Nordson Corporation (NASDAQ:NDSN) Q1 2024 Earnings Call Transcript

Nordson Corporation (NASDAQ:NDSN) Q1 2024 Earnings Call Transcript February 22, 2024

Nordson Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson First Quarter Fiscal Year 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Lara Mahoney. Lara, 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 Stephen Shamrock, Vice President, Corporate Controller and Interim Chief Financial Officer. We welcome you to our conference call today, Thursday, February 22 to report Nordson’s Fiscal 2024 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.cominvestors. This conference call is being broadcast live on our investor website and will be available there for 30 days. There will be a telephone replay of the conference call available until Thursday, February 29, 2024.

During this conference call, we will make references to non-GAAP financial metrics. We’ve provided a reconciliation of these metrics to the most comparable GAAP metric 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 materially differ. Moving to today’s agenda on slide 3, Naga will discuss first quarter highlights. He will then turn the call over to Steve to review sales and earnings performance for the total company and the three business segments.

He will also discuss the balance sheet and cash flow. Naga will then share a high level commentary about our enterprise performance. He will conclude with an update on the fiscal 2024 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 fiscal 2024 first quarter conference call. At the outset, I’d like to recognize the dedicated Nordson team who leverage the NBS Next growth framework to deliver solid first quarter results. Sales of $633 million were near the top of our first quarter guidance range. This was driven by strong performance in our medical interventional, industrial coatings and polymer processing product lines, which more than offset continued weakness in our electronics product lines. In addition, our focus on top customers and differentiated products improved product mix. This focus, in addition to simplifying and strategically adjusting costs, led to strong incremental margins, resulting in adjusted earnings per share of $2.21.

This exceeded our EPS guidance for the quarter. Finally, I’d like to highlight our first quarter free cash flow of $165 million, which was 150% of net income. This was a new first quarter record. I would also like to recognize the steady progress of our ARAG integration, which contributed to our sales and EBITDA margin performance in the quarter. We continue to be excited about the technology and precision agriculture end market as well as the engagement and energy of our new employees. I’ll speak more about the enterprise performance in few minutes, but, first, I’ll turn the call over to Steve to provide detailed perspective on our financial results for the quarter.

Stephen Shamrock : Thank you, Naga. And good morning to everyone. On slide number 5, you’ll see first quarter fiscal 2024 sales were $633 million, an increase of 4% compared to the prior year’s first quarter sales of $610 million. This was driven by a favorable 5% benefit from the ARAG acquisition, partially offset by an organic decrease of 2%. Consistent with prior quarters, the organic sales decrease was primarily volume, partially offset by price as we continue to pass through year-over-year cost inflation. As Naga referenced, strength in our industrial and medical product lines were offset by ongoing weakness in our electronics product lines. Gross profit excluding non-recurring inventory step up amortization in both periods totaled $351 million for the first quarter of fiscal 2024 compared to $333 million in the prior year first quarter.

This improvement in adjusted gross margin of approximately 100 basis points reflect the combination of factors. With our NBS Next growth framework, we are focusing on top products driving a favorable product mix. During the quarter, we also had higher parts sales and improved factory efficiencies, which helped drive the year-over-year improvements. As we execute the Ascend strategy and build scale through strategic acquisitions, EBITDA is increasingly important as a key profitability metric. EBITDA, adjusted for acquisition related items in both periods, totaled $197 million or 31% of sales, a 9% increase over the prior year EBITDA of $181 million, driven by improved gross margins and cost controls as well as contribution from the ARAG acquisition.

Looking at non-operating expenses, net interest expense increased $10 million associated with higher debt levels and increased interest rates. Other net expenses decreased $3 million, primarily related to lower foreign exchange losses compared to the prior year. Tax expense was $29 million for an effective tax rate of 21% in the quarter, which is in line with the prior year rate and our guidance range for 2024. Net income in the quarter totaled $110 million or $1.90 per share. Adjusted earnings per share, excluding non-recurring acquisition costs and amortization of acquisition-related intangibles of $23 million, totaled $2.21 per share, a 3% increase from the prior year adjusted earnings per share amount of $2.14. This improvement continues to demonstrate the benefits of our successful execution of the Ascend strategy.

