Nordson Corp (NDSN) 2009 Q4 法說會逐字稿

Good morning. My name is Kelly and I'll be your conference Operator today. At this time I'd like to welcome everyone to the Nordson fourth quarter and FY 2009 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.

Jim Jaye, Director of Communications and Investor Relations, you may now begin your conference.

Good morning and thank you, Kelly. This is Jim Jaye, Director of Communications and Investor Relations for Nordson. And I'm here with Edward Campbell, Chairman, President and Chief Executive Officer, and Greg Thaxton, our Vice President and Chief Financial Officer. We would like to welcome you to our conference call today, Thursday, December 17, 2009 on Nordson's fourth quarter and fiscal year 2009 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, Thursday, December 24th by calling 1-800-642-1687. You will need to reference ID number 44672558.

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 Ed for an overview of our fourth quarter and fiscal year 2009 results and Nordson's future outlook. Ed?

Thank you, Jim, and good morning to all of you on the call and thank you for attending Nordson's conference call discussing our 2009 fourth quarter and full year results. Our comments this morning will provide highlights of strong operational performance in the fourth quarter as well as some perspective relative to our outlook for the first quarter of fiscal year 2010.

Relative to the fourth quarter, I am pleased with the strong performance delivered in the quarter with sales, operating profit and earnings per share all improving sequentially when considered before the impairment charges booked in the quarter. The impairment charges obviously have a big impact on reported results and we'll talk more about these charges as we get into the details of the fourth quarter. But as you all know, these are non-cash charges that have no impact on our organization's ability to serve our customers or deliver results to our shareholders going forward. Operating margin performance in the quarter at 20% excluding impairment charges underscores the strong performance in the quarter.

In terms of our outlook for the coming year, there are positive indicators that the global economy is improving and we are seeing positive signs specifically related to Nordson's businesses, as well. I'll be speaking more directly about current trends and our outlook for the first quarter of fiscal 2010. But before that, I will turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide a summary of our fourth quarter results.

Thank you, Ed, and good morning to those listening. Regarding fourth quarter results, sales were $237 million, down 20% from the prior year, with volume down 21% in favorable currency effects of 1%. And I'll remind you that we are comparing to a prior year fourth quarter that was an all-time record for Nordson. Looking at sales on a segment basis, Adhesive Dispensing sales volume was down 14% in the quarter as compared to the prior year fourth quarter and Advance Technology and Industrial Coatings sales volumes were down 22% and 39%, respectively. I'll also make the point here to highlight that we have changed the name of the Industrial Coating and Automotive Systems segment to Industrial Coatings Systems which we believes more accurately reflects the composition of this segment's revenue and customer base.

As we look at our sales performance on a sequential basis, that is the fourth quarter of 2009, as compared to the third quarter of 2009, sales are up 15% comprised of 12% volume growth and 3% favorable currency effects. Each of the three segments delivered sequential volume growth with Industrial Coatings up 25%, Adhesive Dispensing up 14% and Advance Technology up 5%. Looking at the 25% sequential growth in Industrial Coating, this growth reflects the improvement we've seen in this segment since orders bottomed in the third quarter as well as some reduction in backlog associated with year-end shipments. With regards to the Adhesive Dispensing segment, all product lines within this segment were up sequentially with the non-woven product line being the largest contributor of growth. As to the Advanced Technology sequential improvement, we noted back in our second quarter earnings conference call that we were seeing improving trends in certain end markets associated with semiconductor and consumer electronics, and we delivered third quarter sequential growth of 38% over the second quarter. These favorable order trends have continued but I'm highlighting here that our fourth quarter sequential performance is comparing against a relatively strong third quarter.

Moving down the income statement, gross margin in the quarter is 58% which is strong on a historical basis due to favorable product line mix, a higher composition of spare parts and consumables and a reduction in manufacturing overhead. As we look at operating performance in the quarter, obviously the impairment charges have a big impact on reported performance but as Ed noted earlier, these charges are non-cash and do not impact our ability to execute going forward. Of the $243 million expense booked in the fourth quarter, nearly all relates to the write-off of acquisition goodwill. This charge is a reflection of the significant decline in the global economic environment as compared to the time we completed these acquisitions. This charge does not imply that the reporting units associated with these charges will fail to perform to our expectations in the future. Of the total $243 million charge, $3.6 million relates to the Industrial Coatings segment and the remainder is associated with Advanced Technology.

