Nordson Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Nordson Corporation First Quarter Fiscal 2020 Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to one of your speakers today. Laura Mahoney, please go ahead.

Thank you, Marcella. Good morning. This is Laura Mahoney, Vice President of Corporate Communications and Investor Relations. I'm here with Sundaram Nagarajan, Norton's President and CEO, and Greg Saxton, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, February 20th, 2020, to report Norton's fiscal year 2020 first quarter. Our conference call is being broadcast live on our Investor Relations webpage at investors.nordston.com, and it will be available there for 14 days. There will be a telephone replay of the conference call available until March 5, 2020, which can be accessed by dialing 416-621-4642. you will need to reference ID number 2468115. 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 Norton's 2020 fiscal first quarter conference call. 2020's first quarter performance was in line with our expectations for the quarter, where sales were consistent with the typical seasonal pattern. As a reminder, Our spending is generally consistent throughout the year due to our direct sales model and strong customer focus. The total company operating margin in the first quarter was also in line with our expectations. We expect sales to improve as we move through the year, allowing us to achieve our previously announced fiscal 2020 sales growth, margin, and EPS guidance. I'll speak more about our fiscal 2020 annual guidance in a few moments. But first, I'll turn the call over to Greg to provide more detailed perspective on the quarter.

Thank you, Naga, and good morning to everyone. First quarter sales decreased 1% compared to the prior year's first quarter. Change in sales included a decrease in organic sales of less than 1%. growth from the first-year effective acquisitions of less than 1%, decrease of approximately 1% related to the unfavorable effects of currency translation as compared to the prior year's first quarter. First quarter's acquisitive growth includes the fiscal 2019 acquisition of optical control GMBs. Within the adhesive dispensing system segment, sales decreased 2% compared to the prior year's first quarter, inclusive of a decrease in organic volume of 1% and a decrease of 1% related to the unfavorable effects of currency translation as compared to the prior year. Growth in our nonwoven product line was offset by modest declines in other product lines and segments. In the advanced technology system segment, First quarter sales decreased approximately 1% compared to the prior year's first quarter, inclusive of a decrease in organic volume of 2%, an increase of 1% related to the first-year effect of the optical control acquisition, and a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Solid growth in medical product lines was offset by softness in those product lines supporting electronic end markets. Industrial coding system segment sales increased 9% compared to the prior year's first quarter. Exclusive organic volume growth of 9% and a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Most product lines generated organic growth in the quarter, driven primarily by demand in the U.S. associated with cold materials, powder systems product lines. Moving down the income statement, gross margin for the total company was 53% in the quarter. Operating profit was $75 million, with reported operating margin of 15%. During the quarter, we incurred approximately $3 million of restructuring charges, as we relined our cost structure within the advanced technology segment. Excluding this charge, total company operating margin was 16%, and the advanced technology segment operating margin was 15%, down from last year's first quarter operating margin due to lower absorption and product mix impacts on gross margin. Operating margin performance for the adhesive and industrial coating segments were both equal to the prior year's quarter. On a total company basis, net income for the quarter was $52 million, and GAAP diluted earnings per share were 89 cents, inclusive of a 4 cent per share charge related to restructuring and a 4 cent per share discrete tax benefit related to stock-based compensation. We delivered first quarter EBITDA of $101 million, or 20% of sales, Excluding restructuring charges in the quarter, EBITDA margin was 21%. Free cash flow before dividends during the quarter was $102 million, or 197% of net income. Free cash flow in the quarter benefited from collection of accounts receivable associated with prior quarter revenue. Our press release includes financial exhibits reconciling net income to free cash flow before dividends and EBITDA, as well as a reconciliation of diluted EPS to adjusted diluted EPS. From a balance sheet perspective, net debt to EBITDA was approximately 1.7 times trailing 12-month EBITDA at the end of the first quarter. I'll now turn the call over to Naga for a few closing comments. Thank you, Greg.

We remain committed to our annual organic sales growth guidance of 1% to 3% for fiscal 2020. with this growth being generated in the second half of the fiscal year. The incremental revenue will generate improved operating and EBITDA margins as we move through the year, where we expect to deliver a total year margin performance equal to fiscal 2019 and EPS growth in the range of 2% to 6% over FY19. We will continue to monitor the macroeconomic environment, including the impact of coronavirus in the Asia-Pacific region. Our facilities in China are operational, and we expect to be closer to full capacity soon. I want to thank our employees in China for incredibly committed to serving the needs of our customers, along with the rest of the Norton team who supported our China employees during the difficult time in many ways. We greatly appreciate all of their efforts and will continue to do all we can to support our employees and their families. Although there may be some impact on sales in our second fiscal quarter as we scale up production, our supply chain recovers, our customers resume operations, and delivery schedules return to normal, we do not expect a material impact from coronavirus on our full year results. Before we open the phone lines for Q&A, I want to share a few observations from my first six months at Nordstrom. This is a great company. It is driven by talented employees who are focused on serving their customers. While we are focused on delivering our near-term 2020 results, we are aligning our internal priorities on the greatest long-term opportunity for this business, profitable growth. To deliver profitable growth, we have four key priorities. First and foremost, we need to sustain the historical organic growth track record. We'll do this through our focus on innovation, emerging markets, and new applications. Second, We need to diversify our business portfolio, including through acquisitions. We'll stay true to what makes us great, which is precision technology. This includes scaling our medical and test and inspection product lines. Number three, we need to implement a growth-focused strategic framework that allows us to grow sustainably. I'm pleased that Norton has a good start on this with the Norton business system. With the executive leadership team, we are evaluating how we can take NBS to the next level. I believe there is an opportunity for Norton in refining and executing on this growth framework. Our fourth priority is folks focused on developing a deep and diverse team to support our growth aspirations. I'm pleased with the customer-focused team that we have today. As we grow, we will need more of them. I'm also pleased to announce our plans for an invested day in the fall where we will discuss our long-term plans for the business in more detail. Please mark your calendar for the morning of September 30th, 2020. The event will be focused at the New York Plaza Palace Hotel and available through webcast. More information will be available in the coming months. As always, I want to thank our customers, employees, and shareholders for their continued support. With that, we'll pause and take your questions.