Now let’s turn to slide 6 through 8 to review the first quarter 2024 segment performance. Industrial Precision Solutions sales of $355 million increased 14% compared to the prior year first quarter, driven by the ARAG acquisition, as well as increased sales in our industrial coatings, polymer processing and non-wovens businesses. Organic sales increased 2% over the prior year first quarter, continuing to build upon a record fiscal 2023 for this segment. EBITDA, excluding ARAG acquisition related costs, was $126 million in the first quarter or 36% of sales, an increase of 16% compared to the prior year EBITDA of $109 million. The increase in EBITDA was driven primarily by the ARAG acquisition, plus the organic sales growth of the base business.

It’s worth highlighting that this quarter marks 12 out of 13 consecutive quarters of EBITDA growth and 11 of 13 quarters of organic year-over-year sales growth. On slide 7, you’ll see Medical and Fluid Solutions sales of $160 million increase 3% compared to the prior year’s first quarter, driven by another quarter of double-digit growth in our medical interventional solutions product line, offsetting softness in our medical fluid components and fluid solutions product line. During the quarter, we started to anniversary the weakness of last year’s biopharma destocking, which was a significant headwind for this segment in fiscal 2023. First quarter EBITDA was $60 million or 37% of sales, which is an increase of $7 million compared to the prior year EBITDA of $53 million or 34% of sales.

The 300 basis point improvement in EBITDA margin over the first quarter of 2023 is due primarily to a combination of factory efficiency gains and cost actions, coupled with leveraging the organic growth in medical interventional solutions. Turning to slide 8, you’ll see Advanced Technology Solutions sales were $119 million, an 18% decrease compared to the prior year first quarter. The decrease in sales was driven by weakness across the segment, primarily electronics dispense products serving semiconductor end markets. First quarter EBITDA was $22 million or 19% of sales, which trailed the prior year first quarter EBITDA of $31 million, excluding acquisition related costs. While the reduction in EBITDA was tied to the overall decrease in volume, favorable mix and cost reduction actions contributed to 32% decremental margins on adjusted operating profits.

This is ahead of our decremental target of approximately 55%. Finally, turning to the balance sheet and cash flow on slide 9. At the end of the first quarter, we had cash of $136 million and net debt was $1.5 billion, resulting in a leverage ratio of 1.8 times based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities. I also want to highlight our strong cash flow performance. Free cash flow was $165 million, a first quarter record and $51 million improvement from the prior year. As a percentage of that income, free cash flow was 150% in the quarter. We strategically deployed the strong cash flow in the quarter. We repaid $107 million of debt, paid $39 million in dividends, and spent $3 million on share repurchases under our 10b5-1 plan, buying back approximately 15,000 shares of company stock at an average price of $212 per share.

For modeling purposes for the full fiscal year, assume an estimated effective tax rate of 20% to 22%, capital expenditures of approximately $40 million to $50 million, and net interest expense of $74 million to $78 million. I want to thank the Nordson team for all of their efforts in delivering another strong quarter. We will now turn to slide 10 and I’ll turn the call back to Naga.

Sundaram Nagarajan: Thanks, Steve. The Nordson team is getting off to a good start to the fiscal 2024. As I travel to our sites, I had the privilege of witnessing the impact of Ascend strategy in building a stronger Nordson that is delivering robust operating performance. Nordson is sustaining market leading positions in diversified end markets through our close to the customer business model and differentiated precision technology. Now, NBS Next has become a new core strength and is manifested in how we operate our businesses. Using data, our teams have a crystal clear view of the profitable growth opportunities in each division. Coupled with an entrepreneurial owner mindset, they are making choices on where they should prioritize growth, as well as where they must simplify.

For example, the industrial coatings team worked with a significant automotive customer on a new electric battery application. They worked closely with the customer and were able to meet its needs with a standard product. Our efforts to standardize top product configurations and eliminate complex customization drove agile execution, shortening lead times and allowing them to be more responsive to the dynamic changes in customer needs. Our medical interventional solutions team has identified its top products and implemented a visual demand based manufacturing or Kanban-based manufacturing system for their products. This has led to significant improvement in their on-time delivery performance over the last six months. The team had a big win when one of our medical device customers placed a large order and the team was able to respond quickly, serving dynamic changes in demand and delighting this top customer.

