Nordson Corp (NDSN) 2010 Q1 法說會逐字稿

Good morning. My name is Christopher and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson first quarter fiscal year 2010 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). I would now like to turn call over to Mr. Jim Jaye, Director of Communications and Investor Relations. You may begin your conference.

Thank you, Christopher. This is Jim Jaye and I am here today with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, Vice President and Chief Financial Officer. We would like to welcome you to our conference call today, Tuesday, February 23, 2010, on Nordson's first quarter fiscal year 2010 results.

Our conference call being webcast 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, Tuesday, March 2, by calling 1-800-642-1687. You will need to reference ID number 55221646. Our attorney 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 with 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 filing with the Securities and Exchange Commission that could cause actual results to differ. After our remarks we will have a question-and-answer session, and I would now like to turn call over the Mike Hilton for an overview of our first quarter full year fiscal results and Nordson's future outlook. Mike.

Thank, Jim. Good morning, everyone. Thank you for attending Nordson's conference call to discussing our results for the first quarter of fiscal year 2010. Before I begin my remarks related today the quarter I would like to take this opportunity to tell you how pleased and honored I am to become Nordson new President and Chief Executive Officer. My first month on the job has confirmed my believe that Nordson is a an outstanding Company and I look forward to working with our entire global team to continue building on our long track record of success. Over the next few week, and months, I will have the opportunity to get to know you our analysts and investors and to share with you many of the reasons why I believe Nordson's future is a bright one.

Our comments this morning will focus on our performance in the first quarter, which I am happy to report was very strong and significantly improved over the same period a year ago. We will also provide some perspective on the outlook for the second quarter of fiscal 2010. For the first quarter, sales, operating profit, and earnings per share were all well above the prior year, as we continue to see improving order trends, and we benefit from the actions we took last year to lower our cost structure.

Not only is our performance well above last year but the operating margin and earnings per share results exceed those delivered in the first quarter of 2008 which was a record year for Nordson on many financial measures. Clearly the continuing penetration of emerging markets, on going development of new applications, lower cost structure, and the focus and execution of our global team are are driving these impressive results.

In terms of our outlook, positive indicators continue to emerge in the macro economic environment, which directly impact Nordson's business. I will speak more to these trends in a few minutes, but before that let me turn over the call to Greg Thaxton our Chief Financial Officer who will provide more detailed commentary on our first quarter results, and outlook for the second quarter.

Thank you, Mike and good morning to those listening. As Mike noted our financial results for the quarter were very strong and I will provide some highlights of first quarter results starting with sales. Total sales in the quarter were up 18% over the prior year, comprised of 12% volume growth and favorable currency effects of 6%. This performance was driven by continuing strong demand within our advanced technology segment, where sales were up 36% over the prior year. This marks the third quarter of sequential sales growth within this segment. The adhesive segment growth was also strong at 12% in the quarter. While sales for the Industrial Coatings system segment were impacted by continued pressure on consumer durable end markets; however, recently we have seen an improvement in demand within this segment.

Moving down to income statement, gross margin in the quarter is 60%, which is very strong on a historical basis, as we continue to benefit from a high composition of spare parts and consumables as well as the cost reduction efforts taken in 2009. As we look at operating performance in the quarter, operating profit of $36 million, is nearly triple that of the prior year and equal to the amount generated in the first quarter of 2008 on 10% less revenue. As Mike noted earlier, 2008 was a record year for Nordson on many financial measures.

This year's first quarter operating margin is 16% compared to 7% in the prior year first quarter. This is strong performance for a quarter that is seasonally our lowest performing quarter. And the 16% operating margin exceeds the operating margin delivered in the first quarter of 2008. This level of operating profit and margin highlights the additional leverage on earnings from our cost reduction efforts. On a segment basis the adhesive dispensing segment once again delivered strong operating margin in the quarter of 28%, up from 25% in last year's first quarter. Advanced Technologies operating margin has increased to 18% in the quarter as compared to 2% in last year's first quarter and 10% for all of 2009 when excluding impairment charges. Industrial Coatings operating margin performance continues to be impacted by the volume of sales, however, margin performance is clearly improved from the prior year as a result of cost reductions. We remain optimistic that this segment will deliver double-digit operating margin with the return of sales.

