Nordson Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Nordson Corporation second quarter fiscal year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will 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. Thank you. Please go ahead.

Thank you, Casey. Good morning. This is Laura Mahoney, Vice President of Corporate Communications and Investor Relations. I'm here with Sundaram Nagarajan, our President and CEO, and Greg Saxton, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, May 21st, 2020, to report Nordson's fiscal year 2020 second quarter results. Our conference call is being broadcast live on our web page at nordson.com forward slash investors and will be available there for 14 days. There will be a telephone replay of the conference call available until June 4, 2020, which can be accessed by dialing 416-621-4600. You will need to reference ID number 8187700. 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 fiscal 2020 second quarter conference call. It's incredible how much the world has changed in the few months since our February conference call. We hope you and your families are staying healthy and safe. In the second quarter, our team was focused on two critical priorities, detecting the health and safety of our employees and responding to the needs of our customers. I'm so thankful to our colleagues around the world for their flexibility, resilience, and commitment as we have navigated through this pandemic. I'm proud of the Norton team. One of Norton's greatest strengths is the diversity of end markets which is certainly contributing to our results to this point in the year. And during this period, all of our production facilities have continued to manufacture products for critical infrastructure applications. Going forward, our focus will continue to be on maintaining health and safety of our employees as we transition from working remotely, where social distancing, regular cleaning, temperature checks, face coverings and other protocols will be essential. Representatives from our global teams have been coming together to share best practices and lessons learned. We're all moving forward together in a conservative manner to ensure everyone's safety. While we remain focused on actively managing this dynamic environment, I'm equally committed to moving this organization forward and making progress toward our strategic objectives. The greatest opportunity for Norton is profitable growth. On March 30th, we announced a business realignment that will make us more agile in accomplishing our strategic priorities of accelerating organic growth, diversifying through acquisition, leveraging the Norton business system, and focusing on talent development. Today we will discuss our results in terms of our two new segments, industrial precision solutions and advanced technology solutions. I'll speak more about the business in a few moments, but first I'll turn the call over to Greg to provide more detailed perspective on the second quarter. Thank you, Naga, and good morning to everyone.

Second quarter 2020 sales decreased 4% compared to the prior year's second quarter. This change included a decrease of approximately 3% in organic volume and a decrease of approximately 1% related to the unfavorable effects of currency translation. Growth in the quarter related to the first-year effect of the fiscal 2019 acquisition of optical controls was not significant. Within the industrial precision solutions segment, which combines our previous adhesive dispensing systems and industrial coding system segments, sales decreased approximately 6% compared to the prior year's second quarter. This change included a decrease in organic sales volume of approximately 4% and a decrease of 2% related to the unfavorable effects of currency translation as compared to the prior year. Relatively strong sales performance of those product lines serving consumer non-durable end markets such as packaging and nonwovens, was offset by weakness in sales of product lines serving end markets such as automotive and general industrial. Sales in the advanced technology solutions segment decreased approximately 1% compared to the prior year's second quarter. This change included a decrease in organic sales volume of less than 1%, an increase of less than 1% related to the first year effective acquisitions, and a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Sales volume increased in product lines serving medical end markets and fluid dispense product lines serving electronics end markets. This growth was offset by weakness in our test and inspection product lines and fluid dispense product lines serving industrial end markets. Moving down the income statement, gross margin for the total company was 55% in the quarter. Operating profit was $125 million, with reported operating margin of 24%, up 20 basis points over the prior year's second quarter. I'll come on and segment operating margins specifically. However, in addition to reducing our compensation accruals, This quarter's operating margin reflects our focus on spending control to offset the decline in sales. This includes our efforts to not only reduce discretionary spending, but also defer open headcount additions within the organization. We would expect to continue with a conservative bias towards spending during the second half of the year as we monitor order trends, where our selling and administrative expenses in the second half of fiscal 2020 are estimated to be in line with our prior year second half spending. On a segment basis, the industrial precision solution segment operating margin was 27% in the quarter. This compares to 28% in the prior year's second quarter. As compared to the prior year, the current year's second quarter operating margin was negatively impacted by lower sales loss. Within the advanced technology solution segment, The reported operating margin was 24% in the second quarter, as compared to 23% in the prior year's second quarter. This improvement in operating margin was primarily driven by product mix. On a total company basis, net income for the quarter was $92 million, and GAAP diluted earnings per share were $1.58. We delivered second quarter EBITDA of $152 million, or 29% of sales, up 30 basis points over last year's second quarter. Free cash flow before dividends during the quarter was $90 million, resulting in cash conversion of 98% of net income. Year-to-date cash conversion is 134% of net income, which was positively impacted by the collection of receivables in the first quarter from the strong finish to fiscal year 2019. Our press release includes financial exhibits reconciling net income to free cash flow before dividends and adjusted free cash flow before dividends, as well as EBITDA. From a balance sheet perspective, we had a cash balance of $306 million at the end of the second quarter as we took a conservative position to ensure appropriate liquidity. In addition to this cash position, we have our undrawn $850 million revolving credit facility available. That debt to EBITDA was approximately 1.7 times trailing 12 months EBITDA at the end of the second quarter. The company returned value to shareholders by investing $38 million to repurchase approximately 300,000 shares during the quarter, which is intended to offset this year's benefit plan dilution. And we paid $22 million in dividends during the quarter. In summary, our top line has held up considering the challenging macro environment. where we benefit from the diversity of the end markets we serve. Norton team has responded in a great way in supporting our customers and delivered solid performance in the quarter. We continue to maintain a strong balance sheet with sufficient liquidity to allow us to stay focused on longer-term strategic initiatives. I'll turn the call back to you, Naga.

