Nordson Corporation (NDSN) Q3 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Nordson Corporation Webcast for Third Quarter Fiscal Year 2018 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Ms. Lara Mahoney, Vice President of Corporate Communications and Investor Relations. You may begin.

Thank you, Norma. I’m here with Mike Hilton, our President and CEO; and Greg Thaxton, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, August 21, 2018, to report Nordson's fiscal year 2018 third quarter results and our fiscal year 2018 fourth quarter outlook. Our conference is being broadcast live on our webpage at nordson.com/investors and will be available there for 14 days. There will be a telephone replay of our conference call available until September 4, 2018, which can be accessed by dialing 404-537-3406. You will need to reference ID number 9285137. During this conference call, forward-looking statements may be made regarding our future performance based on Nordson’s current expectations. These statements may involve a number of risks, uncertainties, and other factors as discussed in the Company’s filings with the Securities and Exchange Commission that could cause actual results to differ. After our remarks on the quarter, we will be happy to take your questions. With that, I’ll turn the call over to Mike.

Thank you, Lara, and good morning, everyone. Thank you for joining Nordson's 2018 third quarter conference call. Nordson delivered solid results despite challenging comparisons to our prior year's third quarter. Our total company sales increased 20% inclusive of 11% organic sales growth. Strong organic growth during the quarter within two of our segments was offset by challenging comparison of the Advanced Technology segment. Our prior year organic growth was 18%. Our commitment to delivering the best technology solutions while employing continuous improvement initiatives, so bottom line performance, generating operating margin of 23%. Free cash flow before dividends was a $118 million which reflects strong cash conversion of 124% of net income. Our base business is strong and we remain focused on bringing value to our customers and the diverse end markets that we serve. Looking ahead to the fourth quarter, our guidance reflects strength in adhesives and medical product lines, all set primarily by lower demand for Advanced Technology dispense product lines that serve the electronics end markets and automotive cold material product lines. For the full year, we are on pace to deliver another consecutive year of organic sales growth, which is a reflection of the stability of the end markets we serve and our ability to drive initiatives that lead organic volume growth. I'll speak more about our outlook in a few moments. But first, I'll turn the call over to Greg to provide a more detailed perspective on the third quarter, as well as our guidance for the fourth quarter and the full year.

