Nordson Corporation

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Norton Corporation fourth quarter and fiscal year 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Laura Mahoney. Please go ahead.

Thank you. Good morning. This is Laura Mahoney, Vice President of Investor Relations and Corporate Communications. We welcome you to our conference call today, Thursday, December 14th, 2023, to report Nordstrom's fiscal year 2023 fourth quarter and full year results. I'm here with Sundaram Nagarajan, our President and CEO. Joseph Kelly, Executive Vice President, and Stephen Shamrock, Interim Chief Financial Officer. While Joe recently took a new role as Executive Vice President, Industrial Precision Solutions segment, he was CFO for the entirety of fiscal 2023 and will represent that viewpoint in today's call. 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 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 December 21st, 2023. During this conference call, references to non-GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric has been provided in the press release issued yesterday. 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 Nordstrom'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 fourth quarter and full year 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 also will talk about the year-end balance sheet and cash flow. Naga will conclude with high-level commentary about our enterprise performance, including an update on the Ascend strategy, as well as our fiscal 2024 first quarter and full-year guidance. We will then be happy to take your questions. With that, I'll turn to slide four and hand the call over to Naga.

Good morning, everyone. Thank you for joining Nordsten's fiscal 2023 fourth quarter and full year conference call. In 2021, Nordsten launched its Ascend strategy to achieve top tier growth with leading margins and returns. We set a goal to deliver $3 billion in sales and greater than 30% EBITDA margins by 2025. As we complete the third year of our strategy, we are on track toward achieving these objectives. This is a testament to our employees who have, in the last three years, developed and deployed the Ascend strategy and tackled dynamic macroeconomic conditions, including a pandemic, global supply chain pressure, labor challenges, and rising interest rates to name a few. In 2023, we also managed the unique period of biopharma destocking as well as the cyclical electronics and markets. The core elements of our business model has enabled us to deliver profitable growth throughout these challenges. This includes a fundamental focus on our customers, commitment to innovation, diversified geographic and end market exposure, and a high level of recurring revenue through aftermarket parts and consumables. Since launching the Ascend strategy, we have added new capabilities to our model, including the NDS Next growth framework and a division-led structure which has empowered our teams to respond rapidly to changing market conditions. This led to solid financial performance in the quarter and the year, exceeding our targeted incremental and decremental profit targets in all three segments. Combining all of these factors With our capital deployment strategy to strengthen our precision technology portfolio, we delivered record sales, 31% EBITDA margin, and record cash flow in fiscal 2023. I'll speak more to this in a few moments, but I'll now turn the call over to Joe to provide more detailed perspective on our financial results for the fourth quarter and fiscal 2023.

