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spk01: Good day and thank you for standing by. Welcome to the Norsen Corporation second quarter fiscal year 2021 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 today's session, you will 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 your speaker today, Laura Mahoney. Please go ahead.
spk02: 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, May 25th, 2021 to report Nordson's fiscal 2021 second 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, June 1st. 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 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. Moving to today's agenda on slide three, Naga will discuss second 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 updated 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.
spk07: Good morning, everyone. Thank you for joining Norton's fiscal 2021 second quarter conference call. Throughout fiscal 2020, we remained invested in what makes Norton strong, our direct sales model and innovative position technology portfolios. We also advanced our new NBS Next growth framework, which ensures we focus our resources on the best opportunities for profitable growth. This strategy has positioned us well last year, and as the recovery continues to accelerate in 2021, it has put us in an excellent position to respond to our customers and deliver record sales, gross margin, operating profit, and EBITDA during the fiscal 2021 second quarter. As the quarter progressed, end market demand accelerated faster and to a greater degree than we originally anticipated, particularly in medical, electronics, and industrial end markets. Norton's dispense applications in the industrial precision solution segment benefited from the pickup in industrial and markets, as well as the sustained demand for food and beverage packaging. In the advanced technology solution segment, a data-centric economy where increasing demand for semiconductors and complex electronic devices drove the need for our test and inspection and fluid dispense products. We have also started to see recovery in our medical intervention solution product lines as the outpatient surgeries are beginning to increase following the COVID-19 related slowdown. Our medical businesses continues to benefit from accelerated growth of single-use plastic fluid components for biopharmaceutical applications. I want to congratulate and thank the Nordstrom Global team for achieving this record second quarter. I'm also proud of our team's dedication to meet this accelerating demand while maintaining COVID-19 safety protocols and effectively managing supply chain and capacity constraints. I'll speak more about the business in a few moments, but first, I'll turn the call over to Joe to provide more detailed perspective on our financial results for the quarter.
spk08: Thank you, Naga, and good morning to everyone. On slide number five, you see second quarter 2021 sales were $590 million, an increase of 11% over prior year's second quarter sales of $529 million. This double-digit growth is more than a bounce back. In fact, as Naga noted, this is a quarterly record for the company, breaking the previous record established in Q3 of 2017. The sales increase was primarily related to 10% organic volume growth off of a relatively strong Q2 2020 performance. Favorable? foreign currency, and a net negative impact from acquisitions and divestitures. The benefits from the Floritech and VivaMoss acquisitions were more than offset by the negative headwind from the divestiture of the screws and barrels product line. When excluding the divested product line in the prior year for comparability purposes, sales growth would have been 15% in the current year second quarter. Robust growth in electronics and consumer non-durable end markets, as well as strengthening medical and industrial end markets, were the primary drivers of this performance. From a geographic perspective, growth was strong in all regions except Japan, which has been more heavily impacted by shutdowns related to the pandemic. Gross profit totaled $338 million or 57% of sales in the quarter compared to $290 million or 55% of sales in the prior year. This 260 basis point increase in gross margin was driven by the combination of improved sales mix, volume leverage, and benefits from structural cost reduction measures taken in fiscal 2020. The divested screws and barrels product line at the beginning of the fiscal second quarter was a significant contributor to the improved sales mix. It is noteworthy that a gross margin of 57% is a new quarterly company record. Also records in the quarter or operating profit of $166 million, or 28% of sales, a 33% increase from the prior year adjusted operating profit of $125 million. And EBITDA of $192 million, or 33% of sales, which is 26% higher than the prior year EBITDA of $152 million. The incremental EBITDA margins were 65% in the quarter. Investors are starting to see the power of the NBS Next Growth Framework as it drives double-digit organic sales volume growth, improves sales mix, enhances manufacturing efficiency, resulting in strong profitable growth. Looking at non-operating expenses, Net interest expense decreased $1 million, or 17%, from the prior year levels associated with reduced debt levels and a lower effective borrowing rate. Other net expense increased $3 million, largely driven by currency translation gains in the prior year that did not repeat in the current year. Tax expense totaled $32 