Nordson Corporation

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 Dan Hopgood, Executive Vice President and Chief Financial Officer. We welcome you to our conference call today, Thursday, May 29th, to report Nordson's fiscal 2025 second quarter results. You'll 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 website and will be available there for 30 days. There will be a telephone replay of the conference call available until Thursday, June 5th, 2025. 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 metric 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 Dan to review sales and earnings performance for the total company and the three business segments. Dan will also discuss the balance sheet and cash flow. Naza will then share a high-level commentary about our enterprise performance and provide an update on the fiscal 2025 third quarter guidance. We will then be happy to take your questions. With that, I'll move to slide four and turn the call over to Naga.

Good morning, everyone. Thank you for joining Norton's fiscal 2025 second quarter conference call. We started the second quarter with increasing momentum in order entry and backlog, enabling us to outperform the midpoint of our sales and earnings guidance. This was driven largely by strength in our advanced technology system and part sales where order entry continues to be solid due to ongoing customer demand within semiconductor and selected electronic applications. We also experienced solid growth in nonwoven systems and medical fluid components and our precision agricultural business, previously referred to as ARAG, posted solid double-digit year-over-year growth. Our Atrion integration is going well, and results continue to perform above our valuation model expectations. I'm very pleased with the customer adoption of Atrion's differentiated products as well as our new employees who have adopted the NBS Next framework, driving operational efficiencies and delivering solid growth results. The sales growth in the second quarter was partially offset by year-over-year weakness in select industrial system sales, reflecting lower overall market demand. That said, industrial systems improved sequentially compared to the first quarter as expected. Operational excellence during the quarter drove strong profit performance resulting in 32% overall EBITDA margins. This was driven by operational execution in our core businesses and strong contribution from the Atrion acquisition that exceeded our expectations. As a growth compounder, we are executing a balanced capital deployment strategy, buying back $85 million in shares during the quarter. In addition, we paid $44 million in dividends and maintained our debt leverage ratio at 2.4 times comfortably within our targeted range. Let's turn to slide five. As investors know from our investor day presentation, using NBS Next, we hold our product portfolio to a high standard. We regularly assess the strategic fit of our businesses and product lines from a market attractiveness and product differentiation perspective, as well as their relative financial performance in the company's portfolio. On May 28th, we signed an agreement to divest select product lines within our medical contract manufacturing business. Exiting these product lines will increase focus on higher value growth opportunities within the 800 million medical and fluid solutions segment. Namely, within our growing portfolio of proprietary medical components, including devices from the recent Atrion acquisition. The transaction is expected to improve our growth profile going forward, and will be accretive to our margins post-sale. We expect this deal to close in the fourth quarter of fiscal 2025. I'll speak more about the enterprise performance in a few moments, but first I'll turn the call over to Dan 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 2025 sales were $683 million, up 5% from the prior year second quarter sales of $651 million. This growth was driven by an 8% increase from the Atrion acquisition, offset by an overall organic sales decrease of 2% and unfavorable currency translation of a little less than 1%. Gross profit in the second quarter was $374 million, a healthy and consistent 55% of sales. SG&A leverage improved year over year, leading to EBITDA adjusted for restructuring and integration costs in both periods of $217 million, or 32% of sales. This is an increase of 7% compared to the prior year. EBITDA growth was driven by improving incrementals in our ATS segment, as well as strong contributions from the Atrion acquisition, which continued to perform above expectations from both the sales and margin perspective. Importantly, the impact of tariffs was not material to the company's operating financial performance in the quarter. Looking at non-operating expenses, net interest expense was $26 million, an increase of $7 million versus the prior year, driven by higher debt levels tied to the Atrion acquisition. Other expenses increased the nominal $3 million, primarily reflecting higher foreign exchange transactional losses compared to the prior year. Tax expense for the quarter was $26 million, or an effective tax rate of 19%. in