Nordson Corp (NDSN) 2004 Q1 法說會逐字稿

Good morning. My name is Shayla and I will be your conference facilitator today. At this time I would like to welcome everyone to the Nordson first quarter fiscal 2004 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. (OPERATOR INSTRUCTIONS) Ms. Price, you may begin your conference.

Thank you, Shayla. Good morning. 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, February 25, 2004 on Nordson's first quarter fiscal 2004 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, March 9, which can be reached by calling 1-800-642-1687, and you will need to reference ID number 5583584.

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 first quarter fiscal 2004 results and Nordson's future outlook.

Thank you, Barb, and thank you all for attending Nordson's conference call discussing our first-quarter 2004 results. I will make some general comments before turning it over to your questions. In the first quarter we saw for the second quarter in a row an improvement in volume. But this quarter was more substantial with volume up almost 10 percent. This coupled with a weakening dollar and continued cost controls, resulted in record earnings that were slightly above our guidance range and better than research estimates. In addition, the positive trend that we have seen in order rates in recent months has continued, which makes us more encouraged about the year ahead.

Sales for the quarter were 171 million, up 17 percent from the prior year. The fifth quarter in a row of increased sales. In addition to the 9.6 percent increase in volume, the weaker dollar added 7.8 percent to sales. Our volume in the first quarter reflects the beginning of an economic rebound in North America and Europe, up 6 and 10 percent, respectively. Pacific South continues to be very strong with volume up 43 percent while Japan was down for the quarter 9 percent.

On a business segment basis, advanced technology continued to lead the recovery with the first-quarter volume increase of 21 percent. Adhesives was up 11 percent while finishing was down 5 percent. The improved first-quarter volume in advanced technology was paced by demand in Asymtek with a volume gain in excess of 45 percent. UV and EFD performance was also strong in the quarter. The growth in adhesive is traced to increases in system shipments to product assembly customers along with a shipment of a very large engineered fiber system.

Lower shipments to automotive customers offset increases in packaging and nonwoven adhesive systems. Although experience in improved order activity in recent weeks, finishing volume for the quarter lagged behind last year's level. Demand as measured by orders continues to show improvement. Orders for the last 12 weeks were up 11 percent over the same period last year on a currency neutral basis. On a sequential basis, that is the last 12 weeks versus the 12 weeks before that, orders were up one percent. The sequential comparison is influenced by seasonality in that the most recent twelve week period includes the Christmas New year shutdown period and it is compared to a period twelve weeks before that which did not have as many holidays.

Again, all comments about orders are in constant currency. Orders would reflect even greater improvement stated in nominal currency, given the weakness in the dollar. Of late we have seen the greatest improvement in orders in advanced technologies. By segment the past 12 week order rates versus a year ago are 128 percent or a 28 percent increase in Advanced Technology. We have seen a rebound in finishing, which is up 24 percent. And orders are up 4 percent in adhesives.

On a geographic basis over the past twelve weeks in North America and Europe are both up 6 percent. Japan has had orders at 114 percent of last year and PSD is at 159 percent of the prior year's level. The trend in order improvement measured by year-to-year change in twelve 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 ten of our standard Investor Relations presentation, which is also been updated with first-quarter 2004 information. You can find these at Nordson.com.

We ended the quarter with $81 million in backlog. That is up from the beginning of the year by $20 million and up from the end of last year's first quarter by $21 million. This also reflects an improvement in economic activity. Turning to the first-quarter income statement, gross margin of 54.4 percent in the quarter was down slightly from 54.5 percent last year despite the benefit of currency of 1.4 percentage points. Offsetting the currency effects was approximately a $5 million fiber engineered system which carried very little margin. Spending was up 9.7 percent. Of this amount, currency accounted for a 6.1 percent increase, while other spending was up 3.6 percent.

Our efforts at cost control can best be seen in the percentage of spending to sales that dropped from 46.9 percent last year to 43.8 percent in this year's first quarter. Let me note that beginning this quarter the allocation of corporate costs to the business segments has been modified in the segment disclosure such that costs, which an independent business would need to incur, have been allocated to each business. Prior year costs have been adjusted on a similar basis.

Our interest expense continues to decline, down about 13 percent from a year ago, reflecting our reduced debt levels and the continuing low interest rate environment. Nordson's net income for the quarter was $9.7 million versus $5 million, representing a record for any first quarter in the company's history. Fully diluted EPS was also a record 27 cents a share versus 15 cents a share last year. Within the improvement was a 9 cent benefit of currency offset by a penny of dilution. The remainder was a result of the volume pickup and cost controls.

Our operating cash flow for the quarter continued to be strong. Specific cash flow items in addition to net income were non-cash charges that generated cash flow of $9 million. Working capital generated 3 million in cash. Capital expenditures were about $3 million, while dividends were 5 million. In addition, we saw an inflow in other sources of approximately $30 million, principally the exercise of employee stock options. Net cash flow was therefore cash generation of $44 million which was used to further reduce debt or is temporarily invested in marketable securities. Our debt leverage measured as debt to total capital ended the quarter at 38 percent.

