Nordson Corp (NDSN) 2006 Q4 法說會逐字稿

Good morning. My name is Deshaunta and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation fourth quarter and 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, Deshaunta. Good morning, everyone. This is Barb Price, Manager, Shareholder Relations, along with Ed Campbell, Chairman and Chief Executive Officer; 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, Wednesday, December 20th, 2006, on Nordson's fourth quarter and 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, December 29th by calling 1-800-642-1687, and you will need to reference ID number 3804643.

Our attorneys have requested we open this call with a cautionary 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 Hellman for an overview of our fourth quarter and fiscal 2006 results and Nordson's future outlook. Peter?

Thank you, Barb, and thank you all for attending Nordson's conference call discussing our fourth quarter 2006 results. It was a very good quarter from any perspective. Not only did we achieve record sales and earnings per share, but we took some strategic actions that will add value in the coming year and beyond.

During the fourth quarter, we sold the Fiber Systems business and now report this business as discontinued operations. In my comments this morning, I will be speaking to the continuing operations performance, except where I specifically include the discontinued operations.

Sales for the quarter were $242 million, up 1.1% from the prior year, a record for any fourth quarter. This increase was largely reflective of foreign exchange benefits as volume was up 0.1%, while currency added 1% 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 with the volume up 9.5%. Europe and Japan had modest volume increases of 1.8% and 1.4%, respectively. The United States and the Americas reflected volume declines of 4% and 9.3%, respectively.

On a business segment basis, Finishings growth was the strongest with a volume increase of 11.1%, while Advanced Technologies volume growth was 2.6%. Adhesives saw a 4% volume decline. The Finishing volume growth is driven by powder volume gains in Japan, U.S. and the Americas. The Advanced Technologies segment experienced strong Asymtek and EFD volume growth, offset by [March] Plasma comparisons, reflective of a very strong quarter in the prior year. Adhesives also faced some difficult comparisons in the quarter in the coating and automotive businesses.

Demand as measured by orders has shown continued growth, but albeit at a declining growth rate. Orders for the last 12 weeks are up 2% over this same period last year in constant currency. On a sequential basis; that is, the past 12 weeks versus the 12 weeks before that, orders are up 5%. These order rates do not reflect the acquisition of Dage, which occurred earlier in this month.

Recent orders by segment reflected that the past 12-week order rates versus a year ago are up 10% in Finishing. Advanced Technology orders are up 6%, while Adhesives orders are down 2%. On a geographic basis, orders over the last 12 weeks as compared to last year are up 19% in Japan, Europe is up 10%, the United States is down 1%, while Asia-Pacific and the Americas are down 10% and 11%, respectively. The decline in order rates in Asia-Pacific reflects a decline in some Advanced Technology sectors. Despite this, as I noted earlier, the Advanced Technology segment is up 6%.

We ended the quarter with $69 million in backlog compared to $75 million in backlog last year using the current exchange rates for both figures.

Turning to the income statement, the overall gross margin rate in the quarter was 57.7%, up significantly from last year's 55.4%. Favorable product mix and productivity accounted for all of the benefit, adding 2.4%, while exchange rates reduced gross margins by 0.1%. Spending was up 10.9%. Of this amount, currency amounted -- accounted 1.2 percentage points to the increase, while constant currency spending was up 9.7%. The increase is attributed to the expensing of stock options, employee benefit costs, some of which are nonrecurring, and employment expansion in higher growth businesses, and to some degree, merit inflation.

Our interest expense continued to decline in the quarter and we saw an effective tax rate of 24% versus 28.6% last year. The reduction in tax rate reflects a lower tax rate for the continuing operations and the use of foreign tax benefits. Nordson's income from continuing operations for the quarter was $29.5 million versus $29.3 million last year. Net income, including discontinued operations, was $27.8 million, compared to last year's $27.9 million.

Fully diluted earnings per share from continuing operations was $0.87 a share versus $0.84 a share last year, while earnings per share including discontinued operations was a record $0.82 versus last year's $0.80 per share.

Our operating cash flow for the quarter continued to be strong. Specific cash flow items in addition to net income were non-cash charges of $4.4 million, working capital generated $11.8 million of cash, capital expenditures were $3 million, while dividends were $5.7 million. In addition, we acquired $11.8 million of stock in the open market and had other inflows of $3.3 million. As a result, we saw a change in cash of $28.8 million in the quarter.

