Nordson - Earnings Call - Q3 2020
August 20, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Nordson Corporation Third Quarter Fiscal Year 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. Please be advised that today's conference is being recorded.
Speaker 1
I would now like
Speaker 0
to hand the conference over to Ms. Mahoney. Please go ahead.
Speaker 1
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 Kelly, Executive Vice President and CFO. We welcome you to our conference call today, Thursday, 08/20/2020, to report Nordson's fiscal year twenty twenty third quarter results.
Our conference call is being broadcast live on our audio webpage at nordson.com/investors and will be available there for fourteen days. There will be a telephone replay of the conference call available until 09/03/2020. During this conference call, references to non GAAP financial metrics will be made. A complete reconciliation of these metrics to the most comparable GAAP metric has been provided in the press release issued yesterday. Additionally, forward looking statements may be made regarding our future performance 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. 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 fiscal twenty twenty third quarter conference call.
Speaker 3
With me today is Joe Kelly,
Speaker 2
the new Chief Financial Officer of Nordson. I'm pleased to welcome Joe to the call this morning. Joe joined Nordson on July 6 and brings over twenty five years of financial and operational expertise to Nordson, most recently serving as chief financial officer of Materion, a global advanced materials company. I'm very excited to have him on board. He's already bringing great energy and perspective to our leadership team.
First, I wanna thank our Nordson employees for their continued flexibility, resilience, and commitment as we have navigated 2020. We remain focused on protecting the health and safety of our employees and responding to the needs of our customers. Norton products serve a very diverse set of end markets including medical, electronics, consumer non durables, and general industrial. This diversity has helped drive the relative stability of our results to this point in the year. By maintaining new safety measures, our team has risen to the challenge and continue to meet the needs of our customers who depend on us to help them drive efficiencies, enhance innovation, and continuously supply aftermarket parts and consumables that keep their manufacturing lines running smoothly.
While we remain focused on managing this dynamic environment, the Nordson leadership team and I are equally committed to making progress towards our strategic priorities of accelerating organic growth, diversifying through acquisitions, leveraging the Nordson business system and building winning teams. On June 1, we announced the acquisition of FluroTech, a precision plastic extrusion manufacturer in the medical device industry. FluroTech brings highly differentiated PTFE medical tubing expertise, which is complementary to our current value added component offering for minimally invasive therapies such as heart valve replacement. Growing our North American Medical business continues to be a priority of our capital deployment strategy. We're pleased to have the Florida Tech employees as part of the Nordson team.
Also during the quarter, we continue to develop the next generation of the Nordson business system, which we're calling MBS Next, Nordson's Growth Framework. Our new segment realignment, which unleashes an owner mindset at the division level, allows our teams to make decisions as close to the customer as possible. Using critical insights created by segmentation tools in NBS Next, our divisional leaders were empowered to prioritize investments and simplify non value added tasks to deliver best in class product quality and delivery. Staying invested in what makes Nordson strong, our customer centric business model and precision technologies will position us to accelerate profitable growth when the economy recovers. I'll speak more about the business in a few moments, but first, I'll turn the call over to Joe to introduce himself and provide a more detailed perspective on our financial results for the quarter.
Speaker 3
Thank you, Naga, and good morning to everyone. I am very pleased to join Nordson, which has a long established reputation as a high quality company that consistently delivers top tier financial results. I look forward to partnering with Naga and the leadership team to drive the next chapter of profitable growth for Nordson. We have an extremely solid and rich foundation on which to build, and I am honored to be part of the team. With that in mind, let's turn our attention to the fiscal third quarter financial results.
Third quarter twenty twenty sales decreased 4% compared to the prior year third quarter. The decrease was primarily related to organic volume as unfavorable currency effects were offset by the benefits from the Flortech acquisition. The company's diverse end market and geographic exposure as well as broad product applications contributed to the relatively strong commercial performance in these challenging times. Our combined Asia region led the way by delivering 3% growth in the quarter. Gross margins totaled $281,000,000 or 52% of sales in the quarter compared to $3.00 $3,000,000 and 54% of sales in the prior year.
