Nordson Corp (NDSN) 2004 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Nordson second-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) Thank you. Ms. Price, you may begin your conference.

Good afternoon. This is Barb Price, Manager, Shareholder Relations; along with Peter Hellman, President and Chief Financial and Administrative Officer; and Nick Pellecchia, Vice President and controller. We would like to welcome you to our conference call today May 26, 2004, on Nordson's second-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 Friday, June 4, which can be reached by calling 1-800-642-1687; and you will need to reference ID number 747-3663.

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 second-quarter fiscal 2004 results and Nordson's future outlook. Peter.

Thank you, Barb; and thank you all for attending Nordson's conference call discussing our second-quarter 2004 results. In the second quarter, we saw for the third quarter in a row an improvement in volume. Volume was up 11 percent. This coupled with a weakening dollar and continuing cost controls resulted in record earnings that were above our guidance range and better than research estimates.

In addition, the continued 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 197 million, up 18 percent from the prior year, the sixth quarter in a row of increased sales, and a record for any second quarter in Nordson's history. In addition to the 10.7 percent increase in volume, the weaker dollar added 7.3 percent to sales.

Looking at geographic sales, I would like to point out that starting with this quarter we have further broken down the revenue within our Pacific South region to add clarity. Beginning this quarter, we will report geographic sales as United States, Americas -- that would be obviously excluding the United States -- Europe, Asia, and Japan. We have posted sales in this fashion for 2003 and 2004 on our website.

Now, turning to the geographic data, our volume in the second quarter reflects strong business activity in Asia and Japan, with volume up 67 percent and 12 percent respectively. Activity in the Americas was also strong with volume up 16 percent. Finally, European and U.S. volume was up 6 percent and 1 percent, respectively, for the quarter.

On a business segment basis, Advanced Technology continued to lead the recovery with second-quarter volume increasing 46 percent. Adhesives was up 2 percent, while Finishing was up 4 percent. The improved second-quarter volume in Advanced Technology was paced by demand in Asymtek, with a volume gain in excess of 95 percent. EFD was up 13 percent, while performance of our UV and plasma businesses was also strong. With respect to Adhesives, increases in system shipments to product assembly customers along with higher packaging revenue was offset by lower non-woven systems shipments.

Demand as measured by orders continues to be strong. Orders for the last 12 weeks were up 15 percent over the same period last year. On a sequential basis, that is the past 12 weeks versus the 12 weeks before that, orders were up 6 percent. 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 Advanced Technology. By segment, the past 12-week order rates versus a year ago are up 36 percent in Advanced Technology; Finishing orders are up 12 percent; and Adhesives is up 11 percent.

On a geographic basis, orders over the past 12 weeks with in the United States have risen 20 percent over the prior year's level while Europe is down 4 percent. Looking at other regions, Japanese orders are up 30 percent; Asia has also risen 72 percent; and the Americas is up 33 percent over the prior year's level.

The trend in order improvement measured by the year-to-year change in 12-week order rates is something we have begun to track, as many of you have interest in this data. To help in this we have posted an updated chart on our website in the investor relations section. It is found on page 12 of our standard investor relations presentation, which has also been updated with second-quarter 2004 information. You can find all of these documents at Nordson.com.

We ended the quarter with $103 million in backlog. That is up from the beginning of the year by $36 million, and up from the end of last year's second quarter by $30 million. This also reflects an improvement in economic activity and greater relative share of engineering systems in backlog, which have longer lead times. Backlog is reflected in constant currency.

Turning to the income statement, the overall gross margin rate in the quarter was 57.3 percent, up from 55.9 percent last year. The benefit of currency accounted for 1.1 percentage points of the increase. Also aiding the margin in the quarter was favorable absorption and mix. These gross margins will likely not be maintained in the third and fourth quarter as we see relatively more engineered systems sales occurring.