We ended the year with a strong balance sheet. Our debt leverage, measured as debt to total capital, ended the quarter at 21%. The quarter's EBITDA was $47.2 million, or $1.39 a share, versus last year's $50.3 million, or $1.44 per share.

In summary, the quarter was one with record sales and earnings per share and we continue to generate significant cash flow. It goes without saying that the full year was also a very strong one with record sales, earnings and earnings per share. Sales were up 7.2%, of which volume are represented 8.5 percentage points, offset by negative currency of 1.3 percentage points. Income from continuing operations were up 15.6%, as was total net income, including discontinued operations. Earnings per share, including discontinued operations, were up 23.8% to a record $2.65 per share.

Let me turn to some brief comments about our outlook for the first quarter of 2007. At the outset, let me note that on December 14th, we acquired Dage Holdings, Ltd. We have, however, not included Dage contribution in our formal outlook. I will at the end of the discussion directionally discuss Dage's contribution to our first quarter.

As we said in our earlier discussion of orders, order volume continues to grow, but at a slower pace. Reflecting this and the fact that our orders have seen the largest growth in Finishing, which has a slower backlog turn, results in a volume forecast for the first quarter of a range of up 1% to down 2%. Given current foreign exchange rates and the weakness of the dollar, volume should get approximately a 3 percentage additional benefit from foreign exchange, if exchange rates stay at the current levels.

On a geographic basis, this outlook reflects continued strength in Asia-Pacific. From a segment perspective, strength in the Advanced Technology segment is moderated by difficult comparisons in some of our large system businesses. In the first quarter, we should see gross margins at about 57% to 58%, a level representative of the Nordson without the Fiber Systems business, which had relatively low margins. Spending in the quarter should grow only a couple of percent over the prior year in constant currency terms and around 4.5% with currency factored in. The modest increase in the quarter reflects the absence of the Finishing restructuring in last year's spending.

The effective tax rate for 2007 should be 34%, slightly higher than the first quarter of 2006, which reflected a rate of 33.5%. This forecast results in earnings per share in the $0.51 to $0.57 per share range, versus last year's $0.52 a share from continuing operations and $0.47 per share, including discontinued operations.

Let me turn to Dage. Dage continues to experience good demand for their test equipment, and this should add 3% to 4% percentage points to Nordson's first quarter volume, given the period since acquisition includes a significant holiday period. We expect, however, little earnings effect in the first quarter.

In summary, the fourth quarter and indeed the full year of 2006 was a strong one. In addition, we sold an underperforming business and bought one that is a leader in a fast-growing segment. This repositioning will be an advantage as we look ahead.

Now, let us turn to your questions.

(OPERATOR INSTRUCTIONS). John Franzreb, Sidoti & Company.

My first question is regarding the Adhesive Dispensing business. Orders are down, volumes are down, you mentioned that you had a tough comp a year ago with the coatings and automotive business, but the order book outlook going forward is down 2%. Can you talk about what's going on there and why the weakness in that segment?

I think we have seen some slowdown, especially in the larger systems. You referred, and it's true in the fourth quarter, this affected our automotive business line, as well as our Coatings business line. To some extent, we also see some slowdown in our product assembly systems business, no doubt in part caused by housing starts. That business does have a good market share in the fabrication of windows and furniture, and probably seeing some slowdown related to housing. So I think the business is in good shape. We're not losing share. It's more just that we're seeing an economic pause that is affecting some of the larger systems.

Okay. And conversely, though, the operating margin in the business was relatively good. I imagine that reflects the divestiture of the Fiber business. Is that true?

Yes. The lack of Fiber gives the whole Adhesives segment an uptick in gross margin. All the margins that I talked about, however, are reflective of the business without Fibers, but you just see an upward shift. I think that the improvement in the margins, both without Fibers in the fourth quarter and as we look ahead, is more representative of mix as we don't have those large systems in the adhesives, whether that's automotive, coating or product assembly. Those come in with lower gross margins, and so it's largely a mix question, and that's what's improving margins despite the slower sales growth.

Okay. One last question -- the Advanced Technology segment, I think the order book of 1 -- or the 6% was a bit better than I was looking for. What you hearing from your customers out there about their spending patterns going into the March period, if you will? Because that was an awfully aggressive spending period for a lot of those end markets a year ago.

