Nordson Corp (NDSN) 2003 Q3 法說會逐字稿

Good afternoon. My name is Sheila and I will be your conference facilitator today. At this time, I would like to welcome everyone to the third quarter earnings release conference call. (OPERATOR INSTRUCTIONS) Ms. Price, you may begin your conference.

Thank you Sheila. Good afternoon everyone. 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'd like to welcome you to our conference call today, August 27, 2003, on Nordson's third quarter fiscal 2003 results.

Our conference call is being broadcast live on our webpage 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, September 3, which can be reached by calling 1-800-642-1687 and you will need to reference ID number 2351472.

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 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 third quarter fiscal 2003 results and Nordson's future outlook. Peter?

Thank you Barb and thank you for attending the Nordson conference call discussing our third quarter 2003 results. I will make some general comments before turning it over to your questions.

Nordson's third quarter was affected by a continuing slowness in industrial spending, a weaker dollar and reduced interest expense. In addition, we have seen some modest improvement in order rates.

While we have seen improvement in earnings with earnings per share increasing 24 percent, it was not the level of improvement that we had anticipated. This reflects weaker volume.

In addition, while our spending neutralized for currency effects was lower than we planned, this was offset by delays in cost reductions and new product launches.

Sales for the quarter were for were 133 million, up 4 percent from the prior year, the third quarter in a row of increased sales. This occurred however, because of the weaker -- because the dollar was weaker as volume was down 4 percent, while currencies added 8 percent.

Our volume reflects the continuing economic slowdown in North America and Europe. In North America, we saw a reduction in volume of 11 percent while Europe was down 3 percent. Pacific South and Japan have seen volume improvement in both the quarter and year to date, up in the quarter 20 percent and one percent, respectively.

On a business segment basis, while advanced technology reported a volume increase of 6 percent, this was more than offset by 6 percent declines in both adhesives and finishing. The improved volume in advanced technology is paced by demand in Asymtek, UV and EFD. Half of the decline in adhesive can be attributed to our fiber business, which last year, was in the midst of a relatively large order. The remainder is represented in a large wide web engineered system shipped in the third quarter last year. Finishing volume has seen continuing weakness from its durable goods oriented customer base.

We see our volume experience as consistent with external economic patterns and does not reflect marketshare or other Nordson specific issues. In fact, it is our view that we have gained share during this downturn.

As we have stated in recent quarters, demand as measured by orders, has begun to show improvement. Orders are up for the year, the last 12 weeks and the last sequential 12 weeks. All of our comments about orders are in constant currency. Orders would reflect even greater improvement stated in nominal currency given the weakness of the dollar.

On a year-to-date basis, orders are running 2 percent ahead of last year's pace. Similarly, over the last 12 weeks, order rates are running at 107 percent of last year's demand. On a sequential basis, that is the last 12 weeks versus the 12 weeks before that, we are at 104 percent.

Of late, we have seen the greatest improvement in advanced technology. By segment, the past 12 weeks order rates versus a year ago are 126 percent in advanced technology, 107 percent in adhesives and 91 percent in finishing.

On a geographic basis, orders over the last 12 weeks in North America are at 112 percent of the prior year's level, while Europe is at 98 percent, Japan has had orders at 101 percent and Pacific South is at 116 percent of the prior year's level.

We ended the quarter with quarter with 73 million in backlog. That's up from the beginning of the quarter by $7 million.

In summary from an order standpoint, we have seen some improvement and the economic climate has begun to reflect increases in capital investment, but these increases indicate a modest recovery.

Turning to the income statement, gross margins in the quarter increased from 53.5 percent to 55 percent on a year to year basis. The benefit of a weaker dollar improved gross margin by 1.3 percentage points. Mix and absorption made up the remainder.

The margin improvement was dampened by cost issues related to new product rollout in adhesives. These issues are being addressed and we should see gradual improvement going forward.

In spending, we see the offsetting negative effects of foreign exchange. Spending was up 6.8 percent with 90 percent or 6 percentage points reflecting stronger foreign currencies. The remaining increases reflect compensation and medical expense increases.

Restructuring costs this quarter were modest and we continue to anticipate spending no more than $2 million on restructuring costs for all of 2003 or a little less than 400,000 remaining.