line with our guidance range for fiscal 2025 and 180 basis points lower than the prior year. Net income in the quarter totaled $112 million, or $1.97 per share on a gap basis. Excluding non-recurring costs related to restructuring actions and integration, as well as amortization of acquisition-related intangibles, Adjusted earnings per share totaled $2.42 per share, slightly above the midpoint of our quarterly guidance, and a 3% increase from the prior year adjusted earnings per share of $2.34. This improvement in year-over-year earnings reflects the strong overall conversion on higher sales and favorability in our tax rate, modestly offset by higher acquisition-related interest expense. Now let's turn to slides seven through nine to review the second quarter 2025 segment performance. Industrial precision solution sales of 319 million decreased 8% compared to the prior year second quarter, down 7% organically and 1% due to unfavorable currency impacts. Growth in nonwoven systems, precision agriculture, and packaging product lines were offset by weaker system sales in our industrial coatings and polymer processing product lines, where we're seeing lower end market demand versus 2024. Also, you may recall that we initiated the transition of our primary industrial coatings manufacturing site to a new South Carolina plant at the start of the fiscal year. That transition is now substantially completed as we move into the third quarter. We expect to see continued sequential sales improvement in our IPS segment as the year progresses. EBITDA was $114 million in the quarter, or 36% of sales. This is a decrease of 12% compared to the prior year EBITDA of 128 million, driven by lower sales volume in the quarter. Turning to slide eight, you'll see medical and fluid solution sales of 203 million, increased 20% compared to the prior year's second quarter. Growth was driven by the acquired Atrion business, which delivered $51 million in revenue during the quarter. This was offset by double-digit declines in our medical interventional product lines. The year-over-year decline in interventional volumes includes the contract manufacturing business that we have intentionally rationalized to prepare for the pending sales. Excluding these medical contract manufacturing product lines, organic sales for the remainder of the segment were down about 4% compared to the prior year, reflecting continued destocking trends in our interventional products. We expect the impact of destocking trends to continue to lessen as the year progresses, and we continue to see sequential improvements that validate this. EBITDA for medical and fluid solutions was 77 million, or 38% of sales, which was an increase of 22% from prior year EBITDA of 63 million. The increase was driven by strong conversion on Atrion sales during the quarter and solid execution to minimize decrementals on lower organic volumes. Turning to slide nine. you'll see advanced technology solution sales were $161 million, or an 18% increase compared to the prior year second quarter. The growth in sales was driven by broad-based demands, notably in electronic suspense, optical, and X-ray inspection systems, all growing double digits over the prior year. We started the quarter with a strong backlog, and we continue to see steady order entry as the semiconductor and electronic applications we serve continue to show solid ongoing demand. Second quarter EBITDA was $40 million, or 25% of sales, an increase of 43% compared to the prior year second quarter EBITDA of $28 million, or 20% of sales. The improvement in EBITDA margin was driven by the organic sales growth and continued emphasis on cost management and improved manufacturing efficiency. These margin enhancements should continue to compound as the segment demand outlook continues to improve. Finally, turning to the balance sheet and cash flow on slide 10. At the end of the second quarter, we had cash on hand of approximately $130 million, and net debt was approximately $2.1 billion. resulting in a leverage ratio of 2.4 times based on trailing 12 months EBITDA. This is a slight reduction from year end and within our long-term targeted leverage ratio of 2 to 2.5 times. Our free cash flow generation was in line with the prior year at $103 million during the quarter, resulting in a 92% conversion rate on net income for the quarter. and a year-to-date cash flow conversion rate of 116%. During the quarter, given market dynamics, we prioritized share repurchases over debt reduction, with share repurchases totaling approximately $85 million. In addition, we returned $44 million to shareholders through dividends, and we also continued to invest in our base businesses, spending roughly $16 million on capital investments including the final investment in our new ICS manufacturing facility. All in all, we had a solid operational quarter, and our teams delivered on their commitments despite ongoing uncertainty in geopolitical and trade policies. While market conditions remain mixed for some of our businesses, we are well positioned to capitalize on profitable growth as the year plays out. With that, let's turn to slide 11, and I'll turn the call back to Nag.

