Nordson Corporation

Good morning and welcome to Nordson Corporation's second quarter fiscal year 2023 results conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Laura Mahoney, Vice President of Investor Relations and Corporate Communications. 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, May 23rd, to report Nordstrom's fiscal 2023 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.nordsen.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, May 30th, 2023. During this conference call, references to non-GAAP financial metrics will be made. A 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 second quarter highlights. He will then turn the call over to Joe to review sales and earnings performance for the total company and the three business segments. Joe will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our earnings performance. He will conclude with an update on the fiscal 2023 full year and third quarter 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 Nordstrom's fiscal 2023 second quarter conference call. During the second quarter, Nordstrom continued to experience a macro environment that can be described as a multi-speed economy. Customer demand in industrial, consumer non-durable, and medical interventional end markets were solid. Alternatively, electronic dispense product lines are being negatively impacted by the downside of the semiconductor cycle. And sales of biopharma product lines in our medical fluid components division continues to normalize against challenging prior year comparisons as customers continue to work through excess inventory. These factors balanced themselves out and the team delivered organic sales growth of 1% compared to prior year's second quarter. During the quarter, the teams also took targeted cost actions in areas where we are seeing weakness in customer demand. These will enable us to effectively navigate the current business environment and strengthen our long-term position for profitable growth. Overall, we remain invested in our competitive differentiators, including our direct sales force, product innovation, and the training and execution of NBS Next growth framework. In a few moments, I'll speak more about the business and what we're seeing in our end markets. But first, I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. On slide number five, you will see second quarter fiscal 2023 sales were $650 million. an increase of 2% compared to the prior year's second quarter sales of $635 million. The increase was driven by organic growth of 1% and a 3% benefit from the cyber optics acquisition, offset by unfavorable currency impact of 2%. During the quarter, sales were strong in Asia Pacific with 7% growth, partially reflecting the timing difference related to the Chinese New Year. Gross profit for the second quarter of fiscal 2023 totaled $352 million. Excluding severance costs, gross profit totaled $354 million, or 55% of sales, comparable to first quarter 2023 profitability. as the team continues to actively manage the price-cost dynamic in these inflationary periods. When compared to the prior year, adjusted gross margins are down 180 basis points, resulting from sales mix changes and factory inefficiencies at sites dealing with reduced volumes. Operating profit totaled $173 million in the quarter. During the quarter, we recorded one-time severance costs totaling $3 million. Adjusted operating profit, excluding these non-recurring items, was $176 million in the quarter, or 27% of sales, 4% below the prior year adjusted operating profit of $184 million. EBITDA for the second quarter was $203 million, or 31% of sales, which is in line with our long-term target profitability level. However, $6 million below the prior year EBITDA of $209 million. The decrease was primarily driven by a $4 million currency translation headwind plus unfavorable sales mix offset by the cyberoptics acquisition growth. Looking at non-operating expenses, interest expense increased $5 million associated with higher borrowings and increased interest rates. Other net expense decreased $38 million, primarily related to the prior year non-recurring non-cash pension annuitization charge of 41 million dollars tax expense was 34 million for an effective tax rate of 21 percent in the quarter which is in line with the prior year second quarter rate and the forecasted full year rate for 2023 net income in the quarter totaled 128 million dollars or $2.21 per share. Adjusted earnings per