Nordson Corp (NDSN) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nordson Corporation webcast for second quarter FY15.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Jim Jaye, Director of Investor Relations. Sir, you may begin.

Thank you, and good morning. This is Jim Jaye, Nordson's Director of Investor Relations. I'm here with Mike Hilton, our President and Chief Executive Officer, and Greg Thaxton, our Senior Vice President and Chief Financial Officer. We'd like to welcome you to our conference call today, Wednesday, May 20, 2015, on Nordson's FY15 second quarter results and third quarter outlook.

Our conference call is being broadcast live on our webpage at Nordson.com/investors, and will be available there for 14 days. There will be a telephone replay of our conference call available until May 27, which can be accessed by calling 404-537-3406. You will need to reference ID number 38836001.

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. And I will now turn the call over to Mike Hilton for an overview of our FY15 second quarter results, and a bit about our third quarter outlook. Mike, please go ahead?

Thank you, Jim, and good morning, everyone. Thank you for attending Nordson's 2015 second quarter conference call.

The Nordson team continued to execute, and delivered a solid quarter in a challenging macroeconomic environment. Sales, operating margin, and earnings per share were within our range of expectations.

As we anticipated, negative currency translation compared to the same period a year ago, was a significant headwind in the quarter, where sales and EPS were negatively impacted by $32 million and $0.15, respectively, compared to the second quarter of last year. We gained momentum sequentially as the top line grew by 6%, and operating margin improved by 2 percentage points, compared to the first quarter of this year. We leveraged the increased revenue to deliver incremental margin of 63%.

Looking ahead, we're forecasting a very good start to the second half of our year. Our current backlog, order rates, and project activity are solid, and the midpoint of our third quarter outlook calls for organic growth of 8%, an excellent level in an macroeconomic environment that continues to be challenging.

I'll speak more about our outlook and current business trends in a few moments. But first, we'll turn the call over to Greg Thaxton, our Chief Financial Officer, who will provide more detailed commentary on our current results and our third quarter guidance. Greg?

Thank you, and good morning to everyone. Sales in the quarter were $401 million, a decrease of 4% from the prior year second quarter. This change in sales included a 1% increase in organic volume, a 3% increase related to the first year effect of acquisitions, and an 8% decrease related to the unfavorable effects of currency translation.

Looking at sales performance for the quarter by segment, Adhesive Dispensing segment sales volume decreased 2%, as compared to the prior year second quarter. Organic growth was solid in product lines serving disposable hygiene, general product assembly, rigid packaging, and injection molding end markets. We continued to see softness in extrusion, and polymer compounding and pelletizing end markets.

Organic volume growth in Europe and Japan was offset by softness in other regions. Sales volume in the Advanced Technology segment increased 5% from the prior year second quarter, where organic volume decreased 4%, and the first year effect of acquisitions added 9%.

In the electronic end markets, strong organic growth for test and inspection solutions, was offset by lower demand for automated dispensing systems. Growth for fluid management components serving medical and industrial end markets also was solid. Geographically, organic volume growth in the US, the Americas, and Japan was offset by softness in other regions.

Sales volume in the industrial coatings segment increased 23%, compared to the second quarter a year ago. Organic growth was positive in most product lines, driven by projects in consumer durable, automotive, industrial and container end markets. The organic growth was broad-based, with double-digit growth in all regions except Asia-Pacific, as compared to the same period a year ago.

Gross margin for the total Company in the second quarter was 55%. At prior year currency rates, gross margin would be 56% in the quarter, equal to the level delivered in the prior year second quarter.

Operating profit in the quarter was $76 million, and operating margin was 19%. Currency negatively impacted operating margin by approximately 2 percentage points, compared to the second quarter a year ago.

Looking at operating performance on a segment basis. Adhesive Dispensing delivered operating margin of 25% in the current quarter. Excluding the effects of currency as compared to the prior year, operating margin was 27%.

Within the Advanced Technology segment, operating margin was 19% in the second quarter, lower than the level of a year ago due to negative leverage on lower organic volume and the impact of currency, where operating margin performance for this segment was also negatively impacted by about 1%, due to the stronger dollar as compared to the prior year.