As restructuring is in some form, an ongoing element of operations, we no longer report earnings per share before these costs.

Our interest expense was reduced 800,000 or 15 percent from a year ago, reflecting our reduced debt levels and the low interest rate environment.

Nordson's net income for the quarter was $8.7 million versus $7.2 million the prior year and fully diluted EPS was 26 cents a share, which was 5 cents better than last year or an increase of 24 percent.

The change in EPS can be broken down as a 9 cent improvement from foreign exchange, 2 cents from a lower restructuring expenses offset by lower volume.

Our operating cash flow for the quarter continued to be relatively strong. Specific cash flow items are noncash charges that generated cash flow of 10.6 million, working capital required cash of 7.5 million, capital expenditures were about 2.2 million, while dividends were 5 million. Net cash flow was therefore, cash generation of 9.3 million, which was used to further reduce our outstanding debt.

Our debt leverage measured as debt to total capital was 48 percent at quarter end.

Cash related measures reflected relatively good performance in this environment as well. The quarter's EBITDA was $25 million or 73 cents a share compared to 23 million or 68 cents a share last year.

In summary, the quarter reflected the continuing soft economy offset by the weaker dollar. In this environment, we continue to watch closely our costs 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 fourth quarter. As we said in our discussion of orders, we see some signs of improvement from the environment experienced in the past two years. We also take some comfort from the fact that we've been operating at a somewhat stable level at a level to which we've aligned our costs. This, coupled with the decline in the dollar, should be positive for the remainder of the year.

This outlook would result in a volume approximately equal to last year with a range of plus or minus one percent. This -- Let me stop. Let me give you this paragraph again. This outlook would result in a volume approximately equal to last equal with a range of plus or minus one percent. However, should foreign exchange rates hold at today's level, there would be a 4 percent benefit, resulting in an increase in sales for the quarter on a year to year basis of 3 to 5 percent.

In the fourth quarter, we should see some improvement in the gross margin of new products but this will be offset by the seasonal delivery of engineered systems that carry with them lower margins. The effect is gross margins approximately -- approximating those of the third quarter.

This outlook results in earnings per share for the full year in the $1 to $1.05 range and for the quarter, in the range of 35 cents a share to 40 cents a share. These figures as I have said before, are after all charges.

In summary, we are continuing to be affected by the (technical difficulty) of industrial weakness but we are seeing signs of slow improvement. Our costs have been restructured, allowing for significant profit improvement as the economy improves.

Let us now turn to your questions.

(OPERATOR INSTRUCTIONS). Pete Lisnic of Robert W. Baird.

Good afternoon everyone.

Hi Pete.

Quick question in regards to just the recent quarter results. The other expense line swung from income in the second quarter of about 800,000 to a $300,000 expense. What's the net line item and what's causing that swing?

The most significant item in that line item is gains and losses on foreign currency transactions and given the volatility, the dollar has been weaker but through our policy of entering into short-term contracts on a recurring basis, we do recognize gains or losses on those contracts as realized. And that number could swing from a gain of 300,000 to a loss of 300,000 fairly easily on a quarter to quarter basis. Third quarter, the primary element in that 260 something thousand of other income lost is foreign currency transaction. Second quarter, we had gains, if I recall, of about four or 500,000.

Okay, all right. And then moving on to this issue with, I guess cost reductions maybe being a little behind plan and some inefficiencies. Can you talk more specifically about what kind of drag that is having on the bottom line or gross margins and what some of those items are, and how soon they will go away?

It is principally in our adhesives business. It relates to the new pro (ph) line and durable line that are being introduced. Pro Blue (ph) was introduced last November. Dura Blue (ph) was introduced in the first quarter. And we have engineered some of the component parts, have negotiated through the supply community those changes. We have qualified those changes on our bills of material and we are in the process of including those reduced costs as the product is built. In the quarter, it had approximately a little less than $1 million of impact to gross margin. We'll see a decline in that, if you will, opportunity costs going forward.

So it's, relatively speaking, still a temporary issue. Goes away, probably start of next year, next fiscal year?

Yes. By the beginning of the fiscal -- we should see a diminished impact in the fourth quarter and further decreases, as we begin the new fiscal. It comes in significant as we approach the fiscal turn.

