Nordson Corporation

Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Nordson Corporation second quarter fiscal year 2024 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 followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Laura Mahoney. 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 Stephen Shamrock, Chief Accounting Officer. We welcome you to our conference call today, Tuesday, May 21st, to report Nordson's fiscal 2024 second quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com forward slash investors. This conference call is being broadcast live on our investor website. and will be available there for 30 days. There will be a telephone replay of the conference call available until Tuesday, May 28, 2024. During this conference call, we will make references to non-GAAP financial metrics. We've provided a reconciliation of these metrics to the most comparable GAAP metrics 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 materially differ. Moving to today's agenda on slide three, Naga will discuss second quarter highlights. He will then turn the call over to Steve to review sales and earnings performance for the total company and the three business segments. Steve will also discuss the balance sheet and cash flow. Naga will then share a high-level commentary about our end market and provide an update on the fiscal 2024 full year and third quarter guidance. We will then be happy to take your questions. With that, I'll turn the call over to Naga.

Good morning, everyone. Thank you for joining Nordson's fiscal 2024 second quarter conference call. Before we begin, I would like to welcome Dan Hopgood, our new executive vice president and chief financial officer to Nordson. Dan started with us yesterday. He brings more than 25 years of financial and operational expertise to the CFO role. Prior to joining Norton, he held roles of increasing responsibility at Eaton Corporation, a 23 billion multinational power management company. Most recently, he served as Eaton's controller and chief accounting officer. As I got to know Dan, I was impressed with his robust financial experience, his time as an operational leader, and his passion for developing talent. Today, he will be listening in, and we look forward to introducing him to all of you in the coming months, starting at the KeyBank Industrials and Basic Materials Conference in Boston next week. Now let's shift into our second quarter earnings results on slide five. At the outset, I would like to recognize the dedicated Norton team who have leveraged the NBS Next Growth Framework to deliver solid second quarter results. Sales of $651 million were within our second quarter guidance range. Growth was driven by the AIRAG acquisition as well as strong performance in our industrial coatings and fluid solutions product lines, which offset continued weakness in our electronics product lines. In addition, our focus on top customers and differentiated products improved product mix. This focus and strategically adjusting costs led to improvements in gross margins and top quartile EBITDA margin of 31%. In the quarter, we delivered adjusted earnings per share of $2.34, which was at the top end of our EPS guidance for the quarter. Finally, I'd like to highlight our second quarter free cash flow of $108 million, which was 92% of net income. We continue to convert earnings into cash flow and use this cash flow to retire nearly 100 million of debt within the quarter. I'll speak more about the enterprise performance in a few moments, but first, I'll turn the call over to Steve to provide a detailed perspective on our financial results for the quarter.

