Nordson Corp (NDSN) 2002 Q2 法說會逐字稿

My name is , and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Nordson Corporation second quarter first year earnings 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 period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you.

Miss Price, you may begin your conference.

Thank you, . Good afternoon, this is , Manager Shareholder Relations, along with Peter Hellman, Executive Vice President, Chief Financial and Administrative Officer. And we would like to welcome you to our conference call today, May 23, 2002 on Nordson's second quarter fiscal 2002 results.

Our conference call is being broadcast live on our Web page at www.nordson.com, and will be available on our Web page for 14 days. There will be a telephone replay of our conference call available until midnight, Wednesday, May 29th, which can be accessed by calling 1-800-642-1687. And you will need to reference ID number 4184662.

Our attorneys have asked us to open this call with a cautionary statement under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. During this conference call, forward-looking statements may be made regarding our future performance, based on Nordson's current expectations. These statements may involve a number of risks and uncertainties, and other factors, as discussed in the company's filings with the Securities and Exchange Commission, that could cause actual results to differ materially. After our remarks, we will have a question and answer session.

I would now like to turn the call over to Peter, for an overview of our second quarter fiscal 2002 results, and Nordson's future outlook -- Peter.

Thank you, , and thank you for attending Nordson's conference discussing our second quarter 2002 results. At the outset, let me apologize for Nick Pellecchia. Scheduling issues made it impossible for him to attend today's call. He will be in tomorrow, for those that want to touch base.

I'll be making some overall general comments before turning it over to your questions. Much like the second half of last year, and the first quarter of our fiscal this year, the second quarter was effected by a continuing slowness in industrial spending, and a continued strong dollar. Sales for the quarter were $164 million, down 15 percent from the prior year. The decline in volume clearly reflects the economic slowdown which a majority of our businesses in geographic markets experienced, compared to a period of pretty demand a year ago. A period in which we first experienced the slowing economy, but nevertheless, was a record in terms of sales.

Volume in the second quarter was down 15 percent in finishing, down 39 percent in advanced technology, while adhesives was our bright spot, with volume unchanged. On a geographic basis, volume was down 24 percent in North America, down two percent in Europe, three percent in what we call Pacific South, and five percent in Japan. So clearly, we continue to experience a global slowdown that has been most pronounced in North America. We see this as consistent with external economic patterns, and does not in our view reflect marketshare or other Nordson-specific issues. In fact, it's our view that we have gained some share during this downturn.

The weakness in demand that we began to experience late in 2000 continued throughout the quarter, but we have stabilized in terms of run rates for the past four quarters or so. The fact that adhesives was flat in volume turns for the quarter may indicate some economic recovery is afoot. Recovery will probably be slow, however, as judged by the last 12 weeks order rates are running at 92 percent of last year's relatively good demand. By segment, the last 12 week order rates are 94 percent in adhesives, 89 percent in both finishing and advanced technology. On a geographic basis, orders over the past 12 weeks are weakest in North America, at 89 percent of the prior year's level, while Japan has had orders at 90 percent of the prior year. Europe over this period is keeping an order pace of 96 percent, and PSV is at 97 percent.

If we look at the past 12 weeks versus the 12 weeks before that, to sequential orders, if you will, a different picture emerges which may indicate some recovery. Overall, the past 12 weeks orders are 10 percent better than the prior 12 week order period. By segment, this is broken down with adhesives being 109 percent better in the most recent 12 week period. Finishing at 98 percent, and advanced technology at 124 percent of the prior 12 week period. These numbers should be viewed as indicators, as there is some seasonality if you look to sequential order trends. But the implied improvement correlate with increased lab and quote activity. We ended the quarter with $74.2 million in backlog, which is down slightly from the beginning of the year. On a year-to-year basis, our gross margins in the most recent quarter decreased from 55.6 percent last year, to 53.7 percent in the current second quarter, reflecting the effects of currency, lower production volume, mix in pricing, all which contributed to these lower margins.

Our cost restructuring of the past two years prepared us somewhat for the slowness we are seeing, but as we experienced some absorption issues in the most recent quarter, additional actions will be implemented in line with the restructuring expense guidance that we have previously given.

We continue to focus on spending, as can be seen by the fact that in constant currency, our spending in the second quarter decreased 11 percent year-to-year. This is as a result of the prompt implementation of the steps that we announced last July to further control costs. A majority of these actions have been completed, and were in fact completed in fiscal 2001. We continue to anticipate approximately $2 million of restructuring costs will be spent during 2002, of which 800,000 were incurred in the most recent quarter. We did adopt FASB 142 at the beginning of the fiscal year, and pursuant to this accounting, ceased amortizing goodwill. For comparison in the prior year, $4 million of goodwill was amortized in the second quarter. Our interest expense was reduced from a year ago, reflecting our reduced debt levels, and the low interest rate environment

And finally, Nordson's net income for the quarter was $7.8 million, versus nine million in the prior year, and fully EPS before restructuring was 25 cents, which is equal to consensus, and compares to 30 cents last year. Included in this year's EPS is approximately nine cents of the FASB 142 effect, or the fact that we're not amortizing goodwill, that I spoke to earlier. That nine cent advantage is offset, in part, by approximately four cents of adverse foreign currency impacts. Our operating cash flow for the quarter was strong. We have included in our press release in the appendix a breakdown of cash flow as a supplement to our press release.

