Nordson Corp (NDSN) 2005 Q4 法說會逐字稿

Good morning. My name is Ashley and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Nordson Corporation's fourth-quarter and fiscal 2005 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 session. (OPERATOR INSTRUCTIONS).

Ms. Price, you may begin your conference.

Thank you, Ashley. Good morning, everyone. This is Barb Price, Manager of Shareholder Relations, along with Peter Hellman, President, Chief Financial and Administrative Officer, Nick Pellecchia, Vice President and Controller, and Greg Thaxton, Group Controller. We would like to welcome you to our conference call today, Wednesday, December 14, 2005 on Nordson's fourth-quarter and 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, Thursday, December 22 by calling 1-800-642-1687 and you'll need to reference ID number 2994607.

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 SEC, 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 fourth-quarter and fiscal 2005 results and Nordson's future outlook. Peter?

Thank you, Barb, and thank you all for attending Nordson's conference call discussing our fourth-quarter, 2005 results. At the outset, let me welcome Greg Thaxton, who will be attempting to fill the shoes of Nick Pellecchia, who we've announced expects to retire in February. Greg comes to headquarters with 16 years of Nordson experience, and I know he will use all of your support as he settles into his new responsibilities. As to Nick, I will reserve any comments until our first-quarter conference call, as that is scheduled before Nick's actual retirement.

Turning to our results, it was a very good quarter from many perspectives from Nordstrom. Not only did we achieve record sales, earnings, and earnings per share but we saw the value in our diversified customer base and ongoing cost-containment actions. These earnings also exceeded the consensus average by $0.14 per share.

Sales for the quarter were $240 million, up 5% from the prior year, a record for any fourth quarter. This increase was largely reflective of higher volume, which was up 4.5%, while currency was a benefit of 0.5% to sales when compared to a year ago.

Looking at the geographic breakdown, our volume in the fourth quarter reflects strong business activity in Asia and the Americas with volume up 23.7% and 17.7%, respectively. The United States had volume growth of 6.3% while Europe was down 2.3% and Japan was down 4.5%.

On a business segment basis, Advanced Technologies was up 41.1%. Finishing was down 3.9% and Adhesives was down 3.7%. Advanced Technology volume strength reflected sales in our Asymtek and Plasma businesses, with EFD also having a strong quarter. Finishing experienced some decline in powder volume, compared to a relatively strong prior year, offset by stronger container sales. In Adhesives, the decline was due primarily as a result of our fiber business, which had a very strong sales quarter a year ago. Without fibers, adhesive volume would be up 5.2% in the quarter on a year-to-year basis.

Demand, as measured by orders, has shown continued strength. Orders for the past 12 weeks are up 6% 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-week order rates versus a year ago are up 33% in Advanced Technology. Finishing is up 6%, while Adhesives is down 3%. We've seen some recent strengthening in Adhesives, which is up on a year-to-date basis 9%, and finishing has improved to be up 10%.

On a geographic basis, orders over the past 12 weeks in the United States have risen 5% over the prior year's level, while Europe is down 7%. Looking at other regions, Japanese orders are up 9%, Asia-Pacific has risen 55%, and the Americas is up 11%. We ended the quarter with $78 million in backlog; that's up from the beginning of the year by $1 million.

Turning to the income statement, in the quarter, the overall gross margin rate was up 55%, up significantly from last year's 53%. Favorable product mix and productivity accounted for most of the benefit, adding 1.5%, while exchange rates added 0.2%. Spending was up 4.5%. Of this amount, currency accounted for 0.5% increase, while constant-currency spending was up 4%. Included in the spending is the first quarter of the Finishing restructuring we announced in October, which represents about 1 percentage point of the spending increase.

Our interest expense continues to decline but reflecting the common stock repurchase, which occurring during the quarter, the decline during the quarter was at a slower rate. Other income and expense this year reflects the absence of a $3.2 million write-off of an investment in the fourth quarter of 2004.

Our fourth-quarter tax rate was 28.4%, lower than the 30% we had forecasted, reflecting the ability to utilize additional foreign tax credit carryforwards. Nordson's net income for the quarter was 27.9 million versus 19.7 million, representing a record for any fourth quarter, while fully diluted earnings per share was also a record $0.80 versus $0.53 last year, an increase of 51%. Currency helped the year-to-year comparison by $0.01 while fewer shares outstanding during the quarter helped by $0.04.

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 use of cash for working capital of 7.9 million. Capital expenditures were 4.7 million while dividends were $6 million. In addition, we repurchased the remaining shares of the Evan Nord Charitable Remainder Trust for 125 million, and we saw other inflows of 13.2 million. As a result, we saw cash flow before the repurchase of the shares of $30 million, or an outflow of 92 million after the repurchase. We used cash and short-term investments and debt to pay for the shares acquired. Nevertheless, we ended the year with a strong balance sheet. Our debt leverage, measured as debt-to-total capital, ended the quarter at 35%.

