Nordson - Q2 2023
May 23, 2023
Transcript
Operator (participant)
Good morning, and welcome to Nordson Corporation's second quarter fiscal year 2023 results conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by 1 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Lara Mahoney, Vice President of Investor Relations and Corporate Communications. Thank you. Please go ahead.
Lara Mahoney (VP of Investor Relations and Corporate Communications)
Thank you. Good morning. This is Lara Mahoney, Vice President of Investor Relations and Corporate Communications. I'm here with Sundaram Nagarajan, our President and CEO, and Joseph Kelley, Executive Vice President and CFO. We welcome you to our conference call today, Tuesday, May twenty-third, to report Nordson's fiscal 2023 second quarter results. You can find both our press release as well as our webcast slide presentation that we will refer to during today's call on our website at www.nordson.com/investors. This conference call is being broadcast live on our investor website and will be available there for 14 days. There will be a telephone replay of the conference call available until Tuesday, May thirtieth, 2023. During this conference call, references to non-GAAP financial metrics will be made. A reconciliation of these metrics to the most comparable GAAP metric was provided in the press release issued yesterday.
Before we begin, please refer to slide two of our presentation, where we note that certain statements regarding our future performance that are made during this call may be forward-looking based upon 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. Moving to today's agenda on slide three, Naga will discuss second quarter highlights. He will turn the call over to Joe to review sales and earnings performance for the total company and the three business segments. Joe will also discuss the balance sheet and cash flow. Naga will share a high-level commentary about our earnings performance. He will conclude with an update on the fiscal 2023 full year and third quarter guidance. We will be happy to take your questions.
With that, I'll turn to slide four and hand the call over to Naga.
Sundaram Nagarajan (President and CEO)
Good morning, everyone. Thank you for joining Nordson's fiscal 2023 second quarter conference call. During the second quarter, Nordson continued to experience a macro environment that can be described as a multi-speed economy. Customer demand in industrial, consumer non-durable, and medical interventional end markets were solid. Alternatively, electronic dispense product lines are being negatively impacted by the downside of the semiconductor cycle, and sales of biopharma product lines in our medical fluid components division continues to normalize against challenging prior year comparisons as customers continue to work through excess inventory. These factors balanced themselves out, and the team delivered organic sales growth of 1% compared to prior year's second quarter. During the quarter, the teams also took targeted cost actions in areas where we are seeing weakness in customer demand.
We believe these will enable us to effectively navigate the current business environment and strengthen our long-term position for profitable growth. Overall, we remain invested in our competitive differentiators, including our direct sales force, product innovation, and the training and execution of NBS Next growth framework. In a few moments, I'll speak more about the business and what we're seeing in our end markets. First, I'll turn the call over to Joe to provide a detailed perspective on our financial results for the quarter.
Joseph Kelley (EVP and CFO)
Thank you, Naga, and good morning to everyone. On slide number five, you will see second quarter fiscal 2023 sales were $650 million, an increase of 2% compared to the prior year's second quarter sales of $635 million. The increase was driven by organic growth of 1% and a 3% benefit from the CyberOptics acquisition, offset by unfavorable currency impact of 2%. During the quarter, sales were strong in Asia Pacific with 7% growth, partially reflecting the timing difference related to the Chinese New Year. Gross profit for the second quarter of fiscal 2023 totaled $352 million. Excluding severance costs, gross profit totaled $354 million or 55% of sales. Comparable to first quarter 2023 profitability.
As the team continues to actively manage the price cost dynamic in these inflationary periods. When compared to the prior year, adjusted gross margins are down 180 basis points, resulting from sales mix changes and factory inefficiencies at sites dealing with reduced volumes. Operating profit totaled $173 million in the quarter. During the quarter, we recorded one-time severance costs totaling $3 million. Adjusted operating profit, excluding these non-recurring items, was $176 million in the quarter, or 27% of sales. 4% below the prior year adjusted operating profit of $184 million. EBITDA for the second quarter was $203 million, or 31% of sales, which is in line with our long-term target profitability level.
However, $6 million below the prior year EBITDA of $209 million. The decrease was primarily driven by a $4 million currency translation headwind, plus unfavorable sales mix, offset by the CyberOptics acquisition growth. Looking at non-operating expenses. Interest expense increased $5 million associated with higher borrowings and increased interest rates. Other net expense decreased $38 million, primarily related to the prior year non-recurring non-cash pension annuitization charge of $41 million. Tax expense was $34 million for an effective tax rate of 21% in the quarter, which is in line with the prior year second quarter rate and the forecasted full year rate for 2023. Net income in the quarter totaled $128 million, or $2.21 per share.
