Edited Transcript of NDSN earnings conference call or presentation 20-Feb-20 1:30pm GMT

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Gregory A. Thaxton, Nordson Corporation – Executive VP & CFO [4]

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Thank you, Naga, and good morning to everyone. First quarter sales decreased 1% compared to the prior year’s first quarter. This change in sales included a decrease in organic sales of less than 1%, growth from the first year effect of acquisitions of less than 1% and a decrease of approximately 1% related to the unfavorable effects of currency translation as compared to the prior year’s first quarter. The first quarter’s acquisitive growth includes the fiscal 2019 acquisition of Optical Control GmbH.

Within the Adhesive Dispensing Systems segment, sales decreased 2% compared to the prior year’s first quarter, inclusive of a decrease in organic volume of 1% and a decrease of 1% related to the unfavorable effects of currency translation as compared to the prior year. Growth in our nonwoven product line was offset by modest declines in other product lines within this segment.

In the Advanced Technology Systems segment, first quarter sales decreased approximately 1% compared to the prior year’s first quarter, inclusive of a decrease in organic volume of 2%, an increase of 1% related to the first year effect of the Optical Control acquisition and a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Solid growth in medical product lines was offset by softness in those product lines supporting electronic end markets.

Industrial Coating Systems segment sales increased 9% compared to the prior year’s first quarter, inclusive of organic volume growth of 9% and a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Most product lines generated organic growth in the quarter, driven primarily by demand in the U.S. associated with cold materials and powder systems product line.

Moving down the income statement. Gross margin for the total company was 53% in the quarter. Operating profit was $75 million with reported operating margin of 15%. During the quarter, we incurred approximately $3 million of restructuring charges as we realigned our cost structure within the Advanced Technology segment. Excluding this charge, total company operating margin was 16%, and the Advanced Technology segment operating margin was 15%, down from last year’s first quarter operating margin due to lower absorption and product mix impacts on gross margin. Operating margin performance for the Adhesive and Industrial Coatings segments were both equal to the prior year’s quarter.

On a total company basis, net income for the quarter was $52 million and GAAP diluted earnings per share were $0.89, inclusive of a $0.04 per share charge related to restructuring and a $0.04 per share discrete tax benefit related to stock-based compensation.

We delivered first quarter EBITDA of $101 million or 20% of sales. Excluding restructuring charges in the quarter, EBITDA margin was 21%. Free cash flow before dividends during the quarter was $102 million or 197% of net income. Free cash flow in the quarter benefited from collection of accounts receivable associated with prior quarter revenue.

Our press release includes financial exhibits reconciling net income to free cash flow before dividends and EBITDA, as well as a reconciliation of diluted EPS to adjusted diluted EPS. From a balance sheet perspective, net debt-to-EBITDA was approximately 1.7x trailing 12 months EBITDA at the end of the first quarter.

I’ll now turn the call over to Naga for a few closing comments.

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [5]

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Thank you, Greg. We remain committed to our annual organic sales growth guidance of 1% to 3% for fiscal 2020, with this growth being generated in the second half of the fiscal year. The incremental revenue will generate improved operating and EBITDA margins as we move through the year, where we expect to deliver a total year margin performance equal to fiscal 2019 and EPS growth in the range of 2% to 6% over FY ’19.

We will continue to monitor the macroeconomic environment, including the impact of coronavirus in the Asia Pacific region. Our facilities in China are operational and we expect to be closer to full capacity soon. I want to thank our employees in China, who are incredibly committed to serving the needs of our customers, along with the rest of the Nordson team who supported our China employees during the difficult time in many ways. We greatly appreciate all of their efforts, and we’ll continue to do all we can to support our employees and their families.

Although there may be some impact on sales in our second fiscal quarter as we scale up production, our supply chain recovers, our customers resume operations and delivery schedules return to normal, we do not expect a material impact from coronavirus on our full year results.

