Nordson Corp (NDSN) 2003 Q2 法說會逐字稿

Good afternoon. My name is Lawanna and I will be your conference facilitator today. At this time I would like to welcome everyone to the second quarter fiscal 2003 results 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 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you, Ms. Price you may begin your conference.

Thank you Lawanna. Good afternoon. This is Barb Price, Manager Shareholder Relations along with Peter Hellman, Executive Vice President, Chief Financial and Administrative Officer and Nick Pellecchia, Vice President and Controller. We would like to welcome you to our conference call today, May 28th, 2003, on Nordson's second quarter fiscal 2003 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, Tuesday, June 3rd, which can be reach bid calling 1-800-642-1687, and you'll need to reference ID No. 704996.

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, uncertainties and other factors, as discussed in the company's filings with the Securities & 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 2003 results and Nordson's future outlook. Peter.

Thank you, Barbara and thank you all for attending Nordson's conference call discussing our second quarter 2003 results. I'll make some overall general comments before turning it over to your questions. Nordson's second quarter was affected by a continuing slowness in industrial spending, a weakening dollar, and reduced interest expense. In addition we have seen a modest improvement in order rates. Sales for the quarter were $166 million, up 1.9% from the prior year. The second quarter in a row of increased sales. This occurred however because of a weakening dollar as volume was down 5% while currencies added 7%.

Our volume reflects the continuing economic slow down not only in North America but in Europe as well, as only Japan showed a volume improvement. Japan was up 8%, North America was down 6% in volume, while Europe and Pacific South were down 9% and 2% respectively. On a business segment basis, all three of our segments reported volume declines. Adhesive was down 4%. Finishing down 14%. And Advanced Technology down 2%. The decline in Adhesives can entirely be attributed to our fiber business which last year was in the midst of a relatively large order. Finishing has seen a slowing in order pace from its durable order cuss her base.

Advanced technology has seen some rebound in volume at EFD and Plasma but slowness in volume more than offset these increases. We see this as consistent with external marketing patterns and do does not reflect market share or other Nordson specific issues. In fact our view is that we have gained share during this extended downturn. As we have stated in recent quarters demand as measured by orders has stabilized over the past year or so. On a year to date basis, orders are running 2% ahead of last year's pace.

Similarly, over the past 12 weeks, order rates are running at 102% of last year's demand. On a sequential basis, that is, the past 12 weeks, versus the 12 weeks before that, we are at 104%. By segment, the past 12-week order rates versus a year ago are 107% in Adhesives, 96% in Finishing, and 93% in Advanced Technology. On a geographic basis, orders over the past 12 weeks in North America are at 102% of the prior year's level, while Japan has had orders at 104% of the prior year. Europe is at 99%, and Pacific South had 111% to the prior year's level. On a sequential basis, the picture is somewhat similar.

North America is 106%, Europe at 103%, Japan at 110% and PSD at 92% of the prior 12-week period. We added the quarter with $66 million in backlog, that is up from the beginning of the quarter $7 million. In summary, from an order standpoint, we have seen modest improvement, but the economic climate continues to reflect caution in making capital investment. We continue to focus on cost control in this environment. On a year to year basis, gross margins in the quarter increased from 53.7% last year to 55.9% in the second quarter. The benefit of a weaker dollar improved gross margin by 1.6 percentage points. Mix and absorption also helped gross margin.

In spending we see the negative effects of foreign exchange. Spending was up 8.2%, with 65% or 5.4 percentage points reflecting stronger foreign currencies. The remaining increases reflect compensation and medical expense increases. Restructuring cost this quarter were $1.4 million and we continue to anticipate as much as $2 million of restructuring cost for the entire year. These will be targeted at specific businesses, which continue to see volume declines, and will not be widespread actions. As restructuring is in some form an ongoing element of operations, we will no longer report earnings per share before these costs. Our interest expense was reduced $850,000, or 16% from a year ago, reflecting our reduced debt levels and the low interest rate environment. Nordson's net income for the quarter was $8 million, versus $7.8 million the prior year, and fully diluted earnings per share was 24 cents a share which was a penny better than last year.

As I just said, we will no longer report earnings per share before restructuring. If we were to, however, earnings per share before restructuring would have been 27 cents up 2 cents from last year on the same basis, and equal to consensus forecast of 30 days ago. Our operating cash flow for the quarter continued to be relatively strong, in a quarter that typically is not a period of cash generation. Specific cash flow items are non-cash charges that generated cash flow of $9 million, working capital also generated cash, $8 million. Capital expenditures were about a million while dividends were $5 million.

