Nordson Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Nordson Corporation third quarter fiscal year 2020 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Ms. Lara Mahoney. Please go ahead.

Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Nagarajan, our President and CEO, and Joseph Kelly, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, August 20th, 2020, to report Northen's fiscal year 2020 third quarter results. Our conference call is being broadcast live on our audio webpage at norton.com forward slash investors and will be available there for 14 days. There will be a telephone replay of the conference call available until September 3rd, 2020. During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric has been provided in the press release issued yesterday. Additionally, 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 Nordstrom's fiscal 2020 third quarter conference call. With me today is Joe Kelly, the new Chief Financial Officer of Norton. I'm pleased to welcome Joe to the call this morning. Joe joined Norton on July 6th and brings over 25 years of financial and operational expertise to Norton, most recently serving as Chief Financial Officer of Materion, a global advanced materials company. I'm very excited to have him on board. is already bringing great energy and perspective to our leadership team. First, I want to thank our Norton employees for their continued flexibility, resilience, and commitment as we have navigated 2020. We remain focused on protecting the health and safety of our employees and responding to the needs of our customers. Norton products serve a very diverse set of end markets, including medical, electronics, consumer non-durables, and general industrial. This diversity has helped drive the relative stability of our results to this point in the year. By maintaining new safety measures, our team has risen to the challenge and continues to meet the needs of our customers who depend on us to help them drive efficiencies, enhance innovation, and continuously supply aftermarket parts and consumables that keep their manufacturing lines running smoothly. While we remain focused on managing this dynamic environment, the Norton leadership team and I are equally committed to making progress towards our strategic priorities of accelerating organic growth diversifying through acquisitions, leveraging the Norton business system, and building winning teams. On June 1st, we announced the acquisition of Floratech, a precision plastic extrusion manufacturer in the medical device industry. Floratech brings highly differentiated PTFE medical tubing expertise which is complementary to our current value-added component offering for minimally invasive therapies such as heart valve replacement. Growing our Norton medical business continues to be a priority of our capital deployment strategy. We're pleased to have the Floritec employees as part of the Norton team. Also during the quarter, we continue to develop the next generation of the Norton business system, which we're calling NBS Next, Norton's growth framework. Our new segment realignment, which unleashes an owner mindset at the division level, allows our teams to make decisions as close to the customer as possible. Using critical insights created by segmentation tools in NBS Next, our division leaders were empowered to prioritize investments and simplify non-value-added tasks to deliver best-in-class product quality and delivery. Staying invested in what makes Norton strong, our customer-centric business model and precision technologies will position us to accelerate profitable growth and the economy recovers. I'll speak more about the business in a few moments, But first, I'll turn the call over to Joe to introduce himself and provide a more detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. I am very pleased to join Nordson, which has a long-established reputation as a high-quality company that consistently delivers top-tier financial results. I look forward to partnering with NAGA and the leadership team to drive the next chapter of profitable growth for Nordson. We have an extremely solid and rich foundation on which to build, and I am honored to be part of the team. With that in mind, let's turn our attention to the fiscal third quarter financial results. Third quarter 2020 sales decreased 4% compared to the prior year third quarter. The decrease was primarily related to organic volume, as unfavorable currency effects were offset by the benefits from the Floortec acquisition. The company's diverse end market and geographic exposure, as well as broad product applications, contributed to the relatively strong commercial performance in these challenging times. Our combined Asia region led the way by delivering 3% growth in the quarter. Gross margins totaled $281 million or 52% of sales in the quarter compared to 303 million and 54% of sales in the prior year. The 200 basis point decrease in margins is attributable to $1.2 million of inventory step-up amortization related to the Floortec acquisition, unfavorable sales mix, and COVID-19 manufacturing inefficiencies. As our factories address employee safety needs in this challenging time with precautionary quarantining of employees, implementing social distancing, rotational staffing, et cetera, a combination of these three factors contributed to the lower gross margin percentage in the quarter. We anticipate the majority of these headwinds to be