Nordson Corp (NDSN) 2007 Q4 法說會逐字稿

Good morning. My name is Lupita and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation fourth-quarter fiscal year 2007 results. 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). Mr. Jaye, you may begin your conference.

Thank you. Good morning. This is Jim Jaye, Director of Corporate Communications, along with Ed Campbell, our Chairman and Chief Executive Officer; Peter Hellman, President, Chief Financial and Administrative Officer and Greg Thaxton, Vice President and Controller. We would like to welcome you to our conference call today, Wednesday, December 19, 2007 on Nordson's fourth-quarter and fiscal 2007 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, Friday, January 4 by calling 1-800-642-1687. You will need to reference ID number 26929529.

Our attorneys have requested that 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 Ed Campbell for an overview of our fourth-quarter and fiscal 2007 results and Nordson's future outlook. Ed?

Thank you, Jim and good morning to all of you and thank you for attending Nordson's conference call discussing our fourth-quarter 2007 results. We had a very strong fourth quarter, generating record sales of $290.8 million, up 20.4% from the prior year and a record for any quarter. Acquisitions added 11.6% to sales while core volume increased 4.4%. In addition, currency added 4.4%.

All segments contributed solid volume growth in the quarter. The Advanced Technology Systems segment reported a sales volume gain of 38.7% reflecting the impact of acquisitions. Excluding acquisitions, volume in this segment was down 6.4%.

The Adhesive Dispensing Systems segment showed a volume increase of 9.5% and the Industrial Coating and Automotive Systems segment achieved a sales volume increase of 5.2%.

Fourth-quarter sales volume was up in all geographic markets with the Americas rising 26.5%; Japan volume was up 22.0%; Asia Pacific was up 16.4%; Europe volume increased 15.9% and the United States increased 11.9%.

The overall gross margin rate in the quarter was 54.9%. This margin rate was impacted by sales mix with a large volume of engineered systems shipping in the quarter. In addition, short-term inventory purchase accounting for acquired inventory also impacted gross margin in the quarter.

Spending was up 13.4% resulting from volume increases of 10.2% driven primarily by acquisitions and currency, which added 3.2% to spending. Operating profit, net of charges associated with purchase accounting, was 16.7% of sales and grew 17% from the prior year. Our interest expense was up $3.6 million in the quarter reflecting the use of debt to finance the four acquisitions completed this year.

Our effective tax rate for the quarter was 33.0% versus 24.0% last year. The prior year rate included a certain nonrecurring tax benefit. Nordson's net income for the quarter was $29.6 million versus $29.5 million from continuing operations last year and $27.8 million overall.

Fully diluted EPS was $0.87. Prior year's reported EPS was $0.87 from continuing operations and $0.82 including discontinued operations. Two items masked excellent earnings performance in the current quarter. First is the lower effective tax rate in 2006 due to nonrecurring tax benefits and a second is a $0.01 per share short-term negative effect of purchase accounting for acquired inventory. Applying the current year effective tax rate to the prior year fourth-quarter results from continuing operations and adjusting for the current quarter purchase accounting charge for acquired inventory, EPS from continuing operations increased 15.8% in the quarter over the prior year.

Cash-related measures reflected good performance in the quarter. The current quarter's EBITDA was $57.5 million, a 22% increase over last year's $47.2 million. Our operating cash flow for the quarter continued to be relatively strong. Specific cash flow items in addition to net income of $29.6 million or non-cash charges of $10.8 million and working capital, which generated $4.9 million in the quarter, resulting in cash from operations of $45.3 million.

Capital expenditures in the quarter were $5 million and dividends were $5.9 million resulting in free cash flow of $34.4 million in the quarter. Our debt leverage measured as debt to total capital ended the quarter at 39.5% or 37% if debt net of cash is used in the calculation. Despite having invested over $325 million in four acquisitions, we finished the year with less than 40% debt to capital.

In summary, we had a very strong finish to the year. I am pleased with the strong sales volume growth achieved by each of our segments, as well as the 17% increase in operating profit quarter to quarter. Our acquisitions, without the impact of short-term purchase accounting adjustments, are accretive to results in the quarter and we believe we have additional synergies to leverage.

In addition, we continue to see significant improvements in the financial performance of our Industrial Coatings and Automotive segment with operating profit margins of 9.6% for the year versus 5.9% for fiscal year 2006. While still not operating at the level we desire, the results to date have demonstrated the turnaround that we have planned.