Inventory, though, and our focus on inventory as we introduce lean manufacturing led to cash contribution from working capital. Overall, cash generation of $37 million was used to further reduce our debt. Debt since year end is down $63 million with debt to total capital at the end of the quarter of 55 percent.

Cash related measures reflected relatively good performance, given the environment. The quarters EBITDA was 23.7 million, or 70 cents per share versus 42 - I'm sorry, 44.2 million or $1.32 per share in the prior year.

In summary, the quarter is fully - the quarter fully reflected the softening economy, lower sales and some currency impacts. We continue to watch costs closely. Yet despite the environment, we generated good cash flow, which has been used to reduce our debt levels.

Let me turn to some brief comments about our outlook for the third quarter of 2002. As we saw in our discussion of orders, we see only small signs of improvement from the environment experienced over the last 12 months or so. Nevertheless, we take some comfort from the fact that we have been operating at somewhat a stable level and a level to which we have generally aligned our costs. There are some positive signs in advanced technology where the sequence order rates were up 24 percent. That is the most recent 12 week period over the prior 12 week period. Adhesives were also flat year-to-year and should perform well with any rebound in system sales. This, coupled with a recent decline in the dollar should be positive for the third quarter.

Overall, however, we project that we will continue to see the same seasonally adjusted pace of activity that we have seen of late. This outlook would result in a volume decline of approximately four percent from last year's level, the third quarter. Should foreign exchange rates hold at today's level there may be slight benefit to both sales and earnings. This sales outlook will result in earnings before charges of approximately 27 cents a share with 8-and-a-half per share impact of adopting FASB-142 included.

As you compare to last year's results, I remind you that there was a 10 cent share benefit from the sale of certain real estate assets last year in the third quarter. The full year outlook is more difficult to forecast with our visibility still limited. At this point, however, we anticipate that revenues will fall short of last year's level by approximately ten percent. We have improved our cost structure and should benefit from any economic rebound. This, coupled with a 142 benefit, should result in a slight improvement over last year's EPS. We will continue to focus on cash flow and anticipate that our cash flow will continue to be strong such that we will be able to retire an additional $20 million of debt by year end, reducing our year end debt to total capital to 51 percent.

In summary, we are being affected by the economic conditions of industrial weakness and a strong . Our cost restructuring over the past two years helped position our cost structure for just such downturn. It should benefit us when recovery occurs. But the economic conditions are affecting our current financial performance. There has been no deterioration of our leading market positions. And the outlook of Nordson's longer term prospects continue to be quite favorable.

Let us now turn to any questions you have regarding the quarter or our current outlook.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from of CSFB.

Hi. Can you hear me?

Yes, we can.

Hi. First question is, you know, now it looks like we're about a month after, you know your quarter ended. And I guess my first question is you're seeing any change in or anything that you're hearing from your customer? And my second question is if we look at the quarter and we break it down on a monthly basis would you say order rates were the same across the three months? Was one month better than another month? Was there a sequential improvement? I mean, I guess that's it.

OK. The 12 week figures that I gave you were in fact, the period ending last Friday.

OK, OK.

Those are quite current order rates.

OK.

And across a worldwide total business over the 12 weeks they were trending up but in a fairly narrow band.

OK.

But I would say we are seeing improvement, at least compared to last year's rates.

OK. Great. Thank you.

Thank you. Our next question comes from Robert of Robert W. Baird.

Hey, Rob.

Hi, Peter. How are you?

Good.

Good. You believe you've gained share. Where?

Particularly in finishing and to a certain extent in electronics.

And electronics would speak for itself. But in finishing does that have a geographic bias to it?

Primarily in Europe.

OK. The roughly ten percent sequential improvement orders you've seen, do you have any way to characterize that versus a sort of, normal sequential improvement?

I think it is - we typically, moving through the year would see a seasonal improvement.

Right.

We think that the sequential improvement is more than seasonal factors. So a portion of that is, if you will real growth or real recovery.

OK.

But you know, to put it in perspective, you know, we are slowly climbing out of a level that we've been in now for 12 months.

Yes.

And I guess the emphasis in my comment there would be slowly.

Yes, right. When you discussed the gross margin comparison you did include mix and price as an impact. Does that mean that you're seeing in aggregate negative price realization?