temporary in nature and forecast returning to our historical gross profit margin levels. Operating profit in the quarter was $112 million, or 21% of sales. Excluding non-recurring items in the quarter related to cost reduction actions and the acquired inventory step-up amortization, adjusted operating profit totaled $120 million, a 9% decrease from the prior year adjusted operating profit. EBITDA for the third quarter was $148 million, or 28% of sales. which is 7% below the prior year EBITDA of $159 million. Looking at non-operating expense, net interest expense decreased $4 million, or 37% from the prior year levels, associated primarily with the lower effective borrowing rate. Other net expense increased $10 million associated with an unfavorable $5 million year-over-year swing in currency gains and losses and a $5 million increase in pension cost. $3 million of the pension increase was related to a non-cash pension settlement charge associated with the prior CEO. Tax expense in the quarter totaled $9 million, or an effective tax rate of 9% in the quarter. The rate was driven lower by a $12 million discrete tax benefit associated primarily with non-recurring levels of stock option exercises and deferred equity compensation. Excluding these discrete items within the quarter, the effective rate would more closely reflect the company's long-term tax rate of 20% to 22%. Net income in the quarter totaled $87 million, or $1.49 per share. Excluding non-recurring adjustments to operating profit, the non-cash pension settlement charge and discrete tax benefits, adjusted earnings were $83 million or $1.42 per share. This represents a 12% decrease from the prior year adjusted earnings, reflective of the 4% decrease in sales volumes. Cost reduction actions taken in the quarter to structurally lower the ongoing cost profile of a company totaled $6 million and primarily related to severance payments. These actions are forecasted to deliver annualized savings of approximately $11 to $12 million. Looking at the segment performance. Industrial precision solutions sales decreased 6% compared to the prior year third quarter. Stable demand from product line serving consumers in non-durable end markets were offset by weakness in sales of product line serving industrial markets. Asia markets appear to be recovering from the lower COVID-19 demand levels. Operating profit for the quarter was $75 million, or 26% of sales. Excluding $3 million in structural cost reduction and simplification actions, EBITDA was $86 million, or 30% of sales, a decrease of 200 basis points compared to the prior year third quarter. Lower sales volume, unfavorable product mix, and manufacturing inefficiencies tied to the pandemic safety measures drove the lower profit levels. Advanced technology solutions sales decreased approximately 2% compared to the prior year third quarter. This change included a decrease in organic sales volume of 3% and an increase of approximately 2% related to the floor tech acquisition. currency impact was minimal. Sales volumes increases in test and inspection product lines serving electronics and markets, and stable demand in medical product lines were offset by weakness in fluid dispense product lines serving industrial and markets. The stable demand in medical is reflective of strength in some product lines, offset by meaningful softness in other product lines more closely tied to elective surgery. It's important to note that the definition of elective surgery has been broadened during the early months of this pandemic, particularly in the U.S. However, we are starting to see market signs that elective medical procedures are beginning to ramp back up. Within the advanced technology solution segment, Reported operating profit was $50 million, or 20% of sales in the quarter. Excluding one-time charges associated with the cost reduction actions and inventory step-up amortization, EBITDA was $71 million, or 29% of sales, in line with prior year profits despite the 2% decrease in sales. Finally, turning to the balance sheet and cash flow. We ended the quarter with a strong balance sheet and plenty of available borrowing capacity. Cash totaled $222 million and net debt was $1 billion, ending the quarter with a 1.8 times leverage ratio based on the trailing 12-month EBITDA. Free cash flow in the quarter was $82 million. which brings the year-to-date free cash flow conversion rate on net income to 119%. Investing activity in the quarter totaled $135 million, driven by the $125 million acquisition of Floortec. Dividend payments were $22 million in the quarter, and the company's board approved a 3% increase in the annual dividend effective in the fourth quarter of 2020. This marks the 57th consecutive year the company has increased its dividend. We remain very confident in the cash flows of the company and are committed to returning a portion of the cash to shareholders in the form of a consistently increasing dividend. In summary, our top line has held up well considering the challenging macroeconomic environment. While we benefit from the diversity of the end markets we serve, the team has responded in a great way in supporting our customers and delivered solid performance while controlling cost in the quarter. We continue to maintain a strong balance sheet with sufficient liquidity to allow us to stay focused on long-term strategic initiatives to drive organic and inorganic growth. I'll now turn the call back to Naga.