On a full-year basis, we achieved record sales of $993.6 million with a strong second half to the year. For the year, sales were up 11.4% with volume increasing 8.0% in favorable currency adding 3.4%. Fully diluted EPS for the year is $2.65 as compared to prior year's $2.86 from continuing operations and $2.65 including discontinued operations.

As with fourth-quarter results, the full year's EPS performance as compared to the prior year is impacted by two nonrecurring items. The first is $0.16 per share in the current year for short-term purchase accounting charges associated with acquired inventory and the second is the low 2006 effective tax rate, which resulted from certain nonrecurring tax benefits. Applying the current year effective tax rate to prior year results and adding the $0.16 per share to current year's reported results, full-year earnings per share increased 5.2% over prior year's EPS from continuing operations. The full year's EBITDA was $183.7 million, up 8% over the prior year's $169.9 million.

Let me now turn to some brief comments about our outlook for the first quarter of 2008. The backlog at year-end was approximately $98 million, up $26 million from the same period of the prior year measured in constant currency.

Recent demand as measured by orders has shown considerable strength. Orders for the last 12 weeks ending December 9 measured in constant currency and including acquisitions in both this year and last year's numbers were up 12% from the same period in the prior year. Recent orders by segment reflect that the past 12-week order rates versus a year ago are up 19% in Adhesives, up 10% in Advanced Technologies, and 1% in Industrial Coating and Automotive. Within Advanced Technologies, I will note that orders without acquisitions are up 5% during this 12-week period. This growth rate of 5% compares to a decline of 8% announced during our second-quarter conference call and growth of 1% announced during our third-quarter conference call. And again including the acquisitions in both this year's and last year's figures improves to 5% year on growth -- year-on-year growth rate to 10%, so we are clearly seeing improving order trends in these Advanced Technology businesses.

On a geographic basis, orders over the past 12 weeks were up in all geographies. Orders were up 44% in Asia Pacific, up 14% in Europe, up 3% in the United States, and up 2% in both the Americas and Japan. With this perspective on order rates and our strong backlog, we currently have a sales outlook in terms of volume of an increase of 16% to 20% in the first quarter of 2008. Favorable currency effects should contribute a 5% increase to year-to-year sales resulting in overall sales growth of 21% to 25% in the quarter. This sales outlook would be a record for any first quarter.

Given the mix of products, we should see gross margins around 56%. Spending in the quarter will be up approximately 17% with the majority related to acquisitions and currency effects. Included in this spending growth is geographic expansion of acquired businesses, as well as continued investment in growth market opportunities. We are estimating a tax rate of 34.75% for the quarter and indeed the full year, up slightly from the prior year's first-quarter rate of 33.47%. This outlook results in earnings per share for the first quarter in the $0.55 to $0.64 range. Earnings in this range would represent record earnings per share for any first quarter with the $0.60 per share midpoint of this range 30% higher than the prior year's first-quarter earnings per share.

Regarding cash flow, let me provide an outlook for capital expenditures for the year. As commented last year, we have begun our efforts to realign our facility's footprint and therefore, you may see some lumpiness in quarters due to the timing of building-related spend versus proceeds from sales. For the year, we would expect operating capital expenditures, that is excluding any real estate investments, to be about $21 million. With that, let me now turn to your questions.

So operator, if you could now solicit questions from the participants.

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

Good morning, everybody.

Good morning, John.

Ed, my first question is pretty much about the acquisitions over the past year. Could you discuss their relative performance versus your expectations and also could you talk a little bit about the cyclicality we should be expecting in these businesses?

First of all, in terms of expectations, these are businesses that we acquired based on the strength of their market positions, the strength of the products and technology that they are bringing to the Company and let me just start by saying everything that we expected to find in these businesses is there. It has validated our assumptions and we feel very positive about the strength of our portfolio of products and market positions that they've brought to us.

I can't necessarily go through each one individually, but I would say that the performance has ranged from strong acceleration during the period of time that we have owned them and immediate realization of opportunities to sell some of these products in other segments or productlines of the organization in certain cases to others having some softening or deceleration, but continued growth as a result of some of the same factors that we have seen in other portions of our Advanced Technology segment.