Thank you, Naga, and good morning to everyone. On slide number five, you'll see fourth quarter 2023 sales were $719 million, an increase of 5% compared to the prior year's fourth quarter sales of $684 million. The increase included 7% growth from acquisitions of AIREG and cyber optics and favorable currency translation of 1% offset by an organic sales decrease of 3%. The organic sales decrease was primarily volume offset by price as we continue to pass through year-over-year cost inflation. In line with our expectations, the volume decline was concentrated in the electronics, dispense, and our biopharma businesses. This pressure was largely offset by double digit growth in medical interventional solutions, industrial coatings, and polymer processing product lines compared to the prior year. Gross profit excluding the non-recurring amortization of acquired inventory, totaled $389 million, or 54% of sales, a 7% increase over the prior year fourth quarter of $363 million, or 53% of sales. The gross profit dollar increase was driven by sales growth. and the gross margin expansion of 100 basis points was driven primarily by improvements in factory efficiency. SG&A in the fourth quarter increased to $199 million versus $186 million in the prior year fourth quarter. Excluding $6 million in non-recurring transaction fees related to the AIREG acquisition, SG&A increased 4% over the prior year, representing 27% of sales consistent with the prior year. Adjusted operating profit, excluding $11 million in non-recurring acquisition costs and step-up inventory amortization, was $196 million in the quarter, a 10% increase from the prior year. we generated very strong incremental operating profit margins of 51% on the 5% sales growth, which can be attributed to our team's continued dedication to executing the NBS Next Growth Framework and their related ability to rapidly respond to changing market conditions. EBITDA for the fourth quarter increased 12% over the prior year to a record $227 million or 32% of sales, which is 200 basis points above our long-term profitability target, as we articulated in our ASCEND strategy. This compares to $202 million or 30% of sales in the prior year fourth quarter. As we continue to execute the Ascend strategy and scale through acquisitions, EBITDA will be a key metric for profitability and cash flow generation. Looking at non-operating income and expense, I am happy to report that in September, we successfully accessed the public bond market with our inaugural issuance of investment-grade rated debt. We raised $850 million in five and ten-year bonds to repay the short-term borrowings used to finance the AIREG acquisition, with the balance of the funds coming from our revolver. Interest expense in the quarter totaled $26 million, an increase of $21 million over the prior year quarter. Seven million dollars of the increase is non-recurring financing costs associated with the repayment of the short-term borrowings. The remaining 14 million increase is a result of higher debt levels and increased interest rates. Other net income decreased three million dollars due to significant currency fluctuations that generated a four million dollar currency exchange gain in the prior year that did not repeat in the current year. Tax expense was $33 million for an effective tax rate of 20% in the quarter, slightly below the full year and within our guidance range. Net income totaled $128 million, or $2.22 per share, Adjusted earnings per share, excluding non-recurring acquisition-related expenses, total $2.46 per share, a 1% increase over the prior year. This improvement, despite the increase in interest expense, is reflective of consistent application of the NBS Next Growth Framework, which leads to steady profitable growth with attractive incremental margins. Turning to slide number six, I'll now share a few comments on our full year results. Sales for the fiscal year 2023 were a record $2.6 billion, an increase of 2% compared to the prior year's previous record sales results. This increase was driven 4% from the cyber optics and AIREG acquisitions offset by an organic decrease of 1% and an unfavorable currency impact of 1%. Adjusted operating profit was $707 million or 27% of sales, which was comparable to the prior year. On a constant currency basis, adjusted operating profit grew year-over-year 1%. EBITDA for the full year increased 1% to a record $819 million, or 31% of sales. This marks the third consecutive year of the Ascend strategy delivering EBITDA growth. Adjusted diluted earnings per share were $9.03, a 4% decrease from the prior year. The decrease in adjusted earnings is primarily a result of higher adjusted interest expense of $30 million associated with both the cyber optics and the air egg acquisitions and higher borrowing rates. Overall, the company's performance remained strong and in line or ahead of targets established as part of the Ascend strategy. Now let's turn to slide seven through nine to review the fourth quarter 2023 segment performance. Industrial precision solutions sales of $405 million increased 14% compared to the prior year fourth quarter. Organic growth in the quarter was 4%, with the AERIG acquisition adding 7%, and a favorable currency impact of 2%. It is noteworthy that the 4% organic growth is over a very strong fourth quarter of 2022 and represents an all-time quarterly sales record for the segment, excluding AERIG. Robust demand in the polymer processing, industrial coatings, and packaging product lines, combined with the execution of the Ascend strategy, drove this quarter's results. Geographically, growth was strong in the Americas and Asia Pacific regions. EBITDA for the quarter was $148 million, or 37% of sales. which is an increase of 26% compared to the prior year EBITDA of $118 million. This growth was driven primarily by leveraging organic sales growth at incremental margins well in excess of our target, plus the benefit of the AIREG acquisition. Medical and fluid solution sales of $169 million decreased 7% compared to the prior year's fourth quarter. This change was primarily driven by a decrease in organic sales volume of 8% offset by a modest 1% currency benefit. The volume declines were the result of continued softness in medical fluid components related to the biopharma end markets as well as the fluid solutions product lines, offset by double-digit growth in our medical interventional solutions product lines. Fourth quarter EBITDA was $62 million or 37% of sales, which is a decrease of 4% compared to the prior year EBITDA of $64 million. EBITDA margins continue to be negatively impacted by the sales mix changes within the medical product lines, but improved factory efficiency within the fluid solutions division enabled profit margin expansion. Turning to slide nine, you'll see advanced technology solutions sales of $145 million decreased 1%. compared to the prior year's fourth quarter. This change included a decrease in organic sales volume of 16%, offset by the cyberoptics acquisition, which contributed 15%, the highest quarterly sales to date under Norton ownership. The organic sales decline was primarily driven by continued softness in our electronics dispense product lines that served the cyclical semiconductor end market and, by way of reference, had a difficult comparison as the prior year fourth quarter had 28% organic growth. Based on customer conversations and historic trends, we continue to expect demand in the semiconductor market to anniversary in the second quarter of fiscal 2024 and begin to recover in the back half of calendar 24. Fourth quarter EBITDA was $35 million or 24% of sales, a decrease of $5 million from the prior year fourth quarter. Noteworthy, however, for this segment is the increased profitability level in the down part of the cycle when you compare the 24% EBITDA margin to the 14% EBITDA margin in fiscal 2020. Finally, turning to the balance sheet and cash flow on slide 10. We had another very strong cash flow quarter, generating $153 million in free cash flow at a cash conversion rate of 120% on net income. For the full year 2023, Norton generated a record free cash flow of $607 million at a cash conversion rate of 124%. With our record free cash flow, we were able to repay approximately $425 million of debt and return capital to our shareholders. Dividend payments were $39 million in the quarter, reflective of the 5% increase in the annual dividend. In addition, we purchased $10 million of shares at an average price of $216 per share. Through our strategic capital deployment, we ended the year with a strong balance sheet. Our cash balance was $116 million, and net debt was $1.6 billion, resulting in a leverage ratio of two times based on the trailing 12 months EBITDA. well within our targeted range for modeling purposes in fiscal 24 assume an estimated effective tax rate of 20 to 22 percent capital expenditures of approximately 40 to 50 million dollars and interest expense of approximately 75 to 80 million dollars in summary Our segments effectively responded to dynamic conditions throughout fiscal 2023 by using the data-driven NBS Next growth framework. This led to segment financial performance exceeding our targeted incremental and decremental profit targets. We are also seeing nice contributions from our recent acquisitions which is indicative of the strength of our capital deployment strategy and the differentiation we are adding to our precision technology portfolio. I want to congratulate the team on achieving record sales and EBITDA as well as the record cash flow performance this year. I'll now turn the call back to Naga.