Thank you, Naga, and good morning to everyone. On slide number six, you'll see second quarter fiscal 2024 sales were $651 million, a slight increase to the prior year's second quarter sales of $650 million. This was driven by a favorable 5% benefit from the ARAG acquisition, partially offset by an organic sales decrease of 4% and an unfavorable foreign exchange impact of 1%. As Naga referenced, strengthen our industrial coating systems and fluid solutions product lines, or offset by ongoing weakness in our electronics product lines. Gross profit performance was strong in the second quarter. We delivered gross profit margins in excess of 56%, an approximately 200 basis point improvement over the prior year. Deploying our NBS Next growth framework, we are focusing on top products, driving a favorable product mix, and products simplification efforts to improve manufacturing efficiency. We also remained disciplined on managing our cost structure and taking actions where necessary. EBITDA, adjusted for special items in both periods, totaled $203 million, or 31% of sales, which was consistent with the prior year. Improved gross margins were offset by higher selling and administrative costs, attributable primarily to the addition of ARAG. Looking at non-operating expenses, net interest expense increased $9 million associated with higher debt levels and increased interest rates. Other expenses net decreased $1 million, primarily related to lower foreign exchange losses compared to the prior year. Tax expense was $31 million for an effective tax rate of 21% in the quarter. which is in line with the prior year rate and our guidance range for 2024. Net income in the quarter totaled $118 million, or $2.05 per share. Adjusted earnings per share, excluding $2 million of non-recurring cost reduction actions and amortization of acquisition-related intangibles of $19 million, totaled $2.34 per share. A 4% decrease from the prior year adjusted earnings per share amount of $2.45. The decrease in earnings was driven primarily by higher interest expense due to the ARAG acquisition. Now let's turn to slide seven through nine to review the second quarter 2024 segment performance. Industrial precision solution sales of $367 million increased 9% compared to the prior year second quarter, driven by the ARAG acquisition, as well as increased sales in our industrial coating systems and packaging product lines. Organic sales increased 2% over the prior year second quarter, continuing to build upon a record fiscal 2023 for the segment, partially offset by an unfavorable foreign exchange impact of 1%. This segment has now delivered organic growth in 12 of the last 14 quarters. EBITDA was $132 million in the second quarter, or 36% of sales, an increase of 11% compared to the prior year EBITDA of $119 million. The increase in EBITDA was driven primarily by the ARAC acquisition, plus organic sales growth and gross margin improvement in the base business. It's also worth highlighting that this quarter marks 13 out of 14 consecutive quarters of EBITDA growth. On slide eight, you'll see medical and fluid solution sales of $169 million increased 2% compared to the prior year's second quarter, driven by modest growth in fluid and medical interventional solutions product lines. This was partially offset by lower sales in our medical fluid components product lines versus last year. Despite the year-over-year decrease, we did see a modest increase in the medical fluid component sales sequentially. Second quarter EBITDA was $63 million for 37% of sales, which was flat to the prior year EBITDA of $63 million, which excluded $1.5 million of special items for cost reduction actions. This segment has now delivered EBITDA margins greater than 35% in 13 of the last 14 quarters. Turning to slide 9, you'll see advanced technology solution sales were $115 million. a 22% decrease compared to the prior year second quarter. The decrease in sales was driven by continued weakness across the segment, primarily related to products serving electronics and markets. Second quarter EBITDA was $24 million, or 21% of sales, which trailed the prior year second quarter EBITDA of $32 million, which excluded special items of $2 million related to cost reduction actions in both periods. While the reduction in EBITDA was tied to the overall decrease in volume, favorable mix and cost reduction actions contributed to 22% decremental margins. This is well ahead of our decremental target of approximately 55%. Finally, turning to the balance sheet and cash flow on slide 10. At the end of the second quarter, we had cash of $125 million, and net debt was $1.4 billion. resulting in a leverage ratio of 1.7 times based on the trailing 12-month EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities. Free cash flow was $108 million, or a 92% conversion rate on net income. We strategically deployed this strong cash flow in the quarter. We repaid $100 million of revolver debt and pay $39 million in dividends during the quarter. For modeling purposes for the full fiscal year, assume an estimated effective tax rate of 20% to 22%, capital expenditures of approximately $40 million to $50 million, and net interest expense of $74 million to $77 million. In summary, we delivered another strong financial performance in the second quarter in line with our expectations. We'll now move to slide 11, and I'll turn the call back to Naga.