Thank you, Joe. I'm pleased with the performance the team delivered in a very challenging environment. I'd like to make note of a few areas. First, I appreciate the strong performance of our teams in Asia Pacific and Japan. They successfully managed through the challenges of COVID-19 earlier this year. Through it all, they remained focused on serving the customer. As a result, they delivered growth in the quarter revenue in the Asia-Pac region increased 3% compared to prior year. We had a very productive virtual review of our Asia businesses several weeks ago. Taking our executive team on a virtual tour of the facilities and new product pipeline, it is clear that the regional team is making meaningful progress in broadening in-country new product, application, and service expertise and resources to serve our customers in the region. Second, I'd like to acknowledge the strong results of our test and inspection product lines, which are up double digits year over year. Test and inspection has been a focus area of our acquisition strategies. and we have built a robust offering of T&I product lines, including X-ray, acoustic imaging, bond testing, and automated optical inspection capabilities. As advanced electronic components and semiconductor technology for 5G, AI, and memory applications are becoming increasingly sophisticated, the need for T&I equipment is growing. Norton's diverse portfolio of solutions and technical expertise is making us a go-to partner for global customers. In fact, our matrix inline automated X-ray, offline DAGE X-ray and bond testing, and Sonoscan acoustic imaging product lines have directed sales in the fiscal third quarter. As I mentioned earlier, I'm encouraged that our teams are beginning to use a data-driven approach with NBS Next segmentation tools to prioritize investments to position their businesses for profitable growth when the recovery begins. In July, I participated in a progress review of the four pilot businesses who are currently deploying NBS Next. I'm pleased with the curiosity and experimentation in how our teams are beginning to apply data-centered insights to enhance customer service levels. Norton's geographic and end-market diversity is one of our greatest strengths. In this period, A test and inspection, consumer non-durable, and medical end markets are helping balance the weakness of industrial end markets that are still under pressure. A recurring revenue of aftermarket parts and consumables contributes to our relatively stable performance in these dynamic times. Looking at the fourth quarter, Our order entry rate has come off of the lowest experience earlier in the quarter. The trailing four-week order entry as we entered the fourth quarter is approximately 93% compared to prior year levels, and the 12-week order entry is approximately 90% compared to the same period last year. Backlog has decreased approximately 3% compared to the prior year. Based on these data points, we expect our fiscal fourth quarter revenue to be comparable to slightly better than the third quarter 2020 revenue. We also expect low single-digit sequential growth in earnings. I want to thank our colleagues around the world for their incredible commitment to our customers. This is an uncertain time for many, and the team's strong execution is commendable. As always, I want to thank our customers, employees, and shareholders for their continued support. With that, I'll pause and take the questions.

If you'd like to ask a question at this time, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. First question comes from Matt Somerville with DA Davidson.

Thanks. A couple questions. First, on the medical side of the business, can you talk about how much of that is being driven by what is now being defined as elective versus non-elective? I guess that was under the impression that the elective portion was pretty minimal.

Yeah, thanks, Matt. You know, as we entered the quarter, the definition of what is elective and what is selective has continued to broaden. And so because of that, we did have some impact in our businesses. But if you look at our medical portfolio of product offerings, we have a fairly broad and diverse offering of that not only serves the minimally invasive surgeries such as cut replacement or stent placement. We also have a number of surgical as well as fluid management product offerings. So what we saw really was a surge in demand for our fluid management product offerings, pulmonary treatments, and so it certainly helped us you know, come in flat to last year in the medical business, you know, less than what we have experienced, you know, historically, you know, 4% to 5% growth. So it was lower than that, but it was flat to last year. And probably put it in context, what I'll tell you is if you take a look at medical device manufacturers, many of them in this environment are down, you know, mid-teens. And so we're really – We're really pleased and, you know, it is slightly lower than our expectation, but very pleased that the team was able to come in on a flat year-over-year basis for the medical day.