million, or an effective tax rate of 20% in the quarter. Net income in the quarter increased year-over-year 35% to $124 million, or $2.12 per share, yet another quarterly company record. This significant growth is reflective of volume leverage driven by the 11% increase in sales as well as benefits from cost control measures and improved efficiencies. Now let's turn to slide six and seven to review the second quarter 2021 segment performance. Industrial precision solution sales of $299 million increased 6% compared to the prior year second quarter. The organic volume increase of 8% was driven by strong demand in flexible packaging and industrial coating product lines. A strengthening euro and RMB also contributed to a 5% in currency benefit during the quarter. The divested screws and barrels product line was a negative 7% impact on the year-over-year sales growth. It's important to note that the segment sales are north of 2020 and 2019 levels when prior year balances are adjusted for the divested screw and barrel product line. Operating profit in this segment was $104 million, or 35% of sales, compared to $77 million of adjusted operating profit in the prior year period. This 36% profit growth was driven by sales volume leverage associated with the 8% organic growth, favorable sales mix, improved manufacturing efficiencies, and lower year-over-year SG&A, including reduced travel expense that we continue to experience through the second quarter. Moving now to advanced technology solutions. Sales of $291 million increased approximately 18% compared to the prior year, second quarter. This change included an organic increase of approximately 13%, as well as increases of approximately 3% related to currency and 2% related to acquisitions. The increase in organic sales volume was driven by strong demand for test and inspection product lines serving electronics end markets and fluid management product lines serving medical and industrial end markets. Also, as we forecasted on the first quarter call, we started to see the electronic dispense applications contribute to growth late in the quarter. Second quarter 2021 operating profit for the segment was $77 million or 26% of sales. This increase of 30% over prior year operating margin of $59 million or 24% of sales was driven by sales volume leverage, favorable sales mix, and the realization of benefits from cost control measures taken in fiscal 2020. It is encouraging to see the benefits of NBS Next driving the top line organic growth and delivering strong incremental profit margins in both of our operating segments. Finally, turning to the balance sheet and cash flow on page eight. We again ended the quarter with a very strong balance sheet and sufficient available borrowing capacity. Cash totaled $133 million and net debt was $734 million, ending the quarter with a 1.2 times leverage ratio based on trailing 12 months EBITDA. Free cash flow in the quarter was strong at $94 million. which was 4% above the prior year free cash flow. Cash conversion on net income was 75% in the quarter, which was below normal levels due primarily to a $50 million discretionary pension contribution. Improvements in working capital efficiency contributed favorably to our free cash flow in the quarter. The year-to-date free cash flow conversion rate remains north of 100%. I'll now turn the call back to Naga.
spk07: Thank you, Joe. Let's turn to slide nine. Again, thank you to the Nordstrom team for delivering this outstanding performance in the quarter. We hosted and investor day on March 30th to detail our long-term plans for making a strong Norton even stronger. If you did not have a chance to participate in our investor day, the replay of the event is available on our website. Now, I'd like to summarize a few highlights. First and foremost, We described the strong growth drivers enabling Norton's future profitable growth performance, including diverse end markets, new applications, and emerging markets. While our growth drivers are unique to each of our divisions, the diversity of our end markets and high level of recurring revenue made us resilient through fiscal 2020 and our strengthening in fiscal 2021 results. At our investor day, we also reiterated our commitment to innovation, one of Norton's key competitive advantages. Our customer intimate model gives us insight to the needs of our customers, and we developed our product roadmap as an enabler of their new technologies. In the presentation, we highlighted two of our newest products, the ProBlue Flex Melter for packaging customers and the new Vantage integrated dispense and automation system, which is the first fully integrated vapor handling system designed for the semiconductor industry. In both cases, these new products are advancing automation, reducing cost, and accelerating productivity. Both products contributed to record sales in the quarter. To make a strong Norton even stronger, we also spoke to the new competencies that we are building, notably the NBS Next Growth Framework. This data-driven framework is driving our decision making. We are already starting to see the benefits of our deployment of NBS Next. Last year, we announced structural cost reductions that were based on our strategic discipline analysis. It also drove our decision to divest the screws and barrels product line at the beginning of the second quarter. Simultaneously, We approved new investments in our top opportunities, such as funding new equipment for our Loveland, Colorado facility to grow our