Not included in capital expenditure for cash flow purposes was a $10.7 million purchase of our adhesives headquarters building in Atlanta known to us as the John's Creek facility which was acquired by the assumption of the building's debt and therefore according to our independent accounting firm should not be treated in the cash flow as a capital expenditure. Net cash flow was therefore cash generation of $19 million. Cash related measures reflected relatively good performance in this environment. The quarter's EBITDA was $23.6 million or 70 cents a share equal to the prior year.

In summary, the quarter reflected the continuing soft economy, offset by the weakening dollar. In this environment, we continue to watch cost closely and continue to generate good cash flow that has been used to reduce our debt levels. Let me turn to some brief comments about our outlook for the third quarter. As we saw in our discussion of orders, we see some signs of improvement from the environment experienced for the past year or so. We also take some comfort from the fact that we have been operating at somewhat a stable level, and a level to which we've aligned our costs. This coupled with the recent decline in the dollar should be positive for the third quarter. This outlook would result in a volume decline and still a volume decline of approximately 1.5% from last year. However, should foreign exchange rates hold at today's level there would be a 7% benefit from the foreign exchange resulting in an increase in sales therefore of 5.5%.

Assuming no change in gross margin from the second quarter, this sales outlook will result in earnings before charges of approximately 29 cents a share. This would represent a 38% increase over last year's reported 21 cents a share. In summary, we are continued to be affect by the economic conditions of industrial weakness. Our cost restructurings over the past two and a half years helped position our cost structure for just such a downturn and should benefit us when recovery occurs. While the economic conditions continue to affect our current financial performance, there is no deterioration of our leading market positions or the outlook of Nordson's longer term prospects. And with those opening comments, let us turn the call over to your questions.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question -- I'm sorry, he withdrew his question. Your first question comes from Waltz Lidpack (ph).

Hi, Walt.

Hi, good afternoon. On the restructuring charge, the $1.4 million that was taken, how much of that was for advanced technology versus other businesses? Segments and how much of it was North America versus anything international?

It was I think all North America.

All North America.

And it was equally split between our finishing business and Advanced Technology.

Okay.

And was -- and it shows up as a corporate charge.

Okay. And what's remaining from prior charges, in terms of cash expenditures?

You know, at the end of the quarter, we -- our remaining obligation through the second quarter charge that Peter just mentioned is about a million-two. So we still have about a million-two to pay out remaining that -- of all the amounts that have been charged.

Okay. And you talked about $2 million of charges for the year in total, so that means $600,000. How much of that that's remaining in the second half, how much is that going to be cash charge?

There hasn't been any specific identification of that but that would be cash charges. That would -- that would almost mirror the type charges we took in the second quarter and they would be cash charges. But you know, there's no specific identification of that number yet.

Okay. Okay, thanks, I'll get back in queue.

Your next question comes from Bob Shenowsky (ph)

Shenowsky, good afternoon. Could you give us what the net currency effect was on operating income?

On operating income, yes. Bear with me for a minute, Bob.

Oh, sure, Nick.

$5 million.

10 cents a share.

10 cents a share. $5 million on operating income.

And I saw on the advanced technology on the year over year basis your operating income improved dramatically. Can you give us some of the drivers behind that?

That's principally a mix shift with EFD selling at their traditional very high margins.

Okay, so it was strictly mix shift. Was there any pricing at all involved here?

Some, I think there was some -- you know, EFD did have some price changes you know positive price changes, but I wouldn't be able to give any more specific than that.

Okay. And then I just had one final one.

Yeah, and just getting back to that, EFD's margins year to year really haven't moved that much. So you know, I go back to -- I think it's primarily mix. You know, you recall that EFD's margins are 80% or better.

Gross margins. Yeah.

And their operating income margins are like 50%. And so as they sell more, it just has a good result on both operating margins.

Okay, great. I just couldn't get it all down, Peter. In terms of the number for SG&A in the quarter could you go through that very quickly in terms of some of the drivers that took it up, you know, relatively high?

Well, the principal driver was foreign exchange. If you look at, you know, foreign exchange to spending last year in second quarter we spent $70 million. This year we spent $76 million.

Right.