Okay, got you. Thank you very much.

Walt Liptak of McDonald Investments.

Good afternoon.

Hi, Walt.

With regard to the pickup in orders in the advanced technology part of the business, can you talk about the customer base geographically, where the customers are located and the type of customers that are making the purchases or putting in the orders?

We've seen increased orders from our largest customers. They are U.S. headquartered but operate in the world market so we are seeing a lot of the equipment shipped overseas, Southeast Asia being a particular area.

I guess to get to the substance of your question, is this anecdotal or is this the beginning of a trend? At the beginning of the turn in the cycle, that's always the question. At this point, we are glad to see the volume and increase in backlog. It's -- I think it does represent the beginning of a change and maybe it's a little front ended, so you see a more modest recovery in advanced technology than the recent order flow might indicate.

Okay and --

We do see it as a change in behavior and a very good first step towards an improved order flow.

Okay. And what does pricing look like on the orders coming in in advanced technology?

We haven't seen pricing pressure. We're not buying these orders. It's more new products, bringing new processes. New processes bring new equipment and I think that's what we're seeing. The regeneration of the new products in advanced technology is pulling our equipment with it.

Okay good. And then in the guidance, the $1 to $1.05 earnings per share and given the revenue, so you are talking about revenue including foreign currency in the range of 184 to 188. Is that right?

Yes.

So with flat gross margins, is the primary cost problem related to the rollout of the Pro Blue and the Dura Blue?

Yes.

Is that why we are not seeing higher earnings on that kind of base of revenue?

Yes, it is.

Okay. Okay, thanks very much.

Bob Schenosky of CIBC.

Hi Bob.

Good afternoon. A couple of things for you. First Peter, just to go on Walter's question, the type of products you are seeing, is it more a replacement type product as volumes start to turn over a little bit or are you actually starting to see any net increases in expenditures?

This is in advanced technology?

Yes.

As I tried to indicate, it's more from a new product introduction by our customers that is (technical difficulty) it's not an increase in capacity by the industry. And it doesn't reflect wearing out of our old product. It tends to be new processes.

So next generation?

Yes.

Okay. And what about on the longer lead time businesses? What -- you know, any change in the body language in terms of stepping up orders there? What are you seeing?

In more engineered systems?

Right.

We really haven't seen that except to some extent, in advanced technology, but in the adhesives business and the finishing business, we see the increases being more in standard product than engineered system product.

Okay because we are hearing from the guys here that follow the consumer side, that his companies are looking for an increase in CAPEX of about 5 percent next year.

That would be terrific.

Okay, but --

We have not seen that flow of orders.

Okay, okay great. Then if I could just lastly, you talked about currency on the top line. You've been very good. You have been one of the few companies that actually talk about it from an earning standpoint as well. What kind of volume do you think you'll have to see in terms of increases year over year to make up what you are going to potentially lose in currency for next year?

Currency probably 4 or 5 percent--

4 or 5 percent.

Okay so that's the type of magnitude you'll need to see as an increase?

Yes.

Okay great. That's all I had. Thanks Peter.

At this time, there no further questions. You do have a follow-up question from Walt Liptak.

I was going to say, you are letting us off too easy. I don't want to draw fire.

Okay, I'll ask a couple more. Just a couple things I noticed is your backlog looks like it's up 11 percent year-over-year with the orders up 2 percent. Is that because of delivery schedules or was there something that got pushed out into the next quarter?

I think it's more delivery schedules. Last year, clearly we were shipping primarily other than the fibers had a big order, we were shipping primarily standard product. This year, there is a bit of a mix including some longer lead for advanced technology. So you know, we look at the backlog as good news. We also note that at year end last year, we had drawn backlog down pretty low relative to the year before. And so all in all, our backlog is part of the improvement that we are seeing in order rates.

Okay. And going back to the last question, with the capital spending trends that you are seeing, especially from North American customers, can you differentiate between large and small customers? Are you seeing any impact from the tax relief?