We have included a supplemental financial schedule with our earnings release to reconcile GAAP amounts to adjusted results excluding impairment charges for certain performance measures. For the fourth quarter, excluding the impairment charges, the operating margin is 20% and this includes $2.3 million of restructuring charges booked in the fourth quarter associated with our spending reduction efforts. Without this charge, operating margin would be 21% in the quarter reflecting very strong operational performance, a level that has not been achieved in 20 years. In addition to strong gross margins in the quarter, the fourth quarter's operating margin is being driven by the 20% reduction in selling and administrative expenses from the prior year.

On a segment basis, the Adhesive Dispensing segment once again delivered very strong operating margin in the quarter of 29%, up from 25% in last year's fourth quarter and matching the level delivered in this year's third quarter. Advanced Technologies operating margin, excluding impairment charges associated with this segment was 16% in the quarter as compared to 17% in last year's fourth quarter and 18% in this year's third quarter. As compared to the third quarter, a decline in gross margins primarily associated with the mix of product lines negatively impacted the operating margin for this segment. Industrial Coatings operating margin performance excluding impairment charges improved from negative in the third quarter to 6% in the current quarter primarily due to increasing sales volumes.

Net income, excluding impairment charges, was $29 million, an increase of 21% over the third quarter of 2009 and just $1.9 million below last year's fourth quarter, again which was an all-time record. At 12% of sales, this adjusted net income is reflective of solid execution in the quarter. Fourth quarter diluted earnings per share excluding impairment charges is $0.85 down just 6% from the prior year's fourth quarter and again an all-time high. The current quarter's performance included restructuring charges of $0.04 per share. Cash measures in the quarter were also very strong. Sources of cash were $45 million of net income plus non-cash charges and $23 million of working capital. Uses of cash in the quarter included a reduction in long term liabilities of $19 million, capital expenditures of $3 million and dividends of $6 million resulting in adjusted free cash flow after dividends of $40 million in the quarter, more than triple the level generated in the prior year's fourth quarter and up 15% on a sequential basis.

The current quarter's EBITDA excluding impairment charges is $54 million, up 20% on a sequential basis. On a full year basis, sales reached $819 million. The current year's operating profit excluding the fourth quarter's impairment charges is $115 million or 14% of sales inclusive of restructuring charges. Excluding both impairment charges and restructuring charges, operating margin for the full year is 16%. Free cash flow for the year was $140 million, more than double the level generated in the prior year.

In summary, we are encouraged by the 15% sequential growth in fourth quarter sales and pleased with our fourth quarter operating performance and cash metrics. On a full year basis the spending reduction initiatives we began in September of 2008 contributed to a 20% reduction in total selling and administrative expenses, inclusive of restructuring charges, enabling us to mitigate a large portion of the sales volume impact on operating profit.

Thank you, Greg. I'll now turn to some brief comments about our outlook for the first quarter of fiscal 2010, but before I do, I would like to add some perspective on the outlook we will share. Although we continue to see significant challenges in the global economy, we also see indicators that convince us that the worst is behind us on a macro basis. However the shape of the recovery is still very uncertain. Specific to Nordson, I do believe we are seeing a recovery in many of our end markets as evidenced by our sequential sales performance in fiscal 2009 and our recent order trends. We have provided our most recent order data, both on a segment and geographic basis with our press release. As a reminder, these orders are for the latest 12 weeks as compared to the same 12 weeks in the prior year on a currency neutral basis.