Thank you for that, Kolar. And then just as a follow-up, can you maybe provide an update on what you're seeing in fluid dispenses that pertains more to consumer electronics, 5G project activity, and kind of what the outlook is there?

Thank you. Yeah, what we see really is, you know, early stages of, you know, we had a good quarter last quarter, if you remember, on the fluid dispense side for our electronic businesses. And what we see is continued project activity. What you do find is in the electronic side, we're finding a lot of applications for these new complex applications. components that go into AI applications, go into a number of, you know, the advanced 5G-related products, be it auto electronics or as well as in mobile sets, you have, you know, increased antenna requirements, you have increased performance, camera modules, you have increased number of, you know, garros as well as micro-speakers and such. So a lot of advanced components, and we're seeing a lot of project activity on that. But primarily on the electronics side, where we see strength and had a really strong quarter was in our testing inspection, which is more geared towards the semiconductor side of the business rather than on the component side of the business. Got it. Thanks, Darnit.

Next question comes from Jeff Hammond with KeyBank Capital Markets.

Hey, good morning, guys. Good morning, Jeff. Hey, just want to really understand kind of the order trend through the quarter. And you kind of gave some different numbers, 12-week trend, 4-week trend, to just kind of really get a better sense of

know kind of what the true trend is in terms of you know things getting sequentially better and maybe where particularly you're seeing things uh get um sequentially better thanks yeah no thank you jeff and so what we'll try to do is probably talk to you a little bit about how we enter the quarter right we entered the quarter and we provided probably for the first time we talked about order entry rates in the way we're talking about it now And I want to provide you some context for that. We feel, given the dynamic environment, it was important for us to provide you with more color than we normally do. So that was the intent. And so as we entered the third quarter, if you looked at the 12-week order rate, we think of the 12-week order rate as a little more longer term and suddenly stabilizes near-term environment. But given the current dynamics, we felt it was important for us to look at something shorter term so that we can see what is happening. So that's why last quarter we provided you six-week guidance. That's because six weeks was the time period that COVID had really hit in our quarter. So going forward, what we're thinking about is giving you a 12-week and four-week guidance around how we are seeing until we get out of this dynamic environment. So with that context, what I'll tell you is that The best way to think about the current environment is to think about it more sequentially. And we begin to see, as we navigated through the third quarter, sequentially the order trends for the total company were starting to improve. So we entered the quarter, I would say, six-week order trends were more in the range of 11%. The short term was around 11% down. And as we exit the quarter, we begin to see that order trend is more like down 7%. So that's sort of, you know. Go ahead.

Where do you think, where are you seeing the best sequential improvement?

Yeah. So I think I answered one part of your question. Now let's go to the next part of the question and probably take it in two chunks, Jeff, is that first give you some color around the regions and then give you some color around the trends we are seeing by end market. So if you think about the geography sequentially, our oral entries are such that from a geography perspective in the U.S., the order trends are stabilizing, albeit at a little bit lower level that we talked about. Americas, which is sort of Latin America and Mexico, still remains challenged, you know, given all that is going on in Mexico and Brazil, still remains challenged, but is a very small part of our company. In terms of Europe, what we do see is a meaningful pickup and a trend up sequentially when compared to third quarter. And then in Asia, as you've seen in our third quarter numbers, we have reported a growth in Asia, you know, when compared to last year. And what we find there in Asia is sequentially that remains flat. It is not accelerating any further than that, but it is remaining flat. So that's the regional picture. And if you look at about end markets, what I will tell you is that – Some of the industrial end markets remain challenged, right? So businesses that have industrial exposure, like our ICS business or our fluid dispensing and EFT, you know, they remain challenged. Our medical business continues to be flat. You know, order entry rates are flat, and we seem to feel good about it. Our fluid dispensing in non... consumer non-durables is flat to slightly up, and our plastic processing is flat to slightly up. And our electronic business, as we talked about, intestine inspection had a strong quarter, and we find that we're flat there. So hopefully that gives you, you know, it's a range of scenarios is what we're seeing in terms of trends. for the various end markets, but essentially the very dynamic environment and what we find ourselves is managing to that dynamic environment. You know, we're seeing some areas where sequentially things are stabilizing and maybe some improvement, but the industrial parts continue to remain a challenge for the company.

