Nordson Corp (NDSN) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Nordson Corporation first-quarter fiscal 2006 results conference call. [OPERATOR INSTRUCTIONS] Thank you, Miss Price, you may begin your conference.

Thank you, Katie. Good morning, this is Barb Price, Manager, Shareholder Relations; along with Peter Hellman, President, Chief Financial Administrative Officer; Nick Pellecchia, Vice President Finance; and Greg Thaxton, Controller and Chief Financial Officer. We would like to welcome you to our conference call today, Tuesday, February 28, 2006 on Nordson first-quarter fiscal 2006 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, March 15, by calling 1-800-642-1687, and you will need to reference ID number 5509830.

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 2006 results and Nordson's future outlook. Peter.

Thank you, Barb, and thanks to all of you for attending Nordson's conference call discussing our first-quarter 2006 results. It was a very good quarter from many perspectives. We not only achieved record sales, earnings, and earnings per share, but we saw strong demand in almost all of our products and geographic markets. These earnings also exceeded the consensus average by $0.04 per share. Sales for the quarter were $197 million up 3.8% from the prior year a record for any first quarter. Foreign exchange, which was expected to be negative reduced sales in dollar terms by 3.4%, slightly better than we had anticipated the beginning of the quarter. Volume, therefore, was a strong 7.2% increase, exceeding our forecast.

Looking at the geographic breakdown, our volume in the first quarter reflects continued strong business activity in Asia-Pacific and the United States with volume up 14.2 and 9.8% respectively. We also experienced increased volume in Europe of 6.3%, while the Americas were up 5.3%. Japan did experience a 3.7% volume decline on a year-to-year basis, reflecting strong Finishing sales last year, and as I speak to orders, you will see that a rebound has occurred from an order standpoint.

On a business segment basis, Advanced Technology was up 24.3%. Adhesive was up 3.1%, while Finishing was basically flat, the increased demand in Advanced Technologies continues to be spread between our main operating groups of Asymtek, March Plasma and EFD and from a diversified set of end products. In adhesives we saw volume increases in packaging, coating, and product assembly, while Fiber's volume was down. Excluding Fiber's volume and adhesives -- excluding Fiber, the volume in Adhesive was up 5.3%. Compared to a strong period a year ago, powder demand within Finishing experienced a decline in the first quarter which was almost all made up by stronger demand from liquid and containers. Demand as measured by recent orders has shown continued strength. Orders for the past 12 weeks were up 13% 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 4%. This sequential growth is noteworthy in that the current period covers the holiday shutdown period. Recent orders by segment reflect that the past 12-week order rates are up 25% in advance technologies, while adhesives is up 10%. Finishings is also up 6%.

Adhesives growth does not reflect any unusual or large Fiber System order but rather growth in our traditional hot melt adhesive dispensing system businesses. On a geographic basis, orders over the past 12 weeks in Europe have risen 12%, while decreasing 1% in the U.S. Asia-Pacific continues to be strong with orders up 48%. Japan was up 21%, and the Americas were up 16%. We ended the quarter with $100 million in backlog, that's up from the beginning of the year by 22 million.

Turning to the income statement, the overall gross margin rate in the quarter was 57.6%, up significantly from last year's 56%. Favorable product mix, productivity, and the ongoing effects of lean accounted for most of the benefits by 2% while exchange rates reduced the rate by 0.4%. Spending was up 3.4%. Of this amount, currency accounted for an offset of 2.6%, while constant currency spending was up 6%.

Included in spending in the first quarter is the impact of the Finishing restructuring we announced in October which represents about 1.5 percentage points of the spending increase. Stock option expense represents about 1.2% of the spending increase. Excluding stock option expense and the Finishing restructuring, spending volume increased 3.4%. Operating income margins was as a result 14.3%, up from last year's 12.5%. Reflecting the effect of the stock buyback which occurred in the fourth quarter last year, interest expense was up slightly on a year-to-year basis. Our first-quarter tax rate was 33.6%, higher than the 31.25% we plan on having for the full-year 2006. The full-year rate reflects a tax refund we expect to receive in 2006. As the timing of this refund is uncertain, the guidance we will give on this call for the second quarter reflects a continuation of the first quarter rate.