Yes, less so than we had seen earlier in the down turn. And the mix is greater as we're having more normal systems, less fiber systems sales. And fiber systems, you'll recall is a area where we do more systems integration and therefore have lower margin plus value added.

OK. And right on the heels of that, you spoke to ongoing restructuring. And the $2 million number of course has not changed. But I got the impression in the way you were speaking to margin that you might be considering some incremental actions beyond what had already been planned.

Incremental - but I would not - in the overall corporate scheme .

OK. All right. Thank you.

Thank you. Your next question comes from Bob of CIBC.

Good afternoon, Peter.

Hi, Bob.

Two quick ones for you ...

Congratulations on your new job.

Thanks. First off, on the better order pattern you're talking about, is it your sense that's replacement or can you point to any new business?

Well, clearly it's I guess you have to define new business. The improvement has been more parts than systems. But we are seeing some uptick in original equipment systems, if you will.

OK, so there has been ...

That would be what you meant by new business.

Right. And then the second part would be, and granted, you know, this may be a bit qualitative in nature, is there any sense from the consumers, the consumer part of your business and the electronic part of your business in terms of your customers' capital budgets.

Could there be any release in this calendar year, or does it look it will be more like a 2003 event?

That's a real difficult one. In packaging, of course, which is the bulk of the adhesives business, I mean they - the overall adhesives business in the quarter was half year-to-year in volume, and that's compared to a pretty good year the prior year. So I would say there's budget there.

And there, it's a matter of proving the payback on new equipment, replacing older equipment, because it's largely that, more than capacity.

Right.

In electronics, I think the thing that gives us best comfort there is the sequential order rates are up 24 percent. And so it appears that - especially for new product introduction, there's demand for equipment. And in new product introduction, there is budget.

There is. OK.

I mean, by definition if you're going to, you know, release a new product, you have budgeted for that. We're not seeing very little, if any, capacity in advanced technology, especially electronics.

OK, great, thanks Peter.

Thank you. There is a follow up question from .

Or maybe two.

He's back.

Inventory reduction drove your cash contribution from working capital.

Yes, it was about 19 or 20 million of the total.

What's the six-month number?

Let me get that.

I mean, I hate to just do a balance sheet calculation, given the currency effects.

looking at that. Let me just fully reflect inventory. Inventory days were only down by one day. So despite the fact that we generated cash out of inventory, we were really getting it back into balance, versus a year ago's turn over.

Yes.

We continue to want to reduce overall days, and I think the days were 188 versus 189, or something like that. So there's still a lot of room to go on inventory.

And no reason for us not to expect to see ongoing progress third quarter, fourth quarter.

That is right.

OK.

Adjusted for any recovery and any seasonality.

But that's - I mean, you don't really have much of that in your forecast.

No. So, in the forecast, that's why we're saying we'll see cash coming out of the business, where in a more normalized period we would probably be - break even or even investing.

Yes. OK. The - in your free cash flow table that's in the press release, cash from operations, capital spending, dividends, and then there's an other. Just a plug?

No, principally in that line for this quarter is options exercise.

OK.

And with the stock up over 80, we saw a reasonable amount of stock options being exercised.

OK.

And then the way that works is, we're issuing shares for cash.

Two more. In electronics, the sequential improvement that you're talking about, can we differentiate between EFD and the other businesses?

Yes, that's easy for me to do, let me just get the right report in front of me. EFD was 13 percent over - the 12-week over the prior 12-week. Electronics was 31 percent over, so the recovery's strongest, and then the other businesses are smaller, but, you know, 36 percent in UV and 29 percent in plasma, period over period.

So it's relatively widespread.

Yes, actually...

And the being more of a parts business wouldn't be seeing the rebound - of course, that didn't see the decline either.

Right. Right.

I mean, relatively.

And on the revenue line, has - did you get to a flat comparison year to year DFD, or is that still down?

Still down.

Still down, OK. And when will we start seeing some evidence of your ability to leverage international with that business?

I would say, you know, materially, at the beginning of our fiscal. I'd - you know, I'd - we're starting to get some, but meaningful growth...

Will start next year.

Yes, next year.

OK. Lastly. Just to clarify what you had to say about your full year outlook for earnings per share. You are, when you say up slightly, I assume you are comparing against a - what, a $1.03?

Yes, $1.02 or $1.03.

Dollar-two or three. So, somewhere between there and where the current consensus estimate is, which is between $1.25 and $1.30.

Yes.

OK. All right, thank you.

Thank you. At this time, sir, there are no further questions.

OK, well, thank you all for attending the teleconference, and your continued interest in Nordson. You're one of our prime constituencies, and we work hard for you every day. Thank you very much.

Goodbye.

This concludes today's conference, you may now disconnect.