share, excluding non-recurring severance costs, total $2.26 per share, a 7% decrease from the prior year adjusted earnings. The decrease is primarily driven by lower operating profit and higher interest expense. Now let's turn to slide six. through 8 to review the second quarter 2023 segment performance. Industrial precision solution sales of $336 million increased 6% compared to the prior year second quarter, driven by strong organic growth of 9%, partially offset by unfavorable currency impacts of 2%. The organic growth was driven by robust demand in the polymer processing product lines, as well as products sold into consumer non-durable end markets across most regions. Operating profit for the quarter was $112 million, or 33% of sales, which is an increase of 9% compared to the prior year adjusted operating profit of $102 million. despite some unfavorable currency translation impacts. As mentioned last quarter, IPS remains our most globally diverse segment, and therefore most exposed to currency translation changes and the timing difference with the Chinese New Year. Looking on a constant currency basis and year-to-date, this segment has delivered 5% organic growth and incremental margins of 60% ahead of our targeted 40% to 45% incremental margins. This segment's continued strong performance demonstrates the power of the NBS Next Growth Framework. On slide seven, you'll see medical and fluid solution sales of $167 million. decreased 3% compared to the prior year's second quarter. This change included a decrease in organic sales of 2% and a 1% decrease related to unfavorable currency impacts. Strong demand for medical interventional solutions product lines, primarily in the Americas, was more than offset by softness the medical fluid components serving biopharma applications and fluid solutions product lines in europe and asia these factors drove a net two percent organic sales decrease during the second quarter we took targeted cost actions in businesses responding to volume pressure that resulted in one million dollars of non-recurring severance costs Second quarter adjusted operating profit was $49 million, or 30% of sales, which is a decrease of $9 million compared to the prior year operating profit of $58 million. The decrease in operating profit was driven by the meaningful sales mix changes within the medical product lines and related factory inefficiencies due to reduced volumes. It is noteworthy that the segment profitability sequentially improved 400 basis points over the first quarter of 2023 and is again running more in line with the profitability levels of the prior two years. Turning to slide eight, you'll see advanced technologies solution sales were $148 million. a 1% increase compared to the prior year second quarter. During the quarter, the cyberoptics acquisition contributed 12% growth. Organic sales volumes were down 10%, and unfavorable currency impact during the quarter was 2%. The organic decrease was driven by electronics dispense products serving the semiconductor end markets in the Americas and Asia, slightly offset by continued growth in the test and inspection product lines. Cost reduction actions during the second quarter of fiscal 2023 to address the significant decrease in electronic dispense product lines were structural in nature and resulted in $2 million of non-recurring severance costs. The second quarter adjusted operating profit was $28 million, or 19% of sales, which was below the prior year second quarter operating profit of $40 million. The decrease in adjusted operating profit was driven by the organic sales decrease, partially offset by the profitable acquisition growth. Finally, turning to the balance sheet and cash flow on slide nine. Our second quarter balance sheet includes cash of $129 million and net debt was $820 million, resulting in a one-times leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities. Free cash flow in the quarter was $159 million. bringing the year-to-date cash conversion rate on net income to 118% as working capital efficiency improved during the current quarter. During the second quarter, we made $37 million in dividend payments and spent $47 million on repurchasing approximately 221,000 shares of company stock at an average price of $212 per share. For modeling purposes, in fiscal 2023, assume an estimated effective tax rate of 20 to 22% and capital expenditures of approximately $45 to $50 million. We'll now turn to slide 10, and I'll turn the call back to Naga.

