Nordson Corp (NDSN) 2006 Q3 法說會逐字稿

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

Thank you, Phyllis. Good morning everyone. This is Barb Price, Manager Shareholder Relations, along with Peter Hellman, President and Chief Financial and Administrative Officer and Greg Thaxton, Controller and Chief Accounting Officer. We would like to welcome you to our conference call today Thursday, August 24, 2006 on Nordson's third-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 Friday, September 1, by calling 1-800-642-1687, and you will need to reference ID number 437-9732.

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 2006 results and Nordson's future outlook. Peter?

Thank you, Barbara, and thank you all for attending Nordson's conference call discussing our third-quarter 2006 results. For the quarter we saw record sales, earnings and earnings per share. While the quarter's performance exceeded our expectations, it did so in part at the expense of the fourth quarter.

Sales for the quarter were $226 million, up 12.1% from the prior year a record for any third quarter. Currency had a small positive year-to-year impact on sales in the quarter of 0.3%. As a result, the quarter reflected strong volume growth up 11.8%. Our volume in the third quarter reflects an increase in business activity in all of our geographies. Asia-Pacific volume was up 26%; the United States had a volume increase up 11%; Europe was up 10%; the Americas volume increased 8%; while Japan was up 3%.

On a business segment basis, advanced technology reported a volume increase of 25%; adhesives was up 8%; while finishing was up 7%. The volume growth in the advanced technology businesses reflect generally strong demand with Asymtek and EFD having growth in volume resulting from the sales of products of an expanding end market. UV Curing also had a good increase in volume. Adhesive saw strong demand in its systems businesses specifically nonwovens, paper converting, coatings and automotive. The growth in finishing was primarily driven by powder systems.

Demand as measured by orders has shown some deceleration in recent weeks. Orders for the past 12 weeks ending August 18th, measured in a constant currency to the same period a year ago were up 4%. On a sequential basis, that is the past 12 weeks versus the 12 weeks before that, orders were down 3%. We see the decrease in the sequential comparison as seasonality as the average pattern has been almost identical over the past 10 years.

Recent orders by segment reflected that the past 12-week order rates versus a year ago are up 5% in advanced technology; up 1% in adhesives; and were up 12% in finishing. On a geographic basis orders over the past 12 weeks in Asia-Pacific continue to be strong up 28%, with a more modest growth in Europe that is up 4%, and in the United States up 2%. But orders were down in the Americas by 9% and down in Japan by 14%.

We ended the quarter with $95 million in backlog; that is up from the beginning of the year by $15 million while down $14 million from last year's third-quarter level both measured into constant currency.

Turning to the income statement, the overall gross margin rate in the quarter was 56.5% equal to the prior year. Spending was up 9.1% with volume increases of 9% in the effects of currency that added 0.1%. There are several unusual items included in spending during the quarter.

Reserves were created for the remediation of an environmental issue in New Richmond, Wisconsin. The reserve addition was $2.8 million and as it is based upon a detailed remediation plan, we expect no additional charges related to this issue.

Restructuring expenses in finishing and our UV curing businesses were incurred totaling $600,000. The adoption of stock option accounting added $900,000 in expense during the quarter when compared to the prior year. Adjusted for these items the growth rate in spending on a year-to-year basis was 4% which is more reflective of our ongoing lean efforts.

Our interest expense was reduced about $1 million, $800,000 of which represents interest income associated with a tax refund of $3.1 million that was also recognized in the quarter. The resultant tax rate of 23.7% also reflects the one-time impact of this refund. Nordson's net income for the quarter was $24.8 million versus $18.6 million last year, a 33% increase and representing a record for any third quarter.

Fully diluted earnings per share was also a record $0.72 versus $0.50 last year, up 44% an increase of $0.22 per share. Affecting this change positively were fewer shares outstanding this year versus last year that had an accretive affect of $0.05 a share and the tax rate helped by $0.02 a share. Offsetting these effects were expensing of stock options, restructuring and environmental accrual that hurt the year-to-year comparison by $0.02 a share, $0.01 a share and $0.06 a share respectively. As such, core performance was an increase of $0.24 a share, a 48% improvement over last year.

