Nordson Corp (NDSN) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Nordson Corporation webcast for fourth quarter and fiscal year 2019. (Operator Instructions) I would now like to hand the conference over to your speaker today, Lara Mahoney. Please go ahead.

Thank you, Lisa. Good morning. This is Lara Mahoney, Vice President of Corporate Communications and Investor Relations. I'm here with Sundaram Nagarajan, Nordson's President and CEO; and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, December 12, 2019, to report Nordson's fiscal year 2019 fourth quarter and year-end results. Our conference call is being broadcast live on our Investor Relations web page at investors.nordson.com, and it will be available there for 14 days. There will be a telephone replay of the conference call available until December 26, 2019, which can be accessed by dialing 416-621-4642. You will need to reference ID number 1057927. During this conference call, forward-looking statements may be made regarding our future performance based upon 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 on the quarter, we will be happy to take your questions. With that, I'll turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's Fiscal 2019 Fourth Quarter Conference Call. I'd like to begin by recognizing the Nordson team for a strong performance against a challenging macroeconomic environment in 2019. Throughout my Nordson site visits over the past 4 months, I've been very impressed by our passion for our customers. We're focused on serving our customers' critical needs and creating efficient technology solutions that bring differentiated value to our customers' businesses. Our focus on the customer, combined with the diversity of our end markets and applications continue to help us during these challenging macroeconomic times. For the fourth quarter, we generated solid organic growth of 4%. For the full year 2019, total company organic sales were down 1% as compared to last year where organic growth in both Adhesive Dispensing and Industrial Coatings segments was offset by softness in electronics end markets served by the Advanced Technologies segment.

For the total company on a full year basis, we maintained operating margin and EBITDA margin in line with prior year despite lower sales, the distraction from tariffs. I'll speak more about our fiscal 2020 annual guidance in a few moments. But first, I'll turn the call over to Greg Thaxton to provide more detailed perspective on our financial performance.

Thank you, Naga, and good morning to everyone. Fourth quarter 2019 sales increased 3% compared to the prior year's fourth quarter. Change included an increase of approximately 4% organic volume, growth of less than 1% related to the first year effect of the fiscal 2019 acquisition of Optical Control and a decrease related to the unfavorable effect of currency translation of approximately 1%. Within the Adhesive Dispensing Systems segment, fourth quarter sales increased 1% compared to the prior year, inclusive of a 3% organic growth and a 2% decrease related to the unfavorable effect of currency translation as compared to the prior year. This segment continues to benefit from the stability of consumer nondurable end markets as well as our growth initiatives. Advanced Technology System sales decreased less than 1% compared to the prior year's fourth quarter, inclusive of a decrease in organic volume of less than 1%, an increase of 1% related to the first year effect of acquisitions and a decrease of 1% related to the unfavorable effect of currency translation as compared to the prior year.

The fourth quarter's acquisitive growth includes the fiscal 2019 acquisition of Optical Controls. Strength in medical end markets was offset by weakness in electronic end markets. Industrial Coating Systems sales increased 21% compared to the prior year's fourth quarter. As discussed during our third quarter conference call, strong backlog entering the fourth quarter and solid order activity during the quarter drove organic volume growth of 22%. The unfavorable effect of currency translation negatively impacted sales by 1%. Sales for this segment was a record quarter, and I'd like to thank the team for their efforts.

Moving down the income statement. Gross margin for the total company was approximately 54% in the quarter, operating profit was $140 million, an increase of 20% compared to prior year and operating margin was 24% as compared to 21% in the prior year's fourth quarter. On a segment basis, Adhesive Dispensing Systems segment delivered strong operating margin of 31% in the quarter, which is an increase of approximately 350 basis points as compared to the prior year's fourth quarter. We are seeing the benefit of the facility consolidation efforts in Germany and Austintown, Ohio as well as some improved product mix impacts on gross margin. We are pleased to see the continued progress the team is making to drive margins within this segment.

Within the Advanced Technology Systems segment, operating margin was 22% in the fourth quarter, which is an increase of approximately 150 basis points as compared to the prior year's fourth quarter. This margin enhancement is largely driven by lower spending in the quarter as compared to the prior year's fourth quarter.