The 200 basis point decrease in margins is attributable to $1,200,000 of inventory step up amortization related to the Flortech acquisition, unfavorable sales mix and COVID-nineteen manufacturing inefficiencies. As our factories address employee safety needs in this challenging time with precautionary quarantining of employees, implementing social distancing, rotational staffing, etcetera, the combination of these three factors contributed to the lower gross margin percentage in the quarter. We anticipate the majority of these headwinds to be temporary in nature and forecast returning to our historical gross profit margin levels. Operating profit in the quarter was $112,000,000 sales. Was Excluding nonrecurring items in the quarter related to cost reduction actions and the acquired inventory step up amortization, adjusted operating profit totaled $120,000,000 a 9% decrease from the prior year adjusted operating profit.
EBITDA for the third quarter was $148,000,000 or 28% of sales, which is 7% below the prior year EBITDA of $159,000,000 Looking at non operating expense. Net interest expense decreased $4,000,000 or 37% from the prior year levels associated primarily with the lower effective borrowing rate. Other net expense increased $10,000,000 associated with an unfavorable $5,000,000 year over year swing in currency gains and losses and a $5,000,000 increase in pension cost. Dollars 3,000,000 of the pension increase was related to a noncash pension settlement charge associated with the prior CEO. Tax expense in the quarter totaled $9,000,000 or an effective tax rate of 9% in the quarter.
The rate was driven lower by a $12,000,000 discrete tax benefit associated primarily with nonrecurring levels of stock option exercises and deferred equity compensation. Excluding these discrete items within the quarter, the effective rate would more closely reflect the company's long term tax rate of 20% to 22%. Net income in the quarter totaled $87,000,000 or $1.49 per share. Excluding nonrecurring adjustments to operating profit, the noncash pension settlement charge and discrete tax benefits, adjusted earnings were $83,000,000 or $1.42 per share. This represents a 12% decrease from the prior adjusted earnings, reflective of the 4% decrease in sales volumes.
Cost reduction actions taken in the quarter to structurally lower the ongoing cost profile of the company totaled $6,000,000 and primarily related to severance payments. These actions are forecasted to deliver annualized savings of approximately 11,000,000 to $12,000,000 Looking at the segment performance. Industrial Precision Solutions sales decreased 6% compared to the prior year third quarter. Stable demand from product lines serving consumers in nondurable end markets were offset by weakness in sales of product lines serving industrial markets. Asia markets appear to be recovering from the lower COVID-nineteen demand levels.
Operating profit for the quarter was $75,000,000 or 26% of sales. Excluding $3,000,000 in structural cost reduction and simplification actions, EBITDA was $86,000,000 or 30% of sales, a decrease of 200 basis points compared to the prior year third quarter. Lower sales volume, unfavorable product mix and manufacturing inefficiencies tied to the pandemic safety measures drove the lower profit levels. Advanced Technology Solutions sales decreased approximately 2% compared to the prior year third quarter. This change included a decrease in organic sales volume of 3% and an increase of approximately two percent related to the Flortech acquisition.
Currency impact was minimal. Sales volumes increases in test and inspection product lines serving electronics end markets and stable demand in medical product lines were offset by weakness in fluid dispense product lines serving industrial end markets. The stable demand in medical is reflective of strength in some product lines, offset by meaningful softness in other product lines more closely tied to elective surgery. It's important to note that the definition of elective surgery has been broadened during the early months of this pandemic, particularly in The U. S.
However, we are starting to see market signs that elective medical procedures are beginning to ramp back up. Within the Advanced Technology Solutions segment, reported operating profit was $50,000,000 or 20% of sales in the quarter. Excluding onetime charges associated with the cost reduction actions and inventory step up amortization, EBITDA was $71,000,000 or 29% of sales, in line with prior year profits despite the 2% decrease in sales. Finally, turning to the balance sheet and cash flow. We ended the quarter with a strong balance sheet and plenty of available borrowing capacity.
Cash totaled $222,000,000 and net debt was 1,000,000,000 ending the quarter with a 1.8x leverage ratio based on the trailing twelve month EBITDA. Free cash flow in the quarter was $82,000,000 which brings the year to date free cash flow conversion rate on net income to 119%. Investing activity in the quarter totaled $135,000,000 driven by the $125,000,000 acquisition of Flortech. Dividend payments were $22,000,000 in the quarter, and the company's Board approved a 3% increase in the annual dividend effective in the 2020. This marks the fifty seventh consecutive year the company has increased its dividend.
We remain very confident in the cash flows of the company and are committed to returning a portion of the cash to shareholders in the form of a consistently increasing dividend. In summary, our top line has held up well considering the challenging macroeconomic environment. While we benefit from the diversity of the end markets we serve, the team has responded in a great way in supporting our customers and delivered solid performance while controlling costs in the quarter. We continue to maintain a strong balance sheet with sufficient liquidity to allow us to stay focused on long term strategic initiatives to drive organic and inorganic growth. I'll now turn the call back to Naga.