Of the increase, $6 million, $3.8 million comes from foreign exchange. The next largest increase is in compensation, with merit increases and the like. And insurances, which is primarily medical. So what I said in my formal comments was, foreign exchange I think is 65% of the change, and the rest is compensation, and medical insurance.

So those numbers should remain relatively stable in the back half of the year considering a stable currency then?

Yeah, I'm just trying to think through the shape of the curve of currency. Currency will continue to be a big impact. It should be --

You're saying in terms of an absolute number, seeing the level we're spending or you're seeing in the second quarter carry through, yeah. I would say that's relatively stable.

, Bob Shenowsky: Thanks very much.

Your next question comes from Robert McCarthy.

Hi, Rob.

Good afternoon, everyone. I apologize, I got disconnected right at the beginning of Q&A so I don't know if you were already asked if you could break the restructuring charge in the quarter between the segments.

Yeah, we were asked but we'll do it real quickly. It basically breaks down evenly between Advanced Technology and finishing and it's all North American.

Okay. So that means that Corporate expenses, as you know unallocated corporate expenses were what?

Well, Rob, the -- the answer was, you know, that was the organizations that were impacted. But we're -- we record restructuring charges as a corporate expense.

Okay, you do?

And so when you look to that attachment, you know, to the press release, the $1.4 million of restructuring charges is in that corporate expense number, that $10 million number.

Okay.

That includes $1.4 million. A year ago the number was about $800,000. That accounts for some of that increase in corporate.

All right. Even then, if the number's taken out of that line, you had almost a 20% year to year increase in unallocated.

Yes.

Attributable to?

Well, it really deals to last year. And again, this is our consistent way we have done this. It deals with medical costs experience for the year 2002. And let me just share with you, what we do in terms of the cost we charge our businesses, we predetermine the amount at the beginning of the year, and we charge them a rate.

We estimate.

We estimate the amount at the beginning of the year and we charge them a rate that we continue to fix throughout the year.

Okay.

To the extent that we have actual performance that deviates from that number, it just gets included in the corporate pool. You know, we do not further reallocate that. A year ago, we were having a favorable experience through mid year of about a million dollars.

Okay.

And so last year's corporate expense number that you see on the attachment includes a credit of a million dollars.

All right.

And there's no similar credit this year.

This year, okay.

And in reality that million dollars with hindsight could be re-spread through those businesses and actually would have impacted their -- you know, operating profit by a million spread between the three businesses of a year ago. But this is the way we've consistently done that.

Okay. So as I think about the second half of the year, we've been looking for some declines here, as you had, you know, allocated some level of expenses out of last year's line out to the segments.

Right.

So this issues overwhelmed that in the current quarter. What happens here in the second half?

They would not repeat to that magnitude at all. I mean, it's -- you know, what you're looking at there, it's unique to the second quarter, I would say. I mean, you wouldn't expect this -- I mean, we do not see that same recurring adjustment to that magnitude the rest of the second half of last year. And so the numbers would get more truer, I would say, in the corporate level.

And directionally, I mean, so -- I mean, my concern is, whether we're going to see any decline in that line at all, then, for the balance of the year. It sounds like you're saying probably not.

Probably not.

Okay, all right. The variety of order statistics that you gave us, Peter, are these all currency-neutral?

Yes.

And can you tell us --

The way you get orders --

Two more little quickies and I'll let somebody else go. Can you tell us quickly what -- you said year to date order volume up 2%. I assume that means through the second quarter.

Let's see, it's actually through about ten days ago.

Ten days ago.

Whatever the week before last Friday was.

Okay. I don't suppose you'd have something as mundane as the comparison for the second quarter?

Well, no, we wouldn't, because what we do is, we rely on our internal audit summaries which are every two weeks.

Two weeks, right. Okay. Then lastly and I'll let somebody else go, can you talk about -- I mean recognizing that the finishing coating business has a -- or coating and finishing segment has a higher proportion of bigger ticket sales and it's not unusual for that line to jump around fair amount quarter to quarter. Is the second quarter just a reflection of business moved directionally in an already weak economy, or is it, you know, new evidence of fresh weakness, I guess is the way I'd ask it?

If you talk to the business, they're more optimistic than their recent order book. The proposals continue to be at a fairly high level. And they believe that those will turn into orders in the second half of the year. I -- I guess I'm a little bit more cautious, and think that --

You've heard that song before?

