Nordson - Earnings Call - Q1 2020
February 20, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Nordson Corporation First Quarter Fiscal twenty twenty Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to one of your speakers today, Laura Mahoney. Please go ahead.
Speaker 1
Thank you, Marcella. Good morning. This is Laura Mahoney, Vice President of Corporate Communications and Investor Relations. I'm here with Sundaram Nagarajan, Nordson's President and CEO and Greg Saxton, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, 02/20/2020 to report Nordson's fiscal year twenty twenty first quarter.
Our conference call is being broadcast live on our Investor Relations webpage at investors.nordson.com, and it will be available there for fourteen days. There will be a telephone replay of the conference call available until 03/05/2020, which can be accessed by dialing (416) 621-4642. You will need to reference ID number 2468115. During this conference call, forward looking statements may be made regarding our future performance based upon Nordson's current expectations. These statements may involve 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 Naga.
Speaker 2
Good morning, everyone. Thank you for joining Nordson's twenty twenty fiscal first quarter conference call. Twenty twenty's first quarter performance was in line with our expectations for the quarter, where sales were consistent with the typical seasonal pattern. As a reminder, our spending is generally consistent throughout the year due to our direct sales model and strong customer focus. So total company operating margin in the first quarter was also in line with our expectations.
We expect sales to improve as we move through the year, allowing us to achieve our previously announced fiscal twenty twenty sales growth, margin and EPS guidance. I'll speak more about our fiscal twenty twenty annual guidance in few moments. But first, I'll turn the call over to Greg to provide more detailed perspective on the quarter.
Speaker 3
Thank you, Naga, and good morning to everyone. First quarter sales decreased 1% compared to the prior year's first quarter. Change in sales included a decrease in organic sales of less than 1%, growth from the first year effective acquisitions of less than 1%, decrease of approximately one percent related to the unfavorable effects of currency translation as compared to the prior year's first quarter. First quarter's acquisitive growth includes the fiscal twenty nineteen acquisition of Optical Control GMB. Within the Adhesive Dispensing Systems segment, sales decreased 2% compared to the prior year's first quarter, inclusive of a decrease in organic volume of 1% and a decrease of 1% related to the unfavorable effects of currency translation as compared to the prior year.
Growth in our nonwoven product line was offset by modest declines in other product lines segment. In the Advanced Technology Systems segment, first quarter sales decreased approximately 1% compared to the prior year's first quarter, inclusive of a decrease in organic volume of 2%, an increase of 1% related to the first year effect of the Optical Control acquisition, a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Solid growth in medical product lines was offset by softness in those product lines supporting electronic end market. Industrial Coating Systems segment sales increased 9% compared to the prior year's first quarter, inclusive organic volume growth of nine percent, a decrease of less than 1% related to the unfavorable effects of currency translation as compared to the prior year. Most product lines generated organic growth in the quarter, driven primarily by demand in the associated with cold materials, powder systems product lines.
Moving down the income statement, gross margin for the total company was 53% in the quarter. Operating profit was $75,000,000 with reported operating margin of 15%. During the quarter, we incurred approximately $3,000,000 of restructuring charges as we realigned our cost structure within the Advanced Technology segment. Excluding this charge, total company operating margin was 16% and the Advanced Technology segment operating margin was 15%, down from last year's first quarter operating margin due to lower absorption and product mix impacts on gross margin. Operating margin performance for the Adhesive and Industrial Coating segments were both equal to the prior year's quarter.
On a total company basis, net income for the quarter was $52,000,000 and GAAP diluted earnings per share were $0.89 inclusive of a $04 per share charge related to restructuring and a $04 per share discrete tax benefit related to stock based compensation. We delivered first quarter EBITDA of $101,000,000 or 20% of sales. Excluding restructuring charges in the quarter, EBITDA margin was 21%. Free cash flow before dividends during the quarter was $102,000,000 or 197% of net income. Free cash flow in the quarter benefited from collection of accounts receivable associated with prior quarter revenue.