At this time, I'd like to remind everyone, in order to ask a question, please press star and the number 1 on your telephone keypad. Your first question comes from the line of Matt Somerville from D.A. Davidson. Your line is open.

Thanks. Good morning. First of all, can you maybe talk about within the adhesive business what the organic volume outlook looks like for the balance of the year as the compares in that business get a bit tougher beyond what was an easier comparison in Q1 and in the quarter where organic volume actually declined against that somewhat easy comparison?

Thank you, Matt. We don't provide guidance by segment for organic growth rate. You know, we fully stay committed to our full year total company guidance of 1 to 3%.

Okay. And then with respect to maybe the coronavirus, did you see any discernible impact late in your fiscal first quarter? And is there a way to sort of frame up what you think that impact could look like in Q2 and maybe talk about how we should be thinking about the sequential earnings cadence for the company, perhaps if seasonality is pushed a bit to the right here relative to a more normal year?

Matt, I think there were two sort of questions in there, I assume, right? So the first one is around coronavirus The impact of coronavirus in our first quarter was immaterial, as we had already planned for the Lunar New Year and had shipments already scheduled and went out in time. We don't expect to have a material impact from coronavirus on our full year results. As we look at it today, we don't see any impact in the second quarter. If there is further disruption in the supply chain or customers having trouble getting back to capacity, there may be some delay in orders that may get pushed out to the following quarter. So that is on coronavirus, and I think you had a question around earnings cadence for the company. Is that correct? Yes, thank you. So our growth is, you know, based on our typical seasonality most of our growth always happens in the second quarter, in the second half, I should say. I'm sorry. So as we go in the second half, this increased revenue will improve and will generate improved operating margins and EBITDA margins that typically have very strong flow-through as we have higher sales.

Thank you.

Your next question comes from the line of Jeff Hammond from KeyBank. Your line is open.

Hey, good morning, guys.

Morning. Can you just talk about what you're seeing in electronics as you go into the heavier kind of quoting and order season around 5G infrastructure, 5G mobile, and just kind of project and activity levels, you know, going into here. I know that's, you know, something we've been looking for an inflection on.

Yes. You know, as you know, there is a lot of press regarding 5G infrastructure, and we continue to believe that that is where we will see the greatest opportunity. The progress also on infrastructure build-out has been slow and slowing. As mentioned before, we don't expect growth in our electronic business compared to fiscal 19 in 2020. That's not what we have forecasted. But our project activities continue to be robust. We're in great conversations. When that wave of 5G infrastructure hits, we will benefit from it. So, as of now, project activities are strong. We continue to be participating in a lot of coding. Timing is what will be dependent on when those project activities convert into order. And you're right. We are at that point in terms of typical order rates will pick up to have us confident in delivering that strong second half, and that's what gives us the strength in maintaining our guidance for the full year of 1% to 3%.

And just to add to that, 5G is an important element, of course. It's indicative of change, but we also automotive electronics, AI. There are a lot of different applications where we are diversified.

Okay, great. And then it looks like the U.S.

business was particularly strong in the quarter. What do you see that's working there well?

It is primarily related to our ICS business that has done well, and certainly our ADC businesses in the U.S.

have also continued to do well. Okay.

And then just on the second half, so I guess you mentioned some of the, you know, project visibility, but other than kind of just typical seasonality, is there anything else? in the quoting or activity pipeline that gives you that confidence, you know, and kind of an acceleration as you move through the year?

No, it is our typical seasonality, and we certainly expect, based on our project activity and our seasonal pattern, we feel pretty strongly about a strong second half, which we have seen in the past, too.

Okay.

Thanks a lot. Your next question comes from line of Christopher Glenn from Oppenheimer. Your line is open.

Thank you. Good morning. Just had a question about the SGA. It was up eight or nine million sequentially adjusted or unadjusted. And the last five years, typically that spend's been down five or eight million, four Q to one Q. So wondering if that you know, indicate some strategic imperative that your kind of front log or pipeline is mandating?

