Nordson Corp (NDSN) 2006 Q2 法說會逐字稿

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation second-quarter fiscal 2006 results conference call. (Operator Instructions). Thank you. Ms. Price, you may begin your conference.

Thank you, Christie. Good morning. This is Barb Price, Manager of Shareholder Relations; along with Peter Hellman, President, Chief Financial and Administrative Officer; and Greg Thaxton, Controller and Chief Accounting Officer. We would like to welcome you to our conference call today, Friday, May 26, 2006 on Nordson's second-quarter fiscal 2006 results.

Our conference call is being broadcast live on our webpage at www.Nordson.com and will be available for 14 days. There will be a telephone replay of our conference call available until midnight Monday, June 5th by calling 1-800-642-1687 and you will need to reference ID number 9011036.

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 2006 results and Nordson's future outlook. Peter?

Thanks, Barbara, and thank you all for attending Nordson's conference call, discussing our second-quarter 2006 results. For the quarter, we saw record sales, earnings and earnings per share. In addition, the sound trend that we have seen in order rates continues to give us the confidence we feel about the upcoming quarter. Sales for the quarter were $232 million, up 11.7% from the prior year, a record for any second quarter. Currency had a negative impact on sales in the quarter on a year-to-year basis by 3.7%. As a result, the quarter reflected very strong volume growth of 15.4%.

From a geographic standpoint, our volume in the second quarter reflects strong business activity in our international markets. Asia-Pacific volume was up 52%. The Americas volume increased 27%. Japan was up 16%, while Europe rose 12%. In the US, we saw a 4% increase in volume.

On a business segment basis, Advanced Technology reported a volume increase of 33%. Adhesives was up 11%, while Finishing was up 7%. The volume growth in the Advanced Technology businesses reflected strong demands from all product lines. In particular, Asymtek saw outstanding growth in volume, resulting from the sale of products to an expanded end market. Adhesives saw a rebound in nonwovens and good demand in paper converting and coating system sales. The growth in Finishing was both from powder and liquid systems. Demand, as measured by orders, has continued to be relatively strong. Orders for the past 12 weeks ending May 12, measured in constant currency to the same period a year ago, were up 6%. On a sequential basis -- that is the past 12 weeks versus the 12 weeks before that -- orders were up 5%. Recent orders by segment reflect that the past 12-week order rates versus a year ago are up 21% in Advanced Technology, up 2% in Adhesives, and were down 5% in Finishing.

On a geographic basis, orders over the past 12 weeks in Asia-Pacific continue to be strong, up 23%, with good demand in Europe, up 11%. Orders were also up in the Americas 5%, while off in the US by 2% and in Japan by 7%. We ended the quarter with $92 million in backlog. That is up from the beginning of the year by 13 million, while down 2% from last year's second-quarter level, both measured in constant currency.

Turning to the income statement, the overall gross margin rate in the quarter was 55.9% compared with last year's 55.7%. The negative effects of currency accounted for 0.4 percentage points but was offset by the favorable effects of volume and mix. Spending was up 7.1% with volume increases of 9.9% offset by currency of 2.8%. Included in the increase in spending was restructuring this year of $1 million, about equally split between our Finishing and Adhesive businesses. Also in spending this year was the expense related to stock option accounting of $1 million. The effect of our ongoing lean efforts can best be seen in the percentage of spending to sales that dropped from 42% last year to 40% in this year's second quarter. Our interest expense was about equal to last year, as the buyback of stock last September used the cash flow that otherwise would have resulted in a reduction in net interest expense.

As was discussed in Nordson's first-quarter 2006 teleconference in February, we anticipate a US federal income tax refund, which when received will lower our full year tax rate to 31.25%. As the timing of this refund is uncertain, the second-quarter tax rate reflects a 33.6% rate as does the guidance we will give on this call for the third quarter.

Nordson's net income for the quarter was 21.9 million versus $17.5 million last year, a 25% increase, and representing a record for any second quarter. Fully diluted earnings per share was also a record $0.64 a share versus $0.47 a share last year, an increase of $0.17 a share. Reflecting this change positively were fewer changed shares outstanding this year versus last year, which had an accretive effect of $0.05 a share. While the expensing of stock options, the restructuring and currency hurt the year-to-year comparison by $0.02 a share, $0.02 a share, and $0.05 a share respectively. As such, core performance was an increase of $0.21 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 $10.4 million. Of use of cash for working capital of 9.1 million, capital expenditures were about $2.4 million, while dividends were $5.5 million. In addition, we saw an inflow of $8.4 million in other sources, primarily stock option exercise proceeds.