Thanks, Joe. Going into fiscal 2023, we knew we would be dealing with a dynamic environment. As the year progresses, we gained better visibility to our customers, and I would now like to provide an update of what we are seeing in our end markets. The industrial position solution segment, we continue to see steady demand in industrial, and consumer non-durable product lines. Investments continue to be made in automotive product lines, notably electric vehicles. We're also seeing continuing strength in our polymer processing product lines related to recycling and battery applications. These diverse end markets and applications combined with our direct sales and the combination of both systems and parts revenue is driving the strong year-to-date profitable growth for this segment which Joe reviewed. Turning to the medical and fluid solutions segment, we continue to experience double-digit growth in our interventional solutions product lines, and the backlog is strong. These products include balloons, cannulas, and catheters that are integrated into medical devices for a variety of procedures, including heart valve replacement, stent delivery, angioplasties, and ECMO for blood oxygenation. The fluid solution product lines within the MFS segment serve a diverse set of end markets including industrial, construction, electronics assembly, animal health, and medical. The construction and electronics assembly end markets within this product line continue to see soft demand, particularly in Asia and Europe. Finally, in the MFS segment, are medical fluid component product lines, which make single-use plastic connectors, topcocks, and valves for the medical and biopharmaceutical markets. Over the past two years, this division benefited from strong double-digit organic growth in biopharma applications. As we shared in the last quarter, Our customers in this end market are continuing to work through inventory destocking. As this business normalizes, the patient care applications within fluid components such as blood pressure cups and IV bags remain stable. That said, the normalization within the biopharma market continues to provide a significant growth headwind for the segment. Within the advanced technology solution segment, we are in the midst of the downside of electronic cycle. This has impacted sales in our electronics dispense and cyber optics product lines. We firmly believe in the long-term growth of the electronics end market. We have not yet seen the benefits from investments related to the CHIPS Act, as we all know that the investment in automation, memory, and electronic new product innovation will continue. While the teams took targeted actions to adjust cost structure for current volumes, we remain invested in product innovation that will serve this end market. Growth in our X-ray test and inspection product lines are successfully muting the historic volatility of this cycle. Even in the downside of the cycle, customers continue to invest in T&I systems to ensure quality and efficiency in their manufacturing lines. Our cyber optics acquisition has more exposure to the memory and market so its product lines have experienced weakness. Regardless, we remain excited about the long-term growth opportunities in the optical end market, and we are pleased with the ongoing integration of this business. I remind investors the past two years this segment delivered 17% organic growth on average. This multiple quarter dip is simply the cycle of semiconductor capital expenditures, and we continue to be encouraged by our differentiated technology serving this long-term attractive growth market. Overall, the diversification of the Knotson product portfolio and market and geographic exposure enables sustainable, profitable growth. However, we are in a period where two divisions are seeing significant market corrections, semiconductor equipment and biopharma connectors. The remaining nine divisions or approximately 80% of Nordsten is delivering 5% organic growth year to date at targeted incremental profit levels. Considering the combination of these end market headwinds and tailwinds, as well as current order entry, we are maintaining our previously provided 2023 revenue guidance of zero to 3% growth over fiscal 2022 and narrowing our adjusted earnings to the range of $8.90 to $9.30. Looking specifically at the quarterly sales and earnings split, Q2 2023 was stronger than anticipated as some sales previously forecasted for Q3 were pulled into Q2. Therefore, we're now forecasting third quarter fiscal 2023 sales to be comparable to the prior year third quarter. Third quarter earnings are forecasted in the range of $2.20 to $2.35 per share. We expect fourth quarter sales to be the strongest of the year, increasing low to mid single digits over the prior year fourth quarter. Our full year guidance range sustains our record 2022 sales performance, which is a testament to our dedicated employees, our customer-focused business model, the diversification of our end markets, and the solid execution of NBS Next and the Ascend strategy. As always, I want to thank our customers, shareholders, and the Nordstrand team for your continued support. With that, we will pause and take your questions.