biopharmaceutical components and building a new facility in Mexico to support the needs of our Norton Medical interventional solution products. These decisions are strengthening both our top and bottom line. Since being vaccinated, I have started to travel to our businesses. It is exciting to see the engagement of our teams deploying NBS Next to make data-driven decisions on how to delight our best customers or invest in the most innovative technology projects or prioritize top products in manufacturing operations. Turning to slide 10, NBS Next is a critical pillar of our new Ascent strategy, which is designed to deliver top-tier revenue growth with leading margins and returns. In addition to NBS Next, the other interconnected pillars of the Ascent strategy are owner mindset, Norton's entrepreneurial division-led organization, and winning teams, not since talent strategy. It is also exciting to experience the progress we are making in each of these pillars. We now have all of our division leaders in place, and they are focused on building a deep and diverse bench of talent who will support our long-term growth. The successful execution of the ASCEND strategy will help us achieve our long-term growth milestones of $3 billion in revenue and 30% EBITDA. This target will be achieved through a combination of organic growth within each segment, as well as the acceleration of acquisitions. Clearly, the record second quarter and updated fiscal 2021 outlook demonstrate that we are off to a strong start towards achieving our long-term goals. Now let's turn to our updated fiscal 2021 outlook on slide 11. As we enter the fiscal third quarter, backlog is strong and trailing 12-week order entry is up double digits above prior year levels across the majority of our product lines and geographic regions. For full year fiscal 2021, we expect sales growth to be approximately 8% to 10% over fiscal year 2020. Excluding the 3% headwind from the revenue of the divested screws and barrels product line in the prior year, our forecasted full-year sales growth would be approximately 11 to 13%. Our forecasted sales growth, combined with strategic actions taken around efficiency and cost, is forecasted to deliver earnings in the range of $7.20 to $7.50 per year. diluted share. The midpoint of this guidance reflects 34 percent earnings growth compared to prior year and a 25 percent increase over 2019 earnings. Our current financial results signify more than the benefits of the recovery. Knotson wins because of the foundation of our precision technology focus, customer-centric model, and diversified end markets. We are well positioned to benefit from the recovery, and our products remain a critical solution to our customers through the cycle ahead. Additionally, our management team is fully engaged in advancing the implementation of the Ascend strategy which will establish a growth framework, entrepreneurial organization, and a deep, diverse team to drive sustainable, profitable growth. As always, I want to thank our customers, employees, and shareholders for your continued support. With that, we will pause and take your questions.
spk01: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. The first question comes from the line of Allison Polnacki with Wells Fargo.
spk04: Good morning. Naga, we're hearing a lot about supply chain issues sort of impacting maybe some growth opportunities, particularly as we enter the back half. Any thoughts there in terms of what you're seeing at this point?
spk07: Yeah, thank you, Alison. You know, from our standpoint, we've had some issues, but very limited around resin. From where we stand today, it is really non-material to our expectations in the back of the year.
spk04: Perfect. And then I just want to go back to your comments on medical. You know, obviously you're seeing an improvement there, and you mentioned the single point of use on the consumable side. Is your sense, is that an inventory issue that people are replenishing inventories, or is this sort of true demand kind of behind what you're seeing today?
spk07: Yeah, in our single-use components, these are for bioforma applications. So think of vaccine, think of – new biopharmaceuticals that are coming on the market, we truly see it is representative of the demand because this is a demand we have seen all through last year as well as this year. So, you know, we have very limited supply chain kind of restocking in this business. We sell mostly directly to our customers there.
spk04: Great. I'm just going to sneak one more in. Any mixed issues to be mindful of in the back half of the year for you?
spk07: Joe, you want to take that one?
spk08: Yeah, I think Allison, good question. I do think that the mix was quite favorable when we looked at our Q2 performance, but when we look at the forecast for the remainder of the year, again, it's pretty much a broad based demand environment that we see in as it relates to geographies and as you see the volume organic growth in both segments. So I would tell you there's no mix issues to be aware of heading into the back half that we see at this time.
spk04: Perfect. Thank you.
spk01: The next question comes from the line of Sari Bronowski with Jefferies.
spk03: Good morning. Congratulations on the great quarter. You know, you had really great margin performance in IPS. Could you just talk through if this is the right level to think about going forward given the divestiture, and how should we think about the benefit of lower travel that you mentioned?