Thank you, Joe. During last year's conference call, As we set the stage for fiscal 2023, I noted that Norton was well positioned to perform during periods of economic uncertainty. It certainly proved true for all the reasons I listed earlier in the call. Fundamental focus on our customers. Commitment to innovation. Diversified geographic and end market exposure. and a high level of recurring revenue. The Ascend strategy has added to these core strengths. Our NBS Next growth framework is becoming a competitive advantage as it is deployed holistically across the company. Put simply, NBS Next is a data-driven segmentation framework that drives choices, focus, and simplification. In fiscal year 2022, we had two divisions that achieved market-leading business performance. That number expanded in 2023 with all divisions making tremendous progress. They're using the framework to guide their focus on best growth opportunities and deliver on time quality products, winning business and growing market share. Our medical interventional solutions business successfully deployed this framework to achieve double digit sales growth throughout 2023 by focusing on its best growth opportunities and simplifying elsewhere. Our electronics processing division leveraged this period of weaker end market demand to carefully curate its product portfolio based on the best growth opportunities. The team recognized through segmentation analysis that the extreme customization we offered created complexity and resulted in longer lead times. applying NBS Next methodology with our deep voice of customer research. The team reduced complexity, improved lead times, and is gaining market share. The electronics division has used the downside of the cycle to implement NBS Next achieving its target decremental margins in the second half of fiscal 2023. They are well positioned for the incremental earnings growth that will come when the semiconductor end markets start to recover in the second half of calendar 2024. In 2023, we also made progress on the acquisition front of our Ascend strategy which is a key priority of our strategic capital deployment. We closed the AIRAC acquisition on August 24th, 2023. The integration is going well, and we are impressed by AIRAC's precision agricultural technology and the energy excellence our new employees bring to Nordsten. Since the launch of the Ascend strategy, we have acquired approximately 400 million in revenue and are 80% of the way toward our acquisitive revenue target. We see ample opportunity in the pipeline to achieve this target, particularly in the medical and test and inspection platforms. That said, we will remain focused to acquire differentiated position technologies that meet our strategic and financial criteria. To enable acquisitive growth, we went to the public markets this summer. As a first-time issuer, we achieved investment-grade ratings from both Moody's and S&P. Both ratings agencies cited Norton's strong cash flow and healthy financial profile as key reasons for the strong ratings debut. We appreciate the flexibility that public debt will afford us as we continue executing on the acquisition and capital deployment portion of our strategy. In summary, I'm very pleased with the progress of our Ascend strategy and believe we are well positioned entering fiscal 2024. I'm also pleased that we have made this progress while sustaining our culture and values. For example, in fiscal 2023, our employees, company, and the Knotson Corporation Foundation donated over $13 million into the communities where our employees live and work to support education, human welfare services, and other charitable activities. Turning now to the outlook on slide 12. We enter fiscal 2024 with approximately $800 million in backlog. The sequential backlog reduction is reflective of strong system sales in the fourth quarter, as well as a paced return to normalized levels. Based on the combination of order entry, backlog, customer delivery timing requests, and current foreign exchange rates, we anticipate delivering sales growth in the range of 4 to 9% above fiscal 2023 sales. Full year fiscal 2024 earnings are forecasted to be in the range of 1 to 8% growth per diluted share. Please note that we are updating our definition of adjusted earnings starting in fiscal 2024 to exclude acquisition-related amortization. As acquisitions will continue to be a critical part of our strategy, we believe this is prudent and more reflective of how we and investors think about our business in terms of earnings and cash flow growth performance. This full year guidance assumes a neutral impact from foreign exchange rates, a recovery of semiconductor end markets in the second half of calendar 2024, and the AIREG acquisition contributing approximately 5% growth at the midpoint of our guidance. As you will see on slide 13, First quarter fiscal 2024 sales are forecasted in the range of $615 to $640 million and adjusted earnings in the range of $2 to $2.10 per diluted share. Before we open it for questions, I want to take a moment to thank Joe for his leadership as CFO over the past three plus years. Joe, I've appreciated your partnership and we are all excited to see you develop your career as the new leader of our IPS segment. As we move forward into fiscal 2024, Steve Shamrock will take over as interim CFO while we conduct our search for a successor. Joe's move and Steve's seamlessly stepping in during the transition are examples of Nordson focusing on developing winning teams, an important success factor in building a scalable, high-quality growth engine. Again, I want to thank our employees, customers, and shareholders for your continued support. We will now open the phone lines for questions.