Thank you. As a reminder to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Jeff Hammond from KeyBank Capital Markets. Please go ahead. Your line is open.

Hey, good morning, everyone. Morning, Jeff. Morning, Jeff.

I just want to focus on the biopharma piece. I know you talked about an inventory D-stock, and I think you thought maybe by 2Q it'd be wrapping up, but it sounds like it's lingering. So just trying to get a better sense of your visibility for that business to kind of either hit easier comps or re-inflect positive?

Yeah. Thank you, Jeff. Overall, you know, I would start with Biopharma secular growth drivers all intact. There is no negative impact to what we have always thought about this business. So this is a strong, high single digits growth business. In terms of this short-term destocking, what we had expected was maybe we would be in the second quarter recovering from it, but it doesn't look like it as we've indicated. Our expectations are by the end of this year, we should be back to normalized order patterns from our customers. And so also by this time, you would have the comps the growth comms would also be, you know, anniversary by that time.

Okay, great.

And then just can you give us a little more color on where you saw the systems pull forward in terms of, you know, segment or business detail? And then just a little more color on, you know, your level of visibility for that, you know, strong fourth quarter ramp. Thanks.

Yeah, Jeff, I guess as it relates to the second part of that question, the visibility, I mean, what I would tell you is our backlog remains at a very elevated level near a billion dollars. But the mix is very different. If you think about our business and our backlog pre-COVID, we typically ran with a backlog that was 80 to 90 percent of quarterly sales. But today, I would tell you, you know, 65 percent of our business is roughly normalized. where the backlog is about 1% of quarterly sales. But there's 35% of our business where the backlog remains elevated. I'd call it two and a half quarters worth of sales and backlog. And the majority of this is our large systems business, particularly in the coatings and plastics processing, which to answer your question is in the IPS segment. Here, these are discrete large system orders where we have customer prepayments. And we have clear visibility to customer request dates. That being said, they can move depending on the customer request dates and our ability to ship within the quarters. The remainder of the heavy backlog is in our medical interventional solutions business. And here, these are large blanket orders placed by our customers for spec in product. And then they routinely communicate delivery quantities. So when you think about it in our strong Q4, It's predominantly driven by these heavy systems businesses where we do have backlog, but it could fluctuate on any given quarter. As you saw here in Q2, some of the IPS, the coatings particularly, and the coatings and the plastic processing, which was quite strong. The plastic processing was where we saw the pull in from Q3 to Q2. And so it's really the large systems business within IPS. that's driving our clear visibility, I would say, to Q4 and customer timing, but also results in our ability to pull in or push out on any given quarter for these large systems.

Let me add something to that. The color is that, you know, we feel really strong about the systems businesses, as Joe indicated. It is also a strong testament of NBS Next growth framework in action. You know, what you find here is that the businesses are truly focused on our best products and have the agility and flexibility to respond to customer demand, you know, in a market-leading way. So we feel really, really strongly about it. And we also feel good about our medical interventional business, which is showing some pretty strong strength. I would say those two things drive our optimism for the fourth quarter.

Okay, appreciate the color.

Our next question comes from Sari Boroditsky from Jefferies. Please go ahead, your line is open.

Hi, good morning. So I guess first, the weakness in ATS, obviously it's been well telegraphed, but there's also a lot of government funding going towards semis. You mentioned a little bit about the CHIPS Act. So when would you start to see that benefit? And then how long do we think about this down cycle given that?

Yeah. You know, the way to think about it, if you look at historical semi-cycles and expect that, you know, the normal cycle expects about four quarters of downturn. And so we are in quarter two is really where we are. So any, you know, what we expect is somewhere middle of next year for sure we'd be in a place where this expenditures start to come back, the capex expenditures start to come back. Our conversations, our customers are pretty bullish about the long-term prospects for this business. As you know, given geopolitical considerations, given that SHIPS Act is going to come in, what you find our businesses benefit from capex expenditures that are allocated from these kind of investments our customers are making, are typically towards the end of their construction. So right now people are constructing plants. They would eventually start putting in equipment. Ours would come in at sort of the back end of that expenditure that goes towards packaging of semiconductors. That's where you would see us benefit.

That's helpful. And then thinking with ATS, margins there have been rather volatile. I know some of this is mix related. But what is normalized mix, and how do we think about margins here into 2024 and over the long term?

Yeah, Sari. When you think about the ATS business, as I mentioned in the quarter, we were responding, as you saw, to the lower volumes for semiconductor. And some of those cost actions were structural in nature, which will help us going forward in terms of the margin profile. But a portion of that I would tell you at the consolidated level, over 100 basis points was the impact of responding to the lower volumes both in semiconductor and in the medical fluid components business. But specifically on the ATS segment, when you think about the profitability, you know over the last several years that has improved. quite significantly from, let's just say, 11% operating profit margins up to ending last year at 29%. So right now, running at these volumes, it's roughly 19% in the quarter, and that's how I would think about it for this year at these volumes with this mix.

And as we think about 2024, is there anything, like, mix-related that we should think about benefiting, or is this really a question of volume at this point?