Yeah, and I'd rather, you know if I were an analyst, I would rather be behind the curve, and have to increase my estimates, than -- and we've factored that in our comments about sales for the third quarter. We have tempered down their own estimates.

That's good. Do you -- in terms of their optimistic optimism, do you have any sense of whether it's primarily related to automotive, which is usually a reasonably important market for them or general industrial?

Well, you know, this is the finishing business. And we break automotive is a business which is included within adhesives.

Adhesives.

I see, okay.

So this goes to primarily powder painting you know durable goods, refrigerators, bicycles, porch furniture, that sort of thing.

That answers the question, thanks.

You have a follow-up question from Waltz Lidpack.

Thanks. The backlogs, improvement that you saw, obviously that includes foreign currency in there. Do you know -- can you tell us what the backlog was excluding foreign currency?

The backlog that Peter cited in his -- up from the beginning of the year, that's currency neutral. That number, that doesn't include a lift of foreign currency. Because we restate the -- you know, as we go into year, we restate the beginning backlog at our new currency rates, and we compare that to the mid year number.

Okay.

So that number that Peter is mentioning was a volume number. The one we call sales volume.

Okay. And I guess in your comments about the large systems still being sluggish, any chance you could talk about just kind of the end markets, appliance, book making, food and beverage, packaging which seem to be seeing the most quote activity or any kind of a pickup?

You know, the packaging market never has seen a real downturn. We are seeing some improvement in UV and Plasma and advanced technology. Clearly we said that EFD is up, you know, double digits which, since they're a replenishment sort of product line, that may bode well for broader advanced technology over time. They're not buying systems but at least they're using the systems they have more. And you know, in the finishing businesses, as we just discussed, that's, you know, fairly dormant in really all the end markets. We did receive a good fiber order during the quarter, and we continue to have proposals that are pretty widespread in that segment as well.

Okay. Can you talk about the fiber order, how large was it, and what's the --

It's about a $3 million order. But represents, I think, the fourth system now. So that's -- that's good news.

Okay, thank you.

Your next follow-up question comes from Bob Shenowsky

Thanks, few quick ones. The back half of the year, split evenly between 3 Q and 4 Q restructuring?

On those operating expenses, I would say that is a fair assumption.

For the last question, in terms of the new fiber orders, when is that expected to hit?

Most of it would hit in the fourth quarter.

Okay. And then if I could Peter just one last one and I've asked you this on the last couple of calls as well. Does the business environment to you feel any different than it has last six months, last year, in terms of the customers getting to a point where you know, they've been under spending on capital, where they're going to need to come to you at some point for new product, whether that's sometime this year or more, is it '04, is it 05, any sense?

I think I said before that last year there was this aura of fear, people didn't know where the bottom was, and so there was extreme conservatism. I would say this year it's cautiousness and therefore until they require the upgrade, the new equipment, they tend to be hesitant to pull the trigger. So they get ready and then they wait and then we, you know, where we get the system, it finally occurs.

So I guess I would move from being very conservative to cautious. There is a better tone, but it is hopefully at the beginning stages of recovery. But the recovery that we've seen is only been modest. The other thing would I add that you didn't ask is, in the economic stimulus bill, that I guess was signed today, there is that continuing provision which allows greater depreciation on capital goods acquired between now and the end of '04. Thought clearly, if you're short-term sighted you'd rather see the date as '03. But eventually that deadline date would start to have an impact.

That combined with the need to replenish some of those assets should positively affect you guys next year then?

That would be our outlook.

Thanks for the candidness Peter.

Next follow-up question comes from Robert McCarthy.

Hi some not to be swarming Piranha but -- The fiber order is in the backlog order?

Yes.

Ten-seven of acquired debt would be refinanced or is it an IRB or something or what do we assume?

I would say that the rates are -- at this point in time it's debt that pretty consistent with our short-term rates. It is a long term debt instrument, that is fairly consistent with our short term rates today. And we're looking at -- you know, the refinancing issue, it's still possible. But I wouldn't see any significant, you know, change in interest expense, you know, with the refinancing at this time.

Okay. And that was consummated beginning, end of the quarter?

That was April.

Beginning of April, yeah.

Okay. And let's see, Peter, in the past we've often talked about what you're seeing in terms of parts business, particularly in the adhesive, the traditional adhesives business. As maybe an indicator. Can you update us?

Yes. Slight improvement, single-digit.

EFD is double digit.

I'm sorry?

EFD is reflecting double digit. Adhesives is single low single slight increase.