Thank you, Greg. Again, I want to thank our colleagues around the world for their incredible commitment to our customers during this quarter. This is an uncertain time for many, and the Norton's team's strong execution is commendable. Our performance through the first half of the year has been solid considering the impact of COVID-19. That said, this is an incredibly dynamic environment, and it is difficult to accurately predict the impact this pandemic will have on our business for the remainder of the year. Our backlog at the end of the second fiscal quarter has increased approximately 6% compared to the same period a year ago, which is certainly a positive sign. The backlog is split evenly between the IPS and ATS segments. On the other hand, order rates have begun to soften in the last several weeks. We measure order rates in constant currency with pro forma growth in order rates calculated as though the fiscal year 2019 acquisition was owned in both years. For the 12-week period ending May 10, 2020, order rates decreased 4% for the same period a year ago. IPS segment order rates decreased 12%, while ATS segment order rates increased 6%, both as compared to the same period a year ago. Looking at a shorter period of time, over the last six weeks, the total company order rates are down 11% compared to the prior year, with IPS down 14% and ATS down 7%. Though six weeks may not be a trend to forecast performance for the balance of the year, These results do highlight the volatility we're dealing with at this time. Because of these uncertainties and the lack of clarity about the duration and impact of the pandemic, we are suspending our previously announced annual guidance for fiscal 2020. We've also decided to postpone our fall 2020 investor day, which I referenced in the first quarter conference call. While the near-term demand trends are unclear, I am excited about the future of Norton. We have a solid foundation fortified by the diversity of our business, our strong customer-centric business model, and market-leading precision technologies. Our liquidity and past financial performance are good indicators of Norton's strength and resilience in the diversity of end markets we serve. We will stay invested in what makes Norton strong, innovation and our talented global organization. Our connectivity to our customers is critical, particularly in an environment like this. We will, however, continue to monitor this dynamic environment to ensure we are taking appropriate action to manage the business through these uncertain times. Before we open the call for Q&A, I want to highlight our recent CFO announcement. On May 8, we announced that Joseph Kelly will be joining Norton as new Executive Vice President and Chief Financial Officer, effective July 6, 2020. Joe brings over 25 years of financial and operational expertise to the role. During the search process, Joe's experience as a public company CFO as well as his operational finance experience, made him the right candidate to help us execute our long-term vision for Nordson. I'm excited to welcome Joe to this strong Nordson leadership team that is focused on driving sustainable, profitable growth in the coming decade. Greg will be staying with the company through August to ensure Joe has a smooth transition. On behalf of Nordson, I want to thank Greg for his time, energy, especially as we have navigated this current environment. Greg, your support and flexibility is greatly appreciated. As always, I want to thank our customers, employees, and shareholders for your continued support. With that, we'll pause and take your questions.

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. And your first question here comes from the line of Mike Halloran with Baird. Please go ahead. Your line is now open.