The Industrial Coating Systems segment improved the operating margin by 425 basis points to 25%, which is a record for this segment. This margin enhancement is largely driven by better absorption and lower spending in the quarter as compared to the prior year's fourth quarter. On a total company basis, net income for the quarter was approximately $103 million and GAAP diluted earnings per share were $1.76. Excluding restructuring charges, the step-up in value of acquired inventory and a net discrete tax expense in the quarter, adjusted diluted earnings per share was $1.79. EBITDA increased 15% over the prior year's fourth quarter to $164 million or 28% of sales and free cash flow before dividends increased 9% over the prior year's fourth quarter or 125% of net income.

I'll now share a few comments on full year results. Sales for the fiscal year were $2.2 billion, a decrease of 3% compared to the prior year. This change in sales included a decrease in organic volume of 1%, growth related to the first year effect of acquisitions of less than 1% and a 2% decrease due to the unfavorable effect of currency translation as compared to the prior year. Full year operating profit was $483 million. Reported operating margin was 22%, which is equal to last year's operating margin despite lower sales. Net income for the full year was $337 million and GAAP diluted earnings per share were $5.79. Adjusted diluted earnings per share to exclude restructuring charges, the step-up in value of acquired inventory and a net discrete tax expense was $5.87. EBITDA for the full year was $587 million or 27% of sales, equal to the prior year. Free cash flow before dividends was $320 million or 95% of net income.

From a balance sheet perspective, net debt-to-EBITDA was approximately 1.9x trailing 12 months EBITDA at the end of the fourth quarter. In addition to funding organic and acquisitive growth initiatives with our free cash flow, we returned value to our shareholders by distributing $82 million in dividends and investing $115 million for the repurchase of shares during the year. A reconciliation between GAAP earnings and adjusted earnings per share is included within the financial exhibits of our press release. Our press release also includes financial exhibits reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA.

Moving on to fiscal 2020 guidance. We're forecasting organic sales volume growth in the range of 1% to 3% as compared to fiscal year 2019. Growth from the first year effect of acquisitions will add 20 basis points. And based on the current exchange rate environment, we expect an unfavorable currency translation effect of 30 basis points as compared to fiscal 2019. With this sales outlook, we expect to hold operating margin and EBITDA margin equal to fiscal 2019 results, offsetting the dilution of inflationary pressure on cost. We expect fiscal 2020 to be a typical year from a seasonality perspective, with a stronger second half than the first and with the first quarter being the softest quarter from a revenue perspective. And our margin performance will follow this pattern, given our direct model, where we have a relatively consistent level of spending from quarter-to-quarter. We expect interest expense to be approximately $36 million in fiscal 2020, and maintenance capital expenditures to be approximately $50 million. Company's estimated effective tax rate for fiscal year 2020 is approximately 22%. Based on this outlook, GAAP diluted earnings per share growth is forecasted to be in the range of 2% to 6% as compared to fiscal year 2019 GAAP diluted earnings per share.

Thank you, Greg. Once again, I want to thank our team for delivering a solid full year results against a challenging macro environment. As we look forward to fiscal 2020, we are taking a conservative approach to our outlook as we are not seeing indications that next year will be any better than the fiscal 2019 from a macroeconomic perspective. And though we are hopeful we'll see improved project activity in electronic end markets convert into improved order trends, we are assuming a flat outlook for these product lines in fiscal 2020. The resilience of other end markets we serve, notably, consumer non-durables and medical gives us confidence that even against a challenging macro environment, we will achieve total company organic sales growth in fiscal 2020.

Before we move into Q&A, I want to recognize the important announcement that we made this morning. Greg Thaxton has announced his intention to retire in 2020. Greg started with Nordson in 1989 as a financial analyst. His sound judgment, strong financial acumen and strategic leadership drove his success within the organization. Since 2008, he has served as Nordson's Chief Financial Officer. On behalf of the Nordson team and our Board of Directors, I want to thank Greg for his many contributions to Nordson. Personally, I've appreciated Greg's leadership, perspective and humor as I've transitioned into the role of CEO. His passion for Nordson is evident to everyone who interacts with him. As a new CEO, one of the last things you want to hear is that your CFO is thinking about retiring. Greg was gracious to put his plans on hold so that Nordson could first execute a smooth CEO leadership transition.

Now it's his turn, and I wish you, Greg, and your family, nothing but the best as you begin planning for this new chapter in your life. But before Greg gets too excited, he has committed to staying with us until his successor is identified and on-boarded. Greg, would you like to say a few words.