I guess one point I would make to I guess reiterate the kind of uplift that they are providing to us, I mentioned that the orders in the most recent 12 weeks for the Advanced Technology segment was 5% year over year if you just looked at Nordstrom's core businesses, but when you average in the growth rate this year over last of the newly acquired business, they bring up that average from 5% to 10%. So these are businesses that are making us better as a segment, making us better as a corporation.

And how should we think about the cyclicality in the businesses now?

Of the four businesses, let me briefly go through them. Dage is a test and inspection company that is centered on semiconductor assembly primarily and so it is one that would move similarly to the Asymtek business in general notion in that it is dependent upon the rate of investment in semiconductor capital equipment, but greatly fueled by new technologies and evolving trends such as lead-free solders and ever small packages where there is a shift, if you will, and a need for these customers to move to the newer products and accelerate investment from what it might otherwise be in the trendline.

YESTech is one that would disproportionately sell into electronic assembly markets as compared to semiconductor assembly markets and so it would move with spending from consumer electronics and the like and its cycle would be, if you will, slightly off and different from that.

Our PICO business, on the other hand, is one that sells precision dispensing equipment and it is a seller of products that range everything from producers of consumer nondurable products to general industrial assembly to some of the same markets that our other Advanced Technology businesses sell into. And it is one that we think would have far less cyclicality.

And then lastly TAH Industries, a company we acquired in the fourth quarter, sells plastic disposable components. It sells into broad assembly markets. It sells into life science markets. It sells into aviation and construction markets as well. It would have very different cycles than would these other businesses. It would tend to flatten some of the cyclicality that we would more generally associate with the electronic and semiconductor market.

I guess in a semi-related question, the order growth in the industrial segment was 1% if I heard you correctly in the previous 12 weeks. You have mentioned in previous conference calls that you have businesses that are late cycle businesses. Could you kind of address what your outlook is and what your thoughts are for some of the later cycle businesses as we enter into 2008?

Yes. Well, first of all, in terms of the 1% in Industrial Coating and Automotive, as I mentioned last quarter, that business has had some impact of capital spending within the automotive industry. That is part of that segment beginning about six months ago and I would also mention that it had a very strong comparable. Right around the same time a year ago, we had a very strong group of orders. 12 months ago, their orders were up 10%. Their shipments were up 11% before currency effects and so some of that I think is influencing the numbers you see there.

As we shared with you our outlook for sales volume in the first quarter, volume from our traditional businesses is continuing quite strong, accelerating in fact from what we had in the fourth quarter and all of 2007 and within that, we expect to see quite good volume continuing in Industrial Coating and Automotive. So I am not in any way pessimistic about the kind of year they are going to have.

In terms of other back cycle businesses or the things that people have been concerned about, I know for example housing is one that has come up in questions in prior conference calls. The portion of our business that is most directly related to those end markets is within the Adhesive segment and that business is very strong. We are seeing globally sales of our systems to manufacturers of products that would find their way into the housing market up over 20% in terms of orders globally and up high single digits in the US. So we have technology that is driving very good performance right now.

Wow, that's impressive. Thanks a lot, Ed.

Charlie Brady, BMO Capital Markets.

Thanks. Good morning, guys. Ed, could you just give us the 12 -- order rate for the past 12 weeks. You said it was 12%. What is that just on an organic basis ex out all the acquisitions?

Well, that is -- that includes the acquisitions in last year's numbers and this year's numbers and frankly, the way we look at it this year in 2000 and -- as we're in 2008 now, they are part of the core base of businesses and yes, they are adding to the growth rate. As I mentioned, the five in Advanced Tech without the acquisitions, 10 overall. Of course, the other businesses are completely devoid of any acquisitions, so 19 is a currency-free, straight core comparison for Adhesives and correspondingly, the 1% is the -- got no acquisition effects there.

Great. Okay. Can you comment on the powder coat business? How is that business faring these days?

The powder business has pockets in this particular quarter of tremendous strength, particularly in Asian markets where we see major manufacturing investment. It has been strong throughout 2007. It is, I will tell you right now in the US, less strong. Our sales leadership in the US region feels positive about the kind of year that they are going to have based upon the indicators that they get from customers, but embedded in that 1% is strong in Asia, less strong in North America.

Okay. On a geographic base, are there any of the businesses that are outperforming significantly in one geographic area or another or the opposite of that, really kind of underperforming or softening in one geographic area or another? You have obviously mentioned the powder coat business, but I wonder if you could extend that out to some of the other businesses?

