Nordson Corporation (NASDAQ:NDSN) Q4 2023 Earnings Call Transcript

Nordson Corporation (NASDAQ:NDSN) Q4 2023 Earnings Call Transcript December 14, 2023

Operator: Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation Fourth Quarter and Fiscal Year 2023 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. Please go ahead.

Lara Mahoney: Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. We welcome you to our conference call today, Thursday, December 14, 2023, to report Nordson’s fiscal year 2023 fourth quarter and full year results. I’m here with Sundaram Nagarajan, our President and CEO; Joseph Kelly, Executive Vice President; and Stephen Shamrock, Interim Chief Financial Officer. While Joe recently took a new role as Executive Vice President, Industrial Precision Solutions segment, he was CFO for the entirety of fiscal 2023 and will represent that viewpoint in today’s call. 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 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 December 21, 2023. 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 has been 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 fourth quarter and full year highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the three business segments. Joe also will talk about the year-end balance sheet and cash flow. Naga will conclude with high level commentary about our enterprise performance, including an update on the Ascend strategy, as well as our fiscal 2024 first quarter and 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.

Sundaram Nagarajan: Good morning, everyone. Thank you for joining Nordson’s fiscal 2023 fourth quarter and full year conference call. In 2021, Nordson launched its Ascend strategy to achieve top-tier growth with leading margins and returns. We set a goal to deliver $3 billion in sales and greater than 30% EBITDA margins by 2025. As we complete the third year of our strategy, we are on track toward achieving these objectives. This is a testament to our employees who have in the last three years developed and deployed the Ascend strategy and tackled dynamic macroeconomic conditions including a pandemic, global supply chain pressure, labor challenges, and rising interest rates to name a few. In 2023, we also managed the unique period of biopharma destocking as well as the cyclical electronics end markets.

The core elements of our business model has enabled us to deliver profitable growth throughout these challenges. This includes a fundamental focus on our customers, commitment to innovation, diversified geographic and end market exposure, and a high level of recurring revenue through aftermarket parts and consumables. Since launching the Ascend strategy, we have added new capabilities to our model, including the NBS Next growth framework and a division-led structure which has empowered our teams to respond rapidly to changing market conditions. This led to solid financial performance in the quarter and the year, exceeding our targeted incremental and decremental profit targets in all three segments. Combining all of these factors with our capital deployment strategy to strengthen our precision technology portfolio, we delivered record sales, 31% EBITDA margin, and record cash flow in fiscal 2023.

I’ll speak more to this in a few moments, but I’ll now turn the call over to Joe to provide more detailed perspective on our financial results for the fourth quarter and fiscal 2023.

Joseph Kelley: Thank you, Naga, and good morning to everyone. On Slide number 5, you’ll see fourth quarter 2023 sales were $719 million, an increase of 5% compared to the prior year’s fourth quarter sales of $684 million. The increase included 7% growth from acquisitions of ARAG and CyberOptics and favorable currency translation of 1%, offset by an organic sales decrease of 3%. The organic sales decrease was primarily volume offset by price as we continue to pass through year-over-year cost inflation. In line with our expectations, the volume decline was concentrated in the electronics, dispense, and our biopharma businesses. This pressure was largely offset by double-digit growth in medical interventional solutions, industrial coatings, and polymer processing product lines compared to the prior year.

Gross profit, excluding the non-recurring amortization of acquired inventory, totaled $389 million or 54% of sales, a 7% increase over the prior year fourth quarter of $363 million or 53% of sales. The gross profit dollar increase was driven by sales growth, and the gross margin expansion of 100 basis points was driven primarily by improvement in factory efficiency. SG&A in the fourth quarter increased to $199 million versus $186 million in the prior year fourth quarter. Excluding $6 million in non-recurring transaction fees related to the ARAG acquisition, SG&A increased 4% over the prior year, representing 27% of sales, consistent with the prior year. Adjusted operating profit, excluding $11 million in non-recurring acquisition costs and step-up inventory amortization was $196 million in the quarter, a 10% increase from the prior year.

We generated very strong incremental operating profit margins of 51% on the 5% sales growth, which can be attributed to our team’s continued dedication to executing the NBS Next growth framework and their related ability to rapidly respond to changing market conditions. EBITDA for the fourth quarter increased 12% over the prior year to a record $227 million, or 32% of sales, which is 200 basis points above our long-term profitability target, as we articulated in our Ascend strategy. This compares to $202 million or 30% of sales in the prior year fourth quarter. As we continue to execute the Ascend strategy and scale through acquisitions, EBITDA will be a key metric for profitability and cash flow generation. Looking at non-operating income and expense, I am happy to report that in September, we successfully accessed the public bond market with our inaugural issuance of investment grade rated debt.

