Nordson Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Northland Corporation's first quarter fiscal year 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star 1 on your telephone keypad. I would now like to hand the conference over to Lara Mahoney. Thank you. 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, Tuesday, February 23, 2021, to report Norton's fiscal 2021 first quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com forward slash investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until Tuesday, March 2nd. 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 was provided in the press release issued yesterday. Before we begin, please refer to slide two of our presentation. where we note that certain statements regarding our future performance that are made during this call may be forward-looking based upon Norton'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. Moving to today's agenda on slide three, Naga will discuss first quarter highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the two business segments. Joe also will talk about the balance sheet and cash flow. Naga will conclude with high-level commentary about our enterprise performance, as well as our fiscal 2021 full-year guidance. We will then be happy to take your questions. With that, I'll turn to slide four and hand the call over to Naga.

Good morning, everyone. Thank you for joining Knotson's fiscal 2021 first quarter conference call. Knotson was well positioned as we entered fiscal 2021. Our COVID-19 safety measures and protocols have ensured we continue to operate safely in this environment. This has allowed us to be agile and responsive to the needs of our customers who serve a very diverse set of end markets, including consumer non-durable, medical, electronics, and general industrial. During 2020, we remained invested in what makes Norton strong, the direct sales model and our innovative precision technology portfolios. Additionally, we were successful in advancing several aspects of our long-term growth strategy. Using the NBS Next growth framework, our employees have been investing their resources in our best opportunities for profitable growth. While this remains a dynamic macroeconomic environment, our team has delivered a very solid first quarter on both the top and bottom lines. It is noteworthy that our first quarter sales and profits are about both fiscal 20 and fiscal 2019 comparisons. In particular, our industrial precision solutions team delivered strong year-over-year growth benefiting from improvements in consumer non-durable and industrial end markets. They also achieved profit margin expansion as volume leverage, improved sales mix, and manufacturing efficiency gains all combined within the quarter. In the advanced technology solution segment, our test and inspection product lines continue to grow. Advancements in technology are causing electronics customers to shift from sampling to 100% inspection, and we are benefiting from this trend. And our medical fluid components product line delivered double-digit organic growth, largely driven by biopharmaceutical applications such as tamper-proof packaging for vaccine delivery. As the first quarter progressed, we were encouraged by the order entry momentum that we are starting to see in the product line serving the broader medical and electronics end markets. We're particularly pleased to see the profit margin expansion ATS delivered on modest growth as the strategic actions taken throughout 2020 to right-size the cost structure of several businesses within this segment delivered the desired results. I'll speak more about the business in a few moments. But first, I'll turn the call over to Joe to provide a more detailed perspective on our financial results for the quarter. Thank you, Naga, and good morning to everyone. On slide number five, you see first quarter 2021 sales were $527 million, an increase of 6% over prior year's first quarter sales of $495 million. The increase was primarily related to organic volume and favorable currency, with additional benefits from the Floortec and VivaMoss acquisitions. The organic growth was driven by strength in consumer non-durable and industrial end markets, plus particular strength in the Asia region. Gross profit totaled $290 million, or 55% of sales, in the quarter, compared to $263 million, or 53% of sales, in the prior year. This 190 basis point increase in gross margin was driven by the combination of volume leverage, improved sales mix, and benefits from structural cost reduction measures taken in fiscal 2020. It is noteworthy that 55% is the highest quarterly gross margin since the third quarter of fiscal 2018. Operating profit in the quarter was $109 million or 21% of sales, a 39% increase from the prior year adjusted operating profit of $78 million. It is here in the operating profit growth rate that you see additional benefits from the fiscal 2020 cost reduction efforts. as SG&A decreased 4% from the prior year first quarter level of $188 million. EBITDA for the quarter was $135 million, or 26% of sales, which is 26% higher than the prior year EBITDA of $107 million. Looking at non-operating expense, Net interest expense decreased $3 million, or 28%, from the prior year levels, associated with reduced debt levels and a lower effective borrowing rate. Other expenses increased $2 million, largely driven by currency translation losses associated with the weakening of the U.S. dollar. Tax expense in the quarter totaled $20 million, or an effective tax rate of 21% in the quarter. Net income in the quarter increased year over year 49% to $78 million or $1.32 per share. This significant growth is reflective of a 6% increase in sales as well as benefits from cost control measures and efficiencies driven by the NBS Next Growth Framework. Additionally, the first quarter of 2020 included a pre-pandemic cost structure, and therefore profitability was lower. Now let's turn to slide six and seven to review the first quarter 2021 segment performance. Industrial precision solution sales of $288 million increased 9% compared to the prior year first quarter. The organic volume increase of 6% was driven by strong demand and flexible packaging and nonwoven product lines, as well as industrial and markets. A strengthening euro and