Spending was up 9 percent. Of this amount, currency accounted for a 5 percentage point increase while other spending was up 4 percentage points. Our efforts at cost control can best be seen in the percentage of spending to sales that dropped from 46.5 percent last year to 43 percent in this year's second quarter.

Let me also note, as with the first 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's costs have been adjusted on a similar basis.

Our interest expense has continued to decline, down about 22 percent from a year ago, reflecting our reduced debt levels and the low interest rate environment. Nordson's net income for the quarter was $16.7 million, versus $8.1 million last year, representing a record for any second quarter, while fully diluted earnings per share was also a record 46 cents a share versus 24 cents last year. Within the improvement was a 10-cent a share benefit of currency offset by 3 cents a share of dilution. The remainder was a result of volume pickup and our cost controls.

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 $8.5 million; a cash generation from working capital of 5.3 million; capital expenditures in the quarter were about 2.4 million; while dividends were $5.5 million. In addition, we saw an inflow of 9 million from other sources, principally the exercise of employee stock options. Net cash flow was therefore a cash generation of 31.8 million, which was used to further reduce debt or is temporarily invested in marketable securities.

Our debt leverage measure by debt to total capital ended the quarter at 35 percent.

I should add that our adoption of lean operating approaches continues to yield results. Inventory management continues to improve inventory turnover, as the second quarter ended with 109 days versus 153 days of inventory a year ago. Another good metric is employment levels. Here we see only an increase of nine people during the first six months of the year, although to be fair, the increase is slightly larger when temporary employees are added.

Cash related measures reflected relatively good performance in this environment. The quarter's EBITDA was $35 million or 96 cents a share compared to $24 million or 70 cents a share last year.

In summary, the quarter reflected an improved economy aided further by the weaker 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 third quarter and for the full year. As we said in our earlier discussion of orders, we are encouraged by the signs of improvement seen over the past nine months. This coupled with the level of our backlog allows us to have an outlook of an increase in volume of 17 to 20 percent in the third quarter and up 12 to 13 percent on the full-year basis.

In addition, should foreign exchange rates hold at today's levels, there would be an additional 2 percent benefit resulting in an increase of sales of 19 to 22 percent for the third quarter. The currency benefit for the full year is seen currently to be 5 percent, resulting in a sales increase on a full-year basis of in the range of 17 to 18 percent for the full year.

In the second half of the year we should see gross margins at about 55 percent, as a greater share of engineered systems brings the margin down from the levels achieved in the second quarter. Spending over the remainder of the year is expected to be consistent with the second-quarter levels.

This outlook results in earnings per share for the third quarter in the 42 to 47 cents range compared to 26 cents last year in the third quarter and the current consensus of 41 cents a share. The full year's outlook is seen to be in the $1.69 to $1.76 range versus last year's $1.04. Earnings in this range would represent record earnings for the full year.

In summary, we are continuing to see the benefits of an economic recovery. For now, at least, we have the added benefit of a weaker dollar. Most importantly, as seen in the past two quarters, our costs have been restructured, allowing for significant profit leverage as the economy improves. After reporting 11 quarters in a row of volume declines, the past three quarters have reflected volume improvement. In this environment, our operating leverage is reflected in record earnings reported for the past two quarters. With that, let us turn the call over to your questions.

(OPERATOR INSTRUCTIONS) Charlie Brady, Hibernia Southcoast.

Just quickly on the Finishing and Coating segment in the quarter, anything unusual there? Is there any seasonal effect? I think it was a negative operating margin last year in the second quarter as well. I know it is a lumpy business; any big orders either in or out this year or last year?

Not in the second quarter. Their sales turns have not seen the uptick, and so they are still operating generally around breakeven. I think as we go forward, we have seen an increase in their order book, in their backlog, and they tend to make more of an engineered system. So we see them increasing in sales over the second half of the year. But there is nothing really unusual except relatively low shipments; or to state it another way they have not seen the rebound yet in the second quarter.

Just on the strength in the Asia-Pacific and the Japanese market, can you give a little more color on exactly where you are seeing that from? And what is underlying that strength?