Our press release includes financial exhibits reconciling net income to free cash flow before dividends and EBITDA as well as a reconciliation of diluted EPS to adjusted diluted EPS. From a balance sheet perspective, net debt to EBITDA was approximately 1.7 times trailing twelve months EBITDA at the end of the first quarter. I'll now turn the call over to Naga for a few closing comments.
Speaker 2
Thank you, Greg. We remain committed to our annual organic sales growth guidance of 1% to 3% for fiscal twenty twenty, with this growth being generated in the second half of the fiscal year. The incremental revenue will generate improved operating and EBITDA margins as we move through the year, where we expect to deliver a total year margin performance equal to fiscal twenty nineteen and EPS growth in the range of 2% to 6% over FY 2019. We will continue to monitor the macroeconomic environment, including the impact of coronavirus in the Asia Pacific region. Our facilities in China are operational and we expect to be closer to full capacity soon.
I want to thank our employees in China who are incredibly committed to serving the needs of our customers along with the rest of the Nordson team who supported our China employees during the difficult time in many ways. We greatly appreciate all of their efforts and will continue to do all we can to support our employees and their families. Although there may be some impact on sales in our second fiscal quarter as we scale up production, our supply chain recovers, our customers resume operations and delivery schedules return to normal, we do not expect a material impact from coronavirus on our full year results. Before we open the phone lines for Q and A, I want to share a few observations from my first six months at Nordson. This is a great company.
It is driven by talented employees who are focused on serving their customers. While we are focused on delivering our near term 2020 results, we are aligning our internal priorities on the greatest long term opportunity for this business, profitable growth. To deliver profitable growth, we have four key priorities. First and foremost, we need to sustain the historical organic growth track record. We'll do this through our focus on innovation, emerging markets, and new applications.
Second, we need to diversify our business portfolio, including through acquisitions. We'll stay true to what makes us great, which is precision technology. This includes scaling our medical and test and inspection product lines. Number three, we need to implement a growth focused strategic framework that allows us to grow sustainably. I'm pleased that Nordson has a good start on this with the Nordson Business System.
With the executive leadership team, we are evaluating how we can take NBS to the next level. I believe there is an opportunity for Nordson in refining and executing on this growth framework. Our fourth priority is focused on developing a deep and diverse team to support our growth aspiration. I'm pleased with the customer focused team that we have today. As we grow, we will need more of them.
I'm also pleased to announce our plans for an Investor Day in the fall, where we will discuss our long term plans for the business in more detail. Please mark your calendar for the morning of 09/30/2020. The event will be focused at the New York Plaza Palace Hotel and available through webcast. More information will be available in the coming months. As always, I want to thank our customers, employees, and shareholders for their continued support.
With that, we'll pause and take your questions.
Speaker 0
Your first question comes from the line of Matt Summerville from D. A. Davidson. Your line is open.
Speaker 4
Thanks. Good morning. First of all, can you maybe talk about within the Adhesive business what the organic volume outlook looks like for the balance of the year as the compares in that business get a bit tougher beyond what was an easier comparison in Q1 and in a quarter where organic volume actually declined against that somewhat easy comparison?
Speaker 2
Thank you, Matt. We don't provide guidance by segment for organic growth rate. You know, we fully stay committed to our full year total company guidance of 1% to 3%.
Speaker 4
Okay. And then with respect to maybe the coronavirus, did you see any discernible impact late in your fiscal first quarter? And is there a way to sort of frame up what you think that impact could look like in Q2? And maybe talk about how we should be thinking about the sequential earnings cadence for the company perhaps if seasonality is pushed a bit to the right here relative to a more normal year?
Speaker 2
Matt, I think there were two sort of questions in there, assume. Right? So the first one is around coronavirus. The impact of coronavirus in our first quarter was immaterial as we had already planned for the Lunar New Year and had shipments already scheduled and went out in time. We don't expect to have a material impact from coronavirus on our full year results.
As we look at it today, we don't see any impact in the second quarter. If there is further disruption in the supply chain or customers having trouble getting back to capacity, there may be some delay in orders that may get pushed out to the following quarter. So that is on coronavirus, and I think you had a question around earnings cadence for the company. Is that correct?
Speaker 4
Yes. Thank you.