Speaker 2
Thank you, Joe. I'm pleased with the performance the team delivered in a very challenging environment. I'd like to make note of few areas. First, I appreciate the strong performance of our teams in Asia Pacific and Japan. They successfully managed through the challenges of COVID-nineteen earlier this year.
Through it all, they remain focused on serving the customer. As a result, they delivered growth in the quarter. Revenue in the Asia Pac region increased 3% compared to prior year. We had a very productive virtual review of our Asia businesses several weeks ago. Taking our executive team on a virtual tour of the facilities and new product pipeline, it is clear that the regional team is making meaningful progress in broadening in country new product, application, and service expertise and resources to serve our customers in the region.
Second, I'd like to acknowledge the strong results of our test and inspection product lines, which are up double digits year over year. Testing inspection has been a focus area of our acquisition strategy. And we have built a robust offering of T and I product lines including X-ray, acoustic imaging, bond testing, and automated optical inspection capabilities. As advanced electronic components and semiconductor technology for five g, AI, and memory applications are becoming increasingly sophisticated, the need for TNI equipment is growing. Nordson's diverse portfolio of solutions and technical expertise is making us a go to partner for global customers.
In fact, our matrix in line automated x-ray, offline dage x-ray and bond testing, and SonoScan acoustic imaging product lines had record sales in the fiscal third quarter. As I mentioned earlier, I'm encouraged that our teams are beginning to use a data driven approach with NBS Next segmentation tools to prioritize investments to position their businesses for profitable growth and the recovery begins. In July, I participated in a progress review of the four pilot businesses who are currently deploying NBS Next. I'm pleased with the curiosity and experimentation in how our teams are beginning to apply data centered insights to enhance customer service levels. Notes' geographic and end market diversity is one of our greatest strengths.
In this period, our test and inspection, consumer nondurable, and medical end markets are helping balance the weakness of industrial end markets that are still under pressure. Our recurring revenue of aftermarket parts and consumables contributes to our relatively stable performance in these dynamic times. Looking at the fourth quarter, our order entry rate has come off of the lows experienced earlier in the quarter. The trailing four week order entry as we entered the fourth quarter is approximately 93% compared to prior year levels and the twelve week order entry is approximately 90% compared to the same period last year. Backlog has decreased approximately 3% compared to the prior year.
Based on these data points, we expect our fiscal fourth quarter revenue to be comparable to slightly better than the third quarter twenty twenty revenue. We also expect low single digit sequential growth in earnings. I want to thank our colleagues around the world for their incredible commitment to our customers. This is an uncertain time for many, and the team's strong execution is commendable. As always, I wanna thank our customers, employees, and shareholders want for their continued support.
To With that, I'll pause and take your questions.
Speaker 0
Thank First question comes from Matt Summerville with D. A. Davidson.
Speaker 4
A couple of questions. First, on the medical side of the business, can you talk about how much of that is being driven by what is now being defined as elective versus nonelective? I guess that was under the impression that the elective portion was pretty minimal.
Speaker 2
Yeah. Thanks, Matt. You know, as as we entered the quarter, the definition of what is elective and what is selective has seen a continued to broaden. And so because of that, we did have some impact in our business. But if you look at our medical portfolio of product offering, we have a fairly broad and diverse offering that not only serves the minimally invasive surgeries and such as heart replacement or stent placement.
We also have a number of surgical as well as fluid management product offering. So what we saw really was a surge in demand for our fluid management product offerings, pulmonary treatments. And so it certainly helped us, you know, come in flat to last year in the medical business, you know, less than what we have experienced, you know, historically, you know, four to 5% growth. So it was lower than that, but it was flat to last year. And and probably put it in context, what I'll tell you is if you take a look at medical device manufacturers, many of them in in this environment are down, you know, mid teens.
And and so so we're really we're really pleased. And, you know, it is slightly lower than our expectation, but very pleased that the team was able to come in on a flat year over year basis for for the medical.
Speaker 4
Got it. Thank you for that color. And then just as a follow-up, can you maybe provide an update on what you're seeing in fluid dispense as it pertains to more to consumer electronics, five g project activity, and kind of what the outlook is there? Thank you.