Net income was $27 million as compared to $11 million last year, and at 12% of sales, this level exceeds the 9% return generated in 2008's first quarter. First quarter diluted earnings per share is $0.78 more than double the prior year's $0.33 per share, and 26% greater than the $0.62 per share earned during the first quarter of 2008. Cash measures in the quarter were also very strong with free cash flow after dividends of $41 million in the quarter. That's 64% greater than the amount generated in the first quarter of 2009. The current quarters EBITDA is $44 million up 57% over the prior year's first quarter, and we continue to maintain a very solid balance sheet with debt to trailing 12 month EBITDA of well under 1, and sufficient head room within our existing credit facilities for strategic investments.

That concludes my comments regarding our first quarter results. Before I discuss the outlook of the second quarter I will provide comments on recent order trends. We provided the most recent order data both on a segment and geographic basis, with our press release. As a reminder, these are orders for latest 12 weeks as compared to the same 12 weeks of prior year on a currency neutral basis. Looking at orders for the 12 weeks ending February 14 they are up 33% compared to the same 12 week period in the prior year. Within Adhesive Dispensing orders are up 14% from the prior year period driven by double-digit growth in most geographies. We are seeing balanced growth both from a product line perspective as well as geographically.

Regarding Advanced Technology, our order patterns have continued at an exceptional pace, 12 week order rates are up 78% from the prior year. We began to see improvement in our order trends at the start of our third quarter of 2009, and this order trend improvement has continued to the most recent period. Driving this demand is a broad base recovery in all product lines, including automated and manual dispense as well as test and inspection. Our customers are adding capacity and we continue to supplement this with gains from new applications. In particular, we are seeing strength in our technology, supporting PC micro processors, Smart Phone applications and LED applications.

Within the Industrial Coatings segment, we have seen some recent improvement in order trends, where the last 12 week orders are up 29% as compared to the prior year. With the return of some system demand and improvement in spare parts orders as our customers increase factory utilization. Although we are up against somewhat easy comparisons I am encouraged by the pace at which orders in all segments have increased over the prior year. And as we look at the order rates on a sequential basis, that is our latest 12 week orders as compared to the proceeding 12 week period, we continue to see improving order trends. Total Company orders are up 8% sequentially, again on a currency neutral basis, which is also very encouraging.

On a geographic basis, orders are up over the previous year in all geographies and we are seeing double-digit growth rates in the US, the Americas and Asia Pacific. Orders in Asia Pacific are up 70% over the prior year led by demand in Advance Technology as this is where much of the manufacturing for these end markets occurs. In addition, the Adhesive and Industrial Coatings segments also showed strong order growth in Asia Pacific. The 29% growth rate in the Americas and the 16% increase in the US are well balanced between the three segments.

Japan's order rate comparison to the prior year is also improved though not as significantly as other geographies due to the lack of large dollar powder system sales. European order rates improved over the previous year as well, though prior career larger dollar system orders within adhesives makes comparisons more challenging. The Advanced Technology and Industrial Coatings segments within Europe delivered very strong order growth rates in the most recent 12 week period over the prior year.

Turning now to the outlook for the second quarter, based on the solid improvement in orders we are projecting sales growth of 26% to 30% over the second quarter, of fiscal 2009. Volume growth is expected to be in the range of up 21% to 25% and currency is expected to add an additional 5% growth based on the current rate environment. We expect gross margin to be about 58% in the quarter, down slightly from our first quarter due to a higher mix of system sales. And we are forecasting slightly higher selling and administrative expenses, than the quarter just completed in nominal dollars to support the increase in sales volume growth.