Nordson's net income for the quarter was $16.1 million, versus $14.4 million, representing of last year -- representing a record for any first quarter while fully diluted earnings per share was also a record $0.47 a share versus $0.39 a share last year, an increase of 21%. The year-to-year change of $0.08 a share was helped by volume, which represented $0.13 increase. Fewer shares which contributed $0.04 of the increase offset by currency a reduction of $0.05. The Finishing restructuring also reduced earnings per share by $0.02 as did stock option expense. 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 $8.9 million, 10.5 million related to the exercise of stock options, a use of cash for working capital of 4.9 million which is a seasonal norm. Capital expenditures were $4.5 million while dividends were 5.5 million. Cash-related measures reflected good performance. The quarter's EBITDA was $33.6 million or $0.99 a share versus last year's $30.6 million or $0.82 a share. In summary, the quarter was one with record sales, earnings, and earnings per share, and we continue to generate good cash flow.

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

Let me turn to some brief comments about the outlook for the second 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 11 to 13% in the second quarter. Given the current foreign exchange rates and the strength of the dollar, some of this volume improvement will be offset such that we will see sales growing between 7 and 9% in the quarter. This year-to-year volume growth reflects continued strength in Advanced Technologies with adhesive segment growth moderated by difficult comparisons across the large system businesses. In the second quarter, we should see gross margins at about 55% to 56%. About the same as last year. Spending in the quarter should grow about 5% but will contain some notable items, including the expensing of stock options and probably the last quarter with the restructuring of our 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 earning per share. Last year fully diluted earnings per share were $0.47 a share. Stock option expensing will have the quarterly impact during the second quarter of 2006 of $0.02 a share. Restructuring in the second quarter will reduce earnings per share by an additional $0.02 a share. Having fewer shares outstanding will help the second-quarter EPS by $0.05 a share, thereby more than offsetting the first two items. The current foreign exchange environment, should it continue throughout the quarter hurts the year-to-year comparison by $0.08 a share. Adjusting by all these items reduces the $0.47 a share of last year to a comparable $0.40 a share. Against this, we are forecasting earnings per share to be in the range of $0.55 to $0.60 a share.

In summary, we are continuing to see the benefits of our geographic and product diversity. Our orders have continued to show strength, currency, a benefit through much of the last few years has turned to be negative at least in the first and second quarters. Nevertheless, we anticipate another strong year ahead. And with those comments let's now turn to your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from John Franzreb with Sidoti and Company.

Good morning. Great quarter, guys.

Thanks, John.

I was wondering if you could discuss sales by end market, the order rates are up pretty substantial given the tough comparisons. I was wondering if there is a disproportionate amount of orders coming from consumer nondurable can you just provide some color where the pull is coming from?

Well, of course in the Advanced Technology segment, most of that is consumer pull, small electronic handheld devices that have proliferated and I think we are well positioned in a number of those areas, small portable disk drives, small screens on cell phones, cell phones themselves, PDAs are all end markets. The projectors for slides and conference rooms all carry parts and pieces that we help fabricate. So Advanced Technologies I think has a very broad end market. In adhesives we have seen some rebounds in our base businesses, our packaging business, the product assembly business, and the coating business had a good quarter as well. I think in addition, we have seen some improvement in Europe. We first saw that in orders in the November time frame and it turned into sales in December and January.

Okay. Secondly, you've been a little quiet on the acquisition front. Is it that you have something or you are happy with your R&D pipeline? Can you just talk a little bit about your appetite for acquisitions at this point.

We continue to be interested in acquisitions in adjacent markets where we, if you will, are underpenetrated. If you know -- if you've followed us for a whale, we tend to develop organic growth beach head and from that then we look for leading dispensing companies in those end markets. Clearly we continue to be interested in Advanced Technologies, including life sciences and possibly in some niche markets in adhesives as well.

Okay. And my last question is regarding the restructuring program. Can you walk us through where you are in that process. You said you have one more charge probably in the current quarter, but what steps remain to be taken, and can you just talk a little about what's going on there?

Sure. Taking you back to last October's announcement, we announced the restructuring that we said would take three quarters to complete, the second quarter is the second quarter of that process -- I am sorry the first quarter is the second quarter of that process. The upcoming quarter, the current quarter is the last of that cost restructuring process. We said that at that time, if you will, operating income of the Finishing business was at 1% our goal was to get to 8% which would be EDA break-even. We said that the cost restructuring would take us about halfway there. So we will start to see the full effects of that in the third and fourth quarters of 2006. The remainder of the restructuring is to groom the product offering by stopping production of those probably old products and low-volume products that have been very noncost competitive.

Okay. Great. Thank you very much.

Your next question comes from Charles Brady with Harris Nesbitt.

Hi, this is actually Kunihiko in for Charlie. Good morning, people.

Good morning.

Hi. Thank you for taking my question. I just had a couple of quick ones. First regarding your European business. We noticed that was up robustly 6%. And I was wondering if there were anything in particular that was driving that? And, also, how is the European tracking entering the second quarter.