Speaker 2
Yeah. I what we see really is, you know, early stages of you know, we had a good quarter last quarter, if you remember, on the, fluid dispense side for our electronic businesses. And what we see is continued project activity. What what you do find is in the electronic side, we're finding a lot of applications for these new complex components that go into AI applications, applications, into a number of, you know, the advanced five g related products, be it auto electronics or as well as in mobile sets. You have, you know, increased antenna requirements.
You have increased camera modules. You have increased number of, you know, as well as micro speakers and such. So lot of advanced components that we're seeing a lot of project activity on that. But primarily on the electronic side, where we see strength and had a really strong quarter was in our testing inspection, which is more geared towards the semiconductor side of the business rather than on the component side of it.
Speaker 4
Got it. Thanks, Naughty.
Speaker 0
Next question comes from Jeff Hammond with KeyBanc Capital Markets.
Speaker 5
Hey, good morning, guys.
Speaker 3
Good morning, Jeff.
Speaker 5
Hey, just want to really understand kind of the order trend through the quarter and you kind of gave some different numbers, twelve week trend, four week trend. Just kind of really get a better sense of kind of what the true trend is in terms of things getting sequentially better and maybe where particularly you're seeing things get sequentially better? Thanks.
Speaker 2
Yeah. No. Thank you, Jeff.
Speaker 3
And so what what we're trying to
Speaker 2
do is probably talk to you a little bit about how we entered the quarter. Right? We ended the quarter, and we provided probably for the first time we talked about order entry rates in the way we're talking about it now. And and wanna provide you some context for that. You know, we feel, you know, given the dynamic environment, it was important for us to provide, you know, provide you with more color than we normally do.
So that was the intent. And so as we entered the third quarter, if you looked at the twelve week order rate, we think of the twelve week order rate as a little more longer term and suddenly stabilizes near term environment. But given the current dynamics, we felt that it was important for us to look at something shorter term so that we can see what is happening. So that's why last quarter we provided you six week guidance. That's because six weeks was the time period that COVID had really hit in our quarter.
So going forward, what we're thinking about is giving you a twelve week and four week guidance around how we are seeing till we get out of this dynamic environment. So with that context, what I'll tell you is that the best way to think about the current environment is to think about it more sequentially. And we begin to see as we navigated through the third quarter, sequentially, their order trends for the total company was starting to improve. Right? So we entered the quarter, I would say, six week order trends were more in the range of 11%.
The short term was around 11% down. And as we exit the quarter, we begin to see that order trend is more like down 7%. So that's sort of, you know go ahead.
Speaker 5
Okay. That's helpful. Where do you think you where are you seeing the best sequential improvement?
Speaker 2
Yeah. Yeah. So so I think I answered one part of your question. Now let's go to the next part of the question and probably take it in two chunks, Jeff, is that first give you some color around the regions and then give you some color around the trends we are seeing by end market. So if you think about the geography sequentially, our order entries are such that from a geography perspective in The US, the order trends are stabilizing albeit at a little bit lower level that we talked about.
Americas, which is sort of Latin America and Mexico still remains challenged, you know, given all that is going on in Mexico and Brazil, still remains challenged, but is a very small part of our company. In terms of Europe, what we do see is a meaningful pickup and and a trend up sequentially when compared to third quarter. And then in Asia, as you've in our third quarter numbers, we have reported a growth in Asia, but, you know, when compared to last year. And what we find there in Asia is sequentially that remains flat. It is not accelerating any further than that, but it is remaining flat.
So that's the regional picture. And if you look at about end markets, what what I would tell you is that, some of the industrial end markets remain challenged. Right? So, businesses that have industrial exposure, like our ICS business or our fluid dispensing and EFT, you know, they they remain challenged. Our medical business continues to be flat.
You know, order entry rates are flat, and we seem to feel good about it. Our fluid dispensing in non consumer non durables is flat to slightly up, and our plastic processing is flat to slightly up. And our electronic business, as we talked about, in testing inspection had a strong quarter, and we find that we're flat there. So hopefully, that gives you you know, it's a range of scenarios is what we're seeing in terms of trends for the various end markets, but essentially, the very dynamic environment and what we find ourselves is managing to that dynamic environment. You know, we're seeing some areas where sequentially things are stabilizing and maybe some improvement, but the industrial parts continue to remain challenged for for the company.
Speaker 5
Okay. Okay. Great. That's good color, Naga. Just on Flortech, can you give us you know, what what kind of the annual revenue contribution, what that business has been growing at, you know, kinda how the margin profile looks versus the medical business overall or at least, you know, the advanced tech segment?