As I mentioned at the beginning of the call, the decisions our teams are making to focus on top products serves our customers well, enhances our product mix and improves our gross margins. In addition, their work on simplification resulted in strategic cost actions that contributed to our profitability in this quarter. It is exciting to see NBS Next becoming a competitive advantage for Nordson and how the steady deployment across Nordson is positively impacting our financial results. Our end markets are performing as expected at the start of our fiscal year. Industrial and consumer non-durable end markets are steady. The ARAG integration is going well and the team contributed to our sales and EBITDA margin performance in the quarter. Our medical interventional solutions product lines continue to grow double-digits, buoyed by trends in non-invasive surgeries and the aging population.

We have now anniversaried the negative impact of biopharma destocking that was a headwind in fiscal 2023. We’re seeing modest pickup in order entry within the fluid components product lines, which we are monitoring closely. Our guidance does not expect any significant pickup in biopharma growth short term. Our product lines exposed to the semiconductor electronics cycle experienced a weaker demand, as expected in the first quarter. We remain very positive about the growth opportunities driving the next electronics cycle, including AI, automotive electronics, onshoring, CHIPS Act, and more. While we fully expected to see benefits of those opportunities in the second half of calendar 2024, we now realize it may be closer to the end of the year.

As the year progresses, we plan to provide investors with better visibility to what we have seen in the market. Through all of this, our ATS leaders have done a very good job of implementing the NBS Next growth framework and positioning themselves for future growth. This includes positioning operations closer to the customer, focusing on differentiated product innovation, and making strategic cost adjustments. ATS ability to outperform their decremental targets in the quarter is a testament to this work. Turning now to our outlook on slide 11. We enter the second quarter with approximately $750 million in backlog. This backlog remains concentrated in our systems businesses while customer order entry patterns have returned to historical norms in the rest of the businesses.

Based on current visibility and order entry trends, we are narrowing our previously issued full year revenue growth to 4% to 7% over record fiscal 2023. Full-year fiscal 2024 earnings are forecasted to be in the range of 2% to 7% growth per diluted share. This full year guidance continues to assume a neutral impact from FX rates and the ARAG acquisition contributing approximately 5% growth at the midpoint of guidance. While we have raised the low end of our guidance, the lower midpoint of the range now assumes recovery of the semiconductor electronics end markets begins in the fourth quarter of fiscal 2024. For the second quarter of fiscal 2024, sales are forecasted to be in the range of $645 million to $670 million, with adjusted earnings in the range of $2.20 to $2.35 per diluted share.

Second quarter guidance considers weaker electronics end markets and the impact of the Chinese New Year shutdown. Before we open our call for questions, I wanted to recognize two new additions to our board of directors. In January, we welcome Chris Mapes, Executive Chairman and recently retired president and CEO of Lincoln Electric Holdings, as well as director at A.O. Smith and the Timken Company. Chris brings a wealth of global operations, M&A, and industrial experience to our board. Throughout his career, Chris has demonstrated track record of operating performance improvement and shareholder value creation. Earlier this week, we announced the appointment of Annette Clayton to our board effective April 1. Annette is the Chairwoman and former president and CEO of Schneider Electric North America.

Her career grew from production floor experience at General Motors to global operations and supply chain leadership at Dell Technologies to her leadership at Schneider, which focused on digital automation and energy management. In addition to her global operations and technology industry experience, Annette direct familiarity with Nordson’s differentiated products and value proposition. Both Chris and Annette will bring unique insight and value to our board of directors. We look forward to benefiting from their counsel as Nordson continues to grow and scale through the Ascend strategy. 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: [Operator Instructions]. Your first question comes from the line of Matt Summerville from D.A. Davidson.

Matt Summerville: First, on the ATS business, what sort of transpired since the last call that has kind of prompted you to push out, Naga, if you will, third quarter, so the inflection that you’ve been talking about in electronics and semiconductor? And similarly, what gives you confidence that we’re going to see something materialize this year?