I should add that our adoption of lean operating approaches continues to yield results. Inventory management continues to improve with inventory turnover for the fourth quarter of 76 days versus 79 days a year ago. Cash-related measures reflected relatively good performance in this environment.

The quarter's EBITDA was $48.7 million or $1.40 per share, versus last year's 38.9 million or $1.05 per share.

In summary, the quarter was one with record sales, earnings and earnings per share. We continued to generate good cash flow, which was used to repurchase a significant amount of debt, yet maintained a strong balance sheet. It goes without saying that the full year was also very strong with record sales, earnings and earnings per share. Sales were up 5.8%, of which volume represented growth -- of which volume represented growth of 3.7 percentage points. Earnings and earnings per share were both up 24%. For the full year, currency helped the improvement of earnings by $0.11 a share.

Before turning to 2006, as a housekeeping item, let me note that, beginning with fiscal year 2006, we will no longer have different accounting periods between our international and domestic businesses. Our international subsidiaries have historically operated in a fiscal year ending one month before the domestic units. Starting with fiscal year 2006, all units will be on the same fiscal periods, which will end at the end of the calendar month each quarter. The results for the month of October 2005 for our international units will flow through retained earnings.

Let me now turn to some brief comments about the outlook for the first quarter of 2006. As we said in our earlier discussion of orders, order volume has maintained strength in recent weeks. This, coupled with the level of our backlog, allows us to have an outlook of an increase in volume of 5 to 6% in the first quarter. Given current foreign exchange rates and the strength of the dollar, much of the volume improvement will be offset such that we will see sales growing by 1 to 2% in the quarter. I should point out that the first quarter, assuming foreign exchange rates stay just where they are, is our most difficult foreign exchange comparison in the year that is ahead of us. This year-to-year volume growth reflects continued strength in Advanced Technology with Adhesive segment growth moderated by difficult comparisons across large-system businesses. In the first quarter, we should see gross margins at about 55 to 56%. Spending in the quarter should grow as quickly as sales but will contain some notable items, including the expensing of stock options, the restructuring of the Finishing business that we announced in late October.

Let me explain these in earnings-per-share terms, so that one can best compare the forecast to last year's earnings-per-share levels. Last year, fully diluted earnings per share were $0.39. Stock option expensing will have a quarterly impact during 2006 of $0.02 a quarter. Restructuring in the first quarter will reduce earnings per share by an additional $0.02 a share. Having fewer shares outstanding will help the first-quarter earnings per share by $0.04 a share, thereby offsetting the first two items. The current foreign exchange environment, should it continue throughout the quarter, hurts the year-to-year comparison by $0.06. Adjusting by all of these items reduces the $0.39 of last year to a comparable $0.33 a share. Against this, we are forecasting earnings per share in the range of $0.38 to $0.43 a share.

In summary, we are continuing to see the benefits of our economic and -- we are continuing to see the benefits of our geographic and product diversity. Our orders have continued to show strength. Currency, a benefit throughout last year, is a negative in the first quarter but if foreign exchange should remain at these levels, that negative declines throughout the year. Nevertheless, we anticipate another very strong year ahead.

With those comments, let's now turn to your questions.

Ashley?

(OPERATOR INSTRUCTIONS). Charlie Brady.

Could we just talk for a minute on the Adhesive Dispensing and non-woven fiber systems, at what point are we completely through the difficult comp with the fiber systems, in terms of not only orders but shipments? I think, on orders, we've kind of went through it already, but are there still shipments sort of out there in the Q that are going to make it a harder comparison?

The first quarter of 2005 was the last quarter where those orders that we saw and spoke about in the last several calls comes through with shipments. So the comparison after the first quarter should be neutral. Should we get orders from fibers, the comparisons actually turn favorable.

Okay, then the tax rate for '06 -- are you still looking at 30% for the year?

Charlie, this is Nick. It will be about 31.25%. It won't be as low as last year because we utilized foreign tax credit carryovers, but it will be lower than our rates in recent past, which were about 32.5%.

Okay. Then final question and I will get back in the queue -- on Advanced Tech, clearly the operating margins there are the highest they've been in at least three years. I'm just wondering sort of what kind of sustainability -- I understand that the sales are going to maybe tick down but internally, you have been doing things on taking costs out and leaning down the business. Have you propelled yourself up to sort of a higher plateau so that even if you get a tick-down in some of the sales growth, your internal operating efficiencies are allowing you to get a higher margin? You know, where does that 24% margin kind of look as far as sustainability?

Well, the fourth quarter typically is our strongest quarter, and that goes across all of our businesses. I would also say that the fourth quarter was one of those quarters where everything happened right; there were no shortages, so all the assembly points were very productive, and of course, at these volume levels, we were getting great absorption. So I think the 24 is a high point.