Thanks, Steve. I also want to commend the business for delivering strong operating performance under a challenging demand environment in some of our segments. This is a testament to how MBS Next is becoming the way we run our business. I want to spend a few minutes talking about our end markets and the changes we are seeing as we move into the second half of fiscal 2024. Starting with industrial precision solutions segment, we continue to see steadiness in industrial and consumer non-durable end markets. After two years of record growth, our full year guidance implies IPS excluding ARAG is about flat to slightly up versus prior year. And while the ARAG integration continues to go well, we cannot ignore the impact of weakening agriculture and market conditions. Despite the weakening of this particular agricultural cycle, which is causing customers to pause spending and work through inventory, we are undeterred in our belief that precision agriculture is a high growth end market, and this cycle is temporary in nature. Based on the past nine months of integration, we remain excited about ARAC's differentiated technology and value proposition. that will help customers boost crop yields while sustainably reducing the expensive usage of fertilizers and chemicals. Within our medical and fluid solution segment, we are continuing to see modest order entry pickup in our fluid components business, which is returning to growth following last year's biopharma destocking. Similarly, our fluid solutions product lines, which have exposure to the electronic cycle, are turning positive. Our medical interventional solution product lines, which grew double digits in fiscal 2023, driven by the trends in minimally invasive therapies and the aging of population, we have tough comparisons in the second half of the year. In the ATS segment, we continue to see positive early indicators of the electronic cycle inflection, but we're not seeing order entry pickup that would support the implied ramp in our prior second half guidance. Keeping in mind the semiconductor subsegment, norms and applications are largely positioned at the back end of the manufacturing process with a focus on advanced packaging of semiconductor chips. Currently, investments are being made in the front end of the semiconductor manufacturing process related to fabrication and processing of silicon wafers. As production shifts towards converting the wafers to individual chips and advanced packaging of these chips, Customers will invest in Norton electronics dispense and test and inspection technology. Overall, we will benefit from the increasing demand for chips in support of AI, automotive electronics, onshoring, Chips Act, and more. While our test and inspection businesses are positioned to improve, the yields and ensure quality of these critical and expensive chips, our X-ray business, which experienced double-digit growth in fiscal 2023, is dealing with challenging comparisons in the second half of the year. Our ATS leaders continue to do an excellent job of implementing the NBS Next Growth Framework and positioning themselves for future growth. This includes positioning operations closer to the customer, introducing differentiated new products, and making strategic cost adjustments. ATS' ability to outperform their detrimental targets again this quarter is a testament to this work. Turning now to our outlook on slide 12, we enter the third quarter with approximately $700 million in backlog. This backlog remains concentrated in our systems businesses while customer order entry patterns have returned to historical norms in the rest of the businesses. Based on the current visibility I just shared and order entry trends, We are updating our previously issued full-year revenue guidance in the range of flat to up 2% over record fiscal 2023. Full-year fiscal 2024 earnings are forecasted to be in the range of down 5% to down 1% per diluted share. This full year guidance assumes a neutral impact from FX rates and the ARAG acquisition contributing approximately 3.5% growth at the midpoint of our guidance. Investors should keep in mind that we anniversary the acquisitive growth impact of ARAG in the fiscal fourth quarter. For the third quarter of fiscal 2024, sales are forecasted to be in the range of $645 to $670 million with adjusted earnings in the range of $2.25 to $2.40 per diluted share. Third quarter guidance considers weaker electronics and agriculture and markets. Even as we face more challenging market conditions, Norton's core strengths remain a diversified portfolio, close to the customer business model, high level of recurring revenue, NBS Next growth framework, and a commitment to innovation. All of this positions Norton well to deliver long-term Ascend strategy goals. As always, I want to thank our customers, shareholders, and the Norton team for your continued support. With that, we will pause, and Steve and I will take your questions.

At this time, I would like to remind everyone, in order to ask a question, Please press star followed by the number one on your telephone keypad. Your first question comes from the line of Mike Halloran with Baird. Please go ahead.

Hey, good morning, everyone.

Good morning.

Good morning, Mike. A couple questions here. You know, Naga, maybe you could just talk to what's assumed in guidance as you work through the year from an NMARC recovery. You know, I certainly understand the electronics piece and the ag piece. You know, you look at the implied fourth quarter ramp, it's still probably a little above seasonality. So wondering if you still have some of those systems and projects hitting in the fourth quarter, or if that's been pushed to next year and thoughts about any sustainability of the packaging piece and how you think the biopharm is going to recover. So basically just maybe lay out how you think the end markets track as we work through the remainder of the year and what's assumed in guidance.