Adjusted earnings per share, excluding non-recurring severance costs, totaled $2.26 per share, a 7% decrease from the prior-year adjusted earnings. The decrease is primarily driven by lower operating profit and higher interest expense. Let's turn to slide 6-8 to review the second quarter 2023 segment performance. Industrial Precision Solutions sales of $336 million increased 6% compared to the prior-year second quarter, driven by strong organic growth of 9%, partially offset by unfavorable currency impacts of 2%. The organic growth was driven by robust demand in the polymer processing product lines, as well as products sold into consumer non-durable end markets across most regions.
Operating profit for the quarter was $112 million, or 33% of sales, which is an increase of 9% compared to the prior year adjusted operating profit of $102 million, despite some unfavorable currency translation impacts. As mentioned last quarter, IPS remains our most globally diverse segment, therefore most exposed to currency translation changes and the timing difference with the Chinese New Year. Looking on a constant currency basis, year to date, this segment has delivered 5% organic growth and incremental margins of 60%, ahead of our targeted 40%-45% incremental margins. This segment's continued strong performance demonstrates the power of the NBS Next growth framework. On slide seven, you'll see Medical and Fluid Solutions sales of $167 million decreased 3% compared to the prior year's second quarter.
This change included a decrease in organic sales of 2% and a 1% decrease related to unfavorable currency impacts. Strong demand for medical interventional solutions product lines, primarily in the Americas, was more than offset by softness in the medical fluid components serving biopharma applications and fluid solutions product lines in Europe and Asia. These factors drove a net 2% organic sales decrease. During the second quarter, we took targeted cost actions in businesses responding to volume pressure that resulted in $1 million of non-recurring severance costs. Second quarter adjusted operating profit was $49 million or 30% of sales, which is a decrease of $9 million compared to the prior year operating profit of $58 million. The decrease in operating profit was driven by the meaningful sales mix changes within the medical product lines and related factory inefficiencies due to reduced volumes.
It is noteworthy that the segment profitability sequentially improved 400 basis points over the 1st quarter of 2023, is again running more in line with the profitability levels of the prior two years. Turning to slide 8, you'll see Advanced Technology Solutions sales were $148 million, a 1% increase compared to the prior year's 2nd quarter. During the quarter, the CyberOptics acquisition contributed 12% growth. Organic sales volumes were down 10%. An unfavorable currency impact during the quarter was 2%. The organic decrease was driven by electronics dispense products serving the semiconductor end markets in the Americas and Asia, slightly offset by continued growth in the test and inspection product lines.
Cost reduction actions during the second quarter of fiscal 2023 to address the significant decrease in electronic dispense product lines were structural in nature and resulted in $2 million of non-recurring severance costs. The second quarter adjusted operating profit was $28 million or 19% of sales, which was below the prior year's second quarter operating profit of $40 million. The decrease in adjusted operating profit was driven by the organic sales decrease, partially offset by the profitable acquisition growth. Finally, turning to the balance sheet and cash flow on slide 9. Our second quarter balance sheet includes cash of $129 million, and net debt was $820 million, resulting in a 1x leverage ratio based on the trailing 12 months EBITDA. We continue to have significant available borrowing capacity to pursue organic and inorganic growth opportunities.
Free cash flow in the quarter was $159 million, bringing the year-to-date cash conversion rate on net income to 118% as working capital efficiency improved during the current quarter. During the second quarter, we made $37 million in dividend payments and spent $47 million on repurchasing approximately 221,000 shares of company stock at an average price of $212 per share. For modeling purposes in fiscal 2023, assume an estimated effective tax rate of 20%-22% and capital expenditures of approximately $45 million-$50 million. We'll now turn to slide 10, and I'll turn the call back to Naga.
Sundaram Nagarajan (President and CEO)
Thanks, Joe. Going into fiscal 2023, we knew we would be dealing with a dynamic environment. As the year progresses, we gain better visibility to our customers. I would now like to provide an update of what we are seeing in our end markets. In the Industrial Precision Solutions segment, we continue to see steady demand in industrial and consumer non-durable product lines. Investments continue to be made in automotive product lines, notably electric vehicles. We're also seeing continuing strength in our polymer processing product lines related to recycling and battery applications. These diverse end markets and applications, combined with our direct sales and the combination of both systems and parts revenue, is driving the strong year-to-date profitable growth for this segment, which Joe reviewed.
Turning to the Medical and Fluid Solutions segment, we continue to experience double-digit growth in our interventional solutions product lines, and the backlog is strong. These products include balloons, cannulas, and catheters that are integrated into medical devices for a variety of procedures, including heart valve replacement, stent delivery, angioplasties, and ECMO for blood oxygenation. The fluid solution product lines within the MFS segment serve a diverse set of end markets, including industrial, construction, electronics assembly, animal health, and medical. The construction and electronics assembly end markets within this product line continue to see soft demand, particularly in Asia and Europe. Finally, in the MFS segment, our medical fluid component product lines, which make single-use plastic connectors, stopcocks and valves for the medical and biopharmaceutical markets. Over the past two years, this division benefited from strong double-digit organic growth in biopharma applications.