I do think that the gross margin across all over businesses in Advanced Technology is among them -- has shown improvement as our lean operating principles that we've been working on here for two or three years are really taking hold, and we're starting to see some improvement in gross margin. So, I wouldn't forecast, going forward, 24%; I think that's kind of high water mark.

But let me also point out something that you said in your comments -- that sales in Advanced Technologies will go down. We are watching this segment very closely, obviously, because it finished the year so strongly, but we are seeing broadening of the orders out of this segment to include processors. You know, during the year, we pointed out that the Advanced Technology in Asymtek in particular, order growth and therefore sales were coming from a myriad of products that weren't related to semis or processors -- MP3 players, cellphones, flat-panel displays and other products. Where we're seeing that broadening to include the more historic markets. Anecdotally, I've heard that some sales shortages in the Christmas season can be related directly to the shortages of semis. We're seeing that in our order flow in that the traditional customers are back with us now. So, while we are watching this business -- and I don't intend to make a forecast especially for the full year, the sales level and order growth is actually broadening and is pretty healthy.

Thanks, Peter.

Robert McCarthy.

Congratulations on a terrific quarter!

Peter, a couple things from your comments -- you specifically identified year-to-date -- I believe -- I want to make sure I got this right -- year-to-date order activity in Coating in Finishing at 10% and Adhesives at 9?

Yes. That's fiscal year-to-date, so it would be about six weeks.

Six weeks or so, okay, but the Advanced Tech number -- no number there?

It's also up. Let me pull out that number.

While you're doing that, I commend you for getting your fiscal quarters lined up for the business. I'm wondering if that might portend starting to disclose these order comparisons on a quarterly basis as opposed to the trailing 12-week comp.

Probably not because, internally, we get our worldwide order rollup every two weeks, and we actually don't collect orders that are tied to the fiscal period. But you know, we will survey you and other analysts to see whether moving from a 12-week rolling to a quarterly rolling would be helpful, and we will look at changing the way we roll up our own orders. But internally, that procedure that we've had historically here for the last, you know, number of years, won't heighten.

The number year-to-date in Advanced Technologies is up 7%.

Okay. In your remarks when you were talking about the performance for the segment in the quarter, you specifically identified Asymtek and Plasma separately from EFD. I gathered that the message is that big year-to-year growth rates were at the two equipment businesses, with Asymtek and kind of Plasma, and what you're communicating is that EFD was up, just not anywhere near that kind of a rate.

Yes. It was up healthfully; that's not a word. It was up meaningfully, but not at the same rate. But we were pleased with the results of EFD.

Meaningfully, to me, means at least 10% or more. Is that what you're trying to communicate?

Yes.

Great. If you will humor me for one more that's kind of I think sort of the master question -- I'm wondering if -- recognizing that you don't want to make a forecast for '06, I wonder if you could make a quick tour through the major product markets and the major geographies and talk a little bit about what you think the key factors are that we ought to be contemplating as we prepare forecasts for '06 -- you know, packaging, product assembly, nonwovens, etc. and then U.S., Europe, etc.

Yes. Well, obviously Asia is very strong and it's becoming a more meaningful part of our business, so that strength not only is impressive but carries more bottom-line results.

The Americas is still rather small, so while its growth has been significant, it has less leverage, if you will.

Japan, while we see strength, will be at a lower level of growth.

The U.S., from all that we see, is in a good growth mode but clearly in single digit.

Europe, you know, we will watch carefully. The numbers in recent results have been down, and that's one that isn't participating, if you will, with the growth on a global basis.

I made my comments on Advanced Technologies in response to Charlie's question. Let me turn to Adhesives. You know, Adhesives will continue to show good growth but in line with its organic growth rates. We do expect that nonwovens will have a positive year; packaging will show better growth than it had in fiscal '05. We will continue to see growth in product assembly commensurate with its past performance. Fibers is kind of a wild-card; we anticipate getting some large orders but these bid processes are such that they are very difficult to forecast and of course that business is very lumpy.

In our Finishing business, we will be affecting the restructuring of that business and therefore the European business will become more profitable, certainly after the restructuring is complete, which should be by the end of the second quarter in all meaningful respects. They should see reasonably good growth in powder sales as some of our new products which speed up color change are accepted by the market and are sold. Where a new plant is being put in place, such as China, these and the more traditional products are in pretty good demand. In plants that are becoming more lean-like, rapid color change is significant enough that they will change out certain elements of existing equipment. So, we expect a reasonably good year in powder, and that's the flagship business in our Finishing business.

Just one follow-up to that, then. As a think about your comments, Peter, about the geographic outlook, do I understand you correctly that you've got a modest level of fibers system sales kind of factored into that?

Yes.

Okay, thanks a lot. That's very helpful.

(OPERATOR INSTRUCTIONS). You have no further questions at this time.

Well, there being no further questions, let me wish you all the happiest of holidays and the most prosperous and healthy New Years.

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