Well, I think the demand, talking about sales, was broad spread in the quarter. In Europe, there weren't any unusual or large sales. So I think it represented good demand, broad based demand, clearly across our adhesives business which is the business that is our biggest business in Europe. With regard to where we are looking forward, I think that the order growth rate that I spoke about is probably the best reference point, and on that basis we have seen over the last 12 weeks that orders in Europe have risen 12%, and so based on that -- and that data -- all the order data is through about 10 days ago so it is quite current. We continue to see good demand in Europe.

Okay. Perfect. And regarding your expectations on Corporate expense. Can you sort of comment on what you expect for the full year fiscal '06? Do you expect R&D to continue to pick up? Any sort of color would be great. Thank you.

As far as spending, if you exclude the stock option expenditures and you exclude the foreign exchange effect year to year and you exclude the restructuring which would occur in the first two quarters, spending should be in the 3 to 3.5% increase. Within that we will get productivity that will be more than offset -- that more than offset wage, and the additional money will go towards investments in new markets and new applications as well as R&D.

Perfect.

There is a bit of a mix, but it should be in the call it 3.5% increase, absent foreign exchange, restructuring, and stock options.

Okay. Finally, can you provide a breakdown by segment on your outstanding backlog and also the additional $20 million added in the quarter? Thank you.

We don't -- we do not disclose backlog by segments, but I can say that -- and to some extent, that's because it is less meaningful in some segments than others. Advanced Technology, for example, back over, turnover is quite rapid in Finishing on the other hand it being an engineering systems business it is a lengthy process. On average last year backing at Nordson was 40 days that is measured across the year. So backlog -- one point is backlog is less visibility than it has historically because we are becoming lean. As we get an order, we are able to ship an order. Having said that, the backlog has grown proportionately with the order growth. As you would expect where we have the highest order growth is where our backlog has grown most significant.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Scott Macke with Robert W. Baird.

Hey, Scott.

Good morning, gentlemen. Can you hear me?

Yes. Good morning, Scott, how are you?

Congratulations on a great quarter. I wanted to dive into the adhesives segment margin maybe in a little more detail. In particular, the year-over-year increase in margin, I believe up 300 basis points despite a year-over-year decline in sales. I wonder if you can break that out to a certain extent. Maybe if there was the absence of a lower margin Fiber System sales or perhaps the impact on mix with perhaps improved sales coming out of Europe. Just any additional commentary with respect to that margin improvement would be helpful.

Yes, it is mix. Where we saw the growth in the demand, we are at our higher margin businesses, especially packaging and product assembly. Where we saw the decrease was most notably in Fibers which carries with it very little margin. In addition throughout adhesives, we are getting the -- we are getting good absorption, and we are also getting productivity through lean.

Looking then to the second quarter, do we have a similar -- what, a similar impact where we will have the absence of the large Fiber Systems sales year-over-year?

We do have some sales in Fiber, but it won't be a big impact either way.

Okay. And then to follow-up on the mix-related questions. Looking at the last 12-week orders. If I got this correctly, Europe up 12% and U.S. down 1%.

That's right.

Can you give us a little -- how might we expect that to impact margins going forward? In other words, what -- where the increases in Europe by segment relative to this modest decline in the U.S. by segment?

We maintain pretty equal margins between the U.S. and Europe. So if that's the swing, U.S. to Europe, for example, we don't get much margin impact one way or another.

In -- last question. Just -- I know the last quarter you disclosed the last six-week order trends. Even if you are -- if you can't disclose that per se, if you just comment on order trends toward the back half of the last 12-week period.

Eyeballing them. There's -- other than the Christmas holiday period and therefore the more recent orders are stronger than the beginning of the period, if you will, they really are very, very constant.

Thank you very much. Very helpful.

[OPERATOR INSTRUCTIONS] At this time, there are no further questions.

Well, before we close the call, there is one more task that unfortunately I -- I must do. Today turns out is the last day of employment of Nick Pellecchia at Nordson. Nick joined the Company in June of 1981 in the tax department and he quickly expanded his scope so that he became Vice President of Finance and Controller. Throughout his 25 years I can't think of anybody had has been more a positive contributor to Nordson's success. When he joined the Company we had $118 million in sales and yesterday we hit a record stock price. So, Nick, thanks a lot, and we will be in touch.

Thank you.

And with that, we will thank you all for joining the conference call. And we wish you well as well. Goodbye.

Bye.

This concludes today's Nordson Corporation first-quarter fiscal 2006 results conference call. You may now disconnect.