Looking at these orders for the 12 weeks ending December 13, overall, they were up 4% from the same 12 week period in the prior year. Within Adhesive Dispensing, orders were up 3% from the prior year on a 12 week basis. The product lines within this segment that serve consumer non-durable end markets are driving the growth in this segment. Regarding Advanced Technology, our order patterns have continued at a strong pace where 12 week order rates are up 20% from the prior year as many of the end markets served by this segment continue to recover including semiconductor and consumer electronics. More specifically, of particular recent strength is our technologies supporting PC microprocessors, smartphone applications and LED applications. And something that is particularly noteworthy is the return of order demand from subcontractors serving these consumer electronic end markets, as this volume had been missing for quite some time from our order books. And finally, orders associated with the consumable product lines within this segment have increased on a sequential basis as consumption of components has increased.

Within the Industrial Coatings segment, the latest 12 week orders are down 22% which is reflective of easier comparison and continuing weakness in systems demand in consumer durable end markets. Demand in this segment appears to have bottomed about three months behind the Company as a whole but we have not yet seen signs of a recovery of any significance. Looking at our order rates on a sequential basis, that is the latest 12 week orders as compared to the preceding 12 week period, we continue to see improving order trends for orders for the Company are up 12%, again on a currency neutral basis. Overall, I'm pleased with these improving trends in orders and optimistic that business conditions are getting better.

As we look at expectations for the first quarter we currently project sales growth of 13% to 17% over the first quarter of fiscal 2009. The volume growth is expected to be in the range of 7% to 11% with favorable currency benefits of an additional 6%. Given the mix of products assumed in our forecast, we expect gross margin to be about 58% in the quarter and total selling and administrative expenses should come in roughly equal to the prior year with volume declines offsetting currency effects. We do expect a one-time tax benefit in the quarter of about $3.5 million or $0.10 per share and a $0.01 per share charge for restructuring cost. This outlook results in estimated earnings per share for the quarter of $0.61 to $0.71 per share with the mid point of this range double the prior year's $0.33 per share and up from 2008's first quarter of earnings per share of $0.62.

In summary, we are encouraged to see the pace of our business improve, although we recognize the current business environment continues to be challenging and the shape of recovery is still uncertain. Although we will see level of selling and administrative expenses return in 2010 as we move forward with restoring some benefits to our employees that were eliminated in 2009, we will take a cautious approach with regards to managing the business while continuing to fund those investments that are important to our underlying business. Furthermore, we continue to believe we have the products organizational talent, resources, and liquidity that leave us in a strong position relative to our competition and we are well positioned to respond to the local economic recovery.

Now let's turn to your questions.

(Operator Instructions) Your first question comes from the line of Charlie Brady from BMO Capital Markets. Your line is now open.

Yes, thanks, good morning, guys. With respect to the orders in Advanced Technology up 20% on the 12 week basis, how much do you think seasonality, if at all, played a part in that, and what kind of follow through would you expect going into the quarter? I'm trying to understand if you had a rush of stuff coming in from the lump and it might steady out after that up 20%.

Charlie, this is Ed. Actually, I would say that our orders are unseasonably strong. In other words, this is a time that generally across all our businesses that orders begin to weaken a bit beginning in November and moving into December. Although I'll say that seasonal pattern probably is a little less consistent in Advanced Tech. But we clearly have seen a real pop in orders in Advanced Tech, as we have, I would say frankly, in each of our segments. There seems to be some trends here of momentum that I think are quite interesting. Greg, I might ask you if you could make reference to what we've seen since the beginning of the fiscal year, at least directionally.

Since the beginning of the fiscal year, we've got, as Ed mentioned, a bit of pop in some demand, Charlie. You're referencing the 12 week comparison as compared to the prior year so we've got some element of comparison to some weaker performance last year. But clearly, as we look at orders in the current fiscal year, which is the last six weeks as compared to the same six weeks of the prior year, the total Company, our orders are up 18%.