Thanks, Dan. Let's start with the implications of dynamic global tariff policies on the company's performance. Similar to the second quarter, we believe we can manage the current tariff levels and don't expect them to have a material impact on our third quarter results. We continue to monitor potential impact on end market demand as a result of these trade uncertainties. However, we remain agile in our action plans, knowing there is still plenty of market uncertainty due to tariffs. Given our in-region, for-region manufacturing strategy, decentralized organizational structure and close to the customer model, we are well positioned to offset the impact of changes in trade policies as they evolve. In the near term, we have implemented targeted price increases and adjusted supply chains to overcome the today modest tariff-related cost increases. In the medium term, The capital-like nature of our businesses allows us to further enhance our in-region, for-region manufacturing strategy. I am proud of the Nordstrom team's solid execution in the quarter on multiple fronts in this uncertain environment. Our close-to-customer model with innovative differentiated products is accelerating our commercial execution and leading to positive order entry momentum in electronics, precision agriculture, and select medical product lines. This has resulted in sustained order entry and a healthy backlog increase of 5 percent since last quarter. In businesses where we are experiencing weaker customer demand, we have implemented targeted restructuring to adjust cost structure. These actions will be substantially completed by the end of our fiscal third quarter and are expected to provide ongoing annual benefits of over $15 million by 2026. We also continue to invest in our organic business. To support the medium-term growth needs of our US and global customers, the industrial coatings business moved into a new greenfield facility in South Carolina at the beginning of this fiscal year. Similarly, we have expanded manufacturing capacity for the electronics process solutions business into India to support growing needs of our customers in the region. Finally, as Dan mentioned earlier, our strong balance sheet allowed us to take advantage of the dynamic market conditions in the second quarter and accelerate share repurchases. Year to date, we have bought back approximately $141 million in shares. At 2.4 times EBITDA, we remain within our long-term targeted leverage ratio of 2 to 2.5. Turning now to our outlook on slide 12. Based on current visibility and order entry trends, we expect third quarter fiscal 2025 sales to be in the range of $710 to $750 million. Third quarter adjusted earnings are forecasted to be in the range of $2.55 to $2.75 per diluted share. The third quarter guidance is in line to the full year expectations we set at the beginning of our fiscal year and confirmed in our Q1 earnings call. In the near term, we are comfortable managing current tariff levels and do not expect current policies to have a material impact on our results. Despite these short-term uncertainties, The strategic competitive advantages of Nordsten that we note on slide 13 remain unchanged. Our strong growth portfolio, high recurring revenues, diversified niche and markets, close to the customer model, proprietary differentiated products, and the NBS Next growth framework positions us well for long-term growth. including potential opportunities when customers shift or modify their manufacturing footprints. This is why Norton has continuously demonstrated resilience and the ability to deliver best-in-class profitability in varying market scenarios from the Great Recession to the pandemic and beyond. As always, I want to thank our customers and our shareholders for your continued support. In particular, I want to thank our Norton employees who are passionate about meeting the needs of our customers. Your efforts show. With that, we'll pause and take your questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from a line of Mike Halloran from Baird. Your line is open.

Hey, morning, everyone.

Morning.

Morning, Mike. Hey, can we just, at a high level, just talk about how you see trends playing out through the rest of the year, what's embedded in guidance, and specifically talk to some of the major verticals, you know, sustainability of what you're seeing in the ATS, wind interventional, DSTOC. is behind you and any other kind of key variables as we think about the back half of the year here? Sure.

Mike, let's start with ATS. You know, we experienced solid order entry in the ATS business across all of our businesses in that segment. You know, stop and think about where this is coming from. What you really see is this incredible investment that is going on for computing power you know be it for ai be it for cloud computing or e-commerce any any of that what you're seeing really is this incredible investment happening and at the heart of all of that investment is really uh complex new generation computer chips and semiconductors right and notes in place really well to notes and so I think that is playing into our growth. Sustainability, based on what we see in the business, we feel really good about the trends we see, the conversations we have with our customers. We've been talking about this impending order entry for a couple of quarters here. I would tell you, we are now seeing it in our businesses and we're seeing it in our results. So ATS in general, pretty good, feel pretty good about it going, playing out through the rest of the year. On MFS, what you have experienced really is Atrion contributing to growth, very solid performance above our model expectations. Our fluid components business, which was down for several quarters, you know, that is now delivering nice growth. So we're seeing some positive order entry momentum there. Destocking continue to reduce in severity as we go through the year. And also you would see that our, you know, a significant part or more than half of our organic declining coming from our contract manufacturing businesses as we have rationalized programs. So that reduces. Now coming to IPS, Look, ARAC doing really well, double-digit organic growth, order entry pretty strong there. Our traditional consumer non-dealable adhesive businesses doing well, good order entry, steady growth there. Our industrial systems business is where we are behind, you know, both industrial coding where Automotive is the big impact there, and our plastic processing business. I would tell you automotive will remain a headwind for the company for another couple of quarters, given what is happening in that end market. But we do see pretty good momentum in our powder coating business. We see very good momentum in a couple of product lines that are very niche. applications so the industrial coatings business continues to improve and believe that through the year they'll do better um so this is the trends that we are seeing in ips is largely in line with our expectations it was largely in line with our expectations in the second quarter largely in line with what we thought at the beginning of the year