Before we open the phone lines for Q&A, I want to share a few observations from my first 6 months at Nordson. This is a great company, which is driven by talented employees who are focused on serving their customers. While we are focused on delivering our near-term 2020 results, we are aligning our internal priorities on the greatest long-term opportunity for this business, profitable growth.

To deliver profitable growth, we have 4 key priorities. First and foremost, we need to sustain the historical organic growth track record. We’ll do this through our focus on innovation, emerging markets and new applications. Second, we need to diversify our business portfolio, including through acquisitions. We’ll stay true to what makes us great, which is precision technology. This includes scaling our medical and test and inspection product line.

Number three, we need to implement a growth-focused strategic framework that allows us to grow sustainably. I’m pleased that Nordson has a good start on this with the Nordson Business System. With the executive leadership team, we are evaluating how we can take NBS to the next level. I believe there is an opportunity for Nordson in refining and executing on this growth framework. Our fourth priority is focused on developing a deep and diverse team to support our growth aspiration. I’m pleased with the customer-focused team that we have today. As we grow, we will need more of them.

I’m also pleased to announce our plans for an Investor Day in the fall, where we will discuss our long-term plans for the business in more detail. Please mark your calendar for the morning of September 30, 2020. The event will be focused at the New York Plaza — Palace Hotel and available through webcast. More information will be available in the coming months.

As always, I want to thank our customers, employees and shareholders for their continued support. With that, we’ll pause and take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of Matt Summerville from D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division – MD & Senior Analyst [2]

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First of all, can you maybe talk about, within the Adhesive business, what the organic volume outlook looks like for the balance of the year? Is the compares in that business get a bit tougher beyond what was an easier comparison in Q1, and in a quarter where organic volume actually declined against that somewhat easy comparison?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [3]

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Thank you, Matt. We don’t provide guidance by segment for organic growth rate. We fully stay committed to our full year total company guidance of 1% to 3%.

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Matt J. Summerville, D.A. Davidson & Co., Research Division – MD & Senior Analyst [4]

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Okay. And then with respect to maybe the coronavirus, did you see any discernible impact late in your fiscal first quarter? And is there a way to sort of frame up what you think that impact could look like in Q2? And maybe talk about how we should be thinking about the sequential earnings cadence for the company, perhaps if seasonality is pushed a bit to the right here relative to a more normal year.

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [5]

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So Matt, I think there were 2 sort of questions in there, I assume, right? So the first one is around coronavirus. The impact of coronavirus in our first quarter was immaterial as we had already planned for the Lunar New Year and had shipments already scheduled and went out in time. We don’t expect to have a material impact from coronavirus on our full year results.

As we look at it today, we don’t see any impact in the second quarter. If there is further disruption in the supply chain or customers having trouble getting back to capacity, there may be some delay in orders that may get pushed out to the following quarter. So that is on coronavirus. And I think you had a question around earnings cadence for the company. Is that correct?

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Matt J. Summerville, D.A. Davidson & Co., Research Division – MD & Senior Analyst [6]

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Yes.

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [7]

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So our growth is — based on our typical seasonality, our — most of our growth always happens in the second quarter — the second half, I should say, I’m sorry. So as we go in the second half, this increased revenue will improve and will generate improved operating margins and EBITDA margins that typically have very strong flow-through as we have higher sales.

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Operator [8]

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

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division – MD & Equity Research Analyst [9]

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Just — can you just talk about what you’re seeing in electronics as you go into the heavier kind of quoting and order season around 5G infrastructure, 5G mobile and just kind of project and activity levels going in the year? I know that’s something we’ve been looking for an inflection on.

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [10]

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Yes. As you know, there is a lot of press regarding 5G infrastructure, and we continue to believe that, that is where we will see the greatest opportunity. The progress also on infrastructure build-out has been slow and slowing. As mentioned before, we don’t expect growth in our electronic business, compared to fiscal ’19, in 2020. That’s not what we have forecasted. But our project activities continue to be robust. We are in great conversations. When that wave of 5G infrastructure hits, we will benefit from it. So as of now, project activities are strong. We continue to be participating in a lot of quoting. Timing is what will be dependent on when those project activities convert into order. And you’re right, we are at that point in terms of typical order rates will pick up to have us confidence in delivering that second — strong second half. And that’s what gives us the strength in maintaining our guidance for the full year of 1% to 3%.