As we shared in the last quarter, our customers in this end market are continuing to work through inventory destocking. As this business normalizes, the patient care applications within fluid components such as blood pressure cuffs and IV bags remain stable. That said, the normalization within the biopharma market continues to provide a significant growth headwind for the segment. Within the Advanced Technology Solutions segment, we are in the midst of the downside of electronic cycle. This has impacted sales in our electronics dispense and CyberOptics product lines. We firmly believe in the long-term growth of the electronics end market. We have not yet seen the benefits from investments related to the CHIPS Act, as we all know that the investment in automation, memory, and electronic new product innovation will continue.
While the teams took targeted actions to adjust cost structure for current volumes, we remain invested in product innovation that will serve this end market. Growth in our X-ray test and inspection product lines are successfully muting the historic volatility of this cycle. Even in the downside of the cycle, customers continue to invest in T&I systems to ensure quality and efficiency in their manufacturing lines. Our CyberOptics acquisition has more exposure to the memory end market. Its product lines have experienced weakness. Regardless, we remain excited about the long-term growth opportunities in the optical end market, and we are pleased with the ongoing integration of this business. I remind investors the past two years this segment delivered 17% organic growth on average.
This multiple quarter dip is simply the cycle of semiconductor capital expenditures, and we continue to be encouraged by our differentiated technology serving this long-term attractive growth market. Overall, the diversification of the Nordson product portfolio, end market, and geographic exposure enables sustainable, profitable growth. However, we are in a period where two divisions are seeing significant market corrections: semiconductor equipment and biopharma connectors. The remaining nine divisions, or approximately 80% of Nordson, is delivering 5% organic growth year-to-date at targeted incremental profit levels. Considering the combination of these end market headwinds and tailwinds as well as current order entry, we are maintaining our previously provided 2023 revenue guidance of 0%-3% growth over fiscal 2022 and narrowing our adjusted earnings to the range of $8.90-$9.30.
Looking specifically at the quarterly sales and earnings split, Q2 2023 was stronger than anticipated as some sales previously forecasted for Q3 were pulled into Q2. We're now forecasting third quarter fiscal 2023 sales to be comparable to the prior year third quarter. Third quarter earnings are forecasted in the range of $2.20-$2.35 per share. We expect fourth quarter sales to be the strongest of the year, increasing low to mid-single digits over the prior year fourth quarter. Our full year guidance range sustains our record 2022 sales performance, which is a testament to our dedicated employees, our customer-focused business model, the diversification of our end markets, and the solid execution of NBS Next and the Ascend Strategy. I want to thank our customers, shareholders, and the Nordson team for your continued support.
With that, we will pause and take your questions.
Operator (participant)
Thank you. As a reminder to ask a question, please press star followed by 1 on your telephone keypad. Our first question comes from Jeffrey Hammond from KeyBanc Capital Markets. Please go ahead. Your line is open.
Jeff Hammond (Managing Director and Equity Research Analyst)
Hey, good morning, everyone.
Sundaram Nagarajan (President and CEO)
Morning, Jeff.
Joseph Kelley (EVP and CFO)
Morning, Jeff.
Jeff Hammond (Managing Director and Equity Research Analyst)
I just want to focus on the biopharma piece. I know you talked about inventory destock, and I think you had thought maybe by 2Q it'd be wrapping up, but it sounds like, you know, it's lingering. Just trying to get a better sense of your visibility for that business to kind of either hit easier comps or reinflate positive.
Sundaram Nagarajan (President and CEO)
Yeah. Thank you, Jeff. Overall, you know, I would start with biopharma secular growth drivers all intact. There is no negative impact to what we have always thought about this business. This is a strong high single digits growth business. In terms of this short-term destocking, what we had expected was maybe we would be in the second quarter recovering from it. It doesn't look like it, as we've indicated. Our expectations are by the end of this year, we should be back to normalized order patterns from our customers. Also by this time you would have the growth comps would also be at, you know, anniversary by that time.
Jeff Hammond (Managing Director and Equity Research Analyst)
Okay, great. Just can you give us a little more color on where you saw the systems pull forward in terms of, you know, segment or business detail? Just a little more color on, you know, your level of visibility for that, you know, strong fourth quarter ramp. Thanks.
Joseph Kelley (EVP and CFO)
Yeah. Jeff, I guess as it relates to the second part of that question, the visibility, I mean, what I would tell you is our backlog remains at a very elevated level, near $1 billion. The mix is very different. If you think about our business and our backlog pre-COVID, we typically ran with a backlog that was 80%-90% of quarterly sales. Today, I would tell you know, 65% of our business has roughly normalized, where the backlog is about 1% of quarterly sales. There's 35% of our business where the backlog remains elevated at, I'd call it two and a half quarters worth of sales in backlog.