At this time, I would like to remind everyone, in order to ask a question, simply press star, then the number 1 on your telephone keypad. We'll pause for a moment to compile the Q&A roster. And our first question comes from the line of Alison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Alison.

Naga, you know, you touched on the EBITDA margin that you posted in 2023, certainly strong and well ahead of your target. How do we think of that EBITDA margin from here as, you know, how does it evolve over the next, say, two to three years?

Yeah. Alison, as we... launched the ascent strategy our target was to have 50 of our growth come from organic and 50 from acquisitions and we also you know set the stage for our organic growth obviously comes at a higher incremental margins when compared to our acquisitions so as we move forward we fundamentally believe this 31 is a sustainable level at which we are operating Depending on the mix of organic and acquisition, you know, this is a sustainable level that we are able to maintain.

Got it. And then could you touch on, you know, the biopharma market, just sort of the cadence of recovery, just how you're thinking about that specific market in 24, just given the challenges it had in 23 around the inventory side?

Yeah. You know, we start to, by the end of the first quarter, we start to anniversary. the decline in biopharma due to destocking. Longer term, we fundamentally believe that this is a great marketplace for Nordsten and will return to the high single-digit number. In the interim, though, you know, we are taking a conservative and definitely a realistic view of saying the recovery is going to be slower.

Okay, but I guess I think you just touched on it, though. There's no real structural impediment for that market, in your view, to not reach that sort of high single-digit growth rate that it historically achieved.

Absolutely not, right? If you think about this, you know, one of the key areas of focus for us is the use of single-use plastics, which essentially go to replace the stainless steel nectars and stainless steel full lines. And that transition is still, you know, in its early stages. So, we fundamentally believe that there is nothing here that is impaired. It's a matter of timing, and it's certainly a matter of recovery, certainly, you know. So, long-term, no issues. We expect we'll probably get to high single digits.

Perfect. Thank you, and congrats, Joe, on the move.

Thank you.

Thank you, Alison.

Your next question is from the line of Mike Halloran with Baird. Please go ahead.

Hey, morning, everyone. Morning, Mike. Morning, Mike. So I just want to help me understand a couple questions on guidance here. First, what's the organic assumption embedded in the growth rate? And I know you gave the FX side already, but maybe just some help on what you're assuming for organic growth. Steve, you got it?