Yeah, I see no reason as we recover that we wouldn't get back to the 22-type margins for this segment.

Great. Thanks for taking my questions.

Our next question comes from Chris Dankert from Loop Capital. Please go ahead. Your line is open.

Hey, morning, guys. Thanks for taking the question. I guess as I look at the guide for fiscal third quarter here, Is the reason for the kind of below seasonal sales expectation, is it just the timing of backlog? Is it that semis are actually getting weaker? Can you kind of give us a little more color on how to think about that third quarter sales guide?

Yeah. As it relates to the semiconductor, and we commented, order entry appears to have leveled off as it relates to those particular product lines. And so while we saw sequential deterioration in semiconductor sales, The guide for Q3 does not imply further sequential deterioration from the Q2 levels for semiconductors specifically. The timing issue between Q3 and Q4, and actually Q2, is predominantly on those large systems sales, Chris, particularly in the plastics and in the coating space where we do have the backlog, and there were cases where some got pulled forward. I would estimate roughly about 10 million got pulled forward from Q3 into Q2. And now, roughly speaking, probably 10 million got pushed out from Q3 to Q4. That's how I would think about the guide.

Got it. That's very, very helpful. And then maybe just kind of a housekeeping thing here. Could you quickly remind us about the mix within that MFS segment and the interventional versus life sciences versus EFD? I think there's a little bit of confusion there.

Yeah, so the way I would think about that is you're correct. So there's the medical biopharma, which is roughly, I would tell you, a $100 million business. And then there's the interventional solution, which is roughly a $300 million annual business. And then the remainder is your EFD, which is your fluid dispense. And as a reminder, that business serves a diverse set of end markets, some of which are medical, some of which are construction, some of which are industrial. And some of which are actually electronics, electronic assembly, some semiconductor. And so it's a very diverse set of end markets served by that business. And so in the quarter, we saw significant strength in the medical interventional solutions business, as Naga has mentioned. And that order entry there continues to be strong. Growth is strong. The biopharma has been talked about. But within that EFD business, I would tell you the electronic semiconductor component of that was pressured within the quarter and contributed to the performance.

Let me add a little bit more color to the fluid components business. Of those 100 million, not all of it is biopharma. A portion of it is biopharma, but you also have other medical fluid connector applications in that business and so what you find is biopharma is the one that is sort of normalizing but you have other connectors that have been pretty stable but the biopharma normalization was fairly significant to show up at the division level and and as i uh indicated in one of my answers you know we expect that this normalizes by the end of the year that's helpful thank you guys

Our next question comes from Matt Somerville from DA Davidson. Please go ahead. Your line is open.

Thanks. Just a couple quick questions. Just to put a finer point on third quarter EPS guidance relative to last year, roughly a 20-cent delta on flat revenue. Currency is going to be probably a somewhat material tailwind in the quarter. Can you kind of parse out what's driving the year-over-year reduction in earnings on flat sales?

Yeah, there's two components also to that earnings guide. One is interest expense is clearly up on a year-over-year basis in the quarter. On the full year, it's going to be up about $20 million, so that contributes. And then also, last year, there was some FX hedge gains in the quarter, which benefited, which are not forecasted to repeat. And so those are below the OP, which I would tell you are having an impact on the year over year earnings guide.

You know, sorry, sorry, Matt, just, just to add, I think it's important to remember that, you know, in the quarter we delivered 31% EBIT margins. So about all of these above the line, you know, operationally, Quality earnings are pretty strong at 31%. Our expectation is that we're at that level going into the second half of the year.