Okay, great. That's good color, Naga. Just on floor tech, can you give us – And, you know, what kind of the annual revenue contribution, what that business has been growing at, you know, kind of how the margin profile looks versus the medical business overall or at least, you know, the advanced tech segment. And just really where, you know, what's the incremental kind of new product or, you know, market that, you know, this gives you that you didn't have before? Yeah.

Yeah. So I think let me give you some strategic color and maybe give you some update around how things are panning out in the first couple of months here. And then Joe can sort of provide you a little bit of color around contribution and such. So it's a great little business. It's a niche business for us. It brings to the company PTFE tubing. So this is the inner lubricious layer of tubing. you know, think about if you're trying to place a stent, you know, you have to thread it through, you know, a tube that's in the patient. And what you really find is you have a lubricious tubing layer which is inside that tube, and that's really what this is, right? So that is their major product line is the inner lubricious layer of those tubing that is used to place you know, stents or heart valves and things like that. So it's a very niche product. It's a great complementary addition to our delivery mechanism core component offering that we have, right? Through Vention, we were able to bring on a very strong position in core components that helped us in this minimally invasive therapies, and we find this has a real nice add to it. In terms of the integration, we really like the business. The technology is really solid. As we have spent time within the business, it reaffirms our strategic thought about adding this. So we really like it. We like the people. Operations are coming along really nicely. Let me maybe turn this a little bit joke and add some color around financials. Overall, it's a value-added business. It's a differentiated business. It adds to the company. It doesn't take away.

Yeah, and Jeff, just to give a little more color, the annual revenue on this business is approximately, let's say, $20 million. And from a margin profile standpoint, it's comparable to our current ATS business. Okay. Thanks a lot, guys. Thank you.

Next question comes from Christopher Glenn with Oppenheimer.

Thank you. Good morning. I just wanted to go into the medical piece for a little bit. I'm curious about how you're thinking about maybe pent-up demand for elective products. It's obviously a pretty important business to you where you've had great success over the past. I'm wondering how you're thinking about the prospects for a ton of pent-up demand, assuming it's not too late for some people in search of elective procedures. Yeah.

Chris, that's a great question. And I think that is, you know, as difficult as it sounds, but that is really what people are dealing with is that, you know, surgeries that are needed are getting postponed. And we are hopeful. But we do fundamentally, to answer your question, fundamentally believe that it's a pent-up demand that we would enjoy As surges come up, we're beginning to see early signs of hospitals opening up and certainly trying to, you know, increase the number of surges that produce. There will be a slow ramp up. You know, this environment, as all of us know and experience, is very dynamic. Things are up and down a bit. But in general, we are very convinced that – remember also that these are spectin products in that – These, you know, they have a great amount of stickiness to the sales orders because we are specced in through FDA approvals for medical devices in our customers. So quite frankly, you know, we feel very strongly about the growth drivers around medical are solid. They have not changed. And in the short term, we would enjoy some meaningful pickup as the surgeries come back. But our expectations are this is going to be a slow ramp, not a very fast ramp. As you can imagine, until we get past this next season of flu and get past to some level of normalcy, this is going to be a little bit up and down. But Even with those postponements, what I really want to emphasize here is that the team came in with a flat revenue year-on-year, which is very strong performance, and that's because we have, you know, our product offering is pretty strong in fluid management as well as pulmonary therapies, which we really not talked about a lot, but there are pulmonary therapies where our cannulas get used And so, you know, we really like medical. We continue to invest here. We still see opportunities. So hopefully that provides you some color.

That's great. Appreciate that. And then my follow-up is kind of an update on, you know, what you're seeing in terms of momentum. You touched it a long time. kind of the handset features and things like that. But for 5G, both for infrastructure and for handsets, kind of compare and contrast, and you expect that ecosystem around 5G is likely your most robust factor in fiscal 21 at this early juncture?