Charlie, I might just amplify a bit on the environment that we're seeing in the technology markets, and I'll, as we often do, refer to Gartner as a public data point of reference. Back in September, they had put together a forecast for 2010 that indicated that they expect spending for packaging and assembly equipment to be up 41% in 2010. They have now raised that forecast from 41% to 53% rate of growth in 2010 and it's not because they are comparing to a weaker '09. In fact they increased their 2009 forecast and significantly cranked up their 2010 forecast. And in automated test equipment that same pattern continues. They're now projecting growth in demand for automated test equipment in semiconductor markets to grow next year by 60%. And I think what we're seeing and what is indicative in some of these public forecasts is that there's a real pop going on in these technology markets and we've seen, even just since our Investor Day, a real increase in the most recent 12 weeks of technology orders.

That's helpful and just on the ICF business, the margins there from our perspective were surprisingly strong. Has that business you think finally turned the corner to where we're in the black now and you'd expect that to have positive margin on a go forward basis?

Charlie it's going to be driven by volume, and the cost reduction efforts and restructuring that the leadership and team in that segment have put together has been very significant. Those changes are in place. The organization is stable. It's operating in an entirely different cost base, and I think if you just look at the revenue we had in quarter four compared to the revenue in quarter three, there's a pivot point in there that it's going to be a function of our ability to continue to drive revenue at the levels that would be more positive. We indicated in our comments that the volume that we saw in the fourth quarter reflected improvement from the low point in demand that we saw in quarter three but it also reflected some shipping down of a bit of backlog in the fourth quarter. So I think as we go forward, we're going to be operating at a level that's going to be driven by where orders seem to be on a go forward basis. And I think we're probably just in the range of that pivot point until we see the improvement in orders from the trend that they've been here on in recent weeks.

But is Q3 of this past fiscal year the low point in terms of sales do you think?

I do.

Great. That's very helpful, thanks.

(Operator Instructions. Your next question comes from the line of Matt Summerville from KeyBanc. Your line is now open.

Good morning, a couple questions. In the press release I think you mentioned for the full year Nordson was successful in taking about $86 million out of SG&A. I'm trying to get a feel for, as you build your view on 2010 or your fiscal 2010, how much of that do you view as permanent, structural, in nature versus how much should we think about coming back through the P&L this year?

Good morning, Matt. I'll just give you some broad strokes. The first quarter was a quarter of transition last year as we had some of our spending reduction efforts implemented but not all. And if you look at the just the dollars of SG&A that the corporation incurred, in quarters two, three, and four, you can see we were running $84 million, $85 million, $86 million kind of run rates. And we talked about on a volume basis being down about $80 million for the full year and about half of that coming back,. So if you say half of the 80 million a quarter I think that gives you some kind of perspective from that 84, 85, $86 million kind of run rate that in broad strokes would be where we anticipate that we'll be across the year.

And if we look at that $40 million that comes back, is there a way to bucket that in terms of how much is more discretionary spend related versus top line driven? Obviously your selling expenses are going to be up if your volume is higher.

We first of all have merit increases that we've reinstituted across-the-board, so we have a level of compensation increase that reflects those changes that we've done. We also have a portion of compensation that's tied to the performance of the organization in various forms of incentives. And that total set of compensation changes, presuming that we hit our performance targets or better, would be more than half of that. And then on top of that we have some things that are tied to travel and probably increased selling and marketing expenses associated with programmatic activities that we believe merit spending in the year to achieve the kind of opportunities that we think are out there.

That's very helpful, thank you. And then I was hoping you could talk about a little bit more in Advanced Tech, you mentioned in the quarter maybe mix was a little bit adverse. When you look at the order book how should we think about mix going forward. Advance Tech before the downturn, prior to some of the acquisitions you made the last few years were running to the 20% or so plus or minus operating margin. Is that a run rate you feel based on the trends you're seeing would be attainable at some point during this fiscal year?

First of all let me talk about the quarter. There clearly was mix in the sales that we had in quarter four as it compares to quarter three. We had the first big step in recovery in quarter three that was focused within those product lines. It had particularly good margins. And what we saw in quarter four and what we're seeing in the order strength now is strength across all of our product lines and some of those that are comparatively contributing less than some of the others affected that. For revenue that was up to 6%, it had a different mix of products and so on. I think as we look at what we see in 2010, obviously there's a volume effect as well. And I would expect that we would see not necessarily a mix that would return back more towards the third quarter necessarily but I think that with the kind of forecast that industry observers are saying is available to organizations like Nordson, that volume effect is going to provide some lift. As to giving a specific forecast, I'm not inclined to do that, Matt.