Got it. That's helpful. And then maybe just spend a minute, Naga, talking about any sort of evolution in your M&A funnel backlog relative to coming out of last quarter, how you're thinking about actionability, et cetera, therein.

yeah our acquisition pipeline remains healthy you know we continue to work on projects uh our focus areas remain the same which is sort of you know continuing to expand our testing inspection continuing to add to any core businesses around dispensing if we run into that or you know continuing to scale up our medical businesses so those three things strategically have not changed pipeline pretty healthy, but we remain financially disciplined. And we've talked about those criterias. And so, you know, we continue to work it, but you're going to expect to see us be disciplined, but our work continues. So there is, you know, I can only tell you that This is top of mind and it's an important piece of our growth strategy. Just as a reminder, you know, we committed to delivering $500 million in acquisitions for, you know, over the plan period. And we have acquired up to $225 million in revenues already and fully expect that we would deliver on that 500 million in the plan period. And so, you know, uh good work and we have demonstrated we are flexible in type of deals we are able to do uh you know we have completed cyber optics which is sort of an public company deal you know last year we did a public company carve out but we continue you know we remain invested in this process and feel good about where we are got it thank you our next question comes from mike halloran from baird please go ahead your line is open

Hey, good morning, everyone.

So a couple here. First, how are you guys thinking about backlog normalization? It's still very elevated. It sounds like you don't expect that to get more normalized until probably next year. And then related, in your guidance, is there any change in the assumptions for underlying demand at this point from current levels? Or is the run rate you're seeing kind of what's embedded in the guide from here out?

Yeah, I guess let me take the first part on the backlog question, Mike. I would tell you, if you look at 65% of our business, that backlog is getting close to historical pre-COVID levels. If you say pre-COVID levels, we ran this business at about 80% to 90% of quarterly sales in backlog heading into any given quarter. For 65% of our business, we're at about one-quarter sales. worth in the backlog. So it's almost at historical levels. The piece that hasn't reverted, and I don't know that it is going to revert to historical practices, is about 35% of our businesses, which is the large systems business, the coatings business, the plastics business, and the medical interventional solution business. There, we continue to have backlog at an elevated level. Orders continue to be strong and it's about two and a half quarters worth of backlog that we're running in those businesses. And so we're not seeing that portion of our business revert to historical norms while the remainder is.

The second part of the question then?

Sorry, could you repeat the second part of the question please?

Just within the guide, is there any assumption for improvement or deterioration in underlying fundamentals? Avoiding backlog normalization or anything like that.

Yeah. So, if you look at our assumption on order entry, we do feel that it has stabilized at the level. We saw that stabilization throughout Q2. And so, we continue to – the guide assumes that we remain at these levels. And then what you have within the quarters is the timing of the systems deliveries. And so that's what drives the quarterly fluctuations.

Sounds good. And then within the medical business, the fluid business there, should that just correlate more with ATS at a high level on a forward basis? And how are you guys thinking about the normalization of that piece? The biopharma piece, you've given a lot of context to the other parts of that medical side of things you're feeling pretty healthy about. So just more of the timing on that remaining piece and how you think about that normalizing.

The biopharma part of MFS, I would say normalizes by the end of the year. And so going into next year, we are back to the 78% year-on-year growth. That's our expectation for our medical fluid component business. And as you think about ATS, that's going to be a little bit in the middle of 2024. So our fluid components comes in first, our ATS business comes in next. And some of this is normalization of comps too, so.

Right. No, no, no. Yeah, Naga, I think you mentioned that earlier in the call. I was more specifically referring to the, you know, the parts of that segment that are more the construction, the semi, the et cetera type pieces.

Okay. Joe, you want to? Yeah, I'll tell you, the fluid, this management piece of MFS that's not on the medical interventional and not on the medical fluid component side, That piece of the business, EFD, I would tell you roughly half of that business has the exposure and market exposure similar to our broad ATS segment. And the other half is more industrial construction. There's animal health. There's medical. So that's how we think about it.

Go ahead. Sorry, Nadia.

Sorry, Mike. So for the portion that has the electronics and construction exposure in Asia, you are right. We got to think about it like the APS recovery.

Great. Great. Appreciate it. Last question. You guys mentioned some

You know, actions internally to normalize for demand. Is there any way you could quantify what those cost actions look like? Or are you thinking about more this just run rates with demand and helps mitigate what those decremental margins would look like?