Chris, this is Greg. I wouldn't suggest it's much of what you just talked through there. I would say that the first quarter did have a $2 million one-time cost in the corporate managed, in the corporate expense line. So that's a non-recurring item. That corporate expense line, if you were modeling that out, I'd expect that to be more around $12.5 million per quarter than the current quarter. If you back that out, then I think you're looking at a pretty modest increase current year over the prior year. And in the first quarter is the quarter when we – have our global compensation increases. So as compared to the fourth quarter, you get a little bit of bump associated with our merit increases hitting in Q1. So if you look at current quarter versus prior to your first quarter, it's a pretty modest increase when you exclude that $2 million one-time item.

Okay, so that sort of suggests spending was a bit restrained after the first quarter. Last year, because I'm looking at if you carry the first core SGA spend rates for the year and you get 2% top line growth, an SG&A to sales would be up about 100 basis points. So are you suggesting that's the wrong way to look at it?

Well, what I would suggest, Chris, is it is dependent upon that top line growth. I mean, if you – assume that in our spending over prior year, we're going to have inflationary impact. We're going to have, you know, our merit increase. You know, it's the need to generate that top line growth to offset what that dilution might deliver from spending.

Is 1Q the high watermark for SGA spend on a run rate basis?

Yeah, given the sales, you know, that's from a seasonal perspective, it's our lowest quarter. That's true.

So SGA absolute then will be higher in subsequent quarters?

Our spending is, you know, fairly flat as you move throughout the year. You know, as Naga mentioned in his comments, you know, with our With our global infrastructure, you know, we don't flex that based upon seasonality of sales trends. So it's a pretty fixed number as you move through the year. So in terms of the margin impact, it's more heavily dependent upon the top line of sales number.

So first quarter spending was a higher mark for the year.

Sorry, Laura, can you clarify that? I didn't hear.

I'm just agreeing with you that it is a higher watermark as a percentage of sales to your earlier question, just based on that additional expense that Greg mentioned.

Okay. I'll follow up offline. Thanks.

Your next question comes from the line of Allison Polink from Wells Fargo. Your line is open.

Hi, guys. Good morning. I just want to go back to your comment, Naga, on just kind of looking at that growth framework and sort of maintaining that sustainable growth at Nordstrom's experience. You know, any high-level color there of how we should think about that comment? Is it end market? Is it, you know, different, I guess, new products? Any color there?

I think the strategic growth framework is really, you know, we'll spend a lot of time here. We're building that out as we're enhancing our existing NBS framework. It would be really, you know, a couple of things that I would add there. That strategic framework is going to be focused on really selecting the best growth opportunities for the company. So really bringing forth a strategic view of where we invest and what kind of end market product niches do we want to grow in? So that would be one of the distinguishing factors that will add to the existing growth framework. And the growth framework also consists of things that the company does really, really well, which is commercial excellence, product innovation. So this new great growth framework is really an enhanced version of our existing NBS Next. And it adds this strategic view of what are the best product market combinations that we want to focus on. So think of that as a greater strategic discipline around where we want to grow in combination with things that the company is really, really good at, which is commercial excellence, close to the customer model, as well as innovation leading to precision technologies that solves the best problems for our customers.

Great. And thanks for the color on that. And then, you know, thanks for the coronavirus color. It's good to hear things are getting sort of up and running again. Have you, I mean, are you experiencing any elevated costs as we sort of get back up and running in terms of getting components in or getting projects out as a result of what's going on?

You know, at the present moment, no. You know, our hope is that the supply changes are continuing to improve as we are seeing And, you know, if this continues over a longer period of time, then, you know, there may be some delivery that could get pushed out. But, no, on the cost side, you know, we have good visibility and fairly comfortable. We have very good inventories that will allow us to continue on the path we're on.

Perfect. Thank you. Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. Your next question comes from a line of Mark Halloran from Barrett. Your line is open.

So, quick question just on the acquisition M&A side of things. What does the pipeline look like and, you know, some of the management changes that, you know, now that you're a little newer to the seat and then With Greg's upcoming departure, does it change your willingness to go after things as it sits here today?

No. You know, we remain committed to our capital allocation strategy and our priorities there. You know, continue to be funding our organic growth, maintaining our dividend streak, acquiring in the spaces that we have expressed an interest in and focus on, which is medical and test and inspection. In terms of acquisition pipeline, we have good opportunities. We continue to work them. When they come to market is something we don't control. But, you know, look for us to continue to stay disciplined and focused on what makes the company strong, which is precision technology and two areas, as I mentioned earlier, that will remain focused on is medical and testing inspections.

And then anything in the industrial coding side that you would point to for the strength? It seems mostly comparisons were a little easier and sequential seemed about normal, but anything in there that was unusual or just pretty normal cadence?

It is pretty normal. As you mentioned, the comps were a little easier. There was some project timing. Certainly things that we worked on in the fourth quarter certainly helped us in the first quarter, but nothing significant.

Great. Appreciate it.

If there are no further questions at this time, I'll turn the call back over to your presenters.

Thank you again for joining us today, and we'll talk to you soon.

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