spk08: Joe, you can take that one. Take that one, Naga. When you look at our IPS margins in the quarter and our Norton record level margins in the quarter, you know, we did benefit clearly from the volume leverage. And then the improved sales mix, when you think about that, the divestiture of the screw and barrel business had a significant impact. I would tell you at the Norton level, it probably expanded margins 150 to 200 basis points. And at the IPS level, you're talking about 300 to 400 basis points can be attributed to the improved sales mix tied to the divestiture of the screws and barrels product line. And so even excluding that, there's nice margin performance. When you think about going forward, I do think there's a component, as I mentioned in the script, where expense will start to ramp up a little bit in the second half, particularly if you think about our direct sales model. With the travel and expense, T&E expense coming up, we'll begin to ramp a little bit more in the second half than we saw in the first half.
spk03: Great. And then, you know, with leverage now at 1.2 times, it's really below your target range. Maybe we could talk a little bit about what you're seeing in the M&A market or how you're thinking about share buybacks.
spk08: Yeah, so on the M&A market, I would tell you we remain very active. In looking at deals, I will tell you there's a feeling in the market that the number of deals coming across continues to, I would say, increase as we work through post-pandemic. And so we remain very active. Strategic discipline that we reviewed in our investor day is our primary filter. And then after we confirmed strategic discipline, we put the financial criteria on. and we remain financially disciplined. So we're looking, as you know, for acquisition targets, primarily in the test and inspection and the medical space, and we will continue to be active. So the volume, I would tell you, is picking up in terms of what it is we're looking at. As it relates to care buyback, you know, we target to offset dilution. I will point out, Siri, that we did contribute an additional $50 million to our defined benefit pension plan, so now our U.S. funded status is north of 98%, and we did pay down $150 million in debt in the quarter.
spk03: Thanks for taking the question.
spk01: The next question comes from the line of Connor Linnett with Morgan Stanley.
spk12: Yes, thanks. I was wondering if we could return to the supply chain conversation a little bit. So it sounds like availability is really not an issue for you. Are you seeing component cost inflation that you need to address with price, or is that also relatively muted?
spk08: Yes. When you think about inflation as it relates to NORTs, and first of all, you have to think about our overall NORTs and cost structure. And I would tell you the material cost is a relatively small component. of our overall cost structure. So manufacturing conversion costs, fixed manufacturing costs, and SG&A represents a larger component than the material cost itself. We do have procedures and processes in place to address material cost increases with price, where, and when appropriate. But I would tell you, Connor, that the challenge is more on the labor cost, potential inflation there, or availability. So when you think about the NBS Next initiatives and investments that we've made in inlining and streamlining the manufacturing process, this is really helping us mitigate some of those pressures on both inflation and availability of the labor costs on the manufacturing side. And where availability isn't a problem, we're able to expand our capacity to serve this 10% volume growth. That's the pressure I would tell you we're seeing is more on the labor side than on the material cost inflation side.
spk12: Okay, got it. And then maybe just sticking with the cost theme, you called out the discretionary expenditure headwind as we move, you know, further towards reopening. Could you maybe just give us an order of magnitude to think about? Is that, you know, at a north level, a 50 basis point, 100 basis point? How should we think about how significant that could be?
spk08: Yeah, I would tell you if you just look at the first half year over year, it's about probably a $5 million benefit in terms of travel and entertainment expense, particularly on our commercial sales force, direct sales model. So a portion of that's going to start to come back.
spk12: Okay, understood. And maybe just to tie this together with some of the questions that others have been asking, I mean, it seems like based on the EPS guidance, that there is a certain degree of margin degradation, maybe some, you know, reversal of mix. Is that the right way to think about the back-off outlook, is that there could be some pressure on margin, but the top-line growth is strong?
spk08: Yeah, so the top-line growth is strong. I think, you know, as you're familiar, the mix in any given quarter could be favorable or unfavorable, and I do think in Q2 we did see a favorable mix. As it goes forward, that may moderate a little bit. Then I would tell you on the cost structure side, some of that expense should start to come back.
spk07: Joe, let me add something to this. Connor, the best way to think about us is that our long-term incrementals on growth is 40% to 45%. We believe based on current guidance, we would still be north of that 40% to 45% incremental in the back half. So, yes, there is some cost coming back, but still a pretty solid performance is what we are forecasting.
spk12: Got it. Appreciate the color. I'll turn it back.
spk01: The next question comes from the line of Jeff Hammond with KeyBank Capital Markets.