Good morning, everyone, and congrats, Greg, on a really great run. So first question, thanks a lot for the context on the order side. Could you just dig a layer lower and talk about whether you're seeing any variance in the end market trends relative to what you would have talked about for the fiscal second quarter? So the non-durables, the medical pieces of electronics doing well and industrial softening a little bit. And also maybe put in context where you're seeing some benefits from what's happening from an environment perspective in the comments as well, please.

yep thank you Mike for the question let's get started with overall the diversity of end markets that Norton serves certainly came through strong and benefited us in the quarter and certainly contributed to our results through the first first half as we think about the order trends as we have talked about this overall what we see for the total company For the 12-week period, Norton's total order rates are down 4%, and in the six-week period, it is down 11%. And if you go further down, if you look at the IPS segment, there is really not a whole lot of disconnect between the first, between the 12-weeks and the six-week order rates. And mainly what you see in IPS, if you think about the product lines in IPS, we see strength in non-durables, especially a lot of strength in non-woven applications in making masks, COVID testing kits, liquid and container product lines. So with really good strength on the non-woven applications and some product categories that you would expect in the consumer non-durable end markets. But that is offset by some significant declines in large system kind of businesses like our ICS with powered systems, as well as PPS that serves the automotive end markets. So where you have systems and when it serves industrial or automotive end markets, we do see the declines. But in general, for IPS, between the six-week and 12-week, really not a lot of difference. When you think about our ATS segments, you know, coming into the quarter, the first, the 12-week trends were up 9%. But if you look at a shorter period of time, really, we are down 12%. And this is really, if you think about it, this weakness we have seen mainly in our electronic systems dispense side. So if you think about that a little bit more, you know, our dispense system, you know, product categories are typically higher price, and they also come in larger volumes. So what we are not able to sort of ascertain is that is this six-week weakness a firm trend, or is it just indicative of the typical volatility we would see? So to remind you, the company really, you know, we use the 12-week order trend. Because of these CapEx cycles, we tend to use the 12-week as a better indicator. But given the environment and given the weakness we're seeing in the shorter term, I'd point you to where we've seen is really in the electronic systems. And to give you some color around, you know, where are we seeing the strengths? Mike, you know, what we're really seeing the strengths, you know, we've talked about the non-Ovens in the IPS segment. In the ATS, really, our medical product lines are doing really well. We see pretty nice strengths there. It is really all around the pulmonary and cardiac bypass machine applications. We have a number of connectors and things that we use in ventilators and other applications and in testing kits as well. So we see good strength in medical applications. We have some really good applications around semiconductor for our electronic dispense businesses. PC board in general is also really up. Where we see weaknesses in ATS is really dispense applications for industrial end markets.

That makes a lot of sense. Go ahead, Greg.

Yeah, just to lay over that, that's some great color on the end market. So, again, the change from the 12 to 6, not much in IPS. And just to clarify, Greg, On the ACS, that was a plus six through 12 weeks and a negative seven in the six weeks. And Naga did a good job of highlighting what was really the change from the 12 to six was around the system side of electronic systems.

I appreciate that in really great color. So on the capital strategy here, strong balance sheet, liquidity is in a very good position, strong free cash flow. So how are you thinking about balancing the near-term potential challenges and the unknowns versus turning more offensive and investing in the long term? I'm guessing on the internal investment sides and the growth initiatives, probably not a lot of change there. But, you know, maybe touch on that briefly and then also touch on how you're thinking about the M&A side, keeping powder dry for that, as well as share buybacks.

Sure. So let me talk about our capital allocation priorities. Really, they remain consistent. No changes there. Our number one priority is continuing to fund our internal organic growth initiatives. You know, just remember that Norton is an asset-light business model. Hence, you know, we spend about 2% to 3% of our revenue on capexes for internal projects. You know, we continue to plan to do that. In terms of we have a good dividend policy that, you know, we continue to increase dividend in line with our earnings, you know, we'll continue to do that. And if you think about our share repurchases, our share repurchases are mainly, our baseline strategy is to offset dilution from our compensation plans, and we intend to do that. As we've seen dislocation in the marketplace, we have acted to sort of implement that strategy, and that's what you saw in the last quarter. And finally, when you think about acquisitions, you know, acquisition is an important key growth lever for the company. You know, we want to use acquisitions to allow us to continue to diversify the portfolio we're in, but we're going to be disciplined. You know, we want to acquire things that makes Norton really strong and special. That is really all about acquiring assets and properties that allow us to create precision technologies that create value for our customers. So, you know, we're going to stay disciplined to that. We've clearly identified where we want to focus on acquisitions, which is really medical and test and inspection. And, you know, maybe if there are bolt-on opportunities in our strong core businesses where we add a lot of value, we will certainly act. But given the environment, you know, we are going to continue to stay focused on the long term, continue to act on opportunities, but, you know, keeping the environment in mind. So that's sort of where we are, and I could add more color if you're a little bit more interested in other areas.

