contribute in a nice way.
On the elective selective surgery, what you're beginning to see is the COVID slowdown is certainly benefiting, and you're beginning to see elective surgeries or selective surgeries in our case, starting to pick up. We saw some nice growth in the business in the quarter. We expect that the next two quarters look pretty good. And it's really difficult for us to say, would we get back to high single digits, which is normally what we expect out of this business in -- end of this year, early next year, it's difficult to say. But that's kind of how we are thinking about is that our expectation for the second half of this business is still pretty good.
And then maybe just a similar conversation on the industrial facing end markets underlying trajectory trend, any nuance that you're seeing within those pieces?
Yes, the industrial businesses as you can see, there is a certain amount of pent up CapEx spending demand that we are certainly enjoying in the quarter based on backlogs and order entries we see -- we expect a pretty double-digit kind of growth is what we’ve -- what implies in our guidance for the full year. What is difficult for us to again pinpoint is that when this gets to a normalized level, that is something difficult to predict right now. But based on what we can see, we feel really good about the second half having a pretty broad based performance across a number of -- across all of our core end markets and across all of our geographies.
Thanks, Naga. Appreciate it.
Thank you.
The next question comes from the line of Chris Dankert with Longbow Research.
Hey, good morning. Thanks for taking the question. I guess thinking about the strong semiconductor demand we saw in the quarter, can you comment about kind of the mix there? Is this being more driven by strong product adoption of the T&I business or is this more customer expansion or a combination of the two? Just any comments there would be great.
Yes. Thank you, Chris. We certainly benefit from our T&I business, which is having a really strong number of quarters and continues to benefit from this semi investment and semi growth and also the complexity of the semiconductors, complexity of electronic components as well definitely benefiting the T&I business. But late in the quarter, we begin to see as I indicated in the script, we're beginning to see contribution from our fluid dispense business as well. Our surface treatment product lines are doing really well. We're beginning to have some very good progress in our coating as well as dispense product lines as well. And so, in terms of where we participate, broadly I will tell you in the semiconductor space we participate in first in the surface cleaning side of it. Second in the underfill in terms of packaging. In the past, a lot of this packaging happened post wafer sliced and then packaging happens. But now we're beginning to see packaging starting to move up front and we're starting to participant there as well. So pretty broad based growth, Chris. I wouldn't pinpoint that just semiconductor or just one particular product.
Got it. Thanks for the color. And then not to put too fine a point on it, but is it safe to assume T&I was up double digits in the quarter though?
Yes, yes.
Okay. Okay. And again, you called it out a little bit ago very, very robust PCB demand and growth there. Is this sort of the beginning of some of the 5G cycle in your opinion? Or is this just -- it's really much more broad based than that?
Yes, we've spent quite a bit time right in the past year or two on a shift in the strategy in electronics for us is to get to a place where we have a broad set of applications across the electronics supply chain. And so what I will tell you is the growth that we're seeing, forecasting that we're thinking about is a broad based demand rather than a specific particular product.
Understood. Thanks so much, Naga.
Sure. Thank you, Chris.
The next question comes from the line of Matt Summerville with D.A. Davidson.
Thanks. Just a follow-up on the -- the test and inspection piece of the business. What sort of anticipated duration do you see Naga in this cycle? What inning are we in? And do you expect that double-digit growth that you experienced in the second quarter to continue into the foreseeable future? What's the right way to kind of be thinking about that?
Yes. I would say we are probably -- typical semi cycle is 3 to 5 years, depending on what happens. And we would say we are probably year one or a little bit past year one, and so the best way to think about it is early in the cycle certainly the growth is much more magnified than it is in the back half of the cycle. So that's -- it's very difficult to sort of pinpoint how many more quarters or a year we have on this double-digit kind of growth. But over the cycle, the best way to think about our end market opportunity is 4% to 5%, which is kind of what we indicated in our Investor Day. We clearly are in the first leg of the growth is maybe the best way to think about it, Matt. Hopefully that helps you.
Thanks. And then just one last one on pricing. With the strength in demand, you're seeing pretty much across the board in your business, double-digit growth in orders and backlog. Are you able to be more of a price taker? Are you positioned to be so as we think about this going forward, given the demand environment you're experiencing?