This outlook results in estimated earnings per share for the second quarter, of $0.81 to $0.89 per share, with midpoint of this range more than double the prior year's $0.41 per share. In summary we are encouraged by the improvement in the pace of orders that began in the second half of 2009, and has continued through to this point in the year. With this improvement in orders, coupled with our lower cost structure, we are pleased with our first quarter performance and expect to deliver very strong second quarter results.

Thanks, Greg.

Now I would like to provide some general comments relative to Nordson's performance as well as some specific comments related to recent order trends. Let me start with some early impressions of Nordson. We have excellent market, customer, and geographic positions. We are the first choice of our customers from a technology perspective, and we are continually reinventing our product portfolios. Our focus on continuous improvement and the restructuring we did in 2009 make us even more competitive. We are leveraging our capability across our platforms, for example, putting all of our advanced technology product lines together under common management will create opportunities. The global team is continuing to perform and we have plenty of cash to support our organic growth needs and future additions to our portfolio. And finally, the business model which is focused on a critical understanding of customer needs, state of the art applications and product solutions, and unparalleled service is a good one to build on.

Now let me touch on our current pace of business once again. Our recent order trends are certainly very encouraging. The order pace is very strong both in terms of recovery over the prior year as well as the continued sequential improvement. Annualizing our latest 12 week order volume puts us at a run rate of approximately $980 million. A strong recovery from where we were just a year ago, and one that began for us in the second half of 2009. As you all realize as we move through fiscal 2010, we will experience more difficult comparisons. A question that many companies including Nordson are wrestling with is whether this order pace is sustainable, given the element of restocking that is occurred throughout the supply chain.

As I look at the individual segments within Nordson, I think we may have different scenarios playing out. It is fair to say we are just beginning to see some real signs of pick up in orders within Industrial Coatings. These will be paced by improvements in consumer confidence given the strong focus in the consumable durable area, this should be an up side as confidence returns. The Adhesive Segment with the large exposure to consumer nondurable end markets and high spare parts content is not that volatile. So any improvement in industrial production should bode well for this segment. The segment where we have seen the most dramatic improvement in order trends is within our advanced technology segment which operates on a cycle that is very different from the classic GDP or industrial production.

The electronics market in particular tend to react quickly to cycles and often overshoots on the way down and on the way back up. My past experience would suggest that orders rates within Advance Technology segment may moderate as we move through th year; however, as you know, in a more typical time our clarity looking forward is good for only about one quarter and last year and the current year are anything but typical. Let me pause at this point to take your questions.

(Operator Instructions) we will pause for just a moment to compile the Q&A roster.

Good morning.

Morn, Kevin.

Maybe for Greg my first question you have done such a nice job of out performing gross margin, how much would you attribute this gross margin to that mix versus the cost initiatives that you referenced.

Yes, Kevin. The margin mix in the quarter was about 48% spare parts which is a strong number on a historical basis, and certainly a large part of a driver of this. But I would say the other large piece as we called out is the cost reduction efforts we took last year and clearly we have better absorption with this volume increase in this quarter.

Now, on the aftermarket side, Greg, you see an increase there in the mix of course because of the early recovery. But, where do you see that, as we get further into the recovery, where should that kind of settle out? Because you are doing things to try to increase that, that mix beyond just the recovery as well.

Yes. And I think what this the comment on the percentage of spare parts in the first quarter highlights is we had good growth in both parts and system to maintain that composition of 48% with the overall volume growth but I would expect as we have talked before, that as we see the overall recovery in the top line, it is going to be, a disproportionate mix of systems than in that recovery versus parts.

Yes. If you put things in historical perspective go back to say 2008 you would be in the low 40 percentage points and it will take a while for the systems orders to ramp up, as customers loosen up their capital spending, constraints which we are starting to see now.

Got it. With such strength in Asia and Advanced Tech, how much of this is driven by new products you are introducing that are being received very well or new customers, or further geographic penetration, just versus simple riding the recovery?

