Nordson Corp (NDSN) 2004 Q3 法說會逐字稿

Good afternoon. My name is Elizabeth and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the Nordson's third-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 very much, Elizabeth. Good afternoon. This is Barb Price, Manager of Shareholder Relations, along with Ed Campbell, Chairman and Chief Executive Officer; Peter Hellman, President, Chief Financial and Administrative Officer; and Nick Pellecchia, Vice President and Controller. We would like to welcome you to our conference call today, August 25, 2004, on Nordson's third-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, Wednesday, September 1, which can be reached by calling 1-800-642-1687. You will need to reference ID number 937568 (ph).

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 2004 results and Nordson's future outlook.

Thank you, Barb, and thank you all for attending Nordson's conference call discussing our third-quarter 2004 results. In the third quarter, we saw for the fourth quarter in a row an improvement in volume. Volume was up 16 percent. This, coupled with a weakening dollar and continued cost controls, resulted in record earnings that were at the higher end of our guidance range and equal to research estimates. In addition, the continued positive trend that we have seen in order rates in recent months has continued, which gives us comfort for the remainder of the year.

Sales for the quarter were 198 million, up 19 percent from the prior year, the seventh quarter in a row of increased sales and a record for any third quarter in Nordson's history. In addition to the 15.8 percent increase in volume, the weaker dollar added 3.3 percent to sales.

On a business segment basis, Advanced Technology continued to lead the recovery, with third-quarter volume increase of 27 percent, while Adhesives and Finishing were up 13 percent and 14 percent, respectively. This broadening of recovery seen in volume is also reflected in our order rates.

Looking at the geographic regions, our volume for the third quarter reflects strong business activity in Asia-Pacific and the Americas, with volume up 40 and 46 percent, respectively. As a reminder, our geographic regions have five areas, the United States, the Americas, Japan, Asia, and Europe. Volume in the United States was up 9 percent; Europe was up 13 percent; while Japan was up 7 percent.

The improved third-quarter volume in Advanced Technology was paced by demand in Asymtek, with a volume gain in excess of 50 percent. EFD was up 16 percent, while performance of our Plasma business was also very strong. With respect to Adhesives, systems shipments to nonwoven and product assembly customers were up 20 percent and 13 percent, respectively, while packaging revenue was up close to 5 percent. The improvement in our Finishing segment was spurred by a recovery in outer coating systems shipments, with volume for the quarter up 25 percent.

Demand as measured by orders continues to be strong. Orders for the last 12 weeks were up approximately 10 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 down approximately 5 percent, which in part reflects seasonal patterns. All comments about orders are in constant currency. Orders would reflect greater year-to-year improvements stated at nominal currency, given the weakness of the dollar.

Of late, we have seen improvement in each of our three segments. By segment, the past 12-week order rates versus a year ago are up approximately 9 percent in Adhesives, 5 percent in Advanced Technology, and 22 percent in Finishing Orders. On a geographic basis, orders over the past 12 weeks in the United States have risen 5 percent over the prior year's level, while Europe is up 10 percent. Looking at the other regions, Japanese orders are up 25 percent, Asia-Pacific has risen 23 percent over the prior year, while orders in the Americas are down 1 percent from the prior year.

The trend in order improvement measured by the year-to-year change in the 12-week order rates is something some have begun to track. To aid investors, we have posted an updated charter of this data on our Web site in the Investor Relations section. It is found on page 9 of our standard Investor Relations presentation, which has also been updated with third-quarter 2004 information. You can find these at nordson.com under the investors section.

We ended the quarter with approximately $115 million in backlog. That is up from the beginning of the year by $48 million and up from the end of last year's third quarter by $35 million. This reflects an improvement in economic activity and a greater relative share of engineered systems that have longer lead times.

Turning to the income statement, the overall gross margin in the quarter was 56.6 percent, up from 55 percent last year. The benefit of currency accounted for 1.3 percentage points of the increase, with the remainder of the improvement aided by absorption and mix. These gross margins will likely not be maintained in the fourth quarter, as we see relatively more engineered system sales occurring in that period.

