Nordson Corp (NDSN) 2003 Q4 法說會逐字稿

Good afternoon. My name is DeShanta (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Nordson 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. (Operator Instructions). Ms. Price, you may begin your conference.

Thank you. Good afternoon. This is Barb Price, Manager of 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, Dec. 11, 2003 on Nordson's fourth quarter and fiscal 2003 results. Our conference call is being broadcast live on our webpage at www.Nordson.com and it will be available on our web page for 14 days. There will be a telephone replay of our conference call available until midnight, Wednesday Dec. 17th which can be reached by calling 1-800-642-1687. You will need to reference ID number 4160959.

Our attorneys have asked us to open this call with a cautionary statement under the safe harbor provision 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 fourth quarter and fiscal 2000 results and Nordson's future outlook. Peter?

Thanks, Barb, and thank you for attending Nordson's conference call discussing our fourth quarter 2003 results. I will make some general comments before turning it over to your questions.

In the fourth quarter, we saw for the first time in 11 quarters an improvement in volume, albeit a little bit less than 1 percent. This, coupled with a weakening dollar, continuing cost controls and lower interest expense resulted in an earnings rebound that was within our guidance and at or better than research estimates. In addition, the positive trend that we have seen in order rates has continued, which makes us more encouraged about the year ahead.

Sales for the quarter were 189 million, up 5.6 percent from the prior year, the fourth quarter in a row of increased sales. In addition to the 0.8 percent increase in volume, the weaker dollar added 4.8 percent to sales. While volume was down 2.8 percent for the full year, in each subsequent quarter of 2003, we saw a smaller year-to-year decrease and in the fourth quarter, we saw for the first time an increase in volume. Our volume in the fourth quarter reflects a continuing economic slowdown in North America and Europe, down 9 and 4 percent respectively. Pacific South and Japan have seen some volume improvement in both the quarter and year-to-date, up in the quarter 36 percent and 21 percent respectively.

On a business segment basis, advanced technology reported a fourth-quarter volume increase of 11 percent, adhesives was up nominally and finishing was down 8 percent. The improved fourth quarter volume in advanced technology was paced by demand in Asymtek, UV and our EFD business. Within adhesives, lower shipments to automotive offset increases in packaging and product assembly. Finishing volume has seen continuing weakness from its durable goods-oriented customer base.

As we have stated throughout 2003, demand as measured by orders has begun to show improvement. Orders were up for the year, the last 12 weeks and the last sequential 12 weeks. All comments about orders are in constant currency. Orders would reflect even greater improvement stated in nominal currency, given the weakness in the dollar. Over the past 12 weeks, order rates are running at 114 percent of last year’s demand. On a sequential basis; that is, the past 12 weeks versus the 12 weeks before that, we were at 109 percent. Of late, we have seen the greatest improvement in advanced technology. By segment, the past 12 week order rates versus a year ago are 150 percent in advanced technology, a 10 percent improvement in adhesives and finishing is at 97 percent of last year.

On a geographic basis over the past 12 weeks in North America, order rates are 124 percent of the prior year's level while Europe is at 108 percent, Japan has orders at 95 percent and PSD (ph) is at 103 percent of the prior year’s level. The trend in our orders measured by year-to-year change in 12 week order rates is something some have begun to track. To help in this, we have posted an updated chart on our website in the investor relations section. It is found on page 10 of our standard investor relations presentation, which has also been updated with 2003 year-end information. You can find these www.Nordson.com. We ended the year with 61 million in backlog. That is up from the beginning of the year by 16 million. This should also help to get 2004 off to a good start. In summary from an order standpoint, we have seen improvement as the economic climate appears to have begun to reflect increases in capital investment.

Turning to the income statement, gross margins and the fourth quarter increased slightly to 53.9 percent from 53.2 percent last year before the charge for inventory obsolescence. The benefit of a weaker dollar improved gross margin by 0.9 percentage points with the effects of mix and absorption offsetting a portion of this gain. Fourth quarter margins within our packaging and product assembly business improved from third-quarter levels, reflecting progress made in addressing cost issues relating to our new product rollout.