Let me maybe make one comment. And then, Joe, you could add a little bit more detail to it that will be helpful. Think about the gross margin of the company pretty strong, right? 55% plus and that is indicative of the value we create for our customers. In some of our product lines, we have a regular price increase once a year to sort of take into account inflation and things like that, but we really need to be thoughtful. We create value and we get paid for it. And should inflation becomes an issue, we will certainly have the opportunity to cover it. But in general, we feel good about where we are. Joe, you want to add any more color to it?
Yes, again, I would just say that we feel very good about our gross margins. The record 57% gross margin we have processes in place to monitor raw material costs, increase inflation and processes to maintain that margin. But I would tell you, the best opportunity is to support this volume growth and to meet the customer's needs as opposed to take this opportunity to raise price because we're already running at very nice incremental margins as Naga mentioned. As we look at the back half in this double-digit organic growth, as we think about it, we are managing the incremental margins to be attractive and that's the best opportunity to support the organic growth and our customers.
And maybe one more to think about is just to reiterate Nordson's position. Typically Nordson is the lowest cost on a very critical component, really small part of our customers' total cost deck, right. So, our components are smaller part of the company -- customers' total cost deck. And so should we need to raise prices, we are able to provide that.
Got it. Thank you guys.
Thank you.
[Operator Instructions] The next question comes from the line of Christopher Glynn with Oppenheimer.
Thanks, good morning. Covered a lot of ground so far, I did want to follow-up on industrial demand patterns. You’ve seen any demand transitions within industrial recovery at this stage? And what I mean by that is typically early on, you just see a lot of production oriented OEM activity, and then more maybe mid cycle type capital improvements driven by different types of capacity coming online. Just wondering, any light you could shed on how that's evolving?
Yes, from what we can see, Chris, today is mostly what we're seeing is a demand pickup based on pent up CapEx spending. And we've not seen significant capacity yet as yet.
Okay. Thanks.
Sure.
The next question comes from the line of Andrew Buscaglia with Berenberg.
Hey, guys. I know you got a lot of questions on these, the supply chain and navigating that. And I think I was hoping you could explain one thing in that, the headlines every day are around these component shortages. I'm just wondering, what's the nature of your business and that you are able to kind of sidestep that? And correct me if I'm wrong, your business test and inspect various components and with coatings on other components. I just don't -- I don’t quite understand, I guess, I would not have expected a quarter in which that performed so well. So just any color there.
Yes, let me maybe give you some overall point of view and Joe can add a little bit more color to it at the end with some data. Think about Nordson from who we are, right, what we are, is we had an assembler of differentiated components to create value for our customers and specific end markets for critical applications. So, but that really is, is that we are a assembler of value added components. And what that really means is that materials as a part of our total cost structure is fairly small. So that's one thing to keep in mind. The second is that we do manufacture our products in country, in region in most of the cases. So we really don't run into a lot of supply chain issues that way. So if you put those two things in perspective, I'm not saying we don't have any problems at all. We've had one or two issues here and there, but they're really not material is kind of what we say.
They are just so niche. It's -- you can't look at it, you can't look at the broad -- the broader headlines. You're kind of too narrowly focused that really doesn't impact you, it seems.
Yes and we're not a big processor of materials either, right? Yes, we have some consumable business, but we're not a big resin converter to contract manufacturing of injection molded parts. That's not who we are, right. So …
Yes. Okay. And then maybe, Naga, you put out that long-term target of 30% EBITDA margins, but it looks like you're -- I mean this year you're going to brush close to that. I mean, I think you would be into the 29,529 based on the implied guidance. So, I guess is the way to look at that long-term guidance more like should we be looking at year-over-year EBITDA growth from like a dollar perspective? Or I guess -- or are you just being really conservative with being able to achieve 30% long-term because you're practically there after this year?
Joe, can walk you through some of the -- some of our thinking, but really it is a long-term target. And what you're seeing now is only the impact of our organic growth this year. So -- and our long-term guidance includes organic growth and a dilution from acquisition. So there's two things. We don't believe this is a conservative estimate. This is through the cycle. Over the 5 years, this is what we expect we will do. Joe, would you add a little bit more color to that, please?
Yes. I mean, I would just add, Andrew, that when you think about it, the organic growth has to drive margin expansion north of the 30% at the EBITDA line, such that when that $500 million of acquired revenue comes in at a 20% EBITDA, the net dilution is down to the targeted 30%. So our 30% is still an appropriate goal. It just includes the dilution of $500 million worth of acquisitions over the next 5 years at a 20% EBITDA.