RMB also contributed to 3% in currency benefits during the quarter. Operating profit in the segment was $83 million, or 29% of sales, compared to $57 million of adjusted operating profit in the prior year period. This 47% profit growth was driven by sales volume leverage favorable sales mix, improved manufacturing efficiency, and lower year-over-year SG&A, including reduced travel expense. Advanced technology solution sales of $238 million increased approximately 3 percent compared to the prior year first quarter. This change included an increase of approximately 2% related to acquisitions, as well as currency gains of 2%. These benefits were offset by a decrease in organic sales volume of 1%. The lower organic sales volume was a mixture of increased demand for testing inspection, medical fluid component, and fluid dispense product lines, offset by continued softness in the medical interventional solutions and certain electronic dispense applications. It is particularly encouraging to see the return to growth in our fluid dispense product lines serving industrial and automotive end markets. First quarter 2021 operating profit for the segment was $47 million. or 20% of sales. This increase of 450 basis points over prior year adjusted operating margin of $35 million or 15% of sales was driven by favorable sales mix and the realization of benefits from cost control measures taken in fiscal 2020. Finally, turning to the balance sheet and cash flow on page 8. We again end the quarter with a very strong balance sheet and significant available borrowing capacity. Cash totaled $226 million, and net debt was $794 million, ending the quarter with a 1.3 times leverage ratio based on trailing 12 months EBITDA. Free cash flow in the quarter was strong at $135 million, a 32% increase above the prior year free cash flow, for a conversion rate on net income of 175%. Higher net income and working capital liquidation contributed favorably to the free cash flow in the quarter. I'll now turn the call back to Naga. Thank you, Joe. Let's turn to slide nine. First, I want to thank the team for delivering a very strong first quarter. Over the past two months, Joe and I have been actively engaged in business reviews and virtual facility tours around the world. I'm very excited about the energy within our divisions and the steady deployment of the NBS Next Growth Framework whether that is in how teams are organizing data to fuel decision-making or the prioritization of best products in the manufacturing processes. We're also seeing the strategic analysis of product lines to identify the best growth opportunities and filling the sales funnel with these targeted accounts. One tangible result from the strategic discipline element of NBS Next was seen on February 1st, 2021, as we successfully closed the divest share of our screws and barrels product line. Our decision to divest this product line was based on critical insights gained from the NBS Next data-driven segmentation approach. While this business is a respected leader in the plastics industry, It did not fit Norton's profitable growth objectives. By divesting this business, we will focus our resources on growing more profitable product lines that will deliver on our long-term objectives. We believe our remaining PPS division has the right degree of differentiation and related technical competitive advantages to deliver over time Nordstrom-like growth and returns. I would like to take a moment to recognize recent changes to our Board of Directors. At the end of November, we welcomed Dr. John DeFord, the Executive Vice President and Chief Technology Officer of Becton Dickinson and Company, and Jennifer Parmentier, Vice President and President of the Motion Systems Group of Parker Hannifin to our Board of Directors. John's technical and regulatory experience in the medical device and market will enrich the strategic perspective of our board as we continue to grow in this attractive market. Jenny brings strong operational, industrial, and M&A experience to the board, which will be important as we continue to deploy our NBS Next Growth Framework. John and Jenny's appointments follow the retirements of Joe Keithley, Randy Carson, and Lee Banks. I would like to thank Joe, Randy, and Lee for their many insights and contributions throughout their time on the board. Our board now stands at nine directors, 56% of whom are diverse. The average tenure is now seven years. I would also like to remind you of our upcoming Virtual Investor Day, the morning of March 30th. We will share more about the ongoing deployment of NBS Next as well as our long-term strategic priorities and financial goals. We will also use this time to give investors a better understanding of our strong competitive advantage, differentiated product portfolio, and diversified end markets and growth drivers. Please visit our website to register. Now for the outlook on slide 10. As we exit the fiscal first quarter, backlog was approximately $495 million, an increase of 7% compared to the same period a year ago. Trailing 12-week order entry is above prior year levels across the majority of our product lines and geographic regions. These very positive indicators suggest continued year over year sales growth, despite the diverse share of the screw and barrel product line. For full year fiscal 2021, we expect sales growth to be approximately 4 to 6% over fiscal year 2020, excluding the 3% headwind from the revenue of the divested Stools and Barrels product line in the prior year, our forecasted full-year sales growth would be approximately 7% to 9%. Our forecasted sales growth, combined with strategic actions taken around efficiency and cost, is forecasted to deliver earnings in the range of $6.30 to $6.70 per diluted share. The midpoint of this guidance reflects 19% earnings growth compared to prior year. While it remains a dynamic environment and business conditions are changing frequently As the world responds to the challenges of COVID-19 virus and its variants, we are confident in the diversity of our end markets and the strength of our backlog. Nordsten is well positioned to deliver on the needs of our customers. As always, I want to thank our customers, employees, and shareholders for your continued support. With that, we will pause and take your questions.