Well, I will. Let me talk for example about Asia Pacific for example. In Asia-Pacific, I mentioned, on a currency-neutral basis, orders right now are up 44%. That is a tremendous number. Our Industrial Coating and Automotive business right now is more than double a year ago in that part of the world, but also significant in that is I had mentioned in conference calls three and six months ago that we had seen weakness in Asia-Pacific in our Advanced Technology business because those were areas where some of the investment had been curtailed during some of the cyclical slowdown that we had seen last year. Our orders now in Asia-Pacific for Advanced Technologies are up 40%. So we see very good growth there. And I guess just to finish the three segments, Adhesive systems orders in Asia-Pacific are up 28%. So Asia is red hot across all three segments.

I will answer a question that hasn't been asked, but I think it's a point worth noting. Within the Adhesive segment, 19% -- a question that might be asked is, well, is that focused in one geography or one line of business? And the answer is not. We have a very strong pattern of orders right now that runs across our product assembly, our non-wovens, other of the productlines that we sell out of that segment and it is demonstrating strength not just in Asia as I mentioned, but also we are seeing it in the other geographies right now, very strong momentum coupled with very good currency as you'll see if you look at the table on the earnings release.

Thanks very much.

This is Peter Hellman. I would just like to add to kind of an implication, Charlie, you made and also going back to John's question. Late cycle businesses is somewhat being trumped by geographic elements. If you think of Asia-Pacific as capitalization or recapitalization and the fact that we have 15% of our sales in Asia-Pacific with only 30% of our sales in the United States, we now are really seeing the play of the geographic diversification. So late cycle we would have to ask you where.

Right. Fair enough. Thanks, I appreciate that insight.

Matt Summerville, KeyBanc.

Good morning. A couple of questions. First, can you give a little more granularity in terms of the core order activity you saw in Advanced Tech between Asymtek and EFD? And then maybe just talk about the other core businesses in the division and how they are performing?

Good morning, Matt. I am not going to go through each one of the businesses. We normally would not get down to that level of detail, but I have shared with folks on these calls that the center of our weakness that we had seen earlier in calendar 2007 had been in products in the -- Asymtek-branded products and I'd tell you that among the various businesses in core Advanced Tech right now, our strength is at Asymtek. So the things that we had expected to see getting stronger as we came into 2008, we are seeing the manifestation of that in the order book now.

Based on the discussions you are having with customers in semiconductor, I guess how much visibility would you say you have into fiscal '08 at this point?

It varies to a great extent by customer. We have some customers where we work very closely with them in terms of their roadmaps and they with ours. We do have the benefit of having just released a brand new major productline within the Asymtek productline family. We introduced that at a major electronics and semiconductor equipment show in Europe just a few weeks ago, Productronica, and the introduction of that productline coupled with the understanding of our technology roadmap, if you will, sometimes can both produce demand after it's released and it can adversely affect demand before its released among those customers that see our roadmap and understand where we are headed.

So we feel optimistic about the fact that we are now in a position to begin to sell systems that have higher performance and greater productivity for our customers and that gives us the belief and the sense that we have been talking about for quite some time that we expect 2007 -- or pardon me -- 2008 to be better than 2007 and correspondingly, I will continue to reiterate that we believe that 2009 directionally is going to be better than 2008. We think that the ramp that we would hope that you are going to see and -- hope is the wrong word, but it is what we expect to see moving forward, is going to continue to have legs that extend into 2009.

That's helpful. In terms of your order bookings as of late, I guess what does that translate into from a mix standpoint in the first quarter? I mean you are talking about 20% to 25% total revenue growth and if you look at what you did last year in Q1, I think it was $0.46, but then add $0.03 of inventory step, so maybe the right base to think about is more like $0.49. I guess help me understand the different dynamics that are kind of playing into your EPS forecast versus revenue growth.

I don't think there is a lot of complexity that goes on with this quarter. It is straight volume both from the continuing first-year effects of acquisitions, but also we are talking about core volume, businesses that we had last year again this year without any acquisition effects that are at levels we have not seen since I believe 2006. And that simply flows right through the P&L. I don't think there is any unusual items that would make this different.

I will comment though in the first quarter, last year, we had relatively weak volume and as a result, there was a greater proportion of our sales last year that were spare parts as compared to systems. So as a result, the gross margin that we would expect to see in the first quarter of 2008 is going to be lower, the 56% range that I mentioned in my comments, compared to last year's 57.7%.

