Nordson Corp (NDSN) 2005 Q2 法說會逐字稿

Good morning. My name is Nicole and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Nordson Corporation second-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, Nicole. Good morning, everyone. This is Barb Price, Manager of Shareholder Relations, along with 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, Wednesday, May 25, 2005, on Nordson's second-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, June 3, by calling 1-800-642-1687, and you will need to reference ID number 6020102.

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 second-quarter fiscal 2005 results and Nordson's future outlook. Peter?

Thank you, Barb, and thank you all for attending Nordson's conference call discussing our second-quarter 2005 results. For the quarter, we saw record sales, earnings and earnings per share. In addition, the positive trend that we've seen in order rates in recent weeks continues the confidence we feel about the remainder of the year. Sales for the quarter were $208 million, up 5.6% from the prior year, a record for any second quarter. In addition to the 3% increase in volume, the weaker dollar added 2.6% to sales.

Looking at a geographic breakdown, our volume in the second quarter reflects strong business activity in the United States, with volume up 11%. Activity was also up in Asia-Pacific, 5%, and the Americas, 3%. As we noted in our April 6 release, Europe and Japan have experienced some weakness with the second-quarter volume declines of 1.5% and 8%, respectively.

On a business segment basis, Finishing reported a volume increase of 17%, Advanced Technology was up 2%, while Adhesive was up very slightly. Within the Adhesive segment, volume declines of 7% and 11% in Europe and Japan, respectively, were offset by strong performance in both the United States and Asia/Pacific. With respect to advanced technology, volume for Asymtek and EFD were relatively flat to a very strong performance a year ago, while the Plasma and UV businesses were strong in the current quarter.

Demand as measured by orders has shown some rebound in recent weeks. Orders for the last 12 weeks are equal to the same period last year. And I should say further that on a year-to-year basis, we are currently facing our toughest point of comparisons for the year as orders reached a peek at this point last year.

On a sequential basis, that is the past 12 weeks versus the 12 weeks before that, orders were up 13%, with seasonality as a factor for about half of this positive comparison. All comments about orders are in constant currency. Orders would reflect even greater improvement stated in nominal currency, given the weakness in the dollar.

Recent orders by segment reflect that the past 12-week order rates versus a year ago were up 13% in Advanced Technology. Finishing orders are up 12%, while Adhesive is down 9%, reflecting a high level of fiber orders last year. On a geographic basis, orders over the past 12 weeks in the United States have risen 7% over the prior year's level, while Europe is down 7%. Looking at other regions, Japanese orders are down 16%, Asia/Pacific have risen 19% and the Americas is at last year's level.

We ended the quarter with $95 million in backlog. That's up from the beginning of the year by 16 million, but down 8 million on a year-to-year basis, reflecting the high level of fiber orders in last year's backlog.

Turning to the income statement, the overall gross margin rate in the quarter was 55.7%, down from last year's very good 57.3%. The benefit of currency accounted for 0.5 percentage points, but was (technical difficulty) by product, geographic and OEM versus non-OEM mix, and to a certain extent, pricing pressure in our European powder business.

Spending was up 3.4%. Of this amount, currency accounted for a 2% increase, while other spending was up 1.4%. Our efforts at cost control can best be seen in the percentage of spending to sales that dropped from 43% last year to 42% in this year's second quarter. Our interest expense continues to decline, down about 11% from a year ago, reflecting not only our reduced debt levels but increasing short-term investment balances.

Nordson's net income for the quarter was $17.5 million versus $16.7 million, representing a record for any second quarter, while fully diluted earnings per share was also a record, $0.47 a share versus $0.46 a share last year. Currency helped the year-to-year comparisons by $0.04, while share dilution hurt the comparison by $0.01 a share.

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 6.6 million; a cash generation from working capital of 24.7 million; capital expenditures were about 5 million, while dividends were 5.8 million. In addition, we saw an outflow of $1 million in other uses.

The acquisition of HHS has not occurred and is still under review by the German Federal Cartel Office. Net cash flow was cash generation of 35 million, which was used to further reduced debt or is temporarily invested in marketable securities. Our debt leverage measured as debt to total capital ended the quarter at 29%.