Speaker 2
So our growth is, you know, based on our typical seasonality, our most of our growth always happens in the second quarter. And the second half, I should say. I'm sorry. So as we go in the second half, this increased revenue will improve and will generate improved operating margins and EBITDA margins that typically have very strong flow through as we have higher sales.
Speaker 4
Thank you.
Speaker 0
Your next question comes from the line of Jeff Hammond from KeyBanc. Your line is open.
Speaker 5
Hey, good morning guys.
Speaker 6
Good morning, Jeff.
Speaker 3
Good morning, Jeff.
Speaker 5
Just can you just talk about what you're seeing in electronics as you go into the heavier kind of quoting and order season around five gs infrastructure, five gs mobile and just kind of project and activity levels going into the year? I know that's something we've been looking for an inflection on.
Speaker 2
Yes. As you know, there is a lot of press regarding five infrastructure, and we continue to believe that that is where we will see the greatest opportunity. The progress also on infrastructure build out has been slow and slowing. As mentioned before, we don't expect growth in our electronic business compared to fiscal nineteen in 2020. That's not what we have forecasted.
But our project activities continue to be robust. We're in great conversations. When that wave of five gs infrastructure hits, we will benefit from it. So as of now, project activities are strong. We continue to be participating in a lot of coding.
Timing is what will be dependent on when those project activities convert into order. And you're right, we are at that point in terms of typical order rates will pick up to have us confidence in delivering that second, strong second half. And that's what gives us the strength in maintaining our guidance for the full year of one to 3%.
Speaker 1
And just to add to that, five gs is an important element, of course. It's indicative of change, but we also automotive electronics, AI, there are a lot of different applications which where we are diversified.
Speaker 5
Okay. Great. And then it looks like The US business was particularly strong in the quarter. What what do you see that's that's working there well?
Speaker 2
It is primarily related to our ICS business that has done well. And certainly, our adhesive businesses in U. S. Have also continued to do well.
Speaker 5
Okay. And then just on the second half, so I guess you mentioned some of the project visibility, but other than kind of just typical seasonality, is there anything else in the quoting or activity pipeline that gives you that confidence, you know, in kind of an acceleration as you move through the year?
Speaker 2
No. It is our typical seasonality and we certainly expect based on our project activity and our seasonal pattern, we feel pretty strongly about a strong second half, and which we have seen in the past too.
Speaker 5
Thanks a lot.
Speaker 0
Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Speaker 7
Thank you. Good morning. Just had a question about the SG and A, it was up 8,000,000 or $9,000,000 sequentially adjusted or unadjusted. And the last five years typically that spend has been down 5,000,000 or $8,000,000 4Q to 1Q. So wondering if that indicates some strategic imperative that you're kind of front log or pipeline is mandating?
Speaker 3
Chris, this is Greg. I wouldn't suggest it's much of what you just talked through there. I would say that the first quarter did have a $2,000,000 onetime cost in the corporate managed in the corporate expense line. So that's a nonrecurring item. That corporate expense line, if you were modeling that out, I'd expect that to be more around $12,500,000 per quarter than the current quarter.
If you back that out, then I think you're looking at a pretty modest increase current year over the prior year. And in the first quarter is a year when or is the quarter when we have our global compensation increases. So as compared to the fourth quarter, you get a little bit of bump associated with our merit increases hitting in Q1. So if you look at current quarter versus prior year first quarter, it's a pretty modest increase when you exclude that $2,000,000 onetime item.
Speaker 7
Okay. So that sort of suggests spending was a bit restrained after the first quarter last year because I'm looking at if carry the first quarter SG and A spend rates for the year and you get 2% top line growth and SG and A to sales would be up about 100 basis points. So are you suggesting that's the wrong way to look at it?
Speaker 3
Well, what I would suggest, Chris, is it is dependent upon that top line growth. I mean, if you assume that in our spending over prior year, we're going to have inflationary impact, we're going to have our merit increase, it's the need to generate that top line growth to offset what that dilution might deliver from spending.
Speaker 7
Is 1Q the high watermark for SG and A spend Yes, on a run rate
Speaker 3
given the sales that's from a seasonal perspective, it's lowest quarter. That's true.