John, this is Ed Campbell. Let me try to give you some response there. We've -- as you mentioned, orders continue at a good rate, 6% up for the most recent 12 weeks, not the same rates of growth that we saw in the middle of 2006, but nevertheless, still positive growth. And what we're seeing is the benefit of the broad diversification of the customer base within the segment. We're seeing good order growth in areas like flat-panel, life sciences. We've continue to make progress with our sales to new applications in LEDs. We have had some further progress with areas like front-end applications and we continue to see good growth from our systems, our plasma systems used with the manufacturer of printed circuit boards. We see right now an awful lot of activity with customers in terms of new projects. Our lab schedules are full. In fact, we have a backlog of people getting in and doing work with us. And similarly, with Dage, we continue to see very good demand in their order book and their shipment forecast.

So a lot of activity out there, but nevertheless, if you look at some of the broad industry statistics, there are some numbers mentioned in one of the morning reports by the folks that follow us that indicate that [semi] data in terms of orders and shipments are beginning to show decline. And we do hear about some of those, and in some cases, we don't see the same rates of growth that we saw in the past. But we feel very good about the underlying fundamentals and the broad diversification of our orders, but recognize that we are not going to see in this particular environment the kind of very large double-digit order rates that we saw in the middle part of 2006.

Fair enough. Thank you.

Charles Brady, BMO Capital Markets.

Good morning. This is [Cooney] sitting in for Charlie. Can you hear me okay? I just had a quick question regarding your Finishing business. The margin we saw this quarter was nearly 15%, and this is sort of on the heels of 7% in your previous quarter and we are definitely seeing improvements following a period of restructuring. But my question is -- were there any sort of one time or [fleeting] factors that particularly boosted margins this quarter? And where do you see margins in this segment normalizing going forward?

The answer to the first part was no. In fact, this quarter had stock option accounting and the prior-year quarter did not. So if anything, there was an additional expense that will be ongoing. The business, as you note, has shown increases in its operating income. For the full-year, operating income was 6%, and this is a business that I think we need to look at over a full-year period as it is our most seasonal business. It's heavy in highly engineered systems which tend to have a second half of the year sort of a shipment rate because of customer demand. At 6%, it's still up, including the stock option expense and some restructuring expense the business had to incur, up over 1%. That is a 5 percentage point increase year-to-year. We are continuing to be on our plan to at least achieve over a cycle an 8% operating income margin. This would equate to EVA breakeven. And I say over the cycle, because this is a cyclical business.

This is a relatively good time for Finishing. They're seeing strong demand in Japan, the Americas. The U.S., as I stated, we expect to see farther demand extension into China. So at least, we will achieve this part of the cycle an 8% operating income, and we're well on a plan to do that.

Perfect. Thank you very much.

Robert McCarthy, Robert W. Baird.

I am trying to, Peter, interpret your comments about your outlook for the first quarter. You said that -- you pointed out that Advanced Technology faces difficult comparisons. With volume growth projected roughly flat, is that your way of telling us you think it will be down compared with prior year?

In the Advanced Technology segment? No, we'll expect in the forecast to see an increase, but the increase is moderated by the very strong demand from a year ago. We saw increases in single digits, but clearly, an increase.

So the negative segment on a year-to-year basis would then the Adhesives?

Yes. When I said -- is offset by large engineered systems -- that is Adhesives, it's Automotive, it's Coating, its product assembly, and to some extent, it's Finishing. While finishing is seeing good order growth, those orders will ship beyond the first quarter.

Understood, but you don't exactly have a challenging comparison, compared with -- I mean last year's Coating and Finishing businesses, do you -- $32 million of revenue?

Yes, it will see us decline from that basis, even despite its order growth.

Alright. Thank you, that's helpful. My other question goes to Dage Holdings and the $229 million price tag. As I recall, when you bought EFD back in 2001, that was a deal that in part took advantage of a feature of the tax code that would allow you to deduct the amortization for tax purposes, goodwill amortization for tax purposes, which had an influence, or it influenced what the real price of that transaction was. So my question is, whether any feature like that exists here, whether we really are just paying the $229 million period. And then, could you talk to expected return on the investment and how you expect that business to deliver that return over a cycle I guess? I'm just looking for some more dialogue on Dage.

First of all, Rob, this is Ed. We've not announced the price. We announced the price multiple to EBITDA (MULTIPLE SPEAKERS).

-- filing, Ed.

Well, then I stand corrected. Thank you, Rob.

Sorry, but --.