Yeah, the cost actions in the quarter were $3.5 million roughly to respond. Very focused actions within the MFS segment and the ATS segment. to adjust our cost structure. I will tell you some of those, Mike, were structural. So it's not just the varial pill piece, but we did take some structural cost reduction actions, particularly in ATS that will help benefit that segment's profitability recovers back to the historical level, let's just say in 24. And so the savings generated within the quarter or within the year will offset the $3.5 million.

Great.

Really appreciate it.

Thanks. Mike, I know you didn't ask this question, but one thing I would remind all of us is that, yes, the business is adjusting to the market demand, and I think that is the right thing for us to do. But I keep in front of mind for all of you that we stay invested in our customer-centric business model, in our product innovation, in NBS Next, deployment, So this is really important of making sure the company is well positioned as we adjust for these short-term headwinds, is well positioned for long-term continued growth. You know, more than 80% of the business is growing, and so we want to make sure we stay invested in innovation, stay invested in our customer experience so that, you know, we do well in those parts, but also even in the parts where we have some short-term headwinds we are invested in innovation.

Thanks, Nag, and maybe next call we'll have a smoother back and forth and I won't cut you off. That's okay.

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Allison Poliniak from Wells Fargo. Please go ahead. Your line is open. Hi, good morning.

Good morning. Good morning, Allison.

Naga, I'm starting to get some questions on China's Micron ban. Just any comments or color on flow through to you guys or any risks that you guys see there? Thanks.

Micron is, you know, somebody that we work with in our optical business. You know, we are focused more on the long term. So because as Micron expands its capacity in other places, we are certainly going to benefit. As you have seen, they've made some pretty strong projections on where they're investing here in North America. So as I think about this, we're going to benefit from alternate investments they make in capacity. So as you know, Nordstrom benefits when people add new lines, expand capacity, or make alternate investments. So I feel like, yes, that might have a pressure on their projects. questions on what their investment, but I think long-term, the way you want to think about this is this is another reason why they would want to expand their capability. Yes, there may be some impact on their volumes in China, but we're not, our business is not impacted by volume of chips manufactured. And in a lot of ways, you know, we are Very close, our customer-centric business model allows us to stay in touch with our customers in a very close way and allows us to understand where they're headed and what they're doing. So, you know, this is pretty new news. This is probably we thinking about how does it impact us in the long term.

Understood. Thanks. And then you made a comment, IPS. generating better growth and execution than you had laid out at the analyst meeting. I just want to understand kind of where the surprise was for you in terms of that division. Was it sort of the development of products? Is it execution? Just get a better sense and how sustainable you think that is going forward.

Yeah, I think there are a couple of things that I'll point to. First, I'll point to that each of our businesses have been thinking about our NBS Next growth framework and have been using what we call internally strategic discipline. Strategic discipline really is about understanding the best growth opportunities and doubling down on those best growth opportunities. So what you begin to see here is a concerted effort by all of our divisions to be focused on the best growth opportunities. Definitely, they benefit from some macro secular trends that we are pretty excited about. First, in terms of on-shoring or reshoring or friend-shoring, whatever you want to call it, what you find is our customers beginning to add capacity, you know, moving away from Asia and investing more closer to home. We certainly benefit from it. So that is an important one. The other thing that we are benefiting from in this business is that there are a number of emerging electric vehicle applications. that are electric vehicle as well as battery manufacturing continues to evolve. So I wouldn't say this is fully solidified yet, but these new applications certainly help us and help the company play in some new applications we've not had opportunities. But strategic discipline kind of brings all of that into focus for the business, allows them to invest there. So those would be the two things that I would point to. certainly execution inside the business in terms of our factory uh dedication to our best products is certainly also playing out so in most in in the businesses we have holistically implemented mbs next you're starting to see a significantly better customer service that is market leading so i you know i would point to those three things as sort of uh where we see how NBS Next is helping our teams deliver on growth opportunities.