No, that was very helpful. Appreciate it as always, and stay safe, everyone. Thank you.

Thank you, Mike.

Your next question comes from the line of Sari Boroditsky. Jeffrey, please go ahead. Your line is now open.

Thank you, and good morning. Following up on the question on the order trends, you talked about the slowing order growth over the last six weeks. Could you just provide some color on the cadence of orders? And did you see any improvement through the last six weeks? So maybe the ending week was a little bit better than the average.

So in general, you know, if you think about our order trends, you know, week to week it is very difficult to sort of say that we could have a trend. And, you know, given the CapEx nature of our businesses, you're going to find, you know, week to week changes. Broadly speaking, I would say the trends really are the two that highlight it, which is really on our IPS really no difference in that it is down about that 10 to, you know, 12 to 14%. That's really, that seems to have, between 12 weeks and six weeks, really no change. But in our ATS, we went from plus six to negative seven, and that weakness we really saw in our electronic system business. And there, you know, as we highlighted, what you would see is just the lumpiness of electronic system orders coming in, And, you know, it would be really difficult, Eric, for us to give you an indication of the volatility from week to week. Because, you know, we can get a large order in a single week and really no order in the following week. So it is really important for us to look at it over a time period. And that's why the company has always used the 12-week as a good marker of how things are moving forward.

I appreciate that. Yes, thank you. So I appreciate the color and the weakness in auto and general industries within IPS. Could you just help quantify the declines you saw in these markets, and how are you thinking about the outlook for the remainder of the year?

Let me, Sari, let me have Greg. Greg, would you add some color to the?

Yes, Sari, we typically don't, you know, go down to that level of quantification just for both. customer as well as competitive dynamics. But we've got several product lines in the portfolio from an injection molding perspective as well as from some structural dispense applications that we sell into. It's not a large portion of the overall portfolio. We give some color on that in our investor deck, but it's just one set of end markets that we put into that industrial bucket where we saw some softness in the quarter. It's around five, six percent of the company's total business.

Okay, thanks for taking my questions.

Thank you.

Your next question comes from the line of Matt Somerville with DA Davidson. Please go ahead. Your line is now open.

Thanks. A couple questions. First, getting back to kind of the order trends you've seen over the last 12 to six weeks, I was wondering if you could add some geographic depth to that, perhaps talking about what you're seeing here in North America versus Europe versus Asia, including China, please.

Let me give you a broad color and then probably have Greg take you through some details. In general, what we're seeing is that Asia is starting to recover, and if you think about Europe, you know, it's still in a state of flux, and U.S. is probably steadying it out. So let me turn it over to Greg so that he can provide you some more detail on the specific order trends.

Yeah, Matt, and I'll pick up on Naga's color that he provided where we say generally You know, the consumer non-durables, the medicals, those kind of things, you know, in each one of the geographies have held up well. Where we talk about the biggest change from the 12 to the six-week being in the electronic systems portion of the portfolio, you know, most of that we've got a lot of those customers that are in Asia and a fair amount in Europe. So where we saw the softness in the 12 versus 6 in that electronic systems was primarily in those two geographies.

Got it.

And then again, at specific end mark, you know, specific to those end markets, generally when we think about the consumer non-durable, the medical, those kind of, it's been pretty consistent in the 12-week and 6-week.

Got it. Thank you for that color. And then just as a follow-up, is there anything, any sort of conclusion to be drawn with respect to what you're seeing in electronics order rates now and what that might foretell, you know, looking forward with respect to 5G-related projects for both devices and infrastructure? Thank you.