No, that's super helpful. And then as far as the contract manufacturing divestiture goes, any way to size the revenue as well as maybe talk to if there are other areas you're thinking about internally? I know this is the second major one. You had the screws, the plastics one earlier, which was super successful. You have this one. Are we at the end of that journey or do you think that there's a little more to go there as well?

Let me give you just the top-level color first, and then Dan can work you through some of the details. Look, as we said in our investor day, building and sustaining a strong growth portfolio is an important part of our strategy. So to that extent, that portfolio analysis happens every year, and we stay focused. You know, true to that process. It is really based on product differentiation relative to financial performance of the business within the portfolio. So that's really the criteria. Nothing changed there. So it is an ongoing process.

And, you know, I'll leave it at that. And so, Dan. Yeah, maybe just to add a little more color, Mike, so maybe direct answer your question. No, there are no other ongoing actions, but I think Tanaga's point, this is a great example of a small business for us to size it for you. This is roughly 4% of our year-to-date sales in the medical segment. um and this is an example of a business that we've been looking at and assessing for a while and ultimately made the decision it's better off in somebody else's hands small part of the overall portfolio but um you know as you look at as you think about margin implications um naga mentioned on the call that it would be accretive to ongoing margins post sale um and i think the simple way to think about that is you know this is on a full year basis roughly 100 basis points accretive to our medical segment margins going forward post-sale. But a small business, but one that, you know, ultimately we determined is better off in somebody's hands. There are no further, you know, we have other active portfolio actions, but this is something that we continue to look at every year.

Yeah. Dan, one thing I would add to that is, look, the main reason to continue to build a portfolio and keep the portfolio strong is is the opportunity cost, right? This action allows our teams in the medical component business to focus on things we are really good at, while this contract manufacturing belongs within, you know, Quasar, who's the buyer of this business, and they are building this as a great home for our teams in that business, and, you know, they will do fine. But it allows our teams to focus on what strategically we are positioned to do which is to grow our medical component business including the ones we bought required through atrium that's great thanks naga thanks dan appreciate the help yep your next question comes from a line of andrew boscaglia from bnp paribus your line is open hey good morning everyone good morning andrew good morning um

know i wanted to just touch on a couple of the segments you know ats has been really volatile you know last couple quarters um should we see more consistent growth in that segment going forward um and what's informing i guess can be more specific around like where in the orders you're seeing improvement even either on a sequential basis or however you want to look at it yeah

Yeah, let me address sort of your first question, which is sort of the lumpiness of this business. You know, this is a business inherently lumpy and inherently lumpy because of the industry that we operate in, right? When we have customers who tend to expand and expand fast and want to expand right now, right? Or want to... you know, stop buying and want to change their investment profile right now. So that is something the company, you know, is difficult to control. But overall, if you think about, you know, how we think about the business within the company, and that may be helpful, is to really say that this is the part of the cycle where it is starting to grow. Now, it is difficult for us to sort of control customer expectations of shipments and timing of shipments. So things could slip from one quarter to next. But, you know, first half, second half is a good way to think about this business in terms of growth. We feel and what we see in our order entry is some pretty strong order entry patterns that gives us know pretty good confidence that this is you know this is the part of the cycle where this business is going to contribute nicely to the company's organic growth you know if you put it in perspective through the cycle this is a five plus percent organic growth business right and order entry and backlog are building and and are supportive of that for the year so

Maybe one other thing I just hit on as you think about this, just to add one additional flavor. And most of the growth we're seeing right now is really with our Asian customers. And so as you think about some of the announcements being made around investments in the U.S., frankly, we're not even seeing that yet. And so the cycle does have some legs to it. Most of the growth that we're seeing is with existing capacity companies. or expanding capacity in some of the Asian markets. But there are additional legs to this that I think are still at the early stages.

