Nordson Corp

NASDAQ:NDSN

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation Third Quarter Fiscal Year 2019 Conference Call. [Operator Instructions] Thank you. Lara Mahoney, you may begin your conference.

[Lara Mahoney, Investor Relations]

Thank you, Lisa. Good morning. This is Lara Mahoney, Vice President of Corporate Communications and Investor Relations. Today, I am 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 5937809.

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 will turn the call over to Mike.

[Mike Hilton, Senior Advisor]

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 three weeks ago. He joins us following 23-year career with ITW. We are very pleased to have him join the company.

[Sundaram Nagarajan, President and Chief Executive Officer]

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 am 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 the customer while prioritizing innovation and talent developments. Similarly, Nordson’s focused on customer passion and innovation as 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.

[Mike Hilton, Senior Advisor]

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 it’s continuing to influence customer investments in new technology and capital. This challenging macro economic environment is lasting longer than most expected and as a result capital projects have been delayed and we have had a weaker third quarter than we originally anticipated. The softness in product lines serving electronics end markets and those within the Industrial Coatings Segment offset solid organic growth from our Adhesives Dispensing segment and the non-electronics product lines within the Advanced Technology.

Also during the quarter within Industrial Coating Segment, some customers move 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 costs. As a result, they held third quarter operating margin, equal to the prior year, but adjusting for one-time charges in both years. Despite the decline in total company sales during the quarter as well as the pressure and distraction from tariffs.

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

[Greg Thaxton]

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 one-time restructuring charges and a charge of $200,000 for the one-time step up in the value of acquired inventory. Adjusted operating margin for the quarter, excluding these one-time charges was 24% equal to the prior year’s third quarter adjusted operating margin also exclude one-time charges. Again this is strong operating performance in the quarter against the 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 2.1 times trailing 12 months EBITDA at the end of the third quarter.

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

[Mike Hilton, Senior Advisor]

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 adhesive segment and the medical portion of the Advanced Technology have held up well despite these pressures, but some customers are certainly more cautious with capital investment during these uncertain time. 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 costs 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 am pleased with the solid organic growth in our Adhesives Dispensing segment and the non-electronics product lines with 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 accounting 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 solutions provider to our customers combined with the diversity of our end markets gives us confidence that we will continue to drive organic growth going forward. We also remained focused on delivering value to our shareholders earlier this month we announced a dividend increase of 9%. This marks the 56 consecutive year of annual dividend increases, ranking us 14 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 that is my – as it is my last conference call, to thank our shareholders, analysts, employees and customers for their support over the past ten years. We’ve entered new markets and grown this business while holding true to Nordson’s core values of integrity, back for people customer passion and 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.

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of Allison Poliniak from Wells Fargo. Your line is open.

[Allison Poliniak, Wells Fargo]

Hi, guys. Good morning.

[Mike Hilton, Senior Advisor]

Good morning, Allison.

[Allison Poliniak, Wells Fargo]

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

[Mike Hilton, Senior Advisor]

As I say there is nothing really unusual about that I’d say we’ve had some large projects that we are ready to go in the quarter and customers 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.

[Allison Poliniak, Wells Fargo]

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

[Mike Hilton, Senior Advisor]

I would say, most all of that falls into the electronic space. If you think back to where we were in the second quarter the electronics industry in general is 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 grade 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 in particularly affecting our dispense business there.

[Allison Poliniak, Wells Fargo]

Alright. Okay. Thank you very much.

[Operator]

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

[Christopher Glynn, Oppenheimer]

Hey, thanks. 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 10 down, it doesn’t look like anything in the quarter really. But as you’re looking at things in real time. Any other demand patterns frame? Or is still pretty solid?

[Mike Hilton, Senior Advisor]

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 electronic 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. Let’s 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 it’s 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.

[Christopher Glynn, Oppenheimer]

Okay. That makes sense. Thank you for that. And on the guidance were flattish margins for the year are a little better, the first nine months were down each quarter obviously, but implies maybe near record segment margin performance since after the first polymer deals, wondering if you’re seeing a clear path radius 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?

[Mike Hilton, Senior Advisor]

Well, we do expect volume to go up in the fourth quarter across most all of the businesses and we – yes, we have seen improvement coming from our polymer business as we talked about, we expected to see elimination of most of the 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 are in a good spot on the Adhesive segment at this point.

[Christopher Glynn, Oppenheimer]

Sounds great. Thank you, Mike.

[Operator]

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

[Matt Summerville, D.A. Davidson]

Thanks. Good morning. Couple of questions. First, can you talk about, sort of, there’s a follow-up to Chris’ question. The annualized savings you anticipate to generate from the manufacturing or footprint optimization that you’ve completed a couple of quarters back in the Adhesive Dispensing segment beyond kind of the elimination of the duplicate of cost that you mentioned, Mike?

[Mike Hilton, Senior Advisor]

Yes, I would say, Matt, for this year we didn’t expect to see much beyond the elimination of those cost, what we’ve 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 quantify that. I think historically we’ve gotten questions around, can we get back – as segments 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 up this.

[Matt Summerville, D.A. Davidson]

Just as a follow-up and two things. First, in the past, I know you don’t comment numerically, specifically, on incoming order rate, 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 three businesses, what you saw through the quarter perhaps even kind of a monthly cadence whether things got better or 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? Thank you.

[Mike Hilton, Senior Advisor]

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 our 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. But I’d say modest improvement but I wouldn’t read too much into that throughout the quarter.