Yeah. So let's, you know, maybe broadly talk about our electronics system business. So We remember in our electronic system business, we have our dispense part of it, and we have our test and inspection. And both of these are larger dollar value systems when compared to, say, our packaging system. So if you compare those two, so you're going to see some amount of lumpiness that are associated with this set of product categories. And so, you know, for us, as we sit here today, if we did not have this macro environment, we wouldn't – talking about this near-term disconnect between the 12-week, because we would say that is normal volatility. But given the backdrop, we thought it would be important to provide you a little additional color. It is very difficult for us to say today that that is either the normal volatility or is it the lumpiness of our order rates, which we normally see. Around 5G, let me talk to you a little bit about what we're seeing today and where we are and what the opportunity looks like. 5G in general is a growth driver for us. It is going to be an important growth driver, not only just in the mobile set, but it's also going to be in the base infrastructure for 5G. We're going to have opportunities in IoT devices. We're going to have opportunities in auto electronics. We're going to have opportunities in consumer electronics. So it's going to be a pretty broad-based industry. opportunity for the company. The rollout of 5G certainly is slower than we had all hoped and would like, you know, for a number of different reasons. You know, still the technology that is getting sorted out. There is some issues around supply chains. We participate in 5G across a number of things. You know, we start with the semiconductor, as we've talked to you about on our electronic side. We're really highly diversified across the entire supply chain. So we start with the semiconductors. where somebody is making a chip for a 5G application, we suddenly work with component manufacturers who then integrate these into filters or switches or antennas. We suddenly participate there. Then you have PCB board manufacturers who assemble those components on a board, and then you have the end product application. So we participate in all of these. For 5G, where we're seeing most of the activity is mostly on semiconductors. We're seeing some activity in PC boards, and we're also seeing some activity in the components. But overall, we're well positioned, but it will be a matter of timing. And, you know, due to this environment, it's really difficult for us to say that, you know, that this would be a, you know, we know long-term it's an important driver for us. Thank you.

Your next question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead. Your line is now open.

Great. Thank you. And firstly, best wishes, Greg. Thanks for all your help over the years with understanding Northson. Good luck with everything. Next, I want to point to supply chain. As you start to ramp, or just even in production, I know Northson is fully producing supply But any supply chain challenges that you guys are noticing or kind of have to deal with in today's environment? Any color there?

Alison, in terms of supply chain, really nothing material. You know, we have a very robust risk mitigation and a risk analysis program with our supply chain. The teams have done a wonderful job of really executing against this risk mitigation. You know, we had maybe occasional one or two issues which were handled fairly, you know, quick and expedient manner. You know, what we have in terms of supply chain have faced is that, you know, there are some constraints around freight. And, you know, we've had to pay a little bit more on freight. But that is just a near-term issue. In general, we don't have any supply chain issues. China is up and running. So, you know, I believe we are in a fairly strong position that way.

Great. And then you touched on it a little bit. Incremental costs that you're having to deal with in terms of managing through this environment, both internally with North Zinni, you just mentioned freight. Is there any way to help quantify that? Is it significant or is it, you know, I would say minimal at this point? Any thoughts there?

Alison, pretty minimal at this point, really. But it is a constraint that we saw early in the process, not anymore, but immaterial. Greg, do you have any additional color?

No, that's right. It's not a material amount, Alison.

Okay. And then within the quarter, were any of your facilities shut down? Just trying to get some thought around context around that.

Not really. You know, all of our facilities are really deemed supporting critical infrastructure, and so we were working through all of this. You know, there were one or two product lines we may not have made for a short period of time, but very limited, really no impact on our facilities.

Great. Thanks so much.

Thank you, Allison.

Your next question comes from the line of Jeff Hammond with T-Bank. Please go ahead. Your line is now open.

Hey, good morning, guys. Good morning, Jeff. And Greg, best of luck in your retirement. And congrats on the new hire. Just on the, can you just go to the mobile handset space? You know, I think you had kind of two years off in terms of spending cycle. And I think this year was anticipated to be a better cycle, and I know there's been a little bit of delays, but just, you know, what are you hearing from the mobile handset OEMs in terms of their level of investment, you know, kind of after two years off?