And then just two final questions. First, Greg, can you talk about what your view is on pension expense fiscal '10 versus fiscal '09? And then Ed maybe if you can comment on how the management transition or the CEO selection process is evolving here?

Yes. Matt, on pension expense, and just for the benefit of everybody else who may be listening on the call, we measure our liability at the end of our fiscal year. At the end of October of 2008, interest rates were very high and they've come down dramatically to the end of October of 2009. So that has a big impact on the discount rate and that affects then pension expense. But in total, I would estimate pension expense about $6 million in 2009 increasing to about $15 million in 2010.

Okay, thank you very much for that, Greg. And then Ed?

Matt, as you will recall, the Board of Directors announced my desire and intention to retire early in calendar 2010. Obviously the Board of Directors has been engaged in managing that process on behalf of the Corporation and while there's no announcements to be made today, I think it's reasonable to project that that timetable will be met.

Thanks a lot, Ed.

Your next question comes from the line of Gregory Macosko from Lord Abbett, your line is now open.

Yes, thank you. Could you just give a little color on the impairment charge? I realize that it's non-cash and I realize it won't affect the individual companies, et cetera. But could you go through how much, how will that affect the D&A going forward and how much is goodwill versus actual assets?

Good morning, Greg. Of the total charge, the majority of that charge is comprised of goodwill, call it 90% or so of that charge is goodwill, so there is no amortization affect associated with that write-off. And the other largest piece of that were other indefinite live assets that also you do not amortize so it won't have an affect year to year on amortization expense.

Indefinite?

An indefinite live asset would be something like trademark or trade names.

I see. Okay, very good, thanks.

Next question comes from the line of John Franzreb from Sidoti & Company. Your line is now open.

Good morning, guys. I want you to talk a little bit about what's going on in the Adhesive Dispensing. The order book is only up about 3%. I wonder within AD, are we seeing relative pockets of strength in packaging or weakness in product assembly? Could you provide a little bit more color on what's going on in Adhesive Dispensing and what your thoughts are going into 2010 and how that plays out?

Sure. As we had in our press release, orders compared to the same period a year ago were up 3% but if we look sequentially, in other words the most recent 12 weeks compared to the prior 12 weeks, they were up 12%. And if I look at the period since the beginning of the fiscal year, which is about six weeks, they were up 13%. And the strength that we're seeing is actually quite broad based. Our packaging business has got numbers that look very similar to the segment numbers. The durable goods segment that we call product assembly has got similar kinds of sequential numbers and it's really quite broad based. I'm encouraged by the fact that we're seeing this kind of performance in all product lines within that segment.

Is that also true across geographies, Ed?

I don't have that data right in front of me but this is a business generally that's comprised of many many small customers rather than dominated by a few across the entirety of the segment. I don't think it's dependent upon any narrow group of customers. I'll also indicate that it's up, there's quite a bounce in orders that we've seen since the Investor Day looking just the absolute dollars of orders that we were looking at back in the middle of October versus what we're seeing today in the middle of December. There's real encouraging signs that the order pace is strengthening.

And are we seeing increase in system work there?

Yes, we're seeing an increase in systems as well as parts. In fact, when we see bounces like this when we're talking about 12% growth in sequential volumes or 13% year-to-date kind of volumes, those are disproportionally systems because of the stable nature of the spare parts orders.

Okay. And regarding, Advanced Technologies has been talked about it but you left out anything on EFD. Can you talk a little bit about what's going on as far as the dispensing side of that business?

We tried to make reference to the fact that the order rates in Advanced Tech for the consumable portion of the business were up nicely as well which is indicative of faster run rates. Hold on one second, I'm actually pulling up a number here. It's got numbers that on both sequential basis and year-to-date basis that are up high single digits.

Okay, and I hate to go back to this, I know I could check the transcript but did you say your SG&A assumption was flat year-over-year for the first quarter?