Before discussing corporate cash flow, let me note the progress we are making in the restructuring of our finishing and coating segment. In October 2005, we announced that over three quarters we would be restructuring this segment and would be incurring a $3.3 million expense over the period. Despite the fact that the restructuring has taken a little longer than we thought and will be completed next quarter, in the third-quarter results we achieved better than planned improvement for this point in time. In the third quarter the segment's operating income margin was 7.9% compared to a -1.3% the prior year.

Our corporate 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 $8.7 million. A use of cash for working capital was $3.7 million; capital expenditures were about $2.9 million while dividends were $5.7 million. In addition, we saw an inflow of $6.1 million from other sources and we repurchased $7.1 million of common stock.

Net cash flow was cash generation of about $20.2 million of which a portion was used to pay off maturing debt. Our debt leverage measured as debt to total capital ended the quarter at 23%. Cash related measures reflected relatively good performance in this environment. The quarter's EBITDA was $40.5 million or $1.18 per share compared to $34.2 million or $0.93 a share last year.

In summary, the quarter reflected very good performance with strong volume growth and continued cost controls. However, the deceleration of growth on a year-to-year basis in our orders caused our outlook for the fourth quarter to be cautious.

As we said in our earlier discussion of orders while our orders continue to increase over the prior year, the pace of the increase has decelerated partly due to difficult comparisons. This coupled with the fact that some systems orders that were due to be shipped in this year's fourth quarter were accelerated by customer request into the third quarter, leaves us to have an outlook of a volume range that on the high side approximates the fourth quarter volume last year, a quarter that itself was a strong quarter particularly in our systems businesses. The low end of the range would be a decline in volume of 2%.

With a weaker dollar than a year ago including the currency impact would result in a sales outlook of up 1% to down 1% compared to last year. Spending in the fourth quarter is expected to be slightly higher than the third-quarter levels and will include the remainder of the finishing and UV curing restructurings in the amounts of $200,000.

Our tax rate in the fourth quarter will be higher than the embedded effective tax rate for the first three quarters as foreign tax loss carryforwards have been utilized and we will incur a one-time foreign exchange gain on the year end repatriation of foreign earnings. We expect that the effective tax rate of 34.25% in the fourth quarter versus 28.4% a year ago. This outlook results in an earnings per share for the quarter in the $0.68 to $0.73 per share range compared to $0.80 per share last year in the fourth quarter.

Although this outlook for the fourth quarter sales may be somewhat disappointing we do you see this as somewhat of an anomaly driven to a certain extent by the impact of our large system businesses. Our early outlook for the first quarter of 2007 would indicate sales volume increases in the range of our recent growth rate of orders. With this fourth-quarter outlook, sales for the full year of 2006 will be in the range of 6 to 7% over 2005 with earnings per share growth of 18 to 20%.

In summary, while we see some deceleration of orders, Nordson delivered a very strong performance in the third quarter and will have a record 2006.

And with that, let us now to turn to your questions.

(OPERATOR INSTRUCTIONS) Walter Liptak with Barrington.

Thanks, good morning. The first question I've got is on the shipment that pushed out of the fourth into the third or got pulled forward. Could you talk a little bit more about what segment that was in? What type of a product and why it was pulled forward?

Walt, this is Greg. We had some volume in some of our larger systems businesses particularly nonwoven that were pulled into the third quarter.

Okay, can you give us a magnitude in terms of dollars?

Yes, it was -- in that particular case it was in about $1.5 million range.

And we have a few more. I would say the order magnitude is 2 to $3 million that moved from fourth to third.

Okay. And then the order growth in advanced technology, the deceleration seems substantial going to single digits from mid-20s. Can you provide some color about geographical regions, what you are hearing from your customers, etc.?

Yes, let me -- geographical regions are tough because most of the equipment ends up in Asia but as it is ordered it may show up as a U.S. order and yet when it ships. So I'd rather kind of get to the tone because it is a global business. And what we are seeing in outlooks especially industry outlooks is kind of a discontinuity on the outlook of semiconductor either down modestly -- this is semiconductor equipment -- or up modestly. But what is inherent in all of those forecasts is the consumer end, things like flash memory, should continue to show pretty good growth. So high single digits, low double-digit growth. And I think that kind of reflects our own thinking at this point.