spk00: Just on backlog, can you give us the backlog number and what that is up organically? I don't know if I missed that in the presentation. Yeah.
spk08: Jeff, these are abnormal times coming out of the pandemic. And when we're looking at our customers' behavior, our backlog, our order entry, we're seeing differences now in the timing of delivery. And so I don't think our backlog is indicative of the next quarter of sales. What I can tell you is our backlog and our order entry are up double digits, and therefore we have confidence in the guidance that we provided. But to give a backlog number right now would not be appropriate, I think.
spk00: So the idea is that you're getting significant orders, but they're longer turnaround than normal?
spk08: Yeah, we do see in particular businesses on the system side customers placing orders in advance. And so, therefore, with delivery times that go out actually into 2022, which is a little bit abnormal for our historical customer order pattern. So, therefore, it's distorting that data point.
spk00: Okay. And then just maybe just to go back to IPS margins, is there a way to give what the underlying core incremental margins were in the quarter to And I'm just trying to understand, like, outside of screw and barrel, like, how much, you know, mix drove it versus some of this temp cost and kind of how you think about that in the second half because those were pretty eye-popping.
spk08: Yeah. So when you think about the IPS business in the quarter itself, I would tell you, The screw and barrel divestiture expanded margins roughly 300 to 400 basis points. So if we were 35% OP, you can drop that down, which is still a very strong north of 30% operating profit number for that business. And so the way to think about that is the power of the leverage on the 8% organic growth within that segment. And so as Naga mentioned, very strong incremental margins. in that business, some favorable mix on the consumer non-durable as it relates to packaging, some favorable mix also within our industrial coatings segment. And it's also in this business, the industrial coatings, where we took some actions last year to structurally reduce our costs late in Q4. And so you see some of that benefit coming through as well.
spk00: Okay. And then just last one, you mentioned in advanced tech, the electronics precision dispense kind of picking up late in the quarter. Maybe that's still lagging from a growth standpoint. But just talk about what you're seeing there from a forward kind of order, quoting visibility. Thanks.
spk07: Joe, let me take that one, and then you can give some color. Jeff, what we're beginning to see here is On the PCB side, we're starting to pick up some pretty strong order patterns around surface treatment, you know, our plasma surface treatment systems. Late in the quarter, we also begin to see our fluid dispense product lines in electronics beginning to contribute across a diverse set of the electronic supply chain. Semiconductors certainly helping, PCB helping, and complex electronic components also helping. So I would say we feel pretty good about what we see in that business and expect it to contribute nicely in the quarters to come. Okay. Thanks a lot.
spk01: The next question comes from the line of Mike Halloran with Baird.
spk13: Good morning, everyone. Good morning. So on the medical side, maybe just some thoughts on elective versus non-elective, underlying trends as you're seeing it today, and then how you think that inflection curve happens from here. Obviously, saw some nice improvement this quarter. Is this kind of the right sustainable pace? And when do you think you're back to what a more normalized level would look like?
spk07: Well... You know, when we come to normalized levels, that is going to be difficult to predict. But let's talk a little bit about what we're seeing in the business right now. First and foremost, if you think about our bioforma side of the business, where we have the fluid components, continues to be strong, has been strong, continues to be strong, and mainly led by not only vaccine, but just the number of drugs that are getting manufactured and introduced from a bio, you know, from a perspective is just accelerating. We expect that part of the business continue to contribute in a nice way. On the elective selective surgery, what you're beginning to see is the COVID slowdown is certainly benefiting and you're beginning to see elective surgeries or selective surgeries in our case starting to pick up. We saw some nice growth in the business in the quarter. We expect that the next two quarters look pretty good. And, you know, it's really difficult for us to say would we get back to high single digits, which is normally what we expect out of this business in, you know, end of this year, early next year. It's difficult to say. But, you know, that's kind of how we're thinking about it is that our expectation for the second half of this business is still pretty good.
spk13: And then maybe this is a similar conversation on the industrial-facing end markets, underlying trajectory, trend, any nuance that you're seeing within those pieces?
spk07: Yeah. The industrial businesses, as you can see, there is a certain amount of pent-up capex spending demand that we are certainly enjoying in the quarter. Based on backlogs and order entries we see, We expect a pretty double-digit kind of growth is what implies in our guidance for the full year. What is difficult for us to pinpoint is that when this gets to a normalized level, that is something difficult to predict right now. But based on what we can see, we feel really good about the second half having a pretty broad-based approach performance across all of our core end markets and across all of our geographies.