Yeah, the 5G activity remains strong. Project activity remains strong. We get invited to lots of different projects where we're working on. But at least for the moment, you know, they've got a lot of promise, as we've talked about in the last couple of quarters, lots of promise, a big circular driver for this business, but not a needle mover at the moment for us. But why we're excited about 5G is not only just the handset, you really want to think about 5G in broader terms around the base station infrastructure built out, which is sorely behind. You know, if you read, you really find there's a lot of advertisement and marketing around 5G, but really, you know, the usefulness of any of that only depends on if you're near the cell tower, right? Remember, these are fairly weak signals, so you've got to really be almost on top of one of these things to this awesome technology that is coming. But eventually it will happen. So they're excited about the base station opportunity. It's slow to roll out. As you know, there are a number of geopolitical competitive things going on around that. That suddenly strains it. We certainly like all the advanced components that are getting developed, so we really like that. Auto electronics will be a big player of 5G because they're going to get incorporated. IoT devices are going to be another big area where 5G is going to get incorporated. So lots of different nuances to 5G beyond just the handset. But the handset is probably what takes up most of the press time. So overall, good activity, still continuing to participate in projects, just not a big needle mover at the moment for the company.

Yeah, we know it's not now, but it sounds like the timing visibility is kind of quixotic, I guess. Yeah, yeah. The good work is making it.

Thank you, Chris.

Next question comes from Mike Halloran with Baird.

Good morning, everyone. A couple margin questions here. So on the ETS, if you think about the sequential margins going into the fiscal fourth quarter, same mixed pressures, that appears to be the assumption, but the same mixed pressures that were there in the fiscal third quarter probably linger for the fiscal fourth quarter.

Yes, I think similar in ATS, the mixed pressure will be there, is assumed to be there in the fourth quarter that was there in the third quarter based on some of the end market demands that Naga just reviewed.

That makes sense. And then the inefficiencies you referenced for the industrial precision business, maybe some context on those and how long you think they linger.

Yeah, so as our factories initially responded during the COVID crisis and our efforts to keep employees safe but continue to meet customer needs, we had significant factories. While they remained open, we were precautionary quarantining several people. When you think about some of our clean rooms, we also had to put in social distancing, and so our Some of our manufacturing processes weren't as efficient from a direct labor standpoint. And so we've been working through that, getting the proper PP&E, the proper staffing in, people coming back from quarantine. And so we're kind of working through those kinks. We've made progress, I would tell you, in the quarter from earlier in the quarter as it relates to manufacturing efficiencies and conversion cost rates. And so we anticipate as we get used to the new normal to continue to improve as we go out throughout Q4 here.

Thanks for that. And then last one, the floor tech piece, obviously really good that you were able to get some M&A done, but maybe just thoughts on the pipeline as it looks from here and what basically the ability to convert some of that pipeline looks like as we sit here today?

Mike, great question. You know, as you think about M&A, you know, we've really talked about what is our focus. Our focus really is, you know, two big areas, scaling up medical, scaling up TNI are the two areas that we're very focused on. And if we find things that are very complementary, very next to our core, we would make some add-ons. But it's really important for us to emphasize the context and, you know, our strategic rationale for anything we do will start with what makes Nonsense strong, right? Position technology, customer-centric business models, two things that we look for. So as we look at the pipeline, you know, our pipeline has a number of opportunities that we continue to stay in touch. But given the environment, you know, think about great companies that we would like to add to the portfolio. This is not particularly the time that they want to sort of transact, meaning, you know, given sort of reduction in their own outlooks and stuff, you know, they're not particularly interested in acting on any of those and, sort of take the wait-and-see approach. So meaningfully, these opportunities are still existing. We're still sort of cultivating them is probably the best way to put it. Should some of them happen to come to the market, as we've been able to do with Floritech, you know, we will certainly act on them. But, you know, you can expect us to stay disciplined. to what we feel are the most important apps to the company in the areas we're interested in.

Great. Thanks, Renagan. Appreciate the time. Thank you.

Once again, if you'd like to ask a question, please press star 1 on your telephone keypad. Next question comes from Andrew Buscalia with Berenberg.