And the other thing to also think about is these tariff regimes that are being talked about, figured out. I think our customers are going to adjust manufacturing footprint. And as they adjust manufacturing footprint, that represents a nice opportunity for Norton. And And if you really think about our expansion in India, that really stems from the fact that, you know, some of our customers are, you know, diversifying their manufacturing footprint and, you know, we will benefit from it. Look, this is who Norton is. We have a very close customer direct model. We work with our customers that are, you know, capital light, manufacturing business and so we are able to pivot to the needs of our customers help them expand serve their needs in whatever geographies they want to so as they move as they expand as they invest you know notes and benefits so hopefully that gives you some color i know you need you had a couple of follow-ups so let's just yeah i you know maybe switching an mfs yeah yeah

The question would be the line of sight on, you know, that the con in interventional medicine has been surprising due to destocking. But what's your line of sight on that destock at this point? It seems like it's slowly coming to an end. And then on the other side of that, is there an acceleration or is this not the type of market where you could see a pickup? You know, maybe it's more of a gradual pickup. I'm not sure the nature of how that cycle would work in that business.

Sure. You know, if it asked me prior to COVID, this is a business that's not cyclical, right? It was a secular 5%, 6%, 7% growth every year. If you think about where we are at in terms of D-stock, what we are finding is that the D-stock in this business is definitely reducing. Definitely reducing because we can see our order entry improve. So we feel good about where we are at in terms of the destocking being getting played out. But fluid components, which is another part of this business, it is a smaller business, but a smaller part of the business that was down significantly for you know, six to eight quarters almost, it is now delivering growth and we feel really good about where they're at. Longer term, the pipeline projects that we're working on for these businesses, they remain strong. You know, in terms of how they would recover, you know, this is not, the customer behaviors are not similar to what you see in electronics. Here, this is going to be far more steady growth. People went through COVID, overstocked, destocked, and now it is going to gradually recover to normal demand growth rates rather than a significant uptick or a significant downtick. So our expectations for this business is that we continue to recover on the destocking, fluid components contributing nicely. But don't forget, Atrion is a big contributor to our growth, and that business, as we have shared, is doing very well, above our expectations.

Yeah. All right. Thanks, Naga.

Sure. Our next question comes from a line of Siri Boroditsky from Jefferies. Your line is open.

Good morning. Thanks for taking the question. Maybe going on... some of the stuff you talked about with ATS. How do you think about margin performance going forward? And how do you maintain a more steady margin performance if you're going to continue to see some of that volatility with the customer behavior you spoke about?

Yeah, I think during the last downturn, the teams really did a nice job of restructuring the business. You know, our expectation is that this This industry performance margin performance is different from our other businesses, right? Because our investments on innovation are significantly higher in this business. You have to invest in innovation, which is, you know, four or five times higher than what we have in our other businesses, because unless you invest, you're not able to participate in the growth cycle. So, so the margins will be different. But we feel like we have adjusted the cost structure such that in a downturn, the margins would be lower than where it is today, which is right now it is at 25%. And in a down cycle, could it be lower? It could be. But it's not going to be a place where we have significantly lower margin performance like you know, seven years, five years ago, or six years ago, you know.

And Terry, maybe one way to think about it is, you know, with the kind of foundational changes or changes, improvements that we've made in the business model, we've essentially raised the waterline in this business, right? So if you look peak to peak or trough to trough, you're going to see sustained improvements and the margin profile going forward. And that's because of the structural changes that have been made to reposition the business.

That's helpful. And then maybe turning the precision ag business return to growth in the quarter, as I believe you expected. Can you talk through what you're seeing in that market and what you've seen from a margin performance and how it should perform in an upcycle?