Net cash flow of $23.7 million was temporarily invested in marketable securities and will be used to pay off maturing debt. Our debt leverage, measured as debt to total capital, ended the quarter at 29%. I should add that our adoption of lean operating principles continues to yield results. Inventory management continues to improve with inventory for the second quarter at 82 days versus 87 days a year ago. Cash-related measures reflected relatively good performance in this environment. The quarter's EBITDA was $42.3 million or $1.23 a share compared to $35.3 million or $0.95 a share last year. In summary, the quarter reflected a continued improvement in the overall global economy. Our geographic and end market diversity is a real benefit in this environment.

Let me turn to some brief comments about our outlook for the third quarter. As we said in our earlier discussion of orders, we are encouraged by the continued strength of orders. This, coupled with the level of our backlog, allows us to have an outlook of an increase in volume of 8 to 10% in the third quarter. In addition, should foreign exchange rates hold at current levels, there would be a neutral effect compared to the prior year. Given the mix of standard products versus engineered systems in our forecast, we should see gross margins in the range of 56 to 57%. Spending in the third quarter is expected to be constant with second-quarter levels, with the remaining finishing restructuring in the amount of about $0.5 million expected to occur in the quarter.

This outlook results in earnings per share for the quarter in the $0.54 to $0.59 a share range compared to $0.50 per share last year in the third quarter. Again, to note that this guidance range assumes a tax rate of 33.6%, which is absent the effect of the receipt of the tax refund.

In summary, we are continuing to experience a very strong year. In addition, the stronger dollar that moderated our first-half performance has abated, at least at present. We continue to balance growth in new applications and markets with our ongoing lean efforts. With those opening comments, let's now turn to your questions.

(Operator Instructions). John Franzreb, Sidoti & Company.

I would like to talk about the backlog trends that we're seeing. Historically, you've always had a step pattern of increasing backlog throughout the year. We have seen a noticeable drop in this quarter compared to the previous quarter. Can you talk about what's going on there?

Well, there are a couple of things going on. First of all, it was a very strong quarter and we saw a very strong -- the second quarter was a very strong quarter, and we saw very strong shipments throughout the quarter and at the end in particular. I think we are becoming far more sensitive to the demands of our customer than the way we manufacture. We clearly in lean have gone to a whole system. And as a result, our backlog is structurally reduced or has increased in turnover. So, I think that's the second factor that orders just stay in backlog less and less time, as we key all of our performance to the expectation of our customer for delivery. The third element is the mix if engineered system does stay in backlog because that's somewhat of an iterative process with our customers. In the current backlog, we have more standard product and parts than we have engineered systems. For example, fibers is almost non-existent in the backlog. Nonwovens has for some time been operating at a lower level. And on a year-to-year basis, Finishing, which would be another -- and automotive, which are two other major engineered system business, are operating at slightly lower volume levels.

Okay, and in Advanced Technology, how much of that flows to the backlog?

That's pretty much a standard product in all of our product lines. And so, that flows through backlog pretty quickly. So, the increase in Advanced Technology would be part of that mix change.

Got it; that makes a lot of sense. Great. Can you just review the impact of the dollar? You mentioned it's going to be neutral for the quarter. If we kind of strengthen a little bit, what is the potential impact for you? How does that impact the operating line?

Well, of course, a strengthening dollar is a headwind for us. A weakening dollar is our friend. At current levels compared to the prior year third quarter, we are about neutral. You know, I think you could probably look at foreign exchange rates over the second quarter and see where the dollar was stronger and see the impacts if you wanted to try to gauge what could be going on in the current quarter -- the third quarter.

Charles Brady, Harris Nesbitt.

Let me ask you, the margins on the Advanced Tech systems -- clearly, highest margins I think you guys ever had in that business. Is there anything in particular that's really driving that? Has the margin level from that business -- because of the wider breadth of products you guys are really selling into in things like iPod and things like that -- has that permanently taken the margins to a higher level? Or was there something in the quarter that really just all came together and drove that margin?

Well, I think the one thing that came together was clearly outstanding volume. So, we got all the benefits of absorption on that volume. I think the other thing that was occurring is, all the businesses -- there are four businesses in Advanced Technology -- were all seeing very good business demand. So, we had that balance. EFD, as you know, is a very high-margin business. It is performing in an outstanding manner during the year. Asymtek, which has relatively standard products and got great absorption on really outstanding volume -- so it was a quarter that we saw stars in alignment. I think the broadening base that you refer to brings more stability to demand -- to sales if you will than it does bring increased margins. But, it is a very important factor that we're watching.

If you look at the last trailing 12 weeks' order rate for that business, are you seeing the same broad-based demand across those four businesses that you saw in the second quarter?

Yes, we are. It is the same sort of geographic pattern as well.

Then, there's been some headlines on Intel -- has ratcheted down their cap spending in particular for new equipment. Any comments on sort of what you're hearing out of Intel and what that might do to your business?

We can't talk to any particular customer. But, we like the diversity of customers that we have in each of the segments that our Advanced Technology businesses operate. So, we respond more to macro than micro trends.