Okay.
Another way to think about is that for every dollar of growth our expectation within the businesses and how -- where we're headed is that we're going to have 40% to 45% incremental. That's really what we're focused around. And so on a yearly basis, that's how we're thinking about it. And if you project that over time with acquisitions, that's sort of how we come to this 30% EBITDA target.
Okay. Thank you, guys.
The final question comes from the line of Walt Liptak with Seaport Global Research.
Hey, good morning, guys. Good quarter.
Good morning. Thank you.
I wanted to follow-up on a couple of things. When you were talking about the backlog earlier, you were saying that there were some systems that were booking out to 2022. I wonder if you can give us some idea of which segment those might be in? And why they're running so low -- so long. Is it just timing of when these things are supposed to get sold? Or is there something else going on?
Yes, Walt, I would just tell you our understanding is that it's the macroeconomic environment where people are hearing what what's been discussed on this phone call, as it relates to supply chain challenges. And so some of our customers are, I think, responding to that and placing orders in advance of when they would typically place orders. So they're not building orders, or building inventory. They're just placing their orders with us earlier than they used to. And so that's what we view as going on and why we're choosing not to disclose the backlog number at this time.
Okay, I understand. Can you give us some color, though, about which segment or is it kind of across the board where customers are just concerned about future delays. So they're sort of pre-placing these orders?
Yes, I would tell you it -- we see it a little bit in both of our segments. And so it's not one segment specific. And it's generally tied to those products that typically have a longer lead time naturally that they're calling and ordering in advance of those. And that's why I made the comment about the systems. As it relates to the parts business, many of those it's booked and shipped within the week. And so there we don't have that built up backlog.
Okay, great. And as you pointed out, the gross margin was absolutely great. And I understand that early in the cycle, there's some things that are abnormal. But as we look into the back half of the year, is this 57% -- is this a reasonable run rate, given what you're seeing from volume levels and mix?
Yes, I think the 57%, I would tell you is a new high watermark. But I do think that a lot of what drove it is sustainable. And when you think about the impact on the divestiture and improved mix, the divestitures of screw and barrel business, you think about the benefits of the cost structure actions that we took last year, and at these increased demand levels. So this is the type of leverage you would expect with strong incremental margins. And so, on any given quarter that can fluctuate up or down 100 to 200 basis points based on mix, but I do think this is reflective of the profitability of this business at the sales levels.
Okay, great. And then maybe a last one for me is just, I think it was in Naga's comments. He made a comment early on that the majority of the products are growing double digits and some of those elective surgery medical are not growing double digits. But I wonder if you can talk about what else is not growing double digits. And if you think you can gather recovery in those in the back half of the year?
Yes, I guess let me take a stab at it. And then Naga can add some more color. But when you look at a geographic split, Walt, I would tell you the one that was not growing double digits in the quarter organically was Japan. There our business experienced -- or in that region, they experienced significant shutdowns and due to the pandemic. And so we did deliver double-digit organic growth in Japan. But I think the comment then, or going back to your question on the electronics and the medical, I think if you look at our performance over the last several quarters, the medical was driven by the biopharma in the single fluid component, single use application. And what we started to see late in the quarter was the growth of the interventional solutions, which was encouraging because that's the one that's more closely tied to elective procedures or selective procedures. And so it was encouraging to see that come back. On the electronic space, the T&I had been the strong performer. And it was encouraging to see the electronic dispense fluid dispense portion of that business come back and contribute to growth in the later part of Q2. And so that was the comment there.
Okay. One other thing I would add is that if you compare the growth rate year-over-year, remember last year Nordson's growth performance or declines were not as deep as we were down about 4%. So the double-digit growth we're seeing is on top of what was not too bad of a decline last year, given sort of the broader environment.
Okay, got it. All right. Thank you very much, guys.
I will now turn the call back over to Naga for closing remarks.
All right. Thank you. I want to reiterate that we are well-positioned to benefit from the accelerating recovery, and our position technologies remain a critical solution to our customers through the cycle ahead. Additionally, our management team is fully engaged in advancing the implementation of the Ascend Strategy, which will establish a growth framework, entrepreneurial organization and a deepened a diverse team to drive sustainable profitable growth. Thank you for your time and attention on today's call. Have a great day.
This concludes today's conference call. Thank you for participating. You may now disconnect.