In the industrial coatings segment, operating margin was 17% in the second quarter, or 19% excluding the negative impact of currency as compared to the prior year. This level of operating margin is an increase on both a sequential and year-over-year basis, and reflects the strong operating leverage generated by this business on higher volume.

Continuing down the income statement, our effective tax rate for the quarter was 31%, and was impacted by currency and jurisdictional mix of income. Net income for the quarter was $49 million, and GAAP diluted earnings per share were $0.80.

As in previous quarters, we have included an earnings per share reconciliation schedule in our press release, to reconcile between GAAP earnings and normalized earnings per share to exclude certain one-time items. The current quarter's EBITDA was $92 million, down 14%, as compared to the same period a year ago, due primarily to unfavorable currency.

Cash flow from operations in the second quarter was $92 million, and free cash flow before dividends was $72 million, reflecting strong cash conversion of 147% of net income, as we have trended back to our typical days sales outstanding level. We have included a table with our press release, reconciling net income to free cash flow before dividends.

We continued our balanced approach to capital deployment during the quarter, distributing approximately $13 million in dividends, and investing $66 million for the repurchase of shares. From a balance sheet perspective, we remain very liquid, with net debt to EBITDA at just under 2 times trailing 12 month EBITDA as of the end of the second quarter.

I'll now move on to comments regarding our outlook for the third quarter of FY15. As we typically do, we provided our most recent order data, both on a segment and geographic basis with our press release. These orders are for the latest 12 weeks, as compared to the same 12 weeks of the prior year on a currency neutral basis, and with the Avalon and Dima acquisitions included in both years.

For the 12 weeks ending May 10, 2015, order rates are up 3%, as compared to the same 12 weeks in the prior year. As we have noted in the past, order growth rates can fluctuate from week to week. And for most of this fiscal year, 12 week order growth rates on a currency neutral basis have been much stronger as compared to the prior year, such that our backlog excluding acquisitions at the end of the second quarter is up 23% over the prior year.

Within the Adhesive Dispensing segment, the latest 12 week orders were up 8%, as compared to the same period in the prior year, where we generated order growth in most product lines. Disposable hygiene, rigid packaging, and plastic pelletizing and compounding drove this growth. Current orders do contain a large project related to pelletizing that is not expected to ship in our current fiscal year.

In the Advanced Technology segment, order rates for the latest 12 weeks are down 10%, compared to the same period in the prior year. Strength in surface treatment systems for electronics, and fluid management components for medical end markets was offset by softness in other product lines, where we do face somewhat challenging comparisons against the prior year.

Within the Industrial Coating segment, the latest 12 week order rates are up 21%, as compared to the prior year. Order rates were strong across nearly all product lines. Backlog at April 30, 2015 was approximately $287 million, an increase of 26% compared to April 30, 2014, inclusive of 23% organic growth, and 3% growth due to the Avalon and Dima acquisitions.

Current backlog increased 25%, compared to the end of the first quarter of FY15. These backlog amounts are calculated at April 30, 2015 exchange rates.

Let me now turn to the outlook for the third quarter of FY15. We're forecasting sales to increase in the range of 2% to 6%, as compared to the third quarter a year ago. This range is inclusive of organic growth of 6% to 10%, 2% growth from the first year effect of acquisitions, and the negative 6% impact related to the unfavorable effects of currency translation based on current exchange rates.

At the midpoint of our sales forecast, we expect third quarter gross margin to be 55%, and operating margin is forecasted to be 24%, with both negatively impacted by about 1 percentage point due to unfavorable currency rates as compared to the prior year. We're estimating third quarter interest expense of about $4.4 million, and an effective tax rate of approximately 30%, resulting in third quarter forecasted GAAP diluted earnings per share in the range of $1.19 to $1.30 per share.

I'll add some data points for the rest of the year that may be helpful. For the second half of the year, we're forecasting an effective tax rate excluding discrete items to be about 30% based on current tax law. We also expect normal maintenance capital spending for the full year to be between $45 million to $50 million.