Yeah, you know, to probably put it in context, right, so if you think about when we started in the path for the company, mobile phone volumes went from $30 million to $1.5 billion. So a significant run over a decade, which certainly the company fully participated in and was an incredibly strong growth driver. As you think about mobile volume growth, as you would read and have seen, there's really not going to be significant volume. What you are going to continue to see is new technology that are new innovation, new features, that are going to continue to come into the phone. And every time that happens, as you know, every change, every innovation, Norton clearly benefits from this, right? And so from that perspective, you know, we feel good about the projects we are working with our customers in terms of every time there is an innovation, we participate in it because Norton is really an innovation go-to partner. We're part of people's technology roadmaps. So what we're really seeing is feature ads and new technologies that we are participating in. And most of those features are still on track. Where we do see some uptick is really in variables. And, you know, those are new applications for the company, and we are really participating in those. Those are... sort of mobile related, but not quite mobile themselves. So I think that's a new area that we have, you know, we've been enjoying and we see some nice growth there.

Okay, great. And then, you know, certainly the decremental is good. I think some of the, in this quarter, some of the, you know, some of that I think you attributed to product mix and advanced tech. And just kind of looking at the order cadence in ATS, how would you think, How should we think about product mix into the second half impacting margins for advanced tech?

Greg, you want to take some of the detail on that? I think the way I would think about that is as we've characterized to this point, medical has been very strong. We would expect to continue that momentum in medical. I think that You know, the question is really around the volatility, if you will, that we've seen in the order rates when you look at that 12-week versus 6-week and more of the system side of the business. And, again, it's not that that 6-week, you know, makes a forecastable trend, but it does, you know, create in our minds, you know, what is this backdrop doing to our customers in terms of, their willingness to move forward with their projects. We're certainly working a lot of projects. We're involved in a lot of projects. You know, the uncertainty is, you know, how many of those will come to market this year. We feel very well positioned with project activity. It's what will hit this year. So you've got one aspect of the business that's, you know, been very strong, continues to be very strong. You know, where we have product lines that sell dispense into the industrial sector, they've been challenged pretty much, you know, through this first six months. You know, the question mark really is on the electronic systems side of the business, what of those projects are going to go forward through the year?

Okay, great. And then final one on medical. I mean, it sounds like there's certain, you know, product lines around markets that are seeing, you know, unique strengths and One, just want to understand what you're seeing in terms of visibility and sustainability there, or is it a short-term pop? And then conversely, there's been a lot of elective surgeries delayed. Did you see any kind of negative impact from that, and would you expect any snapback as elective surgeries kick in?

Yeah, so let's talk about elective surgeries first. For The kind of products and core components that we supply, we have minimal exposure to elective surgery, and so really did not see a whole lot of impact from it. There were some, but very limited, right? And broadly thinking about our medical portfolio of products, really there are two sort of areas that we participate in. One is sort of core components, very critical devices, value-added devices, you know, value-added components that help our med device customers safely and effectively deliver therapies. But that is the part of the business where you have either a pulmonary or a cardiac-related therapies, you know, we are fully participating in. You know, we see very good activity that continues to be pretty strong for us. We do fairly well there. We see a lot of new innovation work there. We continue to participate, and that's doing well. The second half of the business really is around, you know, really critical connectors and things that are used for lots of other things, such as, you know, a good example would be a ventilator application or an IV application. So a number of areas, you know, we see a significant pickup, and we continue to expect to continue to grow there. But remember, there is a baseline market growth that still is intact for us. We have very limited exposure to elective surgery. You know, this business has done well. Order trends in this business are pretty strong as well.

Okay, excellent. Thanks, guys. Thank you.

Your next question comes from the line of Christopher Glenn with Oppenheimer. Please go ahead. Your line is now open.

Thank you. Good morning. Hey, good morning. Greg, good to hear you for the encore. Curious on the packaging side. Really both rigid and flexible with hoarding and everything going on and a lot of your customers' products and the packaging there. I'm just wondering if you're seeing a particularly Constructive backdrop to create a recapitalization dynamic. If you see any differentiated points from rigid versus flexible, could that be a lagged effect of the COVID dynamic where the benefit actually kicks in a little further than some of the immediate impacts from pockets of medical demand by contrast?

The packaging really serving the non-durable part of the company has really held up nicely for us. This is an area that we have, as you know, a very strong market position and strong market leader that provides leading technology. So I would say both parts and systems fairly well held up during this period of time. In terms of flexible versus rigid packaging, for us, really, we participate in both. We don't really see significant uptick one way or the other but our polymer based businesses which sort of helps the flexible side you know this has been helped but you also have the overhang of automotive injection molding applications that kind of overweighs that so our traditional adhesive packaging businesses look really well we we continue to invest in technology here we continue to be you know, really focused around making sure our customers are really having good productivity and certainly working on cost savings. So as you can think about it, right, in terms of your recap of our capital positions, our businesses and our systems are such their value is very small when compared to the savings we can bring to a customer when they improve efficiency or productivity or material savings. So really, we really like the position we have. We think we will benefit from it. For now, it is holding up nicely. Would there be a tailwind? There potentially could be.