spk13: Thanks, Naga. Appreciate it. Thank you.
spk01: The next question comes from the line of Chris Dankert with Longbow Research.
spk10: Hey, good morning. Thanks for taking the question. I guess thinking about the strong semiconductor demand we saw in the quarter last Can you comment about kind of the mix there? Is this being more driven by, you know, strong product adoption of the T&I business, or is this more customer expansion or a combination of the two? Just any comments there would be great.
spk07: Yeah, thank you, Chris. You know, we certainly benefit from our T&I business, which is having a really strong, you know, number of quarters and continues to benefit from this semi-investment and semi-growth, and also the complexity of of the semiconductors, complexity of electronic components as well, definitely benefiting the T&I business. But late in the quarter, we begin to see, as I indicated in the script, we're beginning to see contribution from our fluid dispense business as well. Our surface treatment product lines are doing really well. We're beginning to have some very good progress in our coating as well as dispense product lines as well. And so I, in terms of where we participate, you know, broadly, I will tell you in the semiconductor space, we, we participate you know, in first in the surface cleaning side of it. Second in the underfill in terms of packaging in the past, a lot of this packaging happened post way for sliced and then packaging happens. But now we're beginning to see packaging starting to move up front, and they're starting to participate there as well. So, you know, pretty broad-based growth, Chris. I wouldn't pinpoint that just semiconductor or just one particular product.
spk10: Got it. Got it. Thanks for the call, sir. And not to put too fine a point on it, but is it safe to assume TNI was up double digits in the quarter, though?
spk13: Yeah, yes.
spk10: Okay, okay. And again, you called it out a little bit ago, very, very robust PCB demand and growth there. Is this part of the beginning of some of the 5G cycle, in your opinion, or is this just it's really much more broad-based than that?
spk07: Yeah, we have spent quite a bit of time in the past year or two on a shift in the strategy in electronics for us is to get to a place where we have a broad set of applications across the electronic supply chain. And so what I will tell you is the growth that we are seeing, the forecasting that we're thinking about is a broad-based demand rather than a specific particular product.
spk10: Understood. Thanks so much, Naga. Sure. Thank you, Chris.
spk01: The next question comes from the line of Matt Somerville with DA Davidson.
spk11: Thanks. Just to follow up on the whole, you know, the test and inspection piece of the business, what sort of anticipated duration do you see NAGA in this cycle? What inning are we in? And do you expect that double-digit growth that you experienced in the second quarter to continue into the foreseeable future? What's the right way to kind of be thinking about that?
spk07: Yeah, I would say typical semi-cycle is three to five years, depending on what happens. And we would say we are probably in year one or a little bit past year one. And so the best way to think about it is early in the cycle, certainly the growth is much more magnified than it is in the back half of the cycle. So, you know, it's very difficult to sort of pinpoint how many more quarters a year we have on this double-digit kind of growth. But over the cycle, the best way to think about our end market opportunity is 4% to 5%, you know, which is kind of what we indicated in our investor day. We clearly are in the, you know, in the first leg of the growth is maybe the best way to think about it. Matt, hopefully that helps you.
spk11: Thanks. And then just one last one on pricing. With the strength in demand, you're seeing pretty much across the board in your business, double-digit growth in orders and backlog. Are you able to be more of a price taker? Are you positioned to be so as we think about this going forward, given the demand environment you're experiencing?
spk07: Let me maybe make one comment, and then, Joe, you could add a little bit more detail to it. That would be helpful. You know, think about the gross margin of the company. pretty strong, right? 55 plus percent. And that is indicative of the value we create for our customers. In some of our product lines, we have a regular price increase once a year to sort of take into account inflation and things like that. But we really need to be thoughtful. You know, we create value and we get paid for it. And should inflation become an issue, we will certainly have the opportunity to cover it. But in general, we feel good about where we are. Joe, you want to add any more color to it?
spk08: Yeah, again, I would just say that we feel very good about our gross margins, the record 57% gross margin. We have processes in place to monitor, you know, raw material, cost increase, inflation, and processes to maintain that margin. But I would tell you the best opportunity is to support this volume growth. and to meet the customer's needs as opposed to take this opportunity to raise price because we're already running at very nice incremental margins, as Naga mentioned, as we look at the back half and this double-digit organic growth. As we think about it, we are managing the incremental margins to be attractive, and that's the best opportunity to support the organic growth in our customers.