Spending was up 12.7 percent. Of this amount, currency accounted for a 2.6 percent increase, while the combination of our recent acquisition and the consolidation of a foreign affiliate accounted for a 1.4 percentage point increase. In addition, non-recurring type costs accounted for a 1.5 percent increase in spending. Our efforts at cost control can best be seen in the percentage of spending to sales, that dropped from 44.4 percent last year to 42.1 percent in this year's third quarter. Our interest expense continues to decline, down 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 $17.3 million, versus 8.7 million, representing a record for any third quarter, while fully diluted earnings per share was also a record 47 cents a share versus 26 cents a share last year. Within the improvement was a 4-cent benefit of currency, equally offset by 4 cents of share dilution.

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 $9.5 million; a cash use on working capital of $16.2 million; capital expenditures were about 2.4 million; while dividends were $5.5 million. In addition, we saw an inflow of $11.7 million in other sources, principally the exercise of employee stock options. Net cash flow was therefore cash generation of $10.6 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 32 percent.

I should add that our adoption of lean operating methods continues to yield results. Inventory management continues to improve, with inventory turnover for the third quarter of 114 days versus 145 days a year ago. Cash-related measures reflect relatively good performance in this environment. The quarter's EBITDA was $35 million, or 96 cents a share, compared to $25 million, or 73 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 the outlook for the fourth quarter. As we said in our earlier discussion of orders, we are encouraged by the signs of improvement seen over the past year. This, coupled with the level of our backlog, allows us to have an outlook of an increase in volume of 12 to 14 percent in the fourth quarter. In addition, should foreign exchange rates hold at today's level, there would be an additional 3 percent benefit, resulting in an increasing sales of 15 to 17 percent for the third quarter. Let me give some additional color -- I'm sorry, an increase in sales of 15 to 17 percent for the fourth quarter.

Let me give some additional color on volume by segment. If one were to take the center point of the 12 to 14 percent range that I just gave, one could see volume increases of 11 percent in Adhesives, 12 percent in Advanced Technologies, and 21 percent in Finishing. While the growth has moderated in Advanced Technologies, it has been picked up by our other segments, reflecting the broadening of the recovery.

In the fourth quarter, we should see gross margins approaching 54 percent as a greater share of engineered systems brings the margin down from the levels achieved in the third quarter. Spending in the quarter should exceed prior year's level by about 10 percent, of which 3 percentage points is traced to currency, and the remainder, the same elements as we experienced in the third quarter. This outlook results in earnings per share for the quarter in the 50 to 55 cent range, compared to 39 cents last year in the fourth quarter and the current consensus of 54 to 55 cents.

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 three 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 four quarters have reflected volume improvement. In this environment, our operating leverage is reflected in record earnings reported for the past three quarters.

With those comments, let us now turn to your questions.

(OPERATOR INSTRUCTIONS) Walt Liptak.

Good afternoon. The first question I have is about the moderating that you are seeing in Advanced Technology. Where are you seeing business moderate or is it on more difficult accounts? Is it U.S. customers for U.S. installations, or is it in the rest of the world? And specifically, what does order activity look like anecdotally from Intel?

Walt, this is Ed Campbell. First of all, I won't talk about a specific customer. In terms of the breakdown of what's going on there in the Advanced Tech segment, first of all, there is an issue of relatively more difficult comps that we're having in current weeks as compared to the comparables that we had to look at in the first half of the year. Clearly that is one of the factors.

But there is also, I would say, some deceleration that is occurring in some of the semiconductor equipment end markets compared to what we looked at earlier in the year, which was more growth. So that falls more heavily in Asymtek's line of business than we would see in our Plasma business, our EFD business and our UV Curing. Those businesses are all showing very fine performance and are offsetting some comparable softness that we might see compared to the rate of growth that we saw earlier in the year. So that is the breakdown of what is going on in that particular sector.

But I think looking forward, to respond to a question you might have that I anticipate with respect to the semiconductor business in particular or Asymtek's business more generally, I think our own sense is that that is a business that is more apt to have a leveling of its rate of activity rather than a kind of decline over time. I think there is a lot of soothsayers out there trying to make projections about what is the demand going to be for semiconductor equipment in 2005, and our crystal ball obviously is no better than anybody else's. But our sense is that probably more of one it's a leveling of demand than a reversal in what we have seen thus far this year.

Can you refresh my memory -- the semiconductor end market, what does that represent as a percentage of total revenue?

Within Nordson Corporation?

Yes.

5 percent.

So semiconductor end market is only 5 percent.

Yes.

