Nordson Corporation

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, August 22nd, to report Nordstrom's fiscal 2023 third 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, August 29th 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 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 third 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 enterprise performance. He will conclude with an update on the fiscal 2023 full year and fourth 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 Norton's fiscal 2023 third quarter conference call. While sales were at the low end of our expected guidance range for the quarter, I would like to recognize the dedicated Norton team who has actively controlled costs in divisions where it was necessary and leveraged the NBS Next growth framework to deliver strong growth in divisions where the market demand was strong. This resulted in adjusted earnings per share of $2.35, which was at the high end of our third quarter EPS guidance. Going into the third quarter, we expected to be pressured by the ongoing weakness in our electronics and biopharma product lines. We understand the macro factors impacting these end markets, and we have the line of sight to returning to growth. This quarter's electronics end market softness is particularly visible when looking at our results in Asia Pacific, which declined 20%. This reflects decreased demand from semiconductor customers in our ATS segment, and electronics assembly customers in our MFS segment. These markets are cyclical, and we anticipate them turning in the middle of 2024. The diversification of our business offset some of this pressure. From a product perspective, we continue to experience double-digit organic growth in medical interventional solutions and polymer processing product lines, as well as high single-digit growth in the test and inspection business. Regionally, we experience mid-single-digit organic growth in both Americas and Europe as our customers in both these regions are rebalancing their supply chains to be closer to the markets they serve. I'll speak more about the enterprise and our exciting new acquisition of IREG in a few moments. But first, I'll turn the call over to Joe to provide a detailed perspective on our financial results of the quarter.

Thank you, Naga, and good morning to everyone. On slide number five, you'll see third quarter fiscal 2023 sales were $649 million. a decrease of 2% compared to the prior year's third quarter sales of $662 million. This was driven by an organic decrease of 5%, partially offset by the favorable benefit of the cyberoptics acquisition. During the quarter, sales were negatively impacted by the end market pressures that Naga referenced. Gross profit for the third quarter of fiscal 2023 totaled $360 million. Excluding severance costs, gross profit totaled $362 million, or 56% of sales, which is comparable to the prior year third quarter. SG&A in the third quarter was elevated to $189 million. above the $181 million we have been averaging for the last six quarters. Third quarter SG&A was impacted by notable non-recurring items that I'd like to highlight. Our teams advanced two separate $1 billion global acquisition targets through the comprehensive due diligence process all the way to the final stages as a result of these two significant and strategic projects we encourage seven million dollars in non-recurring costs from third-party service providers we ultimately chose to move forward only with our egg which included an additional one million dollars for the fairness opinion in total we incurred $8 million in non-recurring costs for acquisition-related activity in the third quarter. Operating profit, excluding these non-recurring items, was $181 million in the quarter, or 28% of sales, 4% below the prior year adjusted operating profit of $188 million. Despite the lower sales volume, we held on to decremental margins on adjusted operating profit of 56%, reflective of our cost controls and improved pricing, which can be attributed to our team's dedication to the NBS Next framework. As we execute the Ascend strategy and scale through strategic acquisitions, EBITDA remains a key profitability metric. EBITDA for the third quarter was $208 million or 32% of sales, which is above our long-term profitability target. However, $5 million or 2% below the prior year EBITDA of $213 million. The decrease was primarily driven by lower sales volume in the quarter. Looking at non-operating expenses, interest expense increased $6 million associated with higher borrowing and increased interest rates. Other net expense decreased $2 million related to a combination of changes in pension and deferred compensation plans as well as foreign exchange gains and losses. Tax expense was $34 million for an effective tax rate of 21% in the quarter, which is in line with the prior year third quarter rate and the forecasted full year rate for 2023. Net income in the quarter totaled $128 million, or $2.22 per share. Adjusted earnings per share, excluding non-recurring acquisition and severance costs, totaled $2.35 per share, a 6% decrease from the prior year adjusted earnings. The decrease was primarily driven by higher interest expense and lower operating profit. Now let's turn to slide six through eight to review the third quarter 2023 segment performance. Industrial precision solution sales of $338 million decreased 1% compared to