I should add that our adoption of lean operating approaches continues to yield results. Inventory management continues to improve, with inventory turnover for the second quarter of 91 days versus 94 days a year ago. Cash-related measures reflected relatively good performance in this environment. The quarter's EBITDA was $35.3 million or $0.95 a share, compared to 35 million or $0.36 a share last year.

In summary, the quarter reflected a slow improvement in the overall economy, aided further by a 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 signs of improvement seen in order rates over the past several weeks. This, coupled with the level of our backlog, allows us to have an outlook of an increase in volume of 3 to 5% in the third quarter and for the full year as well. In addition, should foreign exchange rates hold at current levels, there would be an additional 3% benefit for both the third quarter and full year.

In the second half of the year, given the mix of standard products versus engineered systems in our forecast, we should see gross margins of about 55%. Spending over the remainder of the year is expected to be consistent with second-quarter levels. This outlook results in earnings per share for the quarter in the $0.48 to $0.52, range compared with $0.47 per share last year in the third quarter and the current consensus of $0.55 a share. The full year's outlook is seen to be in the $2 to $2.05 range versus last year's $1.73 a share.

In summary, we are continuing to see the benefits of an economic recovery, albeit at a slower pace. For now, at least, we have the added benefit of a weaker dollar. We continue to balance growth in new applications and markets with our ongoing cost controls. And now, let us turn to your questions.

(Operator Instructions). Bob Schenosky, Jefferies & Company.

Actually, this is Monica Mahan (ph) for Bob, who is traveling. A quick question on your volume outlook. Could you give us some color on how that breaks down by segment?

By segment for the quarter, the Advanced Technology segment in the third quarter would be the primary contributor to the volume. Our outlook in there is up double digits for the third quarter, consistent with the order pattern we are seeing today, whereas both Adhesive and Finishing will be up in the 2 to 3% range for the third quarter. And similarly, for the year, it would be a similar outlook for the full year as you carry that through the fourth quarter.

Thanks very much. And then one last question to follow up. On the acquisition, you mentioned the German Cartel is still reviewing it. Do you have an updated time frame for when you would expect that to be resolved, or--?

I think we will hear an opinion from them in the next couple of months.

Charlie Brady, Hibernia Southcoast Capital.

Could you comment to the operating margin in the Coating and Finishings business this quarter? It looked pretty weak despite the revenues sort of kind of coming in at a relatively stable level. What's going on there?

Well, as I've said in my comments, we have seen some pricing pressure in Europe, and the mix was such that that had an impact on margin. I think we could say that we were disappointed with the operating results in finishing too, given the increase in volume. But it reflects, if you -- the European volume coming in at lower-than-normal margins.

Is that pricing pressure continuing into the current quarter? Or is it abating at all?

I would say it is not abating, but the mix is becoming more favorable.

Is the HHS acquisition -- you know, you're saying you're getting an opinion in a few months. It seems to be being pushed out a little bit farther than maybe expected. Is there anything unusual going on there or are the Germans dragging their feet on the review?

No, I wouldn't say they are dragging their feet. But they are clearly studying this acquisition in-depth.

John Franzreb, Sidoti & Company.

I was wondering if you'd talk a little bit about the Advanced Technology segment. The growth there is pretty good, especially considering where we are in the cycle. Are you leveraging that business and maybe to different end markets?

Well, I think as we've all along is that it's a multifaceted segment. And while it is sometimes associated with Semicon, for example, that represents only a portion of the markets it serves. In recent months, we've seen good order rates in our Plasma business and UV business, as well as good stability, given the cycle, in Asymtek and EFD. The Plasma business and UV business does go into broader end markets than often ascribed to, if you will, the Asymtek businesses.

And going to Charlie's question, given where we are in the cycle for finishing, what kind of time line do you forecast that this business can actually be a meaningful contributor to the bottom line? I'm kind of surprised we wouldn't get better leverage at this point, and it doesn't seem like there is anything immediate that's going to turn it around.