Yeah, this is Steve. For the full year guidance, as Naga pointed out, we're forecasting growth of 6%, and our rag is at 5%. So that would imply organic growth of about 1%, because we would say based on current rates, we're FX neutral. So that's how we're thinking about the overall growth rate of 6%.

Thanks for that. And then on the electronics assumptions, you mentioned back half recovery. What informs that, you know, certainly sounds like part of its comparisons, part of its historical recovery curves. Is there anything customers are saying or build rate forecasts or anything else that you would point to?

What I would tell you is the two things that you already acknowledge, which is really historical trends. Certainly, you know, we have a direct sales model and our teams are, spending a lot of time with our customers, understanding what their requirements are and when they would show up. You know, if you were to point to anything, you would say the pipeline of opportunities continue to point towards that timeline of recovery.

And then last one, just on the IPS side. Are you assuming relatively normal sequential patterns from here? Any thoughts on how you're looking at the end market cadencing? demand levels, things like that. I mean, packaging was strong this quarter, which felt a little surprising. So any context on that would also be helpful.

Yeah, sure, Mike. You know, IPS has been running at or above our long-term growth rates here now for, you know, two, three years now. And what our expectation is that we don't see anything in the order entry that gives us a pause. um good backlog and good order entry that we expect to sustain growth in the coming years a significant contribution on ips growth for the coming year would be through the iraq acquisition got it really appreciate it thank you for your time sure your next question is from the line of jeff hammond with key bank capital markets please go ahead hey good morning everyone

Good morning, Jeff. Good morning, Jeff. So, maybe go back to the organic. It looks like the range is kind of minus four to plus one. Do you see all the segments, you know, at the midpoint growing, or are there some segments that, you know, clearly have growth and others that are maybe, you know, maybe down?

Yeah. You know, we just talked about IPS. You know, IPS today at at or above our long-term growth rates continue to sustain modest growth in the year coming up. ATS is going to be flattish in that what I would tell you is that first half we're going to be continued down, second half continues to improve. And so that will be flattish to slight growth. MFS though, we have medical interventional components continue to be pretty strong growth for us. um our biopharma business anniversary itself and not being a drag and then improvement in our fluid solutions towards the back half of the year overall our expectation is that mfs returns to a pretty nice growth next year modest growth for that segment so okay great thanks for that color naya um just eric

You know, there's been a lot of commentary about ag, you know, slowing. I'm just wondering if ARAG is seeing, you know, that pressure. It seems like the math maybe suggests a little bit lower revenue contribution than maybe, you know, when you first bought it. Just speak to what you're seeing there real time.

Yeah. Let me start it and then Joe in his new role can certainly give you some color on ARAG as well. What we see, you know, remember, 45% of our ARAGs revenues are recurring revenue. And they're typically products or short life replacement cycles, so mostly nozzles and things like that. So we will benefit from that, and that is not going to see the pressure you're going to see. The other thing, what I would tell you is that ARAGs components, much like Norton, is critical low-cost component for the customers and also components that drive efficiency reduce waste and so typically what our expectation is that the that you're going to see limited impact from that and so Let me maybe have Joe talk about where we finished the year for ARAG in Norton fiscal year, and then talk a little bit about our expectation for next year.

Yeah, so Jeff, if you think about ARAG, they finished the Norton, what I'll call fiscal 2023, delivering $155 million in sales. And the midpoint of our guidance suggests that ag sales grow in 2024. And so despite some of the news that you're hearing in the ag space, when you look at the components that they provide, the 45% that's run rate parts and consumables that Naga mentioned, We have it, you know, moderated the growth rate from what was previously articulated, but it's still growing when you look at it on a year-over-year basis.

Okay. And then just housekeeping. Amortization in 24, you know, is it $20 million a quarter, $80 million? Is that kind of the right run rate, or how should we think about that?

Yeah, Jeff. I would tell you the guidance on amortization is in the range of $74 to $78 million for the full year and about $19 million in Q1. Okay.

Thanks so much.

Your next question is from the line of Matt Somerville with DA Davidson. Please go ahead.