And and just really where you know, what what's the incremental kinda new product or, you know, market that, you know, this gives you that you didn't have before?
Speaker 2
Yeah. So so I think I let me give you some strategic color and maybe give you some update around how how things are panning out in the first couple of months here. And then Joe can sort of provide you a little bit color around contribution and such. So it's a great little business. It's a niche business for us.
It brings to the company PTFE tubing. So this is the inner libricious layer of the you know, think about you're trying to place a stent. You know, you you have to thread it through, you know, a tube that's in the patient. And what you really find is you have a lubricious tubing layer, which is inside that tube, and that's really what this is. Right?
So that is their major product line is the inner inner and lubricious layer of those cubing that is used to place, you know, stands or heart valves and things like that. So it's a very niche product. It's a great complementary addition to our delivery mechanism core component offering that we have. Right? Through mention, we were able to bring on a very strong position in core components that helped us in this minimally invasive therapies, and we find this as a real nice add to it.
In terms of the integration, you know, we really like the business. The technology is really solid. As we have spent time within the business, you know, it reaffirms our strategic thought about adding this, so we really like it. We like the people. Operations are coming along really nicely.
Let me maybe turn this to a little bit joke and add some color around, you know, financials. Overall, it's a value added business. It's a differentiated business. It adds to the company. It doesn't take away.
So
Speaker 3
Yeah. And, Jeff, just to give a little more color, the annual revenue on this business is approximately, let's say, $20,000,000. And from a margin profile standpoint, it's comparable to our current ATS business.
Speaker 5
Thanks a lot, guys.
Speaker 2
Thank you.
Speaker 0
Next question comes from Christopher Glynn with Oppenheimer.
Speaker 6
Thank you. Good morning. Just wanted to go into the medical piece for a little bit. I'm curious about how you're thinking about maybe pent up demand for elective products. It's obviously a pretty important business to you.
We've had great success over the past. I'm wondering how you're thinking about the prospects for kind of pent up demand, assuming it's not too late for some people in search of elective procedures.
Speaker 2
Yeah. I I and Chris, it's a great question. And and I think that is, you know, as difficult as it sounds, but that is really what what people are dealing with is that, you know, surgeries that are needed are getting postponed, and and we are hopeful. But we do fundamentally, to answer your question, fundamentally believe there is a pent up demand that that we would enjoy as surgeries come up. We're beginning to see early signs of hospitals opening up and suddenly trying to, you know, increase the number of surgeries that is it'll be a slow ramp up.
You know, this environment, as as all of us know and experience, is very dynamic. Things are up and down a bit. But in general, we are very convinced that remember also that these are Spectrum products in that these, you know, they have a great amount of stickiness to the the sales orders because we are specked in through FDA approvals for medical devices in our customers. So quite frankly, you know, we feel very strongly about the growth drivers around medical are solid, have not changed. And in the short term, we would enjoy some meaningful pickup as the surgeries come back.
But we you know, our expectations are this is going to be a slow ramp, not a very fast ramp. You know, as you can imagine, you know, we're still we get past this next season of flu and and get past to some level of normalcy.
Speaker 7
You know, this is going to be a
Speaker 2
little bit up and down. But even with those postponement,
Speaker 7
what
Speaker 2
I really wanna emphasize here is that the team came in with a flat revenue year on year, which is very strong performance. And that's because we have, you know, our product offering is pretty strong in fluid management, as well as pulmonary therapies, which we really not talked about a lot. But there are pulmonary therapies where our cannulas get used. And so, you know, we we really like medical. We continue to invest here.
We still see opportunities. So hopefully, that provides you some color.
Speaker 6
That's great. Appreciate that. And then my follow-up is, good update on, you know, what you're seeing in terms of momentum. You touched it along kind of the handset features and things like that. But for five g, both for infrastructure and for handsets, of compare contrast and you expect that ecosystem around five g is likely your most robust factor in fiscal twenty one at this early juncture?
Speaker 2
Yeah. The the five g five g activity, you know, activity remains strong. You know, project activity remains strong. We get invited to lots of different projects where we're working on. But it is at least for the moment, you know, they've got a lot of promise as we've talked about in the last couple of quarters.
Lots of promise, a big circular secular driver for this business, but not a needle mover needle mover at the moment for us. But what why we're excited about five g is not only just the handset. We really wanna think about five g in a broader terms around the base station infrastructure build out, which is solely behind. If, you know, if you read, you really find there's a lot of advertisement and marketing around five g. But, really, you know, the usefulness of any of that only depends on if you have near the cell tower.