We raised $850 million in five and 10 year bonds to repay the short term borrowings used to finance the ARAG acquisition with the balance of the funds coming from our revolver. Interest expense in the quarter totaled $26 million, an increase of $21 million over the prior year quarter. $7 million of the increase is non-recurring financing costs associated with the repayment of the short-term borrowings. The remaining $14 million increase is a result of higher debt levels and increased interest rates. Other net income decreased $3 million due to significant currency fluctuations that generated a $4 million currency exchange gain in the prior year that did not repeat in the current year. Tax expense was $33 million for an effective tax rate of 20% in the quarter, slightly below the full year and within our guidance range.

Net income totaled $128 million or $2.22 per share. Adjusted earnings per share excluding non-recurring acquisition related expenses totaled $2.46 per share, a 1% increase over the prior year. This improvement despite the increase in interest expense is reflective of consistent application of the NBS Next growth framework, which leads to steady, profitable growth with attractive incremental margins. Turning to Slide number 6, I’ll now share a few comments on our full year results. Sales for the fiscal year 2023 were a record $2.6 billion, an increase of 2% compared to the prior year’s previous record sales results. This increase was driven 4% from the CyberOptics and ARAG acquisitions, offset by an organic decrease of 1% and an unfavorable currency impact of 1%.

Adjusted operating profit was $707 million, or 27% of sales, which was comparable to the prior year. On a constant currency basis, adjusted operating profit grew year-over-year 1%. EBITDA for the full year increased 1% to a record $819 million, or 31% of sales. This marks the third consecutive year of the Ascend strategy delivering EBITDA growth. Adjusted diluted earnings per share were $9.03, a 4% decrease from the prior year. The decrease in adjusted earnings is primarily a result of higher adjusted interest expense of $30 million associated with both the CyberOptics and the ARAG acquisitions and higher borrowing rates. Overall, the company’s performance remains strong and in line or ahead of targets established as part of the Ascend strategy.

Now, let’s turn to Slide 7 through 9 to review the fourth quarter 2023 segment performance. Industrial Precision Solutions sales of $405 million increased 14% compared to the prior year fourth quarter. Organic growth in the quarter was 4%, with the ARAG acquisition adding 7%, and a favorable currency impact of 2%. It is noteworthy that the 4% organic growth is over a very strong fourth quarter of 2022 and represents an all-time quarterly sales record for the segment, excluding ARAG. Robust demand in the polymer processing, industrial coatings, and packaging product lines combined with the execution of the Ascend strategy drove this quarter’s results. Geographically, growth was strong in the Americas and Asia Pacific regions. EBITDA for the quarter was $148 million, or 37% of sales, which is an increase of 26% compared to the prior year EBITDA of $118 million.

This growth was driven primarily by leveraging organic sales growth at incremental margins well in excess of our target, plus the benefit of the ARAG acquisition. Medical and Fluid Solutions sales of $169 million decreased 7% compared to the prior year’s fourth quarter. This change was primarily driven by a decrease in organic sales volume of 8%, offset by a modest 1% currency benefit. The volume declines were the result of continued softness in medical fluid components related to the biopharma end markets, as well as the fluid solutions product lines, offset by double-digit growth in our medical interventional solutions product lines. Fourth quarter EBITDA was $62 million or 37% of sales, which is a decrease of 4% compared to the prior year EBITDA of $64 million.

EBITDA margins continue to be negatively impacted by the sales mix changes within the medical product lines, but improved factory efficiency within the fluid solutions division enabled profit margin expansion. Turning to Slide 9, you’ll see Advanced Technology Solutions sales of $145 million decreased 1% compared to the prior year’s fourth quarter. This change included a decrease in organic sales volume of 16%, offset by the CyberOptics acquisition, which contributed 15%, the highest quarterly sales to date under Nordson ownership. The organic sales decline was primarily driven by continued softness in our electronics dispensed product lines that served the cyclical semiconductor end market and by way of reference, had a difficult comparison as the prior year fourth quarter had 28% organic growth.

Based on customer conversations and historic trends, we continue to expect demand in the semiconductor market to anniversary in the second quarter of fiscal 2024 and begin to recover in the back half of calendar ‘24. Fourth quarter EBITDA was $35 million or 24% of sales, a decrease of $5 million from the prior year fourth quarter. Noteworthy, however, for this segment is the increased profitability level in the down part of the cycle when you compare the 24% EBITDA margin to the 14% EBITDA margin in fiscal 2020. Finally, turning to the balance sheet and cash flow on Slide 10. We had another very strong cash flow quarter, generating $153 million in free cash flow at a cash conversion rate of 120% on net income. For the full year 2023, Nordson generated a record free cash flow of $607 million at a cash conversion rate of 124%.