In addition, we invested $15 million during the first half of the year for the construction of our new and previously described fluid management facility in Colorado. We anticipate additional capital expenditures of approximately $5 million on this project over the rest of the year, and the facility is targeted to begin operations during our third quarter, where we will then exit a leased facility. To add a few additional comments related to currency, assuming exchange rates for the rest of FY15 remain where they are today, we expect currency translation to negatively impact full year sales by about 6%.

In summary, we delivered a solid second quarter in line with our expectations, and against a challenging macroeconomic backdrop. Our current backlog, order rates, and project activity lead us to forecast a strong third quarter.

With that, I'll turn the call back over to you, Mike.

Thank you, Greg. Before taking your questions, I would like to provide some additional comments on our recent performance and outlook.

First, I want to thank our global team again for their hard work. Our employees delivered a solid first half performance in a challenging economy. Their dedication and commitment to our customers continues to be a competitive advantage for Nordson.

In terms of our outlook, as Greg mentioned, we are expecting about 8% organic growth in the third quarter compared to last year, and 24% operating margin at the midpoint of our guidance. This is terrific performance, given the state of the global macro environment.

In our comments last quarter, we spoke about a number of large dollar projects involving several customers across multiple lines of business, that shaped our expectations for the second half of 2015. Several of these products converted to orders during this quarter, and will benefit sales in the second half of the year.

Relative to previous full year commentary, a unique application that we expected would translate into a significant order did not materialize. Changes in customer requirements initiated by the customer during the final stages of the project, resulted in a reduction in the customer's forecast and demand for Nordson equipment.

So while we're not able to give a specific forecast beyond the quarter, further clarity around the scope of these large dollar opportunities leads us to moderate our full year view, such that we anticipate organic growth to be in the mid single-digit range for the year. Again, relative to the weak macroeconomic environment we're operating in, this is strong performance, and puts Nordson on pace for another excellent year.

In addition to growing the top line, our team remains focused on other strategic priorities, accelerating innovation in both products and process, pursuing acquisitive growth in our prioritized spaces, further optimizing the organization through Nordson's business system, and building our bench strength through talent management and development initiatives. Overall, the fundamentals of our business are sound, and we expect to continue to driving excellent results for the shareholders over the long-term.

At this time, let me turn to your questions.

Thank you.

(Operator Instructions)

Our first question comes from Liam Burke with Wunderlich. Your line is open.

Thank you. Good morning, Mike. Good morning, Greg.

Good morning, Liam.

Mike, could you give us a little color on the polymer business by geography? It sounds like the pelletizing is coming back with the large order. But in terms of extrusion, how's that business going, and is one geography doing better than another?

Yes, I'd say, in general, if you look at the injection molding side's still very solid. I'd say if you look at the film side, particularly the high-end films, we're still dealing with the over-capacity situation. I'd say year-on-year, pelletizing is improving. The [grind] board business is improving, relative to tough comps for last year.

I'd say the one thing that we are seeing that is limiting, I'd say, US growth in the business in general is, is the currency is impacting some of the US OEMs from a competitiveness standpoint. For us, that may just shift the business somewhere else, to Europe or Asia, but in the short-term that's having a bit of an impact. But generally, injection's solid, and the extrusion's still relatively soft.

Great. And on the ATS business, it sounds like medical is still providing the growth. Is that continuing, or are you seeing consistent growth out of that segment?

Yes, we're very pleased with what we're seeing on the medical side, across the three broad product areas that we have, nice growth. We expect that business to continue to be a double-digit kind of growth, and we're seeing that. So we can't get our new facility up and running as fast as we can to support that growth.

Great. Thanks, Mike.

Our next question comes from John Franzreb with Sidoti & Company. Your line is open.

Good morning, everyone.

Good morning.

Mike, just on this unique application that essentially didn't materialize. A couple questions. One, it sounds like you had a high degree of confidence that it was going to come in, but the customer, it sounds like something -- it's not deferring it, but literally changed its plans. Can you give us a little color of what happened, that made them change their entire strategy?