Yeah, the margins, let me just take the margin question first on ARAG or precision agriculture business. Look, even in a downturn, the EBITDA margins in that business was as good as the company or slightly better. So in the upcycle, there may be some benefits, but our goal is to continue to grow this business. That's where the opportunity is. Where we are seeing the growth, the growth is coming mostly in Europe and in South America. And so if you'd remember, you know, just, you know, just refresh all our memories around this is that remember, this is a European based business. That is where their strength is. They're a market leader in Europe. Clearly we've gone through, you know, uh, an inventory adjustment in the channel in Europe, and we're growing back again. um we're super excited about a couple of new products that they've launched uh you know clearly we are at the very early stages of implementing nbs next uh i you know so we are super excited about this business it is growing uh our expectation it continues to grow thanks i appreciate the question

Your next question comes from a line of Christopher Glenn from Oppenheimer. Your line is open.

Thanks. Good morning, guys. Good morning. So nice to hear the increasingly assertive pivot on ARAG. And then on your subsequent acquisition to that, Atrion, uh just kind of curious about the upside you know whether that was you know a conservative initial posture or true surprise curious your current thoughts on you know the compound uh growth over time you know is what we're seeing here the profile or does the current upside maybe create some growth challenges in fiscal 26 as you I don't know if you have to digest the scaling that you're seeing here in fiscal 25. So just kind of surrounding some of the Atrion dynamics a bit there. Yeah.

You know, A, I wouldn't say it was a conservative model. You know, remember, we have been in this, the kind of products that sell the majority of the business. We have very good familiarity. And so I understand what the, performance expectations can be from both the market perspective as well as internal. Where we are at in that business is we're integrating nicely. We're certainly performing well commercially. They've got one new product out there that we're doing really well. They've got a couple more coming right behind it. So I think we have a good benefit of new products that are going to help our growth, look, we're ahead, but we still have opportunity in this business. And I think that's how I would think about it.

Okay, great. Is this something where they can really generate a couple material new products every couple of years?

I don't, it's going to be difficult to say, but look, this is a business that has significant amount of IP. I don't know whether I could put a number next to it other than I would say that the innovation opportunities are pretty strong and we really like where they're at. I think that is an important growth contributor for them and the rest of Nordstrom, right? Innovation has always been an important part of our playbook, and that's the alignment with their strategy and ours. Operationally, there may be more opportunities, too. I think that is we are very early days there.

Okay, great. And then pivoting over to ATS, just curious how the – You know, the center of gravity is moving. You know, are you seeing the industrial RF chips around customer innovation starting to land? Is it more midstream processing? Just trying to get a sense of where the piglet is in the pipeline.

All right, Chris. So let me try to, if you're asking me where we are at and how this cycle is playing out, A couple of things we see is, A, the investments that are happening by our customers are pretty significant and they're pretty rapid, which essentially tells us that the opportunity for us to continue to benefit from it remains. I think the investment, as Dan mentioned, investments in North America is still an upside. That's not played out. It'll take many more years to have that show up, but the opportunities in Asia are strong and they're happening. There is a ton of innovation that is happening, and I don't think that is going to end here because I think we are at very early stages of the GPUs that are getting built. The technology around the GPU is significant. And I think, so the more difficult it is, the better it is for Norton. And this is one of those cases where we're going to benefit from it. So we're going to continue to adapt our existing technologies. There's going to be some fast innovation to customize for people's investments. But also, as we solve these bigger problems, I think we have an opportunity. And we have new categories of products. You know, through our cyber optics acquisition, you know, we have a new generation of in-process sensors called wafer sense. And that is a product category that is growing very nicely for us. We see we just released two new products in that category. We have new opportunities there. We're working on more. So innovation is going to, you know, in ATS, for us to win, we have to innovate, and we need to have, we have to play at the right price points with the right manufacturing footprint. So, you know, it's got a nice upside, but, you know, it is lumpy, and it is cyclical. Great. Thanks for that.

Your next question comes from the line of Matt Somerville from DA Davidson. Your line is open.

Thanks. Just a couple quick ones. If you look at your tariff exposure on an annualized basis, what does it look like if it's completely unmitigated, which I realize it isn't, based on the current tariff scenario? I'm trying to get a feel for how much of an impact you're working to offset, and then I'll follow up.