Yes, well, we are focused at increasing, if you will, the breakeven level and getting to operating income margins that are more robust across the cycle, with our goal being that the business would, at a minimum, be EBA breakeven across the cycle, and obviously contribute EBA at the peaks of cycles. We're making progress, but it was hidden, if you will, behind the strong European sales at lower-than-normal margins. So I share your frustration in not seeing more tangible progress. But we believe that as quarters roll out and over the next year or so we will start to be able to demonstrate the progress that we've been working towards.

Walt Liptak, KeyBanc Capital Markets.

You mentioned in your comments that with your gross margin coming down a little bit and the revenue weaker, I guess, than expected because of Europe and Japan, that you're watching costs closely. And I wonder if there's anything beyond that comment, if, you know, there is costs that you can take out at this point to try and offset some of that weakness?

Yes, let me put it in a time frame. At this time in February, when we had our teleconference, we saw second-quarter forecasts that were higher than we delivered. But in April, by April, we had seen that we had moved to a softer environment, and we achieved the results that we expected to under our April release.

With regard to what we're doing on costs, I don't suspect that there will be any significant cost reduction programs. But, having said that, we clearly have a cost reduction focus in Finishing. I just don't think that the actions would be so material that they would affect our results for a period or the remainder the year.

Okay. And given where you are with the stock price and your cash build this year, are you in the market buying back stock right now?

Yes. We have reinstituted our stock buyback program, and we have been buying stock. I would say that we are buying at a rate that would satisfy our benefit plan needs.

Okay. And then you mentioned that part of the reason for the weakness in the gross margin was OEM versus non-OEM. Could you clarify that for us? Is that aftermarket parts and service versus systems?

Even original systems that we sell directly to an OEM comes with an OEM discount versus selling a new system to an end-user. And as that mix changes, it has an effect on gross margin. But I would say the order that I listed those, which was geographic, was a more important mix issue, followed by product, followed by the OEM/non-OEM mix.

Robert McCarthy, Robert W. Baird.

Peter, can you be at all more specific about what's going on with the review of the HHS transaction? For example, is there some date known by which the authorities are obligated to provide at least some kind of an opinion, or--?

Yes, there was -- let me go through the process. We entered that process several months ago. They elected after the first period of review to continue the review into a second phase. And that second phase has a termination date or an end date which would be close to the end of July. They obviously could come out with an opinion sooner than that, but it's my understanding that it cannot be later than that.

And they are obligated to actually have an opinion by that date or could they extend this process further?

It's my understanding that that would be the conclusion of the process.

It would be a drop-dead date. Do you read anything into this? Should we assume that there is some maybe small but non-zero probability that it's not going to go through?

I won't comment on that. We will let the German process come to conclusion. In all of our estimates, we've included no HHS results for our full year.

Right. Okay. Thank you. The comparisons for the Adhesives and Nonwoven Fiber segment, for example, the minus 9 order number, you clarified of course that that was impacted by significant fiber system order activity last year. Could you give us an idea what the number would look like adjusted for that factor?

It would be about still down, but in the 3 to 4% range, Rob.

And can you talk a little bit about -- (multiple speakers)

That's a business that has been impacted by the relative weakness in Europe and Japan.

Yes, right. Beyond the geographic, I was wondering if you could talk a little bit about application markets and where you're seeing strength and weakness?

Most -- the weakness is most prominent in packaging in Europe and Japan.

And is there any part of the business that's showing particular strength?

Yes, our product assembly business is showing some strength and that's most noticeable in the United States.

And the Nonwoven Systems piece of the business -- how is it doing and what are order trends like there?

Relatively flat to slightly down.

I'll get back in line. Thank you.

(Operator Instructions). Charlie Brady, Hibernia Southcoast Capital.

Can you just remind me how much of the Adhesive dispensing business is out of Europe?

That would be about 40%. Europe is actually a little larger -- it is a larger market than U.S., relatively higher than the U.S., and then the balance is Asia and Japan. Probably close to -- (multiple speakers)

(multiple speakers) volume growth (multiple speakers). That is below normal cycle trend -- 1.5 times GDP -- and I've got to assume that that's because the European market, particularly German, is just really, really poor market now. But it sounds like the U.S. market isn't doing a whole lot to offset that business, and I'm just wondering what your outlook is -- do you see any improvement in Europe coming for the rest of the year at all?