With our record free cash flow, we were able to repay approximately $425 million of debt and return capital to our shareholders. Dividend payments were $39 million in the quarter, reflective of the 5% increase in the annual dividend. In addition, we purchased $10 million of shares at an average price of $216 per share. Through our strategic capital deployment, we ended the year with a strong balance sheet. Our cash balance was $116 million, and net debt was $1.6 billion, resulting in a leverage ratio of 2 times based on the trailing 12 months EBITDA, well within our targeted range. For modeling purposes, in fiscal ‘24, assume an estimated effective tax rate of 20% to 22%, capital expenditures of approximately $40 million to $50 million, and interest expense of approximately $75 million to $80 million.

In summary, our segments effectively responded to dynamic conditions throughout fiscal 2023 by using the data-driven NBS Next growth framework. This led to segment financial performance exceeding our targeted incremental and decremental profit targets. We are also seeing nice contributions from our recent acquisitions, which is indicative of the strength of our capital deployment strategy and the differentiation we are adding to our precision technology portfolio. I want to congratulate the team on achieving record sales and EBITDA as well as the record cash flow performance this year. I’ll now turn the call back to Naga.

Sundaram Nagarajan: Thank you, Joe. During last year’s conference call, as we set the stage for fiscal 2023, I noted that Nordson was well positioned to perform during periods of economic uncertainty. It certainly proved true for all the reasons I listed earlier in the call. Fundamental focus on our customers, commitment to innovation, diversified geographic and end market exposure, and a high level of recurring revenue. The Ascend strategy has added to these core strengths. Our NBS Next growth framework is becoming a competitive advantage as it is deployed holistically across the company. Put simply, NBS Next is a data-driven segmentation framework that drives choices, focus, and simplification. In fiscal year 2022, we had two divisions that achieved market-leading business performance.

That number expanded in 2023 with all divisions making tremendous progress. They’re using the framework to guide their focus on best growth opportunities and deliver on time, quality products, winning business, and growing market share. Our medical interventional solutions business successfully deployed this framework to achieve double-digit sales growth throughout 2023 by focusing on its best growth opportunities and simplifying elsewhere. Our electronics processing division leveraged this period of weaker end market demand to carefully curate its product portfolio based on the best growth opportunities. The team recognized through segmentation analysis that the extreme customization we offered created complexity and resulted in longer lead times.

Applying NBS Next methodology with our deep voice of customer research, the team reduced complexity, improved lead times, and is gaining market share. The electronics division has used the downside of the cycle to implement NBS Next, achieving its target decremental margins in the second half of fiscal 2023. They’re well positioned for the incremental earnings growth that will come when the semiconductor end market start to recover in the second half of calendar 2024. In 2023, we also made progress on the acquisition front of our Ascend strategy, which is a key priority of our strategic capital deployment. We closed the ARAG acquisition on August 24th, 2023. The integration is going well, and we are impressed by ARAG’s precision agricultural technology and the energy, excellence our new employees bring to Nordson.

Since the launch of the Ascend strategy, we have acquired approximately $400 million in revenue and are 80% of the way toward our acquisitive revenue target. We see ample opportunity in the pipeline to achieve this target, particularly in the medical and testing inspection platforms. That said, we will remain focused to acquire differentiated precision technologies that meets our strategic and financial criteria. To enable acquisitive growth, we went to the public markets this summer. As a first-time issuer, we achieved investment-grade ratings from both Moody’s and S&P. Both ratings agencies cited Nordson’s strong cash flow and healthy financial profile as key reasons for the strong ratings debut. We appreciate the flexibility that public debt will afford us as we continue executing on the acquisition and capital deployment portion of our strategy.

In summary, I am very pleased with the progress of our Ascend strategy and believe we are well positioned entering fiscal 2024. I am also pleased that we have made this progress while sustaining our culture and values. For example, in fiscal 2023, our employees, company, and the Nordson Corporation Foundation donated over $13 million into the communities that our employees live and work to support education, human welfare services, and other charitable activities. Turning now to the outlook on Slide 12. We enter fiscal 2024 with approximately $800 million in backlog. The sequential backlog reduction is reflective of strong system sales in the fourth quarter as well as a paced return to normalized levels. Based on the combination of order entry, backlog, customer delivery timing requests, and current foreign exchange rates, we anticipate delivering sales growth in the range of 4% to 9% above fiscal 2023 sales.

Full year fiscal 2024 earnings are forecasted to be in the range of 1% to 8% growth per diluted share. Please note that we are updating our definition of adjusted earnings starting in fiscal 2024 to exclude acquisition-related amortization. As acquisitions will continue to be a critical part of our strategy, we believe this is prudent and more reflective of how we and investors think about our business in terms of earnings and cash flow growth performance. This full year guidance assumes a neutral impact from foreign exchange rates, a recovery of semiconductor end markets in the second half of calendar 2024, and the ARAG acquisition contributing approximately 5% growth at the midpoint of our guidance. As you will see on Slide 13, first quarter fiscal 2024 sales are forecasted in the range of $615 million to $640 million and adjusted earnings in the range of $2.00 to $2.10 per diluted share.