Thanks. I was hoping maybe you gave a little bit more granular detail on expectations for MFS. I was hoping you could kind of talk through the same thing for IPS, how you're thinking about rigid, flexible packaging, non-wovens, product assembly, coatings as we move into 24. Yeah.

Hey, you know, let's generally we don't give you know, guidance around the segment, but I will certainly give you some what we are seeing in the marketplace, and hopefully that will answer the question, Matt. So, let's start with packaging, right? Packaging is doing fairly well. The order entry rates and things like that suggest that the backlogs have returned to normal. The parts part of the business is doing fairly well. And so we expect packaging to continue to be steady as we have experienced thus far. So that is packaging. As you think about system businesses like coatings or polymers, as we enter the year, we enter the year with some pretty strong backlog. And so we fundamentally believe that that is one that will help us in the growth there. Nonwovens is being a business that continues to has not declined any further. We'll continue to be tracking in the same place where we are. We certainly have a number of product applications. This is sort of applications such as battery. Think about applications in e-commerce, fabric bonding, and many other miscellaneous applications. This is the part of the business where It is application by application, and this one is doing well as well. Hopefully that gives you a little bit more color and hopefully answers the question you're asking, Matt.

Yeah, I appreciate the detail there. Maybe just over to ATS, two quick things. Are you actually seeing an inflection in cyber optics business pointing out, you know, the the fact that you had the strongest quarter for that business since the acquisition, and then if you can comment a little further on how you're thinking about test and inspection for 24. Yeah.

As you think about test and inspection, you know, we've had strong, strong years here now going, you know, even last year when our dispense business was down a bit, you also found them to be doing fairly well. But as you go into next year, we expect that we would have challenging cons for our X-ray business. We certainly expect that our optical business and our acoustic business, which we've not talked about in the past, is an area that we feel there is some strength. And, you know, too early to say we have reached an inflection point. But certainly telling you that this is an area that we are well positioned to take advantage of any market movement. You know, customer conversation, pipeline activity, all still indicating second half of the year, calendar year, that we have a good recovery. But I think we feel good about where we are, you know. particularly on cyber optics. You know, we've had now a year of experience with this. Cyber optics is exactly what we thought was incredibly fantastic technology that's added to the portfolio. So our thesis around expanding our precision technology portfolio with cyber optics is certainly strong. And, you know, our expectations are that we continue to be able to solve more problems for our customers and continue to benefit on this

you know, investment in semiconductors that is expected to come. Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, simply press star, then the number one on your telephone keypad. Our next question is from the line of Christopher Glenn with Oppenheimer. Please go ahead.

Thanks. Good morning. I was just curious about the ATS foreground. Spend another moment on that. You said your team's very engaged talking to customers, so that sounds like everyone's on the same page in terms of expecting a recovery. Are you just seeing materialization of pre-RFP activity? Is there... like improving breadth month to month. Just curious how the cadence is, is there.

Yeah, I, you know, I would go back to what we were talking about, which is really great customer conversations, you know, historical trends, all pointing towards second half of calendar 2024. Um, you know, clearly our pipeline activity continues to be pretty good. you know, and our expectation is that that translates into order entry and translates into shipment. You know, beyond that, you know, our expectation for the ATS is it's going to be flat with first half down, second half up. And if you look historically, that has been a fairly good indicator. And we believe that, you know, so our guidance is based on APS being flat, not significant growth.

Yep, I understand the timing. Thanks for that. And then a quick one on MFS, the kind of non-medical fluid solutions portion. I think you talked about some significant manufacturing and productivity benefits there from cost actions and MBS Next. Curious how that industrial fluid solutions business. I think it's short cycle oriented. How's that? A little more detail on how that's behaving, please.

Yeah, that is going fairly well. I would say early times here, we are very pleased with the improvements that teams have made in manufacturing and, you know, the business starting to return to where it typically operates. You know, a significant pickup in this business is going to be tied to the electronic customers in Asia as well, right? And so this is a business that has some electronic exposure and that they will benefit from that as the second half picks up for them. But overall, on the industrial side, it seems to be steady.

Thank you. Thanks, Naga.

Yeah, you're welcome.

Your next question is from the line of Walt Littek with Seaport Research. Please go ahead.

Hi, thanks. Good morning. Good morning. You guys haven't talked too much about pricing yet. And, you know, there's still some inflation out there, even though it's come down. You know, how are you thinking about, you know, systems pricing and component pricing as you start going into the new year?