Yeah, let's get started with IPS. You know, the guidance really, you know, maybe start with the first two big hits and then we'll go through the end markets, Mike. So the first, the two factors which you highlighted is that we're not seeing the pickup in orders for electronic systems that we had expected with the implied second half rank. So that's number one. Number two is the agriculture cycle is having a greater impact on ARAG than our own expectation. So timing is just, there is not enough time here to achieve the ramp we had originally expected. In terms of end markets, if you think about IPS, non-ARAG, our expectation is going to be flat to slight growth following record two years in terms of Iraq continues to contribute to the growth of the business. In terms of ATS, you know, certainly the growths are below our long term growth rates. We're not seeing the pickup as we talked about in terms of medical fluid solutions. You know, our expectation is that our fluid components business will be slightly up. Our fluid solutions business would also be slightly offset by tough comms on the interventional components. So, in summary, you're going to have IPS flat to slightly up, ATS down, MFS returning to growth slightly.

So thanks for that. And following up on that, then, are you assuming any sort of pickup in some of those stress markets or any sort of backlog let out in any of those stress markets in the fourth quarter? In other words, just try and understand how de-risked some of those stress points are in the guidance as we work through the rest of the year. Yeah.

Excuse me. What I'll tell you is that if you think about our fourth quarter, is does not expect you know does not require electronics to come back does not expect air right to come back so if you think about those two stress markets but what is expected though is sequential continued improvement in both these markets so we saw that in second quarter Both electronics, you know, ATS is sequentially up. And so that's our expectation.

So in other words, the sequentials from here are relatively stable versus a normal sequential pattern in your mind in those markets.

Yeah. What we're seeing is order entry. Yeah, go ahead, Steve. Maybe provide some more.

No, I might do. I was going to say, Mike, that I think you're spot on there because if you also look at sequential growth, we had 11% growth last year from Q3 to Q4. And our midpoint basically implies around 8% growth this year. So, you know, Q4 is usually seasonally our strongest quarter. So I think that aligns with how we're thinking about it.

Great. Really appreciate that. Thank you.

The next question comes from the line of Tyree Boroditsky with Jefferies. Please go ahead.

Good morning. This is James on First Series. Thanks for taking questions. I just wanted to kind of follow up on the EREC. So can you kind of provide more color on kind of increased pressure? Because I know you guys said that you guys have a high recurring revenue here. And kind of when do you expect to see an inflection point in the act markets? Thank you.

In general, this market is expected to be down this year. And, you know, we expect this turnaround sometime in 25, but we're not really giving any guidance on 25, so difficult to tell you exactly when that will happen. But our guidance does not imply any pickup in agriculture markets this year.

Got it. And kind of wanted to follow up on the strong cross-margin performance here, despite flat revenue growth. So how should we think about the cross-margin for the remainder of the year? Thank you.

Yeah. Yeah. No. So what I would tell you, and that really kind of ties back to our, what I would call very strong Q2 performance, right? Basically, from a sales standpoint with Q2, we came in really where we expected from a sales standpoint. You know, we came in with $651 million of sales in Q2. And that was when we gave the guidance for Q2, we assumed currency neutral. So if you add back about a $5 million unfavorable impact of FX, we basically came in spot on near the midpoint of our guidance. And we actually were at the high end of our guidance in Q2 because of the gross margin performance that you referenced there. And the way I would think about that is we really had a strong performance and margins for a number of factors in Q2, right? We had a very strong mix, I would tell you, in Q2, whether it was, you know, parts versus sales, that was very strong. We had good customer mix and even mix within product lines. And also had, you know, we referenced in our earlier comments, manufacturing efficiencies and cost controls. How I would think about, you know, gross margins going forward, You know, I think I mentioned this on a previous call. We're not focused on gross margin expansion. You know, our long-term focus is really to maintain the gross margins that we have. So I do think what you saw in Q2 was a mix than normal. So, you know, that's how I would think about that going forward. I wouldn't expect as favorable of a mix in, you know, the balance of the year.

Got it. Thanks for taking questions.