So the broadening that you are talking about should more than offset the semiconductor weakness that you're speaking of?

We would expect that to be the case, yes.

Can you talk at all about pricing in the Finishing Systems business?

The Finishing Systems business is one that is a bid business. Typically projects are characterized by high ticket prices, relatively formal bidding processes that customers would look at when it's a major new system installation. And it is one that because of the size and the complexity of the projects from our customers' point of view may tend to lag in terms of when they get canceled at the beginning of an economic decline; and they tend to lag on the recovery as well, as there is hesitancy on the part of customers with large projects to commit new capital until they have the confidence that the recovery is on its way. And that pattern is exactly what we have seen in terms of the more recent acceleration in the rate of growth in orders in Finishing, generally, and in Powder, in particular, which is the largest piece of our Finishing segment.

With that kind of set of dynamics you see in the midst of a decline in the cycle, that pricing does come down. And the margins that we see at the gross margin level in the Powder business were lower in the first half of this year, and I would say continuing somewhat into the third quarter than we might have seen say two, three years ago. There had (ph) been a lot of evidence, based upon things that we're seeing now, orders that we're taking now, to say that margins should be expanding. And in fact, included in the forecast that we have for the fourth quarter in the Finishing business is a reversal of the profit performance we saw in the third quarter, such that we expect to finish the quarter and the year in profitable territory for Finishing.

So basically the pricing is improving?

It is.

Okay, thanks very much.

Brandon (indiscernible).

I wanted to ask about the strength that you saw in Europe, particularly when we have seen other companies that have showed some weakness there, and your volumes were up more than 13 percent this quarter compared to 6 percent in the second quarter. I wonder if you could just give us some color on that.

Yes, the primary strength has been in our core traditional businesses. Our European sales territory is particularly strong in the Adhesives sector. That's the part of the world where many of the major OEMs who export full engineered packaging lines and other types of adhesive-integrated systems, those customers of Nordson are shipping their product, if you will, external to Europe and markets like Asia and so on. So in many cases, where we seek emerging economic strength in some of the adhesive sector, in Asia for example, it will manifest itself in the European sector for Nordson's business. That has been the area of strength.

We have also had some good business in that part of the world in our Fibers business, which is within the Adhesive segment as well in the third quarter.

Okay. And I also had a question about the currency impact on the operating profit by business segment. I was wondering if you could give me that detail.

The currency impact generally has been roughly 35 percent of the sales improvement. And that really runs accordingly by operating segments. I don't have an exact breakdown by operating segment for you, but you could see that the improvement, the currency effect on sales by each operating segment in the quarter -- for example, Adhesive was about $4 million of revenue, and about 35 percent of that, or a little over $1 million, would've been the effect on operating profit. And that runs true for the other segments too.

Okay, so it's about even at 35 percent transfer (ph). Okay, thanks for your answers.

Robert McCarthy.

Good morning, gentlemen -- I'm sorry -- good afternoon, gentlemen. I would like to follow up, Ed, on your comments on the Finishing Systems business. Using your forecast for fourth-quarter sales, you are going to do -- at least your estimating at the midpoint something around 36 million in revenue in the quarter. If you go back a few years, at those kind of volume levels, you have demonstrated the ability for operating margins to approach 10 percent. If all you do is overcome the year-to-date operating loss in the segment, of course, you would be closer to something like 1 percent. I understand that that is not your specific forecast, but can you talk about the dynamics that keep you from being able to generate that kind of profit -- historical profitability levels at these revenue levels? Is it simply a function of change in mix?

I would say it is less mix than it is pretty tough dynamics in some of the end markets that we're selling into. As you know, Rob, the markets that we're selling into in our Finishing Systems businesses are generally associated with industries that are associated with bending metal. This includes the office furniture segment, which was a major segment of demand for the powder business back in the mid-1990s, for example. And with that came some fairly good industry dynamics. During the depths of the post-2000 bubble collapse, we saw basically major difficulties in many of the markets to whom, if you will, the office furniture segment sold to. And with that came a fairly difficult time for all of the people in these markets, and frankly, it associated with some of the competition for the little business that remained.

Margins have come down. And I think you would find that for the entire industry, profitability in some of these segments is not what it was in the very strong markets that we were selling into in the mid-1990s. Which is not to say that those are anything but cyclical patterns, but clearly, there was a desire on the part of, I think, companies in this industry to keep plants busy, to sell product and ensure that volume targets were achieved. That manifested itself in lower operating margins.