Steve, is something that you want to touch on?

Yeah, to answer that question, what I would say, again, just to remind you and everyone that Really, when we talk about pricing, I mean, we're selling the value of our products to our customers. So, you know, we've not passed through large inflationary price increases as a result of that. I mean, again, our focus is maintaining our very strong gross margins from that perspective. So, you know, as I mentioned earlier with the organic growth guidance, the 1% for FY24, I would think that that organic growth would be balanced in terms of a little bit coming from volume and price. But, again, it's not something that we're really focused on from that perspective. Again, our focus is on maintaining those gross margins.

Okay, great. And, you know, I wonder if we could talk a little bit about the ag markets and just the, you know, regionally. You know, AERG is pretty international in Europe and Europe. South America. I wonder if you could talk a little bit, you know, give us some insight on how those markets are trending. And, you know, we probably have a better view on the U.S. But so maybe the second part of the question is, you know, you guys are looking at kind of a new opportunity in the U.S. for market share. You know, can you grow the U.S. part of the business next year?

Yeah, let me start and then Joe can add a little bit more color to the business. as you think about arag right what what we acquired is a european market leader great technology um strong position in europe strong position in south america in an end market that is growing right so our models and our expectations are that we deliver on that promise around continuing to grow the European business and continue to grow the South American business. We certainly recognize that we have an opportunity in North America, but we also understand the market dynamics in North America. Any wins and any expansion here will be at least additional icing on the cake, if you so will, to our model. And so, you know, we like the technology. We like the market position. And the market structure in Europe is uniquely different from North America. And maybe let Joe add color to the work that they're doing in Europe and, you know, our technology.

So, Joe. Yeah, well, if you think about just the level set on ERIG, they're, you know, precision dispensing fluid components that are predominantly components sold to implement manufacturers, spray manufacturers. And when you look, it's, again, predominantly a European business, a very broad footprint throughout Europe through their distribution model and selling to implement manufacturers. And so that market, again, is, I would tell you, the main driver of our forecast when you think about the AIREG business and the growth that we're forecasting. for 2024. The U.S. and other geographies outside of Europe and South America, where Eric has a strong footprint, represents opportunity. And when you think about Norton and our broad geographic footprint, our ability to, you know, I would say realize some of those opportunities, I think is enhanced as opposed to a standalone Eric business. And so when you think about that, we're starting to see in the integration some of the opportunities start to fill in in the pipeline. And so, again, we're optimistic that long-term we can make this a global division within Norton with a broad geographic footprint.

Okay. All right. Yeah, thanks for that answer. And, you know, if I could just try one more on the IPS segment for Joe. Yeah, I wonder if you could just get, you know, help us characterize how you're looking at, you know, kind of the general industrial system spending for next year, what the funnel looks like, and maybe some of the bigger subsegments like around automotive or consumer, you know, consumer goods.

Yes. So, you know, just to level set, the IPS segment is coming off now, I would say, two very strong years. If you look back at 22, they delivered a 7% organic growth. In 23, it grew 3% organically. And so as we head into 24, we're looking to really maintain that from the level of where we are. What drove it, if you go back to 22, was a lot of the large systems and the liquid coatings. And then in 23, it turned, there was heavy automotive, actually growth in automotive on the coating side. And then on the plastic processing side and the recycling, that was strong in the back half of 22 and continued to be strong in 23. And so those large systems businesses within IPS, they do carry a nice backlog into the That being said, the remaining portion of the IPS business backlog there has moderated. So when you see the backlog come down to 800, I would tell you that's the elevated backlog moderating back to historical terms for the remainder of that business. That being said, the order entry there remains steady and is supportive of our forecast. You know, you're familiar with the business, particularly on the packaging side. When systems come down due to investment, parts typically help offset that in terms of growth of parts. And so it's really a nice mix, and I would tell you we've benefited from automotive, liquid coatings, and then the polymer processing the last couple of years on the system side. But the remaining broad-based industry remains steady.

Okay, great. Okay, thank you.

Right? I mean, you know, one thing that I would add, Walt, is really, in general, the company is a recession resilient company and a portfolio that helps us get through uncertain economic environments or downturns in specific end markets, right? That's what you saw happen in 23. You know, as we think about 24, really what we're, our expectation is IPSA study ATS is flattish to slight growth, and MFS returns to pretty modest growth. And that's kind of how I would think about it. And a pretty strong EBITDA margin in last year, and we'll continue to expect to see the same next year.