Yes. What I would say is, we work with this customer, and other significant customers on a lot of development projects and activities. And in this particular case, we were well down the path of gearing up our manufacturing operations, and our engineering and service and support to meet the demand.

But they also continued to look for other innovative approaches to meet their same needs. And in this particular example, they were able to find another way, that for them, that required less of our equipment. So it's not a loss to a competitor or anything like that. It's just they found a different way of doing that.

This customer we work with on other applications, and there's some new ones that are coming in to play as well. But it's just -- we got pretty far down the path, to the point where we were gearing up our manufacturing, engineering, and service organization to support it. So that led us to be pretty confident in that particular project.

So is there some cost that you don't expect to get back from this project, or do you think that it's transferable to other applications, you're just going to have to reposition it a little bit?

The latter, John. Yes, it's not -- we are very good at moving up and down to support our customers requirements in all of our businesses. As customers have pushed us to reduce lead times, we've got pretty adept at how we can move up and down. So no, there's no significant cost hit here, we just redirect the effort.

Okay. And one last question, I'll get back into queue. How much of your backlog is deliverable in 2015?

I'd say most of it is deliverable in 2015 (multiple speakers)

Fiscal year, I'm sorry.

Yes, I'd say most of it's deliverable in 2015. I think we talked about in the past, there are some times in a variety of areas. It could be our coatings business, could be in product assembly, certainly in the pelletizer business where you have either longer lead times, or customers asking you to stage orders. And so, we've got one in particular in the pelletizer side, that is probably a next year order, just given the scope and size of it.

Okay. Thank you very much. I'll get back into queue.

Okay.

Our next question comes from Allison Poliniak with Wells Fargo. Your line is open.

Hi, guys. Good morning.

Good morning.

On the order front, could you give us a sense on how they trended throughout the quarter? I mean, did they get stronger, that's giving you a little bit more confidence in the back half?

Yes, I would say, if you look at year-on-year comparisons, they were strong, and well above last year as I think as Greg mentioned in his comments, until probably the last couple of weeks. That's not necessarily saying the level of the orders are decreasing, it's just that on year-on-year comparison we had a pretty significant step-up in this point last year, in the seasonal pattern in our business. And we do expect orders to continue to pick up, albeit against tough comps over the next 6 to 10 weeks or so.

But we do expect across the businesses, based on what we see from a project activity, that to pick up. But I'd say, it's really been the last couple of weeks, where timing on some of this has kind of hit a little bit tougher comps from last year. But if you kind of look at the area under the curve, it's been strong really for the whole year to this point.

Okay. And then, just touching on acquisitions, could you just give us any color on the environment, kind of sizes of things that you're looking at today, just obviously, given your nice free cash flow and leverage ratio at this time?

Okay. I'm have a little trouble hearing you, but I think you're asking about sort of the M&A environment, then I would say we still have a strong project list out there. I think as we have talked before, you can never really control the timing. I think we also indicated it's likely to be sort of more, the smaller tuck-in, the kind of product line kind of opportunities this year.

I'd say from the environment standpoint, with financing costs as cheap as they are, things still are going for a relative premium. And we know what makes sense for us, and we know where we can deliver synergies, and that factors into our analysis of any particular project. That's obviously, assuming it has crossed the strategic hurdle that it fits into one of our four priorities. But I'd say it's still a pretty robust marketplace out there from a seller's perspective.

Great. Thanks so much.

Our next question comes from Joe Radigan with KeyBanc. Your line is now open.

Thank you. Good morning, guys.

Good morning, Joe.

A couple questions on Advanced Tech. Mike, were you surprised by the organic revenue decline there this quarter? I know you've talked about some longer lead time projects and some phasing of orders, but the delta between the strong order growth last quarter, and the revenue performance this quarter seems a little more drastic than typical.

No, I would say it really comes down to timing. A lot of this is impacted on the systems side, by timing of some of the mobile product end market launches and so forth. And so, I would say the first quarter was a little stronger than we typically see.

I'd say the second quarter, was at a reasonably high level, but year on year maybe a little softer. If you recall last year, we had a big step-up in the third and fourth quarter in this segment, and we expect to see the third and fourth quarter improve as well. So no, not a big surprise, because we can't always control the timing. Our customers really drive that.