Morning, guys. Good morning. I had a question. Morning. I had a question on So in industrial precision, you know, I was way off on, you know, modeling there, my expectations were there, because you've got some tougher markets within there, you know, with auto exposure, AMD exposure, you've got some energy exposure. So I'm curious, you know, why, you know, did the trends in those specific businesses surprise you or is the resiliency in those tougher areas Can you talk a little bit more about what you're seeing there, I guess, and your outlook for these more difficult pieces?

Yeah. So maybe let's first take the ones that are doing well. And, you know, so this is IPS, you know, traditionally has this adhesive business that we have always been a very strong part of the company, a history and a legacy part of the company and a core part of the company. strong market leader, serve a number of recession-resilient end markets, food and beverage packaging, non-ovens, and things of that sort. So if you really think about that business, It has a very strong aftermarket component to it, about 50% of the market. So really think about that piece of IPS being very resilient. It has done well. You know, it had some slight downturn, but in general has done really well, up to our expectations. Certainly early in the quarter, definitely helped by non-wovens in terms of masks. Mask production, so some of our customers shifting from diaper production to mask production was a great example. So we benefited from some of our customers making those turns, and in some cases even added more mask manufacturing capacity. We benefited from it. In IPS, we also have our industrial and market-facing businesses, and those remain challenged. You know, like any other pure industrial businesses, as you think about CapEx deferrals, you know, significant shutdown in the automotive industry, all of that certainly has impacted those businesses. Those remain challenged. But, you know, the diversity of end markets and diversity even within the segment certainly helped us perform fairly well. Greg, should I give you what you're looking for there, Andrew?

Yeah, no, that's really helpful. And, you know, kind of like along those lines, I mean, it seems, you know, the resiliency is there. But I guess in a post-COVID world, you know, are you guys thinking about any of these businesses differently? Is there any sort of pruning opportunities you can make to some of your areas that maybe your view has changed? It seems as though everything is running at some pace.

Yeah, I think they're asking a question around portfolio, and so really our approach to portfolio management is a consistent review of all product lines on a yearly basis, and we really look at it through two lenses. One is take a look at it from a growth potential business. We're very focused on profitable growth, growth potential being an important lens, and second lens really being what is the degree of differentiation? Really what is the profitability of the businesses? So as you consider those, you know, we make decisions, and if you kind of look back at the history of the company, when things didn't add up to our expectations in those areas, we did act on some product lines. So it's an annual assessment and something that we do on a regular basis.

Got it. Okay. Thank you.

Next question comes from Walter Nittak with Seaport.

Thanks. Good morning, guys. Good morning. I wanted to ask a little bit more about the industrial. And, you know, I wonder if you could help us understand any of the trends around, you know, we saw maybe things getting better in May and June, I think. And I wonder if with the virus cases going up again recently, if, you know, some of the caution that you're talking about around industrial is because you're seeing things weaken again.

I think probably, well, the best way to think about it is, you know, we don't seem to find industrial strengthened much. You know, it just seems to have stabilized at a lower level than our other businesses, right? So when we say remains challenged. We're not saying it is going down further. We're saying it has gone down sort of in line with other industrial CapEx businesses, but has not gotten back up. It continues to stay. So it remains challenged. It's probably the better way to put it.

Okay. And that's fair. I wonder, is it down because the customers are just cautious on their CapEx spending? Because I thought there was a high ROI, or is there a difficulty getting out and with sales engineers into the field to sell and spec out systems? You know, I guess is it slower because of this virtual world that we live in now and not being able to get out to customers to sell, you know, new systems?

Yeah, I think it is really the larger CapEx spend where people are trying to sort of So think about our power system businesses. It's a good example. And our power system businesses, these are fairly significant capital outlays. And so if you are an industrial manufacturer and you have some demand issues, this is probably not the time that you're going to sort of put out a capital outlay for a large system. So that's kind of where we're seeing. But what we find ourselves is that when somebody has a need, like our mass manufacturing, which is not industrial but more consumer non-durable, in that particular case, even in this virtual world, we are able to work with our customers, able to understand their space, able to spec in what they need, You know, certain customers have some pretty stringent requirements early on for actual person visit, but that is all changing. We're all learning how to work in this new world. So some of this, you know, a lot of the communication with engineers and such has actually picked up. Because think about, you know, you have engineers and design folks that have projects that need to complete but now are at home and are virtually working. They have plenty of time to spend time with our salespeople. So, quite frankly, the interaction with our customers have changed and actually have increased from an engineer to a salesperson conversations, which, you know, in the past somebody is in a meeting or somebody is doing something else. But now you find yourself having greater touch points with your customers. So hopefully that provides you a color of how we are operating in this environment today.