Great. Thank you. Our next question comes from Walt Liptack from Seaport. Please go ahead. Your line is open.

All right. Thanks. Good morning, guys. Good morning, Walt. One day, maybe as a follow-on to the last couple of questions, using NBS Next with these strategic disciplines, In the ATS segment, I think you guys have been working on trying to broaden some of the applications from, you know, traditional semiconductor electronics to automotive sensors, IoT, things like that. And I wonder if there's a metric that you're looking at now or if there's, you know, something you could tell us about sort of the, you know, the fruits of that effort.

Yeah, within the business, you know, we have got like four targeted KPIs that we measure. which sort of gives us a view of how we are doing in terms of deploying NBS Next. And we call it leadership level performance. So we have leadership level performance on customer growth is one of the key metrics for the business within the company. And what you're beginning to see is where businesses that are not impacted by significant macro trends, that metric is trending towards where we would like to be. And it differs from business to business, so I can't give you a specific number. But what I will tell you is business by business, teams are identifying what is leadership level performance. And we are beginning to see some nice progress in businesses on customer growth, certainly on new product innovation. And there are a couple of other metrics around customer service levels that we are very excited about. a number of internal metrics that allows us to track the effectiveness of the strategy deployment and execution that is leading to some pretty strong customer experience that we believe translates into growth and profitable growth for the company.

Okay. All right, great. That's helpful. And then just switching over to IPS again, The 9% organic, I wonder if you could help us understand how much of that was volume growth and how much was price?

Yeah, Walt, this is Joe. I would tell you the price realization for Norton broadly improved in Q2. And so I would estimate that approximately 4% of that 9% for IPS segment would be attributable to price. and 4% would be volume.

Okay, great. And the 60% incremental margins looked really good, too. Is there NBS Next in there so we're now operating at a higher level, or does that just catch up on some of the price cost?

No, I would tell you that NBS Next expressing itself on the price cost We got to the point where I would tell you that that is no longer a headwind. If you recall, the last two quarters, that's been pressuring our gross margins. And so here, that is price-cost on balance for Norton is no longer pressuring the gross margins as we have realized the price increase to offset inflation and maintain our margins. So what you see there in the 60% incremental, margins for IPS is largely consistent with what we've seen over the past couple of years, and I would tell you there's a host of issues there, but it's the benefit of NDS Next being broadly implemented throughout those divisions.

Okay, yeah, congratulations on that. Okay, thank you.

I would like to make one other comment. I think it's back to Matt's question around the Q3 guide. I spoke to what was assumed in the guide below operating profit. But when you look at the operating profit line and the gross margin, our gross margins were roughly 54.5% here in Q2, consistent with Q1. That being said, the drivers of that were a little bit different than Q1. The price realization is no longer a headwind. But what you see in Q2, the margins are pressured by the lower volumes that we've talked about on those two particular businesses. And then offsetting that is the growth. But the growth is coming with a less favorable sales mix as it's becoming and coming in product lines such as plastic processing and others who are delivering double-digit growth. So the profitability, when you think about Q2, going into Q3, profitability from a gross margin and an OP margin should be comparable because the mix is comparable.

We have no further questions. I would like to turn the call back over to Naga for closing remarks.

Our performance reflects the strength of our differentiated position technology, customer-centric model, and diversified end markets. Again, I want to thank Norton's employees for their commitment, which makes these results possible. The continued deployment of NBS Next and the Ascend strategy will position us well for long-term growth. We look forward to the opportunity to talk with you at upcoming investor events. Joe Lara and Steven Lovas, our MFS segment leader, will be at the Deutsche Bank Industrial Conference on June 8th in New York. Joe Lara and Jeff Penbrook, our IPS segment leader, will be at the Wells Fargo Industrial Conference on June 13th in Chicago. And Joe Lara and our segment leader of ATS, Srini Sivaramaniam, will be participating in a virtual roadshow with Loop Capital on June 14. Thank you for your time and attention on today's call. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.