Nordson Corp (NDSN) 2005 Q3 法說會逐字稿

Good morning. My name is Dashondra (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the Nordson Corporation third-quarter earnings 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.

Good morning. This is Barbara Price, Manager 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, August 24, 2005 on Nordson's third-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, Wednesday, August 31 by calling 1-800-642-1687 and you will need to reference ID number 8439243.

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

Thank you, Barbara, and thank you all for attending Nordson's conference call discussing our third-quarter 2005 results. For the quarter we saw record sales, record earnings, and record earnings per share. In addition we saw the value in our diversified customer base and the ongoing cost containment actions.

Sales for the quarter were $202 million, up 1.8% from the prior year, a record for any third quarter. This increase was reflective of a weaker dollar, adding 2% to sales while volume was down 0.02%.

Looking at a geographic breakdown, our volume in the second quarter reflects strong business activity in Asia and Japan with volume up 21.5% and 7.9% respectively. The United States had flat volume while Europe was down 7.2% and the Americas was down 9.7%.

On a business segment basis, Advanced Technology was up 18.5%. Finishing was down 1.2% and Adhesives was down 6.3%. Advanced Technology volume strength reflected non-semiconductor sales in our Asymtek and Plasma businesses. Finishing experienced some decline in powder volume compared to a relatively strong prior year, offset by stronger container sales.

In Adhesives, nonwovens and coating were down, offset to some extent by stronger packaging volume. I should also note that last year's third quarter for nonwovens was a particularly strong one.

Demand as measured by orders has shown a good rebound in recent weeks. Orders for the last 12 weeks are up 8% over the same period last year in constant currency. On a sequential basis, that is the past 12 weeks versus the 12 weeks before that, orders were up 2%. Recent orders by segment reflect that the past 12 weeks order rates versus a year ago are up 28% in Advanced Technologies. Adhesives is up 5%, while finishing orders are down 4%. The year-to-year increase in adhesive orders of 5% would be 9% without fibers, which had a strong order period last year. The same exclusion of fibers would add 2 percentage points to the overall Company growth rate.

On a geographic basis orders over the past 12 weeks in the U.S. have risen 7% over the prior year's level while Europe is up 3%. Looking at the other regions, Japanese orders are up 8%. Asia-Pacific has risen 28% and the Americas is up 10%.

We ended the quarter with 107 million in backlog. That is up from the beginning of the year by 30 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 in the quarter was 56.5%, about the same as last year's 56.6%. The benefit of currency accounted for 0.4 percentage points but was offset by product mix. Spending was up 3%. Of this amount, currency accounted for a 1.6% increase, while other spending was up 1.4%.

Our interest expense continues to decline, down 19% from a year ago, reflecting not only our reduced debt levels but increasing short-term investment balances. Our third-quarter tax rate was adjusted to 26%, representing further analysis of the new regulations related to the 2004 job creation tax bill offset by changes in state tax related issues. We expect a tax rate of 30% in the fourth quarter of 2005, the same as the nine-month rate.

Nordson's net income for the quarter was 18.6 million, versus $17.3 million last year, representing a record for any third quarter, while earnings per share was also a record $0.50 versus $0.47 last year. Currency helped the year-to-year comparisons by $0.03 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 7.6 million; a cash generation from working capital of 1.4 million; capital expenditures were about 2.4 million; while dividends were $5.8 million. In addition we saw an outflow of 9.3 million in other uses principally the $5.4 million of market purchase of shares as our stock repurchase program was activated during the second and third quarters.

Net cash flow was cash generation of 10 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 28% or 14% if one nets cash against our debt.

I should also note that yesterday Nordson's Directors declared an increase in our fourth-quarter dividend representing the 42nd consecutive year the dividend has been increased. I would also note that our adoption of lean operating approaches continues to yield results. Inventory management continues to improve with inventory turnover for the third quarter of 93 days, versus 95 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, essentially the same as last year.

In summary, the quarter was a good one with record sales, earnings, and earnings per share. We continued to generate good operating cash flow, which was used to reduce debt and increase our cash and marketable securities.

Let me turn to some brief comments about our outlook for the fourth quarter and the full year. As we said in our earlier discussion of orders, order volume has shown a good rebound in recent weeks. This coupled with the level of our backlog allows us to have an outlook of an increase in volume of 1 to 2% in the fourth quarter. Further we could see a slight foreign exchange benefit should rates stay at current levels.

This year-to-year volume growth reflects a high level of fiber sales last year. Excluding fibers, the volume increase would be the 6% on a year-to-year basis, which is more reflective of current order rates. For the full year the fourth-quarter forecast would result in sales of around $830 million, which includes a 2% full year foreign exchange benefit.