Your next question is from the line of Andrew Biscaglia with BNP Paribas. Please go ahead.

Hey, good morning, guys. morning morning uh just one last clarification on on your guidance so the low end you know if you look at the organic sales growth the low end of that guidance you know that if you model that out doesn't really assume much of recovery at all is that correct and then um how much of the recovery is really easy comps versus demand actually picking up yeah yeah so what i would tell you from a

General guidance perspective, I mean, you know, at the low end of our sales guidance, we're talking about, you know, 4% basically from that perspective. So, obviously, you know, there, you know, what would get us towards the lower end there is obviously, you know, if there is the recovery on the ATS side, for example, is slower than what we would expect. If FX rates, you know, go against us, those types of things. You know, and I think we talked earlier, and Naga mentioned it as well, just from a comp standpoint, you know, with some of the businesses that we were talking about, right, whether it was, you know, fluid solutions or, you know, on the electronic side within ATS.

Okay. And then what about the easy comps versus demand picking up? Is that to get to the midpoint, do we need demand to come back?

No, what I was going to say is, I mean, just, you know, from a midpoint perspective, again, I mean, that assumes, you know, 1% organic growth overall. So, you know, again, there would be some volume embedded in there. So, we would expect it to pick up, right? I mean, just kind of given the, you know, by segment, like we talked earlier, you know, from that perspective, ATS, again, we'd expect some second half pickup there in the end of Q2 or Q3 and Q4. We talked about the fluid components earlier and even fluid solutions. I know Naga referenced that as well, electronic assembly picking up in the back half of the year as well.

Okay.

Andrew, I would just add, if I could, the way I think about it is full year, our guidance says we're going to grow 6% at the midpoint, roughly speaking, and Q1 is growth of 3%. So, basically, it implies that the growth rate picks up past Q1, and part of that, as you mentioned, is the comps get easier in Q2 and Q3, particularly because that's when the ATS and the biopharma pullback really occurred. And so, the growth rate is, let's just say, 3% in Q1, and then picks up to 7% in the remaining three quarters. with it being the heaviest in Q2 and Q3 because the comps are easier. Yeah. Okay.

And, you know, in ATS, you know, margins kind of move around quite a bit historically, so it's hard to gauge a pattern. But what is the main driver here for ATS long-term volumes just picking back up? Or are there cost-saving potential in that segment? to get those up to closer to a corporate average margin.

You know, let me just maybe give you a broad view of how we're thinking about ATS. And then, you know, maybe Joe or Steve, you guys could add more color to it. What I would say is ATS at 24% EBITDA and you compare them to their competitors in the markets that they play in is pretty strong. And one of the reasons is that Look, the R&D load here is much higher than some of our other businesses. So, you know, expectations shouldn't be that APS gets to the total company average numbers. You know, you're always going to find that you have 14% SG&A cost here in our business in APS when compared to IPS, which is a much smaller number. So that's the only level setting I want to do is make sure that you're not – your expectations for ATS should be in line with ATS, not in line with the total company average.

Yeah.

And the comment on the full year, we're quite pleased with what we've done to improve the profitability of that business. And here we are at the low point in the cycle, and we're delivering this 24, 23 – EBITDA margins, and so we're well positioned to participate in the recovery, but that doesn't mean you should expect it to get to Norton's, the other segment's levels of profitability.

Okay. Thank you, guys.

I was going to say maybe the only other point I would add there, too, is we've done a nice job in that segment as well, Andrew, just in terms of our decremental margins being very favorable to our targets, right? So we're really managing, you know, costs appropriately based on volume, so.

Okay. Thank you.

And at this time, there appear to be no further questions. I will turn the call back over to Naga for any closing remarks.

Thank you for your time and attention on today's call. We're making great progress on the SM strategy. We're well positioned for profitable growth in fiscal 2024. We remain focused on achieving our long-term objective of delivering top-tier revenue growth with leading margins and returns. I wish all of you a happy holiday season. Thank you.

This does conclude the Norton Corporation fourth quarter and fiscal year 2023 conference call. We thank you for your participation. You may now disconnect.