The majority of this is our large systems business, particularly in the coatings and plastics processing, which to answer your question, is in the IPS segment. Here these are discrete large system orders where we have customer prepayments, and we have, you know, clear visibility to customer request dates. That being said, they can move depending on the customer request dates and our ability to ship within the quarters. The remainder of the heavy backlog is in our medical interventional solutions business. Here these are large blanket orders placed by our customers for spec-in product, and then they routinely communicate delivery quantities.
When you think about it in our strong Q4, it's predominantly driven by these heavy systems businesses where we do have backlog, and but it could fluctuate on any given quarter as you saw here in Q2, you know, some of the IPS, the coatings, particularly and the coatings, and the plastic processing, which was quite strong. The plastic processing was where we saw the pull-in from Q3 to Q2. It's really the large systems business within IPS that's driving our clear visibility, I would say to Q4 and customer timing, but also results in our ability to pull in or push out on any given quarter for these large systems.
Sundaram Nagarajan (President and CEO)
Let me add something to that color, is that, you know, we feel really strong about the systems businesses, as Joe indicated. It is also a strong testament of NBS Next Growth Framework in action. You know, what you find here is that the businesses are truly focused on our best products and have the agility and flexibility to respond to customer demand, you know, in a market-leading way. We feel really, really strongly about it, and we also feel good about our medical interventional business, which is showing some pretty strong strength. I would say those two things drive our optimism for the fourth quarter.
Jeff Hammond (Managing Director and Equity Research Analyst)
Okay. Appreciate the color.
Operator (participant)
Our next question comes from Saree Boroditsky from Jefferies. Please go ahead. Your line is open.
Saree Boroditsky (SVP and Equity Research Analyst)
Hi. Good morning.
Sundaram Nagarajan (President and CEO)
Good morning.
Saree Boroditsky (SVP and Equity Research Analyst)
I guess first, the weakness in ATS obviously has been well telegraphed, but there's also a lot of government funding going towards semis. I think you mentioned a little bit about the CHIPS Act. When would you start to see that benefit? How long do we think about this down cycle given that?
Sundaram Nagarajan (President and CEO)
You know, the way to think about it, if you look at historical semi cycles and expect that, you know, a normal cycle expects about 4 quarters of downturn, we are in quarter 2, is really where we are. You know, what we expect is somewhere middle of next year for sure, we'll be in a place where this expenditures, you know, start to come back, the CapEx expenditures start to come back. Our conversations with customers are pretty bullish about the long-term prospects for this business, as you know. You know, given geopolitical considerations, given that CHIPS Act is going to come in. What you find our businesses benefit from CapEx expenditures that are allocated from these kind of investments our customers are making are typically towards the end of their construction. Right now, people are constructing plants.
They would eventually start putting in equipment. Ours would come in at sort of the back end of that expenditure that goes towards packaging of semiconductors. That's where you would see us benefit.
Saree Boroditsky (SVP and Equity Research Analyst)
That's helpful. Sticking with ATS, margins there have been rather volatile. I know some of this is mix related, but what is normalized mix and how do we think about margins here into 2024 and over the long term?
Joseph Kelley (EVP and CFO)
Yeah, Sari, when you, when you think about the ATS business, as I mentioned in the, in the quarter, we were responding as you saw it, to the lower volumes for semiconductor. Some of those cost actions were structural in nature, which will help us going forward in terms of the margin profile. A portion of that, you know, I would tell you at the consolidated level, over 100 basis points was the impact of responding to the lower volumes, both in semiconductor, and in the medical fluid components business. Specifically on the ATS segment, when you think about the profitability, you know, over the last several years, that has improved quite significantly from, let's just say, 11% operating profit margins up to ending last year at 29%.
Right now running at, these volumes, it's roughly 19% in the quarter, and that's how I would think about it for this year at these volumes with this mix.
Saree Boroditsky (SVP and Equity Research Analyst)
As you think about 2024, is there anything like mix related that we should think about benefiting or is this really a question of volume at this point?
Joseph Kelley (EVP and CFO)
Yeah. I see no reason as we recover that we wouldn't get back to the 22% type margins for this segment.
Saree Boroditsky (SVP and Equity Research Analyst)
Great. Thanks for taking my questions.
Operator (participant)
Our next question comes from Christopher Dankert from Loop Capital. Please go ahead. Your line is open.
Christopher Dankert (SVP and Equity Research Analyst)
Hey. Morning, guys. Thanks for taking the question.
Joseph Kelley (EVP and CFO)
Morning, Chris.