Thank you, Mike, and good morning to everyone. I'll first provide some comments on our third quarter results before moving on to our outlook for the fourth quarter of fiscal 2018. Third quarter sales decreased 1% from the prior year's third quarter, inclusive of a decrease of approximately 3% inorganic volume, 1% growth related the first year effective acquisitions and 1% growth related to the favorable effects of currency translation as compared to the prior year's third quarter. Organic sales volume was in line with our guidance as we expected moderation against last year's results where all segments demonstrated strong organic sales growth. Within the Adhesive Dispensing segment, organic volume increased 3% on top of 6% organic growth in last year's third quarter. We're pleased with the pace of the end market demand across all product lines. Within the Advanced Technology Systems segment, organic volume was down 11% as compared to the prior year's third quarter organic growth of 18%. With the exception of those product lines facing the most challenging comparisons to the prior year, namely dispense and surface treatment product lines serving electronics end markets, demand was robust during the quarter for test, inspection and fluid management product lines, including medical components. Within the Industrial Coating segment, powder painting and container coating product line grow this quarter's organic sales growth of 6% compared to the prior year. Moving down the income statement, gross margin for the total company was 55% in the quarter. Operating profit was $136 million with reported operating margin of 23% in the current quarter. As discussed in previous earnings releases, we've been incurring incremental costs associated with the consolidation of certain adhesive facilities. The impact of this effort is approximately $7 million year-to-date. Specific to the third quarter, incremental costs were approximately $2 million. In the fourth quarter, we're estimating the incremental costs will be about $1 million. On a segment basis, Adhesive Dispensing delivered strong operating margin of 28% in the quarter, or 29% to exclude onetime restructuring charges of approximately $1 million related to the facility consolidation effort. Within the Advanced Technology Systems segment, reported operating margin was 25% in the third quarter, the Industrial Coating segment reported operating margin was 22%, which is up by 160 basis points compared to the prior year, primarily related to improved sales mix and our deployment of tools from the Nordson business system. On a total company basis, net income for the quarter was $95 million, and GAAP diluted earnings were $1.61 per share. EPS was reduced by $0.02 per diluted share from the $1 million non-recurring restructuring charge mentioned previously. EPS benefitted by approximately $2 million or $0.03 per diluted share from discreet tax benefits. A reconciliation of GAAP earnings per share to non-GAAP adjusted earnings per share is included in the financial exhibits of our press release. We delivered strong third quarter EBITDA of $163 million or 28% of sales. From a balance sheet perspective, net debt to trailing 12 months EBITDA was 2x at the end of the third quarter, as we have successfully delivered from the Vention acquisition. Our press release includes financial exhibits reconciling net income to free cash before dividends and adjusted free cash flow before dividends as well as EBITDA and adjusted EBITDA. I’ll now turn to the outlook for the fourth quarter of fiscal 2018. We’re forecasting sales to be in the range of flat to down 4% compared to the fourth quarter a year ago. This outlook includes organic volume to be in the range of up 1% to down 3%, 1% growth from the first year effective acquisitions, and an unfavorable currency translation effect of 2% based on the current exchange rates environment as compared to the prior year. Our guidance reflects strength in adhesive and medical product lines, offset primarily by lower demand against very challenging comparisons for Advanced Technology dispense product lines serving electronics' end markets as well as automotive cold material product lines within the Industrial Coating segment. At the midpoint of this outlook, we expect fourth quarter gross margin to be above 54% and operating margin to be approximately 22%. We're estimating fourth interest expense of about $8 million and depreciation and amortization expense of about $27 million resulting in fourth quarter forecasted GAAP diluted earnings in the range of $1.38 to $1.54 per diluted share. We expect EBITDA to be in the range of $143 million to $155 million. Consistent with our comments in the February earnings call, our estimated effective tax rate for the fourth quarter and full year, based on current tax laws and our jurisdiction of mix of income is approximately 25%. And with that, I’ll turn the call back over to you Mike.

Thank you, Greg. Again I'd like to express my appreciation to our outstanding global team. We knew we are facing challenging comparisons this year and the team continues to deliver growth. I’m particularly pleased with the growth we’ve generated in our medical product lines, which has been a primary area of focus for our corporate development team, helping to drive topline growth and offset the cyclicality of the electronic systems product line within our Advanced Technology segment. For the full fiscal year of 2018, at the midpoint of our guidance, we expect to generate total company organic sales growth of about 2%. This is growth on top of 8% organic growth in fiscal 2017 and 7% organic growth in fiscal 2016. Our ability to deliver organic growth again this year highlights the attractiveness of the end markets we serve, our ability to capture growth initiatives and our ability to continue to meet our customer's expectations. We also remain focused on delivering value to our shareholders. Earlier this month, we announced a dividend increase of 17%. This marks the 55th consecutive year of annual dividend increases, ranking us 14th among publicly traded companies for the longest running record of annual dividend increases. We take pride in returning a portion of our cash flow to our shareholders and we appreciate your continued support. Complementing our dividend increase, our other capital deployment objectives remain consistent. We'll continue to prioritize acquisition opportunities in our targeted markets that will help drive our strategic vision for long-term growth. We're focused on finishing strong with another good year of organic sales growth, enhancing bottom line results of continuous improvements using the Nordson business system, and providing superior service and technology to our customers. With that we'll pause now and take your questions.

Thank you. [Operator Instructions] Our first question comes from Christopher Glynn of Oppenheimer. Your line is open.

Just wondering at ATS you have the period of the lower mobile demand, as that plays out. How would you describe the pipeline of your field testing activity across various applications within those markets as informing your expectation for waves of future innovation to drive demand for you guys?