Okay. And maybe just to clarify a little bit, over the last year your sales in advanced technology seem to be stronger than the overall semiconductor industry I think because of some of the handheld devices, some of the niche markets that you were in. So you are seeing some slowdown in those type of applications, is that it or is it more on the semiconductor side?

I would say the most pronounced changes on the semi side is being offset by the fact that we have more diversity in our portfolio than we often are given credit for. EFD, for example, is this year having an outstanding year with sales growth in the upper teens. And that is more of an annuity than obviously systems sales. And as we've decided a number of times, MP3 players, flash memory, all the other things that our processes find their way into are also giving us if you will the appropriate effect of diversification from just strictly being a semi-equipment producer. In fact, semis are about 25% of that segment's sales.

Okay, thank you. I will get back in queue.

Charlie Brady with a BMO Capital Markets.

Thanks, good morning, guys. Can we just talk for a second about the margins in the coating and finishings business, obviously the restructuring benefits are really shining through here in this quarter. I'm just wondering if you back out that $200,000 restructuring charge, you're in excess of 8% margins on a that. Where do you see on a going forward basis margins in this business? You say the restructuring is kind of still going on and it should be completed fourth quarter, is that to imply then that there is still a little more upside in this segment's margins?

Okay, you know, guys every quarter ask about the finishing business, this quarter I welcome the question. But to address it, what we said when we started the restructuring program was that the initial restructuring, the $3.3 million, would get us to an operating income margin of about 4% because we also had to work on pricing issues and we also had to prune the product line. Our analysis kind of had that as a sequential series of steps when in fact they were happening at the same time. So I think we are seeing some of the benefit of both the pricing issues as well as product line pruning.

The objective was clearly to get to an 8% operating income margin not at the end of the restructuring program but at the end of these group of issues. Getting to 7.9 would indicate that we are totally done and I wouldn't say that we are. There is one time -- one credit in the results of $400,000. So coming out of this quarter, quality of earnings or a more of a run rate would be more like 6.7% but that is well on our way to our 8% goal.

The 8% goal was developed to be EVA breakeven. We expect all of our businesses over time to generate EVA. So clearly we want more than 8% but that was our immediate kind of intermediate-term goal and we are well on our way to that.

So on the way, if we normalize it out at 6.7 and on the way to 8, is it fair to say that going forward it really probably should be more of a gradual increase update as opposed to a sharp pickup?

Yes, I think that is true. And we will have much better color as we scrub our operating plans for 2007.

Okay, thanks. I will get back in queue.

John Franzreb with Sidoti & Co.

Good morning. I was just wondering if you could talk a little bit about the competitive environment in the advanced technology business now that you are expanding into different end markets. Can you just kind of review what the environment is like, what the pricing is like, talk a little bit about that?

In most cases these are new products requiring new manufacturing processes. And we are bringing unique skills that we're able to ramp up pretty quickly because we are adapting them from other similar processes but not for the products that we're getting involved in. In some cases there are older processes that we have to overcome but that is somewhat rare because they are new products. And so I would say that we have some competitive advantage given our speed and our precision and our ability to adapt, if you will, proven technology to new products. But it is a competitive landscape; it's not a cakewalk. But I think we have certain advantages.

Do you find that -- is it more pressing involved now with the slowdown in the consumer electronics than maybe three or six months ago when you were first entering those end markets?

No, we have really haven't seen a change in the pricing environment.

Great. That's it for me now.

Scott Macke with Robert W. Baird.

Good morning everyone. Can you hear me all right?

Yes, we can.

Just wanted to follow up on this business pulled forward. What was the operating income impact of that business being pulled forward?

That would be -- given that it was systems and -- it's probably gross margin of about 50-50 -- yes 50%.

But I gather this doesn't explain all the upside to your internal forecasts that some of that came from coating and finishing as well in the quarter?

Yes.

Okay. I think you've already given us the answer but just kind of want to tie down the fourth-quarter revenue outlook of being roughly flat even though we are looking at 4% order growth recently. Does this, were these systems -- I gather these systems weren't ordered and filled in the quarter. I'm just trying to draw the line between positive orders and a flat revenue outlook.