It is pretty broad based. In general terms, it is up in all segments, most particularly, however, it is up in Advanced Technology.

Okay. I will get back in the queue. Thanks.

Bob Schenosky, Jefferies & Co.

Peter, I just had a clarification. I know a lot of your Asian business is from North American multinationals. But you noted the increase in U.S. orders. Is that true U.S. business or will some of that be diverted as it is reported into business? Will that be moved into Asian?

Bob, the U.S. the pickup in the U.S. orders I would say is predominantly U.S. business on the order rate. What we are looking at in those 12-week order rates that Peter quoted you, based at this point in time, shipped to destinations, those rates are based on that. So that 20 percent is at this point destined for U.S. plants.

So a much broader increase than what we have seen?

Yes.

As a follow-up, can you spend just a second on why you think the European business is still lagging, down 4 percent versus everywhere else up and up pretty dramatically?

It just hasn't seen the rebound. I wouldn't be overly concerned about the small downtick. But we really haven't seen a rebound from a rather stagnant economy.

Is bidding activity in Europe beginning to pick up yet, or not a lot of visibility just yet?

Not a lot of visibility.

Okay. Thanks, Peter.

Robert McCarthy of Robert W. Baird.

A couple of details. First, Nick, can you tell us how much foreign currency impacted the inventory line on the balance sheet?

About $3 million.

Is the increase in outstanding shares strictly a function of option exercise?

Yes.

In other words, no shares have been issued in any kind of transactions?

There have been no shares issued, nor have any shares been repurchased under our repurchase plan. So any change is caused by options.

Okay. Peter, when you said SG&A in the second half you thought would -- or operating expenses would look a lot like the second quarter, I assume you meant as a percent of revenue?

No, in dollars.

In absolute dollar levels?

Yes. So it should drop in the percentage of revenue.

And remain in a range around 85 million? Yes, okay.

I like it when you answer your own question.

I just provided the incremental detail that you didn't. Your outlook for growth in the second half of the year is quite positive. Clearly reflects the acceleration in the Advanced Technology segment. But I'm wondering what you're assuming for volume growth in the other two segments. Frankly, I thought the 2 percent roughly in the Adhesive segment was a bit disappointing. Were you disappointed in it?

Yes, they will have a much better third quarter in terms of percentage change. I would say in general, in the volume in the third quarter, it becomes more balanced across all three segments.

Some of that should be the flowthrough of the strong order activity that you had in Coating and Finishing in the first quarter?

Yes, and the backlog that Adhesives carries into the third.

That carries into the third?

Yes. What we are seeing is engineered systems that have gone into backlog over the third and fourth turn into shipments; and therefore all businesses participate to a higher level in the recovery.

How should we be thinking about the ongoing drag in comparisons for non-wovens business? Was that a particular source of strength in last year's second quarter? I don't remember.

Yes, it was.

Was it an ongoing strong contributor the balance of last year?

No, it was more first half last year.

Well, I think second quarter was the peak and it dropped off a bit from there.

Very good. All right, thanks.

(OPERATOR INSTRUCTIONS) Charlie Brady.

On the corporate expense line in the quarter, at 6.8 million, was there any unusual in that, that brought it up in the second quarter versus what we have seen in Q1? What is your outlook on corporate expense going forward second half of the year?

You have seen this on historical trends between Q1 and Q2 on the way we account and accrue for some of our benefit costs, primarily holiday pay. There is a step-up from the first to the second quarter on that. But on a year-to-year basis it is pretty consistent. So, that isn't anything unusual at all. The step-up that you noticed isn't unusual.

Will that also occur in Q4, as well?

No, there won't be any further. The big step-up is the first and second (multiple speakers).

Thanks. That's it.

John Franzreb of Sidoti & Co.

My first question is, considering the strength that you are having in Asymtek, does that kind of change your R&D outlook, and maybe how you want to spend your dollars in the year ahead?