So at a high level, I think as we talked about in the beginning of year, we said this is likely to be a more challenging year, particularly in the mobile segment. And that's sort of the way it played out with modest volume growth and not a lot of innovation. That's kind of the way it played out. If I look at the various segments that we're involved with, I think the things that will drive mobile in the future, will be the move to 5G that has some impacts on what goes into mobile devices particularly phones, and there are some other areas around RFI shielding and so forth that we see as opportunities going forward in addition to any other innovation that our customers would put into the phones. And we continue to see strong growth in the auto electronic side of things as our customers are putting more cameras, more sensors into the cars. And ultimately, we think long-term, as we move closer to autonomous driving is going to be more input into the cars and that'll play well for us. And then as we mentioned a couple of times here over the last year, we're doing more on the tail end of the semiconductor side with both dispense and inspection, and we think that will continue to grow over time. So we do this coming into the year was going to be a challenging year if you look at our guidance through the fourth quarter, we're likely to be flat to modestly down in that electronics portion of the segment. So our diversification efforts have helped us mitigate a pretty significant decline in to the dispense business. We're not -- probably going to be quite there, but it's helping to do that. And then, obviously the other parts of that segment, the medical business in particular, is growing very nicely and meeting our expectations there.

Okay. And then on the geographies, could you help understand the magnitude that Japan decline in the quarter versus overall Asia-Pac or Asia-Pac, ex-Japan, much more moderate softness. What differentiates Japan in terms of the higher volatility there?

Yes, I think that's really related again for the electronics side of the business. If you think about a lot of final assembly going together in China, but a lot of component manufacturing being outside China and Japan is one of the key areas where we see a lot of component manufacturing. And that's really related to the component manufacturer going into the phone line.

Thank you. Our next question comes from Charlie Brady of SunTrust Robinson Humphrey. Your line is open.

Yes, hi, good morning guys. That's Charlie Brady. Mike, wanted to touch on the Nordson Medical Business. You just touched on a little bit about the growth rate you're seeing there. It sounds like that business positioning today relative to where it's been over the past couple of years with some of those acquisitions. But it sounds like the growth path of that business has picked up a pretty decent amount, the amount of innovation coming out of that has picked up. Is this -- can you just talk about kind of the efforts you guys have made to really kind of more focused on that business in terms of organic development, not just the acquisition stuff you guys have done?

Yes, I think that's a good point, Charlie. There is a lot of new products that are coming out of our medical business. And I think one of the things that helped with the acquisition we made last year with the Vention business, and the restructuring we've done along the Vention model. There is a sort of design and development pipeline on the front end. It really gives us in early with key customers not only the large customers, but some of the emerging innovators. And what that allows us to do is innovate our systems and our components around their desires and where things are heading. And a big focus is around minimally invasive procedures. So when you think about what the fastest growing part of the medical devices segment is, it is around minimally invasive procedures, and that's heart and lung and brain and some spinal cord and other vascular areas. And our design and development capabilities and our components fit nicely into those end markets. So what we have now is a more complete set of offerings that allow those to participate in more opportunities. So we have a strong pipeline there and we're introducing a lot of products to support the growth there. And we're excited about what we see.

Yes, that's helpful, thanks. And then just switching gears here. On the something question here on industry call, price costs, do you guys have seen raw material inflation as pricing got to put through. Can you just talk a little bit about what's your experience in terms of the past?

Yes, so there are some raw material increases that things like steel and aluminum that we see. Our sourcing team has done a nice job of the mitigating the impact there and we've also been able to move some pricing to, I'd say largely to this point offset the impact that we've seen. But there is some cost push there that's a typical, I think, we've been able to offset.

Thank you. And next question comes from Matt Summerville of D.A. Davidson. Your line is open.

First, sort of do a walk-through in terms of what you saw in the quarter across the four pieces of the adhesive business, talking about rigid packaging, polymer, nonwoven and product assembly. And I guess looking out, at least into the fourth quarter, even into early next year, is that what your overall outlook is for those businesses?

So if you look in the third quarter, I would say, our core adhesive business that was pretty solid, stronger packaging, and product assembly a little softer than nonwoven, but that we can see quarter-to-quarter movement there based on big projects. So I don’t read anything into that. And we've had pretty strong comp prior year about 6%. I’d say in our plastic product lines, pretty solid performance in the quarter across most product lines within our plastics business and building a strong backlog in that particular area for the point that we’re seeing some lead time to expand a little bit not only for us, but some others in the industry. So that’s encouraging to see the backlog there build across the plastic components piece of things.