To some extent if you get an order today it might not be for a fourth-quarter shipment -- well, today, we're already in the fourth quarter. But I think we have to go in and look at the orders and see how many of them especially engineered systems take several quarters to complete. And essentially if our orders are up 4% as they have been over the last 12 weeks but we are saying that volume is going to be essentially flat, or we're going to build backlog in the quarter. That reflects proportionately higher systems orders than standard product orders. There is some impact of the pull ahead that essentially we had initially not had in our sales forecast for the third quarter expecting that those would be sales in the fourth-quarter. But that is a small part of the difference.

I think the difference is the timing of orders to delivery. But it is more based on the type of equipment and the customer requirement as well. It's not our ability to deliver.

Okay, thank you. That is helpful and I also went to follow up on the question on the coaching and finishing segment. Did I hear correctly, do you expect margin then to improve sequentially in the fourth quarter?

I think the fourth quarter will be more like the 6.7 I think I said. And then we will gradually improve as we go across to 7 -- the 2007.

Okay. And then finally one more if I may. Just wanted to dive into adhesives and nonwoven segment orders of 1% in the last 12 weeks. I was wondering if you could break that done by line of business if we could talk about product assembly versus packaging versus nonwovens versus fibers?

Typically we don't get down to orders by product line. I think we've -- and especially over a 12 week period. Let me try to give you some color though. Look at some data for just a second.

We see some strength in nonwovens and I guess that and the others are kind of around the average with a decline in automotive if that helps you a little bit. But many of our product lines are around the average.

Okay, thank you. That is helpful.

(OPERATOR INSTRUCTIONS) Bob Schenosky with Jefferies.

A couple of quick ones. The $2.8 million, the remediation, is that all in SG&A?

Yes, it would be in SG&A and it would be in the corporate. And I should say that in corporate we also, we have a fair amount of stock-based compensation. And given the stock decline during the quarter to some extent that was offset by not marking to market but truing up of accruals of our stock-based compensation.

Okay. As you think across really the back half of the fiscal year with your third quarter being much better than expected and really offsetting the variance in consensus in the fourth quarter, with the 18 and 20% earnings growth this year you've talked about a bit of a rebound in the first quarter. And if you talk to covered this already I apologize because I jumped off for a second. But do you see some of the shifts in the fourth quarter more as an anomaly and it rebounded in the first quarter as people are trying to get orders in in 3Q or do you see some broader slowing?

The word I used in my opening comments were anomaly. Now let me just say that at the beginning of any change in trend you may not fully see it but we don't see this as a change in trend. We expect that our first-quarter sales on a very preliminary rough basis should be more like our year-to-year order growth or 4%. We clearly exceeded the consensus I think by $0.12 in the third quarter. Unfortunately we are going to miss the consensus that was out there which was unguided. But the consensus that was out there by $0.14. So if you look at the two quarters together we are pretty close to the consensus.

I think that the fourth quarter is an anomaly and I think we should see some rebound in the fourth quarter to a growth rate of orders which currently we see coming in at about 4%. And then foreign exchange should help us in the first quarter but that is still a long way in foreign exchange markets.

Okay, great. And just two final things. Ed had mentioned last week at our conference about the new salespeople that you have at the Company coming over from (indiscernible) and Tyco and elsewhere. Can you give any color on what they may add to sales next year?

Well, they are really off to a great start. Where we are seeing that is in EFD in one particular unit. And EFD has been really putting in place for since we acquired them the strong platform we've been buying out distributors and putting in our own people. We've been expanding our geography. We've been expanding our product lines. And then we got new management in there and I think they took advantage of all of that prior work. But year-to-date order entry in EFD is up 17%. It has been running pretty consistently at a rate around that. And that is an example I think of the investment that we've made both in people, especially designers and salespeople as well as the geographic footprint and products of some of our businesses.

Okay. So penetration and share are expanding in excess of the market in other words?

Yes, that has been our strategy for at least the last five years is expand new applications and new markets and do so with more aggressive selling and as you know we like direct selling. And we've been investing in a lot of salespeople especially in Asia. And I think we see the benefits of that if you go back to the growth of our Asia business especially if you look without Japan.