In spending, we see the effects of continuing cost control as spending as a percentage of sales dropped from 42.5 percent in last year's fourth quarter to 40.9 percent this year. Restructuring costs this quarter were $400,000 versus 950,000 in the fourth quarter last year. For the full year, 2 million was spent as forecast. Our interest expense was reduced $1 million, or 20 percent from a year ago, reflecting our reduced debt levels and the low interest rate environment. Nordson's net income for the quarter was 13.3 million versus 1.3 million after the charge for inventory last year, or 9 million before the charge. Fully diluted EPS was 39 cents a share versus 4 cents a share last year after the charge and 27 cents before the charge. Hence, earnings-per-share without the charge last year increased on a year-to-year basis 12 cents, including a 7-cent improvement from foreign exchange.

Our operating cash flow for the quarter continued to be relatively strong. Specific cash flow items in addition to net income were non-cash charges that generated cash flow of 9 million, working capital generating cash of 23 million, capital expenditures were about 3 million while dividends were $5 million. Net cash flow was therefore cash generation of $36 million. For the full year, we generated 65 million, which reduced both our outstanding debt and our debt leverage measured as debt to total capital, which was 44 percent at year end.

I should add that our adoption of lean operating approaches continues to yield results. Inventory management continues to improve with inventory turnover of 143 days versus 180 days a year ago when measured across the entire year. Inventory in the fourth quarter improved from 145 days a year ago to 115 days this year. The de-levering that we set out to accomplish three years ago after the EFD acquisition has been accomplished and completed on the time line we planned. We are comfortable with our leverage and will again selectively acquire companies in adjacent markets that will augment our organic growth. In addition, we recently announced the re-establishment of our stock buyback program with our goal being to buy back approximately the same number of shares that we are issuing for employee benefit purposes, such that the number of our shares outstanding does not change. Cash related measures reflected relatively good performance in this environment. The quarter's EBITDA was $31 million, or 93 cents a share compared to 16 million, or 47 cents a share last year.

In summary, the quarter reflected by a slightly improved economy, aided further by a weakening dollar. In this environment, we continue to watch costs 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 first quarter. As we said in our earlier discussion of orders, we see some signs of improvement from the environment experience for the past two years. This, coupled with the level of our year end backlog allows us to have an outlook of an increase in volume of 3-5 percent in the first quarter. In addition, should foreign exchange rates hold at today's level, there would be an additional 7 percent benefit resulting in an increase in sales of 10-12 percent. In the first quarter, we should see some further year-to-year improvement in the gross margin while spending will carry the annual salary increases along with currency effects. The outlook results -- this outlook results in earnings-per-share for the quarter in the 21-25 cent range.

In summary, we're beginning to see the effects of an economic recovery. For now at least, we have the added benefit of a weakening dollar. In addition, our costs have been restructured, allowing for significant profit leverage as the economy improves. And with that, let us now turn to your questions.

Pete Lisnic, Robert W. Baird.

Good afternoon, everyone. Quick numerical question before I ask another one. In terms of corporate expenses, if you back of the charges that you took last year, it looks like corporate expense is up around 40 percent year-on-year in the fourth quarter. Is there anything one-time in that number? Are there certain accruals at year-end that you did not expect? What is driving that increase?

There really is nothing unusual. The year-to-year increase in those corporate expenses were there through the year. In that number would be benefit and incentive programs that would drive some of that. But other than that, there really isn't anything unusual dealing with a year-end event of any nature.

Okay. So it sounds like just because better performance this year, we're hitting some targets, etc., etc.?

Yes. I think if you look at the line item -- there are a couple are higher this year. Medical expenses, which we have historically booked at corporate are higher and management compensation because of the quality of the year is higher. I think as we go into '04, we're going to re-look at how we allocate corporate expenses. And for ease of analysis, probably adjust '03 so that it's on an apples-to-apples basis.

I got you. In terms of another question, the (indiscernible) segment, some I guess inference to the fact that the Blue series is starting to help results there. We talked about it being a little bit of a drag on gross margins in the prior quarter. I assume that it was probably still a little bit of a drag in the fourth quarter, would be my first question. My second question is I guess more theoretical. When you look at kind of what you can do margin-wise in that segment, kind of mid-20s has been the peak. With the Blue series and the costs you're taking out and a leaning of manufacturing, where do you see peak margins in that segment?