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

Thanks. Just a question on ARAG. I remember back to when you did the call, is it related to the acquisition? You seemed pretty convinced that this business would be less impacted by a down ag cycle. And clearly that's not the case here. So what I guess have you learned over the last couple of quarters about ARAG and how how indeed tied to the cycle that business seemingly is? And to that point, you mentioned inventory destocking. I assume that's at the OEM level, but correct me if I'm wrong. How long do you think that destock lasts?

Yeah. You know, you're right, Matt, in that, you know, our expectations that this business would have be less muted because of the precision ag exposure certainly did not play out the way our expectations were. But look, what is really important to remember is we still like the technology. We like the people we have added to the organization. Certainly a very interesting end market. You know, if you look at expectations of some of the OEMs, the precision ag itself is down or expected to be down 20, 25%. So even if you think about, you know, our expectations with precision ag was going to continue to grow through the cycle, that has not worked out the way it is. In terms of inventory destocking, remember 40% of this business is aftermarket parts and those aftermarket parts go through distribution they're not direct sale so they don't go through the oem they go through a distributor and there is some level of inventory destocking that is going on uh in in iraq so got it um with respect to

You know, you'd mentioned kind of last conference call the canary businesses, and I mean that in a positive light with respect to electronics showing some signs of life. Are you concerned that maybe those are no longer good leading indicators for a broader upturn in the electronic side? And could you maybe just put a finer point on how those businesses, those canary businesses, if you will, performed in the second quarter and how inbound order activity has been looking there? Thank you. Yes.

Both the businesses continue to strengthen in the trends that we mentioned in our first quarter. So we remain convinced both those are very good leading indicators. And the reason I'll tell you is those are two separate indicators. For example, the one we talked about was the UV lamp businesses and niche product line in one of our businesses. That is in the front end of the semiconductor process where we sell to large machine builders. That continues to strengthen. The forecasts have actually increased. That lines up with what you see front end semiconductors growing nicely. So you see that. But you also see on finished electronic products, you're continuing to see greater usage of existing lines. So this is the consumables from EFT. Those continue to strengthen. So both those are still strong. I think what it is not getting translated is that you would immediately see a system business pickup. And that's the translation that is getting delayed. We're not concerned that this is This doesn't indicate that the cycle is going to turn. It is more an uncertainty in this CapEx spend in electronics that we are seeing. So it is more related to the CapEx investment rather than does the cycle has not turned or not. So hopefully that helps you.

Got it. Appreciate it. Thanks, Doug. Yeah.

Your next question comes from the line of Christopher Grinn. with Oppenheimer. Please go ahead.

Yep. Thanks. Good morning. Good morning. I wanted to follow up on a little different cross-section for the electronic cycle. I'm curious if you could speak directly to the differences you're seeing in electronics processing versus T&I broadly. And then if any interesting nuances in the different test and inspection modalities. Okay. All right.

I think if you let's just first start with EPS and TNI. EPS systems continue to be in the quarter, continue to be lower in line with the ATS levels, right? So down 20% or so. And in the TNI business, I'll remind you that last year we had some significant growth in those business, so what we're facing on our X-ray business is a tough calm. Among the other T&I business on our optical business, we have our sensors that go into the front end of the market, which is called a wafer sense product line. That is continuing to grow nicely. It is a small part of the business, but it is growing nicely. The acoustic Test and inspection part of the business is also growing, which is more on the front end and on some new memory applications. The optical side, the parts are fine, the systems are behind. So, you know, we fundamentally still believe the test and inspection business will be lower declines when compared to our dispense business. you know what you've got mixed in there is some tough comms in our x-ray business in in in all of these cases the teams are doing an incredible job doing three things one they are certainly strengthening their delivery and quality performances they're moving manufacturing closer to our customers. So we have got a new manufacturing and distribution location coming up in India to support our electronic customers who are shifting focus into India. Third, we have very exciting new products that are being released by our test and inspection business. Our new MXI line of products are well received in the marketplace. We've got a new updated software for our AXI business that is hitting the market. And in our dispense business, you certainly see our Vantage product as well as a new coding product lines, again, all hitting the market. So we're using this time to really position the business for growth.