Dan, do you want to? Yeah, maybe I'll take that and certainly appreciate the question. It's something that's, you know, top of mind for everybody. But, you know, what I would say is certainly at the current levels, I mean, tariffs are very manageable. And as we stated, really had no material impact on our second quarter results. We continue to monitor and obviously this is a developing situation. And, you know, frankly, announcements seem to be, you know, coming, but The general way I would think about it is our in-region, for-region mitigates a large amount of the tariff exposure. And so, maybe I'll just give you a little bit of a framework. If you think about it as a percent of our overall sales, you know, roughly 85 to 90 percent of our sales are fully in-region, for-region, meaning very little import-export exposure. If you think of the 10% to 15% that is not, that is a broad-based or very diversified set of exposures. So we do not have any concentrations of exposure. So if you think of that 10% to 15%, it's split amongst many different arrangements in our global footprint. And no single inter-country exposure is more than low single digits. For those reasons and others, including Naga's points that we tend to be more nimble than most and can pivot as our customers pivot, we don't see a significant impact. It's certainly not at the current levels, no. Things can change and that's where we're continuing to monitor the situation. If the situation changes, we'll make pivots where we need to, but I would come back to no material exposure in the second quarter. At the current levels, we think this is very manageable. And really for us, the bigger risk and the bigger consideration in all of this is what it does to end market demand with our customers, right? If our customers start deferring investments or deferring capital, that's probably the bigger risk, what the general economic impact is to this. And frankly, that's, I would say, you know, what we're watching closer than anything.

Thank you for that. Yeah, no, that was super helpful. Thank you. Just to maybe try and put a little bit finer point on what you're seeing in ATS. Is there a way to quantify how much of that business today is being driven by various categories of high performance computing relative to what that number would have looked like 12 to 18 months ago? Thank you.

I would say, I think 50% of our business would be semiconductor, high power computing as you describe it. And a couple of years ago, I don't know, if you go back, I want to say, you know, four or five years ago, you know, maybe that number was 30%. or so 20 look i'm guessing here uh 20 to 30 percent at best certainly this is an area our teams have focused on but also the type of customers have changed that's you know without getting into specific names i would tell you if we were very um north american centric five years ago We are more Asia-centric. Although Asia was a big presence for us even five years ago, I would say the kind of customer projects we're working on, the innovations we're leading, the demands we are creating tend to be in Asia than North America. But I think that would also change because as North American semiconductor investments become you know, real meaning when the buildings are done, when things people are making, as you have packaging lines come on, Nordstrom is going to benefit.

Understood. Thank you.

Again, if you'd like to ask a question, press star one in your telephone keypad. Your next question comes from a line of Walt Liptack from Seaport Research. Your line is open.

Hi, thanks, and good morning. Good morning, Mark. So I've got a couple of follow-ons. You know, on the ATS segment, Naga, I think you kind of alluded to like a 5% growth. And I wonder if I just want to clarify, was that 5% growth in the second half? on an organic basis, or were you just talking about kind of growth in the future?

I'm talking about through the cycle growth, right? I mean, you know, that is going to be, since it's cyclical, you've got to take it through the cycle. You know, our expectation is this business grows 5%, right? We have very good clarity to Q3, and that is definitely higher than 5%, but we don't guide by segments of, you know,

I realize that, yeah, so thank you for adding that in. Okay, good. And then do you, I think in your prepared remarks you get commented on some selling price increases. Yeah. And so I wonder if you could just help us understand was this like a price increase or like a tariff surcharge or, and was this uncommon? Do you usually do like annual price increases? or is it kind of a normal course of business?

Yeah, no, it's a good question. Look, our pricing focus, so the answer to your question is we regularly assess pricing. It's a normal part of our process. Our focus, and this is largely driven by our current margin profile, our focus is really on maintaining competitiveness and maintaining our margins. But it is something that we look at regularly in the current environment. Certainly some of what you're seeing is tariff impacts being passed on where necessary. And that would include, you know, both think about it as both the direct impact and any indirect impact through the general supply base. And so that is certainly, but again, if I were to look at our overall pricing, I would say you know, there's no significant escalation at this point, right? It's really, you know, look where we have to pass things through and manage. We are doing that, but it's not a significant impact.