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Lara L. Mahoney, Nordson Corporation – VP of IR & Corporate Communications [11]

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And just to add to that, 5G is an important element, of course. It’s indicative of change, but we also — automotive electronics, AI. There are a lot of different applications, which — where we are diversified.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division – MD & Equity Research Analyst [12]

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Okay, great. And then it looks like the U.S. business was particularly strong in the quarter. What do you see that’s working there well?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [13]

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It is primarily related to our ICS business that has done well. And certainly, our Adhesive businesses in U.S. have also continued to do well.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division – MD & Equity Research Analyst [14]

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Okay. And then just on the second half. So I guess, you mentioned some of the project visibility, but other than kind of just typical seasonality, is there anything else in the quoting or activity pipeline that gives you that confidence in kind of the — an acceleration as you move through the year?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [15]

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No. It is our typical seasonality, and we certainly expect, based on our project activity and our seasonal pattern, we feel pretty strongly about a strong second half, and which we have seen in the past too, so…

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Operator [16]

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

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division – MD and Senior Analyst [17]

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Just had a question about the SG&A. It was up $8 million or $9 million sequentially, adjusted or unadjusted. And the last 5 years, typically, that spend has been down $5 million or $8 million 4Q to 1Q. So wondering if that indicates some strategic imperative that your kind of front log or pipeline is mandating?

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Gregory A. Thaxton, Nordson Corporation – Executive VP & CFO [18]

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Chris, this is Greg. I wouldn’t suggest that it’s much of what you just talked through there. I would say that the first quarter did have a $2 million onetime cost in the corporate managed — in the corporate expense line. So that’s a nonrecurring item. That corporate expense line, if you were modeling that out, I’d expect that to be more around $12.5 million per quarter than the current quarter. If you back that out, then I think you’re looking at a pretty modest increase current year over the prior year. And in the first quarter is a year when — or is the quarter when we have our global compensation increases. So as compared to the fourth quarter, you get a little bit of bump associated with our merit increases hitting in Q1. So if you look at current quarter versus prior year first quarter, it’s a pretty modest increase when you exclude that $2 million onetime item.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division – MD and Senior Analyst [19]

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Okay. So that sort of suggests spending was a bit restrained after the first quarter last year, because I’m looking at — if you carry the first quarter SG&A spend rates for the year and you get 2% top line growth, then SG&A to sales would be up about 100 basis points. So are you suggesting that’s the wrong way to look at it?

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Gregory A. Thaxton, Nordson Corporation – Executive VP & CFO [20]

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Well, I — what I am — what I would suggest, Chris, is it is dependent upon that top line growth. I mean, if you assume that in our spending over prior year, we’re going to have inflationary impact, we’re going to have our merit increase, it’s the need to generate that top line growth to offset what that dilution might deliver from spending.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division – MD and Senior Analyst [21]

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Is 1Q the high watermark for SG&A spend on a run rate basis?

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Gregory A. Thaxton, Nordson Corporation – Executive VP & CFO [22]

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Given our — yes, given the sales, that’s from a seasonal perspective, it’s our lowest quarter. That’s true.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division – MD and Senior Analyst [23]

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So SG&A absolute spend will be higher in subsequent quarters?

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Lara L. Mahoney, Nordson Corporation – VP of IR & Corporate Communications [24]

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No.

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [25]

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No.

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Gregory A. Thaxton, Nordson Corporation – Executive VP & CFO [26]

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Our spending is fairly flat as you move throughout the year, as Naga mentioned in his comments. With our global infrastructure, we don’t flex that based upon seasonality of sales trends, so it’s a pretty fixed number as you move through the year. So in terms of the margin impact, it’s more heavily dependent upon the top line, the sales number.