And Chris, this is Greg. I would add that generally if we see like we do across the businesses, if there's a change in packaging, so for example, when there has been a shift toward smaller single-serve type of packaging, that's a good thing for us, because that often means a recap of those lines.

Great, thanks for that. And then on the electronics side, I was curious, you called out strength in fluid dispense product lines in electronics. I don't really recall hearing that product silo referenced. Usually we talk about adhesive dispense systems, so I just wanted to flush that out.

Yeah, Chris, this is Greg. In the past, you may have heard, so for example, last year we talked through the year and suggested that test and inspection product lines were holding up fairly well. Where we were seeing softness was in the dispense side of our product line selling into these electronics end markets. So what we're suggesting this year is we've seen a return in that demand for the dispense side. Test and inspection has been a bit softer in this most recent period. Both of those, you know, may be the same customer buying dispense and test and inspection, but we will often differentiate between those two major product lines.

Think about, you know, maybe to add a little bit more color to it, you know, if you're thinking about fluid dispensing, really what we really mean is dispensing of various different things that our electronic customer would use in a component manufacturer or an end product assembly. A good application would be, you know, an electronic type of adhesive that gets dispensed as an underfill for a chip so that when your phone drops, it does not impact that particular chip. So that will be a good way to think about it. Another good application is that there are thermally insulating materials called TIMs. Our dispense systems in the electronics also use to dispense those TIMs, right? So that's kind of why we distinguish between dispense systems and test and inspection systems like Greg talked about.

And that comes into play sometimes on the operating margin line because, as we've suggested in this quarter, dispensed systems tend to carry higher gross margins than T&I.

Great. Thank you.

And ladies and gentlemen, once again, if you would like to ask a question, please press star 1 on your telephone. Your next question here comes from the line of Walter Liptick with Seaport. Please go ahead. Your line is now open.

Hi, thanks. Good morning. Good morning, Walter. You know, Greg, congratulations. I wanted to ask just a couple of questions, follow-ups on, you know, kind of the order trends and what you're seeing. Because relative to other industrial companies, the order declines, even the minus 11 ATS doesn't look that bad. Did you see any project cancellations or anything in backlog that got delayed?

Well, really, pretty minimal. We did have a few push-outs, but not really any cancellations. So, very limited impact.

Okay. From other companies we're hearing about, You know, systems installations that couldn't happen because companies couldn't get access to their customers' locations because of the virus. Did you see any of that, or is that something that's becoming a bigger issue for you?

Very limited. You know, say, for example, in an automotive plant, you know, we've had some issues when they went to a complete hard stop. But nothing significant, nothing major for us at a total company level.

Okay, great. And then on the cost side, I think, Greg, you mentioned that the spending levels in the second half would be about flat with last year. Is that right?

Yeah, if you look at the spending level for last year's third and fourth quarter, that gets you in the ballpark of what we would expect. to see in the back half of this year.

Okay. And I heard the CapEx, it sounds like you're not making any changes there. Correct. But it did sound like you did do some cost control. So I wonder if you could talk a little bit about, you know, what it is that you're doing to try and hold back the spending. Did you do any furloughs or layoffs, any kind of – you know, pay-related cuts or cutting back on bonus accruals because of the virus?

Sure. Well, let me sort of give you a broad overview and then probably, you know, get Greg to give you a little bit more color and detail on it. In general, you know, we're in a very strong position. We really want to make sure we stay invested in our innovation. We want to stay invested in our customer-centric business model. Really, We want to stay invested, be positioned to participate fully, and win in the recovery. So that's really an overarching theme. But given the environment, you know, we're going to be going to take a conservative approach to our spending levels. And, you know, we have acted on few, you know, cost control measures discreetly in the quarter that certainly helped our decrementals.

maybe let me get Greg to talk you through the little bit more detail on those aspects sure and what we did we did not implement any you know programmatic reductions or compensation adjustments you know given that the business is held up fairly well and all of our our factories are producing products so we're you know it's the it's the Norton team still serving our customers' needs. So we did not implement any of those kind of actions. What we did do, you know, and fairly early in the year, without knowing how significant of a downturn we would be looking at, and we feel like we're still in a period of concern, we did what a lot of companies have done. You know, we first started with travel and then other discretionary spending items um you know really cut back on on those kind of things um and uh you know we'll continue to to manage the business that way with our eye on uh on our order trends but you know we haven't done any programmatic um compensation or you know voluntary involuntary retirement programs we also have um focused very closely on headcount so where we had some attrition or some open positions. We've worked really hard, if they were not customer-facing positions, to not backfill those positions. So we're managing spending very tightly.