That's alright. I think more importantly, to the substance of your question, first of all, you asked about the tax opportunities that we had in EFD and whether it was going to be repeated in Dage, and the answer is -- we don't believe so. The assumptions were not made on that basis. And of course, the EBITDA multiples that we announced in our narrative discussions of EFD at the time we did it adjusted for that benefit, and it was a very handsome benefit that was -- that's made available under the U.S. tax code if both the buyer and the seller elect to take the same tax treatment. And we were able to do that in connection with that transaction.

What we have done in the Dage acquisition is purchase shares, and of course our basis then goes into that kind of a structure.

More substantively to why we would make this investment and where we're going to see the rate of return, this is a business that is very high performing. It operates with leading market shares in its largest segment, which is bond testers, and it has very interesting new products in that segment that are accelerating the growth. That growth acceleration is coming from a variety of regulations in Europe that require the removal of lead from many of the sub-components that go into semiconductor and electronic assemblies, and the need of customers who construct these semiconductors and these electronic packages for test and validation is driving accelerated demand in some of these high-speed bond testers.

Furthermore, they've started a new segment, X-ray Inspection Systems. This was started from scratch in 2001. They have very interesting technology. They have the leading technology in terms of very fine resolution in terms, of -- these x-ray inspections down to 250 nanometers and with projects on the books to take that even further down. This business, moving from no sales and no products to first introducing a product in 2001, the business growth in this segment has grown very rapidly. They have gained market share were they are, while perhaps not the leading market share participant, they are very close to I think having that position. And the margin expansion associated with a new business development has been very dramatic, such that in the 12 months preceding the date of our purchase announcement, they had expanded operating margins to 21% of sales. We think there's further room for expansion. Their sales and order growth have continued very strong through the October 31 date that was reflected in our financial statements, and we think this is going to be another high-performing segment in our Advanced Technology business and we're excited about it. And the return, in a word, is going to come from expanding margin dollars as both the revenue grows and the operating margins expand.

Thanks, Ed. I was hoping to be just a tad more specific. What kind of hurdle rate do you all use when you evaluate an opportunity like this? And then my question is -- how many years will it take you in your models to get to that point?

First of all, we use a weighted average cost to capital that looks at a prospective balance sheet that we would have through the cycle, not necessarily the one that we might have momentarily after the acquisition that reflects the full load of equity. We risk-adjust that return in terms of our forecast. We don't look at a single forecast in terms of certain days that you can predict the future, but we look at a variety of outcomes and do something analogous to a Monte Carlo analysis, to understand under what types of scenarios we might see attractive rates of return. And there's not a specific answer that I can share with you in terms of dates and cost of capital because of that analysis that we do and the approach that we take.

We compare to the performance that it has demonstrated versus Asymtek and other parts of our Advanced Technology segment, and we can see its relatively superior performance with very good prospects for not only a continuation of the work that they're doing, but some exciting new technology that has not yet been reflected in the revenue statement associated with moving some of this technology into the front end of semiconductor assembly and test.

And just one little follow-up. I gather from your comments that recent order growth at Dage has significantly exceeded the 6% number that you were talking about for Advanced Tech?

Yes.

Thank you very much, Ed.

Matt Summerville, KeyBanc.

Ed, you kind of walked through some end markets as it pertains to your Advanced Technology business in terms of what you're seeing. Can you do the same appraisal in terms of what you're seeing in Adhesives right now?

Yes, at a very high level. The Packaging business is staying on its kind of historic growth rate, and I am really referring to both the fourth quarter and quarter trends in some sort of a composite. So in the middle-single digits. As I said, the product assembly business is showing some slight decline, again, probably reflective of the housing industry. Our Coating business is showing a decline, but I think that's more representative of a very good series of large orders last year. Nonwovens is lower than its historic growth rate. We are in a lull between recapitalizations in that industry, and therefore, it's operating around a level performance to the prior periods. So those would be the big businesses within our Adhesives.

Do you think you have seen order rates bottom in your Adhesives business yet?

It's difficult for us to make a forecast, especially at this time of the year when customers -- our customers are still formalizing their capital plans for 2007. So I really wouldn't want to say where we are in a cycle.

Okay. With respect to corporate expense in the quarter, I think it was a little over $9 million. That was a couple million higher than what I was looking for. Are there a couple things that you can call out there, number one? And then, looking out into 2007, is there some sort of rough guidance you can give us, in terms of what kind of spending we should see at that corporate line?

Yes. Without currency, there were a few employee benefit-related costs which probably are nonrecurring, and that would amount to most of the $2 million that you referred to. As you go out for a full year, again without currency, we would expect expense -- spending growth to approximate 4%.