Yes, in nominal dollars. In other words, because the dollar is weaker, that means the foreign currencies are stronger and therefore spending, just that line item on the income statement. So we have a currency portion and then we have a volume portion and the currency increase is offsetting the volume decrease and so on a nominal dollar basis we're saying flat year to year.

What about the increased accruals for compensation?

They would be included in that number in the volume.

Okay. Great. Thanks a lot.

We have another question from Matt Summerville from KeyBanc. Your line is now open.

Greg, I think you'd indicated that for the last six weeks the total Company has seen an 18% increase in orders and I think that was on the heals of a comment you made, Ed, where you feel that that kind of pace is unseasonably strong now. For my benefit, is there any kind of historical reference that you can provide that helps put a little more context around that? And then Greg, I was wondering if you were willing to give the 18, if you would give the breakdown between the segments.

I'm not sure that I can necessarily give you a historical context, Matt, just sitting here right now, but I'll put some perspective on the Company's total orders. Moving away from percentage comparison in the prior year, if I just look at what was the order rate that we were seeing for the previous 12 weeks from the Investor Day in mid October, in millions of dollars, and I compare what it would be looking back in the most recent 12 weeks from last week, orders have increased by, and we describe that, orders have increased by $100 million annual run rate. So that's a real meaningful pop, and we're operating now with the highest rate of orders that we've seen since more than a year now. We're not back at the billion dollar run rate level but we're in the range of $900 million to $1 billion dollar run rate in orders right now.

That color is helpful. And then with the conversations you're having with your customers in Advanced Technology, and moving the Gartner forecast aside for a second, just more based on conversations that Nordson is having with its key customers in the space, how do you feel about the sustainability of the tempo in that business right now, overall?

The technology markets generally, as we all know, are cyclical and these cycles can be very independent of economic cycles. They're a function of capacity and demand and most importantly, new products and items that are driving consumer demand and the pull through with capital equipment. And it's pretty clear that beginning in late 2009 and continuing in into 2010, the broad industrial, the technology market investment pace has really picked up. So we're now back in the sweet part of the cycle that's not economically driven, it's just the investment in new technologies. In the worlds in which we operate, the big drivers that, if you will, are driving this are associated with all forms of personal computing. They're associated with smartphones and they are also associated with a lot of investment in high brightness LED lighting that are being used in flat-panel displays. There's been a lot of conversation of late around televisions, but also all forms of backlighting for computer monitors and notebook computers and all of the other areas in which these flat-panel displays are now being manufactured with different types of technologies. So broad based. And then even within some of the packaging markets that we deal with, there are disproportionate paces of investment in some of the stack die and wafer level packaging concepts that we've talked with investors about in prior sessions.

Are you seeing the pull through on the test businesses at the present time, Ed?

Test business is also strong, yes. In fact we're seeing that in our own order book and it's reinforced by the observation Gartner is talking about with growth rates being up 60% in 2010.

Thanks again.

There are no further questions at this time. I'd turn the call back over to you.

Okay, thanks, Kelly, and just as we close, I'd like to summarize those points that I think are key takeaways from today's call. First, the impairment charges that we booked in the quarter do overshadow somewhat what was otherwise a very strong quarter. Where net income excluding the charge was approximately equal to that of the prior record year amount. And as we've previously stated the impairment charges in no way impact this organization's ability to deliver value to our customers or our shareholders. Secondly, Nordson's end markets continue to show signs of improvement and we're pleased with the improvement in order rates, both sequentially and also compared to what we've had across 2009. This improvement in order rate supports our strong outlook for the first quarter of 2010. And third, the investment that we've made in our spending reduction efforts during 2009 have contributed to strong operating performance and excellent cash flow and we expect to see these benefits in 2010. And lastly during 2009, we continued to make the appropriate investments to improve our competitive position in the marketplace and we're going to continue to do that in 2010, although we will be managing the business with conservative bias regarding operating expenses. So this concludes the call and I'd like to thank all of you again for your continuing interest in Nordson.

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