Thank you, Naga. Earlier this year, I marked 30 years with Nordson. It has truly been a pleasure to be part of such a great organization, and I want to thank all those I have worked with over these many years. With Naga's direction and the collaboration and support of our executive team, the company is planning for its next phase of profitable growth. This is an exciting time for Nordson, and I know the company is well positioned. And I will remain committed to ensuring a smooth transition over the next several months.

Thank you, Greg. We'll be launching a search for Greg's successor, including both internal and external candidates. Thank you for your time and patience during this morning's call, we'll now pause and take your questions.

[Operators Instructions) And our first question comes from the line of Christopher Glynn From Oppenheimer.

Greg, congrats on a great long run at Nordson.

Thank you.

I had a question on medical. Wondering if there's any like key program roll-offs you need to transition through on the horizon, or if you're expecting consistent performance with the long-term organic view there?

Chris, thank you for your question. I -- we don't see any roll-offs that significantly impact our performance. We had a real strong year in medical with 11% organic growth, and our expectations are we'll continue to be consistent with our performance in medical.

Great. And just on the flat margin outlook for next year, understanding your conservative caveat, it does seem ADS built some structural momentum in the profitability in the second half. And at ATS, the electronics is kind of scraping the bottom, it seems, and you should have medical leverage. So would seem more intuitive that there is a bit of embedded margin tailwind there, if you could kind of comment on that view?

If you look at the midpoint of our sales forecast and include some currency offset and consider that we had a direct organization, we want to stay invested in our technology development and our sales interaction with our customers, we do expect inflationary impact on our labor costs. So there is really, at the midpoint of our sales forecast is probably not a significant improvement to our margin. But as we move towards the higher end of our sales target, we would expect positive margin leverage.

Our next question comes from the line of Matt Summerville from D.A. Davidson.

Congrats, Greg. First maybe can you just give a little more granularity into demand trends you saw in the fourth quarter and kind of what the outlook is for the different pieces of ADS being rigid, polymer, nonwoven, product assembly?

Yes. Matt, this is Greg. Order trends within adhesives, again, that's the kind of the resilient set of end markets with the non-durables, have held up pretty well, pretty short -- overall short-cycle lead time. So the performance that you saw in the fourth quarter and really, the full year is indicative of the resiliency of those end markets. We don't go down to that product line level, but we'd expect to continue to benefit from the strength of those end markets as well as where we bring innovation to new applications and new opportunities. So that part of the business, even against these challenging times, as we would expect has held up pretty well.

And then maybe if you guys can just comment on what you're seeing in terms of actionability in the M&A pipeline outside of medical, are there other areas? And maybe test on the electronics side. Outside of those 2 areas, Naga, are you looking to explore sort of other types of M&A avenues for the company going forward?

These are fairly still early in sort of thinking about it. We still have significant opportunity in scaling up our medical platform and our test and inspection platform, so we remain focused there. There are still opportunities. When they come to market is something we can't really determine. If we ever run out of opportunities there, there are always other areas we're looking at, but not at the moment, so.

Our next question comes from the line of Allison Poliniak from Wells Fargo.

Congrats, Greg, on the announcement today. You talked about at ATS, some project, I guess inquiries. Could you talk relative to last year? Are those inquiries picking up? I know it's tough to say if they'll move forward. But how is your feeling around those inquiries of projects for 2020?

Allison, we certainly still see pretty good project activity. We are in the middle of all of that. As you know, we are a market leader in those applications where our customers lean on our technology and our capability to solve problems. So we're in the middle of a lot of activity. We have not seen them convert into order rates, our order rates have not significantly picked up. But we're right in the middle of those projects. We feel very good about our market position and continue to work with our customers. And Allison, when those project activities turn into orders, you'll see us adjust our expectations.

Great. And then just I guess your overall feeling? I mean is it -- do you feel like we've reached some level of stability there where your downside risk is a little bit more minimal at this point?

Yes. If you sort of think about what we're seeing in our businesses today is we -- from third to fourth quarter, we continue to see neutral. We really don't see any downside.

Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Greg, congrats, good to hear.

Thank you, Jeff.

Maybe just staying on electronics, where are you seeing specifically activity levels pick up that may or may not translate into orders?