And the other way to also remember is that we run the company as 14, now 15 divisions. So what this allows us is you have a decentralized organization with business owners who understand their market dynamics, understand their cost structure, are able to simply read the situation and be able to adjust pricing, adjust supply chain so that we are able to keep growing and growing profitably. So our structure, our entrepreneurial spirit in the businesses as well as our close to the customer model, allows us to be able to learn the market and adjust accordingly.

Okay, that's awesome. And just maybe a follow-on to that. So the price increases went through early. Do you get benefits from it already, or are you just about to announce them?

They're phased in over time. There's no one-size-fits-all, as I guess Naga just mentioned. Each of our divisions are making those decisions and managing as appropriate. And so, you know, think of it as pricing is generally an ongoing activity that takes place throughout the year. Okay, got it.

Fair enough. And then just one last one for me, if it's okay. Last quarter, I think you guys talked about how you were feeling that things would be at the low end of your sales range. And but I didn't hear where maybe you did make a comment about that or do you still think you're going to be at the low end of the sales range for 2025?

Yeah, no, it's a very good question and look, I'm going to come back to what we said explicitly. What we can tell you is that Q3 guidance providing for Q3 is certainly in line with our full year expectations. There's a lot of things that are still pending on the policy and trade front, namely some deadlines coming up in July and August. It's a bit early to call Q4 and the outlook for the full year. That doesn't mean that we're backing away from our guidance. Frankly, we just don't know what's going to happen as some of these decisions get made and play out. So Q3 is certainly in line with our full year expectations that we reiterated in the first quarter. Q4 remains to be seen and largely dependent around what happens on the front over the next couple of months and what that impact is. Again, I'm going to go back to my earlier statements. You asked me what are we concerned about. It's really what is the impact on end market demand across our portfolio if customers start pulling back because of these uncertainties. We haven't seen that yet, but it's too soon to say.

I think that is probably what you have to remember is it is uncertain, but we are not seeing in our businesses yet. But these deadlines come up in summer. You know, look, these are not, you know, these are dynamic times to say the least. Yet our teams are doing a fantastic job of continuing to serve our customers, continuing to innovate. continue to do all the things Nordstrom does really well. And I think that is a testament to the team's ability in a very entrepreneurial way to adjust to some very uncertain times. And, you know, we tell you that there is no impact on Paris. Yes, but there is a lot of work that goes behind achieving that outcome, right? And so I think that's what you want to take away is that The impact is minimal. Teams are agile, working, and we'll take a quarter of the time here.

Absolutely. Thank you very much, guys.

Your next question comes from a line of Chris Dankert from Loop Capital Markets. Your line is open.

Hey, morning, guys. Thanks for squeezing me in here. Just as it relates to the outlook, we've been hearing some more constructive commentary from the European machine builders. I guess maybe any color on customer conversations within that business, and then does that support a chance for organic growth in that adhesive dispense business in the back half here?

I think you're right about the European machine builders. We feel pretty good about our position there and we continue to do well. What we are seeing really is our big cyclical, big system businesses, which is not, we don't include the Adisa businesses in it because we have our plastic processing business and industrial coating businesses, which are much bigger systems. Now those are, that is different and that's what is weighing on IPS, but the adhesive business in general, you know, uh, our non Rowan's business year to date has done extremely well, and we expect that they will finish the year really nicely. Uh, our packaging business is doing well. We also expect to do well there and our product assembly seems to be okay. So I think what we are experiencing is slightly different. We are seeing what you're talking about, which is the machine builders, and our ADESA businesses are definitely benefiting from that.

I guess my response on a relative basis, I mean, does it seem like current demand is similar to what we saw in the first half, or is there actually some improvement in that non-wovens activity?

I would say similar, nothing significantly better. But they had pretty nice first half, you know.

Got it. I guess I'll leave it there. Thanks for the call, Naga.

Sure.

And we have reached the end of our question and answer session. I will now turn the call back over to Naga for some closing remarks.

Thank you for your time and attention on today's call. Knotson is well-positioned in this dynamic environment, are close to the customer model, proprietary and niche technology, diversified geographic and end-market exposures, high level of recurring revenue, and a strong balance sheet are among the many attributes that makes us a reliable compounder. Thank you.

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