On tax relief, we are not seeing any increase. The way the tax relief is structured as I it, the benefits are there through the end of next fiscal year and so -- and for a very very small -- that doesn't represent that big a part of our business that we would see some benefits this year. So it's not tax related. And beyond that, I don't really think we see a difference in the mix. If you want, we could pursue that inquiry a little further and come back with some additional information at a later date.

Okay. And let me just ask about the --

We typically don't track on a large to small basis. That's why we're hesitant. If for you all that would be helpful, we could prepare in accordance with Regulation FD, have that available.

Yes, I just wondered because of the accelerated depreciation for taxes you would be seeing a pickup in business.

No, I think that will happen during '04 as people start to look at that deadline. As long as the deadline is out there is out there sometime, there's no urgency to it, so you still have I'm going to buy it when I need it.

Okay. And you're not seeing any big commitments yet from the North American consumer companies and it has been a couple of years, two or three years. Are you seeing a pickup in aftermarket parts and services to maintain older equipment or kind of pent-up demand because of equipment or need for new capacity?

We have seen, as we talked about in the past, parts orders have held in there and in fact have at times been pretty strong above prior year's levels. That continues. Our equipment is very well-made, but it's getting older and its consuming more parts. I have little doubt that at some point when the confidence returns and I believe it is starting to return to the U.S. industrial market, we'll see some pent-up demand that is a form of a recovery. Let's remember that capital expenditures are budgeted once a year in the fall. And so what we are living through is the real industrial psyche of the fall of '02 and I think that confidence is improved in '03 and that will set up higher budgets that will (technical difficulty) for calendar '04.

Okay, okay good. Thanks a lot.

Pete Lisnic.

Just a follow-up on Walt's question. In terms of your forecast, you are looking at basically flat volume for the upcoming quarter and you mentioned last year, you worked backlog down at the end of the year to quite a low level. What are you implying or what is kind of built into your forecast, in terms of backlog at the end of this year?

It doesn't have as significant a drawn backlog.

Okay. And then looking forward to '04 in terms of the cash flow picture, it looks like you are going to hit your targeted debt to cap range of 40 to 45 percent by the end of this year. What should we think about in terms of cash uses for next year? Are you looking at bolt on acquisitions, increasing dividends, can you give us a sense of what the thinking there is?

Well, yes. We've been delevering post the EFD acquisition. I think we said in prior quarterly calls, that we are having an increasing appetite for the type of acquisitions that we've historically done and I would cite to the more modest level, the acquisition with the value of 20 to 40 to $50 million each, in areas that we want to grow in that are adjacent to where we already operate in dispensing technologies.

In addition, that won't satisfy our, if you will, financial sources --

Ladies and gentlemen, this is the operator. Today's conference is scheduled to resume momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. (OPERATOR INSTRUCTIONS).

Hello. I understand we were disconnected or there was a technical problem. I was in the midst of discussing a question regarding use of future financial flexibility. I will assume that that was not heard and the answer is that we will continue as we have historically, look for acquisitions which add to values at Nordson. Traditionally, we have looked at smaller acquisitions that are adjacent to dispensing technologies that we want to grow in. Those have been in the 20 to $50 million range. And in excess of that, we will look to continue our pattern of increased dividends, which now are 40 years of annual increases. We also will most likely buy in the open market, shares of stock to re-charge, to make up for those shares that we use for benefit plans. All in all, I think we have the financial flexibility to add value in various areas and we will look to exploit that or optimize that.

Are there any other questions?

Our next question comes from Pete Lisnic.

I have just one more quick follow-up. In terms of the tech sector or tech segment I guess, the increase in demand or orders you are seeing now, you pointed to new product growth as kind of driving that. What is your sense as to when we might see the other tail of that, meaning the capacity driven or the wear component driven growth? When do you think we might see that pickup? What are you hearing from customers on that front?

I would say the tone from customers is more optimistic. We see that both in private as well as public pronouncements and you follow those as well as we do. So I believe that the overall trend is positive. And no doubt, in the capital budgets of '04, there will be increased expenditures for capacity as well as capacity modernization.

Okay great. Thank you.

At this time, there are no further questions.

Okay. Well, let me thank you all for attending this conference. And thank you for your interest in Nordson. We appreciate it and we will respond, as we have in the past, with our full support. Thank you very much.

(OPERATOR INSTRUCTIONS).