Okay, got it. All right, thanks for that, Colin.

Your next question comes from the line of Chris Dankert with Longbow Research. Please go ahead. Your line is now open.

Hey, good morning, everyone, and congratulations again, Greg. I guess, Naga, just to start off, one of the big focuses of your leadership has been, you know, how do we turbocharge organic growth and really kind of drive that forward? I guess any update on what the key initiatives are there? Is it further tiering? Is it, you know, increased R&D spend for product development? I guess just any comments on, you know, how we get back to growth as we kind of move out of a virus phase, hopefully.

Yeah, so thank you, Chris, for the question. And so really, you know, for us it has been really, really important in this period of time to actively manage the business but continue to stay focused and remain focused on our long-term priorities. And organic growth, as I've talked about many number of times, is sort of the best and the greatest opportunity for Norton. So, you know, for organic growth, one of the things that we're working on through is really transforming our NBS, Norton Business System, to become this strategic growth framework through which we would really drive sustainable, profitable growth in the coming decade. It's really all about what is fundamental to this framework is a data-centric segmentation approach to growth. Really using this data-centric approach to choose and invest in the best growth opportunities so that at every one of our businesses, we want to have a crystal clear view of what is our A growth opportunities, what is our A customers, what are our A products, and really focus our entire business around serving those opportunities disproportionately when compared to others. So that's one of the key things that we're working on. And the second part of this framework is really integrating what makes the company really, really strong, which is our commercial excellence, our customer passion, along with our incredible innovation and market-leading technology. So preserving what we've got, adding one or two things to it. In addition, I would say equally important for us to serve our growth is to make sure that we continue to enhance continuous improvement within the company, you know. The company has been on a five-year journey on continuous improvement. And I come from environments where, you know, there are other companies who have been around this for 20, 30 years. So we have an opportunity to learn that. But it is all in the context of driving growth. It's not in the context of – and so where we are, you know, we've really worked hard in the last six to nine months around transforming our NBS to become a strategic growth framework. That's one thing that the team has really worked hard at. Second is we are in the process of implementing this framework in five pilot businesses to really make it actionable within the business. Over the long horizon, what we expect is a holistic framework that is practiced with rigor and consistency across the company. And we believe such quality of practice is going to enable really top-tier growth in the best opportunities we have. continue to sustain the innovation the company does, and become really this best-in-class delivery quality performer the company really is. So, you know, the company has done a nice job of growth. So it's really as we continue to grow, how do we sustain that growth and how do we sustain it in a very profitable way? And so hopefully that gives you some color as to how we're thinking about it, where we are headed, where we are today.

Perfect. Yeah. Thank you so much for all the color there. If I could just kind of circle back to polymers for a moment, you know, past several years, we've been, you know, going through kind of a manufacturing optimization cycle there, I guess. How do you feel about profitability there today? Is it executing within targets? Just any comments on further actions that may or may not need to be taken inside of polymers?

Yeah. You know, this is a business that we have, you know, we've done a lot of work over the period of time to integrate in the business. You know, we have recognized all of those savings that we had targeted to achieve through those plant consolidations. It's well on track, and, you know, we continue to perform there.

Perfect, perfect. Thanks so much.

Thank you, Chris.

And there are no further questions at this time. I will turn the call back over to Naga for closing comments.

So while the near-term demand conditions are unclear, I am really excited about the future of Nordson. We have a solid foundation fortified by diversity of business and our strong customer-centric business model. We'll continue to monitor this dynamic environment to ensure that we're taking appropriate action to manage the business while staying focused on our long-term objectives of accelerating organic growth, diversifying through acquisition, leveraging the Norton business system, and focusing on talent development. Again, thank you for your time and attention on today's call. Have a great day.

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