No, I think we have been consistent in spending dollars where we see the most potential, and we have been spending a higher percentage of R&D in Advanced Technology. The rebound really does not -- I think we have a more strategic view on R&D and product support spending. So it really won't change where we spend our money. Actually what it is, is a fulfillment of what we have been -- our expectation from that segment.

What is the total budget going to look like this year versus a year ago?

Of R&D? R&D reported on the SEC definition will be in the 3 to 4 percent range. We also measure something called product support, which is a broader measure. It includes new product introductions and the like; and that should be in the 9 to 10 percent range.

Great. Circling back to the demand going on in Adhesive Dispensing, could you kind of give us a sense of what end markets are stronger or weaker than the others? Consumer durables relative to what's going on in say automotive. Could you give us a sense where the pull is there and maybe where some of the weaker end markets are?

The one end market that has been strong and continues to be so is consumer durables in areas of wood furniture. Assembly of wood furniture products. What we call the product assembly business.

I would extend that also to be wooden windows.

The packaging business has been stable. It is within our range. It's our steadiest business over the years, and it is up slightly in the quarter and holding pretty stable.

The automotive business, nothing unusual there. On a quarter-to-quarter basis we do get some lumpiness because of the orders, but nothing unusual there. And Peter did comment on the non-wovens business.

It is interesting you said the wood furniture business, because I think La-Z-Boy had poor numbers this morning. Is that resulting in maybe some transfer of some production geographically; or that is just a La-Z-Boy specific problem?

I cannot comment on them. I think from our standpoint, it is a matter of focus. We focused on the industry, and I think we have developed some product that is being well received by customers.

Okay. Lastly, (inaudible) what's going on in Coatings, if I look at the revenues, you said that the revenues haven't really ticked up. But last quarter, you did about $29 million, and you were profitable. This quarter you're not. And a year ago you were about $26 million or so. Why can't you get a better sustained profit level out of that business?

I think it is a business that sells in the classic sense into durable industries. And durable industries tend to be ones that buy on capacity, and therefore as opposed to new product introduction. Therefore, lag recovery.

We have seen on an order rate basis improvements there. The orders stay in backlog longer because they're engineered systems that take longer for us to fabricate. I think we will see an uptick in the volume, and with that uptick we will have more reflective operating income margins.

Do you have a target of the operating margin for that business?

In all of our businesses, the minimum target is to earn a positive EVA; and that business should as the recovery continues start to generate EVA.

Okay. Thank you very much, guys.

Steve Loredo (ph) of Forthman Less (ph) .

On the Advanced Technology's businesses, could you just clarify for me whether those numbers have acquisition effect, or whether those are organic growth numbers, both in terms of the revenues and the bookings that you talk about earlier? Because I know you made some acquisitions there.

On a year-to-year basis, there is no acquisitions affect to any business except -- actually not even in Adhesives. We bought a business on the first day of our third quarter in Adhesives. So all numbers are organic by definition since there is no acquisition over the last 24 months.

Oh, boy, so those are just spectacular. Are you able to break out for us the geographical? I know you said Japan was very strong there. But could you give us more color commentary on the geographical breakdown of the strength that you're seeing in those business lines?

Within Advanced Technology?

Yes, sir.

No. For competitive regions we don't break down the regional by segment.

Second question is the U.S. has picked up nicely. Can you give us more color commentary on why you think that might be the case? I am just talking about from an orders perspective.

I think we are seeing a long-anticipated recovery in the economy; and capital goods orders reflect that. It is very broad based.

That is what I was looking for.

It is broad based and somewhat -- especially on orders. I think in the fullness of time we will also see it in shipments. We see the rebound symmetric to the declines. By that I mean in businesses such as packaging where we saw very little decline over the last three years, we are seeing modest rebound. And in those businesses where we saw dramatic declines, we are seeing dramatic rebound.

Great. Thank you very much.

Robert McCarthy of Robert W. Baird.

Peter, as we think about the end of this calendar year and next year, and the sustainability of the improved business environment that we are in, what key factors do you think we ought to be thinking about in both the Adhesive and the Advanced Technology businesses?