Christopher Dankert (SVP and Equity Research Analyst)
I guess as I look at, as I look at the guide for fiscal third quarter here, is the reason for the kind of below seasonal sales expectation, is it just the timing of backlog? Is it that semis are actually getting weaker? Just can you kind of give us a little more color on how to think about that third quarter sales guide?
Joseph Kelley (EVP and CFO)
Yeah. As it relates to the semiconductor, and we commented, order entry appears to have leveled off as it relates to those particular product lines. While we saw sequential deterioration in semiconductor sales, the guide for Q3 does not imply further sequential deterioration from the Q2 levels for semiconductors specifically. The timing issue between Q3 and Q4, and actually Q2, is predominantly on those large systems sales, Chris, particularly in the plastics and in the coating space where we do have the backlog, and there were cases where some got pulled forward. I would estimate roughly about $10 million got pulled forward from Q3 into Q2, now roughly speaking, probably $10 million got pushed out from Q3 to Q4. That's how I would think about the guide.
Christopher Dankert (SVP and Equity Research Analyst)
Got it. That's very, very helpful. Then maybe just kind of a housekeeping thing here. Could you quickly remind us about the mix within, you know, that MFS segment and the interventional versus life sciences versus EFD? I think there's a little bit of confusion there.
Joseph Kelley (EVP and CFO)
Yeah. The way I would think about that is you're correct. There's the medical biopharma, which is roughly, I would tell you, a $100 million business. There's the interventional solution, which is roughly a $300 million annual business. The remainder is your EFD, which is your fluid dispense. As a reminder, that business serves a diverse set of end markets, some of which are medical, some of which are construction, some of which are industrial, and some of which are actually electronics assembly, some semiconductor. It's a very diverse set of end markets served by that business. In the quarter, we saw significant strength in the medical interventional solutions business, as Naga has mentioned, and that order entry there continues to be strong.
Growth is strong. The biopharma has been talked about. Within that EFD business, I would tell you the electronic semiconductor component of that was pressured within the quarter and contributed to the performance.
Sundaram Nagarajan (President and CEO)
Let me add some a little bit more color to the fluid components business. Of those $100 million, not all of it is biopharma. A portion of it is biopharma, but you also have other medical fluid connector applications in that business. What you find is biopharma is the one that is sort of normalizing, but you have other connectors that have been pretty stable. The biopharma normalization was fairly significant to show up at the division level. As I indicated in one of my answers, you know, we expect that this normalizes by the end of the year.
Christopher Dankert (SVP and Equity Research Analyst)
That's helpful. Thank you, guys.
Operator (participant)
Our next question comes from Matthew Summerville from D.A. Davidson. Please go ahead. Your line is open.
Matthew Summerville (Managing Director and Senior Research Analyst)
Thanks. Just a couple quick questions, just to put a finer point on, you know, third quarter EPS guidance relative to last year, roughly a $0.20 delta on flat revenue. Currency's gonna be probably a somewhat material tailwind in the quarter. Can you kind of parse out what's driving the year-over-year reduction in earnings on flat sales?
Joseph Kelley (EVP and CFO)
Yeah, there's two components also to that earnings guide is one is interest expense is clearly up on a year-over-year basis in the quarter. On the full year, it's gonna be up about $20 million, so that contributes. Also last year there was some FX hedge gains in the quarter, which benefited, which are not forecasted to repeat. Those are below the OP, which I would tell you are having an impact on the year-over-year earnings guide.
Sundaram Nagarajan (President and CEO)
You know-
Joseph Kelley (EVP and CFO)
Got it.
Sundaram Nagarajan (President and CEO)
Sorry, go on. Sorry, Matt. Just to add, I think it's important to remember that, you know, in the quarter we delivered 31% EBITDA margins, above all of these, above the line. You know, operationally, the quality earnings are pretty strong. At 31%, our expectation is that we are at that level going into, you know, the second half of the year.
Joseph Kelley (EVP and CFO)
Got it. That's helpful. Then maybe just spend a minute, Naga, talking about any sort of evolution in your M&A funnel backlog, you know, relative to coming out of last quarter, how you're thinking about actionability, et cetera, therein.
Sundaram Nagarajan (President and CEO)
Yeah. Our acquisition pipeline remains healthy. You know, we continue to work on projects. Our focus areas remain the same, which is sort of, you know, continuing to expand our test and inspection, continuing to add to any core businesses around dispensing if we run into that or, you know, continuing to scale up our medical businesses. Those three things strategically have not changed. Pipeline pretty healthy, we remain financially disciplined and we've talked about those criterias. You know, we continue to work it, you're going to expect to see us be disciplined. Our work continues. There is, you know, I can only tell you that this is top of mind, and it's an important piece of our growth strategy.