spk07: And, you know, maybe one more to think about is just to reiterate, you know, Norton's position. Typically, Norton is the lowest cost but a very critical component, you know, really small part of our customer's total cost stack, right? So, you know, our components are smaller part of the company, the customer's total cost stack. And so should we need to raise prices, we are able to provide that.
spk11: Thank you, guys. Thank you.
spk01: As a reminder, if you would like to ask a question, please press star 1. That is star 1 for questions. The next question comes from the line of Christopher Glenn with Oppenheimer.
spk06: Thanks. Good morning, all. Covered a lot of ground so far. I did want to follow up on industrial demand patterns. You know, you've seen any demand transitions within industrial recovery at this stage. And what I mean by that is, you know, typically early on, you just see a lot of production-oriented OEM activity and then more maybe mid-cycle type capital improvements driven by, you know, different types of capacity coming online. Just wondering any light you could shed on how that's evolving.
spk07: Yeah, from what we can see, Chris, today is mostly what we're seeing is a demand pickup based on pent-up CapEx spending. And we've not seen significant capacity yet, ads yet.
spk06: Okay, thanks. Sure.
spk01: The next question comes from the line of Andrew Bascali with Ringberg.
spk09: Hey, guys. You know, I know you got a lot of questions on the supply chain and navigating that. And I think I was hoping you could explain one thing in that, you know, headlines every day are around, you know, these component shortages. I'm just wondering, you know, what's the nature of your business in that you're able to kind of sidestep that and improve You know, correct me if I'm wrong, I mean, your business tasks and inspects various components and puts codings on other components. I just don't quite understand. I guess I would not have expected a quarter in which, you know, that performs so well. So just can you get any color there?
spk07: Yeah. Let me maybe give you some overall point of view, and Joe can add a little bit more color to it at the end with some data. Think about Nordson from – from who we are, right? What we are is, you know, we are an assembler of differentiated components to create value for our customers in specific end markets for critical applications. So what that really is is that we are a assembler of value-added components. And what that really means is that materials, as a part of our total cost structure, fairly small. So that's one thing to keep in mind. The second is that we do manufacture our products in country, in region in most of the cases. So we really don't run into a lot of supply chain issues that way. So if you put those two things in perspective, I'm not saying we don't have any problems at all. We've had one or two issues here and there, but they're really not material.
spk09: You're just so niche. You can't look at it. You can't look at the broader headlines. You're kind of too narrowly focused that it really doesn't impact you, it seems.
spk07: Yeah, and we're not a big processor of materials either, right? Yes, we have some consumable business, but we're not a big resin converter to contract manufacturing of injection molded parts. That's not who we are, right?
spk09: Yeah. Okay. And then maybe, Naga, you know, you put out that, you know, long-term target of 30% EBITDA margins, but it looks like you're, I mean, this year you're going to brush close to that. I mean, I think you'll be into the 29s, high 29s, you know, based on the implied guidance. So I guess it's a way to look at that long-term guidance more like should we be looking at your of your EBITDA growth from like a dollar perspective? Or, you know, I guess, or are you just being really conservative with being able to achieve 30% long term because you're practically there after this year?
spk07: You know, Joe, Joe can walk you through some of the some of our thinking, but really, it is a long term target. And what you're seeing now is only the impact of our organic growth this year. So And our long-term guidance includes organic growth and a dilution from acquisition. So there's two things. We don't believe this is a conservative estimate. This is through the cycle. Over the five years, this is what we expect we will do. Joe, would you add a little bit more color to that, please?
spk08: Yeah, I mean, I would just add, Andrew, that, you know, when you think about it, the organic growth has to drive margin expansion north of the 30% at the EBITDA line. such that when that $500 million of acquired revenue comes in at a 20% EBITDA, the net dilution is down to the targeted 30%. So our 30% is still an appropriate goal. It includes the dilution of $500 million worth of acquisitions over the next five years at a 20% EBITDA.