Right? Remember, these are fairly weak signals, so you you gotta really be almost on top of one of these things to experience this awesome technology that is coming, but eventually, it'll happen. So so we they're excited about the base station opportunity. It's slow to roll out. As you know, there are a number of geopolitical competitive things going on around that.
That certainly strains it. We we certainly like all the advanced components that are getting developed, so we really like that. Auto electronics will be a big player of five g because they're gonna get incorporated. IoT devices are gonna be another big area where five g is gonna get incorporated. So lots of different nuances to five g beyond just the handset.
The handset is probably what takes up most of the press line. So overall, good activity, still continuing to participate in projects, just not a big needle mover at the moment for the company.
Speaker 6
Yeah. We know it's not now, but it sounds like the timing visibility is kind of quixotic, I guess.
Speaker 2
Yes. Yes. Good work. Thank you.
Speaker 7
Thank you, Chris.
Speaker 0
Next question comes from Mike Halloran with Baird.
Speaker 8
Hey. Good morning, everyone. A couple of margin questions here. So on the EPS, if you think about the sequential margins going into the fiscal fourth quarter, same mix pressures, that that that appears to be the assumption for the same mix pressures that were there in the fiscal third quarter probably being good for the fiscal fourth quarter?
Speaker 3
Yes. I think similar in ATS, the mix pressure, will be there, has assumed to be there in the fourth quarter that was there in the third quarter based on some of the end market demand that Naga just reviewed.
Speaker 8
That makes sense. And then the inefficiencies you referenced for the industrial precision business. Maybe some context on on on those and and how long you think they linger.
Speaker 3
Yeah. So it it as our factories initially responded during the the COVID crisis and and, you know, in our efforts to keep employees safe but continue to meet customer needs, we had significant factories. While they remained open, we were precautionary quarantining several people. When you think about some of our clean rooms, we also had to put in social distancing, and so our our our some of our manufacturing processes weren't as efficient from a direct labor standpoint. And and so we've been working through that, getting the right proper PP and E, the proper staffing in, people coming back from quarantine.
And so we're kind of working through those kinks. We've made progress, I would tell you, in the quarter, from from earlier in the quarter as as it relates to manufacturing efficiencies and conversion cost rates. And so we anticipate as we get used to the new normal to to continue to improve as we as we go out throughout q four here.
Speaker 8
Thanks for that. And then last one, the the floor tech piece, obviously, would say that you were getting that some m and a done, but maybe just thoughts on the pipeline as it looks from here and and and what the, basically, the ability to convert some of that pipeline looks like as we sit here today.
Speaker 2
Mike, great question. You know, as you think about m and a, you know, we've really talked about what is our focus. Our focus really is, you know, two big areas, scaling up medical, scaling up TNI are the two areas that we're very focused on. And if we find things that very complimentary, very next to our core, we would make them add on. But it's really important for us to emphasize the context and, you know, our strategic rationale for anything we do.
We'll start with what makes more sense strong. Right? Physician technology, customer centric business model, two things that we look for. So as we look at the pipeline, you know, our pipeline has a number of opportunities that we continue to stay in touch. But given the environment, you know, think about great companies that we would like to add to the portfolio.
This is not particularly the time that they wanna sort of transact. Meaning, you know, given sort of reduction in their own outlooks and stuff, you know, they're not particularly interested in acting on any of those and sort of take the wait and see approach. So meaningfully, these opportunities are still existed. We're still sort of cultivating them is probably the best way to put it. Should some of them happen to come to the market as we've been able to do with Flortech, you know, we will certainly act on them.
But, you know, you can expect us to stay disciplined to to what we we feel are most important as to the company in the areas we're interested in.
Speaker 8
Great. Thanks for that, Nagin. Appreciate the time.
Speaker 2
Yep. Thank you.
Speaker 0
Next question comes from Andrew Buscaglia with Berenberg.
Speaker 2
Good morning, guys. Good morning. I had a question on
Speaker 7
so in in industrial precision, you know, that I I was way off on, you know, modeling there and my expectations for there. You've got some tougher markets within there, you know, with with auto exposure, AMD exposure, you have some energy exposure. So I'm curious, you know, why you know, did this did the did the trends in those specific businesses surprise you, or was is is the resiliency in that in those tougher areas?