What I would say is we have in that segment, a number of new products that are coming out. We've talked in the past about our new sort of front end x-ray system. We got our third order there. We have some new prospects there, and in general, our x-ray business with the new products are taking off.

With Dima in the fold, we're launching our mid-tier product. We have gotten some orders from these sort of local Chinese mobile guys, although they're way down the curve in terms of sophistication relative to the global leaders.

So I would say, the thing we can't control, is sort of the timing. I think we have good activity and development projects with key customers. And then, if you look outside sort of the systems part of the business, the general EFD type applications are doing reasonably well, and the medical business is going very strong.

Okay. Great. And then you sort of touched on my follow-up question. But you do have very challenging growth comps in the back half of the year, in the third quarter and fourth quarter. So given the decline in orders you saw this quarter, the 10% decline, is your growth expectation supported by the backlog? Or is this more of a -- kind of to what you alluded to earlier and what Greg alluded, in terms of you have an anomaly in sort of the growth rate, because you had a strong order -- weak fall-off and get replaced by a weaker order week?

Yes, so it's kind of a little bit of both. So obviously, the backlog is very strong, because the prior orders through the quarter, for most of the quarter were really strong. So a lot of that business will be delivered in the third quarter.

And then, when we look at the project activity across all of the businesses, we see solid project activity, and we expect a number of those things to come through. So we expect orders to pick up. We do have a challenging comp, and we are expecting the second half of the year to exceed what we expect -- what we saw last year, even on that challenging comp. So I think our project activity is something that impacts probably later Q3 and Q4, and the big backlog we have, a lot of which will be delivered in Q3, gives us the confidence in the Q3 expectations.

Okay. Thanks. Thanks, Mike.

Our next question comes from Jason Ursaner with CJS Securities. Your line is open.

Good morning.

Good morning, Jason.

Just going back to the large project for a second, where the customer went with a different approach, what end market was that going to?

Yes, I don't think we really want to pinpoint that. But from time to time, we have this across each of our businesses, where we could have large projects that have an impact, and sometimes that distorts things locally.

But it's a customer that we have continuing other projects with. We have a new application work that we're doing with them. This was a sizable project that just didn't go through at the last minute.

Okay. And in terms of the overall second half outlook, relative to what you had said last quarter, about resuming organic growth in the double-digit range versus now, it sounded more mid single-digit. Is that project alone, kind of adding up to that, or is this is a handful of things?

I would say that project is a significant part of that adjustment. I think if we look at the rest of the businesses, and look at the geographies around the globe, we feel pretty good about where we're at, particularly given a soft start to the year. I think if you look at where China is, and what they're trying to do in general, we're starting to see things pick up there geographically.

So I would say that was a significant part of where we thought we were going to be for the year. And everything else looks pretty reasonable, and even some of the areas that geographically you might be concerned about, like where China was early in the year, that's picking up. And Europe is looking more encouraging. The US, we'll have to see if this first quarter was just an anomaly, but we do expect things to pick up there as well.

Okay. Sounds good. Appreciate it, Mike.

(Operator Instructions)

Our next question comes from Charley Brady with BMO Capital Markets. Your line is open.

Hi, this is actually Patrick standing in for Charley. Thanks for taking my question, guys.

Yes, good morning.

Good morning. Just wanted to go to the Adhesives side. Last quarter's orders were 6%, it was pretty good, and then I guess, this quarter 8% is even better. But that didn't really translate into sales. Were the 6% growth in orders last quarter also long-term, like you just mentioned for this quarter? I sort of recall that it was more on a short side, but please correct me, if I'm wrong, mistaken here?

Yes, this is Greg. As you mentioned, both quarters were reasonably strong for that segment order growth rates, and last quarter did have some project activity as well, in those order rates that were going to benefit the second half of the year.

Okay. And I guess, just trying to parse out the organic growth for that Adhesives side of the business, what is your expectation for the third or fourth quarter? Is it higher or lower than, I guess, the organic growth rate number that you put out there? Is that going to be, I guess, beneficial maybe detrimental to that number?