In the fourth quarter, given the seasonal mix of standard products versus engineered systems we should see gross margins at about 54%. Spending over the remainder of the year is expected to be consistent with third quarter levels.

This outlook results in earnings per share for the quarter in the $0.62 to $0.68 per share range, compared to $0.53 per share last year in the fourth quarter and the current consensus of $0.61 a share. The full year outlook is seen to be in the $1.98 to $2.04 range, versus last year's $1.73. The quarter and the year are forecasted to be records in terms of sales, earnings, and earnings per share.

In summary, we are continuing to see the benefits of an economic recovery. Our orders have shown a rebound in recent weeks. Currency, a benefit in the first three quarters, is pretty neutral at this point. We continue to balance growth in new applications and markets against our ongoing cost controls.

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

(OPERATOR INSTRUCTIONS) Charlie Brady, Harris Nesbitt.

On the Adhesives side, I had thought that the fiber comp, the tough comp for fiber had been cleared up at the end of 2Q, but that sounds like there was still -- was there still large fiber orders then in Q3 of last year that made this comp harder?

Yes. Third quarter was probably lower than the second quarter but compared to this year those fiber orders were higher in '03 and those orders then turned into shipments in the fourth quarter and that is why the year-to-year fourth quarter comps cite fibers as well.

If we look into the fourth quarter then, are we up against a similar fiber comp or are we now finally through that?

In terms of orders or in terms of shipments?

In terms of orders.

We should be through that.

On the finishing side of the business the negative operating margin on that business, is that due to what's going on -- the weakness you saw in Europe and -- or was there any sort of shipment that didn't come through there because it looked as though as you got to the latter part of fiscal '04 and then first half of '05 that business had kind of turned profitable things were on the right track and it seems it has backslid a little bit. I'm trying to understand what's going on in that finishing business.

I would say that it is still on the track of gradual improvement. We are facing pricing pressure in Europe and that continues as I commented in prior calls. But I think this quarter is in the pattern that we have seen. The operating margin was slightly lower but if you will note sales were slightly lower as well compared to a prior period.

Thanks. That's all I've got now. I'll get back in the queue.

Walter Liptak, KeyBanc Capital Markets.

In the finishing segment, there is nothing that is non-recurring in the operating profit. Could you refresh our memories though to let us know what you're doing there to improve that business short-term and long-term?

As I have said in the past, we believe that the business should be more profitable at all points in the cycle and clearly this point. There is nothing that is non-recurring in the operating profit. We continue to focus at ways to improve our cost structure and we will be implementing those as those plans develop.

Okay, and the second question would be I guess the strong order growth over the last 12 weeks in technologies, I believe you said it was up 28%. What geographic region would you attribute that to and what sort of end use?

It's difficult. When we get an order especially in Advanced Technologies, we often show that as a domestic order and before it's shipped its nominated to be other markets, so the geographic end point for orders is somewhat problematic. But clearly most of the increased demand is in the Far East. And as far as products, it is in disk drives, conformal coating and cell phone end use products.

Okay, and you said for the 12 weeks order trend was up 12% in total. That's in the local currencies or constant currencies?

It's in constant currency.

(multiple speakers) It was an 8%. The 12 week rate for the whole Company was 8% of those, as Peter mentioned.

I'm sorry, the 12 week for the whole Company -- the 8% was in constant currency?

Yes, that is correct.

Okay and that 8% in constant currency was versus flat when you reported last quarter?

That is correct.

Thank you.

John Franzreb, Sidoti & Co.

I wanted to just talk a little bit about the impact of expensing options and what is the cost of the DDPS (ph) next year?

We're still going through our analysis of that, John, but on a preliminary basis, it is going to be pretty consistent with what our disclosures have been in the past because in the past we have not expensed them on the financial statements but we have shown them on a pro forma basis in are disclosures. And so on an annual basis I would say you're looking at about $0.08 a share.

Roughly $0.02 quarter?

$0.02 a quarter.

And given the lack of profitability in the Finishing side of the business, I imagine you are disappointed to where we are on the cycle. Have there been considerations maybe just exiting that whole segment?

I don't think this is the appropriate time or place to discuss strategic questions such as that. We consider finishing a core business as we have stated previously, and we are clearly have and will take steps to see that over the entire cycle it at least breaks even in terms of EVA.

Then you mentioned those pricing pressures. Why can't you be more of a price leader in that market?

Again, since competitors listen into this call, I would rather not into pricing strategies.

Okay, one last question. Can you talk about the consumer electronics side of the business in Advanced Technology and how that is doing relative to, say, the semiconductor business?

