Nordson Corp (NDSN) 2005 Q1 法說會逐字稿

Good morning. My name is Tracy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Nordson Corporation's first quarter earnings 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.

Thank you, Tracy. Good morning, everyone. This is Barb Price, Manager, Shareholder Relations, along with Peter Hellman, President, Chief Financial and Administrator Officer; and Nick Pellecchia, Vice President and Controller. We would like to welcome you to our conference call today Wednesday, February 23, 2005, on Nordson's first quarter fiscal 2005 results. Our conference call is being broadcast live on our web page at www.nordson.com and will be available for 14 days. There will be a telephone replay of our conference call available until midnight Friday, March 4th by calling 1-800-642-1687 and you will need to reference ID number 3991946.

Our attorneys have requested we 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. 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 2005 results and Nordson's future outlook. Peter?

Thanks, Barb, and thank you all for attending Nordson's conference call discussing our first quarter 2005 results. In the first quarter, we saw as we have for the past 6 quarters an increase in volume, with volume up almost 8 percent. This coupled with a weakening dollar and continued cost controls resulted in record earnings that were within our guidance range and met research estimates. Sales for the quarter were a record $190 million, up 11 percent from the prior year and the fourth quarter in a row of record sales. In addition to the 7.7 percent increase in volume, the weaker dollar added 3.7 percentage points to sales. Our volume in the first quarter reflects the continuation of an economic rebound in all regions except for Europe. Volume was up 4 percent in the United States, 16 percent in Japan, 18 percent in Asia, and 50 percent in the Americas. Volume was down less than 1 percent in Europe.

On a business segment basis, Advanced Technologies continued to lead the recovery with first quarter volume increasing 16 percent. Finishing was up 12 percent with Adhesives up 4 percent. The improved first quarter volume in Advanced Technology was paced by demand in Asymtek with a volume gain in that unit of 30 percent. Our Plasma business also had a strong quarter. Finishing had strong shipments of the powder systems orders -- or shipments to Japan and China that were in year-end backlog, but that carried below average margins. In Adhesives, while automotive and packaging had relatively good volume, this was offset to some degree by the Fibers business which had a strong first quarter last year.

Demand as measured by orders has experienced slowing over the past 2 months. Nevertheless, we believe a large portion of this is timing such that we should continue to be comfortable with a full year of volume growth in the 5 to 6 percent range. All comments about orders are in constant currency. During this period of the weak dollar, this would help nominal currency comparisons. Specifically, orders over the past 12 weeks were down 5 percent over the same period last year on a currency neutral basis. We see this decline as being primarily timing, clearly it is not reflective of loss of share. In some areas, Advanced Technology in particular, the trends are quite encouraging from a market perspective. Of late, we have seen improvement in Advanced Technology with year-over-year declines in Adhesives and Finishing.

By segment, the past 12 week order rates versus a year ago show Advanced Technology is up 17 percent, Adhesives down 10 percent and Finishing down 13 percent. On a geographic basis, orders over the past 12 weeks in the United States are up 13 percent over last year's level. Europe is down 12 percent. Japan is down 11 percent. Asia is down 21 percent. While the Americas are up 1 percent. The largest single factor in the decline of order rates is Fibers, which had a very strong period last year. For example, the corporation as a whole, adjusted for Fibers, would reflect orders down only 1 percent. In addition, a majority of these orders were Asian, thereby explaining substantially all the year-over-year Asian variance. We have also seen weakness in Powder and Nonwoven orders in the most recent 12 week period. We see these as largely timing, as Nonwoven and Powder full year sales volumes are forecasted to be comparable to last year, while Fibers is forecast to be operating at a lower level reflecting the current order shortfall. We ended the quarter with 88 million in backlog. That is up from the beginning of the year by more than $10 million, and approximately flat to last year's level on a currency neutral basis.

Turning to the income statement, gross margins of 56 percent in the quarter was up from 54.4 percent last year. This year's margin is more indicative, as last year we had a large fiber order that carried little margin. This year also had the benefit of currency, which added four -- 0.4 percentage points. Spending was up 10.8 percent. Of this amount, currency accounted for a 3.3 percent increase, while Other spending was up 7.5 percentage points. The larger than normal increase reflects an acquisition, consolidation of our Korean operation, and the timing of accruals. Spending as a percent of sales improved from last year's 43.8 percent to 43.5 percent this year. Our interest expense has continued to decline, down about 22 percent from a year ago, reflecting our reduced debt levels in the low interest rate environment. Nordson's net income for the quarter was $14.4 million versus $9.7 million, representing a record first quarter earnings. Fully diluted earnings per share was also a record $0.39 a share versus $0.27 last year, an increase of 44 percent or $0.12. Of this, currency was a $0.04 benefit offset by $0.02 in share dilution. The remainder was a result of better volume and improved margins.