Are you achieving -- I think of that business as a business where you might have some negative impact from raw material costs or perhaps more so than the other segments. Is that an element here?

I really don't think that it is. I think the issues that we see are not cost-driven. In fact, I would say our operating performance from a cost point of view is quite good. No doubt there is big chunks of steel that go in powder reclamation booths and steel prices have been quite high. That goes into the mix. But I think that we are also seeing that there has been a very competitive market from a pricing point of view as well.

Maybe we're saying the same thing but just in different ways. My sense is that where you have had some pressure on cost, the market has not allowed you to be able to recoup any of that on the top line.

And looking backwards from where we stand in the third quarter and before, that is a correct statement.

Okay. In incoming orders in the third quarter, were there any of the large fiber systems in the Adhesives segment?

Rob, this is Nick. Yes, there were some fiber systems in that number, but not to the magnitude of some of the other as we had in the quarter. And I think the third quarter -- or that 12-week period this year compared to last year probably had an incremental 6 million of revenue.

And what kind of -- I can figure that out. Thanks, Nick, that's helpful. One last one. Ed, in a more general sense -- or really, any of you, I guess -- but in a more general sense, are (technical difficulty) satisfied with the overall development of contribution margins thus far this year?

Absolutely. I think this organization is performing at a magnificent level. I am very pleased with the progress we've made on our cost reduction programs, the use of lean to improve everything from inventory turns to cycle times with orders. We are operating, I think, at a very good rate of productivity. Which is not to say that it has any bearing on our desire to continuously improve. And at the rate that we see orders continuing to come in, the order growth of 10 percent in the most recent period of time over last year, gives us the kind of volume activity growth that enables us to gain in even more productive leverage.

Okay, great. Thanks, Ed.

Bob Schenosky.

A couple questions, Ed and Peter. First is, your backlog seems to be bucking the seasonal trend with it still strong sequentially. Can you discuss any more specifics, either in terms of product or markets or regions that seem to be carrying that?

Yes, I think it reflects the rapid order improvement in Powder Systems that is fairly recent, so it stays in backlog longer and we have more in Fibers. But in general, it is just a more robust level of orders that come through as backlog. But the two items that I would cite would be Powder Systems and Fibers; probably disproportionately both had (indiscernible). Next (indiscernible) to go to that would be product assembly within Adhesives.

On the back of that, more of a qualitative issue, if you can, just to try to get a directional sense. Given the strength in Adhesives, are there any early indications at all from your customers in this segment in terms of the direction of expenditures for next year?

Bob, it is Ed Campbell. Let me just add one additional point on this topic about backlog. I don't want to leave you the impression that we have shipped down the backlog in Advanced Tech. Our backlog now is very close to the high that it's been any time during the year, so that we have not failed to maintain the backlog. It has just disproportionately grown in other areas.

Right, because normally in that, it would tend to peak out in the second quarter and then just get filtered down the third and fourth quarter as you fill those orders, correct?

We have the schizophrenic view here of every quarter we try our damnedest to ship down the entirety of the backlog, while at the same time, we want to build backlog in our sales organizations. So I am not sure where those net aspirations end up, but --

The seasonal pattern, which really is demand from our customers, is they want the equipment to be available to them as they approach their year-ends. And so, yes, our backlog does come down and is a little higher than the seasonal trend that you would expect at the end of the third quarter, which bodes well as we complete the year and should bode well at year-end backlog too.

Leading dead into the second question, is there any early indications at all from the Adhesive customers in terms of what their plans may be for '05?

Bob, it's Ed again. We have not formalized our rollup to our first look at 2005. There is nothing that we have seen from our customers that would indicate that there is a change in direction on the part of Adhesive customers. But I have to just leave it at that general comment at this point.

Okay, thank you.

(OPERATOR INSTRUCTIONS) A follow-up from Robert McCarthy.

Minor detail. I just wanted to confirm the most recent 12-weeks, is that through last Friday?

Yes, it is.

Thanks.

At this time, you have no further questions.

Okay. With that, we thank you for attending the third quarter teleconference and we thank you for your continuing interest in Nordson.

Thank you. That does conclude today's conference. You may now disconnect.