Speaker 7
SGA absolute spend will be higher in subsequent quarters?
Speaker 3
Our spending is fairly flat as you move throughout the year. As Naga mentioned in his comments, with our global infrastructure, we don't flex that based upon seasonality of sales trends. So it's a pretty fixed number as you move through the year. So in terms of the margin impact, it's more heavily dependent upon the top line of sales number.
Speaker 1
So first quarter spending was a higher mark for Greg's early for the year.
Speaker 7
Sorry, Laura, can you clarify that? I didn't hear.
Speaker 1
I'm just agreeing with you that it is a higher watermark as a percentage of sales to your earlier question just based on that additional spend that Greg mentioned.
Speaker 7
Okay. I'll follow-up offline. Thanks.
Speaker 0
Your next question comes from the line of Allison Polink from Wells Fargo. Your line is open.
Speaker 6
Hi, guys. Good morning. Good morning. Just want to go back to your comment, Naga, on just kind of looking at that growth framework and sort of maintaining that sustainable growth that Nordson has experienced. Any high level color there of how we should think about that comment?
Is it end market? Is it, you know, different, I guess, new products? Any color there?
Speaker 2
I think the strategic growth framework is really, you know, we'll spend a lot of time here. We're building that out as we're enhancing our existing NBS framework. It would be really, you know, a couple of things that I would add there. That strategic framework is going to be focused on really selecting the best growth opportunities for the company. So really bringing bringing forth a strategic view of where we invest, and what kind of end market product niches do we wanna grow in.
So that would be one of the distinguishing factors that'll add to the existing growth framework. And and the growth framework also consists of things that the company does really, really well, which is commercial excellence, product innovation. So this new great growth framework is really an enhanced version of our existing NBS Next. And it adds this strategic view of what are the best product market combinations that we want to focus on. So think of that as a greater strategic discipline around where we want to grow, in combination with things that the company is really, really good at, which is commercial excellence, close to the customer model, as well as innovation leading to precision technologies that solves the best problems for our customers.
Speaker 6
Great. And thanks for the color on that. And then on you know, thanks for the coronavirus color. It's good to hear things are getting sort of up and running again. Have you I mean, you experiencing any elevated costs as we sort of get back up and running in terms of getting components in or getting projects out as a result of what's going on?
Speaker 2
You know, at the present moment, no. You know, our hope is that the supply changes are continuing to improve as we are seeing. And, you know, if this continues over a longer period of time, then, you know, there may be some delivery that could get pushed out. But no, on the cost side, you know, we're fairly we have good visibility and fairly comfortable. We have very good inventories that will allow us to continue on the path we're on.
Speaker 6
Perfect. Thank you.
Speaker 0
Your next question comes from the line of Mark Halloran from Baird. Your line is open.
Speaker 8
So quick question just on the acquisition M and A side of things. What does the pipeline look like? And with some of the management changes that, now you're a little newer to the seat and then with Greg's upcoming departure, does it change your willingness to go after things as it sits here today?
Speaker 2
No. You know, we remain committed to our capital allocation strategy and our priorities there continue to be funding our organic growth, maintaining our dividend streak, acquiring in the spaces that we have expressed an interest in and focused on, which is medical and test and inspection. In terms of acquisition pipeline, we have good opportunities. We continue to work them. When they come to market is something we don't control.
But, you know, look for us to continue to stay disciplined and focused on what makes the company strong, which is precision technology. And two areas, as I mentioned earlier, that we'll remain focused on is medical and test inspection.
Speaker 8
And then anything in the industrial coatings side that you would point to for the strength? It seems mostly comparisons were a little easier and sequential seemed about normal. But anything in there that was unusual or or just pretty normal cadence?
Speaker 2
It is pretty normal. As you mentioned, the comps were a little easier. There were some project timing. Certainly, things that we worked on in the fourth quarter certainly helped us in the first quarter, nothing significant.
Speaker 7
Great. Appreciate it.
Speaker 0
There are no further questions at this time. I'll turn the call back over to your presenters.
Speaker 3
Thank you again for joining us today,
Speaker 2
and we'll talk to you soon.
Speaker 0
This concludes today's conference call. You may now disconnect.