Nordson Corporation (NASDAQ:NDSN) Q1 2023 Earnings Call Transcript

Nordson Corporation (NASDAQ:NDSN) Q1 2023 Earnings Call Transcript February 21, 2023

Operator: Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation First Quarter Fiscal 2023 Conference Call. Thank you. And I will now turn the conference over to Lara Mahoney. You may begin.

Lara Mahoney: Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. 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, February 21, to report Nordson’s fiscal 2023 first 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 website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until Tuesday, February 28, 2023.

During this conference call, references to non-GAAP financial metrics will be made. A 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 Securities and Exchange Commission that could cause actual results to differ. Moving to today’s agenda on Slide 3, Naga will discuss the first quarter highlights. He will then turn the call over to Joe review sales and earnings performance for the total company and the three business segments.

Joe will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our earnings performance. He will conclude with an update on the fiscal 2023 full year and second quarter 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.

Sundaram Nagarajan: Good morning, everyone. Thank you for joining Nordson’s fiscal 2023 first quarter conference call. I want to thank our team for delivering another strong first quarter performance. There were a lot of bright spots in this quarter. To begin, it was the first quarter of contribution from our CyberOptics acquisition. The integration of the business is going well, and we are pleased with energy and engagement of our CyberOptics team. Test and inspection is a long-term growth focus for Nordson and we are very excited about the differentiated optical precision technology that CyberOptics adds to our portfolio. Next, we had a solid regional performance in the Americas and Europe, which collectively delivered 9% organic growth.

This was partially offset by declines in Asia Pacific which saw weakness in China relating not only to the Lunar New Year shutdown, but also labor shortages due to the unfortunate spread of COVID-19 in the region. Once again, the diversification of our business and our steadfast dedication to the needs of our customers ensures we deliver results. Finally, I remain pleased by the ongoing deployment of the NBS Next growth framework. Each division is gaining momentum towards achieving top-tier growth, quality and on-time delivery performance. In this dynamic environment, NBS Next ensures we are focused on our greatest opportunities for profitable growth and it also clarifies where we can simplify so we can better focus resources on those opportunities.

In a few moments, I will speak more about the business, and what we are seeing in our end markets, but first, I’ll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.

Joe Kelley: Thank you, Naga, and good morning to everyone. On Slide number 5, you’ll see first quarter fiscal 2023 sales were $610 million comparable to the prior year’s first quarter sales of $609 million. The increase was primarily related to 1% organic growth plus the CyberOptics acquisition, offset by unfavorable currency impact of 4%. The organic growth, as Naga referenced, was driven by strong demand in Europe and the Americas, offset by weakness in Asia Pacific, primarily China. Gross profit for the first quarter of fiscal 2023 totaled $329 million. Excluding the amortization of acquired inventory step-up, gross profit totaled $333 million or 55% of sales, a 3% or 150 basis point decrease compared to the $342 million or 56% of sales in the prior year first quarter.

The team continues to actively manage the price/cost dynamic in these inflationary periods in addition to unfavorable currency impacts. Similar to the fourth quarter of 2022, the impact of passing along the significant year-over-year cost inflation while slightly positive in gross profit dollars squeeze margins approximately 100 basis points. Additionally, the sales mix in the quarter was slightly unfavorable, with biopharma, fluid dispense and product assembly in Asia being down offset by growth in plastics processing and medical interventional solutions. On a sequential basis, comparing first quarter to fourth quarter 2022, adjusted gross margins improved approximately 150 basis points. Operating profit totaled $144 million in the quarter.

During the quarter, we reported onetime transaction fees, inventory step-up and other nonrecurring items associated with the CyberOptics acquisition totaling $10 million. Adjusted operating profit excluding these nonrecurring items, was $155 million in the quarter or 25% of sales, 2% below the prior year adjusted operating profit of $157 million. Foreign currency translation negatively impacted operating profit 6%, offset by 4% constant currency operating profit growth. EBITDA for the first quarter was $181 million or 30% of sales, which is in line with our long-term target profitability level and comparable to the prior year first quarter. Looking at nonoperating expenses, interest expense increased $5 million associated with higher borrowings and interest rates.

Other net expense increased $4 million related to higher foreign exchange losses and increased hedge costs, partially offset by lower nonoperating pension costs. Tax expense was $27 million for an effective tax rate of 20.5% in the quarter, which is in line with the prior year first quarter rate and the forecasted full year rate for 2023. Net income in the quarter totaled $104 million or $1.81 per share. Adjusted earnings share, excluding nonrecurring acquisition cost, totaled $1.95 per share, a 6% decrease from the prior year. The decrease is primarily driven by unfavorable currency changes. Now let’s turn to Slide 6 through 8 to review the first quarter 2023 segment performance. Industrial Precision Solutions sales of $312 million decreased 4% compared to the prior year first quarter due to unfavorable currency impacts of 5%.