Just a couple of comments there. I think obviously there's a significant component that's taking advantage of the recovery and quite frankly that's our number one priority is to make sure we get at least our fair share if not more of the markets recover. But in addition to that we are taking from a new product and new market perspective. For example in the LED space we have talked about at the last investor day we are seeing files improvements across a number of advanced technology, take advantage of that and by back flight the LCD space. So we are doing well for example in that market. So it is a combination of both but certain we are a significant portion of it is coming from the recovery on our customer end.

Okay just finally for me, what was the FX on the EPS line in the quarter?

Over the prior year, it was about $0.09.

Okay. I will get back in line. Thank you.

Your next question comes from the line of Charlie Brady of BMO Capital Markets. Your line is now open.

Hey. Thanks. Good morning.

Morning.

Hey. I don't know if I missed it or not on the orders, did you give us for the, for the three segments, the sequential order increase, as opposed to just the 12 week, over 12 week?

No, we didn't. We talked about the total increase for the Company was 8%, 12 week sequentially, and what that would imply is all segments had some, some pretty nice sequential growth over the prior 12 week period.

If you look at the Advanced Tech orders, do you, is it your sense that you got the Chinese New Year is going to hit in your second fiscal quarter, do you think any of that may be boosted this quarter orders, in advance of the Chinese New Year or was it really not much of a factor?

I think it is probably hard to say at this point, whether or not we saw a prebuy as it relates to the Chinese New Year. I think what we have seen is a continuation of strong recoveries since the second half of the year, and a combination of both things the recovery in the market and some of the new applications that we are pursuing. I think it is hard to say whether or not we saw anything significant from a prebuy perspective.

Okay. One final and I will get back in the queue. On the Industrial Coatings systems and again back to the orders, that 12 week order rate of I guess it was 29% is, is a pretty strong number for that business to surprisingly strong I think from our viewpoint, can you just give us maybe a little more granularity as to where that's really coming from, and sort of where the sustainability obviously probably not at that level but as with we go through 2010. I wouldn't expected at least in Q1 that kind of ramp up in orders in that business.

Yes, the first, the first thing that we are seeing obviously is our customers operating rates come off, we are seeing the improvements sort of in the parts business, and we are just really starting to see in the last few weeks, some improvements from a system perspective. So our expectations is we would see continued improvement later in the year. Now we may have some year-on-year, maybe Greg you want to comment here on year-on-year one-time comments here around the specific period. Yes. In terms of geographically, I called out my comments that Japan is one their has been weak within this, this segment. But otherwise, with that 29%, we are seeing some pretty good growth in all of the other geographies but it is coming off of a low point for that segment. And with the volume in that segment, it is, from that low point, it is, a few larger dollar powder system, orders are going to move that number.

Okay. I will sneak one more in on ICS. You talked about getting back to profitability or double-digit margins, when sales volumes return, can you quantify that, sort of at what level does that business get back into the black and when do we get to that double-digit.

The comment there is if you go back to 2007, for that segment, we were at about 10% operating margins as we had started our efforts back at that point to improve the, the performance in this segment. 2008 we are off to a good start. This is a segment that, saw the early effect of the pressure on the consumer back at the midpoint of 2008 and since that time with our restructuring efforts we have done a lot to improve the performance of that segment and lower the overall cost structure. So, if we got back near those 2007 revenue levels, where we were at 10% at that point I would expect we would be significantly higher than that with our, with our new cost structure.

Thanks.

Your next question comes from Joel Ratikin of KeyBanc Your line is now open.

Morning. I am stepping in for Matt today. Just a couple of question. How should we think about the profitability in Adhesive Dispensing as the year unfolds? Obviously, 1Q is the low point in terms of seasonality. So you will see increasing volumes, yet you have talked about mixed head winds. You should have FX weighing on you as the year progresses. So how should we think of the sustainability of margins going forward?