Let me take them in the order given. The Blue series conversion has been extremely strong. The pickup rates by customers, the adoption of the new equipment has been above our plans. That has actually helped get cost down because we get the absorption of higher volume. We do, however, on the other side have then a decline in what we would call the legacy products. And some of the bills of material there go up because suppliers are providing less parts than we get out of volume contracts. But in general in the fourth quarter, we worked our way through the cost problems, cost issues that we talked about in the third quarter as we told you we would. We told you by the end of the year it would not be an issue. We're there, it is not an issue.

With regard to the longer-term trend in that business, I believe that absent price changes, and we like any company has to be aware of continuing competitive nature of markets. But without that, we should be able to pick up a few percentage points in gross margin as we continue our lean (ph) journey. I think for long-term planning purposes, you may not want to model that in because while we have not seen material price pressure in a lot of industries, price pressure has existed. And I think that one of the reasons why we are embarking on lean is to have a currency for such pressures.

Okay. Just a quick follow-up on Adesis (ph). Last quarter, we also talked about seeing some order improvement and we're seeing it again this quarter. But without really help from kind of the big customers or from big programs, anything that you've heard about or anything in the pipeline in terms of these big orders that can really help that segment in '04?

In adhesives?

Yes.

Adhesives is a pretty granular business to begin with. I think in packaging, packaging and product assembly, we saw less of a decline, therefore I think the rebound will be less pronounced than, say, in advanced technology where we saw the most drastic declines. And therefore as one would expect, we're seeing the most material rebound. But to answer the specific question, no, we have not seen any large program rollouts of customers.

Okay, great. Thank you.

Walter Liptak, McDonald Investments.

Thank you. My question is in the advanced technology area. You mentioned that Asymtek UV and EFC (ph) were all up, and you're seeing better improvement. I wonder if you could break those out in terms of the twelve week order trend?

By business?

Yes.

We traditionally have not done that. We take it down to the segment basis.

Of the big order improvement in the last 12 weeks, can you say if it's across the border or if you're seeing it out of Asymtek versus the others?

The order improvement is really across the Board, most pronounced in Asymtek. EFD, as you'll recall, is a parts business substantially, and therefore, you wouldn't expect to see the same percentage of volatility in that business. But indeed, EFD led the other businesses as a good indicator of, if you will, industrial production within advanced technology. And it continues to show a strong rebound. So we take encouragement from EFD more as an indicator, but all of our businesses in advanced technology have seen pretty good order flow.

Okay. At Asymtek, are you seeing just one or two customers with increasing orders, or are you seeing a broad-based pick-up?

It was led by some of our major customers, but it is becoming more broad-based.

Was that for product going into the U.S. or outside of the U.S.?

That industry is a truly global industry, and it is sometimes hard to track exactly where equipment goes. It tended to be North American customers, but not necessarily North American production.

You may have alluded to this in the prior question, but the gross margin was a little light from I think the expectations that you set in the last conference call, and I'm wondering if you could address the gross margin and what it might look like in the next couple of quarters?

The gross margin in the quarter was -- I would say mix has the biggest impact, Walt (ph). And going forward, I think as we come out of this recession, I think the tilt (ph) would be on some of the systems businesses improving. And so on one end of it, that mix tends to bring down the rate. On the other, the currency environment and the improvements in the cost situation will help in the other direction. As Peter mentioned upfront, the first quarter expectation is built on improvements in the margin rate relative to a quarter ago for all of those factors, currency being included.

Okay, thank you.

Charlie Brady, Hibernia Southcoast Capital.

Hi. Thanks guys, good afternoon. Could you give us a breakdown of the backlog across the three business segments?

We typically have not done that. I will just eyeball it to try to give you some general comments. In general terms, I would say it is up proportionally across the businesses, perhaps with finishing having less of a backlog increase.

Okay. If I heard you right, you said that Japan saw order rates at 95 percent versus a year ago?