The organic growth of 1% was driven by steady demand across most product lines and regions, offset by softness in Asia Pacific particularly product assembly China due to the timing of Chinese New Year and labor shortages from the spread of COVID-19. Operating profit in quarter was $102 million or 33% of sales, which is a decrease of 1% compared to the prior year adjusted operating profit of $104 million. Unfavorable currency negatively impacted operating profit year-over-year, 6%. IPS remains our most globally diverse segment and therefore, most exposed to currency translation changes. Looking on a constant currency basis and organic only, this segment now has delivered quarterly sales and operating profit growth, 8 out of the last 9 quarters, highlighting the strength of business, the team and the execution of the Ascend strategy.

Medical and Fluid Solutions sales of $154 million decreased 3% compared to the prior year’s first quarter. This change included a decrease in organic sales of 1% and a 2% decrease related to unfavorable currency impacts. The 1% organic decrease was driven by significant softness in the medical Fluid components serving the biopharma market and Fluid Solutions product lines in China, offset by strong demand for Medical Interventional Solutions product lines, primarily in the Americas and Europe. First quarter operating profit was $39 million or 26% of sales, which is a decrease $10 million compared to the prior year operating profit of $49 million. The decrease in operating profit was driven by meaningful sales mix changes within the medical product lines and related individual factory inefficiency due to reduced volumes.

Turning to Slide 8. You’ll see Advanced Technology Solutions sales were $145 million, a 14% increase compared to the prior year first quarter. Organic sales growth in the quarter was 5% plus another 14% from the CyberOptics acquisition. This was offset by an unfavorable currency impact of 4%. The organic growth was particularly strong in the Americas region and was driven by the Test and Inspection acoustic product line, which continues to benefit from new product innovation. First quarter adjusted operating profit, excluding the inventory step-up and acquisition transaction expenses was $27 million or 19% of sales, which was comparable to the prior year first quarter operating profit. Organic operating profit growth of 3% plus the acquisition benefit was offset by a 5% unfavorable currency impact.

Finally, turning to the balance sheet and cash flow on Slide 9. Our first quarter balance sheet includes cash of $122 million and net debt was $894 million, resulting in a 1.1x leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic opportunities inclusive of the borrowing that we incurred to fund the CyberOptics acquisition in November. Free cash flow in the quarter was $114 million, or a conversion rate of net income of 109%, an $8 million improvement over the prior year first quarter free cash flow. Dividend payments were $37 million, reflective of the 27% increase in the annual dividend approved last year. During the quarter, we did not repurchase any shares under our 10b5-1 plan.

For modeling purposes, in fiscal 2023, assume an estimated effective tax rate of 20% to 22%, and capital expenditures of approximately $50 million to $55 million. We will now turn to Slide 10, and I will turn the call back to Naga.

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Sundaram Nagarajan: Thanks, Joe. I want to thank our teams or continuing to respond to the needs of our customers and deliver the strong first quarter performance. I’m very thankful that our operations in China are returning to normal as employees have returned to work following the spread of COVID-19 in the region. We will always prioritize the health and safety of our employees and we are so glad that they are well. Throughout the first quarter, I had many opportunities to engage with our employees and travel to sites in North America and Europe. I’m very pleased with the ongoing deployment of NBS Next, which continues to help us prioritize our greatest opportunities for profitable growth. In this dynamic environment, the accelerated deployment of this growth framework will guide our decisions on where to focus and where to simplify.

Going into fiscal 2023, we knew we would be dealing with a dynamic environment as we have limited visibility into the full year. Turning to Slide 11. I’d like to spend a few minutes sharing what we are now seeing in our end markets. In the Industrial Precision Solutions segment, we are seeing increasing demand in automotive and steady demand in industrials and consumer nondurable product lines. Packaging and product assembly end markets continued to perform well in Americas and Europe, and there is softness in China. Within the Advanced Technology Solutions segment, we have started to see a softening of semiconductor orders over the past 45 days. Electronics is known for being a cyclical end market, and we benefited from the boom in investments over the past two years.

Now our customers are starting to reevaluate near-term capital spending, which is having an impact on orders for electronic dispense product lines. In some cases, it’s been a matter of pushing out system orders into the second half. We will continue to monitor this closely. We’re also seeing weakness in optical Test and Inspection product lines relating to the memory end market. Our remaining Test and Inspection order rate remains strong is somewhat offsetting the areas of weakness in the segment. C&I is benefiting from new product innovation such as our new acoustic system that drove growth in the first quarter. The strategy to diversify our APS product offering in terms of technology and application is muting the historical volatility of the company’s overall electronics exposure.

Turning to the Medical and Fluid Solutions segment. We are experiencing double-digit growth in our Interventional Solutions product lines. This is a business that was pressured during the pause in elective surgeries during the pandemic. And now these product lines are returning to high single-digit growth levels. Orders for balloons, cannulas and catheters are a big part of our backlog. Elsewhere in the MFS segment, we’re seeing continued weakness in our medical fluid components product lines. Over the past two years, we benefited from strong double-digit organic growth in this division. This was driven by demand from biopharma customers which partially benefited from the COVID vaccines and then from inventory rebuilding to compensate for supply chain concerns following the pandemic.