Just as a reminder, you know, we committed to delivering $500 million in acquisitions for, you know, over the plan period, and we have acquired up to $225 million in revenues already and fully expect that we would deliver on that $500 million in the plan period. You know, good work, and we have demonstrated we are flexible in type of deals we are able to do. You know, we've completed CyberOptics, which is sort of an public company deal. You know, last year we did a public company carve-out, but we, you know, we remain invested in this process and feel good about where we are.
Joseph Kelley (EVP and CFO)
Got it. Thank you.
Operator (participant)
Our next question comes from Michael Halloran from Baird. Please go ahead. Your line is open.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Hey, good morning, everyone.
Joseph Kelley (EVP and CFO)
Good morning, Mike.
Sundaram Nagarajan (President and CEO)
Morning.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
A couple here. First, how are you guys thinking about backlog normalization? It's still very elevated. Sounds like you don't expect that to get more normalized until probably next year. Related, any... In your guidance, is there any change in the assumptions for underlying demand at this point from current levels, or is the run rate you're seeing kind of what's embedded in the guide from here out?
Joseph Kelley (EVP and CFO)
I guess let me take the first part on the backlog question, Mike. I would tell you, if you look at 65% of our business, that backlog is getting close to historical pre-COVID levels. If you say pre-COVID levels, we ran this business at about 80%-90% of quarterly sales in backlog heading into any given quarter. For 65% of our business, we're at about 1 quarter worth in the backlog, so it's almost at historical levels. The piece that hasn't reverted, and I don't know that it is going to revert to historical practices, is, you know, about 35% of our businesses, which is the large systems business, the coatings business, the plastics business, and the medical interventional solution business.
There, where we continue to have backlog at an elevated level, orders continue to be strong and it's about two and a half quarters worth of backlog that we're running in those businesses. We're not seeing that portion of our business revert to historical norms, while the remainder is.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
The second part of the question then?
Joseph Kelley (EVP and CFO)
Sorry, could you repeat the second part of the question, please?
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Just within the guide, is there any assumption for improvement or deterioration in underlying fundamentals?
Joseph Kelley (EVP and CFO)
Yeah.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
... avoiding, you know, backlog normalization or anything like that?
Joseph Kelley (EVP and CFO)
If you look at our assumption on order entry, we do feel that it has stabilized at the level. We saw that stabilization throughout Q2. The guide assumes that we remain at these levels. What you have within the quarters is the timing of the systems deliveries. That's what drives the quarterly fluctuations.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Sounds good. Within the medical business, the fluid business there, should that just correlate more with ATS at a high level on a forward basis, and how are you guys thinking about the normalization of that piece? Because with the biopharma piece, you've given a lot of context to. The other parts of that medical side of things, you're feeling pretty healthy about. Just more of the timing on that remaining piece and how you think about that normalizing.
Sundaram Nagarajan (President and CEO)
The biopharma part of MFS, I would say normalizes by the end of the year, right? Going into next year, we are back to the 7%-8% year-over-year growth. That's our expectation for our, you know, medical fluid component business. As you think about ATS, that's going to be, you know, a little bit in the middle of 2024. You know, MF, you know, our fluid components comes in first, our ATS business comes in next. Some of this is normalization of comps too.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Right. No, no. Yeah, Naga, I think you mentioned that earlier in the call. I was more specifically referring to the, you know, the parts of that segment that are more the construction.
Sundaram Nagarajan (President and CEO)
Ah.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
semi the et cetera type pieces.
Sundaram Nagarajan (President and CEO)
Okay.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Joe, you wanna take-?
Joseph Kelley (EVP and CFO)
Yeah. Mike, I... Yeah, I'll tell you, the fluid, this management piece of MFS that's not on the medical interventional and not on the medical fluid component side, that piece of the business, EFD, I would tell you roughly half of that business has the exposure and market exposure similar to our broad ATS segment. The other half is more industrial construction. There's animal health, there's medical. That's how we think about it.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
And, and then-
Sundaram Nagarajan (President and CEO)
So-
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Go ahead. Sorry, Naga.
Sundaram Nagarajan (President and CEO)
Sorry, Mike. For the portion that has the electronics and construction exposure in Asia, you are right. We got to think about it like the ATS recovery.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Great. Great. Appreciate it. Last question. You guys mentioned some, you know, actions internally to normalize for demand. Is there any way you could quantify what those cost actions look like? Are you thinking about more this just run rates with demand and helps mitigate what those decremental margins would look like?
Joseph Kelley (EVP and CFO)
The cost actions within the quarter were $3.5 million roughly, to respond, very focused actions within the MFS segment and the ATS segment to adjust our cost structure. I will tell you some of those, Mike, were structural, not so it's not just the variable piece, but we did take some structural cost reduction actions, particularly in ATS that will help benefit as that segment's profitability recovers, back to historical levels, let's just say in 2024. The savings generated within the quarter or within the year, will offset the $3.5 million.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Great. Really appreciate it. Thanks.