Just a comment, I think you hit on sort of the key things that impact the margin in each, each direction, and as Greg said earlier we will see more system sales coming through involvement that mix effect will temper sort of the margins we have seen today. But as the top line improves we would expect the margins to continue to rain strong in that business, with the kind of offsetting factors you have talked about from a margin perspective.

And I would say the issue really is what do we do on the top line, what is going to happen, in that segment with, in term of our revenue growth. We expect to see increasing revenues on the systems side which is Mike called out will impact our gross margin percentage. But, increase, as long as the volume increase is offsetting any spending increase, that comes with it, it would expand operating margin. So I think the point gets back to as you say typically we have higher performing quarter than we do in the first quarter. As Mike talked in some of his comments, the question is how much of what we had, have seen in the first quarter is this restocking element and what's the sustainability of the growth going forward. This is a segment typically is not as volatile, and so, I think it says if we are able to increase the top line, we may see the dilution on the gross margin line, but that volume should be incremental to the operating margin.

All right. And then can you give us an update on your M&A strategy now that you have hired a Director of Corporate Development, does the previous target of 300 million of acquired revenue by 2012 that you laid out, does that look achievable and Mike what are your thoughts in terms of the future direction of the Company, and capital deployment priorities?

So I think at this point, in time, I would say nothing has changed in terms of our overall outlook there. I think if you look at from the deployment priorities the first priority is reinvest to support organic growth, and we are doing that. I think the second priority is to continue to invest in reinventing our existing businesses through new product development, and to support translation growth into new markets. And the third priority obviously is then to add to the portfolio as we have talked about in ways that are complimentary. And finally, sort of the fourth priority would be approximate potentially to look at sort of share buy back as an alternative to that. But in terms o of our overall outlook in terms of the opportunity, we are well positioned I think to take advantage of additions to the portfolio, as Greg talked about earlier we have got an excellent cash position, and access to credit that would support anything we would like to do there.

Okay. Last one, Greg, sorry if I missed this. But can you talk about corporate expense, what were the big deltas versus last year and what should we with expect in terms of run rate going forward?

If you look at last year's first quarter, that had a few items, but that is the, the place where we book our restructuring charges. And so last year, with had about $8 million in charges in that, in the corporate number, and obviously it is much lower this year. Last year also had going the other way, we paid no bonuses in '09. So there were no accruals, there were some reversal of multiyear accruals that went the other way, it reduced that expense. This year, what we are seeing is, we are building bonus accruals and as well, there was an accounting change that we have adopted in our first quarter that requires you to expense any costs associated with corporate development activities. And we did close on an acquisition in our first quarter, the acquisition of, and EFD distributors of ours in Germany. So we have some of those costs now hitting the corporate development line and we have some one-time costs in our first quarter here in that 9 million number I wouldn't expect to be repeated in out quarters. So I think it is higher than what you should see in remaining quarters.

Okay. Thank you.

(Operator Instructions). Your next question comes from Scott Blumenthal of Emerald Advisers. Your line is now open.

Good morning, gentlemen.

Good morning.

Greg, could you give us an idea as to how much Europe figures into the second quarter guidance, that being historically I guess one of the larger geographies? And then maybe touch on Japan in the second year guidance as with well? -- second quarter guidance I'm sorry.

Scott, we typically don't go down to that level of detail in our guidance but I will make a few general comments. Our orders in Europe as we look at the latest 12 weeks as compared to the prior year, were up 6%. And those -- that 6% was impacted by the fact that last year within our first quarter, we did have some larger dollar. So some bigger lumps of orders within our Adhesive segment in last year's numbers that made comps a little more difficult. So we are seeing fairly good trends within Europe, and then your other comment on Japan, the order growth rate there, the latest 12 weeks versus prior year 12 weeks orders were up 9%, and again, like Europe, we had the issue in Japan last year of having some the benefit of larger dollar system orders within the Industrial Coating systems segment that we don't have in this year's number, that impact, but again good growth rate, high single-digit growth rate over that geography over where we were at this time last year.