And then just as a follow-up, while I recognized you guys are in sort of the short cycle nature of the business you don’t really guide beyond the next quarter. Having said that, to your point earlier like given some of these comparisons you are facing, specifically the 50% plus comp that you’re facing in advance tax in the fiscal first quarter of '19, is there any comment you might make is to whether or not you feel the street at this point is effectively handicapping or capturing that comp?

Yes, I mean, obviously the comp is out there. And so I think most folks recognize that. I can't really comment on whether everybody is looking at that. But I’d say if we step back, and this is where the quarter-to-quarter kind of movements can maybe give an improper indication of how the business is doing fundamentally. If we step back and look year-over-year, this is, as I said earlier for the electronics business, this is a challenging year, but we’re going to be close to flat offsetting a pretty significant drop in mobile with the spend, with the efforts that we’ve had to diversify both from a customer and an application standpoint and the strengths of the other parts of our electronics business. And then I thank the continued growth in medical and general industries activities are going to more than offset what we've seen there, which, I think is pretty good performance here, but you can see these swings quarter-to-quarter because we can't control what our customers are going to play orders. What we can't control is how we respond to those and take advantage of it. So I think if you look at sort of annually and over a cycle, you’re going to see this business continuing to grow in the short-term, there is more volatility, and we’re trying to mitigate that with our diversification efforts.

Thanks Mike. I’ll get back in queue.

Thank you. Our next question comes from the line of Chris Dankert of Longbow Research. Your line is open.

Good morning, this is Carl [indiscernible] on for Chris. So just kind of on the facility consolidation, do you have any updates on kind of the timing and expected benefits there?

Yes, so we’re looking at by the end of the calendar year to be through the consolidation efforts. The primary effort is in the U.S. although we have some effort in Germany as well, but we should be through both of those by the end of the calendar year. And I think as Greg mentioned earlier, he is highlighted what the additional cost that we’ve seen this year as a result of that consolidation, we would expect that to go away next year. In the long run, we would expect to see some more efficiencies come out of the new facilities as well. But right now, we’re still in the middle of the final transfers and ramping up the new facilities. So not ready to project the efficiency improvements beyond that at this point.

Okay, great. Thanks. And then any update on like the tier product offering and growth in ADS, ATS there?

Did you say adhesives or ATS. So adhesives, yes, we've seen some nice growth in our despite my former comment here and some nice growth in the lowest peer of non-woven's business as we've talked about that before. We're into a group of customers we haven't captured before. And I think, both from an end customer standpoint and the OEM standpoint, we're seeing nice growth there beyond what we have expected for the year. So that's very encouraging, because in the end they'll move up a line. So I think that's good. I'd also say in adhesives, we've added to our systems additional measuring capabilities and our packaging business, which our customers find very helpful. And the material suppliers also find very helpful in demonstrating the benefits, not only of our equipment, but of their materials. And so we're working closely with them. So I think that's encouraging as well.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from Matthew Trusz of Gabelli & Company. Your line is open.

Are you seeing tariffs or trade rhetoric more broadly impacting your customers in a way that's impactful for your business? And I guess, overall, I'd wonder, what is your overall business confidence in macro outlook now, and has that evolved at all over the last 3 months since we last talk?

Yes, I would say, it's hard to say that we've seen any significant impact on the tariff discussions to date. I would say in general, projects are proceeding as the way they would normally proceed. I think the sort of broader discussions about more aggressive tariffs, particularly with China and China with the U.S. is a little bit more concerning, and that could have some broader impact. We're encouraged to see there is some discussion going on right now, but it's hard to predict where that's going to head. I'd say our view of the overall macro accounting hasn't really changed. And I think in the last quarter, we talked a little bit about the U.S. being stronger than it has been for the last 2 to 3 years. However, Japan and Europe are still growing, but at a softer rate than we certainly saw last year. And China is hanging in at about the same rate as we saw last year certainly not improving. So one thing that has changed significantly and whether that's a function of the tariff discussions or a function of federal reserve policy as currency has flipped around as we look going into the next quarter from being a tailwind to a headwind. So that's probably the one thing at this point looks a little bit different, and it's hard to predict how that's going to go forward as well. But I'd say sort of the outlook we saw three months ago is pretty similar, I'd say, there is some added concern if the tariff is escalates more.