Great, thanks. and then a similar one in ips wondering if you could go into the uh you know state of um you know you know phasing of demand and comparisons for the the polymer and adhesives general assembly uh pieces i think coating stood out as maybe the strongest piece in the quarter for uh non-arag ips yeah

Our coatings business is doing an incredible market demand and really delivering on the growth opportunities. So we're very happy about the performance there. If you think about our adhesive business in general, 12 out of 13 quarters or 12 out of 14 quarters, we have been growing. So pretty strong growth. Our expectation is still as we finish the year, we would be flat. to slightly up so that is in a good spot particularly our packaging part of our business is doing incredibly well if you think about our plastics business again you had record growth in those businesses for the last two years and this year they would face some tough comp and so that would be slightly lower you know we don't talk about sales by individual divisions but generally speaking what i will tell you is our plastic business is slightly lower slightly lower than their record last two years right so hopefully that gives you enough color around the different businesses yeah terrific thank you naga and and one one last thing i would add in our adhesive business uh certainly parts are significantly up when compared to our system businesses this is some of the you know this is one of the reasons when we talk when steve talks about uh sales mix certainly this was very helpful yeah you're saying less system sales in the quarter was um sort of sort of neutralized by really strong uh recurring revenue growth yes recurring revenue growth no

As a reminder, if you would like to ask a question, please press star followed by the one on your telephone keypad. Your next question comes from the line of Chris Danker with Loop Capital. Please go ahead.

Hey, morning. Thanks for taking the question. I guess just return to Eric. Just return to ARAG for a moment. Given that agriculture markets kind of come off peak here, is there any risk around the expected synergies for that deal? And maybe just how do we think about the cost structure of that business in the context of the current slowdown here?

Yeah. I think there are, you know, if you remember when we acquired ARAG, this is a complete new division for the company. Hence, there were no cost synergies baked into our valuation model. It was mostly based on our ability to continue to grow with the market. You know, clearly, you know, with the market being down and our own expectations that it wouldn't follow the market, not panning out the way we had expected, suddenly puts the sales part of our plan behind. But I'd still remind you, great technology. great end market with precision agriculture, long-term solid growth opportunities for us as a company, market leader in Europe, market leader in South America, two big geographies. You know, certainly we have opportunities, you know, as we think about North America. You know, we fully acknowledge that our existing competitors will do a nice job in North America, but we do believe that is an opportunity for us to continue to think about it.

I think that was just kind of the crux of my question. When you brought it on board, there was no expectation of a slowdown. There was no cost side to the economics there, I guess. It doesn't sound like that has changed. It sounds like we're just going to kind of manage through here. We're not contemplating any sort of adjustment to the decrementals on that business.

No. If you think about this business, even with the reduction in revenue, Their profit margins are north of the company's margins.

Got it. Got it. Perfect. Thank you so much for the color there. And I think just for my follow-up, on the electronic side of the business, particularly the electronics processing within ATS, the shorthand, at least for me, has always kind of been that's the handset cycle. Is there anything else that's kind of weighing down that business right now beyond handsets, or is that still kind of the main driver there?

Yeah, Chris, I mean over over the last four or five years we certainly have moved away from the handset as a important driver in that business and said it's still a small part of the business, but really semiconductor advanced packaging is where this business is growing and and in components such as camera modules and things like that. Automotive electronics also has become a bigger part of the business, so. It's no longer just a handset business. It is semiconductor automotive electronics and a small handset presence still.

Got it. Well, thanks so much for the call, Naga. Thank you.

Your next question comes from the line of Walter Liptak with Seaport Research. Please go ahead.

Hi. Thanks for taking my question. Yeah, I just want to try a couple of follow-ups on ARAG. You talked about the market in Europe, Latin America. Are all the markets getting hit the same way by the cycle?

Yes. If you look at some of the market reports that are out there, pretty much across the world, the market cycle seems to be in that down 20% to 25%. And that is North America, that is Europe, that is South America, and even precision ag, which was typically a growth engine.