Our operating cash flow for the quarter continued to be strong. Specific cash flow items in addition to net income were noncash charges that generated cash flow of $9 million, working capital represented a use of cash of 21 million, capital expenditures were about $3 million, while dividends were 6 million. In addition we saw an inflow of $7 million in other sources principally the exercise of employee stock options. Net cash flow was, therefore, about even, which is not unusual for our first quarter. Our debt leverage continues to reduce, measured as debt to total capital, and ended the quarter at 29.5 percent or 21.3 percent when measured net of cash. Cash related measures reflect relatively good performance in this environment. The quarter's EBITDA was $31 million or $0.82 a share compared to $25 million or $0.71 a share last year. In summary, the quarter reflects an improved economy aided further by the weaker dollar. In this environment we continue to watch closely our costs.

Let me turn to some brief comments about our outlook for the second quarter. As we said in our earlier discussion, we've been encouraged by signs of improvement seen over the past year and a half. While recent order trends have reflected a slowing, we are confident for the full year we will reflect volume growth of approximately 5 to 6 percent. This is also the same volume environment that we forecast for the second quarter. In addition, should foreign exchange rates hold at today's levels, there would be an additional 2 percent benefit resulting in a second quarter increase in sales of 7 to 8 percent. I should note that at the current exchange rates, the second quarter represents the toughest year-to-year comparison from a foreign exchange standpoint. In the second quarter, we should see gross margins at about the same level as a year ago, while our continuing cost controls will result in a deceleration of spending increases experienced during the first quarter, such that our second quarter should reflect similar spending rates to prior year as a percentage of sales. This outlook results in earnings per share for the quarter in the $0.50 to $0.55 range compared to $0.46 per share last year, and is in line with the consensus forecast.

In summary, we experienced a strong quarter despite some signs of slowing orders, and we believe this strength should continue into the second quarter. We believe that the full year will reflect volume increases of 5 to 6 percent. For now, at least, we have the added benefit of a weaker dollar. In addition, our costs have been restructured, allowing for significant profit leverage in an improving economy. With those opening comments, let's now turn to your questions.

[Operator Instructions]. Charlie Brady, Hibernia Southcoast.

Thanks, good morning.

Hi, Charlie.

Hi, Charlie.

Could you just talk about the order expectations going forward? If you look at just -- in the 12 weeks that you talked about, with Adhesives being down 10 percent, can you -- can you give us that -- the Adhesives excluding Fibers just for that segment what it would have been? I know you gave us -- as the Company as a whole would have been only down 1, but how about just on the Adhesive segment itself?

Yes. Without Fibers, Adhesives would be down about 4 percent.

Okay. And in -- is that -- I guess I'm just curious as to -- it sounds -- that's a little surprising -- a little bit weaker than I would have thought the Adhesive business would have been, and what's your expectation about that business going forward into Q2 and the rest of the year?

I think we see -- in the first -- in the last 12 weeks, we've seen also slowness in Nonwovens. We don't believe that's indicative of the full year and that would -- that would reconcile, if you will, the decline in the most recent period to a more robust forecast for the full year.

Okay. And an operating margin would have been -- operating margin level for that division, then, are you still -- you still expect being able to get that to a 20 to 21 percent margin operating level?

Yes, yes. Because if you will recall, Fiber as well they're -- they're clearly going to operate at a lower full year sales volume than last year. They bring us very little margin and with the improvement that we'll see in the remainder of the year for Nonwovens and the other businesses, 20 percent is in our forecast.

Okay. And just on the capital expenditures. That was a bit lower than I was forecasting. Is there anything that was sort of driving that down? And what's the expectation for sort of corporate expense out the rest of the year?

Well, capital expenditures you might recall from our last call we're budgeting $14 million, $2 million of which is a purchase of real estate that we're currently leasing, so you could say that operational capital expenditures are $12 million. We typically slightly underspend our budget, and I guess I would reflect it as just getting a slow start. In the second quarter, we should complete the purchase of that real estate so those 2 million will be accomplished in the second quarter, and we should start to see operational spending such that we come in at the 10 million to $12 million full year amount.

All right. I don't know if I misspoke. I was trying to drill down on the corporate expense line.

I'm sorry. I thought you were talking capital.

That was good information to have, too.

That's a great question. Nobody has to ask the capital question.

So, what's your expectation for corporate expense going forward and how the Sarbanes-Oxley and the 404 stuff working out?

There is 404 expense in there. It's not the material driver. The first quarter for corporate is slightly lower than last year. I don't see that being a major leverage of performance.

Okay. Thanks very much. I'll get back in queue.

Okay.

John Franzreb, Sidoti & Co.

Good morning, Peter.

Good morning.