Sundaram Nagarajan (President and CEO)
Mike, I know you didn't ask this question, but one thing I would remind all of us is that, yes, the business is adjusting to the market demand, and I think that is the right thing for us to do. You know, I keep in front of mind for all of you that, you know, we stay invested in our customer-centric business model, in our product innovation, in NBS Next deployment. This is really important of making sure the company is well-positioned, as we adjust for these short-term headwinds, is well-positioned for long-term continued growth.
You know, more than 80% of the business is growing. We wanna make sure we stay invested in innovation, stay invested in our customer experience, so that, you know, we do well in those parts, but also even in the parts where we have some short-term headwinds, you know, we are invested in innovation, so.
Michael Halloran (Associate Director of Research and Senior Research Analyst)
Thanks, Naga. Maybe next call we'll have a smoother back and forth, and I won't cut you off.
Sundaram Nagarajan (President and CEO)
That's okay.
Operator (participant)
As a reminder, to ask a question, please press star followed by 1 on your telephone keypad. Our next question comes from Allison Poliniak-Cusic from Wells Fargo. Please go ahead. Your line is open.
Allison Poliniak-Cusic (Managing Director and Senior Equity Research Analyst)
Hi. Good morning.
Sundaram Nagarajan (President and CEO)
Good morning.
Joseph Kelley (EVP and CFO)
Good morning, Allison.
Allison Poliniak-Cusic (Managing Director and Senior Equity Research Analyst)
Naga, I'm starting to get some questions on China's Micron ban.
Sundaram Nagarajan (President and CEO)
Yeah.
Allison Poliniak-Cusic (Managing Director and Senior Equity Research Analyst)
Just any comments or color on flow-through to you guys or any risks that you guys see there? Thanks.
Sundaram Nagarajan (President and CEO)
Micron is, you know, somebody that we work with in our optical business. You know, we are focused more on the long term, so because as Micron expands capacity in other places, we are certainly going to benefit. As you have seen, they've made some pretty, you know, strong projections on where they're investing here in North America. As I think about this, you know, we're going to benefit from alternate investments they make in capacity. As you know, you know, Nordson benefits when people add new lines, expand capacity, or make alternate investments. I feel like, yes, that might have a pressure on, you know, their questions on what their investment, but I think long term, the way you wanna think about this is this is another reason why they would wanna expand their capability.
Yes, there may be some impact on their volumes in China, but our business is not impacted by volume of chips manufactured. In a lot of ways, you know, we are very close. Our customer-centric business model allows us to stay in touch with our customers in a very close way and allows us to understand where they're headed and what they're doing. You know, this is pretty new news. This is probably we thinking about how does it impact us in the long term so.
Allison Poliniak-Cusic (Managing Director and Senior Equity Research Analyst)
Understood. Thanks. Then you made a comment, IPS, generating better, you know, better growth and execution than you had laid out at the analyst meeting. Just wanna understand kind of where the surprise was for you in terms of that division. Was it sort of the development of products? Is it execution? Just get a better sense in how sustainable you think that is going forward.
Sundaram Nagarajan (President and CEO)
Yeah. I think there are a couple of things that I point to. First, I'll point to that each of our businesses have been thinking about our NBS Next growth framework and have been using what we call internally strategic discipline. Strategic discipline really is about understanding the best growth opportunities and doubling down on those best growth opportunities. What you begin to see here is a concerted effort by all of our divisions to be focused on the best growth opportunities. Definitely, they benefit from some macro secular trends that we are pretty excited about. First, in terms of onshoring or reshoring or friendshoring, whatever you wanna call it, what you find is our customers beginning to add capacity, you know, moving away from Asia and investing more closer to home. We certainly benefit from it, so that is an important one.
The other thing that we are benefiting from in this business is that there are a number of emerging electric vehicle applications that are you know, electric vehicle as well as battery manufacturing. It continues to evolve, so I wouldn't say this is fully solidified yet. These new applications certainly help us and help the company play in some new applications we've not had opportunities. Strategic discipline kind of brings all of that into focus for the business, allows them to invest there. Those would be the two things that I would point to. Certainly, execution inside the business in terms of our factory, dedication to our best products is certainly also playing out. In the businesses, we have holistically implemented NBS Next. You're starting to see a significantly better customer service that is market leading.
I, you know, I would point to those three things as sort of where we see how NBS Next is helping our teams deliver on growth opportunities.
Allison Poliniak-Cusic (Managing Director and Senior Equity Research Analyst)
Great. Thank you.
Operator (participant)
Our next question comes from Walt Liptak from Seaport. Please go ahead. Your line is open.