Okay, thanks for that. And the follow-up is that the precision ag market is, you know, what's different about this cycle, the precision ag is? As long as it's related to, like, destocking or something?

I think there is some amount of destocking, but there is also, you know, we are, you know, I tell you, our knowledge of agriculture when compared to our knowledge of electronics or industrial non-durable is sort of, you know, obviously we've been in this business for a short period of time. So our knowledge is not as deep as we would have in other end markets, but our understanding is that there is some amount of destocking, but there is certainly some hesitancy in investing in large implements even. And so that is what you're seeing is that reduction in OEM. And this is unique because as we looked at this business and evaluated it, know one of the things we were we we did a lot of work around is to understand the relationship between uh cycle and this business's uh performance and you know this seems a little bit unique when compared to their prior performance so um you know i you know we're still figuring it out, but I will tell you that it is impacting us more than we had expected and it is impacting us. And that's, uh, you know, that's what our current situation is. And, you know, we still like the products. We still like the people we're still working on, um, you know, continuing to integrate the business, which is, you know, going really well. Um, and I, I think that's kind of where we are at with that.

Right. Okay, great. Thank you for that color. And just as the follow up question is, the electronics part of the business, you mentioned that there's a timing issue between the front end and the back end. Can you help educate us just how long is that? Is it measured in months or years? How should we think of that?

Yeah, I, you know, we don't, by now, right, look, based on our expectations in the first quarter, We had expected that this would follow quickly or thereafter. That has not happened. So our guidance doesn't imply a significant pickup in electronic market for the rest of the year. And as we approach 2025, we will be in a better place to provide you more color as to when it might actually pick up. But I think what is important to remember is that We have de-risked our outlook for electronics for the rest of the year.

Okay, that sounds great. Thank you. Next question comes from the line of Andrew Buscaglia with BNP Paribas. Please go ahead.

Hey, guys. Hello. I wanted to go back to the ATS segments. Just given the nature of Norton having a more direct sales model, it gives investors a lot of confidence in what you guys are saying. But what is it that these customers are saying to you that's making it so difficult to predict when the spend is going to move forward?

Yeah, I think it's a great question, Andrew. What I will tell you is that none of the projects we are working on with our customers are that somebody has come to us and said, look, this is all off the table. It is canceled. That is not the case. We continue to work with our customers on projects and opportunities as they bring on new technologies for AI, as they bring on more technologies for much smaller, much more complicated chips than we have. So that work, the project work continues. But what it is not translated is from that project work into system orders, it is not translated yet. Nor have people completely canceled projects either, right? So we are sort of in this middle time, you know, call it uncertainty. You know, I can only talk to you about what we're seeing in terms of customer sort of actions rather than, you know, what is the broader trend here. There seems to be a reluctance in translating work that they're doing into systems sales or systems orders. We continue to do well on our parts, but there seems to be some reluctance, and I'm not exactly sure. understand the core reasons as to why our customers have reluctance. But there is reluctance.

Maybe to dig in a little bit deeper, regionally, is there something unusual going on? Is one region worse than the other? And I'm thinking China here. I don't know. What are you seeing by geography, I guess?

Yeah, we're not seeing significantly different behavior from geography, geography. We still, you know, we work with all of the major, you know, major semiconductor manufacturers. You know, there are, you know, there are, it's not like, you know, obviously we continue to sequentially grow. Sequentially we have better order entry. So it is not like we're continuing to decline or we're just flat in the bottom. We're starting to come out. It is just not as fast as we had hoped. I think that is probably what we need to take away is that our reduction in guidance is mainly because we had a far steeper implied ramp in our second half. That's not happening. And that is not happening because the orders we are getting are not at the same rate as we had hoped. It is at a little flatter rate than we had hoped for. And we don't see a whole lot of difference in regions. Clearly, when compared to last year, activity in Asia has picked up. That we can tell you, right? Certainly, Southeast Asia is better than China for us. And that's just for us. Certainly, you know, our Automotive electronics customers in Mexico are significantly better for us. Europe is okay. Broadly, that's how we think about the ATS business.