Okay. Yeah, it does. Thank you for that. And then I wonder just a couple of things on, you know, supply chain. You know, we've heard about, you know, some parts shortages today. You didn't mention anything about that, but I wonder how you feel about your supply chain or if you've made any changes there. And then also in NDS, you mentioned that four plants are doing the segmentation work as sort of a pilot project. I wonder if you could give us a little bit better understanding of which segments that might be in, which factories, and what we should expect over, say, the next six, nine months in terms of any profit improvement.

Maybe two questions there. Let me first take the question around supply chain. We didn't mention it because we had no issues. But frankly, we have a very strong, robust supply chain team and process, and we have a great risk mitigation plan All of that, you know, really played out the way we have anticipated and so really did not have any issues. Early in March, we may have had a few hiccups here and there, but they were all more ended up with higher freight costs than anything else. But in the past quarter, it really is a non-issue for us. And so supply chain, no issues, things running. So everything is good. So in terms of NBS Next, probably what is important to sort of provide you some context is that we look at NBS Next as a growth framework. And really our pilot businesses that are photo firm, and it's equally spread among both the segments, and our expectation is that You know, we've rolled them out to really strong businesses. We've not rolled them out to our weaker businesses. You know, really, the total company is pretty strong. So among the strong, we took our best businesses because we believe that looking at this from a growth lens is more important than anything else. And so what these businesses are really looking at is they're using, at the heart of NBS Next, this really – a data-centric, database segmentation process. And that's what the teams are working on. We are, you know, the way I would characterize it, we have a proficiency model. We look at it within the company. And, you know, we think of them as learn, do, lead, and coach. And I would say our pilot businesses are in the learning mode, starting to do. And our expectation is this would play out here over the next 12 to 18 months. And our goals really are not about how do we increase the profit margin as much as how do we have the best customers facing metrics around products, quality, and delivery so that we are able to accelerate growth when the recovery happens. So really positioning business to capture growth and have a crystal clear view of What are the top-tier growth opportunities for the company, and how do we disproportionately invest in those areas? And, you know, with growth, we would have incremental margin improvements. You know, that could come, but the exercise is not about taking out costs as much as it is really centered around growth.

Okay, great. Yeah, good luck with the project. It sounds very promising. If I could just get one last one in. How are you thinking about pricing in this environment? When do you typically do annual price increases, and are there any businesses where you can get price even with the slowness going on in the economy?

We typically look at annual price increases. As you can expect, there are input cost increases for the company, you know, just given the environment we're in and maybe the potential inflationary environment that we might enter in. So we have in most of our businesses, as you know, our margin profile, our gross margin profiles are pretty strong, and that is really because we add a lot of value, we create a lot of value, and we get paid for the value. But we're also mindful of the position where we are. We have significant premium for the value we are creating. And so you would expect us to be thoughtful, focused around growth. We are focused around creating value and getting paid for it. So pricing is not the biggest growth driver for us as much as making sure that we are participating in the growth as it comes. And then adjust for inflationary costs should we encounter any of them.

Okay, great. Thank you very much.

And at this time, I'll turn the call over to Naga.

Thank you. While the near-term demand conditions stabilize at a reduced level, I remain excited about the future of Nordstrom. We have a solid foundation fortified by the diversity of our business and our strong customer-centric business model. We'll continue to monitor this dynamic environment to ensure we're taking appropriate action to manage the business while staying focused on our long-term objective of making a strong Nordstrom even stronger by accelerating organic growth, diversifying through acquisitions, leveraging the NBS Next growth framework, unleashing owner mindset, and focus on building winning teams. Again, thank you for your time and attention on today's call.

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