Walter Liptak (Managing Director and Senior Research Analyst)
Hi. Thanks. Good morning, guys.
Sundaram Nagarajan (President and CEO)
Good morning, Walt.
Walter Liptak (Managing Director and Senior Research Analyst)
One day, maybe. Thanks. Maybe as a follow-on to the last couple of questions using NBS Next with these strategic disciplines. In the ATS segment, I think you guys have been working on trying to broaden some of the applications from, you know, traditional semiconductor electronics to automotive sensors, IoT, things like that. I wonder if there's a metric that you're looking at now or if there's, you know, something you could tell us about sort of the, you know, the fruits of that effort.
Sundaram Nagarajan (President and CEO)
Within the business, you know, we have got like four targeted KPIs that we measure, which sort of gives us a view of how we are doing in terms of deploying NBS Next, and, you know, we call it leadership level performance. We have leadership level performance on customer growth is one of the key metrics for the business within the company. What you're beginning to see is where businesses that are not impacted by significant macro trends, that metric is trending towards where we would like to be, right? It differs from business to business, so I can't give you a specific number. What I will tell you is business by business, teams are identifying what is leadership level performance, and we are beginning to see some nice progress in businesses on customer growth, certainly on new product innovation.
And there are a couple of other metrics around customer service levels that we are very excited about. Number of internal metrics that allows us to track the effectiveness of the strategy deployment and execution that is leading to some pretty strong, customer experience that we believe translates into growth and profitable growth for the company.
Walter Liptak (Managing Director and Senior Research Analyst)
Okay. All right. Great. That's helpful. Then just switching over to IPS again. The 9% organic, I wonder if you could help us understand how much of that was volume growth and how much was price.
Joseph Kelley (EVP and CFO)
Yeah. Walt, this is Joe. I would tell you the price realization for Nordson broadly improved in Q2. I would estimate that approximately 4% of that 9% for IPS segment would be attributable to price, and 4% would be volume.
Walter Liptak (Managing Director and Senior Research Analyst)
Okay. Great. That brings me.
Joseph Kelley (EVP and CFO)
Oh, sorry. Go ahead.
Walter Liptak (Managing Director and Senior Research Analyst)
Go ahead.
Joseph Kelley (EVP and CFO)
The 60% incremental margins looked really good too. Is there NBS Next in there, so we're now operating at a higher level, or is that just catch up on some of the price cost? I would tell you that's NBS Next expressing itself. On the price cost, we got to the point where I would tell you that is no longer a headwind. If you'll recall the last 2 quarters, that's been pressuring our gross margins. Here, that is price cost on balance for Nordson is no longer pressuring the gross margins, as we have realized the price increase to offset inflation and maintain our margins.
What you see there in the 6% incremental margins for IPS is largely consistent with what we've seen over the past couple of years. I would tell you there's a host of issues there, but it's the benefit of NBS Next of being broadly implemented throughout those divisions.
Sundaram Nagarajan (President and CEO)
Okay. Yeah, congratulations on that. Okay, thank you.
Joseph Kelley (EVP and CFO)
I would like to make one other comment. I think it's back to Matt's question around the Q3 guide. I spoke to what was assumed in the guide below operating profit. When you look at the operating profit line and the gross margin, our gross margins were roughly 54.5% here in Q2, consistent with Q1. That being said, the drivers of that were a little bit different than Q1. The price realization is no longer a headwind, but what you see in Q2, the margins are pressured by the lower volumes, that we've talked about on those two particular businesses.
Offsetting that is the growth, but the growth is coming with a less favorable sales mix, as it's becoming and coming in product lines such as plastic processing and others who are delivering double-digit growth. The profitability, when you think about Q2 going into Q3, profitability from a gross margin and the OP margin should be comparable because the mix is comparable.
Operator (participant)
We have no further questions. I would like to turn the call back over to Naga for closing remarks.
Sundaram Nagarajan (President and CEO)
Our performance reflects the strength of our differentiated position technology, customer-centric model, and diversified end markets. Again, I wanna thank Nordson's employees for their commitment, which makes these results possible. The continued deployment of NBS Next and the ASCEND strategy will position us well for long-term growth. We look forward to the opportunity to talk with you at upcoming investor events. Joe Lara and Steven Lovaas, our MFS segment leader, will be at the Deutsche Bank Industrial Conference on June 8th in New York. Joe Lara and Jeff Pembroke, our IPS segment leader, will be at the Wells Fargo Industrial Conference on June 13th in Chicago. Joe Lara and our segment leader of ATS, Srini Subramanian, will be participating in a virtual roadshow with Loop Capital on June 14th. Thank you for your time and attention on today's call. Have a great day.
Operator (participant)
This concludes today's conference call. Thank you for your participation. You may now disconnect.