Okay, thanks. And then with automotive, how much visibility in that end market do you have, and how do you feel about cold dispensing opportunities as we look forward next year [indiscernible] platforms or otherwise?

Yes, I would say we have a pretty good idea of projects that are planned. I'd say not all those go ahead. And so, if you look at, we talked about this last time, I think we saw sort of global platform speaks in '16, modest decline last year, more of a decline this year. It's hard to tell exactly what the cycle is going to be on that. I think, obviously, drive to more efficient pieces is important, but I would say, one of the areas that we're pursuing in our cold material side of the business is our focus around the electric battery side, both for the automobile side of things and also for the storage capability. And we've seen some nice growth although relatively modest in terms of total revenue this year. But that's an encouraging a longer-term opportunity for not only our cold materials, but a number of our businesses. And then in the cold material space, we're also doing some work of the aerospace side, and say the whole qualification process there has taken longer than we would have expected. But we see some good opportunities there as the industry looks to do to drive automation to help them out with their backlog of orders into effectively increase their capacity. So those are two areas that we see as growth opportunities for that part of the business as well.

Thank you. [Operator Instructions] I have a follow-up from Matt Summerville of D.A. Davidson. Your line is open.

Thanks all for a couple more. Just with respect to ICS, a very, I mean, all here really very good incremental margins in that business. Can you talk about sort of what's driving that? Is that mix related with some of that auto stuff maybe not as strong as it was in the prior year period? And I guess, ultimately where do you think ICS can go? I mean, from earnings, can that be a 20% plus margin business for you guys?

So Matt, you're correct. Certainly the mix has helped, when you look at the mix of different product lines there, and auto tends to have a bigger buying component and some of other systems. So with that being off a little bit, the mix has helped. But we also have done a lot of good things utilizing the merchant business system to drive productivity there. As we said, going back 4 or 5 years, we wanted to get that business up to something like 20% margin and we're getting close. And we still have things to work on there. I think just given the nature of the business, I don't think it's reasonable to expect that it would be in excess of 20% just because of the scope of what we typically supply and how much is more standard buying equipment, but I think, 20% is still a good goal, and we're getting close to it.

And then similarly, my question on ADS earlier, with respect to Advanced Tech, can you may be provide a little bit more granularity? I think last quarter you indicated outside of the mobile space, specifically most of your businesses if not all, in Advanced Tech, were growing in that high single to low double-digit rates. Can you kind of talk about, was the mobile piece up 50% this quarter and everything's up 10%. Can you just give us a better feel for how those various pieces of the segment there are really performing?

Yes, what I would say, if you look at the total segment, I remember half of it or more now is not electronics and that’s performing well both for general industry a piece and the medical. And the medical fees is part of the verification effort and we expect that to be high single digit, double digit growth going forward and its playing out the way we expect it. I think within the electronics segment, the test inspection business has been very solid this year with nice growth in part because that serves a more diverse end market and we see in the dispense side of the business, in particular. So the two biggest components for that business are test inspection and dispense and test inspection for the year will be up nicely. Dispense is going to be off significantly and that really is the mobile related piece. As I said overall, we expect that part of the business, electronics part of the business, it will be down modestly, but you know we feel like we’ve covered a lot of ground between the diversification efforts within electronics and then the diversification efforts in that segment outside of electronics.

And then just maybe one quick one for Greg. It looked like corporate expense stepped up quite a bit couple of million bucks on a sequential basis. Can you talk about that? And I guess what’s your expectation would be built in for Q4?

Yes, there were a couple of onetime items -- onetime expense items in the quarter that is in that corporate manage numbers. So I wouldn’t suggest that that’s a new run rate. I probably back it down back to that $30 million range going forward.