With respect to Dage, you've talked about that quite a bit. Is it pretty safe to say that, on a pro forma basis, you're definitely looking for strong double-digit top-line growth again this year?

Matt, we are always hesitant to give long-term forecast around any of our business units. We typically take it a quarter at a time. There are forces that play in the economy that we tend to be no better forecasters than anyone else. Within their specific market niches and the areas in which they compete, we feel very strongly that they have excellent competitive positions and quality offerings for the customers. Whether or not some of the widely reported softness in some of these technology markets will be stronger, if you will, the forces will be more impactful or not, we're not expert at forecasting that. I would say that, if you look at the rates of growth that they have had and that we have announced in the prior quarters, those are consistent with the kind of growth rates that we have seen in the best of our units elsewhere in Advanced Technology segment. And so in a 2006 environment, I would say absolutely. As to what the full year 2007 is going to be, I'm not in a position to make a specific numerical forecast.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Walt Liptak, Barrington.

I wonder if I could ask the question again about the Finishing business. You had the margin hop, and you answered the question that you're looking for 8% goal over the cycle. I guess in this short end of the cycle, at this peak that we're at, can we see this close to 15% operating margin sustained, or -- throughout the full year, or is this a case where we see a ramp going into the back half of the year?

As I said, this is a business you really have to look at operating income over a four-quarter period. The 14% was in the fourth quarter, which historically is this business's strongest quarter. And so I don't think the 14 is indicative of where the business is today. In fact, it earned 6% over the full year. We would expect the 6% to be improved in '07, assuming that its order growth continues at kind of a predicted level of, I'll call it middle one-digit percentage volume increase. I think it will continue to improve its performance as the restructuring goes into the later phases.

When we announced the restructuring in October of 2005, we said that there were indeed really two phases. One was to close some businesses, to combine some businesses, to reduce some expenditures, and all of that came with a restructuring cost which amounted to $3 million, which is now fully spent. The second phase, which to some extent was occurring at the same time we were restructuring the business, is to look at the product line and to prune it and to make price adjustments on low-volume, especially parts, to, if you will, standardize a lot of the product offering, or, in cases where it will be an engineered system, to price accordingly. All of that will require some period of time to fully be ramped out, and that's why the operating income will continue to improve over '07 and probably '08 as well.

Okay, great. If I could go to another question -- with the Dage acquisition, does this mean that you will slow the pace of acquisitions in 2007, or if not, what does the pipeline look like for deals?

We still have dry powder. Obviously, we have used to some of it with the Dage acquisition, but we don't believe that we should discontinue that activity. We have expanded the scale of our corporate development team here in the last 12 months and we are continuing to look at opportunities that we think bring opportunities to accelerate the rate of our revenue growth and to provide us either technology or access to market segments that we think are interesting. So this is an active and talented group, and it would be my hope that we would find additional attractive acquisitions that we could complete. But, obviously, we're not going to be going more specifically than that.

Okay, great. Thank you.

Robert McCarthy, Robert W. Baird.

Actually, a couple. It sounds like the weakness that you have seen in the Adhesives businesses really is concentrated in -- primarily in the U.S. That business of course, big international presence, but also particularly in Europe. And given improving macroeconomic fundamentals there, recent improvement, overall economic growth, have you seen some improvement in volume growth and/or order growth in that business in Europe?

Let me just take a look at order growth. Yes, Europe is, both in shipments in the fourth quarter, as well as in current orders, it is sound. I would say it's in the middle-single digit, but not perhaps what you implied even faster investor growth.

That's a good clarification, but also better than three or four quarters ago, right?

Right.

My other question, it is kind of a small detail, and my question is whether we still have this impact in the Adhesives segment numbers. With the introduction of the Blue series, you had some long-term contracts on some of the old prior generation product that you were required to build to meet those obligations, and that acted as a constraint on the ability to spread margin there. It seems to me that we ought to be very close, if not past, the expiration of those deals. Can you address the question?

Yes. I would say, at this point, that's not a significant factor to our financial performance. In fact, they're not contracts. They tend to be relationship-driven. We want to make sure that our customers really want to move from one generation to another. We do things to encourage them to do that. We're still manufacturing some legacy units really for customer relationship purposes, but at this point they have a really de minimus effect to our operating performance.

Very good, thank you.

At this time, there are no further questions.

On behalf and of all Nordson employees, let me thank you for your continued interest in our Company. We wish you and yours the merriest of holidays and a very healthy and happy new year.

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