[Greg Thaxton]

Yes, Matt on the free cash conversion will have this in different quarters in the year it’s really a combination of two things related to working capital. It’s the timing during the quarter of when we ship some larger system sales. So, if they occur in the back end of the quarter, they are still setting in receivables. And it’s also, I’d say, more so related to an inventory build as we gear up for 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.

[Matt Summerville, D.A. Davidson]

Got it. Thank you, guys.

[Operator]

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

[Jeff Hammond, KeyBanc Capital Markets]

Hi, good morning, guys.

[Mike Hilton, Senior Advisor]

Good morning.

[Jeff Hammond, KeyBanc Capital Markets]

Congrats, Mike, for a great tenure and Naga, welcome aboard.

[Sundaram Nagarajan, President and Chief Executive Officer]

Thank you.

[Jeff Hammond, KeyBanc Capital Markets]

So just we have a couple of a, couple of things. If we can just go back to the Coating, I was trying to pin down is there a way to quantify how much revenues could move from 3Q to 4Q. Just as we try to size the growth rate in the 4Q?

[Mike Hilton, Senior Advisor]

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

[Greg Thaxton]

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 and, 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 in the third quarter alone with volume down in the direction that it was, it is we’re trying to suggest that it’s, that’s not really the flow of the demand that we’re seeing within that segment and when you balance what we expect to deliver in the fourth quarter, it’s going to get you back to call it normalized performance.

[Jeff Hammond, KeyBanc Capital Markets]

Okay.

[Greg Thaxton]

But what we would say is the fourth quarter probably going to be a record in that particular segment.

[Jeff Hammond, KeyBanc Capital Markets]

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 then just this is kind of better Adhesive spend, a little more, quite 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?

[Mike Hilton, Senior Advisor]

Yes, I would say, part of that is a function to be frank of comparable with last year part of that is a function of, so the steady-state part of that business, there is a steady-state part of the business. The test 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.

[Greg Thaxton]

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

[Jeff Hammond, KeyBanc Capital Markets]

Okay. And then just last one on the Advanced Tech. The margins, you were brought [ph] down pretty substantially, I think your incremental 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?

[Sundaram Nagarajan, President and Chief Executive Officer]

Yes, I think we heard all that, Jeff. What I would say is first the volume does have an impact in the short term. Secondly, particularly within the electronics part of the business or 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 [Technical Issues] versus purchasing some on the test inspection side. So those two are, I’d say the biggest contributors to what we’re seeing there, volume piece and the mix.

[Jeff Hammond, KeyBanc Capital Markets]

Okay. Great. Thanks guys.

[Operator]

Thanks. [Operator Instructions] Our next question comes from the line of Mike Halloran from Baird. Your line is open.

[Unidentified Analyst]

Good morning, everyone. This is Pat, on for Mike.

[Sundaram Nagarajan, President and Chief Executive Officer]

Hi, Pat. Good morning.

[Unidentified Analyst]

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 EPS. Could you maybe help us bridge the gap a little bit there working into 4Q and some of the puts and takes there?

[Sundaram Nagarajan, President and Chief Executive Officer]

Well, I would say overall, we expect for the year to be kind of flat to modestly up as 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 the deal with the grade issues that bring tariffs into play. So, when you look at that overall in the Adhesive 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.

[Unidentified Analyst]

Great. Thank you. I’ll pass it on.

[Sundaram Nagarajan, President and Chief Executive Officer]

Okay.

[Operator]

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

[Chris Dankert, Longbow Research]

Good morning, everyone. Thanks for taking my question here.

[Sundaram Nagarajan, President and Chief Executive Officer]

Good morning.

[Chris Dankert, Longbow Research]

Looking at advanced technology from at the high level here, obviously, I think 5G is top of 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 and long-term revenue growth for Nordson, I guess beyond 5G and flex, what else going to get excited in that business from a high level?

[Sundaram Nagarajan, President and Chief Executive Officer]

Yes. I would say what we see continued growth around is all electronics that will particularly, as we 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 the 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 the long run, that’s going to improve and create some opportunities.

And 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 on the infrastructure piece to really make that effective the phone piece won’t be the gating item, it will be the infrastructure piece that will be the gating item. And then longer term, there is probably some additional opportunity around all of the [Technical Issues] and so forth. I think as we look at our diversification in the segment test and inspection part 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 [Technical Issues]. So, I’d say there are longer-term growth drivers, some of which plan to medical a lot which mobile. So, we’ll see those on the horizon of some drivers.

[Chris Dankert, Longbow Research]

Got it. Got it. And then just kind of a follow-up on that team I guess what inning do you guys think we are in terms of tearing inside of Advanced Technology here?

[Sundaram Nagarajan, President and Chief Executive Officer]

I’m sorry, what they want? Tearing.

[Chris Dankert, Longbow Research]

The tearing?

[Sundaram Nagarajan, President and Chief Executive Officer]

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 inspection side and involves a significant tearing probably four to six 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 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.

[Chris Dankert, Longbow Research]

Got it. Got it. Makes sense. Thanks guys.

[Sundaram Nagarajan, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Mike Hilton, Senior Advisor]

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 improved 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 and some of our other businesses. So, we’re, I’d say encouraged in a difficult market, the diversity of our business as positioned us well. Thank you again for your support and we appreciate your time and attention on this call.

[Operator]

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