I think that what we are seeing in Advanced Technology are products design specific improvement. I think as the economy continues over the remainder of the year to improve, I think you will see a broadening of that pull of product to be both new product as well as capacity driven.

What is not there yet, you're saying?

Which is not there yet. In Adhesives, while that rebound will be more modest, I think too it will broaden from kind of a product pull to being a demand pull. In Finishing, what we will see I think is -- which you didn't specifically ask about -- is a continuation of the engineered systems and a conversion from liquid to powder, which will help as well.

I didn't ask about Coating and Finishing because the company hasn't as yet demonstrated an ability to earn competitive returns there, Peter. Could you also talk about the opportunity with Trio and the concept of powder-coating on wood. Which is a concept, I can tell you from talking to people about this issue over the last couple of weeks, it is something that makes peoples' heads spin, exactly how you might do it. But rather than talk about the technology, can you talk about the size of the opportunity?

Yes, I think it's a technology waiting for a market. In our forecast, we don't have --.

You don't count on much of anything.

We don't count on it.

Very good. Thank you.

Charlie Brady, of Hibernia Southcoast.

Can you guys just give the sales breakdown in the quarter between parts, engineered systems, and standard product?

I don't have that specifically. I would say that the parts base, with our growth in engineered systems in the quarter, in our Advance Tech area, I would say the parts number dropped below 40 percent. Last year that parts revenue was about 40 percent, and it is in the mid to high 30s right now.

The balance of it -- I don't have an exact split between standard and engineered, but it was skewed towards standard systems, and it was reflected in the gross margin rates. There was a better mix or a more favorable mix towards standard systems, which carry with them a bit higher margins. And that was one of the mix issues Peter referred to.

Going forward through the rest of the year, obviously you are saying engineered systems is going to become a bigger piece of that pie. Is that more the expense of a standard, whereas part and parts sits around where it is in mid to high 30s? Or does it cut into parts as well?

As a piece of the whole it is going to cut into both, because it's just got a higher growth rate than the other two in the back half of the year.

Measured over a long period of time, about a third goes to parts, about a third to systems, and about a third to engineered systems. At the trough of the recession, parts had increased in relative terms to 41 percent. We would expect that to now decline in relative terms as engineered systems gains a greater percentage of the pie.

Okay. Talking about the share buyback that is in place, you said you haven't purchased any shares under that program. I'm just curious as to what is the motivation behind that? What drives you to do that to reduce the share creep going forward?

The program has really two principal elements. One is it is to over time decrease the amount of dilution of shares issued for benefit plans. But it is also an opportunistic program. And the stock has been relatively strong and hasn't required a lot of support, so we stand ready to buy.

Okay. On the dilution from options then, you don't feel compelled then or any sense of urgency to buy back shares simply because the number of option exercises is going up?

I think what we have seen is pent-up if you will demand of option exercise, with a stock that was relatively stable in the 20s. When it moved to 30s there were people coming up to the expiration period who exercised options. I can't forecast the behavior of individuals, but I would expect that the option exercise volume that we saw in the first and second quarter this year will wane somewhat.

Okay. Great. Thanks. I appreciate it.

Robert McCarthy.

Sorry about the gratuitous shot on Coating and Finishing margin.

Let me just comment that I think that you will see those margins improve. It is clearly a particular focus of our lean efforts, and if lean is going to be effective we believe it will be effective most all at Finishing.

Good. Because I think that will be additive to most investors' expectations. I just had a simple technical question, Peter. The 12-week comparisons are through what? Last Friday?

Yes. (multiple speakers)

A week from last Friday. Exactly.

I'm sorry; you were both talking at once.

A week ago last Friday, 10 business days preceding today.

Okay. Great. Thank you.

At this time there are no further questions.

Given that, thank you for your attendance and thank you for your continued interest at Nordson.

Thank you. This concludes your conference. You may now disconnect.