Which is what it has been for a quarter or two right?

Right. I think I said April, it was March that we acquired our building, in the March operating month.

Okay. And how about any kind of, I don't know, incremental data you can provide us on the launch of the new product?

It's going well. You know, I think it is exceeding our expectations. It has gone into new lines

Which were an issue for you a quarter ago.

Right. You know, I think the equipment standing up to the test of time by customers, the next phase of transition from the older equipment will be when they want to convert out existing equipment, so that they standardize on the new equipment.

Right.

And we haven't seen that yet, but it's still -- this is our second quarter of essentially selling the units. So I think we're on plan, maybe a little bit better than plan.

That's in revenue. Unless I'm mistaken it was a quarter ago that you all were a bit dissatisfied how that had been handled in terms of production efficiency?

We continue to want to get cost out of the product and are working on that.

But less of an issue in the second quarter, less again in the third?

I'd say from the cost of assembly, it's less of an issue. We still have the issue on the parts assembled and the purchasing folks are working on that to get the cost down.

Okay. Thanks a lot.

Which in part, you know, the improvement in part is just a scale one. We made more units in the second quarter. And so we had more absorption of that. But we still have some cost issues on the assembled parts and will work on that and expect to have that resolved by year end. And suppliers if you're listening to the call we'll be working with you towards that end.

Your next question comes from John Franzit (ph)..

Good afternoon.

Hi John.

I was wondering if you could characterize the monthly order trend if there was some months that were better than others year to date, and also, if we should be aware of any kind of season at in the order flow.

Okay. We've seen, since December, an improvement in the order flow that has been pretty consistent. As I said, we measure every two weeks ending on Fridays so we don't really break it down into months. But it -- there has been, if you will, a remarkable lack of variability between the two-week intervals. So it's been pretty stable since the beginning of December, if you kind of forget the last half of December, because of the vagaries of Christmas and new years. As far as seasonality, it appears not to reflect that. We clearly see traditionally have seen good order flows in the second and third quarter of the calendar year, as customers gear up for, you know, they're using their own capital budgets. And we can see that continuing.

Okay. So you expect it to remain modestly positive over the next three or four months?

Well, yeah. You know, everybody is reluctant to make order forecasts. I think we did that as we talked about the sales level, where volume we had slightly negative, and then more than offset by form exchange. And I think we're reasonably comfortable giving our backlog in the tone of the order flow to make that forecast. But that was for a quarter. We'd have to go back and consider as we go out yet another quarter. But the tone is better. We see a slight up tick and I think that's what we're trying to reflect in our outlooks.

Great. Secondly I was wondering if you would update us on the acquisition profile. I know you're looking at things in the life sciences sector. Anything fresh there?

No. And if there was, of course we wouldn't comment on it. But you know, I think the sort of things that we've traditionally done, which are the smaller, private, well managed firms with a good business plan, that could be enhanced by our distribution skills, perhaps international skills, are the sort of filter that we apply against life sciences and any other businesses. You know, EFD was a unique transaction because of its size. And also because of its performance given its margins. We're very happy with how it's performed. But I would say it is not the typical type of acquisition and if you exclude that, you go back to much smaller acquisitions which put a lot of less stress on the balance sheet. We ended the quarter with debt to total capital of 50%. And we continue to expect that that will go down into the 40s as we continue and so we're recharging our balance sheet for, if you will, modest size acquisitions.

Great. Thank you very much.

Uh-huh.

Your next question comes from Waltz Lidpack.

Just two more quick questions. First, SARS, any disruptions or impacts in your, you know, Pacific south region?

No, we've had very little impact. We had one unit that required ex patriot help in setting it up and getting it going. We have volunteers. But the remainder of our installations have been of a nature that they vent required ex patriots and so people in region have been more than comfortable to, you know, the beauty of it is that we have direct sales and service in 31 countries, including those that have SARS impact. So we have local nationals that are quite comfortable in doing their jobs.

Okay. Good. And then I guess on the earnings per share for the remainder of the year, do you have a target number or range for us through year end?

Given our comments before on, you know, reluctance to kind of forecast out orders, we're reluctant to make a discrete forecast for full year.

Yeah, that's fine. Okay, thanks.

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

Okay. Give you just a second, and then -- I guess there are no further questions? Thank you for attending and thank you for your continued interest. We appreciate your support.

This concludes second quarter fiscal year conference call. You may now disconnect.