Before we open it for questions, I want to take a moment to thank Joe for his leadership as CFO over the past three plus years. Joe, I’ve appreciated your partnership and we are all excited to see you develop your career as the new leader of our IPS segment. As we move forward into fiscal 2024, Steve Shamrock will take over as Interim CFO while we conduct our search for a successor. Joe’s move and Steve’s seamlessly stepping in during the transition are examples of Nordson focusing on developing winning teams, an important success factor in building a scalable, high quality growth engine. Again, I want to thank our employees, customers, and shareholders for your continued support. We will now open the phone lines for questions.

See also 20 Fastest-Growing Spirit Brands in the World and 23 Best Gins for a Classic Martini.

Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead.

Allison Poliniak: Hi, good morning.

Sundaram Nagarajan: Good morning, Allison.

Allison Poliniak: Naga, you touched on the EBITDA margin that you posted in 2023, certainly strong and well ahead of your target. How do we think of that EBITDA margin from here? How does it evolve over the next, say, two to three years?

Sundaram Nagarajan: Yeah. Allison, as we launched the Ascend strategy, our target was to have 50% of our growth come from organic and 50% from acquisitions. And we also set the stage for our organic growth obviously comes at a higher incremental margins when compared to our acquisitions. So as we move forward, we fundamentally believe this 31% is a sustainable level at which we are operating. Depending on the mix of organic and acquisition, this is a sustainable level that we are able to maintain.

Allison Poliniak: Got it. And then could you touch on the biopharma market, just sort of the cadence of recovery, just how you’re thinking about that specific market in ‘24, just given the challenges it had in ‘’23 around the inventory size?

Sundaram Nagarajan: Yeah. We start to — by the end of the first quarter, we start to anniversary the decline in biopharma due to destocking. Longer term, we fundamentally believe that this is a great marketplace for Nordson and will return to the high single digit number. In the interim though, we are taking a conservative and definitely a realistic view of saying the recovery is going to be slower.

Allison Poliniak: Okay, but I guess that I think you just touched on it though, so there’s no real structural impediment for that market in your view to not reach that sort of high single-digit growth rate that it historically achieved?

Sundaram Nagarajan: Absolutely not. Right? If you think about this, one of the key areas of focus for us is the use of single-use plastics, which essentially go to replace the stainless steel nectars and stainless steel full lines. And that transition is still in its early stages. So we fundamentally believe that there is nothing here that is impaired. It’s a matter of timing and it’s certainly a matter of recovery certainly you know so long-term no issues We expect we’ll probably get to high single-digits.

Allison Poliniak: Perfect. Thank you and congrats, Joe, on the move.

Sundaram Nagarajan: Thank you.

Joseph Kelley: Thank you, Allison.

Operator: Your next question’s from the line of Mike Halloran with Baird. Please go ahead.

Mike Halloran: Hey, morning, everyone.

Sundaram Nagarajan: Good morning, Mike.

Joseph Kelley: Good morning, Mike.

Mike Halloran: Just want to help me understand a couple of questions on guidance here. First, what’s the organic assumption embedded in the growth rate? And I know you gave the FX side already but maybe just some help on what you’re assuming for organic growth?

Sundaram Nagarajan: Steve, you got it?

Stephen Shamrock: Yeah, this is Steve. So for the full year guidance, as Naga pointed out, we’re forecasting growth of 6%. And ARAG is at 5%. So that would imply organic growth of about 1% because we would say based on current rates, we’re FX neutral. So that’s how we’re thinking about the overall growth rate of 6%.

Mike Halloran: Thanks for that. And then on the electronics assumptions, you mentioned back half recovery. What informs that? It certainly sounds like part of it is comparisons, part of it is historical recovery curves. Is there anything customers are saying or build rate forecasts or anything else that you would point to?

Sundaram Nagarajan: What I would tell you is the two things that you already acknowledged, which is really historical trends. Certainly, we have a direct sales model and our teams are spending a lot of time with our customers understanding what their requirements are and when they would show up. If you were to point to anything, you would say the pipeline of opportunities continue to be — to point towards that timeline of recovery.

Mike Halloran: And then last one, just on the IPS side. Are you assuming relatively normal sequential patterns from here? Any thoughts on how you’re looking at the end market cadencing, demand levels, things like that? I mean, packaging was strong this quarter, which felt a little surprising. So any context on that would also be helpful.

Sundaram Nagarajan: Yeah, sure, Mike. IPS has been running at or above our long-term growth rates here now for two, three years now. And what our expectation is that we don’t see anything in the order entry that gives us a pause. Good backlog and good order entry that we expect to sustain growth in the coming years. A significant contribution on IPS growth for the coming year would be through the ARAG acquisition.