Speaker 2
Can you talk a little
Speaker 7
bit more about what you're seeing there, I guess, and your outlook for some of more difficult pieces?
Speaker 2
Yeah. So so so maybe let's first take the ones that are doing well and, you know, so this is IPS, you know, traditionally has this adhesive business that we have always been a very strong part of the company, a history and a legacy part of the company and a core part of the company. Strong market leader, serve number of recession resilient end markets, food and beverage packaging, non ovens, and and things of that sort. So so if you really think about that business, it has a very strong aftermarket component to it, about 50% of the market. So so really think about that piece of IPS being very resilient.
It has done well. You know, it had some slight downtick, but but in general has done really well up to our expectations. Certainly, in the quarter, definitely helped by nonwovens in terms of masks, mask production. So some of our customers shifting from diaper production to mask production was a great example. So we benefited from some of our customers making those turns.
And in in some cases, added more mass manufacturing capacity. We benefited from it. In that same in IPS, we also have our industrial end market facing businesses, and those remain challenged. You know, like our you know, like any other pure industrial businesses, you think about CapEx deferrals, you know, significant shutdown in the automotive industry, all of that certainly has impacted those businesses. Those remain challenged.
But, you know, the diversity of end markets and diversity even within this segment certainly helped us perform fairly well. K. So I give you what what you're looking for there, Andrew?
Speaker 7
Yeah. No. That's that's really helpful. And, you know, along kinda, like, along those lines, I mean, it seems, you know, the the resiliency is there. But I guess in a post post COVID world, you know, are you guys thinking about any of these businesses differently?
Or is there any sort of pruning opportunities you can you can make to some of your areas that maybe you maybe your view has changed? Because it seems as though I think yeah.
Speaker 2
Yeah. So yeah. And I think you're asking a question around portfolio. And and so, really, our approach to portfolio management is a consistent review of all product lines on a yearly basis, and we really look at it through two lenses. One is, you know, take a look at it from a growth potential business.
You know, we're very focused on profitable growth, growth potential being an important lens. And second lens really being, what is the degree of differentiation? Really, what is the profitability of the businesses? So as you consider those, you know, we make decisions and and if you kinda look back at the history of the company when things didn't add up to our expectations in those areas, we did act on some product lines. And so it's an annual assessment and something that we do on a regular basis.
Speaker 7
Got it. Okay. Thank you.
Speaker 0
Next question comes from Walter Liptak with Seaport.
Speaker 7
Thanks. Good morning, guys. Good morning. Good morning, Walter. Hi.
I wanted to ask a little bit more about the industrial. And, you know, you know, I wonder if you could help us understand any of the the trends around you know, we saw, you know, maybe things getting better in May and June, I think. And I wonder if with the virus cases going up again recently, if, you know, some of the caution that you're talking about around industrials because you've seen things weaken again. Yeah.
Speaker 2
I I I think probably, well, the best way to think about it is, you know, we we don't seem to find industrial strengthen much. You know, it it is just seems to have stabilized at a lower level than our other businesses. Right? So when we say it remains challenged, we're not saying it is going down further. We're saying it has gone down sort of in in line with other industrial CapEx businesses, but has not gotten back up.
It it continues to the day. So there remain challenges. Probably the better way to put it.
Speaker 7
Okay. And that's, that's fair. I wonder, is it is it down because, the customers are just cautious on their CapEx spending? Because I thought there was a a higher high ROI, Or is there a difficulty getting out and with sales engineers into the field to to sell and spec out systems? You know, I I guess it is it slower because of this virtual world that we live in now and not being able to get out to customers to sell, you know, new systems.
Speaker 2
Yeah. I I think it is really the larger CapEx spend where people are trying to sort of, you know so think about our power system businesses. Right? It's a good example. Now, part of system businesses, these are fairly significant capital outlay.
And so if you are an industrial manufacturer and and you have some demand issues, this is probably not the time that you're going to sort of put out a capital outlay for a large system. So that's kind of where we're seeing. But what we find ourselves is that, you know, when somebody has a need, like our man mask manufacturing, which is not industrial but more consumer non durable, in that particular case, even in this virtual world, we are able to work with our customers, able to understand their space, able to spec in what they need. You you know, certain customers have some pretty stringent requirements early on for, you know, actual person visit, but that is all changing. We're all learning how to work in this new world.