That is exactly what I was trying to understand. All right, thank you.

It is the parts versus systems, but also it is the mix of some new businesses. Some of the businesses that we have acquired do not have the gross margins as we do in some of Nordson's historically strong margin businesses like our Adhesive systems.

Okay, great. Thank you.

John Franzreb, Sidoti & Co.

Yes, I was just wondering if you could kind of talk about the competitive landscape in your three segments. What are you seeing from the competition today?

In the Adhesive segment, I would say nothing that is noteworthy from what we have seen historically. Nordson is blessed with historically strong market positions. We tend to compete with a series of private companies that have particular strengths in certain geographic regions. We have a couple of global competitors. Generally, our competitors try to compete on the basis of either low price or trying to sell competitive spare parts and that is a fairly stable set of relationships.

In our Industrial Coating and Automotive segment, again, I would say there is nothing new from what we see. Within powder, the largest piece of that business, we have a couple global competitors that operate with areas of geographic strengths that are different than ours. We have very strong positions in portions of Europe, but weakness in others, strong North American position, strong Asian positions and so we are enjoying the kind of growth that I mentioned in Asia as a result of those positions.

In the Advanced Technology markets, obviously, we have a number of diverse productlines that sell into different pieces of market segments. Again, as I am just going through the list mentally, I can't think of anything that is different, if you will, from what we have seen in the past.

Well, then can you discuss a little bit about commodity costs as they have come in in recent months and the competitive factors. You seem to have -- at best, you have held your leading shares. How come you are not getting a better margin benefit?

Yes, well, first of all, you should remember that our margin is adversely influenced in all of these comparisons to 2006 because of the acquisition accounting, which between the amortization of acquisition intangibles as well as the inventory effects, it costs us about $0.21 share to what would otherwise be historical cost accounting of the acquired companies and our existing companies less interest.

Right.

I'm not sure if I understand exactly what you are trying to get at.

I don't know. I was just thinking about that 56% gross margin. You have currency in your favor. It seems like the landscape is good and you have lower raw material costs. I would've thought it would've been a little bit higher. Maybe I am missing something.

Okay. The big issue is, a year ago, we had a very weak quarter, as you will recall and the relative volume of our spare parts tends to be consistent and so the mix in last year's first quarter compared to this year's first quarter is quite different in that what is going on this year is a major drive of systems through the P&L and they would average down the spare parts. So frankly, it is a function of how our businesses are performing strongly this year compared to last year. For example, if you compare any first quarter of Nordson to any fourth quarter, you will always see a low gross margin in the fourth quarter and always a high gross margin in the first quarter because of that mix between systems and parts.

Right.

The other issue you asked about was commodity pricing and commodity pricing is a very small issue for Nordson and frankly, the success that we have had in resourcing many of our assemblies and component parts from low-cost countries from relatively expensive Western European and North American centers, our average cost of purchased materials has gone down rather than gone up, more than offset commodity cost inflation.

Okay. And one last question, a little bit of thoughts about paying down the debt. Which is scheduling and what are your thoughts of finishing the year-end '08 at what kind of debt level?

Well, we haven't made a full-year cash flow forecast, so I think that a majority of free cash flow will be used absent any potential for additional acquisitions. It will go to pay debt. Historically, our annual cash flow, and I'm not making a forecast, is order of magnitude $100 million and we'll have to see how the year unfolds with other opportunities. But absent those opportunities, it would go to pay debt, which is all at a floating rate basis under a term commitment that we renegotiated during the year.

Okay, thank you, Peter.

There are no further questions at this time.

Okay, well, let me do a couple things. First of all, let me take note of the fact that we have enjoyed the benefit of Peter Hellman on this call as we have for all of our calls for the last eight years and as we have discussed on some of these calls in the past and you have seen our announcements that Peter will be retiring from Nordson at the end of the calendar year and so I just wanted to take this moment to recognize and thank Peter. I know all of you on this call have had the opportunity to work with him and seen the value of his contributions to this organization. He has left us with a good organization beneath and Greg Thaxton will be stepping into his shoes, but regardless of the talent of the team, we are going to miss Peter on a professional and personal basis and I wanted to just thank him here to this group here today.

And then secondly, let me thank all of you for your interest and attention and we look forward to continuing these conversations as we go through the quarter. Thanks again, bye-bye.

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