Yes.

And given that it looks as though the -- would you expect that to change, given -- is there an instance where it is keeping that down a little bit, or is there one event or -- what is happening there as I expect it to turn around I guess?

Nothing unusual (multiple speakers) 95 percent is a 12-week period.

How does that (indiscernible) look sequentially?

It was also down, down about the same. It was 96 percent on a sequential basis. Japan started the year very strong a year ago, but we don't see this as a decline. In fact, Japanese GDP numbers are showing a little bit of strength.

Okay. On the corporate expense side, and I guess you may have already touched on this, it looks like it came in a little under 11.5 versus pretty big last year. What is the run rate going forward? Was that that tweaked up (ph) in the fourth quarter and (multiple speakers) come back down?

The corporate expenses, as Peter had mentioned, in the corporate expenses are incentive, benefit programs across the board for all employees. And the pace of accruals, it mirrors the business activity levels in the quarters. And so typically, the fourth quarter would have a higher amount than the first quarter. But there is nothing -- going back to the other question we raised -- there's nothing unusual about this year’s fourth quarter relative to the past, in terms of any year-end issues. And with that, the first quarter number off the fourth quarter would be lower because of the pace of the business in the quarters.

The fourth quarter last year that's shown on corporate included the inventory reductions.

My last question, and I will get back in the queue. On the inventory and receivables, obviously that is driving your working capital generation. Is that something that -- were the inventories down any particular reason seasonally, or was that just some of the lean stuff coming into play here?

The answer is both. Seasonally, the fourth quarter is our strongest quarter and inventories are probably at their lowest level as we end the quarter. But we have been working inventory for the past two years very aggressively at Nordson. And I think the more sustaining trend wherein the inventory turnover year-to-year changes that I cited, we believe that we can continue to improve inventory turnover. Ideally at this point as we see potentially volume increases, the inventory dollars may stay the same and the inventory turnover will continue to improve.

Great guys thank you and I appreciate it.

Pete Lisnic, Robert W. Baird.

Back again. Looking at the coating and finishing segment, it looks like that operating margin there was the best I don't know at around eight or ten quarters, somewhere around 9 percent. Was there anything in there in terms of mix that really yielded that kind of improvement in operating margin, and what kind of margin should we kind of think about going forward? Is the 9 percent something or in that range sustainable going forward, and were the low single digit margins that we saw the previous three or six quarters, whatever it was, were those kind of aberrations? How should we kind of think of profitability in that segment?

Operating income margins are always best in the fourth quarter to begin with. So when you compare it, it is better to compare it to prior fourth quarter than the intervening quarters. But in this quarter I think, what we saw was less absorption problems in finishing. And I think that on a seasonally adjusted basis, these are the sort of margins we should continue to see, if not better.

Okay. Because just looking at it, you did 9 this fourth quarter, and last fourth quarter, you did about 4.

Last fourth quarter, they were taking down a lot of inventory and (indiscernible) self aggravated absorption issue.

Okay. In terms of -- we're talking about the this nice improvement in order rates. We're basically six weeks or halfway through the first quarter. Assuming that this continues going forward and let me know if that is not your assumption. But if this continues going forward, what is your outlook for the full year, in terms of any types of targets you may have, or what you are thinking right now?

Good try.

I didn't want to ask that one too directly.

You got good style points. It is very hard for us to anticipate volume very far into the future at all. And therefore, we decided and I think it is consistent with prior years, or at least recent prior years, not to give guidance in any fashion for the full year. We hope that the order trend continues, but we really, like so many companies, it is very hard to forecast.

Okay I will, jump back in queue and try again.

(Operator Instructions). At this time, there are no further questions.

There were a few that implied they wanted to get back in queue, so we will give you a moment before we end the call.

Pete Lisnic

I will try another '04 item, but this one should be relatively straightforward. In terms of capital spending, what are you looking at next year?

We are planning for 12 million.

Fair enough, that is all I had.

Well, thank you all for your continued interest in Nordson. We wish you and your families the happiest of holidays and clearly a great 2004.

Thank you.

This concludes today's Nordson conference call. You may now disconnect.