One more question and I will get back in queue. On the acquisition front, anymore headway on looking at life sciences or any other different areas maybe you are focusing a little more on these days?

We can't comment on acquisitions either. I can say that that continues to be a strategy to broaden our base, and we continue to look towards end markets, which are growing faster than our average growth, and included in those would be life sciences.

Bob Schenosky, Jefferies.

A couple of housekeeping items first. Restructuring expectations for 4Q, Peter?

We don't anticipate having any. And, let me use your question and broaden it a bit. We did have a relatively small restructuring expense in the second quarter in our Adhesive business, as John Keane, who is relatively new General Manager of that business, realigned some of his organization. We -- that should complete that reorganization. In fact, Finishing was running a little slower than we first anticipated when we announced it in the fall -- a three-quarter restructuring in the fall of 2005. They will complete their restructuring in the third quarter, which is only one quarter late spending the remaining $0.5 million.

Okay, great. And then, option expense for the balance of the year -- 1 million a quarter?

Yes, that's pretty straight lined.

Then, for tax rate in the fourth quarter. So based upon your comments this morning, we should assume a much lower tax rate in the fourth quarter on those results?

You know, it may occur in the third quarter. I mean, we are giving guidance that excludes that refund. When we first did that, we had three quarters that the refund could occur within. The process is beyond our control at this point. It's in final IRS approvals and then it goes to a congressional review panel. We do anticipate it in our fiscal year before the end of October. It could happen in the third quarter, but we elected not to have it in our guidance. But, we do fully expect it will occur sometime over the next two quarters.

Fair enough. Final question -- in terms of the year-over-year by region, is it fair to assume that with the US being down that some of that has been picked up by multinational customers ordering out of Asia-Pacific?

Yes, it is. I should say that sales when we show those as in a regional sense are specific, orders sometimes move around. We may get a nomination of an order to a particular region. But, when we actually go to ship that order, it goes to a different region. But I think it is fair to say that it is our global customer as well as an increasing base of local customers that is causing such areas as Asia and the Americas to be strong.

The second part of that -- this is now a couple of quarters of very strong results out of Europe. Are you seeing this as broad or is it just a couple of countries driving the strength?

No, it's pretty broad and it's pretty broad across end markets, which is probably even more encouraging.

(Operator Instructions). Scott Macke, Robert W. Baird.

I was wondering if we could talk a little bit about the Adhesive segment margin for the quarter and maybe specifically talk about the underlying mix. In particular, we see like a 20 million sequential revenue uptick in the quarter but just a modest 30-basis point bump in the margin. I was hoping you could add a little clarity or explanation to that.

Okay. I think to some extent it is mix. We did have a fiber shipment during the quarter, which was pretty large and as you know comes with a lower combined margin as we are more of a systems integrator than perhaps all value content. And, of course, you factored in I trust the restructuring that would flow through the operating income of the segment. But, in addition, I think it was general mix.

Okay, and when we talk about the segment results in terms of underlying mix going forward and in terms of orders, are we still talking about an environment where the packaging and product assembly businesses are strong in the fiber business is softer year over year?

Yes. I think some of our -- you know, we've also seen pretty good strength from the Coating businesses; although, that's a much smaller business. You know, the business that has not -- while it's shown some improvement, has not rebounded -- would be the Nonwovens business. And of course, the Nonwovens business has traditionally had pretty good margins.

Then also wanted to talk about just a little more detail of the objectives in the Coating and Finishing segment. I mean it sounds like in the third quarter then, we should be done with the restructuring lag. I guess to clarify, I think you've talked on previous calls about an 8% margin target or were talking about an 8% goal for a fiscal year. Is that correct?

No. Well, yes and no. Let me -- and thanks for the question. The longer-term goal and I would call that an intermediate-term goal, so two or three-year goal for the Finishing businesses to achieve an 8% operating income margin. At such a level, they would be at an EVA breakeven. Clearly, we want all of our businesses to be generating value or having positive economic value added. But, you know, the first-term goal is to at least get to breakeven.

The restructuring that they are in the final stages of completing bring them from if you will an operating income level of essentially breakeven -- about halfway there. That restructuring should improve their operating income by about 4 percentage points. The remainder of the work before them largely goes to a pruning of product offering, a reduction in a large number of parts and systems that have very little and very old demand. And, we need to prune that because it comes with a lot of cost. That's a process we need to work through with our customers and indeed are engaged in doing. That will consume the two to three-year period that I referred to. So, we are about halfway there essentially doing the easy stuff, which is the restructuring that we've announced. We will continue to work to get to at least that zero EVA level of 8%

At this time, there are no further questions.

Well, I thank you for your interest. I wish you all a very happy and healthy holiday season over Memorial Day. Thank you for your continued interest in Nordson.

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