That’s all from me. Thank you.

Thank you. Our next question comes from Walter Liptak of Seaport Global. Your line is open.

Well, I just want to do couple of follow-on related to China. You know in the past and last year, especially you had talked about some of the Chinese mobile phone makers as some of the new products that have been traction and grown. There is no discussion of that. I wonder if you could help us understand how much of the tough comp is related to the Chinese mobile phone makers. And was there a pause like -- it was like the demand -- the capacity went in and now we’ve got a pause out of China or is that more broad attempt?

No, what I would say is two things. If you look at sort of total smartphone growth, there was pretty -- it’s been pretty modest like 1%, 2% growth for the year. So it’s not a big volume driver. So that affects all of the customers that buy mobile phones. And two, this is the year with less innovation. So it's going to be incremental. And that’s the sort of a typical pattern that we’ve seen a strong year of innovation and a weaker year of innovation. And so that’s kind of what we’re seeing here. And I’d say on the Chinese mobile side, no difference in terms of how they’ve approached the things. Now they’ve probably gained a little bit of market share in short-term, but, probably, I think that would dramatically drive the needle one way or the other.

Okay. Is what you’re saying that the Chinese mobile manufacturers that they're still growing because they come off a small base or …

No. They're not a small base anymore, but they are still growing. I'd say the opportunity is still there for increased levels of automation, so both in terms of the degree of overall automation and in terms of their process approach if they take. It's less than -- less sophisticated than the global base. But I'd say in general, this has been a pretty quiet here for innovation. And so, as we've talked about the past, the smartphone penetration got closer to the saturation that's really around change and innovation. And this year has been a weaker year across the board on that.

Okay got it. And then just a follow-on on -- I appreciate your answer on the tariff question, but I wonder, specifically I'm curious you've run through the $50 billion tariff and the $200 billion tariff. Are your product categories included in either of those tariff discussions?

So I'd say in the first set of tariffs, very few, very modest. In the second set, we don't really know yet all of the details on the code. And we don't know what the Chinese response is going to be. So that's -- those are two unknowns to date. And so we'll have to wait and see. Obviously, we're trying to understand that as best we can and we've got a team focused on that. But there is not enough clarity yet to make a comment there. But I'd say when you talk about $200 billion, it gets more concerning.

Okay. And it's -- let's say that in the second, $200 billion that your product going into China for electronic assembly was included in. Is that 25% increase -- is that big enough to be deterrent to the band or is there any other choice? I don't think there is any local supply for the kind of dispensing equipment that you make for electronics?

I would really not want to speculate here until we see how that plays out. Obviously we would -- we do have manufacturing capability into go and we are doing both test inspection in some of our good tiered dispense products out of there. But we would pull all the levers we could if there was an impact to us. Like I said, we really are waiting to get a better feel for both the U.S. side and the Chinese side and trying to anticipate what might happen and how we might mitigate any particular impacts there. But I would just say, in general, when you look at that magnitude of the number, it's more concerning than $15 billion or $16 billion.

Thank you. I have a follow-up from Christopher Glynn of Oppenheimer. Your line is open.

Just wondering if you could remind us what the algorithm is for FX translation as impacts EPS ultimately with when you add in the transactional influences?

Yes, Chris. This is Greg. If you look historically, the way it kind of models out is, if you look at the percentage change in sales, it's a 2 to 3 times that number percentage change in EPS. So if currency adds 1% to sales, it might be a plus 2.5% tailwind to earnings per share change from the prior year.

Thanks. And then on interest, I'm not sure if my numbers are right, but I think you have $13 million in the quarter and said $8 million for the fourth quarter. Can you explain this dynamic there if I got those numbers correct?

Yes. So, a little bit of a timing issue where we had some cash on the balance sheet that will post the third quarter year end, we will be paying down some debt.

Okay. Thank you.

Thank you. At this time, I'd like to turn the call over to Mr. Mike Hilton for closing remarks.

Well, thank you for your interest in our call today. And thank you again to our global team for continuing to serve our customers as well.

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.