So some of this, you know, a lot of the communication with engineers and such is actually picked up. Just think about it, you know, you have engineers and design folks that have projects that need to complete, but now are at home and at virtually working. They have plenty of time to spend time with our salespeople. So quite frankly, the interaction with our customers have changed and and actually have increased from an engineer to salesperson conversations, which, you know, in the past, somebody is in a meeting or somebody is doing something else. But now you you find yourself having greater touch points with your customers.
So hopefully, that provides you a color of how we are operating in this environment today.
Speaker 7
Okay. Yeah. It does. Thank you for that. And then I I wonder just a couple of things on, you know, supply chain.
You know, we've heard about, you know, some parts shortages. You know, you didn't mention anything about that, but I wonder how you feel about your your supply chain or if you've made any changes there. And then, and then also in NBS, you mentioned that four plants are are doing, the segmentation work, as sort of a pilot project. I wonder if you could give us some, you know, a little bit better understanding of which segments that might be in, which factories, and, you know, what we should expect over, say, like, the next six, nine months in terms of any profit improvement.
Speaker 2
So maybe maybe two questions there. Yes.
Speaker 7
One of the other questions. Sorry.
Speaker 2
Right. So let me first take the question around supply chain. We didn't mention it because, you know, I we had no issues. But, frankly, you know, we have a very strong robust supply chain team and process, and we have a great risk mitigation plan. All of that, you know, really played out the way we have anticipated, and so really did not have any issues.
Early in March, we may have had few hiccups here and there, but they were all more ended up with higher freight cost than anything else. But in in the past quarter, really, is a nonissue for us. And so so supply chain, no issues. Things running. So everything is good.
So in in terms of MBS next, probably what is what is important to sort of provide you some context is that we look at MBS next And and really our pilot businesses that are four of them, and and it's equally spread among both the segments. And and our expectation is, you know, we we rolled them out to really strong businesses. We've not rolled them out to a weaker businesses, you know, really, it's the total company is pretty strong. So among the strong, we we took our best businesses because we believe that looking at this from a growth lens is more important than anything else.
And so so what these businesses are really looking at is they're using at the heart of n b s next is really a data centric database segmentation process. And that's what the teams are working on. We are you know, the way I would characterize it, we have a proficiency model. We look at it within the company. And, you know, we we think of them as learn to lead and coach.
And and I would say our pilot businesses are in the learning mode starting to do. And, you know, our expectation is this would play out here over the next twelve to eighteen months. And and our goals really are not about, you know, how do we increase the profit margin as much as how do we have the best customers facing metrics around products, quality, and delivery so that we are able to accelerate growth when the recovery happens. So really positioning business to capture growth and have a crystal clear view of what are the top tier growth opportunities for the company and how do we disproportionately invest in those areas. And, you know, with growth, we would have incremental margin improvements.
You know, that would come. But the exercise is not about taking out cost as much as it is really centered around growth.
Speaker 7
Okay. Great. Yeah. Good luck with the the project. It sounds very promising.
If I could just get one last one in. How are you thinking about pricing in this environment? You know, when do you typically do, you know, annual price increases? And are there any businesses where you can where you can get price even, you know, with this, the slowness going on in the economy?
Speaker 2
I I you know, we we typically look at annual price increases. As as you can expect, there are input input cost increases for the company, you know, just given the environment we're in and maybe the inflation potential inflation environment that we might enter in. So we have in in in most of our businesses, as as you know, our margin profile, our gross margin profiles are pretty strong. And that is really because we add a lot of value. We create a lot of value, we get paid for the value.
But but we're also mindful of the position where we are. You know, we have, know, significant premium for the value we are creating. And so you you would expect us to be thoughtful, focused around growth. You know, we are focused around creating value and getting paid for it. So, you know, pricing is not not the biggest growth driver for us as much as making sure that we're participating in the growth as it comes.
And and then adjust for inflationary costs should we should we encounter any of them.
Speaker 3
Okay. Great. Thank you very much.
Speaker 0
And at this time, I will turn the call over to Naga.
Speaker 2
Thank you. While the near term demand conditions stabilize at a reduced level, I remain excited about the future of Nordson. We have a solid foundation fortified by the diversity of our business and our strong customer centric business model. We'll continue to monitor this dynamic environment to ensure we're taking appropriate action to manage the business while staying focused on our long term objective of making a strong Nordson even stronger by accelerating organic growth, diversifying through acquisitions, leveraging the MBS next growth framework, unleashing owner mindset, and focus on building winning teams. Again, thank you for your time and attention on today's call.
Speaker 0
This concludes today's conference call. You may now disconnect.