Okay. Thanks, Naga. Thank you.

Your next question comes from the line of Jeff Hammond with KeyBank Capital Markets. Please go ahead.

Hey, good morning, everyone.

Good morning, Jeff.

Hey, so just if we step back and think about, you know, capital allocation, I think you guys have kind of been on the wrong side of cycle timing around cyber optics and AIRG now. And I'm just wondering how you think about, you know, cyclicality and timing, you know, as you kind of look at deals going forward.

yeah i think it's a fair question and and we have spent time thinking about this we certainly need to put that into part of our equation as we think about acquisitions and deals but you know having said that i would tell you the technology behind each of these deals are spot on for us as a company to continue to expand our portfolio precision technologies We certainly have short-term pressure because of the market conditions, but we believe that the long-term drivers in both these bases are pretty sound, and we like the technologies we have and the people we've added. You know, finally, what I'll tell you, it's not offered as an excuse, if you so will, right? But it is, we really don't control when high-quality assets come to market. We continue to remain focused on our strategy of building strong, precision technology portfolio, continue to deploy NBS next. And we believe the long-term strategic fit of these businesses. And I know as we get past these market conditions, we're going to be incredibly happy that these are part of Norton's portfolio. So I think it's a fair question you ask, but that's what we're working on.

Okay. Appreciate the color there, Narga. Sure. Just on decremental margins in the second half, I mean, you guys have done a pretty good job with MBS Next, kind of limiting the decrementals. But I think, at least in our model initially, you know, we have pretty severe decrementals. So just maybe how you're thinking about decrementals and holding the line.

Yeah, if you think about decrementals, I think we think about decrementals inside the company mostly for our core businesses. That is probably the best, you know, best apples to apples comparison. And if you look at our core business, apples to apples decrementals were pretty strong in the quarter. But if you look at the total companies, given ARAG performance where you have lower sales, yet you have the full load of SG&A, you know, your decrementals at the total company level will look skewed. But without ARAG, we had some pretty strong decrementals. And if you're looking for a number, sorry, Steve, you want to go ahead and add?

Yeah, no, no, I was just going to say, Jeff, what I'd also focus on, too, is just our EBITDA margins as well, right? I mean, I think we've been very successful in terms of generating you know, strong EBITDA margins. I mean, even Q2 was the fifth quarter in a row where we had EBITDA margins 31% or higher. And, you know, the last three years we've delivered 30% or more EBITDA margins. And I think we're obviously well on our way to do that again here in 2024.

And in the core businesses, Jeff, if you're asking for what is a target incremental, it is about 50 to 55. I would use 55 is just sort of in line with our gross margins because we want to stay invested in our precision technology innovation. We want to stay invested in our direct customer model. You know, that is what we have done in the past, and that's what we'll continue to do. But if you really put all of this in perspective, right, if you look at our full year, we're still, our midpoint is, you know, essentially implies a 1% growth over at record 2023. We're still expecting that we will deliver 31 plus percent EBITDA margins. We will still convert pretty strong on net income to free cash flow. In the quarter, we converted about 92%. So, you know, from an operational perspective, Yes, the teams are dealing with some market conditions, but the operational performance of the company is in a pretty good place, and we continue to do that in this environment.

Okay, great. I'll leave it there. Thanks.

Thank you.

I will now turn the call back over to Naga for closing remarks. Please go ahead.

Our solid second quarter operating performance reflects the strength of our diversified markets, close to the customer model, differentiated precision technologies, and rigorous implementation of NBS Next growth framework. We remain focused on the deployment of the Ascend strategy that positions us well for long-term profitable growth. With that in mind, we are excited to announce that we will be hosting and Investor Day in New York on Thursday, October 3rd, 2024. We'll be sharing more information about the details of the event this summer, but please save the date on your calendars for the afternoon of October 3rd. Again, I want to thank Norton's employees for their commitment, which makes these results possible. Thank you for your time and attention on today's call. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.