I should add that our adoption of lean operating approaches continues to yield results. Inventory management continues to improve with inventory turnover for the first quarter of 112 days versus 172 days a year ago. Cash related measures reflected relatively good performance in this environment. The quarter's EBITDA was $25 million or 71 cents a share compared to $19 million or 56 cents a share last year. In summary, the quarter reflected an improved economy, aided further by the 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 second quarter. As we said in our earlier discussion of orders, we are encouraged by the signs of improvement seen over the past six months. This coupled with the level of our backlog allows us to have an outlook of an increase in volume of 8 to 10 percent for the second quarter. In addition, should foreign exchange rates hold at today's level there would be an additional 6 percent benefit resulting in an increase of sales of 14 to 16 percent. In the second quarter we should see gross margins at about the same level as a year ago.

In addition, our continuing cost controls will result in modest spending increases excluding currency. This outlook results in earnings per share for the quarter in the 38 to 42 cent range, compared with 24 cents per share last year in the second quarter, and the current consensus of 36 cents a share. In summary, we are beginning to see the effects of an economic recovery. For now at least we have the added benefit of the weaker dollar. In addition, our costs have been restructured, allowing for significant profit leverage as the economy improves. With those opening comments, let's now turn to your questions.

(OPERATOR INSTRUCTIONS) Robert McCarthy with Robert W. Baird.

Peter, did I understand you to say that the contribution of the fiber systems order to adhesives segment revenue in the quarter was about $5 million?

It was to revenue, yes. To gross margin, it was no.

And do you have additional such orders in backlog?

No, I think the margins will increasingly get better in that business going forward and clearly for the rest of the year. That order was taken in a period of time when on an absorption basis, given the lack of orders in that industry, it was the appropriate order to take. But we moved quickly into more normalized margins. However, I will point out in fiber since it is a lot about systems integration, the gross margins on those projects and the risk on those projects and the value added on the projects is materially less, so the gross margins reflect that.

Understood. Understood. Glad to see continued strong order performance. Can you speak to -- I realize that you are attempting to get at this with the trailing twelve-week comparisons, but can you give us some view of how order activity was in the month of January? Did you see any slowing?

We saw a bit of slowing. In fact, recently it has come back. Such that the numbers speak for themselves, but there was some slowing during January; February was a little stronger. We got through Christmas better than last year, but the seasonality is what I point out in the sequential.

Of course. I'm sorry, did I just hear you say that February had looked a little stronger so far?

Yes.

Okay. And then within what you are seeing in terms of orders, do you have any particular concern that you are not seeing strength in the core adhesives for packaging application business?

You know that business went down more, and therefore one would expect it to rebound less; on a year-to-year it is 4 percent up, and on the trailing it is basically flat.

That is the order activity?

Yes.

So we are down on revenue or a volume basis in revenue, but not in orders?

Well orders is a leading indicator.

Yes, I understand.

I think its rebounding the way we would -- the shape of the rebound is as we would expect.

This is Nick. In the quarter packaging was up in the low single digits which is not out of the realm of the band it usually operates in. It could be a bit better, but it really -- packaging was not down in the quarter.

I apologize. I thought I had understood you to say that packaging and nonwoven were down.

No, automotive orders in adhesives were down and it offset some small increases in packaging and nonwoven.

I'm sorry, I misunderstood. Okay and lastly, could I ask you for a couple housekeeping currency adjustments? First, the backlog number that you present, is that in constant dollars, or is it in actual local currency terms?

In the backlog, Rob?

Yes, that would (multiple speakers).

That number is published in what we -- the budgeted rates of exchange that we set at the beginning of this year.

Okay.

So that backlog number is in those dollars, which reflect a weaker dollar relative to a year ago period. But not the extent to where it moved since that time.

So in terms of an indicator of near-term revenue, assuming currency exchange rates stay where they are today, it actually understates backlog a little bit.

That's right.

Similarly do you have a figure for inventory at the end of the quarter without the effect of currency?

No, but it is roughly in the -- it would be about 6 percent lower, roughly, on average.

And I promise last thing, but everybody is going to want this. Can you give us revised or restated segment operating income numbers? For the second, third and fourth quarters of last year?

I will have to get that, follow-up on that. I don't have it right here in front of me.

Very good. Thank you.

And since we will be following up we will post it on the website, too, on the Investor Relations section.

Okay. Thanks a lot.

At this time there are no further questions.

Can you check one more time, please?

(OPERATOR INSTRUCTIONS) At this time there are no questions.

Then we will make this short and sweet, and we will be posting probably later today on the website a page that speaks to Rob's follow-up so that you all can see that information. And I thank you for attending today's call, and I thank you for your continued interest in Nordson. Goodbye.

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