Okay. And then finally, was the depth of the cut at Ford and what may follow in the other two of Big Three a bigger impact to your fiscal fourth quarter maybe than you would have previously thought?

No, I would say that we had an outstanding fourth quarter in our automotive business in '05. Production doesn't affect us too much in our automotive business because we are on the systems end. What really impacts us is platform introductions when they have the chance to retool for a platform, we tend to see a lot of equipment orders. I think that the conditions in the automotive industry will have an impact to our automotive business but I wouldn't hide behind that in the fourth quarter. I think that is more really tough comparison where we saw -- what was the percentage of total sales last year in automotive?

It was big, it was probably in the 30% plus range.

I think we saw up to even 35% of the whole year sales in automotive were delivered in the fourth quarter. So we had a real tough comparison.

I was just checking to see if there was going to be any delays in any of the new programs because of the cuts in production. You're not seeing anything though?

No. And again you would be looking at a delay in a platform launch rather than the reduction in production. To some extent the auto companies have to retool their product lines faster because of the energy changes. And I think in fact you might see something that is counterintuitive which is an increase in platform introductions even though they are financially looking to ways to cut costs.

Okay, for the next fiscal year?

Yes. Well actually we're already thinking about 2007 for shipments but 2008 is what the RFPs are starting to talk to.

And this is Greg. Just to clarify that, automotive was closer to 40% in quarter four as a percentage of total year.

So it is a really tough comp, usually hard.

Right. Okay, thank you.

Charlie Brady with BMO Capital.

Thanks. On the advanced tech segment margins in the quarter with the online -- the order growth being around single digits here. Where is that taking your absorption in those businesses? And to what impact does this lower order growth rate have on your margins as it pertains to really absorbing? Because obviously in Q2 you had great absorption and the margins were record levels and obviously that has come off of that. But I'm wondering what that does in the fourth quarter?

The orders are still up. We get better absorption when orders are going up. These plants are achieving very, very good absorption. I would only worry about absorption when orders are going down and shipments are going down.

Okay. And then on tax rate for '07 -- 33.5, 34% for the year?

This is Greg. We are closer to 34.5.

Okay, thanks very much.

And I would say that is a preliminary look. We are just about to start our operating plan reviews. But that is the number that we would have and will adjust and make sure that it is an FD event when we have a better look at the whole year plan.

Okay, thanks.

[Jane Sevlingson] with [Dartmoor Capital].

Good morning. If you addressed this I apologize. The Americas business was down sharply I believe in orders. Could you address that?

I think it was -- let me get the number.

I thought you said Americas --?

Oh yes, the Americas, that is a small -- the Americas is -- it's everything except for the United States, so it is Canada, Mexico and South America. It is a small unit. And so it tends to have a rather volatile order entry pattern. It also has been running pretty strongly all year. It was down but I would point it is a very low base.

Can we read anything from that being down in terms of general? Is South America starting to weaken? Mexico starting to weaken? Or do you just think this is an anomaly for you guys?

I think it is an anomaly.

And it is to a certain extent driven by some lumpiness of engineered systems as opposed to kind of a base trend.

Okay, good. Thank you.

Scott Macke with Robert W. Baird.

Hello again. Just wanted to follow up to talk on the tough comparison in the auto business. What segment are we talking about that exposure being in or that tough comparison being in?

Well, automotive is a product line within our adhesives segment.

We're talking about -- are we talking about a tough comparison in terms of orders, revenue or both?

We were talking as far as volume.

Okay, revenue. Also while we're talking a little geography I was just wondering what you broadly speaking in terms of order growth moderation in Europe, what sort of end markets you are looking at, what sort of product line?

Let's see, Europe was up 4% -- I'm looking at the data.

It's moderation in the advanced tech segment is driving most of that.

And it sounds like that that may just reflect stronger growth in Asia-Pacific and where those orders are served out of?

Yes, Asia-Pacific was up 28% for the most recent 12-week period.

Okay, thank you.

At this time there are no further questions.

Given that there are no further questions, I thank you all for attending this teleconference. And thank you also for your continuing interest in Nordson.

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