Charlie, what I was giving you was three cycles, what our European business position is relatively to the U.S. And I didn't -- in the quarter, those numbers would be different. I don't have that exact split that I could give you, but those numbers would be different because of the strength in the U.S. versus Europe in the last three months.

Quarterly, the U.S. would be more than the 40% to a cycle?

I don't have that specific number for you, but it would be -- if the general trend was Europe, about 40. In the U.S., about 38 or whatever that -- be in the high 30% range. And the U.S. in the quarter was a little higher than that, and Europe was a little bit lower.

Okay, well, in that case you would expect that since Europe is weaker and it's a small proportion of the overall sales, that the overall growth of that segment would be a little bit better than 2 to 3% at least -- at least, that's what I would think. But it sounds as though maybe that that's not the case. And I'm just trying to figure out why the volume growth is really only 2 to 3%. That just seems a little on the low side.

Well, it is being affected by Europe, and it's also being affected by, while very good growth in Asia-Pacific, lower than our prior year. I mean, remember that last year on a comparison basis, Asia/Pacific was putting up some really unbelievable numbers and now we're down to very good growth rates, but at a lower growth rate than prior year. U.S. is strong. Europe is essentially flat to weak as we look for the remainder of the year. We do see some rebound in Japan. But the Asia/Pacific market for adhesives is at that slower growth rate, and the Americas really don't drive the needle much.

Okay, fair enough. Thanks.

Robert McCarthy, Robert W. Baird.

Actually, I might have a couple. I should've asked when we were talking about this fiber system issues and the order issue and the order comparisons, when will that drop out or become so small that it's insignificant in terms of these comps?

The year-to-year comparison?

Yes.

You know, that's what's causing us to have the toughest comps now. So as the 12 weeks cycle on, it starts -- we start to have easier accounts.

And by the time we talk a quarter from now, it will be gone then, right?

Yes.

Yes.

Okay, all right. Peter, are you a little surprised, granted that we live in a relatively slow-growth economy with weakness in some specific served markets, but are you a little surprised that all you are getting out of EFD right now is basically flat with last year, and are you satisfied with that?

Well, I think we're satisfied with the performance of EFD. The investments that we've made in Southeast Asian markets has -- is starting to show tangible results. This is a soft period in the economy and I think that they're doing okay. If I had to color it, I guess I would expect a little more growth than they're seeing. But it's not loss of share. It's customer behavior. I think what we're seeing is very slow industrial production in their end markets.

So they just because of their unique mix that includes some things like fiber, etc., you know, it's -- (multiple speakers)

It's fiber optics.

Okay. Yes.

Fiber optics and circuitboard assembly --

Are not exactly robust.

Right. But, you know, we are still seeing the growth in Life Sciences in that business. But it's still a small piece. The most promising aspect is the geographic build in Southeast Asia.

Charlie Brady, Hibernia Southcoast Capital.

On the gross margin assumption for 55% for basically remainder of the year of third quarter, that's coming down. I'm just wondering to what extent is the six sigma -- the lean manufacturing, these cost -- sigma cost initiatives -- when do you expect to sort of see some benefits start offsetting maybe some of the pricing pressure you're seeing out of Europe or some of the cost pressures?

Well, all comparisons this quarter are kind of basing at 57% last year, which was an extraordinary gross margin and was driven by very favorable mix, not only geographic mix, but product and standard product versus engineered systems. A 55% gross margin at Nordson is a relatively normal margin and I'd say what we're getting at this point is lean is offsetting the price pressure that we're seeing. But we expect more out of lean, you're right, and we would expect those margins to trend upward. But we don't see that in the second half of the year, which always is dominated by high engineered systems volume, which come in at the lower margins.

Okay, so that's the reason? Because 55 is obviously lower than what you did in the current quarter that you just reported, and that's a function of having a mix issue on lower-margin engineered systems in the second half of the year?

Yes, you know, we did 55.7 and our discussion of 55 for the remainder of the year is in the range of second-quarter performance.

At this time, there are no further questions.

Well, given that there are no further questions, thank you for attending the conference call, and we look forward to your continued interest of Nordson. Thank you.

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