So the order rates that we're seeing are around 8%, and obviously that factors into our overall outlook, and the midpoint of our outlook was also around 8%. So that's a significant contributor to it. The one order that -- there was a one large pelletizer order that we said, was going to be even longer lead time that's going to fall into early next year. So that is part of that 8% that won't necessarily come in third or fourth quarter. But the business in general looks pretty solid there, and we're expecting solid growth in the third quarter, and some of the areas geographically that were a little slower to start, have picked up.

Okay. That's perfect. And just one quick question on Asia-Pacific. Obviously, the region actually had a pretty good couple of quarters in terms of [slow] sales and orders, and sort of that bucked the trend a little bit this quarter. Can you add a little more color there?

Yes, I would say, if you look around Asia, and if you look at Japan, for example, we had a solid quarter this quarter, but from an order standpoint it's a little bit softer. And it's a mix across businesses, and we do expect that to pick up and close out the year stronger. I'd say similarly, if you look at Asia-Pacific, it's some mix of mobile business. Some mix of other parts of our business like, for example, in China things like beer and beverage packaging business is pretty soft, but starting to pick up again. So I'd say China in general is probably the one area that was off to a softer start this year, that now has really started to pick back up. And obviously, there's a lot of activity at the government level to help to continue to drive the growth in that economy, and we see that picking up throughout the rest of the year.

And this is Greg, just to add another comment. Some of this relates to the timing of orders, and specifically in our advanced technology segment, where there's a large customer base in Asia-Pacific. If you go back to the last quarter within Asia-Pacific, we were showing order growth of 46%, and this quarter we're down 15%. A portion of that is the timing of when we're receiving some of those orders combined with, as Mike mentioned earlier, we are reaching a point of more challenging comps. So I think if you look over the last couple of quarters at how we're doing within Asia-Pacific, they kind of tie to Mike's comments.

Great. Thanks for the color.

Our next question comes from John Franzreb with Sidoti & Company. Your line is open.

Just a follow-up on a previous question. I know you didn't want to identify the end market. But could you identify what segment you expected that unique order to fall into?

Yes, I don't know that we want to call that out either, John, and we're not trying to be mysterious here. It's just that, with a lot of our larger customers, we do a lot of things under confidentiality agreements, and I don't necessarily want to disclose that, from both a customer and a competitor standpoint. So I'd rather not comment.

Okay. Was there a significant amount of associated R&D spend related to this project that we could expect to drop off? Any color on the R&D front might be helpful?

No, I wouldn't say that -- not -- as we called out sort of two years ago when we were working on a whole new platform, the back -- front end x-ray machines for the semiconductor side, that's was kind of a unique, whole new market. This would fall under the category of our continuous development work with customers. So it wouldn't -- what we've developed is not something we can't use with them or others, other places. So it's not kind of a unique, new platform that we're trying to develop, like the automated x-ray machine for [sider] bumps and TSV.

Right.

And John, just another couple comments. So this would have been more of a standard type product solution for us, which is the good news. And just getting back to your comment earlier on the costs that we may have incurred. As you likely know for us these volumes and meeting the demands of our customers are often just us putting more temporary labor in the factory to meet that demand. So it's not that we incurred a lot of additional costs throughout the organization that we're going to burdened with.

Perfect. And on Industrial Coatings, good year-over-year revenue growth, but the margin was kind of flattish year-over-year. Was that entirely due to currency, or is there a mix issue going on also?

Well, there's 2 percentage points I think Greg called out that were the currency. I am not going to --

That's right.

So that's pretty significant. I think 17% would have been 19%, if not for the currency, so that's pretty significant. From time to time, we do have mix, but I think far outweighed -- the currency far outweighed anything in that.

Okay. Great. Thank you very much, Mike.

Thank you. I'm showing no further questions. I would like to turn the call back to Jim Jaye for closing remarks.

Thank you, Amanda. And again, thank you everybody for joining our call. As always, I'll be available for questions throughout the day today, and the rest of the week, and I look forward to talking with you. Everyone, enjoy your long holiday weekend, and we'll talk to you soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.