Now we believe there is inventory destocking at large customers for these product lines. Over the medium to long term, revenue growth rates for these product lines remain strong, driven by secular growth drivers such as single-use components in biopharma applications. Finally, in our MFS Fluid Solutions product lines, we are seeing some weakening in injection molded product lines relating to the construction as well electronics applications in China. Considering the combination of end market headwinds and tailwinds, current order entry and the pushout of delivery dates, we are updating our previously provided 2023 revenue guidance to 0% to 3% growth over fiscal 2022 and adjusted earnings in the range of $8.75 to $9.50. I remind investors, while we are seeing some changes in order patterns, our guidance reflects sustaining our record-level 2022 performance, which is a testament to our dedicated employees, the diversification of our business and the solid execution of the Ascend strategy.

Looking specifically at the second quarter 2023 on Slide 13, we are forecasting second quarter fiscal 2023 sales to be comparable to the prior year second quarter as acquisition benefits are largely offset by currency headwinds. Second quarter earnings are forecasted in the range of $2 to $2.15 per share reflective of the anticipated sales mix, which is comparable to the first quarter of 2023, while we remain financially prudent in this environment, we are adopting a balanced approach and will remain invested in innovation, differentiated service experience for our customers in strong core businesses. We also will continue to accelerate strategic investments to fully participate in high-growth markets while making tactical adjustments to cost structure in select businesses when it is needed.

As always, I want to thank our customers, shareholders and the Nordson team for your continued support. With that, we will pause and take your questions.

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Q&A Session

Operator: And we will take our first question from Mike Halloran with Baird. Your line is open.

Mike Halloran: Hi, good morning, everyone.

Sundaram Nagarajan: Good morning.

Joe Kelley: Good morning.

Mike Halloran: So Naga, obviously, a lot of moving pieces here. Maybe help understand the change in 2Q and call it, a little bit more stability in how you’re thinking about the back half of the year here. It seems like the outsized 2Q that we were — you were talking about in the last quarter has been pushed in the back half. So maybe talk a little bit about the backlog, why you think it’s sustainable risk in cancellations, what kind of seasonality you’re assuming front half versus back half versus a normal year? And just any of the puts and takes to help understand those moving pieces a little bit better?

Sundaram Nagarajan: Yes. Mike, what I’ll do is I’ll take you through segment by segment, the end market trends. And then, Joe, if you could sort of bridge some of the questions that Mike has, will be great. So first and foremost, in the last 45 days what we have really seen, orders have fallen off approximately 9% versus the prior run rates. And portions of this could be attributed to Chinese New Year, some of it could be are softening in the electronic process solutions business, which essentially does fluid dispensing for semiconductor and back-end electronics. What you also are seeing is that in these end markets, in addition to softer orders, we have had customer requested pushouts of order delivery, right? So that’s — those are the two things that are happening.

Broadly, let’s go segment by segment. If you look at our industrial precision solutions, we’re running at or above our long-term growth rates, increasing demand in automotive, steady demand in industrials and consumer nondurable product lines, packaging and product assembly, particularly pretty — doing fairly well in Americas and Europe with some softness in China. So IPS in general, we feel really good about where the orders are, where the backlog is and how we’re thinking about Q2 and the rest of the year. If you come to Advanced Technologies, this is below our long-term growth rates. One thing to remind you is that the growth rates we are looking for in this segment, particularly, because we have diversified the volatility in the segment is suddenly muted than what we have seen the past.

So a couple of things happening here, as I said, softening semiconductor orders over the past 45 days. Electronics traditionally being cyclical. We benefited in the first two years. And what we are now seeing is the downside of cycle. Our customers are beginning to reevaluate more the near-term capital spending versus the long-term capital spending. We still feel good about the long term. But in the short term, there is some softness in the orders. We’re also seeing some weakness in our optical test and inspection product lines as it relates to the memory end market. Remaining test and inspection looks pretty strong. And if we go to — now going to our medical fluid components, this is also below our long-term growth rates, but there are two different things happening here.

What you find is double-digit growth in our interventional product lines. So this is the part of the business where we were pressured due to postponement of elective surgery during the pandemic, and now you see this business coming back pretty strong. And orders for balloons, cannulas, catheters are really a big part of our backlog. And in our biopharma-facing fluid component business, the order rates continue to be — continue to be weaker than we had expected. And this is partially driven by our biopharma customers who are destocking inventory. During the pandemic, they benefited partially from COVID, but also where rebuilding their inventory because of supply chain concerns. We fundamentally believe this is a strong business. It will get back to the high single digits in time.

And the last bit, I would say, is there is some weakening in our fluid dispensing injected motor product lines in construction as well as electronics in China. So hopefully, that gave you — I gave you a lot of things here, but give you some color segment by segment, what we are seeing. Joe, you want to – sorry, go ahead Joe.