I think the rebound in Advanced Technologies and clearly within the Asymtek and plasma businesses was reflective of a strong consumer product end use and represents strengths in that and the growth came on that side versus if you will the semiconductor side.

Thank you.

Bob Schenosky, Jefferies.

Peter, a quick question on Europe. You noted it is up about 3%. Is this the beginning of a potential trend change here or is this just a bounce off weak counts from a year ago?

It is difficult given our kind of micro orientation to say. I think we have been expecting some bounce in Europe. Whether this is the beginning of a modest recovery there it is really too early to say. And I guess I would throw the question back to the analysts on this call to look at other companies and their European experience and perhaps comment rather than have us. We are pleased with the modest rebound. Summers are always tough in Europe to get comparison because of the impact of vacation. So we will see whether the trend continues.

Right, that's the question because we're not seeing it from anybody else.

Then that is good input.

If I could, given your debt levels now, can you give us any color on the acquisition front?

Well, we were clearly disappointed to terminate the contract with hhs and we will continue to find opportunities to broaden especially our applications and market presence through acquisitions. As I said, we did have a share repurchase program was ongoing in the third quarter and of course we raised our dividends. So I think we will balance our balance sheet liquidity against all three of those end uses.

And lastly on the Adhesive side, can you give us any color on the type of backlog and in terms of customer CapEx plans?

Bob, it's Nick. I'd say on the recent growth we have seen I'd say packaging has been steady throughout the year and what we saw in the recent 12 week numbers are pretty consistent through the year. We have been seeing moderate growth there through the year. I would say that the business in our Product Assembly, which is the larger adhesives systems, home products, office furniture, assembly, and so end markets, that has picked up and is reflective in those numbers. Those are the nonwoven business that Peter referred to has really been no change in the order path of that business.

But the office furniture side we should begin to see some pick up there with the non-res improving?

Yes. The product assembly which is office furniture but it is also decorative wood windows, home furniture also, various end uses of that product, but these are larger systems and that has picked up.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS) Scott Mack (ph), Robert W. Baird.

A question on -- just a follow up on the Product Assembly pick up, are we talking in the U.S. or Europe or both?

Both. Both regions I would say had shown some pick up in that business (multiple speakers)

And with that market perhaps becoming a little firmer, are there other areas that are improving within Nordson?

We didn't hear the beginning of your question.

I'm sorry. Within Europe then, outside of Product Assembly with the orders and presumably revenues and outlook improving there, are there other end markets that are improving as well in Europe?

The 12 week number of Europe was -- we sent is up moderately from what it had been. I would point out Product Assembly both in Europe and the U.S. but other than that I don't think there was one market that we would point to that is driving the 3%

I think we have had some good experience in coating as well.

Okay, I see. Also, I know we've talked about the Advanced Technology segment but I was wondering if you could speak to the EFD business in particular if that has been participating in that significant growth in that segment in terms of orders?

Orders are up but not nearly to the extent of the overall segment.

Okay and just one last question. I want to make sure I understand correctly, that tough fiber comparison that persists into the fourth quarter of this year but then as we look out into fiscal year '06 then that disappears?

Yes. The tough comparison no longer continues in the fourth quarter in terms of year-to-year order rates, but it does continue in it is a tough comp for shipments or sales. And there should not be the lumpiness in '06 compared to '05.

I see, thank you.

Charlie Brady, Harris Nesbitt.

Just on the share repurchase, can you -- is that still ongoing and how much of that is left?

We have good authority left and it is still ongoing.

Thank you.

Walter Liptak, KeyBanc Capital Markets.

Thanks. Regarding the guidance specifically the gross margin, with the strength in the order trend in the technology segment which I believe is a higher gross margin than some of your other products, is that correct?

It is higher than average for the Company, but again there are products with our Adhesives segment that are higher.

Okay, I would think with the strength in orders in technology which tend to be maybe a little better than average why your gross margin forecast is the lowest of the year. Is there something --?

That is a seasonal phenomenon. Our fourth quarter gross margins are typically the lowest of the year and that is because working with customers throughout the year to complete engineered systems, those systems typically are shipped in the fourth quarter so they can complete our customer's capital expenditure program for the year. So with the higher proportional engineered systems being shipped in the quarter, the fourth quarter is always our lowest gross margin quarter. And we don't see any issues in forecasting the 54%.

A better comparison, Walter, is comparing it to last year's fourth quarter and that is where you will see the product mix –- (multiple speakers).

So in fact gross margins are up a percentage point.

That's fine. That explains it. Thank you.

At this time there are no further questions.

Given that, I thank you for attending our third-quarter conference call and I wish you all the best in the last two weeks of summer.

Again, thank you everyone for participating in today's conference. You may now disconnect.