spk07: Another way to think about it is that for every dollar of growth, you know, our expectation within the businesses and where we're headed is that we're going to have 40% to 45% incremental. That's really what we're focused around. And, you know, so on a yearly basis, that's how we're thinking about it. And if you project that over time with acquisitions, that's sort of how we come to this 30% EBITDA target.
spk09: Okay. Thank you, guys.
spk01: The final question comes from the line of Walt Liptak with Seaport Global Research.
spk08: Hey, good morning, guys. Good quarter. Good morning. Thank you. I wanted to follow up on a couple of things. When you were talking about the backlog earlier, you were saying that there were some systems that were booking out to 2022. I wonder if you can give us some idea of, you know, which segment those might be in. And why they're running so low. So, so long is, you know, is it just timing of when these things are supposed to get it solved or is there something else going on? Yeah, well, I would just tell you our understanding is that it's the macro economic environment where people are hearing what what's been discussed on this phone call. as it relates to supply chain challenges. And so some of our customers are, I think, responding to that and placing orders in advance of when they would typically place orders. So they're not building orders or building inventory. They're just placing their orders with us earlier than they used to. And so that's what we view as going on and why we're choosing not to disclose the backlog number at this time. Okay, I understand. Can you give us some color, though, about, you know, which segment or is it kind of across the board where customers are just concerned about future delays and so they're sort of, you know, replacing these orders? Yeah, I would tell you, we see it a little bit in both of our segments, and so it's not one segment specific. And and it's generally tied to those products that typically have to have a longer lead time naturally that that they're Calling and ordering in advance of those and that's why I made the comment about the systems as it relates to the parts business You know many of those it's book and ship within the week And so there we don't have that that built up backlog Okay, great and You know, as you pointed out, the gross margin looked absolutely great. And, you know, I understand that early in the cycle, you know, there's some things that are abnormal. But as we look into the back half of the year, is this 57 percent? Is this a reasonable run rate given what you're seeing from volume levels and mix? Yeah, I think this 57 percent, I would tell you, is a new high water mark. But I do think that a lot of what drove it is sustainable. And when you think about the impact on the divestiture and the improved mix, the divestiture of the screw and barrel business, you think about the benefits of the cost structure actions that we took last year. And at these increased demand levels, this is the type of leverage you would expect with strong incremental margins. you know, on any given quarter that can fluctuate up or down 100 to 200 basis points based on mix. But I do think this is reflective of the profitability of this business at these sales levels. Okay, great. And then maybe a last one for me is just, you know, I think it was in Naga's comments, he made a comment early on that the majority of the products are growing double digits. And, you know, some of those elective surgery medical are not growing double digits. But I wonder if you can talk about what else is not growing double digits and, you know, if you think you can get a recovery in those in the back half of the year. Yeah, I guess let me take a stab at it and then Naga can add some more color. But When you look at a geographic split, Walt, I would tell you the one that was not growing double digits in the quarter organically was Japan. There, our business experienced, or in that region, they experienced significant shutdowns due to the pandemic, and so we didn't deliver double-digit organic growth in Japan. But I think the comment then, going back to your question on the electronics and the medical, I think if you look at our performance over the last several quarters, the medical was driven by the biopharma and the single fluid component, single use application. And what we started to see late in the quarter was the growth of the interventional solutions, which is encouraging because that's the one that's more closely tied to elective procedures. or selective procedures, and so it was encouraging to see that come back. On the electronic space, you know, the T&I had been the strong performer, strong performer, and it was encouraging to see the electronic dispense, fluid dispense portion of that business come back and contribute to growth in the later part of Q2.
spk07: And so that was the comment there. One other thing I would add is that if you compare the growth rate year over year, Remember, last year, Norton's growth performance or, you know, declines were not as deep as, you know, we were down about 4%. So the double-digit growth we are seeing is on top of what was not too bad of a decline last year, given sort of the broader environment.
spk13: Okay, got it. All right, thank you very much, guys.
spk01: I will now turn the call back over to Naga for closing remarks.
spk07: All right. Thank you. I want to reiterate that we are well positioned to benefit from the accelerating recovery, and our precision technologies remain a critical solution to our customers through the cycle ahead. Additionally, our management team is fully engaged in advancing the implementation of the Ascend strategy, which will establish a growth framework, entrepreneurial organization, and a deep and a diverse team to drive sustainable, profitable growth. Thank you for your time and attention on today's call. Have a great day.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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