NDSN - NASDAQ

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.

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.com\investors. 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.

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.

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.

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.

[Operator Instructions]. Your first question comes from the line of Matt Summerville from D.A. Davidson.

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

Your next question comes from the line of Saree Boroditsky from Jefferies.

And maybe another data point I'd add to there as well, just to Naga's comments, if you think about the backlog, we consumed about $200 million last year for the full year as we transitioned more to a normalized environment. And in Q1, we consumed about $50 million. So, we're still on that, I'll say, normalized pace.

So, you know the impact of the Chinese New Year in the second quarter, I believe in the past you've talked about it being a $15 million to $20 million impact. So would that still be the right way to think about the shift for this year?

What I would tell you, as I think about the second quarter and the guidance we gave, and the timing of the Chinese New Year, I'd say, is roughly about a $10 million to $15 million impact. That's what we're seeing. And if you really think about that, right, the guidance that we gave for the second quarter here at the midpoint, we've got sales growth of 1%, which would imply negative organic growth of 4%. Again, we're still expecting ARAG to contribute 5% and FX to be neutral. If you think about that, that's about – half of that negative organic growth is coming from the Chinese New Year. Obviously, we had the opposite effect in Q1 as well, right? So even on a quarter-to-quarter basis, the organic growth rates in Q2 is not as bad on the surface as they look based on that.

Your next question comes from the line of Mike Halloran from Baird.

Just want to follow up on that last comment there. Maybe you could talk about the seasonality as you think of the year here, right? I think this was the first year that I can see in my numbers that wasn't up sequentially, at least double digits, if not handsomely in the double-digit level. So I get the Chinese New Year impact. I get that you're shifting the semiconductor recovery to the back half of the year. Just making sure there's nothing else going on that's unusual in the second quarter. When you get to the back half of the year, can you help us with that cadence thing and maybe help us out relative to normal seasonality? In other words, are you shifting that significant kind of sequential uptick into the third quarter? Is this more steady in the third quarter versus 2Q and then a more sizable uptick in the fourth quarter?

I'll start with that from that perspective. If you look at the second quarter guide there, right, what I would tell you is what, you're what you're not seeing, again, is the weakness in electronics end market that's also weighing down the second quarter as well in the ATS segment. So, from that perspective, if I think about the second half, as Naga referenced earlier, the comps should get easier for sure from an ATS perspective, particularly with the expected pickup in the fourth quarter. So I think that's what gives us confidence there if we talk about seasonality and how that works from quarter to quarter, at least with respect to ATS.

[Operator Instructions]. Your next question comes from the line of Andrew Buscaglia from BNP Paribas.

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

Back on this Chinese New Year, is that pretty broad across the segments? Or is that going to be more focused on electronics?

Jeff, I would tell you that most of that impact is concentrated in the IPS segment and to a lesser degree in ATS.

We have no further questions in our queue at this time. I will now turn the call back over to Naga for closing remarks.

Our strong operating performance reflects the strength of our diversified end markets, close to the customer model, differentiated precision technology products and rigorous implementation of NBS Next growth framework. Again, I want to thank Nordson's employees for their commitment, which makes these results possible. And continued deployment of the Ascend strategy positions us well for long term growth. Thank you for your time and attention on today's call. Have a great day.