Okay. That's really helpful. Thank you. And also, could you talk about in the Q2 guidance, and I think Charlie tried to touch on it as to whether you think you will turn into the positive and Industrial Coatings, is that baked into the second quarter guidance as well?

Yes. Again, we typically don't look at segment profitability but I think the answer to that is, is we are at that point as we have said in the past that pivot point where we are very close to that break-even level, and it is really about volume growth. If we get -- if we see the order improvement that we have been, we have improved to the profitability in that segment from where we were in the fourth quarter it is really a volume question and we are right near that pivot point.

If you look at the customer perspective, typically this time of year, they have gone through their capital budgets and they're starting to get to the point of releasing funds. So we would expect to see more of the systems piece of that business come back toward the second half of the year. So as Greg said we are near the point of break-even and we would have expectations that the latter part of the year as these capital projects get approved we would see improvement there.

Okay. Very helpful. Thank you.

Your next question comes from John Franzreb from Sidoti & Company.

Welcome aboard, Mike, good morning Greg and Jim.

Morning.

Just to touch on the last comment, is it fair to characterize the quotation activity for large systems orders is improving or are you hopeful that they are improving.

I would say just in the last few weeks we have started to see the quotation level, increase to the point where we could notice that. So I would say we are just starting to see that in the last few weeks.

Looking at Advanced Technology, if I look at the six businesses that make up the segment could you kind of rank on relative order strength which businesses are doing the business to worse so we can get a sense of what is driving demand?

What's very encouraging is very strong increase in order rates in all of the product lines. The end market demand is really driving this growth in both the automated dispense of the Asymtek product lines, but the manual dispense as well as there are more lines up and running, it is driving the EFD for example manual dispense. But some of the capacity in our customers is also reaching to the test and inspection. Mike commented on a specific niche application of ours within LED. That's reaching both the dispensed product lines as well as test and inspections. So, what's been encouraging is just, is this lift in orders in all of the product lines. And just to add to that if you go back to some comments that we made in December based on information from the Gardner folks they were looking for this year to be a strong year from both a back end and packaging, and from a testament inspection, we are looking from growth year-on-year of 50 plus percent. That I think we are seeing early on as Greg said as at that started to play out through the first quarter across the board.

So is EFT keeping up with your consumer related products?

What Greg said is all of our six businesses are doing well and seeing significant growth across them from an order perspective.

Okay. And one last question, just touched on early, as the dollar firms, at what level do we have to think about as becoming head wind, and not just on the year-over-year, obviously the comps get tougher as the year progress but just in general versus a competitive standpoint, do you look at what level is concerning to you?

Yes, John if you look at last year, if we talk about the euro, the second quarter last year was at about $1.30 became $1.39 in the third quarter, $1.45 in the fourth quarter. And so, at the level where we are today, $1.35, $1.36, we still have the tail win compared to the second quarter, and then approaching that head wind at the $1.39 at the third quarter. The yen is, the yen we have strength there this year. Second quarter was about a [97, 96.5] as was the third so we have some tail wind with the yen at about [90] now.

Thanks a lot, guys.

There are no further questions at this time. Mr. Jaye I will turn the call back to you.

We will turn it back to Mike Hilton for a few closing remarks. Mike.

Thank you. I would just like to wrap up with a summary point or two. Number one, we are very encouraged with the improving business conditions and increasing order trends, and although we recognize the current business environment continues to be challenging and the shape of recovery is somewhat uncertain. We will continue to be cautious in our approach with regard to managing the business. We want to take advantage of the opportunities that out there and we are doing that as you can see through the first quarter. But we don't want to get too far ahead of the underlying market. And so we will take advantage of every opportunity but be prudent in terms of our spending. Further more we continue to believe we have the products, the organizational talent, the resources, and the liquidity to respond to the global economic recovery and to compete effectively in all of our markets. This concludes the call and I would like to thank everyone for your continued interest in Nordson. Thank you.

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