I was wondering if you could talk a little bit about Asymtek. The 30 percent jump in volume, is that indicative maybe of recovery in the end market, or is it just easier comps for them?

It's more end markets. It typically is in MP3 assembly, cell phones, and disk drives rather than in semiconductors; but it is end market driven and our last year was pretty good comps so I think it's a real performance gain.

Great. And secondly, could you talk a little bit about what's going on in finishing? I mean, you said it's a timing of orders. Can we expect recovery of that? What are you hearing that gives you that kind of confidence that maybe we are not seeing maybe the end of that cycle coming through?

Well, we're seeing good RFQ activity. We're seeing all of the pre -- preorder activity, lab use and the rest. You do know our business well enough to know that the Powder orders are larger single orders, and I think that's why we're thinking it's just timing. What we've seen in the Powder business and some of our Adhesive business is kind of a slow start coming out of Christmas, and at this point we're of the view that it seems to be more of a timing issue than a systemic downturn. But clearly, we have evidence to indicate that it's not market share.

Okay. Thanks a lot.

Scott Macke, Robert W. Baird.

Good morning, everyone.

Good morning.

Good morning.

First question. In terms of the 5 to 6 percent volume outlook for, I guess, both FY '05 and the second quarter, is that consistent across segments or how does that break out between segments?

Yes, it's -- it's positive in -- well, I'll talk second quarter. It's positive in all segments. It's 4 percent for Adhesive. It's 10 percent for Finishing and it's 5 percent for Advanced Technology. You do the weighting and you'll find us pretty center -- centrist of that range. And for a full year, I'd probably not want to get into specifics by segment, but all are up, if you will, in that range.

Okay. I see. And then can we talk a little bit about I guess the underlying business environment in Europe? Any variation you're seeing within the different lines of business and perhaps within the different countries within Europe?

No. There really isn't a pattern. I think we're just seeing relatively -- slowness or sluggishness. It's -- it's in most businesses, up slightly or down slightly to prior year in volume. Of course, foreign exchange helps us.

I see, and that's consistent across I guess geographically across Europe as well?

Yes, I -- yes, it's -- the range is very narrow if you looked at geographically or you looked at by product lines.

Okay. Thank you very much.

Bob Schenosky, Jefferies.

Good morning. A competitive question as relates to Asymtek, please. With Camelot's problems in the past, how does the competitive landscape now sit? Is that part of the benefit that we've seen in the volume growth for Asymtek?

No. I think that it has more to do with the design of our equipment to meet particular assembly and dispensing needs that are at the hot points in the market; and so rather than look to competitors, I would say that we have managed to engineer our equipment so it is meeting the needs of the faster growth areas in the end markets.

Great. And a follow-up to that one is can you talk about pricing in the 3 segments?

Yes. In Advanced Technology -- we have pricing pressure from all of our large customers on a worldwide basis. Advanced Technology we see less of it. We have seen, as I indicated, some margin pressure in Powder systems in Asia. But across the board, of course, gross margins are up and that's indicative to our ability to fairly price our products in this competitive environment.

Okay. And then if I could, just one final one. Can you give us any more color on the acquisition at all?

Not much more than the -- when we made the announcement. We're very pleased that we were able to reach a definitive agreement with HHS. We believe that they operate in markets that are adjacent to the markets we operate in and broaden our footprint. We believe that our worldwide franchise will help leverage their growth in areas that they were, if you will, underpenetrated, Asia in particular. The announcement I think was on a Thursday or Friday, which -- a little over 2 weeks ago. We filed with the German Federal Cartel Office that following Monday, and we await their review. Should we receive that review, we would close quite quickly. Working through the economics of the acquisition, while at this time we're not disclosing the purchase price, it has margins that are similar to our Adhesive business, measured as a premium to EBITDA. It's at the upper end of a 7 to 8 percent range; and if you work through the economics, it would be accretive in the first full year by as much -- $0.10 a share, but it would be likely that given the Cartel Office review, a closing towards the end of our second quarter is a likely target such that we'd only get for this full fiscal year $0.05 of earnings accretion.

Great. Thanks, Peter.

Charlie Brady, Hibernia Southcoast.

I think you just answered my question. I was going to ask you about the growth -- the volume growth of 5 to 6, just to clarify that does not include HHS, correct? Since you're closing end of Q2, I guess not?

None of our outlooks, I should -- that's a very good question. None of our outlooks second quarter, full year reflect the acquisition.

Thanks. That's all I had.

[Operator Instructions]. You have no further questions.

Well, having no further questions, I thank you all for attending this teleconference of our first quarter earnings. We appreciate your continued interest in Nordson, and we wish you the very best today. Thank you.

Thank you for participating in Nordson Corporation's first quarter earnings conference call. You may now disconnect.