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Lara L. Mahoney, Nordson Corporation – VP of IR & Corporate Communications [27]

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So first quarter spending was a higher mark per Greg’s earlier comments for the year.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division – MD and Senior Analyst [28]

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Sorry, Lara, can you clarify that? I didn’t hear.

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Lara L. Mahoney, Nordson Corporation – VP of IR & Corporate Communications [29]

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I’m just agreeing with you that it is a higher watermark as a percentage of sales to your earlier question just based on that additional spend that Greg mentioned.

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Operator [30]

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Your next question comes from the line of Allison Poliniak from Wells Fargo.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division – Director & Senior Equity Analyst [31]

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Just want to go back to your comment, Naga, on just kind of looking at that growth framework and sort of maintaining that sustainable growth that Nordson’s experienced. Any high-level color there of how we should think about that comment? Is it end market? Is it different, I guess, new products? Any color there?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [32]

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I think the strategic growth framework is really — we’ll spend a lot of time here. We’re building that out as we’re enhancing our existing NBS framework. It would be really — a couple of things that I would add there. That strategic framework is going to be focused on really selecting the best growth opportunities for the company, so really bringing forth a strategic view of where we invest and what kind of end market product niches do we want to grow in. So that would be one of the distinguishing factors that will add to the existing growth framework.

And the growth framework also consists of things that the company does really, really well, which is commercial excellence, product innovation. So this new great — growth framework is really an enhanced version of our existing NBS next, and it adds this strategic view of what are the best product market combinations that we want to focus on. So think of that as a greater strategic discipline around where we want to grow in combination with things that the company is really, really good at, which is commercial excellence, close to the customer model as well as innovation leading to precision technologies that solves the best problems for our customer.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division – Director & Senior Equity Analyst [33]

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Great. And then on — thanks for the coronavirus color. It’s good to hear things are getting sort of up and running again. Have you — I mean, are you experiencing any elevated costs as we sort of get back up and running in terms of getting components in or getting projects out as a result of what’s going on?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [34]

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At the present moment, no. Our hope is that the supply changes are continuing to improve as we are seeing. And if this continues over a longer period of time, then there may be some delivery that could get pushed out. But no, on the cost side, we’re fairly — we have good visibility and fairly comfortable. We have very good inventories that will allow us to continue on the path we are on.

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Operator [35]

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(Operator Instructions) Your next question comes from the line of Mike Halloran from Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division – Associate Director of Research & Senior Research Analyst [36]

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So quick question just on the acquisition, M&A side of things. What does the pipeline look like? And some of the management changes that — Naga, you’re a little newer to the scene and then with Greg’s upcoming departure, does it change your willingness to go after things as it sits here today?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [37]

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No. We remain committed to our capital allocation strategy, and our priorities there continue to be funding our organic growth, maintaining our dividend streak, acquiring in the spaces that we have expressed an interest in and focused on, which is medical and test and inspection.

In terms of acquisition pipeline, we have good opportunities, we continue to work them. When they come to market is something we don’t control. But look for us to continue to stay disciplined and focused on what makes the company strong, which is precision technology and 2 areas, as I mentioned earlier, that we’ll remain focused on is medical and test and inspection.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division – Associate Director of Research & Senior Research Analyst [38]

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And then anything in the Industrial Coating side that you’d point to for the strength? It seems mostly comparisons were a little easier and sequential seemed about normal. But anything in there that was unusual or just pretty normal cadence?

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [39]

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It is pretty normal. As you mentioned, the comps were a little easier. There was some project timing. Certainly, things that we worked on in the fourth quarter certainly helped us in the first quarter, but nothing significant.

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Operator [40]

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There are no further questions at this time. I’ll turn the call back over to your presenters.

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Sundaram Nagarajan, Nordson Corporation – President, CEO & Director [41]

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Thank you again for joining us today, and we’ll talk to you soon.

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Operator [42]

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