the prior year third quarter, driven by softness in our product assembly and nonwoven product lines in Asia. This was partially offset by continued strength in polymer processing product lines and growth in the Americas and Europe. Year-to-date, the IPS segment has delivered 3% organic sales growth following two consecutive years of double-digit growth. EBITDA for the quarter was $122 million, or 36% of sales, which is a decrease of 3% compared to the prior year EBITDA of $126 million. The biggest driver of the decrease is lower sales volume. and unfavorable sales mix due to the higher sales volume in polymer processing product lines. EBITDA in the current quarter has improved compared to the prior two quarters of the current year, and year-to-date is $4 million higher than the prior year. On slide seven, you'll see medical and fluid solution sales of $171 million decreased 4% compared to the prior year's third quarter. The decrease was driven by continued softness in the medical fluid components division related to destocking in single-use plastic components for biopharma applications and fluid solution product lines specifically for electronic assembly primarily in Asia Pacific. This pressure was partially offset by double-digit growth in our medical interventional solutions product lines. Third quarter EBITDA was $68 million, or 40% of sales, which is a decrease of $8 million compared to the prior year EBITDA of $76 million. EBITDA continued to be impacted by meaningful sales mix changes within Medical Product Alliance. It is noteworthy that the segment EBITDA margin sequentially improved 200 basis points over the second quarter of 2023, and back to the profitability levels this segment delivered in 2021 and 2022. Turning to slide eight, you'll see advanced technology solution sales were $140 million, a 3% decrease compared to the prior year third quarter. During the quarter, the cyber optics acquisition contributed 11% growth. Organic sales volume was down 13%. The organic decrease was driven by electronics dispense product line serving semiconductor and markets. predominantly in Asia Pacific, slightly offset by continued growth in tested inspection products. The cyclical downturn of demand in the semiconductor market will anniversary in the second quarter of fiscal 2024, which aligns with the historic down cycles lasting approximately four to five quarters. Structural cost reduction actions were taken during the third quarter of fiscal 2023 to address the volume decrease in electronic dispense products. For example, they've chosen to outsource their fabrication shop to focus on more value-added precision dispense technology, resulting in a $2 million of non-recurring severance costs. Third quarter EBITDA was $33 million, or 24% of sales, which was an improvement compared to the prior year third quarter EBITDA of $30 million. The improvement in EBITDA during the quarter was driven by favorable sales mix and continued realization of cost savings actions. Despite the double digit organic sales volume decrease, This segment is delivering quarterly profitability only 100 basis points below 2022 levels. Finally, turning to the balance sheet and cash flow on slide 9. We had a very strong cash flow quarter, generating $181 million in free cash flow, bringing our year-to-date cash conversion rate on net income to 126%. Cash ended the quarter at $143 million, and net debt was $695 million, resulting in a 0.9 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, such as our upcoming acquisition of ARIC. We expect to close the AIREG acquisition by the end of August and exit the year with a net debt to EBITDA leverage ratio of approximately two times. During the third quarter, we repaid $111 million of debt, paid $37 million in dividends, and spent $23 million on repurchasing approximately 107,000 shares of company stock at an average price of $217 per share. Our board approved a 5% increase in our annual dividend effective in the fourth quarter of fiscal 2023. This marks the 60th consecutive year the company has increased its dividend, an impressive accomplishment only enabled by maintaining a truly differentiated precision technology portfolio, and serving diverse end markets. For modeling purposes in fiscal 2023, assume an estimated effective tax rate of 20% to 22% and capital expenditures of approximately $35 to $40 million, as several of our investment timelines have pushed out. With our upcoming acquisition of ARIC, I want to provide you with some assumptions for modeling purposes. For revenue, assume approximately $20 to $30 million in fiscal 23. EBITDA margins are expected in the high 30% range. We expect ERIC to be slightly diluted to GAAP EPS in Q4 2023 due to increased amortization of acquisition related intangibles and interest expense associated with the acquisition. Excluding acquisition costs and related intangible amortization, EPS should be neutral for the fourth quarter. Due to the expeditious nature of the close, the acquisition will initially be financed with a short-term loan and revolver borrowings. We anticipate following up with a bond issuance in the public markets later this year, and we are currently working through the ratings process. Based on current market conditions, assume a weighted average interest rate of approximately 5.5% for total Norton debt in 2024. We will now turn to slide 10, and I'll turn the call back to Naga. Thanks, Joe.