Sundaram Nagarajan: A couple of things. What we will tell you is the demand or shipments for ATS in the quarter was as expected, weaker as we had expected. But the order entry has not picked up, as we had hoped. The inflection in order entry is sort of the precursor to having shipments in the following quarters. So that is really what has happened in our thinking, is that this cycle inflects maybe a quarter later than what we had hoped. But a couple of other things I will add to this that is really important to keep in mind. First and foremost, in the back half of the year, clearly comps get much easier for the business. Second thing I would also note, we have backlog, which have expected customer shipments, customer designated shipments in the second half.

And then the third thing I would note for you is that we are beginning to see in a very small way in some niche businesses where we supply UV lamps to some front end semiconductor manufacturing customers. Order entry is very nicely up when compared to last year. It is a small part of the business, but it’s a good early indicator. In a same way, if you think about our electronic adhesives packaging businesses where we sell the barrels, we also see some pickup in business there, order entry and shipment. So a couple of early indicators. And finally, what I will tell you is that our opportunity pipeline for projects with conversations with customers still remain robust. Nothing really has been shelved or put away. So order entry has not turned yet.

That is probably the takeaway you can have. But we have enough evidence in the business to feel strongly about how second half plays out for this business. So maybe I’ll stop there.

Matt Summerville: Just as a follow-up, and sticking with ATS, it sounded like in your prepared remarks that you saw maybe fairly broad weakness across the segment. Maybe you’re implying that the test and inspection investment cycle you’ve been seeing last 18 months or so is starting to roll over? Is that the proper conclusion to be drawing here?

Sundaram Nagarajan: In terms of the test and inspection, we have had some very robust growth in the last – the cycle and, past, our dispense business. So, what you’re really seeing is some strong comparisons that are difficult to keep up with. What I would tell you and what has been our experience is that the test and inspection business cyclicality is much more muted when compared to our dispense business. That is a distinct difference. But, yes, it does go through a cycle and comps are also in its way.

Operator: Your next question comes from the line of Allison Poliniak from Wells Fargo, please go ahead. Hi, good

Allison Poliniak-Cusic: In terms of growth here, there’s obviously some headwinds still in that segment. Could you maybe talk to any structural challenges, if there are any, with that business in terms of maybe even competitive dynamics that would limit it to that kind of returning to that high single digit growth? Or nothing in the way, it’s just sort of cyclical and you’d expect to achieve that at some point going forward? Just any thoughts there?

Sundaram Nagarajan: MFS has returned to growth. And to your question about do we see any structural changes in our own position or the landscape? The answer is no. If you look at our medical interventional business, it is growing double digits, continues to grow double digits. And we expect this business to continue to grow high single-digits. What you have in MFS is this medical fluid components which had the biopharma exposure, last year was a significant decline, right? And so, that significant decline essentially put MFS in a negative growth last year. But that is anniversaried. And so, what we are beginning to see is a modest pickup in order entry in this business, not from biopharma, but from other end markets this business serves.

We serve patient care, we serve surgical applications, and we see pretty good order entry there. And so, that is what you’re seeing in terms of – over time, what you’re going to find is, have MFS return to high single-digits. And you have the fluid solutions business in there as well, which has a broad diversified exposure beyond medical. And so, that business is also tied a little bit to electronics and we’re beginning to see some pick-up there.

Allison Poliniak-Cusic: And then IPS, I think you talked about weather patterns starting to normalize there. Anything that, I would say, is sort of a red flag or does it seem pretty consistent in terms of what you’re seeing in terms of demand for products in that business as well?

Sundaram Nagarajan: IPS, steady. Order entry has steadied pretty good. But, look, we’ve been growing in this business for 11 out of 13 quarters. I mean, pretty remarkable growth. So, order entry is normalized. What we mean is that order entry patterns are similar to pre-COVID. That’s what we mean by that. What we also see is that you have strong backlog in big system business like our industrial coatings product line and our polymer process product line. That will essentially help us get through this year. And then it is good to remember ARAG is in this segment and is going to contribute 5% to our organic growth this year. So we feel really good about IPS. So the way to think about it – if I were to summarize the two questions, one from Matt and from you, I will tell you, IPS steady, RI contributing 5% to the growth, MFS return to growth, pretty nice growth.