So if you think about our electronic business, we are involved in a very diverse set of applications and end markets, including semiconductor packaging, product applications to PC board, to automotive electronics to 5G. So it's not one particular driver or the other. But overall, throughout the electronic supply chain, we are involved in multiple different applications, as you know, and we find that the project activities are pretty strong across the board.

Okay. Maybe you can just comment on, I think you've talked at length about 5G and what you're seeing there? And then just in terms of infrastructure and then what you're hearing from the mobile handset guys?

As I would tell you that 5G projects continue to be in project phase and conversation, and discussions and product development phase. Really, as you think about 5G infrastructure rollout, they are slower-than-expected, probably early days now in terms of how these projects convert into orders. But in general, you'll find that our activity levels are pretty good, and we're still engaged in solving issues for people. So but we feel good about our project activity. It just -- they've not converted into orders yet.

And Jeff, this is Greg. I'd add, just from what we tend to see from a seasonality perspective, this is kind of a low point at which we would tend to see project activity for some of those end markets that you were referring to.

Okay. And then I know you don't give segment guidance, but would you expect each of the segments to be within that 1% to 3% organic? Or I guess Industrial Coating tends to be a little more economically sensitive. Is there maybe a little more pressure there?

As we look at 2020, we feel good that at the mid- to high end of the -- you would expect to see organic growth across the segment.

Okay. And then just housekeeping, I think you said $0.03 of kind of onetime items. Can you spike that out on kind of a pretax basis, where would it hit the segments or if there's -- I think you mentioned a tax item, or if anything hit corporate?

Yes. It really isn't significant across the segments. It's primarily some restructuring charges that hit across the segments as well as corporate that makes up the bulk of it. So it's not enough to really move margin performance for any particular business.

Our next question comes from the line of Mike Halloran from Baird.

Congrats, Greg. So first, on the operational improvement side, it sounds like that's going well on the adhesives. Maybe just some context on what you're seeing there and thoughts on what kind of actions you're thinking about into 2020?

On the operational improvement side, on the adhesive segment, pretty much, as you indicated, all of those came from consolidations that happened last year. We are through most of those. We feel like we're in a pretty good place in terms of margin performance here. I would say the -- really, the margin performance in that business is going to be more proportional to the volume rather than any structural restructuring that is still left in the business.

Okay. That makes sense. And then the follow up is, when you're thinking about bridging GAAP to adjusted earnings for fiscal 2020 at this point, is the thought that, based on what you know today, the GAAP and the adjusted numbers are about equal in the next year? Or is there something -- or is there some anticipated restructuring or other items that you think could force some deviation between the 2?

No, this is -- Mike, this is Greg. It would be pretty much in line with the growth in reported EPS.

So you're saying GAAP -- the expectations for GAAP EPS growth should be similar for adjusted EPS growth, adjusted 2020 versus adjusted 2019?

Correct.

[Operators Instructions) Our next question comes from the line of Walter Liptak from Seaport Global.

Congratulations, Greg. It's been a good run. Wanted to ask about the geographic regions and there's -- it looks like the U.S. recovered a little bit, that's probably on the back of coatings. So I wonder if we could just kind of review some of the geographic regions and think about the EU, which looks like it weakened a little bit as well as Japan and Asia Pac, which look like they may be starting to recover, just any trends that you're seeing there?

Yes, Walt, this is Greg. I think you characterized some of it pretty well. U.S. volume, really in the quarter, we saw good growth across each of the segments. Europe, to a large extent, is related to some softness. We've talked along throughout the year of some challenging comps within certain product lines within adhesives, primarily nonwoven product line being up against really challenging comps from the last couple of years. And that's where many of the OEMs are located, so that's the largest impact there within Europe. And then in Asia Pacific, where, in the quarter, really some good strength across all the segments.

Okay, great. The coatings part of the business, we had that slow down last quarter, and then it looks like those shipments that got delayed came through. How do things look as you start the 2020 period? Are we back to kind of that macro overhang on coatings?

On the coatings, you're right. In the fourth quarter, we certainly realized the strong backlog going into the quarter. As we look into 2020, our expectations are, it's going to be GDP kind of business. Really, we are through most of shipping all of our backlogs there but we're well positioned to deliver on the GDP-type of growth rate for ICS.

Okay, great. And then last one for me. Just going back to the 5G comments about infrastructure and mobile. For those of us that don't get the visibility that you do, why is the infrastructure part of that pushing out? And is there any region of the world where there's delays being seen?

So think about the U.S. and the Europe and just think about overall supply chain in the 5G has been disruptive pretty dramatically because of the trade disputes and such, and that has really put a lot of project activities on a slower pace. And so if you think about 5G technology as they transition into the phones, you really want to consider that the infrastructure work needs to get done first. Then if you pack on the supply chain issues that have been created, that is really, in our sort of understanding and recognition, that's sort of where there is some slowdown.

Our next question comes from the line of Chris Dankert from Longbow Research.

Congratulations again, Greg. Want to just quick just talk on semis broadly, and if you could just comment on what you're seeing at [friends on test] inspection, specifically, that'd be really helpful.

On the semi, yes, we do see increased activity. And certainly, we, on the test and inspection side, especially our x-ray businesses, given the complexity of the new semis that are starting to come out, the 2D, 2.5, we are starting to see some new opportunities. We're in lots of new project activity, right now, is still going on. So our expectation, as those project activities convert into orders that -- we would adjust our expectations for that segment.

And Chris, this is Greg. We've commented throughout the year that when you look at the electronic systems portion of Advanced Technology, it's really been the dispense platform that's been the area that we've seen the challenge against prior years. Test and inspection has held up pretty well for us this year given all of these trends that are occurring within those spaces, and it's an area that we would expect to see some good growth opportunity going forward.

Got it, got it. And circling back to Mike's question a little bit. Obviously, we did lap the duplicative costs in the Adhesive Dispensing and kind of that realignment. But my understanding was there was supposed to be some additional back end synergies. Have we kind of moved away from that? Or is it, as you said, I mean we just need to get volumes to really see that benefit first?

Yes, this is Greg. We're through most of the consolidation, the period where we were incurring the duplicate costs. We were behind much of that at the end of last year and into this year. So where we're going to see the benefit going forward would be, as we're operating in a more efficient environment both from the standpoint of 2 facilities versus 5 as well as where we've made investments in automation within the manufacturing environment, that's where we'll see the pickup, the efficiency gains in margin going forward. So it's about pushing volume through this current state.

Understood, all right, so that makes sense. And just one last one for me on kind of what the M&A strategy is, again, obviously you said medical, that remains top of mind; test inspection. I didn't hear, though, it is kind of the battery sealant and cold material dispensing, is that still kind of on the menu as an additional M&A target?

Yes. On the battery side, we have significant, I would say, organic growth opportunities in battery. And we've made some nice progress. We've made some nice wins in the marketplace certainly, some of which you're seeing in the ICS business. But we remain focused there, but it is not as big an opportunity when you compare it to test and inspection and our medical platforms.

Yes. We're participating in battery, really, in each of the 3 segments and continuing to work with those who are driving the innovation there. So it wouldn't be one that we would highlight as a target for M&A, it's more ensuring that we're funding the organic growth opportunities there within each of our segments.

And our next question comes from the line of Christopher Glynn from Oppenheimer.

Yes, wanted to ask if the parts and consumables, has that performed pretty steady? And in particular, at ATS, as we're going through an extended period between equipment cycles for electronics, should that engender a pickup in the parts consumables there? Just wondering about that optionality.

Yes. Chris, this is Greg. On a full year basis, and this would be kind of intuitive in a year where in some of the segments, our systems volume was down, on the full year parts, we're about 56% of revenue. Now that's also aided by continued strong growth in medical, which is -- falls into that parts and consumables category. So if we start to see a pickup in some of our end markets, and we're getting more system demand across the portfolio, that might moderate a bit. On the other hand, we expect to continue to see medical growing at the kind of rates that we've been talking about historically. So it's up a bit from historical, largely due to growth in the medical portion of the portfolio.

And just, it's also a map, right, because our systems as a percent of revenue was down. So it suddenly -- but we're pretty pleased with our -- how we are growing that part of the business. And so our expectation is that it will continue to be a big part of how we continue to grow the business.

Okay. Yes, I'm just wondering also if you see a particular driver that kind of necessitates for better growth into electronics parts as the equipment ages out there in the installed base?

No. I would suggest that if we see an improvement in those end markets, it's going to be more about systems volume that's driving the top line.

We have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

Again, I want to thank you for your support. Despite macro challenges for our business, the diversity of our end markets and our focus on customer solutions will allow us to grow and improve margins over the long term. Appreciate your time and attention on today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.